[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
CAP, AUCTION, AND TRADE: AUCTIONS AND
REVENUE RECYCLING UNDER CARBON CAP AND TRADE
=======================================================================
HEARING
before the
SELECT COMMITTEE ON
ENERGY INDEPENDENCE
AND GLOBAL WARMING
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
JANUARY 23, 2008
__________
Serial No. 110-23
Printed for the use of the Select Committee on
Energy Independence and Global Warming
globalwarming.house.gov
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20402-0001
SELECT COMMITTEE ON ENERGY INDEPENDENCE
AND GLOBAL WARMING
EDWARD J. MARKEY, Massachusetts, Chairman
EARL BLUMENAUER, Oregon F. JAMES SENSENBRENNER, Jr.,
JAY INSLEE, Washington Wisconsin, Ranking Member
JOHN B. LARSON, Connecticut JOHN B. SHADEGG, Arizona
HILDA L. SOLIS, California GREG WALDEN, Oregon
STEPHANIE HERSETH SANDLIN, CANDICE S. MILLER, Michigan
South Dakota JOHN SULLIVAN, Oklahoma
EMANUEL CLEAVER, Missouri MARSHA BLACKBURN, Tennessee
JOHN J. HALL, New York
JERRY McNERNEY, California
------
Professional Staff
David Moulton, Staff Director
Aliya Brodsky, Chief Clerk
Thomas Weimer, Minority Staff Director
C O N T E N T S
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Page
Hon. Edward J. Markey, a Representative in Congress from the
Commonwealth of Massachusetts, opening statement............... 1
Hon. F. James Sensenbrenner, Jr. a Representative in Congress
from the State of Wisconsin, opening statement................. 3
Hon. Earl Blumenauer, a Representative in Congress from the State
of Oregon, opening statement................................... 4
Hon. Marsha W. Blackburn, a Representative in Congress from the
State of Tennessee, opening statement.......................... 5
Hon. Jay Inslee, a Representative in Congress from the State of
Washington, opening statement.................................. 6
Hon. Jerry McNerney, a Representative in Congress from the State
of California, opening statement............................... 7
Witnesses
Dallas Burtraw, Senior Fellow, Resources for the Future.......... 8
Prepared Statement........................................... 11
Peter Zapfel, Coordinator for Carbon Markets and Energy Policy,
European Commission--Environment Directorate General........... 33
Prepared Statement........................................... 35
Answers to Submitted Questions............................... 100
Hon. Ian Bowles, Secretary of Energy and Environmental Affairs,
Commonwealth of Massachusetts.................................. 43
Prepared Statement........................................... 46
Answers to Submitted Questions............................... 108
Appendix to Statement........................................ 129
John Podesta, President and Chief Executive Officer, Center for
American Progress.............................................. 49
Prepared Statement........................................... 50
Appendix to Statement........................................ 131
Robert Greenstein, Executive Director, Center on Budget Policies
and Priorities................................................. 65
Prepared Statement........................................... 67
Answers to Submitted Questions............................... 117
HEARING ON CAP, AUCTION, AND TRADE: AUCTIONS AND REVENUE RECYCLING
UNDER CARBON CAP AND TRADE
---------- --
--------
WEDNESDAY, JANUARY 23, 2008
House of Representatives,
Select Committee on Energy Independence
and Global Warming,
Washington, DC.
The Committee met, pursuant to call, at 9:30 a.m., in Room
2128 Rayburn House Office Building, Hon. Edward Markey
[chairman of the Committee] presiding.
Present: Representatives Markey, Blumenauer, Inslee,
Larson, Herseth Sandlin, Cleaver, Hall, McNerney,
Sensenbrenner, Sullivan and Blackburn.
The Chairman. Good morning. This past December the New
Direction Congress passed the Energy Independence and Security
Act, a momentous first step towards combating global warming
pollution and securing our energy independence. With that down
payment in place, Congress now must turn to the next great
challenge: enacting an economy-wide cap-and-trade program that
will reduce heat-trapping pollution 80 percent by 2050.
A cap-and-trade system harnesses the power of the market to
ensure that pollution will be cut by a defined amount at the
lowest possible cost. Cap-and-trade is an idea that is made in
the U.S.A. Its advantages have been demonstrated under the
Clean Air Act's highly successful acid rain program. The
Europeans have adopted this idea for their emissions trading
system for carbon dioxide. And, fortunately, we are now in a
position to benefit from the lessons we have learned in
implementing that system.
One of the most important questions that any cap-and-trade
system must answer is how tradable pollution allowances should
be distributed. Should they be given away for free to polluters
or should they be auctioned off? The acid rain program and the
early phases of the EU emissions trading system rely primarily
on free allocation. But both economic theory and the EU's
recent experience have taught us that giving allowances away
may result in massive windfall profits for polluters and,
surprisingly, does not lower costs to consumers.
In most cases, polluters will charge consumers for the
value of the allowances, even if they receive those allowances
for free. Auctioning avoids this problem and ensures that
allowances distribution is transparent and fair based on the
free market, rather than political deals. Auctioning also has
the advantage of sending a carbon price signal that is loud and
clear, not muffled by special interest giveaways. And, finally,
auctioning can provide tens of billions of dollars of revenue,
which can be used to greatly reduce the overall cost of the
program and speed the transition to a low-carbon economy.
By investing auction revenues in technology research and
development, efficiency, renewable energy, and rebates and tax
cuts for low and middle-income households, we can provide a
much needed stimulus to the economy, one that will get us out
of the doldrums and unleash a clean, green revolution of
innovation and prosperity.
For all of these reasons, economists have long been nearly
unanimous in advocating auctioning over free allocation. Now,
policy-makers around the world are moving decisively towards
robust action. As Mr. Zapfel, our witness from the EU will
explain, the European Commission just this morning announced
its proposal to move to 100 percent auctioning of allowances
for electric utilities by 2013 and to increasing reliance on
auctions for other industrial sources. At least six of the
Northeastern states, including my home state of Massachusetts,
represented this morning by Secretary of Energy and
Environmental Affairs, Ian Bowles, are planning to use nearly
100 percent auctions to distribute allowances under the RGGI
cap-and-trade program.
As Congress begins debate on cap-and-trade legislation, it
is imperative that we learn from these experiences. The health
of our planet's atmosphere is a sacred public trust that
belongs to all of us, and the right to pollute it should not be
given away for free, nor should we adopt a program that will
enrich corporate polluters at consumers' expense.
I believe that with a well-designed cap-and-trade program
based on robust auctions and revenue recycling, we can do our
part to save the planet from global warming in a way that grows
our economy, creates jobs, is efficient, transparent, and
socially equitable. Our distinguished panel of witnesses today
is well-qualified to help us to move forward on this endeavor.
I would also at this time like to inform the members that
David Moulton, who serves as the Select Committee's Staff
Director and Chief Counsel, will be leaving that position on
February 7th. David is one of Capitol Hill's most experienced
veterans. And, much to my regret, he has decided to retire from
the Hill after more than 25 years of serving in the House and
the Senate.
David has been at my side on every major issue I have
worked on since 1985, from energy to the environment to
telecommunications to consumer protection. Over the last 23
years, he has worked with me in a series of capacities,
including Legislative Director, Chief of Staff in my personal
office, and as Staff Director of the Subcommittee on
Telecommunications and Finance, before assuming the role of
Staff Director for this Committee.
