[Senate Hearing 109-420]
[From the U.S. Government Publishing Office]
S. Hrg. 109-420
CLIMATE CHANGE
=======================================================================
CONFERENCE
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
on
CLIMATE CHANGE
__________
APRIL 4, 2006
Printed for the use of the
Committee on Energy and Natural Resources
______
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
PETE V. DOMENICI, New Mexico, Chairman
LARRY E. CRAIG, Idaho JEFF BINGAMAN, New Mexico
CRAIG THOMAS, Wyoming DANIEL K. AKAKA, Hawaii
LAMAR ALEXANDER, Tennessee BYRON L. DORGAN, North Dakota
LISA MURKOWSKI, Alaska RON WYDEN, Oregon
RICHARD BURR, North Carolina TIM JOHNSON, South Dakota
MEL MARTINEZ, Florida MARY L. LANDRIEU, Louisiana
JAMES M. TALENT, Missouri DIANNE FEINSTEIN, California
CONRAD BURNS, Montana MARIA CANTWELL, Washington
GEORGE ALLEN, Virginia JON S. CORZINE, New Jersey
GORDON SMITH, Oregon KEN SALAZAR, Colorado
JIM BUNNING, Kentucky
Bruce M. Evans, Staff Director
Judith K. Pensabene, Chief Counsel
Robert M. Simon, Democratic Staff Director
Sam E. Fowler, Democratic Chief Counsel
John Peschke, Professional Staff Member
Jonathan Black, Democratic Legislative Assistant
C O N T E N T S
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STATEMENTS
Page
Bailey, Paul, Director, Generators for Clear Air................. 43
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 2
Bradley, Michael, Executive Director, Clean Energy Group......... 40
Callahan, Kateri, President, Alliance to Save Energy............. 38
Claussen, Eileen, President, Pew Center.......................... 62
Domenici, Hon. Pete V., U.S. Senator from New Mexico............. 1
Doniger, David, Policy Director, Climate Center, Natural
Resources Defense Council...................................... 46
Edward, Garth, Trading Manager, Environmental Products, Shell.... 7
Feinstein, Hon. Dianne, U.S. Senator from California............. 14
Grumet, Jason, Executive Director, National Commission on Energy
Policy......................................................... 24
Helme, Ned, President, Center for Clean Air Policy............... 21
Hobson, Chris, Senior Vice President, Research and Environmental
Affairs, Southern Company...................................... 9
Johnson, Kirk, Executive Director of Environmental Affairs,
National Rural Electric Cooperative............................ 45
Krupp, Fred, President, Environmental Defense.................... 42
Marron, Donald, Acting Director, Congressional Budget Office..... 22
Moler, Elizabeth A., Executive Vice President, Government and
Environmental Affairs and Public Policy, Exelon Corporation.... 5
Montesano, Craig, Director of Governmental Affairs, National
Mining Association............................................. 44
Morris, Michael, Chairman of the Board of Directors, Edison
Electric Institute............................................. 41
Morris, Michael, Chairman of the Board, President, and Chief
Executive Officer, American Electric Power..................... 58
Murray, Michael, Director, Legislative Policy, Sempra Energy..... 8
Pershing, Jonathan, Director, Climate, Energy, and Pollution
Program, World Resources Institute............................. 63
Pizer, William, Senior Fellow, Resources for the Future.......... 26
Pomerance, Rafe, Chairman, Climate Policy Center................. 60
Richels, Richard, Technical Executive for Global Climate Change
Research, Electric Power Research Institute.................... 23
Rosenzweig, Richard, Chief Operating Officer, Member of
International Climate Change Partner, Natsource................ 61
Ruben, Andy, Vice President of Corporate Strategy and
Sustainability, Wal-Mart Stores, Inc........................... 10
Shaw, Ruth, Group Executive for Public Policy and President for
Duke Nuclear, Duke Energy Corporation.......................... 4
Slump, David, General Manager, Global Marketing, GE Energy,
General Electric Company....................................... 5
Sterba, Jeff, Chairman, President, and CEO, PNM Resources........ 6
Thorning, Margo, Senior Vice President and Chief Economist,
American Council for Capital Formation......................... 20
Walsh, Michael, Senior Vice President, Chicago Climate Exchange.. 59
Wolfe, Samuel, Chief Counsel, New Jersey Board of Public
Utilities...................................................... 25
CLIMATE CHANGE
----------
TUESDAY, APRIL 4, 2006
U.S. Senate,
Committee on Energy and Natural Resources
Washington, DC.
The committee met, pursuant to notice, at 9:55 a.m., in
room SD-G50, Dirksen Senate Office Building, Hon. Pete V.
Domenici, chairman, presiding.
OPENING STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR FROM
NEW MEXICO
The Chairman. Hello, everybody. I guess if one was planning
a way to make something difficult, we would have planned it
this way. It is going to be about as tough as possible to get
this done in an orderly manner. Nonetheless, we want you to
know we do appreciate it, and we're going to get the benefit of
what is gathered here and what you have worked on, regardless
on the--what intervenes and what causes us to have commotion
because of us not being in control of the Senate. And we are
not in control of that.
The Senate's going to have votes this afternoon. There's an
appropriations markup, which takes six of our members. Other
things are going to intervene regularly. And we are about as
far from the floor as we can be, by just an accident of
arrangement. So, that's going to mess things up a bit, too.
But I think what we'll do is just see what happens, and you
bear with us. Okay? We'll try to follow our schedule.
I have some brief opening remarks, and then I'll yield to
Senator Bingaman, and we'll move right along from there.
First, I want to take this opportunity to thank everyone
who submitted comments on our white paper. We received more
than 150 submissions, containing more than 500 individual
documents. Our white paper is based on the Sense of the Senate
Resolution adopted by the U.S. Senate shortly before it passed
the Energy Policy Act of 2005. That resolution was not included
in the conference report, but Senator Bingaman and I agreed
that we would follow that resolution with the white paper in an
attempt to identify a path forward on developing an approach to
a mandatory-based mechanism.
The white paper proposed four questions: Who is regulated,
and where? Should allowances be free or auctioned? Should a
U.S. system allow trading with other cap-and-trade systems
around the world? And should the U.S. cap-and-trade system be
conditioned on comparable action by developing nations?
These, the response, both in terms of sheer numbers and
breadth of input, is overwhelming. Most of those who submitted
answers were extremely generous with their time and ideas, for
which we are extremely grateful. A number of responses were
adamantly opposed to the imposition of mandatory controls on
greenhouse gas emissions. Some expressed opposition, others
offered suggestions about how to construct a mandatory program.
Still others wholeheartedly supported a mandatory approach. A
number of comments suggested an upstream approach to
regulation. Others recommended regulating downstream, large
emitters. And still others recommended a hybrid system that
regulates at various points along the economic spectrum.
Responses to other questions were equally diverse. Some
favor free allowances, to minimize any economic impacts, others
favor the allowance auction approach. Some favored linking
trading with other systems, and opposed linkage. With regard to
comparable action by the developing world, some suggested
waiting for such action by others, and some submitters urged
that the United States move now, rather than wait, and believes
that our imposition would encourage the development, in those
nations, of similar or the same.
Obviously, I have simplified, dramatically, the range of
responses. Many are very detailed and complex, and, in some
instances, it was very hard to even summarize them, to be
honest. But the range of responses to the questions supports my
feeling, when we were discussing a possible amendment to the
energy bill--I felt then, and I feel now, that designing and
implementing a mandatory system will be very difficult, both
politically and economically. Consensus will be a very
difficult thing. But I also feel now, as I did then, that we
need to start somewhere. And this conference is our starting
point.
Special thanks go to those selected to participate today.
Your comments illuminate the magnitude of the task faced by the
committee, and, indeed, the task faced by the Congress, if it
is to design a mandatory market-based greenhouse gas emission
program that is fair to all affected and produces substantial
greenhouse gas emission reductions that does no harm, does
maximum harm to the--minimum harm to the economy and encourages
the developing world to get on with their part of the effort.
I do not know where we will end up, but I do believe that a
large number of our citizens are concerned about climate change
and I think that Congress needs to explore ways to reduce our
contribution to the greenhouse gases to the atmosphere.
With that, I ask Senator Bingaman to take his time and
proceed as he sees fit.
Senator Bingaman.
STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR
FROM NEW MEXICO
Senator Bingaman. Thank you very much, Mr. Chairman.
Thanks, first, to you for holding this conference. I think this
is a very useful thing to be doing, and I echo your thanks to
all of those who are participating and to all of those who have
filed comments in response to the white paper that we issued. I
think that the seriousness with which many of the respondents
address the issues, I think, is very heartening. It's obvious
that this is a subject that many people feel is in need of
attention.
Let me just take the rest of my few minutes here to call on
Perry Lindstrom, who's with the Energy Information Agency. He,
kindly, came over here to very briefly explain a chart that the
Energy Information Administration prepared for us, entitled
``Greenhouse Gas Emissions Flow 2004.'' When I finally took the
time to look at that chart, I thought it was pretty useful. And
so, I suggested that maybe Perry could come and briefly
describe what's involved with the chart. I think copies have
been made available to people.
And, Perry, why don't you go ahead and give us your short
explanation, and then I think the chairman intends to go ahead
with the statements.
Go ahead, Perry.
Mr. Lindstrom. Thank you, Senator.
This is just a brief overview of what the emissions look
like in the economy in 2004, which is the latest year for which
we have complete data. As you see, petroleum is the largest
single category, starting on the left here, which is the--kind
of the input, or upstream, side. And then coal is the second
largest, followed by natural gas. If you look down here, this
``renewables'' is mainly plastics and things of that nature
that are burned at municipal solid-waste sites, things of that
nature.
So, those four categories make the energy total--subtotal.
And then, you add to that, for the CO2 total,
industrial process emissions, and that gives you the total
CO2 in the economy.
In addition to CO2, there are other gases, such
as methane, nitrous oxide, and some high GWP gases, which are
more esoteric, things like sulphur hexafluoride, that are also
used in our economy.
You move from there to the middle of the chart, this is
where the conversion to electricity takes place. And you see
that we have ``direct emissions'' here, which then are in the
end-use sectors. And then, the conversion emissions, we
allocate them out to the end-use sectors based on electricity
sales.
A little more complex part of this chart was allocating
methane and nitrous oxide and the other gases to the end-use
sectors. We had to make some judgments as to where those other
gases would go, and you can see, from looking at the ``C''
section, over to the far right, that many of those end up in
the industrial sector, in terms of our end-use allocation.
There are some adjustments that are made under the United
Nations Framework Convention on Climate Change. We add in the
U.S. territories, and we--under that agreement, the
international bunker fuels are removed from every country's
inventory.
I should mention that we have a memorandum of understanding
with the U.S. EPA, and we give the energy data to the U.S. EPA,
and they submit it every April, around April 15, to the United
Nations, and that's our official submission, in terms of the
U.S. inventory of greenhouse gases.
That's basically it, in a nutshell, fairly straightforward.
I can answer any questions, if you have them.
Senator Bingaman. Well, instead of me asking questions,
maybe we'll have some as we go through the first panel here.
Mr. Lindstrom. All right.
Senator Bingaman. Thank you very much, Mr. Chairman.
The Chairman. Well, Senator Bingaman, I think that was a
very good way to start this day off. It's the best explanation
I have seen of the whole summary of it--where it starts, how it
changes, and where it comes out.
Now, with that, we're going to hold to the schedule, and we
ask everybody to do their very best. We're going to go right
around. Each one knows what they're going to be talking about.
Each one has their mike.
And we're going to start with you, Ruth Shaw, Duke Energy
Corporation.
STATEMENT OF RUTH SHAW, GROUP EXECUTIVE FOR PUBLIC POLICY AND
PRESIDENT FOR DUKE NUCLEAR, DUKE ENERGY CORPORATION
Ms. Shaw. Thank you, Mr. Chairman.
I am Ruth Shaw, group executive for public policy, and
president of Duke Nuclear, for Duke Energy Corporation. We
appreciate the committee's initiative in holding this Climate
Conference, and the opportunity to participate.
As the Nation's largest investor-owned utility with a
diverse fuel mix and a commitment to sustainability, Duke
Energy is considering plans for new nuclear generation, for new
lower emission pulverized coal units, and for IGCC, with the
ability to capture carbon, as well as other options, including
improved efficiency.
The assets we are contemplating will serve our nearly 4
million electric customers across five States for 50 years or
more, and will impact their electricity power--their
electricity prices for at least that period of time. The
investment required is many billions of dollars. Customers and
shareholders need greater certainty about carbon constraints
and costs as we make these significant decisions for our
future.
Therefore, Duke Energy favors U.S. policy on climate change
that, first, is mandatory, not voluntary; second, is
economywide in its scope, sending consistent signals to all
sectors in all regions; is market-based, with price
transparency; promotes development and use of new technologies,
which are essential long-term success; is simply to administer;
provides price certainty; and begins now, becoming more
stringent gradually over time. We think this can be achieved
through a well-designed cap-and-trade program that applies
upstream, effectively sending a price signal to all energy
users, including a safety valve, and using allowance
allocations to address economic impact.
A carbon tax could also be an effective approach, and we
look forward to working with you on a greenhouse gas reduction
program that can be part of a global solution.
The Chairman. Thank you very much.
Elizabeth Moler.
STATEMENT OF ELIZABETH A. MOLER, EXECUTIVE VICE PRESIDENT,
GOVERNMENT AND ENVIRONMENTAL AFFAIRS AND PUBLIC POLICY, EXELON
CORPORATION
Ms. Moler. Good morning, Mr. Chairman and members of the
committee.
I'm executive vice president of government and
environmental affairs for Exelon Corporation, the Chicago-based
utility company. Our chairman and CEO, John Rowe, serves as co-
chair of the bipartisan National Commission on Energy Policy.
We appreciate the committee's invitation to appear today, and,
in particular, the recognition you have given to the NCEP
report in the committee's white paper.
In my brief time this morning, I want to stress the need
for a mandatory, comprehensive, and balanced national
greenhouse gas program. Like Duke, Exelon believes the
greenhouse program must be mandatory. There is compelling
scientific evidence that global warming is both real and caused
by human activity.
We advocate either a carbon tax, which has many advantages,
particularly from an efficiency point of view, or a cap-and-
trade system of the type recommended by the NCEP. It is
critical that we start now. We need economic and regulatory
certainty in order to invest in a low-carbon energy future. The
committee has held hearings on climate-change issues for nearly
30 years. The first one was in 1978, when I was still on the
staff. It's time to act.
Second, greenhouse gas regulation must be comprehensive. It
must employ carbon intensity targets designed to slow, stop,
and ultimately reverse greenhouse gas accumulation in the
atmosphere. It must be a national program. It must be
economywide, in order to be fair. And it should be upstream.
Finally, any cap-and-trade program must be balanced. It
must include a safety valve and an allocation scheme designed
to ensure that the costs do not outweigh the environmental
benefits. Allowances should initially be allocated for free, to
avoid undue economic burden to consumers, but, over time, they
should be options. And, finally, any allowance program should
not create windfalls or distort price signals to customers.
Thank you.
The Chairman. Thank you.
Now we're going to stand in recess and go vote. You're free
to behave as you'd like.
[Laughter.]
[Recess from 10:06 to 10:26 a.m.]
The Chairman. Thank you very much. We will now proceed.
David Slump, please.
STATEMENT OF DAVID SLUMP, GENERAL MANAGER, GLOBAL MARKETING, GE
ENERGY, GENERAL ELECTRIC COMPANY
Mr. Slump. Chairman Domenici, Senator Bingaman, members of
the committee, I am David Slump, general manager of global
marketing for GE Energy. We thank you for this opportunity to
speak.
GE supports congressional action now to start reducing
greenhouse gas emissions. Any solution must include a market-
based price for carbon and incentives to develop and deploy
zero- and low-carbon-emitting technologies. Clean energy
technologies cannot reach their full potential unless and until
energy choices reflect a forward price for carbon. Prolonging
uncertainty on carbon in the United States delays and distorts
technology decisions, particularly with respect to power
generation where investment lives are 50 years or more.
Technology is the answer to this dual environmental and
economic challenge. Development and deployment of new
technologies cannot occur in a vacuum. Clear public policy is
needed to accelerate continued development and deployment of
high-efficiency natural gas, renewables, cleaner coal, next-
generation nuclear, and advances in carbon capture and
sequestration.
Coal must continue to be a significant part of our energy
fuel mix in a carbon-constrained world, and IGCC is a way to
burn coal cleaner. IGCC provides a very clear example of the
economic distortion and technology deployment caused by the
lack of a forward predictable price for carbon. IGCC is more
expensive in initial capital cost, but becomes the most cost-
effective coal options when carbon-capture and storage are
valued. Absent a public policy that values carbon, IGCC is
disadvantaged, as utilities must justify their decisions on a
cost basis for rate recovery or financing.
Any U.S. sector subject to carbon constraint must be
allowed to meet a portion of its obligations through offset
projects, including in India and in China. Such linkages will
lower U.S. costs, help maintain U.S. energy technology
leadership, preserve U.S. jobs, and also revitalize U.S.
leadership in science and engineering education. We stand ready
to work with all stakeholders to assure that this issue is
addressed in the most cost-effective manner possible.
Thank you.
The Chairman. Thank you very much.
Jeff Sterba.
STATEMENT OF JEFF STERBA, CHAIRMAN, PRESIDENT,
AND CEO, PNM RESOURCES
Mr. Sterba. Thank you, Mr. Chairman, Senator Bingaman,
members of the committee.
I'm Jeff Sterba, chairman, president, and CEO of PNM
Resources, an energy holding company headquartered in
Albuquerque, New Mexico. We provide electric and gas service
throughout the State of New Mexico, parts of Texas, and at the
wholesale level throughout the Western United States, using
coal, nuclear, wind, and natural gas.
At PNM Resources, we agree with the comments that have gone
before us that we believe now is the time for a healthy debate,
at the Federal level, on climate change, and support the move
to a mandatory program.
Let me speak specifically on some of the design principles.
I would suggest a climate program that, first, is economywide.
There is no single carbon fuel or industry sector that causes a
majority of carbon emissions and the low hanging fruit of
carbon reductions are likely scattered throughout the economy.
And only an economywide program will avail itself to those
opportunities.
Second, it needs to place the focus on the real solution:
technology, both the deployment of existing technology and
energy efficiency, but, more particularly, the funding of
future low-carbon and carbon-free technology deployment.
Third, that utilizes market mechanisms such as a cap-and-
trade program and other mechanisms that recognize the
interrelationship between carbon reductions and economic
vitality. So, I commend the notion of a carbon intensity
measure as the one to work with, because it brings the two
things together.
Fourth, that places the point of regulation as close to the
end user as possible, for efficiency reasons, but recognizes
the transactions costs when millions of users are involved. So,
I would differ a bit with the previous speakers and recommend a
hybrid system, where the point of regulation is at the plant
level for coal, where you have just several thousand users, and
upstream for petroleum and natural, where there are millions of
users.
Fifth, that allocates to existing coal-fire-generation
allowances of large major of their emission--of their current
emissions. It could be reduced over a long-term timeframe.
Sixth, that incorporates a safety valve to manage the
impact of a cap-and-trade system.
Seventh, that allows U.S. companies to invest
internationally. And, last, that requires the United States to
pursue multiple mechanisms, such as the AP6 Initiative, to
encourage all major nations to commit in an appropriate way.
Thank you. I look forward to your questions.
The Chairman. Thank you very much.
Garth Edward.
STATEMENT OF GARTH EDWARD, TRADING MANAGER, ENVIRONMENTAL
PRODUCTS, SHELL
Mr. Edward. Chairman, Senators, thank you for this
opportunity.
I'm Garth Edward. I'm the manager for the environmental
trading in the Shell group.
Shell shares the concern on climate change, and we believe
that action should be taken in an equitable and an economically
responsible way. Now, let me focus on the questions that you've
tasked us with.
First of all, on the issue of the point of regulation,
Shell believes that a downstream allocation approach delivers
the best results. The entity that is regulated and has the
allocation must be able to actually implement the technologies
that reduce emissions. This means that generators in large
industry, including refineries, should be covered in respect to
their stationary source emissions. However, on the transport
side, we believe that vehicle manufacturers may be in the best
position to implement the technologies and choices that address
mobile source emissions.
In terms of allocation approaches, we believe that
grandfathering--by that, we mean the free allocation of
allowances, based on historical emissions--may have a role to
play at the start of a system, but we believe that a move
towards auctioning is likely to become necessary, and that this
will become more attractive to business if a transparent
recycling of revenue can be achieved, especially one that
minimizes the draw on any working capital.
In terms of linking with other international markets, both
in developed and in developing countries, we believe this is
necessary for environmental and economic reasons. However,
careful thought has to be given to the interaction of existing
emission markets.
Two final points, to wrap up. We understand the attraction
of a price cap or a safety valve, but we believe that measures
on the supply side may be a better way to protect
competitiveness in this country. And we do note, of course, the
benefits of including all six greenhouses gases, rather than
just CO2 alone. We believe that this can lead to
significant cost savings and efficiencies.
Thank you very much, sir.
The Chairman. Thank you very much.
Now we're going to back up.
Michael Murray.
STATEMENT OF MICHAEL MURRAY, DIRECTOR, LEGISLATIVE POLICY,
SEMPRA ENERGY
Mr. Murray. Thank you, Chairman Domenici and other
Senators. I appreciate the opportunity to be here today and to
participate on this very important issue.
Sempra is based in San Diego, California, and provides
electricity, natural gas, and value-added products and services
to over 29 million customers in the United States, Europe,
Canada, Mexico, South America, and Asia.
In my brief comments today, I would like to focus on two
points that I think we ought to talk about a little bit as we
have the panel discussion.
The first is the need for a national program. We fully
support your efforts here in developing a national program. We
think broad sector participation is critical to the success of
this. We are concerned about the patchwork of State regulatory
programs that are going forward. There are over 20 States now
that are considering some type of climate action programs, from
registries to caps to performance-based standards. And we are
concerned for companies like ours, that operate in multiple
states, that we'll have different sets of regulations to comply
with.
