The House Energy and Commerce committee passed the American Clean Energy Security Act (H.R.2454), also known as the Waxman-Markey bill, on May 21. The bill is expected to be considered by other House committees in the coming days and is reportedly on a fast track for a vote in the full House before the July 4 recess.

While there are many important changes that this 946-page tome is aiming to bring about, we are focusing here on one central part of the proposed legislation — the Cap & Trade regime. The bill creates winners and losers among different energy producing and consuming sectors through its initial free awards of emission permits.

Approximately 85% of the permits are doled out for free, with the rest auctioned off. According to a preliminary estimate by the EPA, a permit to emit one ton of carbon dioxide or equivalent will be worth $11-$15 in 2012, with the value of all permits at around $60 billion in 2012. By the 2025, the value would be higher, according to EPA estimates, rising to $22-$28, with the total value at around $113 billion.

Oil producers and refiners, such as Valero (VLO), Tesoro (TSO) and ConocoPhillips (COP) are clearly on the losing side, having been allocated a very small portion of the permits (2%). This forces them to purchase permits on their own account. Electric utilities and other consuming industries such as steel, cement and paper manufacturers benefiting from the giveaways.

Here are the salient features of the Cap & Trade system as proposed in the bill:

  • Starting in 2012, industries would be required to reduce their emissions to specific targets through the middle of the century. The cap-and-trade system comes completely into force by 2016.
  • The bill aims to cut emissions by 17% below the 2005 level by 2020 and 42% by 2030. By 2050, emissions are expected to drop by 80% below the 2005 level.
  • The bill requires companies to buy permits to be allowed to emit carbon dioxide and other polluting gases. If a company cuts its emissions by more than the statutory limit, then it can sell the extra permits. Conversely, a company needing extra permits can purchase those.
  • If a company’s emissions exceed its permits, it would be fined two times the value of the permits it should have purchased.

Read the full analyst report on “VLO”
Read the full analyst report on “TSO”
Read the full analyst report on “COP”
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