At a meeting with senior corporate executives sponsored by the Business Roundtable, President Barack Obama said that distributing greenhouse gas emission allowances for free “doesn’t work,” but acknowledged that his climate change plan has little chance of clearing Congress without strong support from business and industry.

In his budget request for fiscal year 2010, Obama called on Congress to work with the White House to establish an economywide greenhouse cap-and-trade program to trim U.S. emissions by 14% below 2005 levels by 2020 and by 83% by mid-century.

The budget request also called for auctioning all the allowances industry would need to comply, saying this approach would “ensure that the biggest polluters do not enjoy windfall profits.” The plan called for spending $150 billion of the auction revenues for clean energy technologies and for returning the balance of the revenues to consumers—“especially vulnerable families, communities and businesses to help the transition to a clean energy economy.”

Tough Crowd

Obama’s appearance before than 60 chief executives followed a warning by Senate Budget Committee Chairman Kent Conrad (D-N.D.) before the meeting that the president’s climate plan lacks the votes to clear the Senate in its current form.

Obama’s remarks seemed intended not only to soothe industry concerns but also to send a clear signal to Conrad and other Democrats disquieted by the cap-and-trade proposal that the White House is mindful of their concerns. But, he said a U.S. climate change response must also send a clear signal to entrepreneurs that investments in clean energy will be rewarded.

“Now, the experience of a cap-and-trade system thus far is that if you’re giving away carbon permits for free, then basically you’re not really pricing the thing and it doesn’t work, or people can game the system in so many ways that it’s not creating the incentive structures that we’re looking for,” Obama said, according to a transcript provided by the White House.

“The flip side is . . . if it’s so onerous that people can’t meet it, then it defeats the purpose—and politically we can’t get it done anyway.

“So, we’re going to have to find a structure that arrives at that right balance. We want to create a price structure. Keep in mind that the reason I’m interested in a cap-and-trade approach is precisely because I think the market makes decisions about these technologies better than we do.”

Negotiations Begin

At a Senate Budget Committee hearing on the president’s fiscal 2010 budget request, Conrad told Energy Secretary Steven Chu that a number of Democrats think the president’s plan doesn’t provide enough money to help consumers cope with the higher energy prices expected to result from a cap on carbon emissions.

Conrad also warned Chu that he and other lawmakers want to see more money set aside to protect vulnerable industries—such as energy-intensive manufacturers, coal-dependent utilities, and companies that would face unfair competition in the global marketplace from companies based in countries not bound by an emissions cap.

“It’s very important for the administration to understand what I’ve been hearing,” Conrad said. “I know it discomforts some in the administration to hear that the budget as is, in my judgment, just as it’s written, probably can’t pass here.”

Conrad later told reporters that in addition to helping consumers and vulnerable industries, some Democrats think some of the auction revenues also should be used to reduce the burgeoning federal deficit.

Other Democrats also weighed in at the hearing. Sen. Debbie Stabenow (D-Mich.), whose state has been hit particularly hard by the global recession, and Sen. Ron Wyden (D-Ore.) said they were particularly worried that Obama’s plan may not provide enough protection for low-income consumers. Stabenow also urged Chu to consider a different approach for using the auction revenues.

“I’d like to work with you in this budget to put forward a clean energy fund that would be within the context of this budget, but would not be tied to the cap-and-trade regime specifically, in case this takes a little bit longer to get done,” Stabenow said.

Minority Party Piles On

House Democrats have been less vocal in their complaints than their Senate colleagues. At a House Democratic caucus meeting with Office of Management and Budget Director Peter Orszag on Mar. 12, members asked few questions, and none about the auction proposal, Rep. Bart Stupak (D-Mich.) told The Energy Daily. But Stupak said many of his House Democratic colleagues have the same concerns as Senate Democrats have.

“I think that there is concern about how to distribute the auction funds,” Stupak said. “There is a feeling that consumers aren’t getting enough back to offset the costs [of an emissions cap.]”

Obama acknowledged that he is hearing from congressional Democrats concerned about his proposal, but he reminded the business leaders that the science underpinning global warming concerns is “overwhelming” and that the United States and other countries already are feeling the impacts of climate change, pointing to water shortages in the Southeast, the Southwest, and California and an unprecedented 10-year drought in Australia.

“I was talking to some members of Congress just yesterday, you know, who were concerned about this, because I’m sure they’re hearing from industries and, you know, what does this mean economically, et cetera,” Obama said.

“I just want to point out, you know, anybody who has been to Las Vegas recently and looked at Lake Mead; or is familiar with what’s happening with agriculture in California right now; or go down to Atlanta, which may not have any water soon, because of what’s happening in terms of changing weather patterns; or talk to [Prime Minister] Kevin Rudd in Australia—that’s going to cost us money, too. It’s just not—it’s not priced.”

—Chris Holly (cholly@accessintel.com) is a reporter for COAL POWER’s sister publication, The Energy Daily.