We also think that it should address issues of allowance
allocations to assure companies are not significantly
disadvantaged. This is the hybrid auction allowance approach.
And, finally, we think that the promotion of technological
development will really be key and instrumental to driving the
success of this program.
The second point is that we think any Federal program
should recognize the actions of companies like Sempra, who have
taken significant steps to reduce their overall carbon
footprint. Examples of these include our major efforts in
infrastructure of LNG facilities in the west coast and gulf
coast to bring in clean supplies of natural gas to supplement
our domestic supplies. Our clean generation fleet in the West,
which is one of the cleanest combined-cycle gas fleets in the
country, are significant energy-efficiency programs. We're very
proud of the fact that, on our customer side, since 1990, we
have reduced about 2\1/2\ million tons of CO2
equipment from our customer reductions. This is about a 500
megawatt powerplant. And, over the next 10 years, we hope to
achieve about the same amount.
On our own facilities, we have an energy conservation
strategy of 10 percent energy reduction per square foot by
2010.
On the renewables, Sempra's utilities are well on their way
to meeting the renewable portfolio requirements of California,
which is 20 percent.
And, finally, on voluntary registries, Sempra's utilities
are a voluntary member of the California Climate Registry,
which is efforts to determine GHG inventories and developing
measuring metrics.
Thank you very much. And we look forward to working with
you as you go forward in developing this important program.
The Chairman. Thank you very much.
Chris Hobson.
STATEMENT OF CHRIS HOBSON, SENIOR VICE PRESIDENT, RESEARCH AND
ENVIRONMENTAL AFFAIRS, SOUTHERN COMPANY
Mr. Hobson. Thank you, Mr. Chairman.
My name is Chris Hobson. I'm senior vice president of
research and environmental affairs for Southern Company. And we
very much appreciate being included in this conference today.
Southern Company operates 40,000 megawatts of coal,
nuclear, natural gas, and hydroelectric generation capacity to
serve 4 million customers in the Southeast. We believe that our
Nation's efforts and resources ought to be committed to the
development of new technologies to address climate change,
rather than being focused on mandatory caps and taxes.
Developing these low-CO2-emitting technologies give
us the opportunity to meet the challenges of climate change,
and, at the same time, provide the energy for a growing
economy.
In our service territory alone over the next 15 years, we
anticipate the demand of 11,000 megawatts of new generating
capacity and our company as being a leader in developing those
technologies that will serve that demand.
We, along with DOE and Orlando Utilities, will be building
an ITCC 285-megawatt plant in Orlando, Florida. We think that
this technology, even though it's coal-based, would generate
between 20 and 25 percent less CO2 emissions than
the current fleet of coal-fired powerplants. We have taken a
leadership effort in FutureGen, which will develop a zero-
emission powerplant that will deal with the issue of carbon
capture and sequestration.
We're actively involved, in our own region, on the issue of
CO2 capture and sequestration with the Southeast
Regional Carbon Sequestration Partnership. And we are also
pursuing the construction of the new generation of nuclear
powerplants, with our goal of having new nuclear capacity
online by 2015 and 2016.
In our written comments, we address specific questions
posed by the committee, and there are some important points I'd
like to briefly make. One, the impact to the American consumers
and our competitiveness must be addressed up front. This
program should be economywide. Allowances should be allocated
fully to emitters. And regulated entities should always have
the opportunity to use offsets for compliance.
With those brief remarks, I look forward to any questions
you might have.
The Chairman. Thank you very much.
Andy Ruben.
STATEMENT OF ANDY RUBEN, VICE PRESIDENT OF CORPORATE STRATEGY
AND SUSTAINABILITY, WAL-MART STORES, INC.
Mr. Ruben. Yes. Mr. Chairman, Senator Bingaman, and members
of the committee, my name is Andrew Ruben. I am vice president
of corporate strategy and sustainability for Wal-Mart Stores.
On behalf of my CEO, Lee Scott, I would like to thank the
committee for this very important conference and inviting Wal-
Mart to participate.
In 2005, our CEO announced a vision for Wal-Mart that
places sustainability at the core of our corporate mission. Lee
Scott stated that environmental threats should be seen as
Katrina in slow motion. Environmental threats are challenges
for our business, just as they are for our communities, our
associates, and our customers.
Mr. Scott noted that at the top of the list of such
challenges was the fact that increasing greenhouse gases are
contributing to climate-change and weather-related disasters.
Wal-Mart is not--is waiting neither for further study nor for
legal mandates to take strong action on climate change.
We'll eliminate 30 percent of the energy used by our
stores. We have set our corporate goal of eventually being
supplied by 100 percent renewable energy. We'll eliminate 25
percent of our solid waste in U.S. stores in the next 3 years
as we approach a corporate goal of producing zero waste. We'll
increase the efficiency of our truck fleet by 25 percent over
the next 3 years, and we'll double that efficiency in the next
10.
Mr. Chairman, these are only a few of the steps that Wal-
Mart is taking to reduce its own climate impact. But let me be
clear, we believe this is good business. Through these strong
actions, we are proving that reducing greenhouse gas emissions
through innovation adds value to our shareholders and our
customers. It's because we see climate as a critical social
issue, and because we believe that greenhouse gases can be
cost-effectively reduced throughout the economy, that Wal-Mart
would accept a mandatory cap-and-trade system to control
greenhouse gas emissions.
Finally, as the committee develops the details of such a
program, we look forward to sharing what we've learned in the
past 18 months. If properly incentivized, companies like Wal-
Mart can drive innovation up the supply chain in passing those
savings on to consumers.
A well-designed system would also encourage companies like
Wal-Mart to help offset any negative impacts of climate
regulation on those least able to afford it.
And, finally, in short, we hope to be part of the solution.
We look forward to sharing with you in more detail the many
ways that we could, and already are, using our position to
drive positive change.
Thank you.
The Chairman. Thank you very much.
Now, with that, we have completed the first round of
witnesses. And now we have, what, staff? How much time do we
have for questions? Forty-five minutes for--to go around
between us and talk with each other, among each other, and
exchange views.
I'm going to start by asking Senator Bingaman if he would
like to open with some questions. Senators, would you be ready
to have questions, so we can stimulate some conversation?
Senator Bingaman.
Senator Bingaman. Thank you very much.
One of the key issues that we're trying to get at here and
have heard a lot about is how to allocate emissions, or how to
allocate permits to emit.
Let me ask Betsy Moler about Exelon's view on this. As I
understand what you've submitted, you talk about, ``The
approach to allocation should evolve over time in order to
acknowledge the different circumstances among existing electric
generators, while also encouraging a transition to more
efficient low-carbon generation over time.'' Could you describe
what you have in mind there with this evolution of the
allocation system?
Ms. Moler. I will try, Senator Bingaman.
We would propose to start the allocation of allowances by
giving away the vast majority of allowances for free, selling
perhaps 10 percent, in order to mitigate the impact of the
program on our economy. And we have endorsed a safety valve, as
well, where DOE would sell allowances. Over time, we advocate
auctioning more and more allowances in order to encourage the
development of clean technologies and to increase the
efficiency of the program.
We have suggested one innovation--what we think's an
innovation in the program. We propose to give the allowances,
not to the generators, but to the local utilities, and to
require them to pass through the financial benefits of those
allowances to retail customers. This is particularly important
where we have a patchwork of State regulatory programs with
some utilities on a cost-of-service basis, and some of them
based on a market basis. Over 50 percent of our citizens in the
United States are served by utilities that have restructured,
so this is not a trivial consideration.
If you give free allowances to the generators, we think
it'll disproportionately benefit consumers in States that have
not restructured. So, we would give the allowances to the local
distribution companies, the utilities, and then they would have
to be purchased by the generators and by the fleet operators,
or what have you, in order to actually implement the program.
Senator Bingaman. I didn't know if you wanted to have
someone ask a question.
The Chairman. Yes.
Senator Bingaman. We might get Jeff Sterba's comment on
that same set of issues, at some point here.
The Chairman. Jeff, do you have comment on that--on the
comment that was made by Elizabeth Moler?
Mr. Sterba. I would generally agree with what Ms. Moler has
expressed, in terms of, number one, allocating the vast
majority of them to current users. I think--we serve both
regulated and unregulated markets--I think it is a complexity
to allocate them to the distribution company. The vast majority
of coal units, which, for our industry, is the real issue; 80
percent of the carbon emissions come from coal out of the
electric utility industry--the vast majority of coal units are
regulated. They're in regulated rates. The benefit clearly must
flow through to customers.
I'm not sure that that wrinkle that she's throwing in is
really worth the added risks and complications of doing it. But
I do believe that they ought to be allocated to the users,
because you've got to mitigate the impact on the ultimate
consumer.
I also think that her argument that over time you should
phase down the amount that's allocated for free is a reasonable
approach, over a long period--say, 40 or 50 years. So, on the
margin for new resources, you're providing the right kind of
signal to get new clean, low-carbon- or no-carbon-emission
technologies being deployed.
The Chairman. Thank you very much.
Anybody else want to comment on that?
[No response.]
The Chairman. All right.
Senator Alexander.
Senator Alexander. Thank you, Mr. Chairman.
Perhaps you discussed this, but at--with General Electric
I'm interested in your IGCC, your coal gasification that you
purchased from Chevron, and took steps in Florida. And, as I
understand it, there is a new facility in Ohio with AEP. What
can you tell us about that progress, what about the technical
challenges and obstacles that you see there, and when will it
be completed?
Mr. Slump. Correct. GE acquired ChevronTexaco's technology
mainly because our customer base was, at the time, having to
buy a license, as opposed to a standard powerplant, and
integrate that. They wanted a standard powerplant solution with
a single-point accountable provider. So, we announced a
partnership with Bechtel, and we are in a position to provide a
630-megawatt standard plant. We've launched the FEED study, the
front-end engineering study, with AEP for their site, as well
as Cinergy. And the commercial operation date for these will
begin in 2010 and beyond.
The Chairman. Senator Murkowski.
Senator Murkowski. Mr. Chairman, I was struck, by listening
to most of you, that you have all indicated an economywide
regulatory program is needed for--just from the equity
perspective, but then, similarly, the number of respondents
that acknowledge that this is going to be tough to do.
Mr. Slump, I guess I'll direct the question initially to
you. What would the impacts to the economy be if we do impose
the economywide program, as opposed to doing a more directed
approach--say, for instance, directed towards the electricity
sector? Singling out you, because you've got the vast majority
of the greenhouse gases coming from that sector of the
industry. We're saying that, from an equity perspective, it
makes sense to go economywide, but it's going to be difficult.
So, what would the effect be if we just focused, or we just
began with a single sector?
Mr. Slump. We've proposed a third-party study to look at
the economics and the tradeoffs of the various proposals. You
know, the impact of the economy varies with the cap or the
price of carbon. So, the comment we were making was just the
80/20 rule. If you capture transportation and the utilities,
you've captured a percent of it; and, initially, it may be
easier to begin to implement, with less administrative burden.
Senator Murkowski. Anybody else want to comment on that?
Mr. Hobson.
Mr. Ruben. I'd add----
Senator Murkowski. Mr. Ruben. I'm sorry.
Mr. Ruben. I'd add one comment to that. I think there's a
way to not only capture an efficient segment of the market,
but, at the same time, leave enough available credits to reward
those players who might be able--for example, a player like
Wal-Mart, who can reach up and down a supply chain, both
creating additional benefits, either up the supply chain, such
as, for example, with a supplier we have in southern Georgia,
and being able to incent that supplier to reduce their
electrical needs by 60 percent, benefiting both our consumers
and the prices, as well as reducing greenhouses gases, or reach
down the supply chain and offer those same benefits to a
customer, a technology like a compact fluorescent light bulb,
that, just by increasing the penetration of a high-efficiency
product like that, we're able, not only to share that benefit,
but also--not only to reduce greenhouse gases--I'm sorry--but
also share the economic benefit of using less energy,
potentially mitigating some of the increased costs that we'd
see, depending on the type of policy and regulation.
The Chairman. Mr. Sterba, would you comment on that?
Mr. Sterba. Mr. Chairman, Senator, I think the logic that
was just given is the best logic for why it needs to be
economywide. There are many things that can be done throughout
the economy. And what you want to do is incent the lowest-cost
initiatives that can be taken in the economy to reduce carbon
dioxide emissions, whether it's on energy-efficiency, whether
it's in the transportation sector, through the refinement of
the efficiency of diesel engines, or whether it be in the
production of electricity through a coal or a natural gas
facility. That's the value of it being economywide, is, you can
get the lowest-cost solutions, because they are everywhere
within the economy.
The Chairman. Yes. I think I was going to Garth next.
Excuse me.
Mr. Edward. Thanks, Senator.
A quick point. I mean, I think, all things being equal, the
costs of compliance to the overall economy will be brought
down, the wider the scope of the emissions trading system. I
think that's true. It's just that the costs of implementation--
the transaction costs, if you will, if we try and reach
everybody, in terms of monitoring and verifying and enforcing--
tend to outweigh the benefits at the margins. So, we've got to
take a balance and go where we can achieve the best results in
the quickest timeframe for the best transaction costs. And that
tends to mean that we're going to focus on applying the
regulation to those parts of the economy that actually deploy
technology, change their capital investment plans, and so on.
And that's why we favor a kind of--a downstream approach, in
terms of stationary-source emissions, the power generating in
large-industrial sector. But when we look at the transport
sector, we do recognize that as a very important source of
emissions, and one that must be addressed, but the upstream
approach may not best change emissions from the transport
sector. When it comes to transport, the ability to change the
emissions coming from the transport sector may best be done at
the vehicle manufacturer's level, where the purchase of a car
is probably one of the single biggest impacts on the emissions
from the transport sector.
Thank you.
The Chairman. Now, Mr. Murray.
Mr. Murray. Thank you, Senator.
Senator Murkowski, I think we should consider that we do
have a fair amount of experience when we look at the broader
scope of trading, if you look at the criteria pollutant efforts
that we've done, where we've been able to trade stationary
versus mobile sources. The more robust you make the trading,
the--and I agree with the earlier comment, that we will get the
most efficient way of getting the reductions. And that's why I
think the broader the participants in the market, if you will,
the more opportunities we have to make these reductions.
We have a lot of history on criteria, stationary versus
mobile trading, and we could look at that, and look at the
successes and things that we've done, and be able to take from
that, perhaps, for applying it to CO2.
The Chairman. We want to let Senator Feinstein ask a
question here before we run out of time.
Senator Feinstein.
Senator Feinstein. Mr. Chairman, I'd like to make a brief
statement, if I might.
The Chairman. Please.
STATEMENT OF HON. DIANNE FEINSTEIN, U.S. SENATOR
FROM CALIFORNIA
Senator Feinstein. Let me just thank you for holding this
hearing.
I can't help but notice that it's the most widely attended
hearing that I think I've been to for this committee. And I
think it shows the gravity of the situation. I also think it
shows the need for action.
Now, California is going to take action. The Governor, last
year, signed an executive order to reduce global-warming
emissions by 25 percent by the year 2020. Yesterday, the
speaker of the legislature and Assemblywoman Pavley introduced
a bill that would require the California Air Resources Board to
institute a mandatory emissions reporting and tracking system
to monitor compliance with the emission limits. That would
essentially reduce global warming by 145 million tons by 2020,
or 25 percent below forecast emissions.
The State has taken action on automobiles. It'll probably
be litigated. The attorney general says that the State can move
ahead independently. We believe Canada will follow.
I think it is very critical that we take action.
I've put together a bill, which is really based on McCain-
Lieberman, but adds more flexibility. And essentially what it
does is caps companies' emissions at today's level from 2006 to
2010, then reduces emission .5 percent annually from 2011 to
2015, and then 1 percent annually from 2016 to 2020. It would
require companies to cut overall emissions 7.25 percent from
today's levels by 2020. Now, that's equal to 400 million metric
tons of CO2 by 2020. What's interesting is that
California's cut would be 145 million metric tons. That's about
a third of what a 7\1/2\-percent reduction nationally would
mean. I think what that points out is really the unique wisdom
of taking national action.
Now, I'd like to make my bill available to anyone who would
like to look at it and comment on it prior to our introduction
of it, so all you have to do is let us know your thoughts. But
I'd like to ask this question.
Ms. Moler mentioned the issue of the auction. The auction
is disputed between business and the environmentalists. The
environmentalists want an auction. Most businesses say, ``Hold
off.'' The proceeds of the auction would go, obviously, to fund
new technology.
My question of you, if I might, is--you have said, ``Over
time, an auction''--and I'd like to ask you to expand on that.
You and others, as well--commented on the role of an auction if
you did have a mandatory cap-and-trade system. Our system
includes carbon sequestration and agriculture, providing
credits for that, so that there is incentive for agriculture to
get involved, as well--we've left the question of the auction
open, and I'd like to have comments from the panel on when you
believe an auction should come into play, how many years hence,
and what the rationale for that time delay would be.
Ms. Moler. We would start an auction in, say, the year
2009-2010. Initially, the vast majority of allowances, we would
give away for free, if you will, and have a small portion of
the allowances subject to auction, 10 percent--90/10 is what we
have proposed--and then, over a period of time--and it's,
frankly, pretty arbitrary, but--how quickly you ramp up the
auction really depends on how much you think the economy can
handle the cost. But over a period of time, we would invert it,
so that you eventually have all of the mission allowances
auctioned. And we would take the money and put it in a
sequestered off-budget fund for technology development.
Senator Feinstein. Thank you. That's very helpful. Anybody
else?
Ms. Shaw.
Ms. Shaw. We, basically, would endorse the approach that
Ms. Moler has described. But I would add to that the--your
comment about the wisdom of a national approach is essential.
And that's one reason I really applaud the work of this
committee. As laudable as some of the efforts are on a State-
by-State or regional basis, they make it extremely difficult
for us to achieve the end goals.
Senator Feinstein. Anybody else, on the auction question?
Yes, sir?
Mr. Edward. The advantages of auctioning, in particular,
are that they promote the entry of new entrants, or new
efficient players, let's say, in the power generation market or
the industrial market, over time. It also deals very well with
exit or closures of installations from an emissions trading
system. Auctioning has many benefits, just in terms of the
operation of an emissions trading system, and, from economic-
theory points of view, is good benefit to do with equity, and
so on.
The problem may arise, though, when companies come new to
an auctioning system that auctions, let's say, 100 percent or a
large majority of the allowances from the get-go, and that
means that those companies are having to pay a great deal in
order to get the allowances that effectively form their license
to operate. And that initial payment to get those allowances
can be a huge dent, in terms of cash flow or working capital.
And so, there are difficulties there, from a business point of
view.
The way that auctioning may deal with that is by recycling
part of that revenue, either through the tax system or back in
some way. But some of those issues need to be dealt with.
Senator Feinstein. You're advocating recycling the auction
proceeds, partially, back to the businesses that are
participating, in addition to the technology. So, in other
words, in a certain ratio? And what would that ratio be?
Mr. Edward. Well, I don't think we have any precise views
about the ratio. I think it's the principle that the cash-flow
impact to companies has to be addressed. And I think there are
various ways to do that. Probably can explore them further. But
that's a concern, initially, from a business point of view.
Recognize the benefits of auctioning from a system point of
view has a lot of benefits in the long term, but how to get it
up and running at the start without seriously hurting companies
from a cash-flow point of view.
Senator Feinstein. Well, let me just ask, does anybody
disagree with what Mrs. Moler said about holding an auction to
2009 or 2010, and then doing it on a 90/10 basis? Is there any
disagreement with that?
The Chairman. There's one.
Senator Feinstein. Mr. Hobson.
Mr. Hobson. I don't think that we necessarily disagree. I
think the auction program under the SO2 program has
worked reasonably well. I think where we might part company is,
what does the future detail of that auction look like? Does it
stay constant? It's that ramping down that can generate real
problems for emitters in the future. And so, I think the
concept of an auction, with a small percentage of allowances
being auctioned, is not a bad idea. But I think it's the ramp
that becomes----
Senator Feinstein. Mr. Sterba, did you have----
The Chairman. Senator, I think we're going to get on with
the next one.
Senator Feinstein. All right.
The Chairman. Senator Menendez.
All right. I'm going to pose a proposition here. I'm
listening to all of you, and it seems like Chris Hobson--
Southern Company's statement is a little different than most of
yours.
[Laughter.]
The Chairman. Is that a fair assessment? And I don't think
he's embarrassed at my saying that.
Mr. Hobson. No.
The Chairman. I gather that Southern Company, a very
reputable, strong company in the United States, is saying
they're going to get there a different way. They're going to
stop emitting carbon into the atmosphere, but they're going to
do it with technology changes in the makeup of that which they
use to generate electricity. Am I correct that that's what you
say you're going to do, and that you would explain to us, at
this forum, how that's going to happen?
Mr. Hobson. Yes, Senator. The items I articulated, such as
FutureGen, the building of an ITCC, the development of new
nuclear, are all technologies that will ultimately get us where
we want to be, in terms of addressing CO2 emissions.
And I point those out to highlight the fact that, even in the
absence of a mandatory program, there are substantial efforts
underway to bring these technologies to the point of
deployment.
The Chairman. Yes.
Mr. Hobson. And a mandatory program, in our view, is not
necessary to make that happen.
The Chairman. Now, Chris, I did not bring you--bring that
up, and your name up, and your company's, any way other than
because it is a bona fide approach, and it's out there, and the
American people understand it, and your constituents understand
it. And I think it ought to be talked about here. What's wrong
with what they're saying? And what should we be doing to make
sure that more of what they say is going to happen, happens?
I'd just throw that before you for a few minutes of discussion.
Jeff, did you have your hand up? Then we'll come to you,
Ruth.
Mr. Sterba. Mr. Chairman, I'm glad you put this question
out there. I really think it's more an issue of form than
substance. There is no way that we can accomplish what needs to
be done on greenhouse gases without technology. It is the only
answer that we really have. So, I think all of us would agree
with the statement that Chris has made that technology is the
driver. And some of the technology exists today, but much of it
does not. And that's the big investment gap that we have to
bridge.
