CARBON EMISSIONS: Allowances to emit one ton of greenhouse gases are being handed out for free.
FLICKR/TOMSAINT11

A massive climate bill has taken its first step forward in the House, its path paved by the giveaway of allowances -- free greenhouse gas emission permits designed to mute the economic impact of a carbon cap-and-trade program.

Free allowances -- each conveying the right to pump a ton of greenhouse gases into the atmosphere -- were the glue that held the sprawling bill together for Reps. Henry Waxman (D-Calif.) and Ed Markey (D-Mass.) and fellow Democrats on the Energy and Commerce Committee last week.

The "cap" of cap and trade would impose steadily tightening limits on greenhouse gas emissions. Companies covered by the bill whose emissions exceeded their caps would have to purchase emission allowances, or buy offsets -- for example, by investing in rainforest preservation. Some allowances could be banked or borrowed to ease transitions. But the decisions would affect firms' choices of fuels, introduction of new technologies, and decisions to hire, fire, expand, shrink or move operations overseas.

The bill's allowances help lessen its economic impact on parts of the country with industries threatened by trade or heavily dependent on coal to generate electricity. Even so, the climate legislation will create major winners and losers. "Some will have zero costs, some will have extremely high costs," said Harvard University economist Robert Stavins. "It's very hard to estimate who will be the most burdened."

Washington state, with its plentiful hydroelectric power, emitted 0.15 ton of carbon dioxide per megawatt of power it produced in 2005. Indiana -- a center of coal-based power generation -- emitted nearly 1 ton of CO2 per megawatt, Stavins noted.

A computer model run by ClearView Energy Partners estimates that greenhouse gas limits will hit three times as hard in West Virginia, Kentucky and North Dakota, for example, as in Washington state, California or Oregon.

Oil refiners and manufacturers of chemicals, paper, cement and metals will be vulnerable. So will companies that face tough U.S. or foreign competition that makes it hard to pass on higher energy prices.

"The firm makes a choice," said Kevin Book, a ClearView partner. "You can adapt. You can accept lower profits to retain customers, or, if you can jack up prices, you will. We don't know what the industrial players will do." Electric power prices would still come under the eyes of public utility commissions.

The different regional burdens required Waxman to parcel out allowances to benefit coal states -- whose economies would feel more pain -- in order to get a majority of Democrats behind the bill. "You can leave it up to Congress to do what it does well, and that is to build a constituency for the program," Stavins said.