Whether it is energy efficiency or the V-chip, children's
educational television, or rollercoaster safety, protecting the
Arctic refuge, or fighting global warming, David has been my
closest adviser. He has combined a deep commitment to the
public interest with a mastery of the legislative process.
Over the last year, David played a pivotal role in setting
up the Select Committee. And he has helped to grow it into a
force for change in this Congress and in the world.
David exemplifies all of the best qualities of the staff
whose hard work and professionalism make it possible for this
institution to serve the public. He combines the soul of John
Audubon with the writing talents of Mark Twain. His skills,
counsel, and creativity will be greatly missed by me and by all
of my staff.
David, I want to thank you for all that you have done for
me over the years. You are not only one of the top advisers
that anyone in Congress has ever had, but you are also my very
dear friend. And I wish the very best to you, your wife,
Francie, and your two daughters in all of your endeavors in the
years ahead.
And I know for myself and all of the staff of the Select
Committee and the members of the Select Committee, we offer you
our thanks for your public service. Thank you so much for
everything you do.
[Applause.]
The Chairman. Let me turn to recognize the ranking member
of the Select Committee, the gentleman from Wisconsin, Mr.
Sensenbrenner.
Mr. Sensenbrenner. Thank you very much, Mr. Chairman.
First of all, let me say that I think I speak for over
72,000 other people who were in Lambeau Field Sunday night that
we don't think global warming is such a bad thing. [Laughter.]
Because if it weren't for global warming, it might have
been 20 below there, rather than just a little bit below the
zero margin. And the game was bad.
Today's hearing will focus on the details of a cap-and-
trade system. Specifically, the hearing will examine how carbon
credits and allowances are to be distributed in a cap-and-trade
system. However, I will not be offering much input into this
nuance question because I will oppose a cap-and-trade
regulatory regime and oppose it strongly, no matter how credits
are distributed within the system.
My reason for opposing this mess is simple. From the
outside of the Select Committee, I said that I will oppose any
legislative effort that will hurt jobs and the economy. And I
am convinced that a cap-and-trade system will do just that.
One needs look no further than Japan, Italy, and Spain to
see what quicksand awaits U.S. ratepayers under a cap-and-trade
system. Together these nations will have to fork over $33
billion to buy carbon credits according to a November 30th
Bloomberg news article. This amounts to a tax on electricity in
those countries since the cost of these credits will probably
be hidden in the overall electricity bill.
Make no mistake. These costs are the price tag of the Kyoto
treaty. President Bush has received much grief for failing to
sign on to that bloated regulatory regime. But after seeing how
it is raising electricity costs in Europe and Asia, I am
pleased that the President followed my advice and kept the
United States out of that bad deal.
The question isn't if a cap-and-trade system will raise
electric costs. The question is how much they will raise costs.
This is a question that I have been asking over and over today
and throughout the year as we continue to examine this issue.
When this Select Committee conducted a field hearing in
Seattle last November, I engaged with New York City Mayor
Michael Bloomberg on the differences between a cap-and-trade
system and a direct tax on carbon. While I disagree with Mayor
Bloomberg on the need for carbon tax, we both agreed that at
least a carbon tax is an honest attempt to reduce carbon
emissions; whereas, a cap-and-trade system simply buries the
cost deep within your electricity bill.
Cap-and-trade is a politician's dream, doesn't have to vote
for the tax and then can run around and criticize the evil
electricity companies for passing the cost of these credits on
to consumers. It's a dishonest way of doing it. At least Mayor
Bloomberg said that if we're going to do this type of a taxing
system, we ought to do it the honest way.
If the politicians in Washington believe it is a good idea
to use taxes in an effort to fight global warming, then they
should show the ratepayers exactly how much they are spending
on these so-called global warming solutions. I think most
people would find that to be the real inconvenient truth.
Ten years ago, when I was Chair of the Science Committee,
an employee of the Clinton administration testified that the
Kyoto treaty and the cap-and-trade system that was envisioned
in that would raise electric rates by 80 percent.
I can't face the senior citizens in my district, saying
that a procedure that I have advocated cost them that much
money. And what is going to happen to manufacturing when the
cost of energy here goes up that much but the cost in China
doesn't go up at all?
Since 2005, Europe has been under a cap-and-trade system.
So far the results don't look good. Open Europe, a group that
studied the system, found that it acted like a wealth transfer
mechanism, subsidizing polluters in states making little effort
to control carbon emissions while punishing states that had
tougher emission allocations.
Perhaps the cost of this system would be worth it if they
were actually creating measurable improvements to the
environment. But as Open Europe notes, this regulatory system
has actually led to an increase in emissions from Europe.
The American people deserve a technological approach to
global warming that improves the environment while protecting
the economy. They don't deserve a tax hike that masquerades as
a solution.
I yield back the balance of my time.
The Chairman. Great. The gentleman's time has expired. The
Chair recognizes the gentleman from Oregon, Mr. Blumenauer.
Mr. Blumenauer. Thank you, Mr. Chairman. I, as always,
appreciate the eloquence of our ranking member. One of the
fallacies I hear, though, in his presentation is that we are
already paying huge costs as a result of global warming. And
the scientific evidence is that it is going to be far greater.
The Stern review suggested that by investing as little as
one percent of our GDP, we could avoid the worst effects.
Failure to avoid the worst effects could have the GDP worldwide
dropping 20 percent. I mean, this is a wise investment.
And the good news is that a year from now, the United
States will no longer be the single holdout of the
industrialized countries that don't believe that we're going
into a carbon-constrained economy. It is still open to how that
carbon constrained. And it maybe that carbon tax has some
merit.
I am intrigued, as you, Mr. Chairman, with the potential of
the carbon cap-and-trade. It might just be the key to saving
the planet, but it also might be very helpful to get us out of
the current economic crisis that we find ourselves in because
we have systematic weaknesses, economic deficit, environmental
deficit, infrastructure deficit.
A cap-and-trade has a potential for creating a great deal
of value. How that is captured and where it is allocated is of
great interest to me. I am going to be posing some questions to
this terrific panel that you have assembled to see if there is
some way that a portion of this value could be reallocated to
deal with crumbling infrastructure, in some places in the wrong
places, invested in the wrong ways, that we might be able to
take a portion of it to be able to revitalize the
infrastructure, to reduce the carbon footprint over the long
run while we stimulate the economy in the foreseeable future
and avoid economic catastrophe in the future.
I deeply appreciate this opportunity and look forward to
pursuing this. But be forewarned. This is something I would
like some of our witnesses to think about with this.
The Chairman. Great. The gentleman's time has expired. The
Chair recognizes the gentlelady from Tennessee, Ms. Blackburn.
Ms. Blackburn. Thank you, Mr. Chairman. Thank you for the
hearing. And I want to thank our witnesses for being here
today. I also want to apologize. We have an O&I Committee
hearing with Energy and Commerce. So I am going to have to be
up and down and back and forth today, Mr. Chairman, but I do
thank our witnesses for being here. And I thank you that we are
going to look at how a cap-and-trade would be administered and
the prospects for such a system.
I will tell you right up front I have some grave concerns
about this type carbon reduction scheme because of my belief
that it would drastically affect the nation's energy supply and
would significantly distort the market. So I join my colleagues
in letting you know that I do have some questions that I would
pose to you.
