A cap-and-trade system begins by placing a cap on carbon emissions and distributing permits (permission to emit a certain amount of CO2) equal to the capped amount. The notion is that permits will be bought and sold, allowing market forces to determine where emission reductions can be made fastest and easiest. The question is how to distribute those initial permits.

When the EU carbon trading system was established, permits were given away based on emissions, meaning the biggest polluters got the most permits. The idea was that those polluters most needed the money because they had the biggest reductions to make, but in practice it was an enormous financial windfall for their shareholders and prompted very little action on their part to reduce emissions.

The alternative is to sell the permits at auction. This would, in effect, put the proceeds in government coffers rather than in the pockets of utility shareholders. The question then becomes: what should the gov’t do with all that money (up to $50B a year)?

The Lieberman-Warner cap-and-trade proposal, released early this year, was widely seen as the "moderate" bill that could get some support from Senate Republicans. One of the biggest criticisms it faced is that it would auction only 20% of the permits — 80% would be given away to polluters.

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But an intriguing item in Politico indicates that Lieberman may be open to changing that:

Lieberman, following a forum sponsored by the Progressive Policy Institute Wednesday, said such a change to his legislation was possible. "We’ve heard [calls for a 100 percent auction] from some stakeholders and heard that from some of our members. We’re thinking about it. Warner and I haven’t closed our minds to that. It’s on the table," he said.

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This could be huge news. The L-W proposal is viewed as the middle of the road. If it moves to 100% auctioned credits, that will effectively sanctify it as the new baseline. The policy and political implications are both huge.