So, the question then becomes: Well, how do you move this
ball forward? And is there low-cost reductions to carbon that
could occur with a mandatory system, that may not occur without
it? And for, I think, us in the utility industry, whether you
make it mandatory or it stays voluntarily--voluntary, there's
an awful lot of things we're going to stay focused on, in
trying to reduce greenhouse gases, because we see the call for
that.
But I think in other sectors, in other areas, that may
happen a lot more slowly if it remain solely voluntary, where
it's much more dispersed, in terms of the obligation or the--
I'm sorry, the cause of the emissions of carbon dioxide.
So, that's where I think the--it--the difference really is
how we get there, not, what is it going to take, in terms of
technology? I think we all agree, that's the only solution we
have.
The Chairman. Yes, Ruth.
Ms. Shaw. And, essentially, I would echo Jeff. I think the
difference is more one of timing. We, too, are committed to
advances in technology. But there are very significant regional
differences. For example, even though we're looking at IGCC in
the Carolinas, among the States that we serve, carbon
sequestration is not possible, because of the geology. Some of
the technologies that are available today and emit no
greenhouse gases, including nuclear, face significant barriers
to future construction, of which this committee is well aware.
And financial investments will not be made until some of those
issues are resolved.
We simply believe that we cannot delay, and cannot count on
a strictly voluntary approach if we're going to move forward on
this action. We also believe the United States cannot be alone
in the world, in terms of acting on these issues.
The Chairman. What was the last statement?
Ms. Shaw. We believe the United States must act, must be
part of the global community in acting on these issues.
The Chairman. Right.
Andy Ruben, from Wal-Mart?
Mr. Ruben. Yes, thank you, Senator.
It's a very good question you've posed, and I think we
agree with the last statements that are made. And it really--
for us, we see it one of timing, of how fast things move, and
what market forces come into play with a system like we're
talking about, or some type of policy.
The initiatives and the actions that we are taking, we're
going to take anyway--again, because we believe they're good
business. But the timing of those, the aggressiveness, will
change, based on what type of policy is set up in a U.S. system
such as we're talking about.
And just a quick example, LED lighting is a much more
efficient lighting technology that we are--that we have just
rolled out in all the signage programs in the front of the our
stores.
Now, we're currently working, because we know it will save
50 percent of the energy, even over an efficient T8 light, in
our freezer coolers. That, right now--we work every day to find
better ways to roll that out faster. But some type of policy, a
policy that rewards that kind of innovation, will accelerate
the pace of those type of opportunities.
The Chairman. Very good point.
Mr. Murray.
Mr. Murray. Yes, thank you, Senator.
I think another thing we should always consider when we're
looking at this is the energy efficiency aspect. And I think
California has been a leader in energy efficiency, and just the
information exchange with the other States, I think, is
important, to look at technology development and what we've
done out there, and to share that with others, and basically
put these programs in place. You can get a lot of megawatt
reductions with energy efficiency. And this is particularly
important in the Southwest, where we have such huge growth,
when you think about it, where California is growing at a rate
of about 600,000 people a year, which is about 1,000 megawatts
of new power that's needed every year. That's two 500-megawatt
powerplants that are needed just for the new people coming into
California. So, just to keep up with that demand in the West
and the Southwest, we're going to have to institute these kind
of programs.
The Chairman. Okay.
Yes, David?
Mr. Slump. GE believes, as with others here, that
technology is the key. But to accelerate technology, a forward
and predictable price for carbon must be used.
If you look around the world--China will add 170 gigawatts
of new capacity by 2020; the United States and Western Europe,
100 gigawatts; India, 60 gigawatts--you have to do this through
fuel diversity. You will need coal, you will need nuclear, you
will need renewables. So, the only way to put that into that
investment choice is to value carbon equally.
Where there are markets, such as India--2 weeks ago, we
were in India and launched a rural electrification program. For
years, people have been trying to do rural electrification in
India. You know, over 400 million people have no power. And
because of the Clean Development Mechanism, we were able to
deploy 24 megawatts of biomass gas receps. The government of
India has reduced tariffs for clean energy technologies from 15
to 5 percent. We're working with the local governments. It'll
provide 4,000 new jobs. And I think the point is, technology
innovation and commercial innovation are linked, but you need a
market price to drive it.
The Chairman. Senator Bingaman.
Senator Bingaman. Let me just ask--David, you say because
of the clean technology mechanism?
Mr. Slump. Sorry. CDM, Clean Development Mechanism.
Senator Bingaman. The Clean Development Mechanism. And that
is a mechanism that's set up in the EU trading system. So, what
I understand is that because of the financial benefit to GE in
the European trading system, you are able to make this
investment in reduction of energy use in India. Is that
correct?
Mr. Slump. Partly. Actually, the way we did this is, the
developer we're working with needed it for the pro forma to go
forward, so we partnered him with PriceWaterhouse to do the
exchange, but we got our standard margins and payment terms on
importing the engines to India. I think India is the number one
market for CDM in the world right now, twice as big; and number
two, Brazil. And it's just a point that--where you have market
mechanisms, maybe not perfect, you get some traction.
Senator Bingaman. Okay. I was going to ask one other
question of Garth. You had said in your testimony, that Shell
favors measures on the supply side, rather than a safety valve,
in any kind of a cap-and-trade system. Could you describe or
elaborate on that a little bit? I'm not clear exactly what you
mean.
Mr. Edward. Well, I guess the concern with a safety valve
or a price cap is to ensure the competitiveness of industries
in the United States. And there are, maybe, different ways of
doing that. A price cap can be difficult to maintain in
markets, especially markets that have interaction with the
international community. And we don't have price caps in the
rest of the energy complex. And so, there can be difficulties
in trying to introduce a price cap in this part of the market.
But if we are concerned about ensuring competitiveness, rather
than capping prices, per se, then there are, maybe, ways of
doing that, and one of those ways if by supply-side actions,
being able to increase the supply of allowances as
competitiveness is challenged, or if competitiveness is
challenged. And so, that's just one way of meeting the
competitiveness objective without necessarily interfering
directly in the market.
Senator Bingaman. So, when you say ``on the supply side,''
you're talking about the supply side of allowances. Is that it?
Mr. Edward. That's exactly it. There may be various sources
of supply. The supply of allowances issued by the Government is
one. Access to international markets is another. The
possibility to have access to new and additional sources of
offsets within the domestic economy is another.
Senator Bingaman. You talk about an open architecture
approach that encourages a global carbon market through linking
with other systems. And that's what you're talking about there?
Mr. Edward. That would be part of the equation. But if we
just hold it domestically for a second, the--an increased
supply of allowances from the Government is one possibility,
but, also, increased access to offsets that are domestically
generated is also another possible source of supply.
Senator Bingaman. Thank you.
The Chairman. All right. I think we're a bit early. We
haven't used our full 45 minutes, but we're--I think we're
going to finish this panel, if you don't mind, and move to the
next one.
Thank you all very much.
The next panel, please?
[Recess from 11:15 to 11:16.]
The Chairman. Thank you very much. Very, very good
exchange.
We're going to get started, and, if it works, by 12:30 or
so, we'll be out for lunch, until our 2:30 meeting.
We're going to start right now, over on our left. Margo,
are you about ready? You're first. And turn on your mike and
give us your 2 minutes. We look forward to hearing from you.
STATEMENT OF MARGO THORNING, SENIOR VICE PRESIDENT AND CHIEF
ECONOMIST, AMERICAN COUNCIL FOR CAPITAL FORMATION
Dr. Thorning. Thank you very much for the opportunity to
appear before this very important hearing.
I'd like to take my time to compare, briefly, the pros and
cons of a cap-and-trade approach to reducing greenhouse gas
emissions to one based on a voluntary approach.
In the European Union, the emission trading system is not
working very well. Their environmental agencies shows that
they'll be 4 percent above their 1990 targets in 2010, not 8
percent below. Companies have been faced with higher energy
prices--in part, due to their emission trading system.
A cap-and-trade system will not provide the investors
certainty or drive the technology that's needed to reduce
greenhouse gas emissions. Caps such as those proposed by
policymakers in Washington are just the first step. As many of
us know, the call is to reduce greenhouse gas emissions 60 to
80 percent by 2050. So, a small first step is just the
beginning of additional reductions, which increase uncertainty
for investors. Furthermore, unlike EU firms, U.S. firms would
be compelled to comply with emission reduction targets. They
would have to meet these targets or be shut down; whereas, the
EU has a more flexible system that will allow continued
production. Caps would also increase electricity prices, reduce
economic growth, and reduce the uncertainty about the return
that could be expected on investment. Furthermore, they won't
drive the technology that'll be needed, because of the fact
that a current government can't bind a future government as to
prices that will be in effect as a safety-valve price or for
the targets that would be in place.
So, I think a focus on the administration's approach, which
is based on voluntary approach and a strong drive for new
technology to reduce greenhouse gases, is the most efficient
way to go forward. EIA data shows that a high-tech scenario
reduces emissions, reduces electricity prices, and increases
GDP, compared to a mandatory reduction in greenhouse gas
emission intensity.
Finally, reforming the U.S. tax code to reduce the cost of
capital for new investment by increasing depreciation
allowances for energy investments could pull through the
cleaner, more efficient technologies that we need, and reliance
on mechanisms like the Asia-Pacific Partnership to transfer
technology to developing countries can also be a strong factor
in global greenhouse gas reductions.
Thank you.
The Chairman. Would you repeat the last statement,
regarding foreign investment, please?
Dr. Thorning. The Asia-Pacific Partnership, which is
focused on development--economic development and on technology
transfer to countries like India and China, can have a very
strong impact on reducing global greenhouse gas emissions.
The Chairman. Thank you.
Mr. Helme.
STATEMENT OF NED HELME, PRESIDENT, CENTER
FOR CLEAN AIR POLICY
Mr. Helme. Thank you, Senator. It's a pleasure to be here
this morning.
I'm Ned Helme. I'm the president of the Center for Clean
Air Policy. It's an environmental think thank based here in
Washington, and also in Brussels and in Toronto. We were the
principal consultants for the European Commission in the design
of their emissions trading program that, as you know, is up and
running, and we've worked a lot, Senator Feinstein, with
Governor Schwarzenegger and with the folks in California, on
the design of the California program, and also with the
Governments of India, China, Brazil, and Mexico, on the designs
of their programs to move on climate change and reduction of
greenhouse gases.
I've got five points I want to make this morning:
First, we strongly favor an economywide approach and a
mandatory approach, as you've heard from other speakers, and
for the same reasons.
Second, in terms of point of regulation, we would favor a
hybrid approach, as Jeff Sterba outlined to you; basically, one
which would put the six or seven major industrial sectors and
the electric generators as points of regulation, along with
natural gas distribution companies and oil refiners. That way,
you get the advantages of capturing the small sources, like
residential and commercial transportation through the upstream,
and you get the advantage of going after the major industrial
point sources, where they really have an ability to identify
good opportunities for emission reduction if they're regulated
directly.
As a footnote to that, it's not a problem, in terms of the
number of sources that we'd regulate. If you went on a hybrid,
it would take about 8400 sources in the United States would be
regulated, less than are currently regulated in the European
Commission system. If you went upstream, it would be about
2,000 sources. So, clearly workable, from a technical point of
view.
In terms of allocation, we favor the auction, as was
discussed. One point I want to add is that the auction, if you
recycle the revenues in the form of tax reductions, reduces the
total societal cost of the program significantly, so you're
going to have a cheaper program for society if you go that
route. I would agree with Betsy Moler that it makes sense to
start the auction slowly.
What we found--we did a study with Charles River
Associates, looking at this, and found that it would take about
9 percent of the allowances to hold the shareholders harmless
of the major corporations that are involved in this--a little
more for coal, probably 35 percent; a little more for
utilities--but it's doable. So, you have plenty of allowances
left for other purposes, and we would favor some tax relief and
also technology innovation, using the allowances as an
incentive for companies to develop new technologies that
wouldn't happen under the kinds of caps we're probably able to
pass, legislatively, in the near term. So, I think the
combination of setting aside a pool of allowances, letting
companies compete for those allowances if they're going to do
coal gasification sequestration, if they're going to do
advanced nuclear, if they're going to do advanced wind
technology, much like California now does for their renewables
program. The company that asks for the fewest allowances to do
that technology gets the award. And I think it's a great way to
create competition for pushing these new technologies that we
need. We aren't going to get it with the kind of caps we can do
in the near term. We need additional incentives to get those
new technologies.
Thank you very much.
The Chairman. Thank you very much, Ned.
Donald, we're looking forward to hearing from you, please.
STATEMENT OF DONALD MARRON, ACTING DIRECTOR, CONGRESSIONAL
BUDGET OFFICE
Mr. Marron. Great, thank you, Mr. Chairman.
I'm Donald Marron, Acting Director of the Congressional
Budget Office. Thank you for inviting CBO to participate in
today's conference.
In keeping with CBO's mission, my comments will focus on
the key economic issues that arise in designing a cap-and-trade
system, but do not actually make any specific policy
recommendations.
In response to the first question, ``who is regulated, and
where?'' we agree with many of the previous panelists, that an
economywide approach would be the most economically efficient,
and that administrative costs would probably be minimized in an
upstream approach. An important limitation of a purely upstream
approach, however, is that, in itself, it doesn't provide any
incentives for emissions capture or emissions sequestration.
In response to the second question, the allocation of
emission allowances, really, the key issue there is that the
emissions potentially might have a significant amount of value,
and that Congress has to make choices about who's going to
receive that value.
There are three basic options that we've heard about. The
first option would be to sell the allowances, and then use the
resulting proceeds to reduce distortionary taxes. I think
economists are generally in agreement that that approach has
the overall greatest economic benefit, and that minimizes the
overall economic burden that would be placed in the economy
from the regulations. However, it would also do nothing to
directly offset the burdens that would be placed on effected
producers and consumers.
A second option would be to sell the allowances and then
use the proceeds to finance R&D adaptation efforts, things like
that. Such efforts may be valuable, but it turns out there's
very little economic rationale for linking expenditures on them
directly to the revenues that come from the allowance auctions,
or selling the auctions--selling the allowances.
A third option would be to allocate allowances to offset
some of the costs that are borne by producers and consumers by
the introduction of the regulations. Unfortunately, identifying
who actually bears those costs would be extremely difficult.
Market forces, not the identity of the regulated parties, will
ultimately determine who bears the costs. Consumers would pay
higher prices. Some companies would earn lower profits. Some
workers would earn lower wages. Indeed, even the Government
would bear costs through higher prices. Each of those groups
might have a reasonable claim for some allocated allowances. At
the same time, there will also be some winners. Some companies,
for example, would actually have higher profits because of the
introduction of the regulations. Sorting through those impacts
to determine an appropriate allocation of allowances would be
very challenging.
Thank you.
Senator Bingaman [presiding]. I think the chairman intended
we just go right ahead.
Richard, why don't you tell us EPRI's point of view?
STATEMENT OF RICHARD RICHELS, TECHNICAL EXECUTIVE FOR GLOBAL
CLIMATE CHANGE RESEARCH, ELECTRIC POWER RESEARCH INSTITUTE
Dr. Richels. Thank you very much, Senator.
Good morning. My name is Richard Richels. I'm technical
executive for global climate change research at the Electric
Power Research Institute, in Palo Alto, California, Senator.
EPRI is a not-for-profit public-interest organization
conducting research on issues of critical importance to the
electric power industry. I will highlight five points from our
written submission.
One, economic efficiency--that is, achieving our
environmental goals at least cost--is critically important.
Climate policy will have costs. The difference between an
efficient and inefficient system can be at the order of
hundreds of billions of dollars, and can determine the very
success of a program.
Two, technology advances are central to controlling the
cost of addressing climate change. The value of near-term
policies will ultimately be judged by how effectively they
create technology innovation.
Three, a cap-and-trade system should have as broad a
coverage as possible in order to reduce emissions where it is
cheapest to do so, and to provide the framework for an
efficient, long-term transformation of the economy. This is
true both domestically and internationally. Stabilization of
atmospheric concentrations cannot be achieved without the
active involvement of both developed and developing countries.
Four, the point of regulation is not important, from the
standpoint of economic efficiency, as long as coverage is the
same, but very important in determining administrative
feasibility, complexity, and costs.
And, five, the allocation of permits is unlikely to affect
the net costs of a policy significantly. However, it can
greatly impact different households, companies, and regions of
the country. The issue of who pays is a question of equity and
a matter for the political process.
Thank you for the opportunity to share some of the insights
from our research with you. I look forward to your questions.
The Chairman [presiding]. Thank you very much for your
comments.
Now we're going to move to Jason--how do you say your last
name?
Mr. Grumet. Mr. Chairman, it's Grumet.
The Chairman. Grumet.
STATEMENT OF JASON GRUMET, EXECUTIVE DIRECTOR, NATIONAL
COMMISSION ON ENERGY POLICY
Mr. Grumet. Thank you, Mr. Chairman, Senator Bingaman, and
Senators Murkowski and Feinstein, for the opportunity to be
here today on behalf of the National Commission on Energy
Policy.
I'd like to start with a general reflection, and then make
a couple of specific points.
At the outset, I think it's worth trying to distinguish
between the basic notion of the costs to society of a program,
and the equity issues, which I think are really the focus of
today's discussion. And just to illustrate, from a question of
overall societal costs, the proposal by the Energy Commission,
in essence, seeks to reduce emissions by about a percent a
year. The EIA concludes that the costs of that, the costs of
the control technologies to achieve those reductions, would be
somewhere between $1 and $4 billion a year, and, on the basis
of that conclusion, reaches the ultimate conclusion, which I
like to repeat daily, that our proposal would have no material
effect on economic growth.
Now, equity considerations are critically important, but
rather different. Equity considerations are essentially the
question of, how do we divide up the 99 percent of permissible
emissions among the various stakeholders in society? And that's
what you have to do at the outset of a market-based program.
The beauty of a market-based program is, then the market itself
decides the most efficient way to achieve those reductions. But
these questions are of critical importance, from fairness,
equity, and, ultimately, political viability.
But I guess I want to stress, at the outset, that it is
possible to have a meaningful step towards reducing greenhouse
gas emissions that meets with the Sense of the Senate
obligation not to undermine the economy here in the United
States.
On specifics, just for a moment, out of the 150 or so truly
excellent submissions, of course, someone raised every
different possible point. But I'm encouraged that there do seem
to be some centers of gravity forming. I believe there is a
general preference for an economywide program and an
appreciation that to achieve that, administratively, you would
have to move upstream in the energy food chain, either all the
way upstream or--hybrid, in my book, is all basically upstream.
NCEP believes that it's important that allocations are used to
mitigate the costs of the program on those who bear those
costs. We agree with the Center for Clean Air Policy and
others, that actually you need a very small fraction of those
allowances to compensate the major energy users. This is good
news and bad news. It's bad news, because that contradicts, I
think, basic conventional wisdom, so it's hard to develop a
policy consensus around that. It's good news, because it means
that there are, in fact, a lot of allocations available to
compensate broadly the people who will bear the costs of this
program, and to pursue broader social desires.
So, let me just close by recognizing that there are very
strong disagreements remaining about whether, and how, to
pursue a program. But I do believe that if this committee and
the Congress decides that it is, in fact, appropriate to
proceed, there is an analytical consensus forming that will
enable that to happen.
Thank you.
The Chairman. Thank you very much, Jason. Jason, maybe, at
the end of this session, I'm going to ask you to make a little
presentation, so that those listening might understand what
this upstream/downstream/sidestream hybrid----
Mr. Grumet. I welcome the warning, Senator, thank you.
The Chairman. Can you get ready for that? If you need a
chart, think about it. If not, get ready.
[Laughter.]
The Chairman. Samuel Wolfe.
STATEMENT OF SAMUEL WOLFE, CHIEF COUNSEL, NEW JERSEY BOARD OF
PUBLIC UTILITIES
Mr. Wolfe. Good morning, Mr. Chairman, Senator Bingaman,
and members of the committee. Thank you very much for the
chance to participate here today.
The Chairman. You're welcome.
Mr. Wolfe. New Jersey and several other States have spent
much of the last 3 years designing a regional program to cut
greenhouse gas emissions from powerplants. We wanted a program
that would get real reductions in greenhouse gas emissions,
that would minimize the cost to energy consumers, and that
would make our region's economy more competitive rather than
less competitive with respect to the rest of the country.
The key to accomplishing all three of this goals--all three
of these goals was the decision to hold back at least 25
percent of the emission allowances for the benefit of
consumers, and specifically to leverage the value of those
allowances to spur investment in energy efficiency, and also to
encourage the development of renewable energy resources.
So, the result of this is that growth in our economy does
not have to be accompanied by growth in greenhouse gas
emissions. And what means for the cost of the program is, we're
keeping down the demand for these allowances, keeping down the
price of these allowances, as a result, and so, in that way,
trying to keep down the overall direct cost of the program.
In addition to that, investing in energy efficiency in
renewable energy means that we're less dependent on fossil fuel
electricity, and we're making better use of the energy that we
have. So, the result is that we are keeping down the pressure
on electricity prices, as well, and, indirectly, since so much
of the electricity in our region is generated from natural gas,
keeping down the pressure on natural gas prices, at the same
time. So, as a result, I think we've positioned ourselves to be
more competitive than regions that generate and use electricity
less wisely.
Now, we don't accomplish any of this, and we certainly
don't have any effect on wholesale prices, if we were to simply
hand all the allowances over to the electric generating
community. And the Congress is true, too. By holding back 25
percent or more, we're not having any effect on wholesale
prices as a result of that, either.
So, just to sum up, I would respectfully suggest that a
wise national program would share the same goals as a regional
program, achieving real reductions in greenhouse gas emissions,
minimizing the cost to energy consumers, and making ourselves
more competitive with respect to the rest of the world, rather
than less competitive.
And I'd also suggest that leveraging a greenhouse gas
program is not simply a matter of damage control, it's really
an important reason to do the greenhouse gas program in the
first place. We're going to be making an awful lot of
investment in our energy infrastructure over the coming years.
And whether that's a matter of investing more in railways to
transport coal, powerplants to burn it, transmission lines to
deliver electricity to places where it can't get right now, you
know, if we put that investment in those directions, we're
doing nothing more than perpetuating what we're doing right
now, and we're--and we have the chance, with a wise national
program, to, instead, put our country on a course towards
really equipping ourselves to be as competitive as possible in
the 21st century.