Now, I know that proponents of the cap-and-trade system
argue that the system is necessary because humans are causing a
global climate change through emissions and carbon dioxide.
And, therefore, we have to institute something that is going to
drive a change to this human behavior.
But then we turn around. And in our study and research, I
have read several things in some of our scientific journals
from the past decade that show that most, if not all, of our
recent global warming is caused by the sun and other natural
causes and cannot be specifically and irrefutably linked to
human activity.
And if these schemes were to be implemented, they would
have little to no effect in changing the current projected rate
of temperature more than a couple of degrees over 100 years.
So I think that it is our responsibility. It's this
Committee's, and it is Congress' responsibility to take
reasonable actions to protect the environment. But closing coal
plants and imposing massive energy costs on consumers in
developing nations is in my opinion not the way we ought to go.
A cap-and-trade or a carbon tax system will likely lead to
shuttering many of the power plants that are in existence today
and would compromise the American job market and could lead to
a greater dependence on foreign energy sources, rather than
driving us toward energy independence. And all of this would
end up having a negligible environmental effect.
In my opinion, that may be a little bit too steep a price
to pay. This past summer, several of my colleagues and I
traveled to Europe and firsthand had some firsthand visits with
those on the cap-and-trade system. It raised some concerns. We
look forward to hearing from you today.
I yield back.
The Chairman. Great. The gentlelady's time has expired. The
Chair recognizes the gentleman from Washington, Mr. Inslee.
Mr. Inslee. I was talking to the President of the National
Academy of Sciences the other day. And he wasn't worrying about
the sun wobbling around or sunspots destroying the climactic
system of the Earth. This is a problem we have got to tackle. I
am glad we are here because if we don't solve this problem,
nothing else matters.
I want to make three comments about cap-and-trade. First,
those who are critical of the cap-and-trade system, I would
just simply say, as they say in Texas, show me what you've got.
Show me what you've got to solve this problem. And those who
criticize this and approach from a lot of other criticisms
never come up with another system to solve this problem. It is
the best system we have available, and we should implement it.
Second, for those who argue that a cap-and-trade system is
sort of a camouflage system, trying to avoid responsibility, I
would suggest the reason it is important is the first word. It
is a cap. And a carbon tax does not have a cap. A carbon tax
makes some assumptions about behavior that may or may not be
true.
The European experience has been a tax alone does not and
cannot solve the problem. You have to have a hard, meaningful,
concrete, impenetrable, legally enforceable cap.
And this we guarantee our constituents. We are going to
tell our grandkids we are going to have a solid, enforceable
limitation on how many megatons of CO2 we are
putting into the atmosphere.
Third, the most important debate we will have in the next
12 months is on an auction because there are some things we can
learn from Europe. It's true they don't know what football is,
but there are some things we can learn from them.
And the number one lesson from Europe is that you have to
have an auction if you are going to have a meaningfully
successful cap-and-trade system, both for reasons of equity
because of the tragedy of the commons that they first
brainwashed me about in economics back 36 years ago but also
because it has to work that way from an equity standpoint and
an enforcement standpoint by putting a price on carbon. That is
a lesson from Europe. They have learned it. We don't have to go
through their painful first few years. We can learn from their
experience.
I will be working on legislation to have the earliest
implementation of 100 percent oxygen as soon as humanly and
politically possible. It is what I believe will be the single
most important debate we have in Congress this year. And we
hope that the forces of oxygen prevail for our grandkids' sake.
It is a lesson from Europe. We have got to learn it.
Thank you.
The Chairman. The gentleman's time has expired. The Chair
recognizes the gentleman from California, Mr. McNerney.
Mr. McNerney. Thank you, Mr. Chairman.
I want to thank the panel for coming here today. The cap-
and-trade policies that are ultimately adopted by this
government are not only extremely important, but it is also an
extremely interesting process.
Speaking as a scientist, I look forward to getting into
some of these details and having some fun mucking around, but,
in particular, such a program will determine the direction of
our economy. It will help or hurt our poor, our lower-income
people. It will guide industry and, if done properly, will make
America a leader as we move forward into the twenty-first
century.
So, with little or no pressure on the panel, I look forward
to your testimony. And I reserve the balance of my time.
The Chairman. The gentleman can do that. The Chair
recognizes the gentlelady from South Dakota, Ms. Herseth
Sandlin.
Ms. Herseth Sandlin. Thank you, Mr. Chairman. I will
reserve my time for questions as well. Thank you.
The Chairman. The Chair recognizes the gentleman from
Connecticut, Mr. Larson.
Mr. Larson. Thank you very much, Mr. Chairman. I, too, look
forward to the testimony. And I feel somewhat like that old
George Gobel line. I feel like a pair of brown shoes at a black
tuxedo event.
I do favor very strongly a specific tax credit, carbon tax
credit, because I think that that is the most direct, most
efficient means of us accomplishing a goal. I am skeptical
about the cap-and-trade and remain to be convinced and
certainly am anxious to hear from our panelists today.
But I am especially concerned about the auction and about
how the auction takes place, how a cap-and-trade is going to be
administered, what is going to happen down line to people when
we know the costs are going to rise.
I especially am concerned in the Northeast about the
constituents that I represent. And I feel that they would be
more advantaged by making sure that we had a payroll tax
deduction specifically tied to a carbon tax that would both
benefit them and I think provide both an appropriate cap and a
path forward for us to solve this very difficult problem.
I think it also would be helpful to us in dealing with our
foreign partners, most notably in China and India, because of
the transparency issues that obviously exist but remain to be
convinced otherwise.
The Chairman. The gentleman's time has expired. And all
time for opening statements from the members has been
completed. So we will now turn to our panel.
And we will hear first from Mr. Dallas Burtraw. He is a
Senior Fellow at Resources for the Future. Mr. Burtraw is an
economist who is recognized as one of the leading national
experts on emissions cap-and-trade systems. He has worked in
this area for the past two decades and has played an important
role in evaluating the Clean Air Act's acid rain program and
has worked extensively on the Northeastern states' RGGI program
and on the EU's emission trading system. We welcome you, Mr.
Burtraw. Whenever you are ready, please begin.
Mr. Burtraw. Thank you. Thank you for the opportunity to
testify today.
STATEMENT OF DALLAS BURTRAW
Mr. Burtraw. Resources for the Future neither lobbies nor
takes positions on specific legislative or regulatory
proposals. So I emphasize that the views I present today are my
own. I mean, I am going to talk specifically about the question
of how emission allowances are allocated or initially
distributed in the implementation of a cap-and-trade program by
addressing several specific questions.
The first is, what are the efficiency benefits of auctions?
There are not many viewpoints that you can get most economists
to agree on, but one of them is that the role of an auction in
the implementation of an emissions cap-and-trade program
delivers significant efficiency benefits.
One perceived virtue of auctions is that they are
consistent with the principle of simplicity and transparency,
which is valuable in the formation of a new market.
A second and equally forceful reason that economists favor
an auction is that it makes funds available that can be used to
achieve other goals. Depending on how these revenues are used,
they can help in an important way to reduce the economic costs
of climate policy. For the purposes of minimizing the costs and
promoting economic growth, economists would favor dedicating
the use of revenues from an auction to reduce preexisting
taxes.
