Under the proposed law, roughly $1 trillion worth of carbon allotments would be allocated in the beginning. The biggest share of the allotments, totaling about 37 percent, would be handed out to electrical utility companies. The theory behind giving so many allotments to utilities was that it would ultimately ease the regulatory burden on most consumers, who didn’t have a choice but to use electricity. The oil refineries, by contrast, would receive just 1.7 percent of the allotments. This tiny sliver of allotments was barely visible in the pie chart that Koch’s lobbyists were circulating. Even Hoffmann was swayed by this graphic presentation.
“It was pretty clear that Congress was targeting the refinery industry,” he said. “It did seem starkly unfair.”
There was even more for Koch to worry about. The government could ratchet down the allotments over time, squeezing the refineries even harder. It looked like a plan to make oil refining a thing of the past.
As it happened, the carbon allotment provision of the Waxman-Markey law was written by Jonathan Phillips, the twenty-nine-year-old congressional aide who was toiling away in the basement of the Longworth Building. Phillips had no idea that he had just become Koch Industries’ chief antagonist. He was too busy working.
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During the spring of 2009, the long-held liberal dream of passing a cap-and-trade bill was starting to look like a reality. Henry Waxman was in charge of the House Energy Committee, Ed Markey was lobbying his fellow Congress members, and President Obama was speaking in favor of its passage. The Committee on Global Warming spent years provoking Congress into action, and now that action was here. Phillips and his coworkers knew that they had one chance to get it right.
Phillips was asked to write a significant portion of the bill that would create a mandate to spur energy production from renewable sources like wind turbines and solar panels. Creating an economically transformational law wasn’t nearly so hard in 2009 as it had been in the early 1930s, when Franklin Roosevelt’s administration laid the groundwork for the New Deal. The basic policy machinery of the New Deal was still in place, which created a self-propelling momentum to increasing federal power. As Phillips and his colleagues sought to construct a cap-and-trade system, all they had to do was tweak the massive legislative structure that was already in place. The entire Waxman-Markey law, in fact, was really just an amendment of the Clean Air Act, the Federal Power Act, and other existing laws. It wasn’t even necessary to create a new federal agency to implement the law. The carbon cap could be imposed and policed by the EPA, and the renewable-energy mandate could be imposed by the Federal Energy Regulatory Commission, for example.
This was, in short, Charles Koch’s worst nightmare. As the government became more powerful, it became easier to expand those powers.
The technical aspects of the bill were mostly settled by early 2009. Phillips and his colleagues were now working on another aspect of the bill: its politics. They needed to win support from a majority of Democrats, which was problematic. One inarguable fact about the cap-and-trade bill is that it would put a price on carbon and thereby increase energy prices, at least in the near term. Oil prices would go up. Coal prices would go up. Electricity bills would go up. Congress members knew that supporting the bill would draw relentless political attacks when higher energy costs were realized. It was true that stemming carbon emissions might mitigate an eventual climate disaster, but this wouldn’t help a congressman get reelected in two years’ time.
Phillips and his colleagues needed something more than an argument to persuade hesitant Democrats. Luckily, they did have something: an immense pot of money called carbon emission allotments. When a cap was put on carbon, the right to pollute with greenhouse gases would instantly be worth at least billions of dollars. And the government would possess a newly invented piggy bank from which it could disburse the money.
Based in part on observations of carbon trading markets in Europe, most experts estimated that the price of carbon would float around $13 to $15 a ton in the first years of the market. The Waxman-Markey bill allowed for roughly $1 trillion in allotments during the first thirteen years of the law’s enactment. The initial allotments might become even more valuable over time because the bill called for total greenhouse gas emissions to fall 17 percent from their levels in 2005 by the year 2020.
“We created a commodity out of nothing,” Phillips said.
The committee invited conservative Democrats to negotiate how the allotments would be allocated, creating a windfall available to early adopters of the cap-and-trade system. Phillips and his colleagues held closed-door meetings with staffers for congressmen like Gene Green of Texas and Virginia’s Rick Boucher, whose home districts were rich in fossil fuel jobs. The political horse trading gained intensity through April and May as Waxman-Markey gained support in the House. Phillips said that the energy-backed Democrats bargained hard for a big share of allotments. The committee couldn’t help but comply. “The last thing we wanted to do was be responsible for shutting down US industry,” Phillips said. “So they had a captive audience.”
The biggest share of allotments—about $378 billion worth—was given to the electrical utility companies. Just 6 percent of the allotments would be paid to support renewable-energy sources and energy efficiency plans at the state level. That was less than the 6.5 percent offered to natural-gas-fired utilities.
Phillips said that the oil refiners pushed hard for more allotments, mostly through the office of Gene Green, who had multiple oil refineries in his home district in Texas. Ultimately, they agreed to a price. The bill would pay out $17.8 billion to the oil refiners. Phillips and his colleagues made this concession over the protests of environmental groups, who already claimed that the cap-and-trade system favored polluters. Even with that pressure coming from liberal Democrats, the subsidy to oil refineries seemed necessary to get the bill passed.
“They got a great deal,” Phillips said.
His view was not shared by Koch Industries’ lobbyists. While Phillips was using carbon allotments to target conservative lawmakers who were hesitant to support the bill, Koch’s lobbying shop was employing different tactics.
David Hoffmann heard the strategy laid out during the meeting of Koch lobbyists. Koch decided to target moderate Republican politicians who might be tempted to support the measure. There were not enough Republican votes in Congress to kill the bill, but Republican resistance could help slow its passage and make conservative Democrats think twice about supporting it. These were the very same votes that Phillips and his colleagues were trying to secure in the early summer of 2009. If Koch could peel away support from the Republican side, the effort might collapse.
“It was all about identifying those representatives who were on the fence,” Hoffmann recalled. “I just remember them talking about individual representatives they needed to reach out to.”
There was no better target, in this effort, than a deeply conservative congressman from South Carolina named Bob Inglis. He was a close ally of Koch Industries, who had taken the company’s campaign donations and toured its factories. But Inglis would later admit that he was a “heretic” on one issue: global warming. It would make him an example to his peers—and destroy his career.
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