Thank you.
The Chairman. Thank you very much.
William Pizer.
STATEMENT OF WILLIAM PIZER, SENIOR FELLOW, RESOURCES FOR THE
FUTURE
Mr. Pizer. Thank you, Mr. Chairman and members of the
committee, for the opportunity to speak here today.
I should say that my comments don't reflect any sort of
institutional position of Resources for the Future, which is an
independent, nonpartisan, nonadvocacy organization that doesn't
take positions on matters of public policy. So, these are my
own comments.
What I'd like to do, really, is just make two points--
first, about the difference between upstream and downstream
points of regulation. And I guess I would like to point out
that, in the European emissions trading scheme, which is the
only example we have of a CO2 program right now,
which is a downstream program, they actually don't measure
emissions directly; they measure fuel use, and they apply
emission factors to that fuel use, which is exactly the same
thing we do in an upstream program. So, it's not obvious to me
that some of the differences that people suggested with regard
to what it'll encourage or incentivize are really there.
The second point I'd like to make is that a lot of people
have pointed out the capacity to differentiate between where
things are regulated and where the allocations are going to
occur. And I would suggest that, not only can we do that, but
we probably should do that, and that's because the costs of the
program do not generally follow where the regulation occurs.
And, again, I would point to the experience in the EU ETS so
far, where, in power markets, the German power markets, what
we've observed is that even though the power companies are
required to turn in allowances for the CO2 emissions
associated with the fuels they use, what we see is that power
prices in those markets have actually risen sufficiently to
cover most of the cost of those allowances, even though they're
getting the allowances, 95 percent of the allowances, for free.
Now, this is not to say that in the U.S. power markets, we
shouldn't be giving out allowances for free. It just means to
say that when we choose where we're going to give out
allowances, it shouldn't be blindly applied to where the
regulation is--actually occurs. And I think we actually can say
some pretty intelligent things about where the costs are borne
and who might deserve to get allowances in order to be more
equitable.
Thank you.
The Chairman. Thank you.
Well, that finishes the panel. And, Senator Bingaman, that
brings us to questions. And if you'd like to go first?
Senator Bingaman. Thank you. Let me ask--sort of, follow up
on Billy Pizer's comment there.
As I understand it, EIA's estimate is that the cost of a
mandatory program, such as the one that NCEP, this National
Commission on Energy Policy, has proposed--the cost would be
roughly $4 billion a year. I think Jason referred to that. At
the same time, the program would allocate somewhere between $30
and $40 billion worth of allowances. I guess I'd like your
explanation as to how those two numbers relate. I mean, does it
make sense to be allocating $30 to $40 billion of allowances?
And what will that--what will the ultimate economic effect of
doing that be, relative to the $4 billion cost of implementing
the program, overall?
Mr. Pizer. Sure. The $4 billion--or the $3 to $4 billion
that Jason mentioned reflects the cost to the economy of
undertaking specific activities to reduce emissions, like
switching fuels or applying more energy-efficient technologies,
or what have you. And so, that's the real cost, in terms of
resources.
The $30 to $40 billion represents the value of the
allowances. And this isn't a real cost, in an economy sense;
it's a transfer from whoever doesn't have the allowances, and
needs them, to whoever is allocated the allowances for free, or
to the Government, if they're auctioned. It's much the same way
as if housing prices go up. It's not a really cost, in the
sense that someone owns the house, and they get the higher
price. It's just a transfer between who has the allowances and
who needs the allowances.
Senator Bingaman. Mr. Chairman, you might--did you want to
have Jason go through this description?
The Chairman. I did, but I want to make one other
observation.
I noted that sitting over here were two people. Ned, you
mentioned that you did work for the European community, and our
first witness talked about the failure of the program. And I
wondered how compatible you were, sitting there together.
[Laughter.]
The Chairman. Well, first, I assume that you told them how
to do it, and they didn't follow your instructions. Is that----
[Laughter.]
Mr. Helme. Not at all, sir. I think they've done very well.
I don't think the program's a failure at all. My sense is that
it's quite successful. It's underway. Prices are a little
higher. What Billy Pizer was pointing to, in terms of the
German situation, just as someone on your earlier panel raised,
in Europe the electricity markets are not fully deregulated.
And so, companies are actually able to capture monopoly pricing
in some situations. And there's a lot of debate now that
companies are basically passing on costs, saying it's because
of the allowances, and basically capturing some big rents. And
I think that'll be fixed, over time, as a major debate in
Europe. But, remember, this is the first year. They've got a 3-
year pilot phase. The real program kicks in in 2008. But, I
would argue, it's been quite successful, so far.
The Chairman. Yes, ma'am?
Dr. Thorning. I'd like to give a little different
perspective on that. As I'm sure most of you know, the European
emissions system only covers one-third of all power generation.
For the Europeans to actually put in place a system that covers
all emissions would be political suicide, because energy prices
and trading prices would have to rise such that it would simply
be unsustainable. So, I believe that the European emission
trading system will not ultimately prevail, and that they will
gradually be moving toward a more realistic approach, reducing
global greenhouse gas emissions. In my discussions with
officials and companies in the EU, I sense a growing unease
about where they're going with this. And Italy has already said
it wants to opt out of the second commitment period.
So, I think we need to look carefully at the lessons we can
learn from Europe, and not make the same mistakes they're
making.
Mr. Helme. Can I respond?
The Chairman. Absolutely.
Mr. Helme. In terms of the, (a) all of electricity
generation is covered, not one-third. About 45 percent of total
emissions are covered, in terms of the overall sectors. You
threw me off by your comment.
In terms of the politics of this, the way the European
Commission works, once you have a regulation in place, as they
do, it requires an action by the Commission to pull it back.
The member states can't stop it. In fact, there's a lot of
debate about extending the program to aviation, to
transportation, et cetera. And, I would argue, that would be
smart, but their programs of taxes and the efficiency standards
that they have in other sectors are less cost effective than a
trading program, that, over time, you will see this program
expand to other sectors, because--precisely what you heard in
the first panel, broader trading brings costs down, you get
more environmental bang for your buck, and that's what you
want. So, I think--I have quite the different view from my
colleague here.
The Chairman. All right. Well, I guess time will tell.
Now we're going to have Jason give us a little explanation
of how this works.
Jason, are you ready?
Mr. Grumet. Sure. This nice chart, to my left--and, I
guess, up on the screen--provides a useful visual aid. Thank
you for that.
A few words about point of regulation, which, I think, in
general, is really the question of, where in the energy food
chain do you place the burden to collect and surrender permits
to the Government? Boiled down, it's an administrative issue.
It really, as has been said, has no bearing on the costs of the
program, and, ultimately, no bearing on the ultimate effect of
the program. It does bear significantly, though, on your
options with regard to the scope of your overall program. But,
from a substantive sense--and, I would say, from political
sense--it bears strongly on the question of who gets the
goodies at the outset of the program. And I'll say a word about
that.
What this chart shows is essentially the range of options,
from the top of the food chain, fuel extraction, which would be
oil wells, point of entry of petroleum. It's the economy coal
mines and--with natural gas, there are a number of options, but
the top of the food chain would be natural gas wells. Going all
the way down to the right, you see the true downstream
expression, which would be, you know, light sockets, small
businesses, automobile tailpipes. I think that when most people
talk about a market-based program, they're imagining something
generally on the upstream side of the equation. To go all the
way downstream, I think that the statements from Shell, that we
should really focus on the auto companies, would be perceived
by the auto companies as advocacies for CAFE, which is really
more of a command-and-control option, as would be setting new
efficiency standards or, in some ways, requiring limitations
on, you know, use of energy.
So, I think the real debate kind of fits into the top half
of the equation, what Jeff Sterba and others described as a
hybrid program, where you would regulate the large stationary
smokestacks, which is the full scope of the program in the EU,
at that point of combustion, and everything else above that. To
my mind, it's really essentially still an upstream expression.
And I guess there's two, kind of, closing points that--I
don't pretend to have the monopoly on this topic--as both Mr.
Helme and Ms. Thorning point out, the European Union only
focuses on the large, stationary-source emitters. It does not,
in fact, have full program coverage. It covers about half of
the economy. To move beyond that half of the economy, my view
is, you have to actually move the program farther upstream,
that to go smokestack by smokestack, you start getting very,
very small smokestacks after about half of the emissions are
covered. You have to start regulating bakeries and, you know,
small businesses. Not going to happen. So, if you really want
full program coverage, that actually, in some ways, pushes you
farther up the food chain.
The second point, which I think is less substantive, but
politically, in some ways, more important, is that there is a
perception, based on history, that who you regulate is the
entity that should get the lump sum of the allocation, at the
outset. That has been our history with the acid rain program
and other stationary-source control programs. Billions--Rich
Richels and others can explain to you better than I why carbon
is different, but I think there is a perception that if you are
regulated, you're going to get more of the allocation at the
outset. And I would suggest to you that some of the preferences
we're hearing about point of regulation are actually derivative
from the broader question of who gets the allocation to start
the program. And so, I think there is a clear political linkage
between the two, while there is no necessary substantive
linkage between those two questions.
I would pause there.
The Chairman. Okay. Does anybody want to comment on--as a
panelist here, on that chart, on that explanation?
[No response.]
The Chairman. Okay.
Senator Murkowski. Mr. Chairman?
The Chairman. Yes.
Senator Murkowski. Can I just ask for you to follow up,
then, on your last comment there? You're suggesting that the
downstream users, the household--the little folks, even though
they're not subject to the regulation, you're suggesting that
they share in some of the allowances. And you've indicated that
perhaps Mr. Richels or Mr. Pizer can speak more to that. Can--
--
Mr. Grumet. I'll frame it, and then pass it on.
The Energy Commission believes strongly that the
allocations--the free allocations should be given to the people
who bear the burdens of the program. And, you know, different
people have their different estimates, but you've heard the
word--the number, 10 percent, thrown around, that the actual
regulated entities are only likely to bear, cumulatively, about
10 percent of the costs of the program. And that is because
they pass those costs on. If the cost of coal increases because
they have to purchase in permits, that will then get passed on
to the electric sector. And so, even if the electric sector
wasn't regulated, they will still bear costs from this program.
And then, they, being good, smart capitalists, will pass those
costs on, through higher electricity prices, and large energy
users, like the aluminum companies, and others will bear some
cost of compliance. And so, actually, the point of a carbon
constraint is to send a price signal all the way through the
economy so that everybody has an incentive use energy more
wisely. And so, in that regard, there is a logic to trying to
allocate broadly. There are a lot of different ways in which
people suggest that be done, but the notion of an auction as a
mechanism do so that is simply that you would raise revenue
that then could be disbursed broadly through society. But there
are other suggestions that people actually give direct
allocations to a cement--to the cement industry to cover some
of their costs of higher energy costs, and then they would sell
those allowances to the energy producers, or whoever needs
them, to create some greater equity.
The Chairman. Okay. Good question--comment.
Yes, Richard?
Dr. Richels. With regard to the--thank you. With regard to
the issue that you could somehow make the electric utility
industry whole by allocating between 5 and 10 percent of the
permits to them--and, earlier, Ned mentioned the study by CRA--
there was a subsequent study by CRA, I believe, that took a
very careful look at the analysis that came up with the 5 to 10
percent number, and found some very unrealistic assumptions
underlying that analysis. I won't get into the detail, but one
of the analyses were that the utilities would receive the
permits in perpetuity. When they calculated the number of
permits that would be required to make the utility whole under
what they consider to be more realistic assumptions, the number
was more like 75 percent.
Now, I'm not saying that 75 percent's right. I'm not saying
that 10 percent is right. What I think that the Senators need
to understand is that there's a great deal of uncertainty
underlying some of the numbers that are being tossed around.
The Chairman. Ned, before you--I know you had your hand up,
but I had on my mind asking you a question. You threw around--
mentioned a number, 8400.
Mr. Helme. Yes, sir.
The Chairman. About that number.
Mr. Helme. This is the number of entities--you know,
plants, sources--that would need to be regulated if you did the
hybrid, the combination that Jason and I have been talking
about, where you regulate the industrial point sources over a
certain size, and you go to natural gas distribution companies
and oil refiners and natural gas processing plants. There's
about--this is several years ago--there were 8400 facilities.
And the EU program today is, like, 12,000 facilities. So,
clearly that hybrid kind of thing, which would cover basically
100 percent of the economy, could be done with 8400 facilities,
which is quite workable, in terms of a regulatory program.
Whereas, if you went downstream as--you know, down to the
individual bakery and dry-cleaner, you're talking about
hundreds and hundreds of thousands of sources. So, in contrast,
an upstream system that's just coal mines, coal preparation
plants, natural gas pipelines, distribution, refineries, is
about 2,000 sources. So, either way, it's quite workable.
But, I wonder, as to Rich's comment about the studies--I
think the other key point here for Senators to think about is
the amount of allowance you need to give to, let's say, the
utility industry is completely a function of how tough the cap
is. Okay? In the study I cited, we were looking at a cap at 7
percent below 1990 levels, basically the equivalent of the
Kyoto target for the United States. The kind of study that
Jason's talking about, for the proposal NCEP put together, is a
much less stringent cap. And so, less allowances are required.
In our study that the CRA did, we found the utility industry
needed 26 percent of the allowances, and in Jason's study it's,
like, 10 percent, but that's because it's a less stringent cap.
So, remember that when you think about this, obviously the
tougher the cap, the higher the cost, the more you need to give
to the companies to offset their--the loss to their
shareholders. So, that's the way to think about this.
The Chairman. Senator Murkowski.
Senator Murkowski. I want to follow up on the 8400 comment.
That's today. That's the number today. How do we deal with the
fact that we've got a growing population? How do we account
for--if you've got a cap-and-trade program--this is what some
of those who object to it say--you can't account for an
increasing population. How do we keep those sectors--for
instance, the coal industry, which many of us are concerned
about--how do we keep those from seeing rising unemployment
rates? We've got a society, an economy, that's constantly
moving, constantly in flux. How do we account for those?
Mr. Helme. Well, there's two answers, I think. One is, in
terms of the number of facilities, it's a function of how many
cement plants, steel mills, refineries, powerplants, et cetera,
are built. So, I would argue that--not going to be that many
more. I mean, it might be more than 8400, it might be 10,000,
over time, but not such a problem. But your other question is
trickier. It's, sort of--when I say it's enough to give 26
percent to the utility industry to hold their shareholders
harmless, that's not the same as saying--for the coal industry,
it's 34 percent--that's not the same as saying, ``I'm taking
care of the communities,'' or ``I'm taking care of the
workers,'' or, ``I'm taking care of the railroads.'' That's
saying, ``I'm taking care of the shareholders of coal
companies, electric utilities companies, steel companies, et
cetera.'' That's not the same thing.
And the point I think Jason was making, that we have a lot
of allowances left over when we take care of those
shareholders. A portion of that certainly could be put to the
workers. I mean, if we're going to have an effect on oil
refinery workers, they could be compensated.
So, the point here is, you've got plenty to play with.
There's a lot more money on the table in a carbon program than
there was in the SO2 trading program. So, there are
ways to design this. And I think we can say, ideally, from an
economist's perspective, you want to auction as much as you
can. But from a political perspective, it's all about equity,
who--as Rich Richels said, who do we want to give this to? And
there's plenty of opportunity to do that.
The Chairman. Mr. Pizer.
Mr. Pizer. I just wanted to add to Ned's comments and say,
you don't want to get the impression that you can make
everybody okay. I mean, this is a program that's going to cost
$4 billion to someone. But the point is, is that you can use
the allocation, if you do it carefully, to try to control the
distribution of those impacts and make sure that the
communities or the companies that would otherwise be more
adversely affected, are somehow compensated. And I think that,
you know, we have some idea, and you've heard some different
estimates today. I was actually going to point out that I think
the estimate that Jason referred to, that said 5 to 10 percent,
was actually 5 to 10 percent of the total. Whereas, I think the
number that Ned was talking about was actually 20-something
percent of the power sector's actual emissions. So, when you
take those together, they're actually not that far apart.
The Chairman. Okay.
Mr. Pizer. Well, the point was, is that this is 10 percent
of a pool for the entire economy. So, if you talk about that,
relative to the emissions in the power sector, it's actually
closer to 20-something percent. I think that the estimates that
we've heard, while they're going to be subject to debate,
clearly, there are numbers that can be dealt with in the power
sector to deal with them.
The Chairman. All right.
Senator Bingaman.
Senator Bingaman. I wanted to ask Samuel Wolfe to comment a
little more on this public benefit allocation that you folks
are contemplating in this RGGI program. How does that relate to
what Senator Murkowski was asking about there? I mean, how do
you see this working? And would each State make its own
decision as to what allocation to make to what purposes? How
would it work?
Mr. Wolfe. Thank you, Senator.
It would be a State-by-State decision about, first of all,
whether to stay at the 25-percent floor or whether to go above
that level. It would also be, I think, a State-by-State
decision on exactly how to invest the proceeds of that portion
of allowances, but with set-aside to benefit consumers. I think
the best way to do it is to see where you can best leverage
that money, if, say, by investing--and some of what we've seen
in the modeling that's been done for the Regional Greenhouse
Gas Initiative is that by investing that money in energy
efficiency, we see a very quick and very large reduction in the
cost of CO2 allowances, and that means, again, a
very quick and large reduction in the cost of the program. So,
that seems to be a much better leveraged way to take advantage
of the resources that we're creating when we create a cap-and-
trade system.
Just to expand on that concept, one thing that I think
we're all circling around here is the idea of making regulated
entities whole. And it's worthwhile just taking a moment to
explore what that means.
One way to help reimburse them for their costs is certainly
to hand them allowances. But in a large chunk of our electric
generating fleet in this country they're not subject to utility
regulation; and so, they are going to recover their costs of a
greenhouse gas cap through the wholesale electricity markets.
And they are not going to change their behavior in doing that;
they're not going to seek to recover any less money through the
wholesale markets, if they're handed a larger stack of
allowances. Really, it's two separate things. And the
allowances that they're being handed are basically almost a
direct pass-through to the shareholders, in addition to the
money that's going to be recovered through the wholesale power
markets.
The Chairman. Senator Feinstein.
Senator Feinstein. Thank you very much, Mr. Chairman.
I wanted to go back, just for a moment, to what California
is doing, because it's certainly the most aggressive action in
the Nation, so far. And they have a macroeconomic study from
the University of California at Berkeley that actually shows
that these limits will produce new jobs and new employments,
and, actually, as a boon to the economy of the State.
I see you nodding, Mr. Helme. I'd like everybody to comment
on that, because the fear has been economic disadvantage by
moving in this direction. Everything I see is economic
advantage in moving in this direction, because, sooner or
later, global warming is going to begin to impact every
company, as well as every other kind of entity on the planet,
if we don't address it.
Mr. Helme. We work extensively with them, and did our own
sort of bottom-up microeconomic study that mirrored the kind of
findings they had. So, I think it's--you're right, in terms of
the level of reductions that are required in the caps in
California, it is a very positive picture. A lot of that
positive picture comes from the Pavley auto standards, where
you're saving a lot on gasoline consumption, that far exceeds
the cost to the automakers that goes in building in additional
price of the hybrid cars, and that sort of thing. So, a big
piece of those benefits from that, and also for energy
efficiency. But I agree with you.
Senator Feinstein. Right. Anybody else on that? Please.
The Chairman. Please. Margo?
Dr. Thorning. I'd like to mention that there is some work
on the ACCF's Web site looking at the impact on California of
trying to meet emission reductions. And we found, with our
general equilibrium model, by--I think Charles River Associates
also prepared that study--significant cost to California, in
terms of jobs and employment. So, I think you need to look very
carefully at the two different microeconomic simulations and
assess the question of how realistic the assumptions are.
And, second, just to draw us back one more time to our
friends in Europe, Europe is, of course, growing at 1 percent
or less a year, and the higher energy prices they're facing are
definitely having an impact on their ability to provide jobs
and sustain well-being. So, I think it would behoove us to take
a good look at the voluntary approach, which the EIA's own
recent analysis shows is more productive, in terms of reducing
greenhouse gas emissions and reducing electricity prices, than
is a mandatory emission intensity reduction program.
Senator Feinstein. Mr. Marron, and then Mr. Richels.
The Chairman. Just before we go to the next person, could I
ask Ned--you mentioned two main reasons that the economic study
came out positive. Repeat them again.
Mr. Helme. The two biggest pieces of benefits are the
benefits from the California car standards, where you get a lot
less consumption of gasoline, because it's much stricter
standards, and so that's a big saving for consumers, and more
than offsets the additional costs to the automakers of
producing the more efficient vehicles. And, second, the
extensive energy efficiency program and removals program that
they're building, which has huge--again, it's like appliance
standards--the homeowner gets a more efficient dishwasher, and
obviously saves energy for a long period of time, so big
benefits there.
The Chairman. All right, thank you.
Now, who was next on this?
Donald.
Mr. Marron. Yes, I want to just say that from the
macroeconomy point of view, introducing the kinds of
regulations that have been discussed today would almost
certainly have net costs, leaving aside whatever benefits come
from preventing, possibly, or changing, the degree of global
warming. And I guess the easiest way to think about that is to
think about the various products that we produce today in the
economy--say, electricity--if a cap-and-trade system were
implemented, firms would either be paying more for the fuel
sources they get, switching to more expensive fuel sources, or
installing various kinds of capital that might capture and
sequester emissions. All of those things are a net cost. They
may employ people, but, from a macroeconomic point of view,
what you basically observe is a switching of jobs from one
role, where people used to produce some other products, into a
role in which they're helping, in essence, execute other
requirements of the regulation. And so, again, I think, from an
overall economy point of view, the key issue would be whether
the costs that are imposed by the regulation are balanced by
more than offsetting benefits from the environmental benefits.
They're not going to be offset by benefits within the economy.
Senator Feinstein. Mr. Richels.
The Chairman. Richard, did you want to comment?
Dr. Richels. Actually, I couldn't have said it better than
Donald. I mean, what you're talking about is what economists
typically refer to as a ``free lunch.'' I don't think we should
fool ourselves into thinking that there's a free lunch out
there to be had. It could be the best lunch we ever paid for,
but I think we're doing consumers a disservice by telling them
that we can get all this done at zero cost.