A second approach would be to reinvest some portion of
allowance value to reinforce policy goals. For example, in the
ten-state Northeast Regional Greenhouse Gas Initiative that
takes effect in 2009, at least 25 percent of the allowance
value which would be realized through an auction is to be
budgeted to consumer benefit, such as investments and energy
efficiency.
A third idea is that even a relatively small sliver of
auction revenues would provide a relatively substantial
infusion of support for research and development of new
technologies. I know that others on this panel have other ideas
that deserve consideration on this revenue question.
Second, would free allocation of allowances significantly
reduce economic impacts on consumers? The group that is most
affected by climate policy will be consumers.
In the electricity sector under an auction, although we
find that some electricity generators are going to bear some
costs under an auction, consumers of electricity bear about
eight times greater costs. This results because generators are
able to pass along the cost to consumers through increasing
prices.
Free allocation of emission allowances to generators cannot
be expected to reduce this impact where there are competitive
markets. The only important exception is in that portion of the
electricity sector where there are regulated prices. And in
these regions, consumers would benefit from free allocation to
firms.
However, in general, throughout the economy, the ability of
firms to pass on the cost of allowances does not hinge on how
they receive the allowances initially. Sometimes one hears
firms argue to the contrary, saying they would not charge their
customers for emission allowances they received for free.
When one hears this, one might think that a different
conversation needs to be had between those firms and their
shareholders because it is shareholder value they would be
giving away.
The fact that a firm and competitive market will charge its
customers for the use of an asset that the firm has received
for free is often a difficult idea for people to grasp at first
but is wholly consistent with economic theory and is in general
what has been observed in empirical studies. In general, giving
allowances away for free to firms will provide little benefit
to consumers.
There is one way that consumers could benefit from free
allocation, however. And that is if citizens were to receive
allowances' value directly. This approach has been called a
cap-and-rebate to every person with a Social Security number.
Number three, to what extent do auctions deprive polluters
of capital needed to invest in achieving substantial reductions
in greenhouse gases? In the electricity sector, most new
investment and generation relies on project-specific financing,
meaning that each project is evaluated and financed
independently with capital from outside the firm. As a
consequence, implementation of an auction will not affect the
availability of capital for financing new projects in the
important electricity sector.
What proportion of allowance value is needed to compensate
polluting firms? Overall, economic estimates suggest that the
loss in market value of industries that are going to be heavily
affected by climate policy is less than 30 percent of the value
of emission allowances. This estimate masks some differences
among firms because many firms turn out to be winners, and some
firms are losers.
In the electricity sector, which, again, is the center of
much attention, the industry as a whole would require just six
percent of allowance value, but this accounts for firms that
gain value. And to compensate only the losers would require
about 11 percent of the allowance value.
Is it feasible to allocate, construction an allocation
formula, that would efficiently target compensation to those
firms that are adversely affected?
The award of free allowances is a blunt instrument for
achieving compensation for producers. Free allocation tends to
reward winners as well as losers, thereby eroding efficiency
and the ability to compensate other affected parties.
We find the opportunity costs of compensation to producers
in the electricity sector is five times the cost of
compensation delivered successfully. The difference accrues to
firms as windfall profits.
One way to improve this would be to apportion allowances
for the states and let the states conduct allocation to achieve
compensation goals. This cuts in half roughly the cost of
achieving compensation or more modest compensation targets also
reduce the cost. Nonetheless, under any strategy, there are
important considerations regarding the difficulty of achieving
compensation.
Finally, to what extent are the economic impacts of
legislation on polluting firms likely to be spread among
shareholders who hold diversified portfolios? In this modern
age, the vast majority of shareholders hold few, if any, stocks
in individual companies. Most of us hold assets in mutual
funds. For this reason, the way to deliver compensation to
owners of equity is to design an efficient policy in order to
lessen the overall cost of the policy, which is precisely the
virtue of the use of options.
Thank you for the opportunity to testify.
[The statement of Dallas Burtraw follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
The Chairman. Thank you, sir, very much.
Our second witness is Mr. Peter Zapfel. Mr. Zapfel is the
Coordinator for Carbon Markets and Energy Policy for the
European Commission. Mr. Zapfel has represented the European
Commission as a delegation member in the U.N. climate
negotiations and has been actively involved in the commission's
work on emissions allowance trading, including the EU's
proposal just released today to transform the EU emissions
system post-2012.
I would like to state for the record that the Committee
appreciates Mr. Zapfel's voluntary participation. The Committee
recognizes that because of Mr. Zapfel's status as a
representative of the European Commission, neither Congress nor
the Committee have legal authority over his presentation today.
We welcome you, Mr. Zapfel. And whenever you are ready,
please begin.
STATEMENT OF PETER ZAPFEL
Mr. Zapfel. Mr. Chairman, members of the Committee, it is a
pleasure to testify today. In particular, as you alluded
already, before we have earlier this morning when you were
getting out of your beds, the European Commission has tabled a
set of legislative proposals to implement our far-reaching
climate and energy policy goals for the next decade.
What I would like to do in my five minutes of intervention
here focusing on auctioning is give you some information of
what we have proposed this morning, why we have proposed to go
to auctioning as the main method of allocation, give some
experience we have with free allocation, and end up with a few
recommendations.
Before going into auctioning, I also, however, want to
point out that the core of our proposal this morning on
reviewing our carbon-trading scheme is the proposal to bring
down the emissions cap, the number of allowed emissions, by 21
percent in 2020 compared to the emissions level in the trading
scheme in 2005. So we have a very robust emissions cap proposed
that will drive forward the carbon market and deliver
environmental benefits and also create a well-functioning
carbon market.
The Commission has this morning proposed that as of 2013,
as of the start of the third trading period, we make auctioning
the main method of allocating allowances and we go and do a
transition so that by 2020, in principle auctioning is the only
method of allocating allowances to the European common market.
Free allocation would immediately end at the end of the
second rating period in 2012 from our plans. And for other
industrial installations in other sectors covered by our
scheme, free allocation would be phased out over an eight-year
period so that by the end of the third trading period in 2020,
we would no longer in principle have free allocation.
Why have we made these proposals? We see three merits, in
principle, for auctioning. Auctioning has merits in simplicity.
Auctioning has merits in transparency. And auctioning is also
seen as advantageous from our side for the efficiency in the
clear carbon pricing that it creates.
What experience do we have in Europe with free allocation
for the first eight years, the first two phases of our scheme?
Free allocation is a very complex process to handle. The asset
value of the allowances of the carbon allowances is
considerable. And for the formal process, you need a device to
allocate the allowances free of charge. You need a lot of data,
which is administratively a very cumbersome process, the first
point.
The second point of free allocation tends to be a rather
in-transparent process while this major asset value is
allocated into the allowance market.
Thirdly, because of the periodic nature that we do the
allocation process and because of the possibility and,
actually, the rules for free allocation change from period to
period, this has the potential actually to distort decision-
making by actors in the market and has, in fact, to some extent
distorted decision-making.
And, fourthly, as has already been alluded to in
introductory statements, free allocation creates distributional
disadvantages for some sectors in a sense that the additional
benefits in terms of companies increasing their prices far
outweigh the additional costs and you create something which
politically is called windfall profits.
Finally, as I said, some recommendations. I think we reckon
in the European Union that auctioning as a method of allocating
emission allowances is a fairly new thing in emission markets.
