Two senior House Democrats released on Tuesday a draft of comprehensive climate and energy legislation that calls for a controversial carbon cap-and-trade system, but leaves to future negotiations key details of how it will work.

How the call for cap-and-trade will be worked out with the draft's other key energy policies – among them a national renewable portfolio standard, a federal low carbon fuel standard and a host of incentives for energy efficiency – remains to be seen.

The draft from the offices of House Energy and Commerce Committee Chairman Henry Waxman, D-Calif., and Energy and Environment Subcommittee Chairman Edward Markey (D-Mass.) would require electric utilities, oil companies, large industrial plants and other entities that collectively make up 85 percent of the nation's greenhouse gas emissions to participate in a carbon-trading system.

The program's overall goal would be to cut emissions by 3 percent below 2005 levels by 2012 and by 20 percent below 2005 levels in 2020, with further reductions to come in future decades.

The draft program would allow entities to "bank" allowances (each for one ton of carbon emissions) for future years and "borrow" allowances from future years, as well as create a federal "strategic reserve" of 2.5 billion allowances that could be injected into carbon markets in case "prices rise faster than expected."

It would also allow up to 2 billion tons per year of "offsets," or credits for reducing emissions, to be purchased by entities that exceed their limits – a proposal that drew the criticism of environmental groups including Greenpeace, which said the amount, nearly a quarter of the country's annual emissions, is too high.

But the draft program does not address a key point of contention – how to allocate the tradable emission allowances. Opinions are split on whether it's better to require entities to buy a majority of allowances or to get a portion for free.

Instead of tackling that issue, the draft would leave it to future "discussions among Committee members," a summary stated (see EPA Proposes Rule to Collect More Greenhouse-Gas Emissions).

"If the starting point is not dealing with the most controversial and difficult aspect of a cap-and-trade plan, that doesn't sound very good for the future of that cap-and-trade plan," said Sam Jaffe, a senior research analyst with Energy Insights, an IDC company. "The details are going to be everything."

Still, Jaffe noted that including cap-and-trade indicated House leaders were more confident about passing the measure, despite some opposition from business interests on concerns that it could stifle economic growth.

President Barack Obama is counting on the cap-and-trade program to provide $646 billion from 2012 to 2019, and top administration officials, including Energy Secretary Steve Chu, have been calling for it (see Chu's Wish List: Cap-and-Trade and Cheaper Solar).

Obama also is likely eager to have a national greenhouse-gas emissions policy in place before he goes to Copenhagen in December to join world leaders in negotiating a climate treaty to succeed the Kyoto Protocol, Jaffe noted (see U.N. Climate Talks Pose Big Impact on Greentech).

To ease passage of a cap-and-trade system, the draft appeared to make certain concessions to groups opposed to it, said Erik Olbeter, a senior analyst for Pacific Crest Securities.

Those include a proposal to direct billions of dollars towards projects that capture and store carbon emissions from coal-fired plants, as well as a call to "harmonize" state and federal rules in setting new federal vehicle emissions standards and low carbon fuel standard, Olbeter said. That will likely be key to winning support from the coal and auto industries, he said (see Obama to Seek to Allow California, Other States, to Impose Emission Standards and Obama: Cars Need to Improve Gas Mileage by 40%)

Olbeter did note that the House draft doesn't include a strong call for increased federal authority to site transmission lines to carry renewable energy to population centers -- a key detail in draft energy legislation released by Senate Majority Leader Harry Reid's office earlier this month (see Draft Legislation A Boon for Solar, Smart Grid).

That's likely to upset renewable energy advocates who believe building new national transmission lines will be critical to meeting federal renewable energy goals (see Solar and Wind Groups Lobby FERC to Lead Grid Expansion).

"Reid is really going to push for" that increased federal transmission authority to be added to final legislation, Olbeter predicted, given that the House draft does include a renewable portfolio standard that calls for the nation to get 6 percent of its electricity in 2012 and 25 percent by 2025 from renewable sources like wind,solar biomass and geothermal.

Jaffe noted that supporters of the renewable portfolio standard could have some convincing to do among representatives of Southeast states, where coal provides much of the electricity and conditions for wind and solar power are worse than other regions.

"How it's going to be handled on a regional basis is very important," he said.

Olbeter did note that the draft's call to allow state governors to claim up to one-fifth of their renewable energy requirement through energy efficiency measures could help convince states to support the program.

Some other, less well-noted points of the House draft are:

  • A proposal for low-income families living in pre-1976 manufactured homes to get rebates to buy new Energy Star-rated manufactured homes.
  • New efficiency standards for lighting and for appliances, and a program to give financial incentives to manufacturers that sell a lot of "best in class" energy efficient appliances.
  • A call for utilities to achieve energy efficiency goals compared to "business as usual" projections of 1 percent electricity savings by 2012 and 15 percent electricity savings by 2020, along with smaller savings in the use of natural gas.
  • Adding nonprofit hospitals and public health facilities to a list of institutions eligible for energy efficiency grants and loans, as set out under the 2007 Energy Independence and Security Act.
  • Giving the Environmental Protection Agency authority to create special programs to reduce emissions of hydrofluorocarbons and black carbon, two contributors to global warming.
  • A proposal to provide "rebates" of some kind to companies that may see additional costs incurred under a cap-and-trade system, such as those that use large amounts of energy or produce commodities that are traded globally. 

Join industry leaders and influencers at Greentech Media's Enterprise Carbon Accounting and Greening the Supply Chain events.