I think that the California study, we need to start taking
a more careful look at that. I've summarized the IPCC economic
analyses, the Intergovernmental Program on Climate Change
analyses, for the last three reports. There's been a lot of
tension between the top-down modelers--I'm pleased to say Billy
is an example of a top-down modeler, as well as myself--and the
bottom-up modelers. Bottom-up modelers tend to think that
there's a lot of--awful lot of inefficiencies in the economy,
so much inefficiencies that if we could just take advantage of
those inefficiencies, we can put the economy on track, and
it'll be a win-win for the environment and the for the economy.
I just am not convinced that that's the case.
Senator Feinstein, EPRI will be doing an analysis of the
California situation, looking at the costs of California going
it alone. And, typically, we find that when a State goes alone,
there is a cost to that State. There's a migration of jobs out
of the State, there's a migration of employment, there's a
decrease in net income.
And, you know, the best of all situations--we say we want
as wide a coverage as possible--well, we want it to be
globally, is what we would really like to see. I mean, that's
the way to really protect the environment. The United States
could reduce its emissions to zero, and it's not going to
stabilize atmospheric concentrations. Without international
cooperation, then we'll have to go to some kind of country-by-
country action and hope that, at the end of the day, we'll be
able to put together some kind of patchwork quilt.
But I'd hate to see us put ourselves in the position where
we have to put that patchwork quilt together at the State
level, because that's going to be extremely difficult to do.
And I commend you on coming forward and trying to move
California, where I just moved out of after 28 years, into a
more national perspective.
Senator Feinstein. Okay.
The Chairman. Thank you.
Now, we're just getting near the end of this. Let's go,
Jason.
Mr. Grumet. If I can pile on. First I'd like to say,
Richard, I hope you didn't move because of the job dislocation.
[Laughter.]
Dr. Richels. Well, I would have done that later.
Mr. Grumet. I am neither a top-down or bottom-up modeler.
But I think it's important to recognize the frame of this
issue, and that is that for a long time there have been some
who have been saying this is free and easy, and there have been
some who have been saying it's economically ruinous. And
neither, I think, is the case.
There are clearly significant opportunities to have
benefits, in addition to the environmental benefits, from
encouraging efficiency and trying to internalize these costs of
carbon. And I think many of those will be long-term benefits,
they'll enhance our economic competitiveness overseas, they'll
provide all types of benefits. At the same time, there will be
real costs of this program.
And, I think, to Senator Murkowski's broad, and, I think,
most important question, how do we make sure that those costs
are, in fact, consistent with our broader desires for economic
well-being? And that's a question of program design at a
metalevel, which is really not invoked in the white paper.
That's a question of the pace of emission reductions, whether
or not you have cost certainty to overcome the kinds of
unhappiness that they've been experiencing in Europe, where the
costs are about three times what had been initially perceived,
and whether, in fact, you also invest resources in new
technologies to provide an incentive.
And I guess I would just say, at the end of the day, the
first panel nailed it, that this is about technology. And the
question is, how do you create the incentives for technology?
There's a polar argument which says, do it all through markets,
do a kind of Kyoto-like--you know, put it all on business. We
don't think that's going to work. There's an all--a voluntary
notion, which says, put it all on the tax base, have it all
done through taxpayer-funded incentives. Don't think that's
going to work.
What the Commission believes is, you need a combination.
You need a modest market signal, to provide a long-term message
to the ingenuity of America to start to make different
decisions and to have the benefit of generating some revenue to
provide incentives. So, you have kind of a pull and push, which
gradually moves us forward. And, I think, with that kind of
combined approach, we can take a meaningful first step.
The Chairman. All right. Getting close now.
Richard.
Dr. Richels. I just want to add to that. I totally agree
that cap-and-trade, or whatever market mechanism we need, makes
a lot of sense, as far as economic efficiency is concerned. But
without a technology policy that goes along with it, it's going
to be very difficult to do the heavy lifting that's going to be
required downstream. And that's not going to come about through
cap-and-trade. We need, somehow, to incent the public sector
and the private sector to make sure that the carbon-free
technologies are available in the future, when we're making
those 50-percent reductions or 80-percent reductions that will
be required to stabilize atmospheric concentrations.
The Chairman. Okay.
Ned.
Mr. Helme. I just want to clarify that I agree with Jason's
point, on the larger, longer term. Clearly, it's not going to
be a free lunch, by any means. You're going to face additional
cost. And I agree with Richard's point, here at the end here,
the reason we really need to push technology--and that's why I
propose this reverse auction, where you put some of the
allowances out there--is that if you look at the SO2
program in 1990--you remember, the acid rain program--the cost
estimates for SO2 scrubbers and for NOx
SCR controls were much--factor of two, factor of three higher
than they are today. We've got a cap. We drove the technology.
The competition of that trading market created a lot of
innovation in the technology. And today we have very reasonably
cost technologies. And that's why none of the utilities are
objecting to the CAIR rule or--and so on, because they know
what it costs, and it's not absurd, in terms of the costs.
And our hope with climate is the same way. We need to drive
the technology. We don't have the technologies today. You know,
we're talking about gasification sequestration, but it's 30
percent more expensive than--you know, traditional
supercritical coal. That can happen. If we drive those
technologies--same with nuclear, same with advanced
renewables--if we drive those technologies now, by the way you
design the program, by creating a set of allowances that make
it attractive for people to build those technologies and not--
today they can't make--recover their costs doing that, for the
most part. So, I think that's where we want to go. And we'll
see the same pattern, I would argue. Those technologies will be
competitive by 2020, and we'll be able to get there.
So, I agree with a lot of our panelists here, that that's
where we need to go.
The Chairman. Okay. Margo? And we're going to wrap this up.
Dr. Thorning. I certainly concur we need to drive
technology, but I--focus this on the strong role economic
growth can have in pulling through the technology that we need.
For example, in Europe, emissions intensity has only fallen by
7.6 percent from 1997 to 2003, in spite of their mandatory
push. Here in the United States, emissions intensity has fallen
by 12.6 percent over that same time period, because we're
growing in, on average, 3\1/2\ percent a year. Europe is only
growing at 1 percent. So, economic growth can play a really
strong role in pulling through the technologies that we need.
And another incentive that, as I had mentioned before, we need
to focus on is making our tax code competitive with the rest of
the world.
The Chairman. All right.
Senator Bingaman.
Senator Bingaman. Let me just ask Ms. Thorning. It's true,
though, that most of our growth is in the service sector as I
understand it. Also, we are much less efficient than Europe, as
a general matter, in use of energy. Therefore, we can reduce
our energy intensity more easily. Am I right about either of
those?
Dr. Thorning. Well, I would suggest that, because the
United States has a whole different structure and is--you know,
the distances are greater, energy prices have been cheaper--
that it's not necessarily easier for us to make the kind of
switches toward lower greenhouse gas emissions. But because
we're able to invest in new capital, because our economic
growth is stronger, we've made better progress than has Europe.
And Europe is increasingly a service-sector economy, as well.
And, by the way, in the service sector, there's a lot of
manufacturing buried in there, because there's been a change in
the structure of how services are provided to the manufacturing
sector.
The Chairman. All right. We stand in recess until 2:30.
Take your belongings with you and return to this room at 2:30.
[Recess from 12:11 to 2:36.]
AFTERNOON SESSION
Senator Bingaman [presiding]. Okay, why don't we go ahead
and get started here.
Senator Domenici has been delayed with a meeting of the
Appropriations Committee on the supplemental appropriation
bill, but he's going to be here as quick as he can. But he
indicated that we should go ahead and start.
So, why don't we just do what we did this morning, go
around and have everyone make the points that they would like
to make, and then we'll have some questions. Hopefully by then
we'll have some additional Senators so we can have some give-
and-take discussion.
Kateri, thank you for being here, with the Alliance to Save
Energy. Go right ahead.
STATEMENT OF KATERI CALLAHAN, PRESIDENT,
ALLIANCE TO SAVE ENERGY
Ms. Callahan. Thank you, Senator.
My name is Kateri Callahan, and I serve as the president of
the Alliance to Save Energy, which is a nongovernment and
bipartisan organization dedicated to advancing energy
efficiency worldwide. And, as the first panelist, I'd like to
thank and commend you, Senator Bingaman and Senator Domenici,
for organizing this conference and for inviting the Alliance to
be part of what I consider to be a very important national
dialogue.
The Alliance has two overriding recommendations today.
First, we would like to urge that any national climate strategy
employ energy efficiency to the greatest extent possible,
because there's an impressive body of study that suggests that
such technologies and practices are the most cost-effective
means we have at our fingertips to controlling greenhouse gas
emissions. And, second, while we engage in what could be a very
protracted debate on national climate policy, we would like to
urge the Congress to go ahead and immediately adopt policies
that will drive energy efficiency in every end-use sector. We
believe that such measures are likely to complement any kind of
an overarching national scheme that's finally enacted. And,
meanwhile, we can begin to reduce greenhouses gases
immediately, while also growing our economy.
We already have solid evidence that efficiency can, and is,
delivering tremendous carbon savings to our economy. Our own
research, Senator, indicates that energy efficiency policies,
the building and appliance standards, the incentives we've put
in place, and technology improvements, since the mid-1970's are
allowing us to avoid the use of approximately 40 quadrillion
Btus, or roughly 40 percent of the energy currently consumed,
and that we avoiding the emission of almost 2 billion tons of
CO2 every year.
These impressive savings don't come close to tapping the
full efficiency gains. For example, the modeling that was
undertaken by RGGI, the Northeast greenhouse gas initiative,
showed that doubling that region's energy efficiency policy
impacts could cut electricity growth by two-thirds by 2024 and
would keep carbon emissions flat, and it would do all of that
while adding jobs, at a cost of less than 3 cents a kilowatt
hour in improvement to the economy.
So, to reap the promise of energy efficiency in any
national climate strategy, we ask that the Congress make
explicit provisions for such technologies and measures. For
example, if you undertake an upstream cap-and-trade program,
we'd urge that you follow the lead of RGGI and allocate a
significant portion, at least 25 percent, of the allowances or
revenue from such an auction--or from the auction of such
allowances directly to support energy end-use activities and
other public benefits. And, again, as stated earlier, we
believe it's critical to move forward today in front of any
agreement on a national climate strategy to reduce greenhouse
gas emissions, and we think you can cost effectively do this by
implementing and funding the provisions--the energy efficiency
provisions that were in EPAct 2005. We also urge you to
consider adopting additional measures, including policies to
improve the fuel economy of our light-duty fleet, to extend and
expand the current suite of tax incentives--energy efficiency
tax incentives that are in place, and, finally, to institute
something I know you're interested in, Senator, a national
energy efficiency resource standard and/or a public benefits
fund that could be modeled on successful programs that States
have underway to deliver--or to invest in energy efficiency.
We believe this dialogue is critical to the development of
a sustainable energy future in the United States, and that
energy efficiency represents the cheapest, the quickest, and
the cleanest mechanism that likely will be considered all
during this debate. We also believe, however, as I mentioned
earlier, that we can take action now, a no-regrets policy, put
in place Federal legislation that will drive energy efficiency,
in transportation, in buildings, in the energy supply sector,
and we can do that while we debate broader programs and make a
meaningful impact on greenhouse gas emissions.
Thanks for your time, and I look forward to your questions.
Senator Bingaman. Thank you very much.
Michael Bradley, with the Clean Energy Group. Go right
ahead.
STATEMENT OF MICHAEL BRADLEY, EXECUTIVE DIRECTOR, CLEAN ENERGY
GROUP
Mr. Bradley. Thank you, Senator.
My comments today represent the views of the six Clean
Energy Group companies which support the Clean Air Policy
Initiative.
Since 2000, these companies have actively supported a
Federal multipollutant legislative approach for reducing
NOx, SOx, mercury, and CO2 emissions from
powerplants. These companies include Calpine, Entergy, Exelon,
Florida Power & Light, PG&E, and the Public Service Enterprise
Group. Collectively, these companies own or operate more than
140 gigawatts of electric generating capacity in 40 States.
This represents about one-sixth of the total U.S. generating
capacity.
Our members support the adoption of a mandatory greenhouse
gas regulatory program based on a fair and cost effective
program design. We believe that the scientific evidence on the
risk associated with climate change is sufficient to warrant
immediate legislative action. We agree with many of the
participants today that an economywide regulatory system could
be effective in controlling greenhouse gas emissions. However,
the practical reality is that the economywide approach will
require tremendous political lift. I think we're seeing that.
We believe strongly that a sector-specific cap-and-trade
program initially focused on electric generating would be a
good first step in setting us on a course to begin reducing our
Nation's greenhouse gas emissions. A cap-and-trade program for
the electric generating sector could be designed to readily
integrate into a broader economywide program at a later point
in time.
As the industry makes substantial investments in both new
and existing powerplants, we are better served by having the
right economic signals in place to guide these capital planning
decisions.
In terms of program design, my comments today will focus
primarily on the methodology used for distributing allowances
to the electric generating sector.
One of the options that we have seen proposed in the
responses to the four questions over the last month is to use
the allocation to compensate higher emitting facilities by
basing the allocation on a facility's share of historical
emissions. We disagree with this approach. We don't think that
this approach is good public policy, nor do we think that it
would be good business practice.
An allocation based on compensation fails to drive
innovation and the deployment of new high efficiency generating
technologies. An allocation based on compensation penalizes new
market entrants that would be excluded from the allocation
entirely. And, finally, an allocation based on compensation
penalizes companies that have invested in generating fleets
with a lower carbon intensity prior to the imposition of the
cap.
Instead, we advocate an alternative approach that requires
companies to earn allowances based on their current
performance. Allowances are a valuable commodity that should be
used by policymakers to drive investment decisions that will
lead to better environmental and lower costs.
Specifically, we advocated updating output-based
allocation. Under this approach, allowances would be
apportioned based on the facility's recent power output. This
creates a very strong financial incentive for improving
powerplant efficiency. Also, an updating--output-based
allocation approach encourages the deployment of new innovative
technologies by providing a mechanism for new powerplants and
new projects to be integrated into the cap-and-trade program on
an equal basis. From a business perspective, we feel this
approach is the right approach, because it treats companies
equitably based on their ability to deliver low-cost energy
supplies.
In the absence of an equitable distribution allowance
approach, such as an output-based allocation, we would support
an alternative allowance allocation approach, such as an
auction, to ensure a fair distribution of the burden under
national greenhouse gas programs.
Thank you very much.
Senator Bingaman. Thank you very much.
I am reminded here, we need to try to get this done in a
couple of minutes, if people can possibly do that. But
appreciate the good comments that we're hearing.
Michael Morris is here to represent the Edison Electric
Institute. Welcome, and go right ahead.
STATEMENT OF MICHAEL MORRIS, CHAIRMAN OF THE BOARD OF
DIRECTORS, EDISON ELECTRIC INSTITUTE
Mr. Morris. Thank you very much, Senator. Appreciate the
opportunity to try to be the first to get done within a couple
of minutes. I'll do all that I can in that regard.
Senator Bingaman. We wish you well.
Mr. Morris. I'm sure you were addressing the previous
speakers, not me, right?
[Laughter.]
Mr. Morris. We really are here to represent the Edison
Electric Institute. I think you're very familiar with it, 185
member companies and 65 international affiliates, as well. We
would like to commend you and your colleagues for the
opportunity to be here and comment on the white paper.
EEI strongly supports voluntary technology, carbon
intensity-based approaches to the global climate issue. We
believe that this can--and, in fact, already has--achieved
significant results. Technology is the key to addressing the
greenhouse gas issue as we go forward. Strategies should be
adopted that develop and implement a zero- or lesser-emitting
generation technologies, taking into account the economic
turnover of capital stock. Robust voluntary measures that
reduce carbon emissions and emission intensity surely will get
us in that direction.
Emphasis on the reduction of carbon intensity is important,
because we think that's essential to make certain that we don't
dampen economic growth as we go forward. In addition, we would
support a robust budget support for the implementation of the
issues that came up in the Energy Policy Act of 2005. And I
know you're a strong supporter of that, as well.
We note the critical international dimensions of the
climate change issue and the importance of investment overseas
in technology and best practices.
The reality of rapidly increasing emissions from major
developing nations such as China and India demonstrate the
importance of the international partnerships and other
voluntary technology-based multinational agreements like the
Asia-Pacific Pact. We feel very comfortable with that, and
believe it's the right way to go. American electric power and
EEI will continue to work in that direction.
As we look at the issues in front of us, we believe that it
ought to be an economywide system that surely is based on the
point of the actual pollution themselves. We would talk about
downstream and upstream analysis, as we go forward. And clearly
we are strong supporters of the allocation method, rather than
the auction method, and will address that we get to the
questions.
I'm seeing the signs behind you that say I'm out of time.
Thank you.
Senator Bingaman. Well, thank you very much.
Fred Krupp, we're glad to have you here, and you're
speaking for the Environmental Defense Fund.
STATEMENT OF FRED KRUPP, PRESIDENT,
ENVIRONMENTAL DEFENSE
Mr. Krupp. That's right, Senator, Environmental Defense.
And it's an honor to be with you here today. And I want to
commend both you, Senator Bingaman, as well as Chairman
Domenici, for your leadership on U.S. climate policy and the
progress you've made in opening this dialogue and allowing us
to delve more deeply into this most serious challenge.
The first principle of effective climate policy is
establishing a clear emissions target related to the problem
we're trying to solve. That problem is the increasing
concentration of greenhouse gases in the Earth's atmosphere,
which are causing an accelerated warming of the planet.
Just last month, the Journal of Science published an
article that found that the rate at which Greenland, the ice
sheet, is draining into the ocean has doubled over the last
decade, suggesting that a tipping point leading to the complete
loss of the Greenland ice sheet and a 20-foot sea-level rise
may be closer than previously predicted.
Because of the increasing flood of similar evidence, we
must now establish real limits, not emissions caps that would
allow greenhouse gases to rise. They would ultimately make our
task more difficult and more costly.
In response to your questions on the point of regulation
and allocation, we believe those decisions flow from the basic
design of the program. In order to achieve reduced greenhouse
gases at the least possible cost, the basic design of the
program must include both a real emissions limit and an
opportunity for all sectors of the economy to contribute to the
solution. This is because Environmental Defense believes the
most powerful tool to manage the cost of climate policy is the
ingenuity of the American people responding to the incentives
in a market economy. A stable and predictable emissions limit
creates the demand for emissions reduction and offset
technologies. Market demand and innovative entrepreneurs will
provide a better mix of technologies than any government
employee could choose. Similarly, the fundamental elements of
emissions trading and banking in a competitive market serve to
grind down costs far better than any government program could.
Finally, I believe farmers can play an important role in
meeting the climate challenge. Farmers can raise the crops that
would become renewable fuels in ways that produce less carbon
than traditional fossil fuels. This can provide a win-win
solution for energy security and climate policy.
In addition, we think agricultural offsets are one of the
most powerful tools to reduce costs. EPA's analysis of the
Clean Air Planning Act last fall predicted that--carbon dioxide
allowances prices between $1 and $2 if the use of offsets is
unlimited. At the same time, they would provide new revenue
streams for farmers as the world markets for farmers become
ever more challenging.
Thank you.
Senator Bingaman. Thank you very much.
Next, Paul Bailey, who is speaking on behalf of Generators
for Clean Air.
Go right ahead.
STATEMENT OF PAUL BAILEY, DIRECTOR, GENERATORS
FOR CLEAN AIR
Mr. Bailey. Sir, if I fail to meet the 2-minute challenge,
it won't be Jonathan's fault. He has warned me.
Senator Bingaman. All right.
Mr. Bailey. So, we'll see how I do.
I thank you for this opportunity today, Senator Bingaman. I
also wanted to express our appreciation to the committee staff
and the National Commission on Energy Policy staff, because
they've been helping us over the last few months in explaining
issues to us and responding to questions. And we appreciate
that.
Although the members of this group--there are nine utility
companies that belong to the group--although the members have
different views regarding mandatory climate change legislation,
all wish to be responsive to your request for input on the
white paper. I will briefly summarize their major points.
If Congress enacts mandatory climate change legislation, it
should apply economywide and should encourage all greenhouse-
gas emission reductions and offsets. Reducing utility
compliance costs and electricity price increases should also be
a major criterion for deciding on point of regulation and
allocation of allowances. The electric sector should receive an
allowance allocation based on its pro rata share of covered
greenhouse gas emissions. Legislation should allocate
sufficient allowances to fossil generation to minimize utility
compliance costs and increases in electricity prices to
consumers.
A 95 percent allowance allocation to fossil generation
would minimize both compliance costs and electricity price
increases. On the other hand, auctioning allowances would
increase compliance costs dramatically, without any additional
environmental benefit. GCA is generally opposed to any auction.
Allocation of allowances within the electric power sector
should be based on either historic greenhouse gas emissions or
historic heat input adjusted for type of fossil fuel combusted.
We support a safety valve for allowances--a safety-valve
price for allowances to protect the economy and provide cost
predictability. For similar reasons, Congress should consider
mechanisms to ensure that compliance costs are recovered and
that unregulated fossil generation is not penalized.
Lastly, Congress should also consider ways to avoid a
patchwork of State requirements, in favor of a uniform Federal
program.
Thank you.
Senator Bingaman. Well, thank you very much.
Next is Craig Montesano, with the National Mining
Association.
STATEMENT OF CRAIG MONTESANO, DIRECTOR OF GOVERNMENTAL AFFAIRS,
NATIONAL MINING ASSOCIATION
Mr. Montesano. Thank you, Senator. We'll try to meet your
mandatory requirement today on the time.
Senator, in our post-Katrina world, the National Mining
Association believes Congress should consider climate policy in
the context of energy security, technology development, and
U.S. economic competitiveness. From this perspective, America's
abundant supply of coal should be viewed not as a problem to be
overcome, but as a solution to our growing dependence on
foreign energy sources, a solution that requires only the
proper investment in technology to fully realize its potential.
