When it comes to perhaps the largest and most complex policy challenge facing the Obama administration—finally slowing the pace of global warming before dangerous changes become unstoppable—the new president stares down a Dickensian paradox. On the one hand, it’s the best of times for dealing with the issue. The Democratic-controlled Congress is itching for action, with environmentalist Californians Senator Barbara Boxer and Representative Henry Waxman at the head of key committees. And the problem has risen so much in visibility that many fossil-fuel companies have come to consider the capping of their greenhouse gas emissions a virtual inevitability. They have joined together in the U.S. Climate Action Partnership—a group featuring General Electric, DuPont, General Motors and many other major corporations—which has called for “cap and trade” legislation that would limit and then slowly ratchet down emissions.

Slide Show: Obama's Cabinet

Yet it’s also the worst of times to address global warming. The recession makes the enactment of strong climate protection policies—which are bound to raise the price of energy, at least in the short term—highly vulnerable to attack. Given the state of the economy, global warming simply cannot top the president’s agenda; ideally, though, progress on it would follow a breakneck timeline that some experts are already describing as impossible to meet.

At the close of 2009, the nations of the world will assemble in Copenhagen to negotiate a global climate treaty to succeed the Kyoto Protocol. If a U.S. climate policy doesn’t exist by then, it is hard to see how developing countries such as India, Brazil and especially China—whose emissions now exceed those of the U.S.—can be convinced to sign an agreement. The U.S. has been emitting carbon dioxide for far longer and in far greater quantities; the other nations expect the U.S. to take the plunge first.

No one doubts the Obama administration’s dedication on the issue: the president’s cabinet and the White House are filled with a dream team of scientists and climate policy experts committed to strong action (profiled throughout this article). Among the most valuable players are Harvard University’s John Holdren (the president’s science adviser) and Nobel laureate physicist Steven Chu (the secretary of energy). The president himself appears just as passionate. As he put it in November 2008: “Delay is no longer an option. Denial is no longer an acceptable response. The stakes are too high; the consequences too serious.” Yet as of this writing, several unresolved matters of policy—and strategy—raise questions about how President Barack Obama’s team can best manage this gargantuan challenge. The choices the president and his key people make over the coming months will determine whether the U.S. will successfully confront climate change—and whether it will lead the world in doing the same.

A Job for the EPA?
The first question concerns the extent to which the new administration will use existing laws and regulations to control greenhouse gas emissions, regardless of whether or not Congress passes new legislation.

In mid-2007 the U.S. Supreme Court handed down its decision in Massachusetts v. EPA, ordering the Bush administration to determine whether greenhouse gas emissions from vehicles represent a danger to the public—which would trigger regulatory control over those emissions under the Clean Air Act. The ruling was a strong rebuke to the Bush government, but in response Stephen Johnson, then chief of the Environmental Protection Agency, essentially punted, opening up a protracted public comment process rather than taking strong action. The Obama administration, however, has indicated that it will do what the Supreme Court asked and generally reverse a number of Johnson’s unpopular precedents.

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One key move for the new EPA under former New Jersey Department of Environmental Protection head Lisa Jackson is granting the state of California a waiver (which Johnson had denied) allowing it to implement its own tough tailpipe-emissions standards. President Obama supports the state’s waiver request and almost immediately on taking office announced that the EPA would reconsider it. Carrying out California’s standards would have important implications because of the huge size of its car market and the eagerness of many other states to follow its lead. The EPA can also issue, in response to the Supreme Court, a so-called endangerment finding concerning greenhouse gas emissions. By law, if these emissions can be “reasonably anticipated to endanger public health or welfare,” the agency must use the Clean Air Act to limit them.

Policy analysts expect the EPA to go at least this far. But the question then becomes whether the administration will move forward with “command and control” regulatory action that would impose pollution standards for vehicles, power plants and other sources of greenhouse gas emissions. (That path is what some experts are recommending, among them William Ruckelshaus and William Reilly, former EPA heads under Republican administrations.) Or will the administration instead pause and ask Congress for a new law, amending the Clean Air Act to better address the details of reducing economy-wide emissions of greenhouse gases? “That’s where the decision gets really interesting,” says Paul Bunje, executive director of the Center for Climate Change Solutions at the University of California, Los Angeles. “Who leads?”

