One area of contention is the distribution of carbon allowances, which polluting companies will need to obtain for each ton of carbon dioxide they plan to emit. The Obama administration has called for — and continues to push for — 100 percent of permits to be auctioned off, while some industry leaders and moderate Democrats support giving out some or all allowances for free in order to reduce the economic burden on polluting companies and consumers.

The original Waxman-Markey draft did not specify how the allowances would be distributed, but now Waxman has signaled that he is open to the free allocation of 40 percent of permits to local electricity distribution companies and 15 percent to the industries that would be most vulnerable to international competition under the agreement, according to E&E Daily (via Climate Progress). The free permits would slowly be phased out in favor of a 100% auction within 10 to 15 years.

Another major compromise involves the short-term emissions reduction targets. The Obama administration called for a 14 percent reduction by 2020, while the Waxman-Markey bill stipulated a 20 percent cut. Now Bloomberg reports that Waxman has agreed to a 17 percent target, while E&E Daily says Waxman will settle for 14 percent. The long-term target — an 83 percent reduction by 2050 — will probably remain in place.

While environmentalists will no doubt be disappointed by Waxman’s capitulation — particularly since even the ambitious draft bill was unlikely to reduce emissions as far as some scientists have urged — it was inevitable that some compromise was in order if the legislation was to have any chance of passing. It is still unlikely to win much or any Republican votes, but Waxman may have done enough to address the concerns of moderate Democrats on his committee.

Waxman still hopes to vote the bill out of committee by Memorial Day.

Most environmentalists support a 100 percent auction, but the ambitious and comprehensive Waxman-Markey energy and climate bill released last week was largely silent on the issue, leaving open the possibility that some permits might be distributed without an auction. Utilities and pollution-heavy industries tend to oppose an 100 percent auction, which could cost them a great deal. If Obama endorses a partial auction, it would likely be to win over some moderate senators from coal- and heavy industry-reliant states.

The Post piece presents the two opposing arguments:

Keith Trent, chief strategy, policy and regulatory officer for Duke Energy Corp., said utility executives are hoping for a 10-year transition to a 100 percent auction so they can install pollution controls without raising electricity costs too high. He added that emitters would still have an incentive to cut carbon dioxide because of the overall federal cap on carbon emissions: “The cap is what makes the system’s environmental integrity, and you can’t exceed that cap because you need an allowance to do it.”

But environmental advocate Erich Pica, director of domestic programs for Friends of the Earth, said giving utility providers free allowances would be less efficient than rebating the revenue from auctions directly to taxpayers. A 100 percent auction, Pica said, “forces the polluters from Day One to pay for the transition to a clean energy economy, and keeps low and middle-income consumers whole during the transition.”

Given the strong opposition that cap-and-trade has faced, a partial auction would not be a huge surprise. However, it would still represent a major concession by the Obama administration on one of the president’s core agenda items.

648 Pages of Ruin
There’s a lot of ruin in a nation, which is why it is taking Henry Waxman (D., Us Magazine) and Edward Markey 648 pages to finish America off. That’s the length of their draft of a Global Warming and Energy Bill, just circulated today (we should have the text up at GlobalWarming.org soon). The bill contains everything you’d expect from an Al Gore wish list and will assuredly raise energy prices to crippling levels, as well as finish off the auto industry as we know it.

You have to wonder exactly what they expected.

Perhaps the most striking feature of the draft bill is its silence on whether carbon allowances will be auctioned or how much they will cost. Republicans were up in arms when President Obama’s budget proposal anticipated $646 billion in cap-and-trade revenue from selling allowances; they immediately labeled it a $646 billion energy tax. Yet the Waxman-Markey bill leaves open the possibility that the allowances will be given away to polluters for free — exactly what Republicans like Sen. John McCain (Ariz.) have been arguing for.

So it’s entirely conceivable that energy price increases resulting from this legislation will be lower than anyone anticipated. I imagine that the post on The Corner would have read identically no matter what the details of the draft bill.

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Hit hardest would be the “95% of working families” Mr. Obama keeps mentioning, usually omitting that his no-new-taxes pledge comes with the caveat “unless you use energy.” Putting a price on carbon is regressive by definition because poor and middle-income households spend more of their paychecks on things like gas to drive to work, groceries or home heating.

The Congressional Budget Office — Mr. Orszag’s former roost — estimates that the price hikes from a 15% cut in emissions would cost the average household in the bottom-income quintile about 3.3% of its after-tax income every year. That’s about $680, not including the costs of reduced employment and output. The three middle quintiles would see their paychecks cut between $880 and $1,500, or 2.9% to 2.7% of income. The rich would pay 1.7%. Cap and trade is the ideal policy for every Beltway analyst who thinks the tax code is too progressive (all five of them).

Hmm, let’s take a look at this claim.

As the Journal’s editorial board points out later in the editorial, Obama’s plan calls for 80 percent of the revenue generated by selling carbon allowances to be given back to the public through a tax credit of $400 for individuals or $800 for families. If you accept the Journal’s numbers, that means the bottom quintile would gain $120 a year, while higher-income families would lose slightly (in the short term, at least, until alternative energy becomes cheaper).

Don’t believe me? Then take a look at this chart from the very same CBO report cited by the Journal:

Note that although Obama’s plan calls for a tax credit, the effect is that of a lump-sum rebate, because every individual/household would receive the same amount. So the Journal’s questionable math notwithstanding, the poorest 40 percent of Americans would gain from this plan (including a substantial gain by the poorest 20 percent), the richest 40 percent would lose and the middle 20 percent would break about even.

If that’s not a progressive tax scheme, what is?