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Here Comes Global Warming Legislation


Washington finally appears ready to take on climate change. But expect an epic battle over what form the laws will take

When it comes to global warming, Washington's political winds have shifted. Last summer, legislation that would have limited emissions of greenhouse gases such as carbon dioxide died. Now, growing pressure to curb emissions is coming from the courts, states, and many businesses. There are still holdouts who argue that action on climate change would cripple an already lumbering economy. But the ideological battle is largely over, says Steven B. Corneli, senior vice-president for market and climate policy at power producer NRG Energy in Princeton, N.J., which supports legislation to reduce emissions. "The number of players saying we need to do this is stunning to me," says Corneli. In fact, on Jan. 15, CEO John W. Rowe of utility Exelon and the chief executives of more than a dozen other companies, including General Electric (GE), Xerox (XRX), ConocoPhillips (COP), Caterpillar (CAT), and Duke Energy (DUK), urged Washington to pass climate legislation and even offered detailed policy suggestions.

It helps that the costs to the economy of any climate legislation wouldn't kick in until 2012 at the earliest, when many economists believe the recovery should be under way. But that doesn't mean getting a bill passed will be easy. Fierce fights are coming on countless details, from targets and timetables for greenhouse gas reductions to who bears the brunt of the financial pain.

The biggest battles will be over the cost of fighting climate change, which will take the form of "cap-and-trade" legislation. The idea here is that the U.S. government imposes steadily tightening limits, or caps, on overall emissions coming from different industries. To keep operating, companies will need permits, or allowances, for each ton of carbon they emit.

But there's a debate over how the permits, which can be bought and sold, should be distributed to different companies at the onset. If they are all sold in an auction, as President-elect Barack Obama has proposed, the advantage goes to utilities with lots of "clean" nuclear plants, such as Exelon (EXC), which won't need to buy as many as those that own dirty coal plants, like Duke Energy. Coal-intensive companies want the government to start the process by handing out free permits based on need.

Companies are also skirmishing over who gets stuck with responsibility for emissions reductions. Automakers, not gasoline refiners, should be on the hook for the carbon dioxide coming from car tailpipes, argues Royal Dutch Shell (RDS). Nope, car companies retort. Vehicle emissions shouldn't even be regulated under a climate bill, says Honda Motor. Instead, it argues, the government could raise fuel economy standards since higher mileage means fewer emissions.

Whatever the details, a climate bill will generate an enormous amount of revenue for the government through the sale of permits. The failed 2008 legislation was projected to raise more than $1 trillion between 2009 and 2018. "The big battle will be over how to divvy up the money," says Stephen Harper, global director for environment and energy policy at Intel (INTC). Republicans, fiscally conservative Democrats, and many businesses want safeguards so the money doesn't disappear into pork barrel projects or the Treasury's general coffers. One idea is to use the funds to offset higher energy costs by lowering payroll or income taxes, or by investing in low-carbon technologies.

At a time when the economy is stumbling, businesses and even many Democrats also want assurances that the costs of action on climate change won't skyrocket. That's why they are pushing for mechanisms to limit the damage, such as a ceiling on the price of emitting carbon or the ability to buy permits based on reductions made more cheaply elsewhere in the world. "It is unlikely that we can support anything that would impose more economic burdens," says Bryan Brendle, director of energy and resources policy at the National Association of Manufacturers. But Corneli and other Washington insiders see a path that didn't exist before: auction some permits when cap-and-trade is first initiated but also give many away. In addition, there would be cost controls and financial support for key technologies such as capturing and storing carbon emissions from coal plants. "The fears of the business community would be overcome by a credible technology commitment," says Dow Chemical (DOW) Vice-President Peter Molinaro.

On one point, most climate activists and political conservatives agree: Pumping money into green technologies and jobs right now makes little sense unless it's accompanied by a signal that, over the long term, the price of emissions from fossil fuels will rise. Otherwise, there's no sustained financial incentive for companies or individuals to go green. Add it up, and climate policy should be one of the biggest issues facing companies. Says Dow's Molinaro: "We're faced with the stark reality that this has already started moving."

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Carey is a senior correspondent for BusinessWeek in Washington.

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