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Moderate Dems Try to Tone Down Climate Change Bill

As President Obama last week encouraged Democrats on the House Energy and Commerce to reach a consensus on climate change legislation, Committee Chairman Henry Waxman (D-CA) remained mum on the potential changes that were being negotiated with moderate Democrats and when markup of the measure would occur. He is expected to unveil a new compromise approach this week.

The president summoned committee Democrats to the White House last Tuesday, where he "encouraged us to finish work on climate change," said Rep. Gene Green (D-TX, who attended the meeting. Green is one of several moderate Democrats on the committee, who find the current draft too stringent and support free allocations -- rather than auctioning -- of emission credits to certain energy-intensive industries, such as oil and gas, electricity, steel and metals and chemicals, to help offset carbon emissions.

Obama said he understood that a final climate change bill would have to reflect regional differences, according to Green. Green said he has asked for 5% of the emission credit allowances for refineries in Texas; Rep. Mike Doyle (D-PA) is seeking 15% of emission credit allowances for chemicals, aluminum and steel; and Rep. Rick Boucher (D-VA) is working on an 40 % allowance proposal for the electricity industry.

"The president...believes regional impact should be taken into account and addressed and that our trade-sensitive industries need to be protected," said White House spokesman Robert Gibbs following the meeting.

Democrats on the House energy panel "are reportedly nearing agreement on the free allocation issue, which could give more than half of the total credits to industry for free. Presently negotiators are considering granting roughly 40% to local distribution companies that service electric utilities and around 15% to industries producing vulnerable, globally competitive, greenhouse gas (GHG) intensive commodities," said analysts with FBR Capital Markets Friday.

"Over time the free allocation system would phase down to a complete auction. If implemented, a 55% free allocation could be worth nearly $50 billion per year of the estimated $90 billion carbon market," they said.

Martin Edwards, vice president of legislative affairs for the Interstate Natural Gas Association of America (INGAA), agreed, saying he believed that Congress will compromise on "some kind of hybrid" system that would combine free emission credit allocations and an auction. There probably will be "free allocations for some period and then it will transition to a straight auction."

The centerpiece of the draft climate change bill before the House energy panel is a cap-and-trade system, which would cap carbon emissions and allow emitting industries that exceed their caps to trade emission credits (see NGI, April 27). Obama in the past has said he supported a 100% auction of emission credits to raise revenues for renewable and alternative fuel projects, but Green said the president indicated last Tuesday that he may be more flexible on this issue to get a climate change bill through the House. Waxman has vowed to pass the bill out of committee before the Memorial Day recess.

Moderate Democrats have "successfully stymied" the draft bill's progress at the subcommittee level, said energy analyst Christine Tezak of Robert W. Baird & Co. Given the real possibility that moderate Democrats could join Republicans in opposing the bill in subcommittee, Waxman has indicated he will take the bill straight to the full committee for mark-up.

The support of House moderate Democrats is critical to getting climate change legislation out of Congress. "If a bill passes the House without the support of moderate Democrats, then we give it very long odds in the Senate," Tezak said.

INGAA's Edwards said he believes climate change legislation this year will be a "long shot." It's already facing resistance in the House, and will likely confront even more opposition in the Senate. But the White House is optimistic. "We're hopeful to get something done this year. Obviously...it is a strong priority of the president," Gibbs said. The FBR analysts said they see climate change legislation being enacted in the first half of 2010.

The draft bill sets "extremely ambitious [carbon] reduction targets that ultimately will affect" interstate natural gas pipelines, which INGAA represents, and a number of other industries, Edwards said. "It's a major game-changer."

In a related development, a study by the Pew Center on Global Climate Change last Wednesday found that energy-intensive manufacturers are likely to face only modest competitiveness impacts under the cap-and-trade proposal to reduce greenhouse gas emissions.

The study projects that U.S. energy-intensive manufacturing industries would on average lose 1% of their annual production to imports assuming a carbon dioxide (CO2) price of $15/ton in the United States and no carbon prices in other countries. Both the Energy Information Administration and the Environmental Protection Agency have projected CO2 prices of approximately $15/ton under cap-and-trade programs proposed in Congress, it noted.

The study's authors concluded that the projected impacts can be addressed through policies targeted to energy-intensive sectors. The range of policy options include 1) compensating energy-intensive sectors covered by a mandatory cap for their regulatory costs; 2) excluding these sectors from the cap-and-trade program; or 3) use of border-adjustment measures to equalize costs for domestic and imported energy-intensive goods.

"The analysis shows clearly that, at the price level studied, the potential impacts are very modest and very manageable," said Pew Center President Eileen Claussen. "Policymakers have a range of policy tools to mitigate the modest economic impacts that may be foreseen. The bottom line is that fear of competitive harm should not stand as an obstacle to strong climate policy."

The study was written by economists Joseph E. Aldy and William A. Pizer, who were affiliated with Resources for the Future, a think tank in Washington, DC, at the time of the analysis. Both have since taken positions in the federal government.

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