In fact, clean-coal-based electric generation and coal-to-
liquids technology can play a vital role in addressing both our
economic and environmental challenges. But this will be far
less likely if Congress imposes a mandatory cap on greenhouse
gas emissions. Rationing the use of our most abundant and least
costly fuel will result in higher costs for U.S. manufacturers
and consumers, especially in the 26 States that rely on coal to
generate more than half their electricity.
Moreover, mandatory control systems in countries where they
are in place are proving to be unworkable, amassing a record of
missed targets, bureaucratic uncertainties that retard economic
growth while yielding negligible reductions in greenhouse gas
emissions.
By contrast, America's pro-technology voluntary
multilateral approach is achieving economic productivity,
matched with impressive reductions in greenhouse gas intensity.
The Asia-Pacific Partnership embodies this approach. It is a
serious commitment by the world's largest energy consumers to
find long-term sustainable solutions to both clean development
and emissions reductions.
Finally, the 2005 Energy Policy Act will greatly enhance
the positive trends of which I speak, and America's coal
producers look forward to working with the committee in fully
implementing the Act.
So, in conclusion, we hope the solutions proposed at this
hearing will address the energy and emissions challenge posed
by China and India, and acknowledge the importance of energy
efficience and clean coal technologies for reducing America's
reliance on foreign energy sources.
Thank you for fostering this constructive discussion on
climate today.
Senator Bingaman. Well, thank you very much.
Kirk Johnson is here, with the National Rural Electric Co-
ops. Glad to hear from you.
STATEMENT OF KIRK JOHNSON, EXECUTIVE DIRECTOR OF ENVIRONMENTAL
AFFAIRS, NATIONAL RURAL ELECTRIC COOPERATIVE
Mr. Johnson. Thank you, Senator Bingaman, Senator Salazar.
It's a pleasure to be here before the committee.
My name is Kirk Johnson. I am executive director of
environmental affairs for NRECA, and I'm here representing the
930 electric cooperatives around the country who provide power
to the 39 million Americans, who are not just our consumers,
but who are also our owners. And so, we come at this from a
slightly different perspective, being consumer-owned utilities.
I'd like to address a couple of general policy matters
before we get to the specifics of your questions.
First off, I think, very much, Congress got it right last
year, in the Energy Policy Act, by including the technology-
based programs for our clean coal development and other
programs to address the climate change issue. It garnered well
over 60 votes, and we think that is the way forward on the
climate change issue.
We also think the administration is getting it right on the
international front by focusing on the Asia-Pacific
Partnership. We believe that will be a more productive
international effort than Kyoto or whatever might be following
after Kyoto. And so, we think that's also going in the right
direction.
It's interesting to note that the Kyoto Protocol appears
to--or it appears the European countries will not meet their
targets under the protocol. And it reminds me of a very famous
quote from Albert Einstein, when he said, ``The definition of
insanity is doing the same thing over and over again, and
expecting a different result.'' I don't think we want to do
that.
To get to the specific questions posed by the white paper
that you want to be here to discuss today, we, NRECA, support a
voluntary technology-based program. And we have not supported
mandatory climate programs in the past, and nor do we now. But
if the Congress does decide that additional measures are
required, we would give a few ground rules for those.
First, we think any policy must be sound economic policy,
sound energy policy, sound environmental policy, and sound
national security policy. We believe any approach must be
economywide. We think there probably should be a safety valve
or other type of economic off-ramp. Any approach must include a
global component. And we firmly believe that allowances should
be allocated, rather than auctioned, which simply imposes a tax
on the American economy unnecessarily.
So, again, thank you very much for the opportunity to be
here. I look forward to a productive dialogue.
Senator Bingaman. Okay. Our final participant on this panel
is David Doniger, with the Natural Resources Defense Council.
Thank you for being here.
STATEMENT OF DAVID DONIGER, POLICY DIRECTOR, CLIMATE CENTER,
NATURAL RESOURCES DEFENSE COUNCIL
Mr. Doniger. Thank you, Senators.
I would like to make two points. First, we're facing very
real dangers that require urgent action. Most serious climate
scientists warn that we need to cut emissions at least in half
by the middle of this century to avoid truly dangerous climate
impacts. These emissions cuts must begin in the next 10 years
if we want to pull this off with a minimum of economic impact.
Delay makes the job much harder.
As this graph shows, a slow start would mean a crash
finish. The rate of reductions that would be necessary to
achieve a given target if we start later becomes much steeper
and much more economically disruptive.
Senator Bingaman, you deserve a great deal of credit for
working towards mandatory legislation, but the bill under
consideration would only slow emissions growth and postpone
decisions on cutting emissions for another 10 years. With
respect, we do not have that much time.
It is possible to be more ambitious and yet still centrist.
A long-term declining cap, tracing out the line in the--the
green line on that chart--would meet the environmental
challenge and also give businesses clear market signals to
guide their investments. We have offered an alternative to the
safety valve--borrowing--which can be used to prevent
unexpected spikes in compliance costs without breaking the cap.
My second point is that emissions allowances, which would
be worth billions of dollars each year, should not be given
away for free to current polluters, giving them huge windfalls
at consumers' expense. Rather, allowances should be used to cut
costs and promote investments in energy efficiency and cleaner
technology. So, we would recommend that at least half the
allowances should be used to help consumers invest in energy
efficiency measures that hold down costs and another quarter of
the allowances should be used to help industries invest in the
big change technologies that we need to cut emissions in half.
And that sum also should be used to help communities adapt to
the changes that can't be avoided. And we look forward to
discussing these ideas today and in the future.
Thank you.
Senator Bingaman. Well, thank you very much. Thanks for
your very interesting statements.
I'm joined by the chairman here. Did you want to ask any
questions, to start with, or should we just go ahead with
questions? We've heard from each of the witnesses.
The Chairman [presiding]. Let's proceed. Thank you very
much, Senator Bingaman.
And thanks to all of you for your understanding. I don't
know what you could do. Maybe you're not understanding, but you
couldn't----
[Laughter.]
The Chairman [continuing]. You couldn't do anything about
it, because I can't, either. So, I'm back.
And, Senator, if you'll just tell me where we are, we'll
proceed.
Senator Bingaman. Well, we've heard from each of these
witnesses. And now I think we're ready to present questions
and----
The Chairman. Okay, let's go. You start, and I'll follow.
Senator Bingaman. Okay.
The Chairman. Thank you very much.
Senator Bingaman. Let me ask about--one of the
disagreements that we seem to have built in here is the
question of, if you do an allocation of permits, on what basis
do you do it? I pick up that there is a difference of opinion.
Mr. Bailey, you said, as I understand it, why don't you repeat
how you think the allocation should occur. I believe, Mr.
Bradley, you said it should be on an updated output-based
allocation. And I think that's different from what you're
suggesting. Mr. Bailey, could you explain whether you disagree
with Mr. Bradley--and, if so, why?
Mr. Bailey. Well, Michael and I have a different
perspective on this. He favors updated output allocation. And
my group, which is about 20 percent of the coal-fired
generation in the country, favors allocating emissions--
allocating allowances based on either emissions--in other
words, if you produced 1 percent greenhouse gas emissions in
some baseline period, you'd get 1 percent of the allowances. Or
you can distribute allowances based on heat input, which is
sort of analogous to that, also.
Senator Bingaman. You're advocating that, whether or not
these particular companies actually incur costs. Am I
understanding that correctly?
Mr. Bailey. Yes, sir. That's merely a way to allocate
allowances beneath that cap among the companies. That's exactly
right.
Senator Bingaman. It seems to me that a lot of the
witnesses I've heard from have been in favor of allocating
these permits in order to reduce the economic impact on
different entities in the economy. And if you got the ability
to pass on the additional cost that's imposed, I don't know why
you would want to--why it would make good sense to give you the
permits.
Mr. Bailey. I think, Senator, there are two issues here.
And I get them confused sometimes, myself. One of the issues
is, the electricity sector gets a certain number of allowances.
And that may be what you're talking about. We can address that,
also. I'd like to address that. The other issue is, regardless
of the number of allowances, how those allowances should be
distributed among the companies. So, I was addressing that
latter question, given some number of allowances. The question
you raised about how many allowances, let's say, the
electricity sector should get, we looked at this. We were the
ones who suggested a 95 percent allowance allocation. And we
looked at that from the primary standpoint of reducing
compliance costs and impact on electricity consumers. That's
the only way we looked at it. We did some very simple math. We
provided that in comments.
If you look at EIA's analysis under a National Commission
on Energy Policy-type program, just pick one year, say in the
year 2015, the increased fossil fuel costs are about $19
billion in that year. So, those are costs that somebody's going
to have to pay for. You can do that either of two ways. You can
handle those costs either of two ways. For example if you
auctioned all allowances off--there were no allowances given
away free--then electricity price's compliance costs would
increase by $19 billion in that one year alone. So, over, let's
say, a 10-year period or so, the increased compliance cost
would be about $200 billion. But I'm just focusing on the year
2015 right now.
If fossil generation got a 90-percent allowance allocation,
which some people mentioned this morning, that cuts those
compliance costs by a factor of 10, so you've gone from $19
billion a year in 2015 to about $2 billion a year in 2015. If
you provide a 95-percent allowance allocation, you've cut that
again by a factor of two, and you're talking about compliance
costs of about a billion dollars.
So, we looked at it merely from the standpoint of reducing
compliance costs and electricity price increases. That was the
only reason that we proposed that number. The allowance
allocation, whether you had 100 percent auction for $19 billion
or a 95 percent allocation for a billion dollars, none of
those--all those have the same environmental effect. The
emission reduction would be the same under those. So, we
propose that merely as a way to hold down electricity price
increases.
Senator Bingaman. Mr. Doniger.
Mr. Doniger. I think that Mr. Bailey's analysis is based on
the model of a regulated utility and an assumption that if the
allowances are given for free, they will not have any economic
value to those companies and they will not be passed--there
will not be any increases in electricity prices. Well, we don't
know that that's the case, in that there is a market value to
these allowances, and those allowances can be sold, and
companies can reap a very large windfall.
We've made a proposal, which would deal with the fact that
some of the electric utilities are under regulation, and others
are not. And that proposal would be to give the allowances, in
either case, to the distribution entities, with a proviso that
those allowances would be used to pass through savings to
ratepayers and also to invest in energy efficiency for business
and residential customers to hold down costs. In a regulated
scenario, the company may be--it may be vertically integrated,
so it may be the same as giving this to the generator. But in a
deregulated scenario, there's a market transfer that will occur
between the distribution company and the upstream generator. In
either case, you would be getting the value of the allowances
into the hands of consumers in the form of energy efficiency
investments or in the form of lower rates, and we think that's
a durable way to deal with the distinction between regulated
and unregulated jurisdictions in the electricity sector.
Now, that's just the thumbnail sketch of an idea. It
happens to be quite similar to what Betsy Moler suggested this
morning. And we would be happy to explore it with the committee
and with others to see if there's a way to bridge the gap
between the--those who are talking about this from regulated
versus an unregulated perspective.
The Chairman. Mike Morris.
Mr. Morris. Thank you, Senator.
First off, 80 percent of the fossil-based generation is
still regulated in this country. And I would argue that some of
those States that have deregulated are rethinking their
approach to that as we go forward. So, the point made by David,
I'm not sure that that holds water on a wider range.
The fact of the matter is, credits that are given to
utilities would defer a cost that, but for that, they would
have to buy a credit or invest capital in some technology, and
a customer's electric rates would go up. That's why we did the
allocation based on the input method when we looked at the
SO2 and NOx allocation process.
To touch on one of Michael Bradley's points, to say that
that would then stop technology from being put in place,
because we have all these credits, we wouldn't use them, is
simply wrongheaded thinking. American Electric Power, Duke,
Southern Company are all going forward with integrated gas
combined-cycle technology facilities, all of which are
extremely expensive and very much technologically driven. So,
even with those credits in hand, we're going forward with that.
So, part of the premise that is used by Michael, I think was a
bit of a misstatement. I want to make sure that we get that on
the record so that people realize how we use those. And to the
extent that credits were in excess of the actual emissions
targets that we have, and they were monetized, that goes back
to your customer by way of a credit to the fuel cost. So, there
is no gain. If, in fact, you went to an output--to someone who
incurs no cost, then it would be a huge gain. And if those
people were willing to credit whatever they got by selling
those back to their customers as a credit to the fuel costs
over the overall cost of delivery of electricity, that might be
a fair way to look at that. But, short of that, it's just an
economic grab.
Mr. Bailey. Senator, could I add one thing?
The Chairman. Where was this? Paul?
Mr. Bailey. Yes, sir, right here.
EIA did an analysis of the Energy Commission-type program
some time ago, and we took a look at that. And we're not the
first ones to work with a 90- or 95-percent allowance
allocation. Actually, EIA's results, macroeconomic results,
some of which were very modest for a program like this,
compared with other mandatory climate change programs, those
results were so modest, in part, because EIA assumed a 90-
percent allowance--95-percent allowance allocation through the
year 2013, and, after that, an allowance allocation of 90
percent. So, there is a case study in how an adequate allowance
allocation can hold down these impacts we're all concerned
about.
The Chairman. Now, we need the other Michael.
Mr. Bradley. Yes. Let's make it clear. Input is based, as
Paul indicated, 1 percent of the emissions, they get 1 percent
of the allocations. Output, it's--1 percent of the electric
generation that's delivered gets 1 percent of the allocations.
Similar to your car. Your car is regulated on a per-mile basis.
When it comes to some of Mike's comments, what we're
talking about, from the Clean Energy Group's perspective, is
allocating in a manner that sends a signal to create and
continue to grow clean and efficient generation, zero-emitting
generation, like renewables and nuclear, as well as low-carbon
generating emission, like natural gas, combined-cycle natural
gas. We're talking about creating a market signal for
efficiency, for clean energy, which sends a very different
signal for investments, going forward, than if you base your
allocation based on historical emissions. The more you pollute,
the more allocation you get, is essentially what the basis
comes down to.
We have advocated strongly in favor of Senator Carper's
bill. And in his CO2 title, there's an allocation
scheme that treats all forms of generation equally, except for
nuclear. Nuclear is just allocated based on the increased
capacity that has been added to those facilities since 1990. An
investment has been made. We would be worse off if it hadn't
been made, in terms of CO2 emissions today. And keep
in mind that the emissions--CO2 emissions from the
electric sector have increased by approximately 27 percent
since 1990. The portion of greenhouse gas emissions coming from
the electric sector since--in 1990, it was about 36 percent,
now it's about 39 percent. So, the sector itself is growing.
It's meeting demand. It's delivering what it has to deliver.
But it's not becoming less intensive, in terms of
CO2 emissions.
The Chairman. All right. If Paul would take that, one more,
and then we'll move on to another one.
Mr. Bailey. Okay. Just to put this in perspective a little
bit, coal-fired generation, there are 26 States that get more
than half their electricity from coal. Those are the States
that these companies operate in, and those are the States we're
concerned about being harmed economically by the wrong
allocation scheme.
The Chairman. Yes.
Mr. Bailey. I'm about to lose my point here. Sorry, I've
lost my train of thought here.
The Chairman. That's fine.
Fred?
Mr. Bailey. I apologize.
The Chairman. If you get it back, put your hand up.
Mr. Krupp. Mr. Chairman, thank you.
As I listened to the back and forth about allocation, it
reminds me that what's really primary here is, what's the level
of environmental performance, and what's the level of design
quality, so that we grind down the costs and have the least
possible cost and the most innovation to the economy? I can
understand that this allocation issue is going to be very
important in the weeks and months ahead to your constituents.
But I think we should bear in mind, it's really secondary to
the primary issues of environmental performance, the cap, and
design performance to grind down the costs. And if we keep
sight of that, there probably is more than one answer to this
allocation issue in--it's an equitable question, and an
important one. I don't mean to minimize it, but I do think it's
secondary.
Mr. Bailey. I got my thought back, Mr. Chairman.
The Chairman. Just a minute.
Mr. Bailey. Yes, sir.
The Chairman. Fred, secondary in the context you have just
put it, but maybe not secondary from the standpoint of us
having to work something out with constituents of our country.
It may be very primary as to how we're able to allocate. That
may be our toughest job.
We could arrive at those others, because in--matter of
fact, they're not pinching anybody, right? They're theory.
They're what you'd like to do. They're goals. But when you get
to the other, people are going to be able to--institutions,
entities are going to be able to measure what we're talking
about, right?
Mr. Krupp. Yes. Mr. Chairman----
The Chairman. It's difficult.
Mr. Krupp [continuing]. I understand what you're saying,
and I completely agree with you. The primary thing that history
will judge a bill on is the level of environmental performance,
and, did it drive the cost down? But history will also judge
the leadership that you, Mr. Chairman, provide, and your skill
in bringing together parties, and Senator Bingaman's skill in
bringing together parties, on what I've termed a secondary
question, bringing together parties behind a cap-and-trade
mechanism so that there is one, to begin with.
The Chairman. I understand.
Mr. Krupp. We need your leadership on that, absolutely.
The Chairman. I understand.
Mr. Krupp. And you're expert in that. I don't pretend to
be.
The Chairman. I understand.
Fred, you had a quick rethought? Now, that--when you get a
rethought, that means it's got to be short.
[Laughter.]
Mr. Bailey. We took a look at the Carper bill that Michael
Bradley likes, did some analysis of it, and we found that that
penalized coal-fired generation about $3 billion a year, based
on an output allocation providing allowances for nuclear
generation.
Thank you for your patience, sir.
The Chairman. All right. Okay.
Ms. Callahan. May I make a comment on allocations, too? I
mentioned in my testimony that we believe that there ought to
be a significant share of the allocations set aside for energy
efficiency and other public goods. RGGI has taken that approach
and suggested to the States a 25-percent-or-more allocation.
That is being proposed, because, to the point of cost
effectiveness, there are measures that can be taken at the end
use, particularly in the electricity sector, that could be more
cost effective. And, in fact, the RGGI modeling has shown that
there could actually be positive impacts to the economy and the
creation of jobs by setting aside these energy efficiency
allocations and upping their commitment, in terms of policy, to
those activities.
The other thing I wanted to mentioned, that in order to get
to that, RGGI had to change their modeling. And the modeling
that we're doing now, in looking at the costs of implementation
of cap-and-trade programs, often doesn't recognize the benefits
of energy efficiency and appropriately model. So, the RGGI
modeling that was done, and the work there, is really
groundbreaking and can evidence what can happen, in terms of
using energy efficiency as a cost-effective mechanism.
The Chairman. Before I give this mike back to Senator
Bingaman, I was coming next to you on the subject you're
talking about, because I'm having some difficulty
understanding, although I'm intrigued, by your suggestion that
significant reductions in greenhouse gas emissions can be
realized by marked improvements in our ability to use energy
more efficiently. I guess I'm just going to ask you, would you
just elaborate? Where are these savings going to be achieved?
How do we reduce greenhouse gases, the emissions, and then--
under a mandatory reduction program--and then have it designed
in such a way that it encourages these efficiencies that you're
talking about?
Ms. Callahan. Well, sir, the way that it would operate--and
it may not be a direct one-for-one--they're indirect emissions
at the end use. And the way that you're creating--or--the
emissions reduction is by avoiding the emissions, in the first
place. You're not using the energy that you once were for the
same end product or the same good. So, for example, in
California, where they have employed energy efficiency building
codes, appliance standards that are greater than they are in
many parts of the country, they also have very significant
public benefits funds, public education and outreach programs.
Their electricity use is about 40 percent less than the
national average in that State, per capita. So, I'm hoping I'm
addressing your question on this, but it would be investments
that would be set aside for energy efficiency improvements at
the end use by homeowners, by commercial buildings, by energy
users, electricity consumers, natural gas consumers.
The Chairman. Okay. Nothing exotic or extraordinary, just
very straightforward. Some people wouldn't call them
efficiencies. You do. I understand that. That's good. At least
I understand what you're saying.
I have a question to the National Mining Association, and
then I will go back to you, Senator.
Craig, the Energy Information Administration, in its latest
long-range outlook, suggests that the United States will
require half again as much electricity in 2030 as it now
consumes. As much as 60 percent of that will be generated by
the use of coal, which is kind of startling to a lot of people.
The use of coal is not going to go down during the next 25-year
projection of American use--going up--even though they're going
to put some nuclear in, for the first time. We don't know how
many. They at least show 'em, which is rather incredible, they
do. How would a mandatory greenhouse gas reduction program
alter the EIA estimate on the United States and how heavily we
will remain dependent on domestic coal reserves for electric
generation? Could you tell us why--that's one. And we'll talk
about the developing countries, as a second question.
Mr. Montesano. Okay.
The Chairman. Could you answer that?
Mr. Montesano. Thank you, Senator.
I think the answer to the first question is, it puts us in
a very bad fix in the United States, as far as energy. You
mentioned the projections for coal-based electricity use. Now,
coal-based electricity use since 1970, has increased 136
percent. By 2020, it's supposed to go up another 36 percent. I
think that you can just bank on that number getting higher and
higher.
The Chairman. Right.
Mr. Montesano. And that is complicated by another fact,
that by 2050 there will be 1 million more persons here in the
United States than there are now. And there will be an
associated energy demand with that, particularly in the
residential and commercial sectors.
Understanding, as we do, some of these parameters, I think
the problem becomes, then, what an artificial restriction of
coal does to our domestic energy picture.
Now, assuming, for a second, that nuclear power isn't quite
up and running. The siting, permitting, and waste-disposal
issues haven't been worked out yet. And assuming that
renewables haven't reached the point where they can address
that demand. Well, that leaves natural gas. The problem with
natural gas is, No. 1, the EIA estimated that our domestic
supplies of natural gas, which are 3 percent of the world's
proven reserves, are not going to be enough simply to supply
the needs of the lower 48 States. Well, then, where do we get
our natural gas from? Well, 58 percent of the world's reserves
are controlled by Russia, Iran, Qatar, and then, our good
friend to the south, Venezuela, holds another chunk of that.
