Can Washington make a carbon cap fit?

LAGUNA NIGUEL, Calif.--Despite formidable political challenges, the United States has a good chance of passing legislation to regulate greenhouse gas emissions in the next nine to 12 months, energy industry experts said here on Monday.

The critical factor to passing climate change laws is managing the transition to low-carbon energy sources without sharply raising prices for consumers, said panelists at the Fortune Brainstorm Green conference.

The House on Tuesday will begin hearings on an energy and climate bill its sponsors hope to pass this summer. The Environmental Protection Agency on Friday issued a preliminary finding that greenhouse gas could be regulated under the Clean Air Act because they pose a threat to public health and safety.

These developments make it more likely than in previous years that rules to put a price on emitting carbon dioxide in the U.S. will be put in place. If they take hold, it would be a turning point for the U.S. economy, creating the financial foundation for sustainable and green technologies, said William Bumpers, the chair of the climate change practice at law firm Baker Botts.

"If enacted and implemented, 20 years from now we'll look down the road and see this is as the most important piece of legislation in the history of the country," said Bumpers. "It has truly transformational potential."

On the panel were energy industry executives who are lobbying for quick enactment of carbon regulations, which would be phased in over the next five years. They included Jim Rogers, the CEO of utility Duke Energy, and NRG Energy CEO David Crane, a power generation company that relies primarily on fossil fuels.

Despite the support in some quarters, climate change laws are opposed by some business leaders and politicians, particularly from states in the South and Midwest that rely heavily on coal for power generation. As such, even if the House passes a bill this year, it faces a tough road in the Senate.

That's why negotiating the details of a "transition period" between now and a future low-carbon economy are so crucial, panelists said.

"We can keep the costs to households to pennies a day," said panelist Fred Krupp, the president of Environmental Defense Fund. "We can limit the costs to very manageable levels if we do it right. I think the equitable thing to do is to have a transition."

Businesses typically favor a cap-and-trade system, rather than a straight carbon tax. With a cap-and-trade system, big polluters such as utilities and cement manufacturers purchase or are given permits to emit carbon. Permits can be traded among participants to stay under an emissions limit--the cap--established by government.

Up for debate are how many of those permits are given away, rather than auctioned off. The House bill, for example, calls for giving away permits to heavy polluting industries in an effort to keep them competitive internationally.

Panelists said that a legislative approach to regulating carbon emissions is better than having the EPA regulate them under the Clean Air Act because Congress can better deal with the complexity of the situation. The Obama administration, too, prefers "comprehensive legislation" over regulation by the EPA.

Best or last chance?
It's important to establish a price on carbon emissions because large businesses are waiting for a "price signal" before they make investments in low-carbon technologies, Krupp said.

Once that price is in place, a utility that relies heavily on coal, for example, will invest in renewable energy or technology to store carbon dioxide underground. That also helps create jobs for people in clean-energy industries, Krupp added.

In cap-and-trade proposals in general, there is a long-term horizon for emissions target reductions--the House bill targets an 83 percent decrease in carbon emissions compared with 2005 levels by 2050.

Because of that time scale, a utility can upgrade its power generation facilities around cleaner forms of energy and efficiency and address the "carbon issue" at the same time, said Duke's Rogers.

"The fact is that electricity prices will go up anyway as we retire and replace power generation so why not address this environmental issue at the same time," he said.

"The key is to smooth out the cost increases as much as possible, to help the business plan, and help us use electricity more efficiently," he said.

Successfully managing the transition to minimize or eliminate cost increases on consumers is important to get right in the coming year, Bumpers said. Otherwise, carbon regulations will be set back years.

"Businesses will have an obligation to deal with a capital commitment over the next 30 years that is unprecedented," Bumpers said. "If we don't manage this transition by mitigating cost impacts...there could be political backlash because prices have gone too high too quickly...Those trillions of dollars of investments will turn out to be bad investments."