Creating a 'Pollution Casino': Why the Energy Bill May End Up a Boon for Our Dirtiest Industries

As the states move to establish quotas for renewable-energy production, the federal government -- for once -- hasn't lagged far behind.

At the end of May, the House Energy and Commerce Committee passed "The American Clean Energy and Security Act," also known as the Waxman-Markey bill, which seeks to create a cap-and-trade system to forcibly lower carbon-dioxide emissions. The goal: to ease global warming and avert catastrophic climate change.

But Waxman-Markey, backed by big polluting industries such as Shell Oil and Duke Energy, hasn't garnered full support from environmental groups. Many oppose the bill, citing its incentives are too diluted to be effective and will actually sacrifice billions in revenue that should be invested in clean energy, while others critically support it, urging Congress, as it attempts a historic first by directly addressing climate change, to toughen it.

"There are serious flaws with this bill. The political process is pushing for expediency over strengthening the context, and we think that climate change is too important to get it wrong," says Tyson Slocum, research director at Public Citizen's energy program, from Capitol Hill. Public Citizen is a national nonprofit consumer advocacy organization.

The current drive to get the bill signed into law is twofold: First, the Environmental Protection Agency's March ruling that carbon dioxide threatens the public's health has put pressure on Congress to act, and second, the U.N. plans to hold a Climate Change Conference in December in Copenhagen, which many consider a last chance to create a global plan of action before the Kyoto Protocol expires in 2012.

"This bill is possibly the most hamfisted, complicated, expensive way for lowering emissions that could ever be imagined," Ronald Bailey, Reason magazine's science correspondent and adjunct scholar at Cato, says of the onerous 946-page bill. "If you understand cap-and-trade, it's theoretically brilliant -- but that's not reality."

To understand the bill's flaws, first a quick 101 on how cap-and-trade works. The government imposes a limit, or cap, on industrial emissions, requiring major polluters to buy permits from the government or other companies to pollute -- hence the 'trade.' But this also works as an incentive, because companies that reduce their emissions by investing, say, in renewable energy, can sell their excess permits on the open market and make a profit.

But as it stands, the bill distributes 85 percent of those permits to favored industries for free. "If you create a new legal right to pollute and then give it away, that's not an effective strategy," says Slocum, adding this helps fatten polluter's profits without making a dent curbing actual emissions. "The only rationale for this is that special interest has flexed its political muscle."

Indeed, this is politicking as usual. Many permits were given away to woo lawmakers in regions rich with coal, not to mention the industries themselves, which haven't been regulated in the past and lobby heavily for their interests.

The bill would give a large number of permits to coal-fired electric utilities until 2025 to help them make the transition to clearer fuels. But some environmentalists insist all permits should be auctioned off and the money invested in renewable energy.

Just how willing are industries like coal to protect their interests? According to "The Climate Change Lobby," a study conducted by the Center for Public Integrity, last year more than 770 companies and interest groups spent $90 million funding climate-change lobbyists in Washington -- of which The American Coalition for Clean Coal Electricity spent $10.5 million alone. So it's no surprise that with Waxman-Markey on the table, and where billions of federal dollars are at stake, vested interests are lining up eager to tailor climate policy in their favor.

Criticism is also levied at the bill's allowance for $2 billion in carbon offsets, $1.5 billion of which would be international. Carbon offsets are the market-based solution for consumers and corporations alike to reduce or negate pollution through cost-effective alternatives, such as planting trees in India to negate emitting carbon at home. Offsets are a seductive sales pitch to trade or buy pollution back, but it doesn't work.

In Europe, the European Union's Emissions Trading Scheme kicked off five years ago, but the market was flooded with permits, making it cheap to pollute -- compare $38 per ton of carbon dioxide, which now trades at $12 per ton.

"The problem with Europe is that each country got to set its own emission allocations, and the temptation to cheat was overwhelming -- in fact, all of them cheated," says Bailey, noting ETS has yet to deliver any greenhouse-gas reductions. According to the Wall Street Journal, European emissions have actually risen by 1 percent per year since 2005.

"Offsets literally provide massive incentives for polluters. Rather than transforming their business practices, they can simply write a small check to an Indonesian farmer, whose activities may not offset their industrial emissions," says Slocum, who also warns that carbon markets are new, unregulated and far from transparent. "This legislation relies on the good graces of Wall Street to behave itself in a brand-new trillion-dollar derivatives market. Wall Street does not have the public interest in mind. It will turn this market into a massive pollution casino that will enrich investment banks at the expense of an accurate price signal."