If we are forced to rely on LNG from abroad, I think,
again, that puts us in a very bad fix, but especially because
we are competing with China, which is gobbling up petroleum
left and right. So, I think that a pretty good preview of
things to come, Senator, was something that happened, I
believe, in--it was either December of January, where there was
a deal brokered by a Massachusetts congressman with Citgo, the
Venezuelan petroleum company, to supply natural gas to the
State of Massachusetts. Now, I don't think we want to be
there--as a Nation, I don't think we want to be dependent on
foreign supplies. In fact, I think we want to enhance our
domestic supplies. And I think we can do that through clean,
coal-based electric generation and coal-to-liquids technology.
And I think that once we realize those technologies, we will
be, I think, better poised for our energy demands.
The Chairman. Yes, David?
Mr. Doniger. Thank you, Senator.
This doesn't have to be an issue of whether we're going to
use more or less coal, or more or less of any fuel. It should
be an issue of whether we're going to use those fuels with more
or less emissions. And the future of coal is going to be
sturdier if we get to very low carbon-emitting coal plants,
like IGCC with carbon disposal, than if we're continuing with
our only choice to be to build conventional coal plants and
drive the climate problem to disaster.
So, that is where we have a huge opportunity, first, from
having the price signals that come from a carbon cap, and,
second, from using a good, solid chunk--we recommend at least a
quarter--of the allowances to go to power companies and others,
for example, who are prepared to build the IGCC plants with the
carbon storage, and move that along a lot faster. That's going
to be good for the coal industry, as well as for the stable
future of the electric industry. That's the formula for getting
out of this tradeoff between more coal and more emissions.
The Chairman. That's true. The problem is that you can't
get them built.
Let's move over here. We had some questions. Let's take
Michael Morris.
Mr. Morris. Thanks again, Senator.
Let me try to address that issue. I think it's very
important that if we have a mandatory cap, that new coal
technology with the integrated gas combined-cycle
implementation and ultimate carbon capture and sequestration
will work for the new coal activities. But let's not forget, on
the energy demand cycle that you spoke of earlier, not only the
growth that we'll see between now and 2030, but the physical
ability to satisfy demand today requires that we keep as many
of the current coal fleet plants online that we can. And the
retrofit technology that we're working on through EPRI and
other activities are heading in the appropriate direction, but,
to date, a very expensive, and, most importantly, a very
parasitic amine technology takes about 30 percent of the energy
production capacity away from a plant. So, if you had 1,000
megawatts, and you retrofit with amine, and you're down to 700
megawatts, you've exacerbated, rather than helped, your
situation.
With the new ammonia technology that EPRI is working on,
the parasitic impact is only 10 percent, and that may be a way,
as that technology continues to develop, that we can do
retrofit.
So, I have no disagreement with David and the comments that
he makes, but we need to make certain we have adequate energy
to grow the economy of today, let alone the economy of 2030 and
2050.
The Chairman. Right.
Mr. Morris. So, we have to have those plants in the----
The Chairman. Right. Fred.
Mr. Krupp. Michael, I'm an American, and I completely agree
with you, we need to have energy. We need to have low-cost
energy. But there are some retrofit technologies that are
available today that are pretty cheap. I was in Kansas not long
ago and saw farmers that, together, own a million acres of
land, the Agri-Mark group of farmers. And they are able to
sequester carbon, about three-quarters of a ton per acre per
year for 25 years. And I think they'd be willing to sell those
offsets--I know they would--for quite a modest price.
This brings me to the fact, we need a robust future for
coal in this country. There's no question, we've got a lot of
it. We have to be able to burn it. But one thing that's really
important as you go forward and mark up a bill is, let's make
sure there's a robust opportunity for these farmers, who can
change their practices and provide a retrofit technology today,
for the burning that's happening today, for very cheap--let's
make sure that those offsets are robustly available in the
bill.
Mr. Morris. Excuse me, Senator, I just want to make sure--
that's not a retrofit technology. That is an offset. And we do
that through the Chicago Climate Exchange. A number of
operating utilities are doing just that, creating credits with
better farming technology. We totally support that. We think
that's an excellent idea.
The Chairman. I think we're going to get way off base here
and have just a general discussion, an argument, about this.
The truth of the matter is, the utility companies--utility
companies do know, Fred, what's available for their industry,
and they aren't going to come here before us and tell us
something that's not so. They know about the farmers, but that
doesn't help what the problem is described that they have.
Farmers--is a great thing that's occurring, and we're proud of
it, but it doesn't solve the fact they need a bill to move
1,000 megawatt plants, and they've described the dilemma
they've got.
Mr. Krupp. But, in terms of today's capacity, if you set a
modest limit, it would allow them to continue to operate the
plants, at very modest costs.
The Chairman. Yes.
All right. Now, we're going to move right along here,
Senator Bingaman, unless you have something urgent. You can
have a couple, and then we'll----
Senator Bingaman. I have one question, and it's not urgent,
but I would ask it, if we've got time.
David, let me ask your view on this whole issue of offsets.
I mean, what are appropriate offsets? There's a lot of talk, a
lot written in these responses to our white paper about offsets
outside the cap. What do you think is an appropriate offset to
allow, and what do you think is not?
Mr. Doniger. Thank you, Senator.
First, in the draft bill that you have developed, you've
proposed--and we think this is a good idea--that a slice of the
allowances should be dedicated to--as a reward for offset
activities, such as Fred described, and encourage those
activities with a slice of the allowances from within the cap.
Where we get concerned is with the idea that offsets would coin
new allowances beyond the cap, because the prior experiences
that we've had with this--and this goes back almost 30 years,
through several different variations of the Clean Air Act--is
that it's very, very difficult to ensure that offsets are
really additional to what would have happened anyway.
We've seen, in the Energy Policy Act's 1605(b) Program that
electric utilities, in particular, have registered with DOE
millions of tons of supposed reductions that really represent
no difference in the business-as-usual activity. And sorting
out the rules for how you would tell what's a valid offset has
been an impenetrable problem. But funding them from within the
cap means that the environmental cap is maintained, and we
support that. We think that's a great way to get incentives to
the farmers for biofuels and for soil sequestration and so
forth.
But there is also a bit of a dilemma here. We rely on the
market signal from the cap to generate incentives for
innovation to drive new technologies. On the other hand, if
there's unlimited offsets, and you have a near-zero price of
carbon, where was the incentive to develop new technologies?
Senator Bingaman. Let me just do one follow-up and ask,
Michael Morris referred to the Chicago Climate Exchange--they
have a system for permitting offsets and verifying offsets.
How, in your view, does that work, if you're familiar with
that? Is that designed in a way that you think makes sense, or
not?
Mr. Doniger. Well, I don't want to speak to all the rules
that the Chicago Climate Exchange uses, but I do believe that
if you tried to scale up what they're doing from--when you're
dealing with pilot programs, you can give the kind of care and
attention that it takes to vet these offsets, but when you try
to mass produce them on a big scale, especially when both the
providers and the potential users have an interest in the
largest number of offsets at the lowest possible price, you end
up with a quality-control program--problem. You end up with it
being very difficult to ensure that the offsets are really all
they're cracked up to be.
And the international treaty, the CDM, which you heard
about earlier, they're really struggling with that, because
they have a international board to try to vet the quality of
the offsets, and there's lots of complaints about bottlenecks,
``Why are you scrutinizing this? Just let me go, let me have
this, let's get going.'' And the quality starts to go down as
the volume goes up.
So, we don't have a great solution to that, but keeping
things within from--the reward coming from within the cap puts
a discipline on this that would really help ensure that quality
and keep the numbers from going out of control.
Mr. Morris. Senator, if I just might add, because we're one
of the founding members of the CCX, it is an audited event. For
a farmer to say he's created 1,000 credits, that activity
actually gets audited to ensure that they're real. I couldn't
agree with David more, no one wants to create credits out of
whole cloth. And the utility industry has not done that. I
think he made that statement. That's just absolutely wrong.
And, to Senator Domenici's comment earlier, to what purpose
would we do that, to be hammered for doing something that's
wrong? Not going to happen.
So, the larger the program gets, the more difficult the
audit is to make sure that someone who says, ``I've got a
credit''--because he's gonna be paid for that--and we're not
going to send them money unless we're sure that there's a real
credit that's been created. And having it above or below a cap
is immaterial as to its reality. So, I think the logic is
missing in David's comments.
Thank you.
Mr. Krupp. Mr. Chairman, might I just mention one thing,
constructively, that you all could do, even before you mark up
a bill, and that would be to direct the Federal agencies to
come up with standards, both for geological sequestration,
where there are similar problems, that things can leak, as well
as for agricultural and forest offsets. I think that could be
done right away, and that would be terrific.
I, for one, hope that this problem is so big that if
there's the potential--the greenhouse gas problem is so big
that if there's the potential for cheap carbon credits by
allowing farmers and foresters to play, that will let them play
and make sure, of course, that the credits have integrity--by
one study, as much as 146 million metric tons are available in
our agricultural industry, enough to get us a third of the way
back to 1990 levels, if we just set up the cap and write the
rules. That's very promising.
The Chairman. I know we're supposed to be finished, but,
you know, what Senator Bingaman and I have been toying with is
a proposal that has a safety valve in it. And some of you have
commented that you didn't think the concept was a very good
idea. Now, if you did think it was a good idea, don't comment
now.
[Laughter.]
The Chairman. We don't need no more of that. But for any of
you who didn't think it's a good idea, or don't, you can have a
couple of minutes here to tell us why. So, we're going to do
that, if you put up your hands.
Mr. Montesano. Mr. Chairman?
The Chairman. Yes?
Mr. Montesano. The one problem that the National Mining
Association has with the idea of a safety valve is that it's
part of a larger compliance problem with mandatory bills that
eat into funding that would otherwise be used by companies to
conduct research and development. And a healthy economy is one
that's actually going to lower emissions more than an unhealthy
economy. And we think that safety valve as part of a
bureaucratic--part of a compliance regime, would be problematic
for us to work with.
The Chairman. I don't get it. I don't get what you're
saying. Can you try it again?
Mr. Montesano. If companies are paying--you know, basically
paying for compliance costs, and the costs of meeting, you
know, the standards set forth in a mandatory problem, that's
money that they can't use otherwise for R&D. I think that's the
problem that we have with it.
The Chairman. Well, a safety valve doesn't say anything
about that. It says that, at some point, after you've done
that, if it isn't working, we'd cut it off.
Mr. Montesano. Well, the safety value also--remember that
EIA did a study on the safety valve, and the safety valve
drastically increases in prices over the years.
The Chairman. Fred--David?
Mr. Doniger. Senator, I appreciate your asking this
question. There's two cost-control issues that I think a safety
valve is intended to deal with. One is the instability in
prices, the chance that you'll have a price spike, unexpected
problems, in the short term, that would--sorry.
The Chairman. Hold it a second.
Mr. Doniger. Yeah.
The Chairman. Okay, thank you. Thank you. Go ahead.
Mr. Doniger. If I may, there's two cost issues that I think
the recommendation for a safety valve is trying to deal with.
One is the instability in prices. It could spike up and down,
not be stable. Short term problem.
The Chairman. Right.
Mr. Doniger. The other problem is a sort of long-run issue.
If you knew what the price was, it still might go up, or it
might go down, depending upon how technology develops.
Well, the first problem seems to be, really, the dominant
one. People react to price spikes. If you had a long-term
carbon cap, such as we were suggesting there, then you could
have both banking, which is already built into your program--
people do things early, as a hedge against future price
spikes--and borrowing, which would allow them to do things
late, as a way of dealing with price spikes. If you had banking
and borrowing, you would not have price spikes. You would have
a long-term stable price. It would be affected by what the real
cost is of meeting the cap.
And so, what we're proposing is that you consider using
borrowing as the main cost-control tool, and the safety valve
becomes a trigger for Congress thinking, every 5 years or 10
years, ``Is this thing--in light of the science, in light of
international cooperation, and in light of the costs, is this
thing too weak or too strong?'' and use the periodic review,
informed by the prices, to decide what you should do. But don't
have an automatic safety valve that breaks the cap.
The Chairman. Okay. Now, Craig, you have the luxury of
playing the chairman. See, if you were me, you could have said,
to me, ``You don't get it''----
[Laughter.]
The Chairman [continuing]. Instead of the reverse, because
I didn't get it. I got it now. And I thank you for your answer.
Okay. I understand. We're going to go on now to the next
group. Thank you, everybody. It's been a great session.
[Recess from 3:40 to 3:47.]
The Chairman. All right. Are we ready to start? One, two,
three, four, five. Is that right? Six.
All right. This is our fourth panel. And we are pleased to
have you.
This is the Trading and International Competitiveness
Panel, and they're responding predominantly, as I understand
it, to questions 3 and 4 of the white paper. That is, ``Linking
and Developing Country Action,'' correct? Should a U.S. system
be designed to eventually allow for trading with other
greenhouse gas cap-and-trade systems around the world, as
Canadian Large Final Emitter system or European Union? And,
question 4, if a key element of the proposed U.S. system is to
encourage comparable action by other nations that are major
trading partners and key contributors, should the design
concepts in the NCEP plan, to take some action and then make
further steps contingent on a review of what these other
nations do, be part of the mandatory market-based program? And,
if so, how?
American Electric Power, Michael Morris, you're first.
STATEMENT OF MICHAEL MORRIS, CHAIRMAN OF THE BOARD, PRESIDENT,
AND CHIEF EXECUTIVE OFFICER, AMERICAN ELECTRIC POWER
Mr. Morris. Thank you very much, Senator. And since I was
on the last panel, I won't have to thank you for the chance to
be here, but I'll do that anyway.
I want to specifically--because I know that the 2-minute
warning will get to us in a hurry, talk specifically to the
questions.
As to question 3, we absolutely believe that it should
ultimately be linked to other trading programs on an
international basis, as well as a much broader and more
flexible creation of potential credits. The farming things that
we just heard about, a panel ago, would apply to any country
that is dedicated to agriculture. So, creating credits in other
environments and using those as part of an international
trading platform, I think would be an excellent way to go on
that question.
As to the other, developing nations being involved, it's
essential. If you truly believe that the goal here is control
of the greenhouse gas growth worldwide, then you have to have
the world involved in it. And if we don't do that, we find
ourselves in very awkward positions. We believe very strongly
in that. However, we do not believe in the current paper
concept of having a two-tier, ``We'll get started, and if they
come along, great; but, if they don't, then Congress will
reconsider and throttle back.'' I've lived through some of
that, and the likelihood of that happening is probably very,
very small.
So, I would go into the program either with an absolute
commitment, like the Byrd-Hagel undertaking of some years ago,
and, if not that approach, at least set up an automatic ratchet
down if the other countries don't act in the way that they are
committed to or the way that we would hope that they would.
Short of that, I think what we'll find is a period of time
when, in fact, America is doing the things that it's committed
to do, and others are not, with the associated economic impact
that that would have on the manufacturing base of this country,
when our manufacturing competitors are just, willy-nilly, going
on their way. So, I would think automatic, rather than
reconvene, reconsider--that would be a good way to go.
Thank you very much for your time.
The Chairman. Thank you very much.
Michael.
STATEMENT OF MICHAEL WALSH, SENIOR VICE PRESIDENT, CHICAGO
CLIMATE EXCHANGE
Dr. Walsh. Thank you, Senator.
If Congress considers it appropriate to pursue legislation
in this area, we think that you're going to want to ask the
following question, what really works out in the field? And,
since 2003, the members of the Chicago Climate Exchange have
formed not only the first North American market, but the first
international greenhouse gas reduction and trading program,
that includes all six gases, agricultural and forestry offsets.
And, indeed, this market, if--as a country, would be the second
largest emission group under cap-and-trade in the world. It's a
diverse market. And the good news is, it works, and it works
well, now, on an international basis.
Now, we've brought to the design of this program a lot of
hands-on experience, a couple of decades of experience working
with these markets, SO2 auctions we administered,
and so on. We also operate the largest carbon trading system in
Europe, the European Climate Exchange. And that is another
dimension of the international market that's in place now.
CCX members take a legally binding commitment to cut
absolute emissions 4 percent over 4 years, 6 percent by 2010.
They use standardized rules to measure and qualify emissions,
all subject to independent audit. It's a comprehensive rules
system involving a registry, a trading platform, and predefined
project-based domestic and international offsets for
agriculture, methane, and forestry. So, the international links
are in place now.
We've got about 140 very diverse members, but my input
today really reflects the views of the exchange, and not those
members, members such as Ford and DuPont, American Electric
Power, Baxter, Tampa Electric, Waste Management, Rolls Royce,
International Paper, IBM, many international companies. We've
got cities, like Chicago, Oakland, and Portland. The State of
New Mexico, the first State to take the commitment to reduce
its own emissions, taking that leadership action.
The Iowa Farm Bureau is, right now, aggregating hundreds of
thousands of acres of farm--and selling the credits as a new
crop in the market. So, it's working now.
Let me close with some key lessons that we think are useful
for informing any policy discussion.
First, learn from proven methods. Use existing measurement
and verification protocols, and don't reinvent the wheel.
Second, keep it simple. We asked all of our members to
simply take a 4 percent emission cut. Why define major winners
and losers?
Third, standarized offset rules work, and can work in the
international context.
Fourth, the market should, and can, define and credit early
emission reductions. The market concept works now. We should
build international linkages, from the outset.
And I look forward to discussing some ideas for making that
happen in the open discussion.
Thank you, Senator.
The Chairman. Now, yours is voluntary.
Dr. Walsh. Voluntary, but legally binding. They sign a----
The Chairman. Oh, you have----
Dr. Walsh [continuing]. Contract once they join the
exchange. That's correct, Senator.
The Chairman. Yeah.
Now we're going to take Rafe.
STATEMENT OF RAFE POMERANCE, CHAIRMAN,
CLIMATE POLICY CENTER
Mr. Pomerance. Thank you, Senator. And thank you for
holding this conference to elucidate the debate----
The Chairman. You're welcome.
Mr. Pomerance [continuing]. And your structure, hopefully,
of a real mandatory system.
I want to answer the questions 3 and 4 in the context of an
overall program. And, briefly, what I believe, and the Climate
Policy Center believes, that that program should be economywide
to capture all emissions and level the playing field. Second,
it should be upstream-regulated--the point of regulation should
be upstream, for simplicity. Third, there must be a safety
valve to protect the economy. Fourth, there should be linkages
in this program to actions by key developing countries to
ensure global progress. And, fifth, and finally, there should
be wise use of allowances for a number of different purposes;
not just compensatory purposes, but purposes of solving the
climate problem and protecting the treasury.
Now, having said that, a number of these elements were
present in the Bingaman amendment of last year, and in the
Udall-Petri bill that was introduced in the House last week.
On question 3, should we design the system to be
compatible? At this time, my answer is no. The Kyoto Protocol,
of which I was a negotiator, is quite different than the system
that I advocated, in terms of an overall program. And, in
particular, the safety valve makes them incompatible. And the
other part I'd just say is that, if that were to happen, it
would require, I would sense, an enormous amount of
international negotiations to make it work. But it doesn't--
they're actually literally incompatible in important ways.
On the developing-country linkage, the answer is, yes, that
a first step by the United States, with a safety valve, with an
escalator, that escalator could be linked to ensuring that it
would rise at a certain rate, but only if developing-country
actions in key developing countries passed the test by the
executive branch. In other words, we would create an incentive
for China and India to take comparable actions, by saying, ``We
will take the first step, but we'll only go so far, unless you
respond.'' And it's possible, in fact, to use some of the
allowances to help them make the changes that are required.
Did I hit 2 minutes? Thank you.
The Chairman. Fine. You did very good.
Mr. Pomerance. Thank you.
The Chairman. Richard.
STATEMENT OF RICHARD ROSENZWEIG, CHIEF OPERATING OFFICER,
MEMBER OF INTERNATIONAL CLIMATE CHANGE PARTNER, NATSOURCE
Mr. Rosenzweig. Thank you, Senator. Thank you, Senator
Bingaman, Chairman Domenici.
In addressing questions 3 and 4, very briefly, 2 minutes--
I've never been limited to 2 minutes before, so I'll talk fast.
With respect to linkage, we would think that you'd want to
create the opportunities to develop a program which has
opportunities for linkage. And it's for a very simple reason.
You want entities to be able to buy, sell, trade with each
other. It's the comparative advantage of trade. The more
sources that are participating, and the more opportunities
there are, the more it will drive down costs and facilitate
reductions in environmental activities.
This is no different than the reason for an economywide
program--to bring transport into an economywide program, as
opposed to just regulating a couple of sectors. You have those
economic benefits.
There are several issues that have to be considered in
doing this. The cost cap is one. It can have a perverse effect
with respect to potential arbitrage opportunities across
boundaries. It's going to have to be considered.
Second, compliance instruments. All the various legislation
allowed different types of instruments to be used by regulated
entities for compliance. This, once again, creates
opportunities for different types of activities that may or may
not be what a country had in mind.
Last, we'll call it comparability of effort. Some
governments just simply are not going to allow linkage with a
country who they--whose target is far less stringent. They are
not going to want to allow that government's regulated firms to
be sellers in such a market.
The other types of linkage with respect to developing
countries. Right now, that's being done through the project-
based mechanisms. The United States can do one of three things.
I can, sort of, allow U.S. firms to buy certified emission
reductions, which--according to the international standards,
or, I think, to actually play a leadership role in this area,
there is an opportunity for the United States to create new
standards for domestic offsets that can actually inform the
debate post-2012, in the first commitment period of the Kyoto
Protocol.
Thank you.
The Chairman. Thank you.
Eileen.
STATEMENT OF EILEEN CLAUSSEN, PRESIDENT, PEW CENTER
Ms. Claussen. Thank you, Senator Domenici, Senator
Bingaman.
I'd like to address the issue of the comparability of
national efforts by disentangling two distinct, but related,
objectives. First, achieving adequate action by all major
emitting countries, and, second, protecting U.S. firms against
competitive impacts.
The first of these objectives is best achieved through
multilateral commitments, engaging all the major greenhouse
gas-emitting nations in a fair and effective long-term effort.
Twenty-five countries account for 83 percent of global
emissions. Engaging these major economies requires a flexible
framework that allows different countries to take on different
types of binding commitments. We believe the United States
should play a leadership role in developing such a framework.
