Today the Senate is debating a climate change bill meant to cause the American industry to reduce emissions of carbon dioxide.

The bill would create a complex system of emission allowances — CO2 comes from the burning of oil, gasoline, and coal — that companies could buy and sell, a “cap-and-trade” system. Such a system would, at least in theory, put a ceiling on the amount of emissions overall.

The bill is sponsored by Senators Lieberman and Warner, a Republican of Virginia. Senator Boxer, a Democrat of California, has made substantive amendments to it. The bill has not passed the House yet, and President Bush has threatened a veto. But sponsors want a strong showing so that next year a President Obama or McCain might be more congenial.

Many economists like the cap-and-trade approach because trading allowances can insure the best use of a valuable resource. Permits have been used successfully to regulate emissions of sulfur dioxide and to prevent over-fishing in Alaska.

But Congress is using cap-and-trade not as a means of economic efficiency, but as a way of rewarding friends and raising revenue. The bill is permeated with politics that cost the taxpayer and disadvantage those groups that don’t happen to have their own line in the bill.

The home states of Mr. Warner and of Senator Baucus of Montana get 15% of rural electric allowances even though these states account for far less than 15% of the output. Ms. Boxer’s home state of California most likely will escape the 11% to 64% overall hike in electricity prices caused by the bill because California uses little coal.

The bill would create two new government agencies, the Carbon Marketing Efficiency Board and the Climate Change Credit Corporation, funded with tax dollars from large businesses. They would set declining limits on American annual emissions and allocate allowances for emissions, some by auction, to existing companies and start-ups.

Just like brownie points, allowances for extra emissions would be allocated as a reward for politically-correct behavior. For example, businesses that have reduced emissions since 1994 would receive early distributions of allowances through 2016. Special allowances would go to states that have adopted emissions restrictions that are more stringent than federal regulations.

The bill would require companies to adopt carbon-accounting systems that would make taxes look simple. Companies would have to submit quarterly data to the government on fossil fuels, greenhouse gases, and electricity used, traded, produced, or consumed.

These huge transactions among companies and between the private sector and the government would create opportunities for self-dealing, dishonest reporting, and corruption.

The Lieberman-Warner bill would require annual reductions in emissions starting in 2012. Emissions would fall to 5.8 billion carbon dioxide equivalents in 2012 from 2006 levels of 7.1 billion carbon dioxide equivalents, an 18% decline, and then to 1.7 billion carbon dioxide equivalents in 2050. This would be a 76% decline over 44 years. If it strains your imagination of how this can be done without sacrificing economic growth and activity, you’re not alone.

So here’s how the cap-and-trade system would actually work. Starting in 2012, the cap for all emissions would be specified and reduced annually. Businesses would be given credits if they devised so-called offsets, such as planting trees, which absorb carbon, or carbon capture, which pumps carbon into deep, underground vaults.

Each metric ton of carbon dioxide equivalent would be assigned a unique ID number so that the new federal agency can track where carbon goes. At the end of each year, businesses would be required to submit either an emission allowance, offset allowance, or international emission allowance for each carbon dioxide equivalent, at which point the allowance is retired.

In such a system, those who have allowances to emit greenhouse gases are in a favorable position, and these allowances would be increasingly held by the new federal agencies. The Climate Change Credit Corporation would receive a percentage of the annual emissions allowances to distribute by auction, starting with 21% in 2012, and increasing annually until reaching 69% in 2031, with the revenues accruing to the government.

To help further the system, the bill makes a bow to promoting energy efficiency at home, encouraging public transportation, and fostering technology to use energy more efficiently. Yet we’ve seen that higher prices do most of that — being confronted with high oil prices, individuals put their own personal cap on demand for oil businesses will replace travel with video-conferencing. I, for example, have begun pedaling my bicycle to the office.

To avoid American companies escaping the system by fleeing abroad, in 2019 American importers would be subject to an “International Reserve Allowance” limit. Products from countries that don’t have emissions reduction plans would require International Allowances. This is unworkable and possibly contradicts World Trade Organization laws. Furthermore, it makes no sense for America to regulate greenhouse gases without countries such as China and India doing the same.

To achieve its goals of cutting emissions, Lieberman-Warner sets up an unworkable bureaucracy, with opportunities for corruption and payoffs. Even a carbon tax, which I oppose, would be a simpler and more efficient alternative if senators want Americans to pay even more for energy.

Ms. Furchtgott-Roth, dfr@hudson.org, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute.