HELENA - Congress is considering several proposals to cap greenhouse gas emissions in an attempt to slow global warming and climate change and move the country away from reliance on fossil fuels like oil and coal.

What is "cap and trade" and how is it supposed to work? Or its cousin, known as "cap and dividend?"

Here's a look at the basics of each proposal, as embodied in bills before the U.S. Senate:

Cap and trade

The cap on greenhouse gases: The bill sets a nationwide ceiling or cap on emissions of a half-dozen greenhouse gases, at 2005 levels, including carbon dioxide, which accounts for 90 percent of GHG emissions in America. The greenhouse gas limit will be gradually lowered over 40 years, to reduce greenhouse gases to 83 percent less than 2005 levels by 2050.

Who is regulated: Large, stationary sources that emit more than 25,000 tons per year of regulated greenhouse gases (coal-fired power plants, for example), importers and producers of petroleum products, and distributors of natural gas.

Allowances or pollution credits: A set number of allowances will be issued each year, tied to the cap, to limit greenhouse gases. Each allowance or credit equals one metric ton of greenhouse gases. Large producers of greenhouse gases must acquire credits that equal how much greenhouse gas they emit.

Who gets the allowances: Certain amounts will be allotted, for free, to industries that emit greenhouse gases. About one-fifth of the allowances will be sold, by auction, to polluters that need more credits to operate. Proceeds from the sale of credits will pay for a variety of public purposes, such as rebates to low-income consumers, clean-energy and conservation projects, and reducing the federal deficit. Over time, the number of allowances given away for free is reduced. By 2050, four-fifths of the credits will be auctioned.

The "trading": If an industrial entity that emits greenhouse gases doesn't have enough permits to equal its emissions, it must either reduce the emissions or buy allowances from others who have extras (such as clean-energy businesses and low-income households, who also get permits). These permits will be traded (bought and sold) on the private market, like any commodity. Wall Street brokerage houses already are preparing to operate carbon-credit trading markets.

The floor price of one carbon credit will be $10, and the beginning ceiling price will be $28. The overall market could be worth $100 billion to $150 billion in its initial years.

Offsets: Projects that remove CO2 from the atmosphere (planting trees, for example) can receive payments for "offset" credits, which are the equivalent of an allowance. A polluting entity can stay under its cap by purchasing offset credits from project operators, such as a farmer using no-till methods that release less CO2.

Effect on consumers: Fossil-fuel energy prices will go up, because the cost of "pollution credits" will increase the cost of oil, coal-fired power, etc. The question is, how much, and for whom?

The nonpartisan Congressional Budget Office (CBO) estimated last year that the House-passed cap-and-trade bill would increase costs by only $175 per year per household by 2020. The Environmental Protection Agency's study of the impacts has similar results. Opponents of the bill argue the cost will be much higher, with widespread negative economic impacts.

The outcome: Fossil-fuel energy (coal, oil, natural gas, gasoline) will become more expensive as allowances shrink and become more costly. These industries essentially would be phased out - unless they find a way to capture or mitigate their carbon emissions. The bill's goal is to push the nation to transition from fossil-fuel energy to renewable forms of energy, with new industries and technology replacing the old.

Renewable, green energy would become cheaper by comparison, and possibly cheaper as technology advances in this field (with the help of funding from cap-and-trade revenue). Those who conserve energy and use non-fossil fuels will pay less for energy.

Political status: The House passed a cap-and-trade bill (HR2454) last June, but the Senate hasn't acted on it. A Senate bill (S1733) was approved by the Senate Environment and Public Works Committee last November, but has had no further action.

Cap and dividend

The cap on carbon-dioxide: This similar approach sets a nationwide cap only on CO2, the primary greenhouse gas. It also gradually tightens the cap, down to 80 percent lower than 2012 levels by 2050.

Carbon shares: Regulated industries must buy carbon "shares" that equal the amount of CO2 they produce. Each share equals one ton of fossil carbon.

Who is regulated: The "first sellers" of carbon into the economy - coal mines, oil-and-gas producers and importers of fossil fuels. Only a few hundred companies would be regulated.

The auctioning/sale of carbon shares: The federal government would auction the shares to regulated companies. The cost of these shares will be set by public auction, with a floor price of $7 and a ceiling of $21. Several billion shares would have to be sold. Every two years, regulated companies must report how much carbon they brought into the economy. If they exceed the amount allowed by their shares, a penalty is imposed.

Income from the sale of carbon shares: 75 percent of revenue from selling shares would go directly to U.S. citizens, to help offset higher energy costs passed on by companies that buy the shares. Every American with a Social Security number would get an equal amount. The remaining 25 percent goes to a Clean Energy Reinvestment Trust, which could fund numerous things, including block grants in states more reliant on fossil fuels or research into clean-energy projects.

Trading of shares: Companies that buy the shares can resell them to other carbon-producing companies. No other trading or third-party sellers would be allowed.

Effect on consumers: An August 2009 study by the University of Massachusetts' Political Economy Research Institute estimates that even with higher energy prices, average families would gain about $100 a year, after dividend payments. However, the study doesn't look at individual businesses' cost of buying higher-priced energy.

The outcome: The same as cap and trade, as mentioned above. The only difference may be in how quickly or efficiently one approach works.

Political status: A cap-and-dividend bill, S2877, awaits action in the Senate Finance Committee.

 

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