Sen. John McCain (R-Ariz.) blasted President Obama's cap-and-trade proposal today, saying it represented a "irresponsible, ill-conceived and distorted version of a cap-and-trade system."

Under cap-and-trade, the government would establish an emissions ceiling that polluters can exceed only if they obtain allowances.

Obama favors auctioning off all of those allowances, while some Republicans and moderate Democrats think a portion should be given away initially to ease businesses' transition into the new system.

"The president's proposal of auctioning 100 percent of the carbon credits is bad economic policy that would cost businesses billions of dollars and allow for little-to-no transition into a low carbon system," McCain told the Reform Institute Forum today. "I am a supporter of a strong cap-and-trade system, but I will not and cannot align myself with a giant government slush fund that will further burden our businesses and consumers."

The legislation currently being discussed in the House does not dictate what portion of the allowances would be auctioned. Rep. Ed Markey (D-Mass.), a co-sponsor of the legislation, has said he believes at least some portion should be given away at first.

"Initially, at least, we have to set aside a certain amount of the carbon credits to ensure that the steel, the paper and other trade-sensitive, energy-intensive industries are not exploited in the near term by the Chinese and others in terms of them taking advantage of this increased cost," he told an MIT conference. "Right off the top, we cannot auction off all those credits."

President Obama did say during his campaign that all allowances under a cap-and-trade policy should be auctioned. But there are signs the administration is open to a compromise.

In an interview with the Washington Post, White House Science Adviser John Holdren hinted that an all-auction policy might not be feasible.

"The idea, obviously, is to end up with a bill that reflects both the thinking of Congress and the administration, a bill that the president can sign," Holdren said. He added that "whether you get to start with [100% auctions] or get there over a period of time is something that's being discussed."

Even environmentalists are flexible on the issue.

"It's not essential to us that there be 100% auctions from the start," said David Doniger, Policy Director of the Climate Center at the National Resources Defense Fund. "I think over time you want to get there."