The answer has major strategic consequences. By granting the California waiver and making an endangerment finding, the Obama EPA would be marching states and the federal government ever closer to comprehensive climate regulation. Such moves could “prod” Congress itself into action, notes Doug Kendall, president of the Constitutional Accountability Center, which runs the popular Warming Law blog (http://theusconstitution.org/blog.warming). In particular, if fossil-fuel companies see states and the EPA moving forward, that could further goad them to demand a comprehensive fix from Congress, rather than leaving themselves vulnerable to a piecemeal, state-by-state approach or varied EPA rulings to come.

Although the Obama administration will not want to usurp Congress’s role and solve global warming single-handedly, it can move a considerable way toward making a new law virtually inevitable—and then outline principles for how Congress should carry the ball forward. So if Congress fails to act or moves too slowly, ongoing EPA steps can serve as a “fallback,” Kendall notes.

Carbon Tax or Cap and Trade?
Whether President Obama exploits existing laws or calls for a new one—or both—he can still jump-start nationwide emissions reductions almost immediately. The president’s economic stimulus bill and possible energy legislation can snatch what some are calling the “low-hanging fruit” in climate policy: investing in critical renewable energy sources and energy-efficiency technologies to power a transition away from fossil fuels.

Environmental organizations also want every relevant government agency, from the Department of the Interior to the Department of Transportation, to begin to include climate change considerations in its planning. This mandate would help restart the climate change “adaptation” process. The Bush government fought attempts to study and raise awareness about the many ways in which global warming is already changing the nation’s weather, agriculture, ecosystems, landscapes, water supplies and much more—but under President Obama, comprehensively assessing the dangers can resume. So can a range of regionally targeted preparedness measures.

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The president’s first budget request to Congress could well contain any number of items that would help set change in motion. One request would be funding for the EPA to set up a greenhouse gas regulatory capacity. Writing such matters into government budget mechanisms further goads the legislative branch into action—and Congress doesn’t need much pushing. Representative Waxman, chair of the powerful House Energy and Commerce Committee, has pledged to have a climate bill through his committee by Memorial Day, which among other measures would establish a cap-and-trade system to be set up by the EPA to reduce emissions.

A direct tax on carbon emissions is another option. Many economists insist that a tax, collected by the Internal Revenue Service, is the simplest and most efficient strategy. Notable supporters include Al Gore, NASA Goddard Institute for Space Studies climatologist James Hansen, ExxonMobil CEO Rex Tillerson, and President Obama’s own Office of Management and Budget chief Peter Orszag. A tax does have drawbacks, however. It doesn’t set any fixed limit on emissions but merely assumes that as they become more expensive, polluters will cut back and eventually convert to less carbon-intensive technologies as the innovations become competitive.

Environmental organizations may not be satisfied with the tax route, worrying that the country is taking an unreasonable planetary gamble unless we ratchet down emissions by scientifically supported, fixed amounts. President Obama himself has repeatedly called for reducing U.S. greenhouse gas emissions 80 percent below their 1990 levels by the year 2050, a very ambitious goal (although some, including the Worldwatch Institute and United Nations Intergovernmental Panel on Climate Change chair Rajendra Pachauri, have challenged President Obama to push for even stronger near-and long-term emissions targets).

The cap-and-trade approach, which President Obama favors, would reduce economy-wide emissions by such set amounts by allocating a fixed number of tradable emissions permits (or allowances) each year and by decreasing their total amount over time. This framework nominally avoids the unfortunate concept of a “tax,” anathema in tough economic times or, indeed, at any time in the U.S.

Simply choosing between a carbon tax and a cap-and-trade system hardly exhausts the available policy choices, however. The specific design of the cap-and-trade system, presumably to be administered by the EPA, will have strong implications for its ultimate effectiveness and political salability.

President Obama officially supports a cap-and-trade bill featuring a so-called 100 percent auction, meaning that all the pollution permits created under the law would be sold rather than simply given away to fossil-fuel companies. The auction approach offers notable benefits: it creates a purer marketplace and would raise a dramatic amount of government revenue—official estimates range from $50 billion to an eventual $300 billion annually. The revenue could then be used for a variety of public purposes, such as investing in clean energy technology (which President Obama has already suggested) or even making direct payments to citizens to help them cope with higher energy costs—the “cap and dividend” approach advocated by Peter Barnes of the Tomales Bay Institute and other financial analysts.

Still, fossil-fuel companies can be expected to strongly oppose anything approaching a full auctioning of permits. For instance, the Climate Action Partnership calls for so-called grandfathering—giving away a large percentage of permits for free to existing emitters, at least at the outset. Indeed, past climate bills under serious consideration avoided a full auction. The leading contender for 2008, the Boxer-Liberman-Warner Climate Security Act, would have auctioned off only 24.5 percent of permits in 2012 and would have increased the total to 58.75 percent by 2032.

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Since 2008, however, Democratic majorities have increased in the Senate and in the House of Representatives, and the political environment has become more favorable to full auctioning. But few political observers would argue that President Obama will be able to get his desired 100 percent allocation. Some type of compromise is likely. “I think the momentum is growing toward auctioning off more rather than less,” comments Dan Weiss, a climate and energy policy expert at the Center for American Progress in Washington, D.C. “Will they auction all? That’s a stretch.”

In determining the breakdown between auctioning emission permits and giving them away, several factors will loom large. One is the European Union’s experience. Its cap-and-trade system, begun in 2005, featured little or no auctioning of permits—instead it used virtually full giveaways. After several years we can see the effect: Energy prices rose even as polluting companies enjoyed large windfalls. This widely cited failure strengthens the hand of auctioneers, as do the incredible political dividends that can be reaped if the money from auctioning is plowed back into the economy.

Paying Back Americans
Ingenious ideas abound for turning the capital raised from auction revenues into political gold. In its ideal form, the cap-and-dividend method returns 100 percent of the proceeds from a full-permit auction to citizens in the form of monthly checks, which could add up to $1,000 a year for every person in the U.S. Paul Higgins, a senior policy fellow at the American Meteorological Society, suggests one variation on that theme: a “prebate” for taxpayers, followed by regular checks to offset increasing energy prices—some of which citizens could pocket if they decrease their carbon footprints. “You say to people right up front, ‘We need to reduce emissions, foreign oil dependence. We’re going to put a fee on those things, and we’re going to take the revenue and give it back to the people, and we’re going to do it ahead of time,’ ” Higgins says.

Another idea is to redistribute some of the wealth through the U.S. tax code, by cutting taxes in proportion to auction revenue raised, while also perhaps reserving some of the money for additional investments in clean energy technology. That is the approach supported by Rafe Pom­er­ance, president of the nonprofit climate policy think tank Clean Air-Cool Planet and a former Clinton administration expert on climate at the State Department. “You get an improvement in the efficiency of the economy and your carbon reductions,” he explains, calling his approach “double dividend.”

Cap-and-dividend proponents argue back that their approach—putting a tangible check in people’s hands—is a far more poli­tically (and psychologically) savvy way to bring the entire U.S. public along on such a deep remaking of the economy and to help them feel like they are weathering big changes in energy markets.

Creative fixes that deliver politically as well as on a policy level will be vital. Without a disciplined, filibuster- and defector-proof Democratic majority in the Senate, a successful climate bill has to please conservative Democrats and moderate Republicans, who are deeply concerned about any legislative impact on the pocketbooks of citizens in their state.

Take Democratic Senator Claire McCaskill of Missouri, a strong ally of President Obama who has nonetheless cautioned that a cap-and-trade bill could be “playing with fire.” She says the president understands that “the American people are not ­going to judge him on whether or not health care’s gotten done or cap-and-trade’s gotten done; they’re going to judge him by whether the unemployment numbers look good this time next year.”

