It is in Title III of the draft that cap-and-trade, and other market based mechanisms for mitigation are introduced. Before looking at the details, a note about cap-and-trade: in order to be an effective tool for reducing reductions, the actual “cap” part of the cap-and-trade needs to be substantially lower than current emissions, it needs to be ratcheted down over time, and it needs to avoid excessive grandfathering. Additionally, and I will argue to an emasculating extent, this title leans very heavily on offsets to reduce global warming pollution.
The draft takes steps towards meeting these criteria, but the immediate economic implications of cap-and-trade are likely to favor growth and sustained affordable prices or consumers. The companies – including oil and utilities – that are responsible for 85% of American GHG emissions are mentioned particularly by the draft. Federal allowances are provided for each ton of CO2 emitted, and companies emitting over 25,000 tons of CO2 (apparently, only companies emitting over that amount) must obtain credits from the federal government for each ton of CO2 that they emit. The particulars of the initial allocation of credits are unclear, but it seems inevitable that some sort of grandfathering in of allowances will occur; to the extent that the cost of reducing emissions is lower when overall emissions from a firm are higher (to the “left” of a marginal control cost curve), the heaviest emitters should indeed cut their emissions quickly if this bill is enacted. The draft calls for a ratcheting down of the cap such that by 2050, emissions are 83% below 2005 levels (3% below ’05 levels by 2012, 20% by 2020, and 42% by 2030). As expected, the most severe shocks that will occur from legitimate emissions reductions are left to the medium term.
In any event, reducing emissions to 20% of 2005 levels by 2020 is an ambitious enough call that opposition will be fierce. There will be a fairly substantial coalition of both republicans and blue dog & coal state democrats that will be pushing to loosen the cap, should the bill pass at all. John Boehner (who called the threat of climate change "comical") and Eric Cantor are already working to rally what political capital they have to stop this bill from doing what it's intended to do.
The draft then goes on to call for carbon offsets and other means of reducing emissions through mechanisms that do not directly operate on American soil. Two billion tons of emissions reductions are called for in just the “prevention of international deforestation.” To account for some of the shortcomings of offsets – including the potential for them to not be permanent – the draft requires 5 tons worth of credits for 4 tons worth of CO2 that is offset. The limitations remain, and 2 billion tons is a large portion of emissions to ascribe to the somewhat nebulous black box of offsets.
An interesting quasi-loophole is written into the draft: 2.5 billion tons of “strategic reserve” allowances will be created, that can be auctioned off if prices rise unexpectedly high. It’s interesting that although the “free market” character of cap-and-trade is what makes it politically palatable to many, there is an implicit mechanism to actually disrupt the mechanics of the system should they yield consequences that are, essentially, unpopular.