Waxman-Markey: Cap and Trade--love it or hate it?

You've heard about cap-and-trade. We're going to briefly review how it works under the House's Waxman-Markey clean energy bill.

This is the seventh in RaisingIslands.com's review of the massive clean energy bill in Congress, which is alternatively called Waxman-Markey, HR2454, the American Clean Energy and Security Act of 2009, or ACES. The bill is now being considered by the Senate.

Cap and trade: The term means there's a cap on the amount of greenhouse gas that can be produced, and that industry will be able to trade credits. If I can't get under the cap this year, but you've gone far below your cap, then I can buy credits from you to avoid penalties.

It's a tried and true system, along the lines of this: I don't have enough sugar to make cookies, so I go next door and borrow a cup from a neighbor, who has plenty.

But in the case of Waxman-Markey, it's not sugar I'm borrowing or lending, buying or selling—it's emission allowances. That's the legal right to release carbon dioxide or equivalent greenhouse gas into the atmosphere.

Over the years, the number of the emission allowances would decline—in concert with the nation's commitment to reduce the production of these gases.

And every quarter, the government would sell a limited number of emission allowances at auction, from its “strategic reserve” of allowances. If you couldn't borrow or buy from someone else, you'd have to buy them from the government. (If you have extra allowances, you don't have to sell them. You can hold them for use later.)

There would be a market established for the sale and purchase of emission allowances, so you wouldn't have to shop around for them.

As the number of allowances declines, industries that don't reduce their emissions would have to pay more to buy allowances. That's the incentive to find ways to cut CO2 production. A company whose emissions exceed its emission allowances would be in violation of the Clean Air Act, and subject to penalties.

The money from the sale of emissions allowances would go to fund the various other programs of ACES. Some could be turned over to taxpayers.

There are a lot of confusing terms in all this. Here are a few.

An Emission Allowance is measured in tons of carbon. One allowance is a permit to release one ton of carbon.

A Carbon Credit is a kind of reverse allowance. You get a carbon credit, for example, if you've planted enough forest land to sequester one ton of carbon. You could then sell that credit to someone who needs an allowance.

There are different kinds of carbon credits—Carbon Offset Credits, Carbon Reduction Credits, even Certified Emissions Reductions. They are created in different ways, but the result is that you can sell them to people who can't avoid releasing greenhouse gases.

In other matters in Waxman-Markey, there are provisions to create green jobs, including training programs to bring workers up to speed. There are provisions to help low-income residents deal with the costs of the energy program, including tax credits and monthly energy cost refunds.

The bill includes measures to bring clean energy technology to third-world nations, helping them gain benefits from U.S. technological advances.

In our next and final segment reviewing the bill's details, we'll look at what the Waxman-Markey bill proposes to help the nation adapt to those impacts of climate change that it will not be able to avoid.

© Jan TenBruggencate 2009