But ensuring broad comparability at the national level will
not necessarily achieve the second objective, protecting U.S.
firms against competitiveness impacts. It's not the
competitiveness of the U.S. economy as a whole that is at
issue. To the degree that there are competitiveness impacts,
they will fall on specific sectors, energy-intensive industries
whose goods are traded internationally. These sectors might
remain vulnerable, even if efforts by all major emitters are
broadly comparable, because countries could choose to exempt a
given sector from controls, giving that sector an advantage
over the foreign competition.
At the international level, one way to ensure a level
playing field is to establish multilateral agreements along
sectoral lines. These could be one element of a flexible
framework.
At the domestic level, in designing a national cap-and-
trade system, we should set the caps at modest levels, allow
offsets, and grandfather allowances in a way that protects
vulnerable firms or sectors. We could also dedicate funds,
possibly by auctioning a portion of allowances, to provide
technology assistance to affected industries and transition
assistance for their workers.
Let me just say, in closing, that the single most important
step the United States can take to encourage stronger efforts
by other countries is to begin in earnest to address our own
greenhouse gas emissions.
Thank you very much.
The Chairman. Thank you very much, ma'am.
Jonathan.
STATEMENT OF JONATHAN PERSHING, DIRECTOR, CLIMATE, ENERGY, AND
POLLUTION PROGRAM, WORLD RESOURCES INSTITUTE
Dr. Pershing. Thanks very much, Senators. It's a pleasure
to be here.
My name is Jonathan Pershing, and I am the director of the
Climate, Energy, and Pollution Program at the World Resources
Institute, which is a nonpartisan research and policy think
tank here in Washington.
I think that this discussion in the conference, and the
effort, is at a critical time. Science is clearly telling us
that action is urgent if we're to forestall the climate
problem.
I'd like to make several points based on our submission and
the analysis that we've done.
The first, we can learn a lot from existing programs. We
have a series of U.S. programs--the SOX, the NOX
program, now the RGGI program; we have the CCX program. We also
happen to have the advantage of the EU program, and those
lessons are ones that apply here, even though they have
somewhat different circumstances.
On the international side, clearly international action has
got to happen. According to the U.S. Energy Information
Administration, in 25 years from now, in absolute terms, the
United States is going to have more growth in its emissions
than India, Russia, Korea, Mexico, and Brazil, combined. And
it'll be about the same time as--size as China, which has four
times our population. So, to give you some sense of scale, it's
quite critical. But we can't just, therefore, wait for them to
act. We're 20 percent of the problem. We've got to act,
ourselves. And the issue of the technology drivers that you can
create become a central part of the future. If this is a
technology program, as this morning's panel indicated, we
clearly need to move that forward. And others are ahead of us
in that curve.
I'd like to make a brief point about linking. In principle,
it's very desirable. The economics of markets means that the
more countries and the more players we have, the lower the
price is going to be. But not all markets are legally and
equally robust. We need to have institutional integrity. That
means systems where compliance rules are strong, trustworthy,
where reporting is open and transparent, and monitoring and
verifications assured. That may not apply to all developing
countries, if any. And we should not be bound by that.
And, finally, if I say that we need to have China and India
in, that's quite clear. But it does not mean they need to do
the exact same thing that we do. Something different might
reasonably apply. It may not be a market in trading, it may be
a system of offsets for project-based activities that we can
look to.
Thank you.
The Chairman. Thank you very much.
Senator Bingaman.
Senator Bingaman. Well, thank you all very much. Very
interesting testimony.
Let me ask Michael Walsh, first, and maybe then Michael
Morris. You folks have been doing this for about 2 or 3 years
now--3 years, right?
Dr. Walsh. Almost 4, sir.
Senator Bingaman. Nearly 4 years. And you have in place a
legally binding system, which you believe is reducing
greenhouse gas emissions--as having the effect of reducing
greenhouse gas emissions that would otherwise be produced by
your members. And the AEP is a member, as I understand.
What would be wrong--as at least a theoretical basis--what
would be wrong with just taking what you have come up with, by
way of requirements for your members, and essentially mandating
that everybody in the country comply with those?
Dr. Walsh. Well, to be clear, Senator, it's not that we
believe the emissions are down. The independent audit body,
NASD, which is a congressionally sanctioned entity, has
verified to us that emissions are down faster than we have
required under our commitments. And at very modest cost, I
might add. So, these are audited, and those numbers are
adjusted for dispositions of facilities. So that, on a real
basis, these emissions are, in fact, down.
Senator, it's up to our elected officials to determine
whether it's appropriate to apply that structure. It's a very
conservative structure. We don't give out as many credits to
farmers, as some people have quoted in the numbers today. We
discount our offsets quite frequently, to be extremely careful.
Maybe we could be a little bit more liberal. We have some
safety valves in the system that may not be appropriate for a
national policy. But, by and large, we strived, with our many
members who helped us to design this, to have a functioning
system that is a respectable and credible and serious audited
system. So, we think it may offer useful insights for
policymakers here and around the world. I want to emphasize, we
had members from Brazil sign a legally binding contract to
reduce emissions, members from Canada, members from other
countries.
Senator Bingaman. Well, let me ask a, sort of, follow-up.
The cost of a permit to emit a ton of carbon in your system is
about $2.50, right?
Dr. Walsh. Yesterday's close was about $3, so a farmer in
the Midwest is getting about $1.50 an acre per year in his new
environmental service crop.
Senator Bingaman. Okay. Now, the cost in Europe to emit a
ton, on the European Exchange, is about $30.
Dr. Walsh. That's correct.
Senator Bingaman. What would the cost--of course, there are
many differences. One obvious difference is that in Europe,
their system is mandatory. It applies to a specific segment of
the economy. What would be the cost--what would happen to the
cost of a permit to emit a ton of carbon in your system, with
your requirements, if it were mandatory for everyone in the
country?
Dr. Walsh. Well, as an exchange official, Senator, you
probably can understand I really can't make a conjectural
remark about where price might go. We have many----
Mr. Morris. Sarbanes-Oxley?
Dr. Walsh [continuing]. We have many professional
marketmakers and entities that have a position in the exchange.
It would be a function of, does new supply in the market come
in faster than new demand? And we have opened the market to all
six greenhouse gases, so that IBM or Waste Management can cut
fluorocarbons and methane at very low cost. And as we--if we
saw a signal towards a bigger market, instead of having half a
million acres of farmland enrolled now, we might be out in
Curry County getting all kinds of ranchers and grazing land
enrolled, as well, and landfills in Las Cruces, as credit
suppliers. Many people were hesitant to get involved in the
market, on the sell and the buy side, until they saw that it
was working. So, it's impossible to say, and I couldn't. Even
if I had a hunch, I wouldn't be able to reveal it to you, sir.
Mr. Morris. Senator, if I might just add to your question,
because I think it's an important one, the fact of the matter
is, the Chicago Climate Exchange is voluntary, and that's the
appeal to people like Ford, IBM, DuPont, and American Electric
Power, and others. And it does work. The notion--to Senator
Domenici's question earlier, you volunteer to get involved,
but, once involved, you've signed a legally binding contract
that, if you fail to live up to, you're in violation of the
NASD standards, and you'll be on the--you know, above the fold
in the Wall Street Journal for being someone who did a
fraudulent activity. So, it has with it the beauty of the
integrity.
And, to the point that was asked in the earlier panel,
about the auditing of the actual creation of the credit, very
important. If you took your program and made it nationwide, it
would work. I know it would work. The price, unknown. If we had
allocation of credits, because that would be part of the way
you'd create it, we would surely step up into the $8 or $9 or
$10 a ton. If you put your safety valve in, that might work to
suppress that price as we go forward.
But what American Electric Power stands for, and, I think,
what we all hope, is that voluntary actions will really lead
this country in the right direction. The Asia-Pacific activity
that we did in Australia--I happened to be there when we did
it--China and India were there trying to learn from us and
others, from Japan or from Korea and from Australia, what
they're doing, how--what we're doing to control greenhouse gas
emissions. And those are the kinds of things----
So, mandatory, without those huge emitters in the game,
takes the American economy and puts a real damper on it, going
forward. And, again, we need to have them in a Reagan-like
``trust and verify'' program. And if we're going to have that,
``we start first,'' it has to be an automatic step down if they
don't live up to their end of the goal, or we'll be, again,
economically behind the eight ball. But, your idea would work,
I'm certain of it.
The Chairman. Now, let's move over and ask some of you.
I'm constantly amazed to read the views of people that say,
``If we'll just do something, Chinese will do something.'' And
the other day I read a very long dissertation about China, in
which they said the very opposite, just--they took the position
in--exactly the opposite of that. Can any of the four of you
just talk to me a little bit about----let's just take China.
It's clear that China is a controlled environment, in terms of
economics. They decide they're going to buy nuclear
powerplants, they place an order for 20, right? No horsing
around. They figure how many new powerplants they need, and
they say this, and they tell somebody, ``Locate 'em, and build
'em,'' right? ``We don't care how dirty it is, or what.'' So, I
assume it's the same if they decided to change their mind on
pollution. Would you agree, Rafe? They could fix it, and they--
if they wanted to?
Mr. Pomerance. I'd just give my view on this. Everyone has
tried to predict what the Chinese or the Indians would do in
the future on this problem. What is their behavior going to be?
And their per-capita incomes are very low, so the usual answer
is, ``Not much,'' because they're unwilling to spend capital.
Well, how do you answer the skeptics' question? The way we
would--we certainly know that they're not going to act if we
don't act. That would be pointless, just as we say it's
pointless for us if they don't. We're much wealthier, we have
the ability to act. So, what--how might we do this?
Our suggestion is, the United States takes the first step,
but within that step is a review to examine what the Chinese
have done in response. And if they don't measure up to the
standard that we create, we don't go further. That would induce
the possibility of a negotiation. I think that all
governments--with what I understand about the climate system,
the way it's going, all are going to be subject to incredible
international pressure to act in some reasonable fashion as
time goes on. And I include the Chinese. I was in--present in
the--many meetings, and there are many domestic measures--I'm
no expert--that the Chinese have taken, for their own reason,
to date.
Thank you.
Mr. Rosenzweig. A couple of things. I think anyone who's
looked at climate knows that you're not going to address the
problem over 100 years without the Chinese, other large
developing countries coming into the system. But I think it's
important for the United States to, sort of, step back and,
sort of, recognize what the Chinese, I'm sure, have said to all
of my colleagues, former negotiators here, is that the
developed world is responsible for about 80 percent of the
concentrations in the atmosphere. So, that may warrant the
United States taking the first step.
I'm just going to, sort of, take one other point here,
which is, we did a lot of work with respect to metrics in
evaluating countries' performance in dealing with climate
change. And we developed a series of economic, environmental,
and technological metrics in order to evaluate that. And we
looked at four developing countries. We looked at China, India,
Mexico, and Brazil, for obvious reasons, given their size. And
so, I think to take this to write legislation that says, ``The
United States will look and then determine how to go forward,''
probably needs to be done in a fairly general way, because it's
very complicated.
And here's the results of just looking at their
environmental performance. China's performance, from the
dataset we had, improved their emissions intensity by about 45
percent, I believe, over 10 or 15 years; their absolute
emissions went way up. India's emissions intensity improved
much less; their absolute emissions went way up. Mexico's
emissions intensity improved; their absolute emissions went way
up. Brazil, who probably has done more than all of these
countries, from a climate perspective, emissions intensity did
not improve, because they have this little problem of having no
water, so they use a lot more gas to generate power.
So, looking at metrics is an awfully difficult, complicated
thing to do, and it's also important to note that the Chinese
improvements were mostly based upon economic reforms, taking
subsidies out of the economy, not addressing climate. So, as
you look at metrics, I think it's important to, sort of, stay
general.
The Chairman. Before you get rid of the mike, you would
agree, however, would you not, that if they decided they wanted
to--they are the kind of governance and economy that could just
get it done?
Mr. Rosenzweig. I think there's going to be several ways
that developing countries can play in this system. It's going
to have to be determined through international negotiations.
The Chairman. Yes.
Mr. Rosenzweig. I think Jonathan's comments have that about
right. But, yes, I think there are certainly things----
The Chairman. I'm not talking about negotiations, but just
as a matter of--we have a harder time accomplishing it than
them. That's why we're doing all of this.
Ms. Claussen. Yes.
The Chairman. They wouldn't have to have all these
meetings, right?
[Laughter.]
Mr. Rosenzweig. They might be more efficient, from a
governance perspective.
The Chairman. Well, they just tell somebody to do it,
right?
Ms. Claussen. Yeah. I mean, if I could just make a couple
of comments. We just completed a dialogue with 25 individuals
from 15 countries with seven companies, so it was a real mix of
people, to try to figure out what kind of arrangement we could
have, post-2012, sort of after Kyoto was over, to, sort of,
think ahead. And we had a couple of people there from China,
also from India and Brazil, and a lot of American companies,
and actually some Senate observers, as well. So, it was mixed
group. And I think there was great willingness on the part of
everyone to consider something, post-2012, that is broad,
flexible, allows them to do different kinds of things, as long
as they are meaningful and verifiable. And the Chinese were
right there.
So, I really believe that if we were to try to do something
ourselves, and then move forward we would find them willing to
do some things that would also be meaningful.
The Chairman. Jonathan.
Dr. Pershing. Just two additional points, perhaps, to add.
The first one is, if one compares India and China--because
those are the two that you frequently look at--I'd just take
the example over the past 25 years in electrification. India
currently has about 500 million people who do not have access
to electricity. Twenty-five years ago, China had the same
number. Today, still the same 500 million in India, only about
10 million in China.
The Chairman. Really?
Dr. Pershing. So, you can get some sense about--as you--
just very directly answering your questions, Could they do it?
I believe they could do it. It doesn't necessarily mean that
they would adopt a program the same as ours. It could mean that
they do things for reasons of energy security, which we clearly
have as a priority, as well, that deal with things like
transport efficiency. They have just done this massive push to
gas, which is having the same size net reductions as the
current combined offset projects around the world, one dash-to-
gas in China. So, you see these fundamental opportunities that
they could meet. So far, they have not. And, in fact, they have
rejected the idea of adopting a trading program.
I would suggest that an area that you could support would
be to push, for example, the State Department to be your
interlocutor. You can get a judgment as to how effective or
valid or valuable relative and comparable efforts have been.
The Chairman. Senator Bingaman.
Mr. Rosenzweig. China's also become the largest seller, as
well, of project-based offsets in the world.
The Chairman. All right.
Mr. Rosenzweig. In one year, they have decided they wanted
to do this, and they're, by far, the biggest seller.
The Chairman. Okay.
Senator Bingaman. Let me try to understand how the various
permits or allowances--I guess the words are, sort of, used
interchangeably in this process--but how these international
markets would relate--those allowances that are generated in a
system in this country that has a safety valve, how that would
relate to what is generated in Europe, which has no safety
valve, with what is generated on the Chicago Climate Exchange,
which has no safety valve, how--I mean, if there were some kind
of world market for allowances and permits, is it clear that
there's a clearing mechanism for those different types of--and
different-valued permits? Dr. Walsh, you're the expert on that.
Dr. Walsh. Well, you've got a lot of expertise here today,
sir.
I just spent the weekend in Europe with a roomful of some
of the very top energy and emissions traders throughout the
continent, and they're eager to see U.S. leadership--in part,
because they know that we would pursue a more flexible, six-
gas--perhaps a little more comprehensive offset system than
what the European system allows now. So, where we're going and
how those markets will interface is difficult to predict.
Currently, the Chicago Climate Exchange accepts
international credits from the Clean Development Mechanism and
from the European Union allowance system. We are at a
significant price differential. How that would pan out if we
opened up our markets to international trade is difficult to
predict. However, if we did see something like a $7 or $8 price
gap in the United States, and the European demand was strong at
$30, clearly the credits would flow to that higher priced
market. All else constant, whether it be business relationships
or credit or payment worthiness issues, putting those aside,
the markets would seek out the highest and best opportunity,
one would expect, sir.
Senator Bingaman. Well, some of the discussion in the
previous panel about capped--about offsets outside the cap--
give me a little explanation as to how you see that. If each
country has a separate cap, and offsets are being generated in
China, you know, how does--what is meant by this concept of
``outside the cap''? David Doniger was saying that he thought
it was a big mistake to allow offsets outside the cap. I think,
Michael Morris, you were saying you thought wherever the
improvement in the environment occurs, so much the better,
there's no reason to limit that.
Dr. Walsh. Senator, let me preface my answer with the
following observation. To a significant degree, the debate
about offsets has become a bit of a tempest in a teapot. If we
were to stack up the emission reductions realized by the
Chicago Climate Exchange members, and stack 'em 50--they'd be a
50-foot-tall pile--only one foot of that would be offsets.
Offsets do not come flowing in like Niagara Falls. We see that
in the Clean Development Mechanism, which has a high price at
the end of that rainbow. We see that in the Chicago Climate
Exchange.
So, there's been a--frankly, a bit more debate than I think
is worthy. One can clearly define, in a conservative,
verifiable way, what an offset is. And if you provide those
clear instructions, you still will see a relatively modest pace
of uptake on offsets.
Now, that said, there is some view that if you were to call
for a--say, a 4-percent cut in emissions, as CCX does, over 4
years, and were to allow in, let's say, up to one-fourth of
that, 1 percent, as offsets, that, in fact, some view that you
wouldn't really achieve the 4-percent cut, you would only
achieve a 3-percent cut, because, well, those offsets are
somehow--are new and different and extra. But we don't see it
that way. If the cut occurs in Brazil or in China or in Canada,
and it's verifiable, we think that's a cut.
So, I think there's some confusion on that issue, but a lot
of folks have a different viewpoint on inside or outside the
cap.
Senator Bingaman. So, you're saying that, ``outside the
cap,'' the 25 percent of the reduction that you would permit to
come from offsets would be outside the cap? Is that the way
you're understanding that term?
Dr. Walsh. The example I gave you was a scenario where 25
percent of the reductions--in fact, it's only--it's been less
than--less than 5 percent of our reductions--25 percent of the
reductions were occurring offsite, not at the smokestack of our
members, but were occurring on farms and through forest growth
or methane capture. I don't understand, Senator, why anybody
would consider that not to be a desirable thing to have happen.
These are win-win things that are both reducing carbon
emissions and providing local environmental benefit. Some
people think that that is not enough of a cut, or is not a
valid contributor to progress. I would beg to differ.
Senator Bingaman. Yes, go ahead, Jonathan.
Dr. Pershing. I think one of the big questions around the
offsets market has been how robust they are. One of the issues
that David Doniger raised earlier was that there is some
suspicion that you can't accurately monitor and verify them.
One of the approaches that's been taken in a number of markets
as they develop is to try and create benchmarks. So, there's
some standard that's set, and that's a standard that's
universally applied. And if you do that, you have more likely
integrity of all the market structures you're going forward
with. And when you do that, you have more confidence in those
market options. That has two effects. The first is, it
maintains market integrity. The second, it allows you to look
at those offset benefits, probably anywhere in the world, that
meet that benchmark. And that's got a huge economic value.
Senator Bingaman. Rafe.
Mr. Pomerance. Just to try to elucidate this a bit more, I
think that David Doniger made a proposal to use--if I recall
correctly--use allowances to, in effect, buy offsets. In that
case, you don't have to worry about their verifiability.
They're just good projects. And they don't, sort of--they're
not in the accounting of the cap. The outside-the-cap is, if a
Nation has 100 units of allowable emissions, and it decides to
buy ten units outside the country, through the Clean
Development Mechanism, say, then its allowable domestic
emissions would be 110. But there is a real question about--in
many people's minds--about the verifiability of the offset. So,
he's sort of--would--I believe, was taking an insurance
approach to offsets, which is to use the value of the
allowances to buy offsets.
Mr. Rosenzweig. I disagree with David. Offsets are good. I
think it's important to step back and look at what they're
trying to accomplish with a first stage of a climate program.
And you want to encourage activities that may not occur without
the incentive to do it.
The problem with offsets is the transactions costs, which
basically do not allow developers to secure financing to
develop their projects. There are several different ways that
the world is learning to implement, to develop modern
verification standards, and to ensure that they are real,
verifiable reductions.
So, as a first step, we would, you know, disagree with
David. We think that you can create offsets outside the cap
that create a lot of beneficial activities. That would also
work fairly well if you're going to go with a safety valve,
that you would probably create a whole bunch of environmental
activities that may not occur if there were not a safety valve.
So, I would, sort of, suggest that the two things play hand
in hand.
Thank you.
The Chairman. I have no further questions.
Michael Walsh, I just wanted to indicate that my office
will be calling to see if we can set up an appointment with
either you or whomever, so you can come to the office and tell
me more about the program, in detail, specifically, so I will
understand it.
Dr. Walsh. We look forward to that opportunity, Senator.
The Chairman. I think it's important that I do that, and do
that as soon as I can.
Now, with that----
Senator Bingaman. Mr. Chairman, I thought you--I thought
you were going to volunteer to join the Chicago Climate
Exchange, have your office join.
Dr. Walsh. Well, Senator, you should be aware that we have
an open-door policy, not only to corporate emitters in Brazil
and elsewhere, but to organizations like the World Resources
Institute, that wanted to define and help us build the system
and offset their own emissions. So, we've got the thought
leaders, but we've also got the prayer leaders, from the
Jesuits of Santa Clara, California, who are one of our original
investors, and are also offsetting their members in our
exchange. So, you'll be in very blessed company if you want to
become a member, sir.
[Laughter.]
The Chairman. I have not yet said I'd be a member, but
you've given me a very good reason, with that new group----
[Laughter.]
Dr. Walsh. Thank you, Senator.
The Chairman [continuing]. There. I'm sure I'll be close to
them quickly----
[Laughter.]
The Chairman [continuing]. What they do. Maybe I can act
like them, right? In any event----
All right. Thank you, everybody. I notice a lot of your
were patient, stayed a long time. A lot of coverage stayed the
whole day. And we think it was beneficial to us. We will not
deny that it was hard work for us, and for you, too. But our
schedules are the things that make our lives tough. But for
that, it would have been a very nice, fun day with all of you.
Thank you. We look forward to the compilation of this, and
see what comes next. You all wait and see.
[Whereupon, at 4:28 p.m., the conference was adjourned.]