May 15, 2008: 7:34 AM EDT
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A $3 trillion climate change battle

Regulating greenhouse gases will generate a lot of money. Who should get it?

By Marc Gunther, senior writer

As climate change legislation nears passage, a debate has broken out about who should profit from the billions of dollars generated by the auction of carbon credits.

(Fortune) -- A climate-change bill that has widespread support as it heads to the Senate floor will create an estimated $150 billion of new assets in the first year it takes effect. Between now and 2050, regulating greenhouse gases could easily generate $3 trillion worth in value in the United States.

Should that value go to utility companies, electricity customers who will face rising rates, government investments in new technology or tax cuts? Or should it be returned to all Americans?

That question is being debated vigorously by energy companies, politicians and environmental groups. Next week, an influential coalition of big companies and green organizations called the U.S. Climate Action Partnership (U.S. CAP) -- its members include GE (GE, Fortune 500), General Motors (GM, Fortune 500), Ford (F, Fortune 500), DuPont (DD, Fortune 500) and Shell (RDS-B), as well as utilities Duke Energy (DUK, Fortune 500), FPL Group (FPL, Fortune 500) and PG&E (PCG, Fortune 500) -- will take up the issue.

The issue gets pretty wonky pretty quickly, but it's worth trying to understand because the stakes are so high. This battle over billions will be critical as Congress takes up the climate change bill.

Here's why: Essentially, presidential candidates John McCain, Barack Obama and Hillary Clinton, leading Democrats and moderate Republicans in Congress, dozens of Fortune 500 CEOs, and mainstream environmental groups all agree that a so-called cap and trade system to regulate greenhouse gases is needed to fight global warming program. That, by itself, is remarkable.

Under any cap-and-trade plan, the government would set a cap on emissions, which would decline annually, and then issue a limited number of permits to pollute - each one allowing the emission of one ton of carbon dioxide. For the purposes of this discussion, let's make the reasonable assumptions that the government will issue 5 billion permits, each worth about $30, during 2012, when the leading climate change bill, sponsored by U.S. Sens. Joseph Lieberman, a Democrat, and John Warner, a Republican, could take effect. Do the math - the permits would be worth about $150 billion.

Ask where that money should go, and the consensus breaks down. Coal-burning utilities say they should be given the permits for free - otherwise, they argue, their customers will be whacked with much higher bills. Others, including candidates Obama and Clinton, say all the permits should be auctioned - why reward the polluters, they ask? Still others want auctions so that proceeds can be used for a variety of causes, ranging from investments in renewable-energy research to middle-class tax cuts to paying down the federal debt.

The Lieberman-Warner bill offers a little something for everyone. About half of the permits would be given away for free to power companies, manufacturers that emit greenhouse gases and state governments, which could sell them to raise money for energy efficiency, forestry and agriculture conservation programs and others.

The other half would be auctioned, and the money raised is designated for investments in clean energy, low-emissions vehicles, energy assistance programs for low-income families, wildlife and bird preservation, even something called the "climate change worker training fund" - in other words, a slew of government programs related to the environment. Over time, as the U.S. transitions to a low-carbon economy, fewer permits would be given away and more would be sold.

U.S. CAP is deeply divided over the issue. Jim Rogers, the president and CEO of Duke Energy, has strongly argued that more permits need to be allocated for free to coal-burning utilities - like Duke Energy.

More auctions would create economic and political problems. "A 100 percent auction is a carbon tax," Rogers said recently at a discussion organized by CERES, a coalition of investors and environmental groups. "It will fall disproportionately on people who are in the 25 states where 50 percent of the electricity comes from the use of coal. Their rates will go up 40, 60 and 80 percent. There will be huge rate shock." The backlash could derail efforts to curb global warming.

Lew Hay, chairman and CEO of the Florida-based FPL Group, which has been investing heavily in wind power, owns nuclear plants and has fewer coal assets, strongly disagrees with Rogers. In a commentary in The Energy Daily, Hay wrote:

"Jim thinks electric power companies should be permitted to emit carbon into the atmosphere for free. I think they should have to pay for every ton of carbon that goes up the smokestack. His approach granting a disproportionate amount of free allowances to the biggest emitters - allows those who contribute the most to global warming to reap a massive financial windfall. Mine requires them to bear the cost."

Environmental groups, meanwhile, worry that the fight over free allocations versus auctions threatens to get in the way of the most important part of the legislation - enacting strong emissions caps. "What we care most about," says Nat Keohane of the Environmental Defense Fund, "is establishing strong and declining mandatory caps that get us the emissions targets that scientists say we need."

In part, the debate over how to allocate the $150 billion worth of permits (in year one, remember) depends on whether you think rising electricity prices are a good or a bad thing.

Keohane, an economist, says: "If electricity prices don't rise, people don't have the incentive to conserve or to buy energy-efficient appliances." To cushion the impact of rising electricity prices on low or middle-income people, he says, proceeds from auctioning permits could be used to reduce taxes on labor and capital, and in particular the regressive Social Security payroll tax. Some have called this the "double dividend" of climate regulation - one dividend being a reduction in pollution, the other a reduction in taxes.

But David Hawkins, who directs the climate center at the Natural Resources Defense Council, argues that higher prices alone won't bring about needed gains in energy efficiency. For that, you need programs to help people do energy audits on their homes or buy new appliances or insulation - programs which could be funded by the auctions.

"If your raise prices and don't give people options, all you are going to get are complaints," he says. After all, he adds: "We don't advocate rising the price of food as a cure for obesity."

Author and activist Peter Barnes has put forward a simple plan called cap-and-dividend (see He would auction all of the permits and then return all of the proceeds to the American public, in the form of per capita grants. Among other things, he says, this would keep the government out of the picture and build broad political support for a climate-change bill.

"There's no avoiding the energy price rise, unfortunately," Barnes says. "That is the medicine we need to swallow. But to quote Mary Poppins, a spoonful of sugar helps the medicine go down." To top of page

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