There are several environmental markets operated here in
the United States. Some auctioning has taken place there. Also
we in Europe at this stage have limited experience with
auctioning. But in a number of fields on a daily basis--on a
very regular basis--governments organize the allocation of
economic assets by auctions. And we can learn a great deal from
such other government-driven auctions; for example, for
government bonds, for spectrum licenses. So we are not starting
something completely new with transitioning to auction as the
main method of allocating carbon allowances.
There are two things I want to raise at the end of my
testimony of what is crucial in our view to make auctioning a
successful mechanism of allocating allowances. First of all, we
think we need to take time to design the auction mechanism very
well. That's why we have proposed today to trust in principle.
We want to go to auctioning, but we will work out as part of
the implementation process a detailed regulation. And we want
to work with a lot with stakeholders, with the experts in
financial markets to design a well-functioning auctioning
mechanism because the economic assets involved are
considerable. So we need more time to work that out in a good
way.
And, secondly, we need smart ways of recycling the revenues
from the auctioning. There are various things to which the
allowance value, the revenue can be put to. And there is
further work to be done in working out, as I say, in a smart
and effective way to allocate, to recycle the revenues.
Thank you very much.
[The statement of Peter Zapfel follows:]
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The Chairman. Thank you, Mr. Zapfel. We very much
appreciate your being here today.
Next we have Ian Bowles. He is the Secretary of Energy and
Environmental Affairs for my home state of Massachusetts. He is
a recognized national leader in climate and energy policy.
Secretary Bowles oversees the state's six environmental natural
resources and energy regulatory agencies. Among other things,
Secretary Bowles has the lead role in Massachusetts'
implementation of the Regional Greenhouse Gas Initiative, RGGI.
Prior to serving as secretary, Mr. Bowles was Associate
Director of the White House Council on Environmental Quality
under President Clinton.
We welcome you. Mr. Secretary, whenever you are ready,
please begin.
STATEMENT OF IAN BOWLES
Mr. Bowles. Thank you very much Mr. Chairman and members of
the Committee. Thank you for your focus on this tremendously
important topic today. I am delighted to be here.
My comments today reflect the general context in New
England. We have expensive electricity. We have no indigenous
coal and natural gas, face transportation costs to bring those
fuels to our region. We have on average lower greenhouse gas
emissions than the rest of the nation. And we have across New
England a deregulated power market.
In Massachusetts, we have also made--and other New England
states have as well--considerable investments in energy
efficiency. And in Massachusetts, we are currently in a rate
decoupling proceeding where we are trying to eliminate the
current economic incentive on our distribution utilities to
maximize power sales at a time when we are trying to cut
greenhouse gas emissions.
We already have in place some limited greenhouse gas limits
on our power plants. And, as the Chairman noted, we are in the
process of transitioning to the RGGI system the first of next
year.
In renewable energy, we are moving forward with three new
biomass power plants, the Cape Wind project, a sizeable solar
program, and new incentives for biofuels. And, as the Chairman
noted, we have combined, first state in the nation to do so,
our energy and environmental agencies together to focus on
three key goals: tapping the economic potential of the
burgeoning clean energy sector--in Massachusetts, we have got a
quarter of billion dollars of private venture capital
investment and a great deal of job creation in that area--
second, curbing our greenhouse gas emissions; and, third,
reducing our energy costs.
When Governor Patrick brought Massachusetts into the RGGI
process early last year, one of the central questions we faced
was whether to auction for allowances or whether to grant them.
Based on our analysis, we concluded that auctioning was a
better way to protect the interests of the ratepayer.
And the core thing to know there is that in a deregulated
power market, the value, the economic value, the market value,
of an allowance is going to make its way into the electricity
bill one way or another, whether that generator decides to
expend the allowance as they dispatch power to the grid,
whether they save those allowances for a future generation
event in the future, or whether they decide to sell those
allowances. And either way that value is priced in, whether or
not that allowance is given out or whether it is sold to the
generator.
On the contrary, if you sell it to the generator, then
you've got those revenues to do something with and you can
protect the ratepayers. And that's what we decided to do with
our auction proceeds. And our first auctions begin in the
second quarter of this year as we move into the compliance
period for RGGI.
As we did an analysis of what we should spend those monies
on to best protect the ratepayer and achieve our environmental
objectives, energy efficiency stood out above all else. We have
the opportunity to not only save money for the ratepayers but
also to lock in permanent greenhouse gas emissions reductions.
In terms of the cost of RGGI, we see in the first couple of
years less than a one percent increase in potential electricity
bills. And as energy efficiency investments grab hold and
accrue over time, within ten years, we see over five percent
energy savings.
Now, why is that? It's because we've got a great deal of
energy efficiency left in our system and, indeed, across the
nation that is cheaper in many cases than power generation.
In terms of how much revenue we are going to produce, if
it's a $1 permit, you will produce about $26 million. If it's a
$5 permit, it will be $133 million. At the higher end of that
scale would be effectively doubling our investment in energy
efficiency in the Commonwealth.
As you think about a federal system, I would make a couple
of key points. One is that states, I think, are in the best
position to deliver energy efficiency services. It's something
where the federal government is somewhat too removed from the
individual ratepayers and the end-use consumers. It's something
that states have done a great deal on. And I think you could
set up objective standards to say, ``What is the performance
basis that we would like to see for use of proceeds down at the
state level for energy efficiency?''
I would also make that point that as compared to a
grandfathering scheme, where you are giving out allowances, the
auctions really level the playing field across all of the
different sectors, instead of building in potentially unfair
treatment for early movers.
As we conduct our auctions this summer, we are going to
focus on a few things. I will mention them quickly. I am happy
to get into more detail in the questions.
We are going to have our auctions open to any qualified
buyer. As we watch the market develop, we may add rules in the
future to make sure there isn't any hoarding or anything of
that nature. We are going to have a sophisticated market
monitoring system so we know who some of the players are. And
then as we go forward, we are going to use a three-year
compliance period to allow some flexibility between years
because emissions vary depending on things like weather events.
Finally, I just would mention I have submitted a longer
ten-page appendix. And I would be delighted to take questions.
And I thank you for your focus on this. We in the states look
forward to engaging with the Congress as you move forward.
Thank you very much, Mr. Chairman.
[The statement of Ian Bowles follows:]
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The Chairman. Thank you, Mr. Secretary, very much.
Our next witness, Mr. John Podesta, is the President and
CEO of the Center for American Progress. Mr. Podesta served as
Chief of Staff to President Bill Clinton from October of 1998
to January of 2001, where he was responsible for directing,
managing, and overseeing all policy development, daily
operations, and staff activities of the White House.
Mr. Podesta has also held a number of other senior
positions on Capitol Hill and in the White House and is a
recognized expert on technology policy, amongst other areas. We
are very fortunate to have him with us here today.
We welcome you back, John. Whenever you are ready, please
begin.
Mr. Podesta. Thank you, Mr. Chairman.
STATEMENT OF JOHN PODESTA
Mr. Podesta. And I started with David Moulton, but they
kicked me out a lot faster. So it's nice to be back here.
You have got my full statement.