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In 2008 Senator McCaskill was a member of the Gang of 16, a group of Democratic moderates who supported climate legislation in theory but called for measures to protect taxpayers, such as “cost containment” to avoid energy price shocks as well as “price relief” for working families. Democratic leaders representing coal states in the midsection of the country, such as Senator Debbie Stabenow of Michigan, have also said publicly that they favor climate legislation that is more moderate than Obama has supported, or than Boxer and Waxman had advocated last year. These same concerns—and legislators—are perhaps equally influential now.

Appeasing these legislators could require some version of the cap-and-dividend approach combined with a “safety valve” pushed by Democratic Senator Jeff Bingaman of New Mexico. It would make a cap-and-trade bill somewhat more like a carbon tax by placing a ceiling on the amount that permit prices could rise—thus protecting the economy from too much disruption too quickly. Lawrence Summers, head of President Obama’s National Economic Council, supports such a measure.

Another feature likely to improve the legislation’s chances for passage is some means of making reassessments, based on the latest scientific developments, of whether the country needs to cut emissions even faster than previously assumed. NASA’s Hansen, for instance, now says we must keep atmospheric carbon dioxide concentrations below 350 parts per million (ppm) for the long term; given that they are already above 380 ppm, that implies the need for far stronger targets than even President Obama is suggesting.

Salting legislation with such measures and remaining politically practical could help avoid a “train wreck,” something Pomerance fears could occur either if the president “comes forward with something that’s viable and the environmental community rejects it, or he does what the environmental community wants and it’s rejected.” The fear is that “we could overreach and never get started,” leaving the country with little to bring to the Copenhagen summit at the end of 2009.

Leading the World to Copenhagen
Flexibility and creativity will be just as essential to international negotiations, for which a domestic climate bill would serve as a powerful calling card. Much has been learned since the 1997 Kyoto Protocol, which the Clinton administration championed but which the Senate refused to ratify, claiming that developing nations would not be compelled to sacrifice their own economic growth under the treaty as the U.S. might. To avoid making that mistake again, the administration must go into international negotiations guided by an existing domestic policy, rather than once again trying to foist international standards on a Congress that hasn’t acted yet.

In fact, any U.S. law could be made “partly conditional” on international response, notes the American Meteorological Society’s Higgins. It could be written so that the U.S. takes stronger mitigation actions if its allies do, and vice versa. Stanford University law professor David Victor adds that the administration will probably want to negotiate separate deals with developing countries such as India and China even before reaching Copenhagen. “Politically,” he explains, “there’s no way you can get a significant deal through the U.S. Congress without some answers to the question, ‘What are our competitors doing, what’s China doing?’ ”

Just as regulatory policy must bleed over into legislative action on climate change, so legislation and international policy must also overlap. Several international meetings are set to build momentum toward the Copenhagen finale this December, so the administration will have the ability to set an interna­tional agenda that corresponds with what it is trying to achieve domestically. Indeed, diplomats who convened at the most recent of the international climate change meetings—in Poznan, Poland, in late 2008—seemed to be waiting anxiously for the Obama administration to announce its agenda before taking any decisive step.

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The world is waiting on the U.S., which makes major advancement on climate change an even more daunting project, requiring almost superhuman strategizing, creativity, flexibility and organization. The goal may be too much for the administration to achieve in one year, especially when hamstrung by a weak economy.

Already some skeptics, including former Clinton Department of Energy official and prolific climate blogger Joe Romm, have questioned whether any comprehensive legislation can be pulled off in time for the Copenhagen summit. Romm instead suggests spending the year educating the American public about what needs to be done and brokering a separate emissions deal with China. Yet the environmental and economic communities alike have given the highest marks to President Obama’s relevant cabinet members as being up to the challenge. As Stanford’s Victor says of the Obama environmental team: “In a practical world, if anyone can do it, it’s them.”

Note: This article was originally printed with the title, "Winning the Carbon Game".