FACTBOX: Business interests in U.S. climate bill

(Reuters) - The U.S. Senate is debating this week a bill that would aim to fight global warming by creating a carbon market sparked by regulation of greenhouse gases.

Any climate bill is not expected to become law until after the next U.S. administration comes to power. President George W. Bush said he would veto the bill if it passes Congress because it would be too expensive.

But the Senate's discussion of the bill sponsored by senators Joseph Lieberman, a Connecticut independent, and John Warner, a Virginia Republican, has been cited as a first step in forming a climate law in the country that has historically been the world's top greenhouse polluter. Here is a summary of what is at stake for businesses in Lieberman-Warner.

1) ALLOWANCE ALLOCATION

Credits for the right to emit greenhouse gases in a cap-and-trade system would represent an asset worth $100 billion or more annually. There are two approaches to allocations: giving them away, or auctioning them. In other emissions schemes where they have been given away, allowances have been "grandfathered" to regulated emitters, such as refiners or power plants, based on past greenhouse gas output.

Supporters of grandfatherings say giving allowances for free helps businesses deal with initial costs of the pollution regulation. On the other hand, giving away allowances to producers could lead to windfall profits and make them better off under a climate policy than before, because the cost of emissions permits may be passed to consumers.

In an allowance auction, the government receives the auction revenue from the firms that purchase the allowances. Auction supporters say they can cut program costs and raise revenues that the government can use to fund programs such as clean energy investments or reduce taxes.

-WHAT LIEBERMAN-WARNER WOULD DO:

Both. It would give one-third of the allowances to industry, gradually phasing out free allocation by 2030. It would auction or directly allocate a little more than 25 percent of allowances for federal programs, including technology deployment and climate adaptation programs.

2) COMPETITIVENESS

Climate policy costs give rise to concerns about the ability of U.S. producers to compete against foreign suppliers operating in countries where emissions do not carry similar costs, especially in energy-intensive sectors.

A second concern is that costs can lead U.S. production of goods to shift abroad to unregulated foreign firms, and the resulting emissions leakage would undermine the environmental benefits of the policy.

-WHAT LW WOULD DO: Would require energy-intensive imports from countries without comparable climate policies to purchase "international reserve allowances," essentially a border tax set at current market prices for allowances for the carbon content of the imports starting in 2020.

3) TECHNOLOGY

Responding to the risks posed by climate change will require the development of new low-carbon technologies. Policies that impose a price on carbon emissions would help push these technologies into the marketplace.

But there may also be a lack of confidence in the long-term government commitment to emissions pricing.

-WHAT LW WOULD DO: About 13 percent of the allowance value would be auctioned, or used directly for technology support. Most technology provisions are deployment incentives for low-and zero-carbon generation, renewable energy, cellulosic fuels, and advanced vehicles. An amendment would decrease this to about 10 percent of the allowance value. There are also bonus allowances set aside for carbon capture and storage projects of 3 or 4 percent.

4) OFFSETS

Most programs to limit greenhouse gas emissions include provisions that allow players to seek reductions outside the regulated system, such as destroying methane at farms or building solar and wind power farms, typically known as offsets.

Offsets can expand the pool of low-cost reduction options. Many offset projects, however, present challenges: reductions can be difficult to measure or, in the case of carbon capture and burial, carry risks of impermanence.

-WHAT LW WOULD DO:

Allow offsets from domestic projects for up to 15 percent of the annual emissions cap. Allow offsets from international projects for up to 5 percent of the cap, and up to 10 percent for international forest carbon offsets.

If these limits are not met, allowances from other international trading systems may be used, but the total number of offsets is limited to 30 percent of the annual cap.

--Source: Resources for the Future

(Reporting by Timothy Gardner, editing by Matthew Lewis)