[The statement of John Podesta follows:]
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Mr. Podesta. I would like to make four quick points. First,
I would like to take this up a notch. Make no mistake. While it
may be slow-moving, I think we are in a crisis. As our
understanding of the implications of global warming increase,
the case for dramatic, immediate action is only made stronger.
Just last week, we learned that the western Antarctic ice
sheet is melting faster, at a rate that was anticipated this
could mean a sea-level rise of two meters, as Dr. Pachari
noted, in this century, not the inches or feet, as originally
predicted by the IPCC Fourth Assessment, which will threaten
population centers, agricultural patterns, and coastal
ecosystems around the world.
Perhaps the best we can hope for and certainly the least we
ought to plan for is a climate that will cause severe economic
dislocation and national security challenges to the United
States. Worldwide we are already feeling some of the economic
consequences of climate change. We will soon feel the national
security consequences of human migration, food shortages, water
scarcity, destructive weather events, spread of disease, and
national resource competition.
The challenge I think we face as a nation and a world is
nothing short of conversion of our economy that is sustained by
high-carbon energy, putting both our national security and the
health of our planet at risk to one based on low-carbon,
sustainable sources of energy. The scale of that undertaking is
immense, but its potential, as the Chairman noted, is also
enormous.
My second point is that energy policy is economic policy.
In order to reverse the economic downturn we are currently
facing and to capture the opportunities provided by a low-
carbon energy transformation, we must put energy at the center
of our nation's economic growth. Fundamentally changing how we
produce and consume energy, investing in low-carbon innovation,
and transforming our economy to a low-carbon model are key to
promoting economic growth, mobility, job creation, and
regaining the technological leadership in the global innovation
marketplace.
Mr. Sensenbrenner noted a ten-year-old EIA projection,
which proves I think in more recent projections to be wrong. I
would note that ten years ago the United States had 44 percent
of the solar market. Today we have nine percent, a loss mostly
to Japan and Germany. I think the jobs of the future clearly
are on the clean energy side.
The U.S. Congress obviously realizes the importance of
energy policy to the Economy. I commend the Congress for
passing the 2007 energy bill and particularly for your work,
Mr. Chairman, over the years on the raising the CAFE standard.
The Center for American Progress recently released a report
entitled ``Capturing the Energy Opportunity'' that laid out a
strategy that we believe is pro growth, provides opportunity,
and takes on global warming, all in a fiscally responsible way.
At the core of that strategy is a fundamental commitment of the
federal government to invest in green-collar jobs, research and
development, and deployment of low-carbon technology, and to
assist low and middle-income Americans with rising energy
costs.
My third point is that a cap-and-trade needs to be at the
center of that energy policy. CAP advocates an energy strategy
that employs both a cap-and-trade system and a suite of public
investment policies funded by the auction revenue of carbon
permits.
A cap-and-trade will identify the necessary level of carbon
reductions to get us to a point where we have a sustainable
planet and allow the marketplace to price the cost of those
emissions. In order to avoid a windfall profit for polluting
industries, we recommend auctioning 100 percent of the carbon
credits. Our proposal would allocate ten percent of auction
revenue to businesses operating in energy-intensive sectors to
compensate shareholders, employees, and communities in those
sectors. We recommend half of the remaining 90 percent of the
revenue be allocated to low and moderate-income Americans to
help offset energy price increases.
Polluting industries, and not hardworking American
families, should shoulder the burden of this transformation to
a new energy in the future. And to ensure that low and
moderate-income Americans are protected from short-term
increases in energy costs, we estimate and commit $336 billion
over 10 years for income support and for middle class tax
support. The remaining half of the revenue would go to support
science and technology innovation; drive transition to a low-
carbon economy by funding R&D; efficiency, as Ian has
mentioned; and other initiatives, including infrastructure
investment, Mr. Blumenauer.
To meet the overall goal of emissions reduction under this
cap-and-trade model, we recommend adopting complementary
policies. For example, we support going further than what the
Congress has recently passed in implementing a 55-mile-per-
gallon cap-based standard by 2030, improving our distribution
in fueling infrastructure, investing in transportation
infrastructure, and another suite on the electricity side,
including creating a performance standard for all new coal-
fired facilities equivalent to the best available carbon
capture and store technology.
So my last point, and I will conclude by saying that we
cannot continue waiting to jumpstart this energy
transformation. Adopting a combination of short-term stimulus
and long-term public investment policies will not only enable
for the U.S. to once again become a world leader in low-carbon
energy innovation but will also diversify our energy base, thus
fostering economic stability, helping to boost economic growth,
creating new green-collar jobs, and boosting productivity for
our economy. We think we can create a virtuous cycle and a win-
win situation for the American public.
Thank you.
The Chairman. Thank you, Mr. Podesta.
And our final witness, Mr. Robert Greenstein, the founder
and Executive Director of the Center on Budget and Policy
Priorities. Mr. Greenstein has written numerous reports,
analyses, and articles on budget and poverty-related issues,
including most recently how best to design planet policies to
address impacts on low-income households. For his outstanding
work at the center, Mr Greenstein was awarded a McArthur
fellowship.
We welcome you here today. Whenever you are ready, please
begin.
Mr. Greenstein. Thank you, Mr. Chairman.
STATEMENT OF ROBERT GREENSTEIN
Mr. Greenstein. My focus is on the effects that climate
change policies can have on the budgets of American families
and the federal budget and the implications that has for the
design of a cap-and-trade system.
Our analysis indicates that Congress can design climate
change policy that is environmentally sound and fiscally
responsible, treats consumers fairly, and avoids increases in
poverty. But to do so, the policy will have to be well-
designed, and it will need to generate sufficient revenue to
meet the requirements of sound climate change policy and
mitigate the impacts on vulnerable populations. That means it
will be essential to auction most or all of the allowances.
Our analysis of these issues can be summed up in four key
numbers. Number one, $750 to $950 per year. That is the average
increase in energy-related costs for the poorest fifth of the
population from a quite modest, 15 percent, reduction in
emissions, the kind of target that is often mentioned for, say,
2020. As you know, climate change policies work, in part, by
raising the price of fossil fuel energy products to encourage
efficiency and the substitution of clean energy sources. That
will raise costs to consumers for a variety of items, from
gasoline and electricity to food, mass transit, and other
products that have energy inputs.
Households with limited incomes will be affected the most
because they spend a larger share of their income on energy-
related products than more affluent households do. And they
also are less able to afford investments that can reduce their
energy consumption, such as buying a new energy-efficient car
or going out and buying a new heating system for their home. If
climate change legislation is passed but nothing is done to
protect people of limited means, more of them will slip into
poverty, those who are poor will become poorer, and the trend
toward widening income inequality will be aggravated. Now let
me give you a little context.
This figure of $750 to $950 per year in increased costs for
the bottom fifth of the population, from a 15 percent reduction
in emissions, the people in question, the bottom fifth of the
population, have average income of only a little over $13,000 a
year. So 750 to 950 would be a big hit on them.
Figure number 2, $50 billion to $300 billion per year. That
is the Congressional Budget Office estimate of the resources
potentially generated by climate change policies. That is CBO's
estimate of the value of the emissions permits under a cap-and-
trade system. In other words, it is the amount of the proceeds
the government would receive if the permits were fully
auctioned off.
Key figure number 3, approximately 14 percent. That is the
share of the auction proceeds needed to fully offset the
increased energy costs that low-income consumers would face. In
my written testimony, I outline principles for designing a
mechanism, an approach to fully and efficiently offset the
increased energy costs on the bottom 20 percent of the U.S.
population and also provide some relief to hard-pressed working
families in the next to the bottom 20 percent. That could all
be done for about 14 percent. That is one-seventh of the value
of the proceeds from auctioning off the permits in a cap-and-
trade system.
Now, if Congress wanted to assist middle-income consumers
as well, that could be accomplished if a somewhat larger share
of the proceeds were used for that purpose. For example, with
approximately half of the allowance value, half of the value of
the permits, Congress could fully compensate the bottom 60
percent of Americans and provide significant compensation to
the next 20 percent, leaving out only the most affluent 20
percent, which is the group that consumes the most energy and
is most able to afford to make sizeable adjustments in their
consumption patterns.
My final, my fourth, key number, less than 15 percent. That
is the Congressional Budget Office's estimate of the share of
the allowance value that is needed to fully compensate energy
companies and other emitters for financial losses due to
climate change policies.
CBO has conducted a review of all of the literature in the
field. There are a number of studies that have been conducted.
The broad set of findings are that the net impact on the
emitters could be in terms of potential economic losses would
be offset for less than 15 percent of the permits. And CBO has
called the provision of a larger share of the permits free to
emitters as an approach that would result in, CBO's terms,
windfall profits for the companies receiving the free
allowances.
Now, there is a misconception--Mr. Chairman, you referred
to it in your opening remarks--a misconception some have that
energy prices will not rise or not rise as much if the
allowances are given away. That belief flies in the face of the
basic laws of supply and demand. A cap on emissions will limit
the supply of energy from fossil fuels. And when supply is
restricted, prices rise. Regardless of whether the government
gives away or sells the allowances, the energy companies will
be able to sell their products at the higher price. They will
be able to charge what the market will bear.
Harvard economist Greg Mankiw, who served as Chair of
President George W. Bush's Council of Economic Advisers, has
characterized a cap-and-trade mechanism in which the allowances
are given away in large numbers for free as a form of, in
Mankiw's words, corporate welfare. Now----
The Chairman. If you could please summarize?
Mr. Greenstein. Let me summarize. The final thing I simply
wanted to mention was the impact on budgets. Higher energy
prices will raise the cost of federal, state, and local
services. The cost of heating schools, hospitals, and the like
will go up. Cost-of-living adjustments for Social Security and
veterans' programs will need to be higher to reflect the higher
energy costs.
The Pentagon is the nation's single largest consumer of
energy. And its costs will rise. Those can all be addressed,
too, those issues, by devoting a share of the permits to
offsetting the resulting increases in federal, state, and local
costs, all of which comes back to the same issue.
All of these things can be taken care of if most or all of
the permits are auctioned off. If they are not, you get a
potential for increased poverty, increased deficits in debt
from the higher government costs, alongside windfall profits
for emitters.
Thank you.
[The statement of Robert Greenstein follows:]
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The Chairman. Thank you, Mr. Greenstein, very much.
And now we'll turn to questions from the Select Committee.
The Chair will recognize himself.
Mr. Zapfel, thank you again for being here today. It is
very important to us.
The EU is making a big change today. They are moving in a
completely different direction than they did in their original
phase in dealing with greenhouse gas emissions.
What happened when the allocation was free for the various
sectors of the European economy? What was it that you found
happened?
Mr. Zapfel. Thank you, Chairman.
As I pointed out before, when we go into the fourth year of
free allocation now in our first rating period and, thus, in
our second rating period, we have predominantly free
allocation, we learned very early on, even before our trading
scheme started via the future markets on the side of our
prices, that the value of the allowances get priced, first and
foremost, into electricity.
We continue to do ongoing economic assessment. Our scheme
is now just going into its fourth year. There is empirical
evidence we continue to learn. But in principle, we see that,
as has been said before, even if allowances are given for free,
some sectors find it fairly easy to include the value of
allowances into the prices. And this distributional effect is
something that has resulted in a lot of debate in Europe and is
actually one of the multi-weighting factors proposals that we
have made today.
The Chairman. Okay. So how do you deal with the challenge?
Many people say that this is an unprecedented step that you are
taking and that industry is unprepared to deal with the
consequences of having an auction system. What is your response
to that?
Mr. Zapfel. It is not something we do overnight. As you
know, we are now in the year of 2008. And the proposal is that
the changes come in the year 2013.
In principle, overall in the design of the regulatory
framework for our carbon market, we pay a lot of attention to
that we give this new market sufficient regulatory stability.
And one of the key issues there is that we give sufficient
foresight so we don't do changes overnight.
We had, for example, a lot of debate whether we should
already change our rules on very short notice so that the
second phase would already see regulatory changes. The
Commission has not entered in such changes because we think for
the market to develop well, to work efficiently, it needs
sufficient lead time so that everybody can prepare for the rule
changes.
The Chairman. And how are you dealing with industry
opposition? And which industries are most opposed to moving to
an auction system?
Mr. Zapfel. I think, also as you said before, I think we
are not the only ones across the world who is considering
starting a legislative debate to move towards auctioning.
We, of course, follow very carefully the debate in the
United States. We have seen what is happening in the RGGI
system or what has been decided in the RGGI system. There are
other carbon markets designed around the world, in Australia
and New Zealand. There is a debate here. So I think we are
moving along an international trend that is developing.
Of course, I think from the perspective of an individual
business, if you are subjected to a carbon cap, it is always a
preference for an industry to ask for free allowance, rather
than to have to pay for the allowance. I think that is a
natural opposition that we have in our political process.
What is important to us is that there is to continue to
empirically evaluate what are the real effects. What empirical
evidence do we have? As I said, so far, there is no compelling
empirical evidence that this is damaging. What we reckon is
that some sectors, as I said, the borrow sector can move
quicker. And other sectors need some time to adapt, industrial
sectors, which we give more time to adapt to those changes.
The Chairman. Okay. Thank you.
Mr. Podesta, you are an expert on the budget and
appropriations process. What recommendations would you make to
ensure that any revenues that do come from an auction system
are, in fact, preserved for R&D, are preserved to take care of
the poorest citizens, who may be affected by this very dramatic
change in the way in which we regulate energy in our country?
Mr. Podesta. Mr. Markey, that is a very good question, but
I think that we have dealt with it before in the Land and Water
Conservation Fund and other funds that could be segregated
either through the direct appropriations process or moving in
the direction that we see, for example, in the Lieberman-Warner
bill, where the money is deposited directly into certain
accounts that would be used only for the purposes that would be
put forward.
But I think that's in the end of the day I think a critical
question to ensure that the money goes to both what Mr.
Greenstein spoke about, which is to cushion the burden. Again,
in our proposal, we take it up to the middle class so that
while they may see net increases in their energy pricing, we
also believe that their energy bills can over the mid term bend
down, as we have seen in California, because they are using
less energy as efficiency is driven through the system. But
ultimately they are going to pay a little bit more.
And we think that those accounts need to be balanced and
that the structure of the cap-and-trade system needs to
essentially fence off that money so that both of those things
can take place: the right kind of investments and protection of
working people in this country.
The Chairman. Thank you, Mr. Podesta. Again, Mr. Zapfel,
thank you for being here. We feel like we are here on day one
at 8:00 A.M. of the new era of auctioning. And I personally
just want to praise the European Union for their courage in
moving in that direction. I think it is the correct direction.
The Chair's time has expired. And I recognize the gentleman
from Wisconsin, Mr. Sensenbrenner.
Mr. Sensenbrenner. Thank you very much, Mr. Chairman.
As I think we all know, there is a great deal of concern
about the direction that our economy is taking. And the fix is
on for a bipartisan economic stimulus package. And the debate
is over not whether to stimulate the economy but how best to do
it. The bottom line is that there will be money pumped into the
economy to try to prevent a recession from occurring or worse.
Now, I am a member of Congress. And everybody up here is a
member of Congress. How does a member of Congress justify
voting to pump money into the economy in an economic stimulus
package and then turn around and support a cap-and-trade
program, which takes money out of the economy and could cost
both consumers and businesses billions of dollars? Let me start
with you, Mr. Podesta, since your advice is always very good to
members of Congress.
Mr. Podesta. Well, Mr. Sensenbrenner, I don't think you
need to have that net impact. In fact, I think, as I said, you
could create the virtuous cycle of taking money out of the
economy that's going towards polluting the atmosphere, creating
a worldwide crisis, causing us long-term national security
problems that will require us to put more money into defense,
take that money out from the pollution side, put it back in
through rebates for low-income people, middle class people, and
investments that will build a long-term economy.
Mr. Sensenbrenner. Okay. First of all, we don't need to get
into the science, but CO2 is not a pollutant.
CO2 is a naturally occurring gas. It's not like
sulfur dioxide or something like that. Every time we exhale, we
exhale CO2. And that is not polluting this room.
Mr. Podesta. I never thought I would say this, but I agree
with the Supreme Court and disagree with you, Mr.
Sensenbrenner.
Mr. Sensenbrenner. Well, the Supreme Court is not right all
the time either.
Mr. Podesta. I agree with that.
Mr. Sensenbrenner. Okay. Yes. The thing is let me continue
on this. In 2000, the CBO did a study on cap-and-trade system
and determined that the cap-and-trade system would be
tremendously regressive.
Now, I think that both you and Mr. Greenstein seemed to
indicate that without tinkering around with the cap-and-trade
system, it would be regressive and without the tinkering
around, we end up giving carbon breaks for the rich using
carbon, instead of tax and debate in the vernacular.
If we go to tinkering around, which people are debating
about, aren't we turning cap-and-trade into a wealth
redistribution system? Mr. Greenstein.
Mr. Greenstein. I would say the answer is no. Under a cap-
and-trade system, you have a decision. You have to make a
decision. You give the permits away for free. You auction them
off. You have to make a decision.
The CBO report indicates if you have a cap-and-trade system
and you give away the permits for free, you have highly
regressive effects. If you have a cap-and-trade system and you
auction off some substantial share to all of the permits, then
whether it's regressive, progressive, or neither of the above,
sort of make this just kind of right in the middle, depends on
what you do with the proceeds from those permits that you
auction off.
But the only way in which it is clearly regressive is if
you either--if you give away a substantial share of the permits
for free, it is clearly going to be regressive because you
clearly won't have enough money to offset the regressivity that
the increases in consumer prices alone would cause.
As long as you auction off a substantial share of the
permits, you have the potential to ensure that the system is
not regressive. You can make it progressive if you want to. You
can simply avoid the regressivity.
Mr. Sensenbrenner. But getting back to what Mayor Bloomberg
told this Committee last November in Seattle, you know, why not
be honest? If we're going to increase energy costs to do this,
why doesn't Congress directly levy a tax, which is the honest
way of doing it? And that way members of Congress have to be
accountable for their votes one way or the other, rather than
simply folding the cost of this into energy bills and then
Congress taking a bow for ``giving money away'' to people that
we decide need to get the money from the auction. Isn't Mayor
Bloomberg right in saying, ``Let's be up front and honest,''
rather than, you know, going through this tremendously
bureaucratic system with all kinds of values of who deserves
the money from the auction and who doesn't?
Mr. Greenstein. There may be a different set of answers on
the panel here. Let me quickly note for starters that your
prior question, ``Is it regressive? Is it not regressive?'' the
same question applies to a carbon tax. It would all depend on
what you did with the proceeds for----
Mr. Sensenbrenner. Yes. I am not for carbon tax either.
[Laughter.]
Mr. Greenstein. Now, as you know, the advantage of a cap-
and-trade is you have a firm cap on emissions. And the
disadvantage is you don't know in advance the impact on the
price. With the carbon tax, you have certainty on the price but
uncertainty on the exact level of emissions reduction that you
get. Many economists, including----
Mr. Sensenbrenner. Well, my time is up. You know, Europe
has had cap-and-trade. And the amount of emissions has gone up.
So my time is up. Thank you. Europe has failed, don't need to
copy them.
The Chairman. The gentleman's time has expired. The Chair
recognizes the gentleman from Oregon, Mr. Blumenauer.
Mr. Blumenauer. One of the benefits of the head in the sand
attitude of this administration is that we have a chance to
look at the experiences in other parts of the world as people
are struggling with how we are going to have a carbon-
constrained economy.
Lots of things are not pollutants in the natural order. I
mean, CO2 in its normal amounts is not salt, but if
we get too much of a good thing, we have real problems. And I
appreciate our witnesses saying that these things are not
mutually exclusive in terms of stimulating the economy by not
taking it out of the economy.
Everything I heard from the witnesses is you are thinking
that this is not somehow something that is going to be shot
into space that is going to be circling the planet. This value
is going to be reinvested somewhere. It is going to be a
windfall in the hands of some. It is going to be targeted
towards redevelopment.
Mr. Podesta, I am not certain that I would use the Land and
Water Conservation Fund as an example that gives me hope. I
think we can learn from that experience as well. But you are
suggesting that it is part of a comprehensive strategy.
As I hinted at in my opening statement, what I am
interested in is your observations about making it part of a
comprehensive strategy that focuses on the two principal
expenditures of American households, both in terms of dollars
and in terms of carbon, housing and transportation.
I would be interested in observations, particularly from
the right wing here on the panel, at least my right wing, in
terms of how you think we can best harness the value that could
be created to help households with infrastructure and energy
conservation and transportation that would reduce their carbon
footprint, stimulate the economy, and protect their economic
security.
Mr. Podesta. Well, let me begin. I think the Congress--and,
again, I commend you--has already taken a giant step by
increasing vehicle efficiency on the transportation side. There
is obviously more investment to do in transportation, in smart
growth, in some of the initiatives that you have championed in
more mass transit spending, et cetera. And I think some of the
proceeds of the auction should go and ought to go to those
kinds of investments.
On the housing side, I think you get it that through,
again, complementary policies through the cap-and-trade, better
building codes, a smart grid, investment in the electric
infrastructure so that you could have real-time metering and
basically begin to do what has happened in California, which
over the past 30 years has kept its per capita energy
consumption flat while the United States energy consumption has
grown by 40 percent while maintaining high levels of growth in
the economy and high levels of wealth in the state.
So I think those complementary policies--and Mr. Bowles is
trying to implement those in Massachusetts--are directly going
at the issues of efficiency, building codes. That is where the
low-hanging fruit is. And we need to pay attention to that, in
addition to creating the right kind of structure over the cap-
and-trade.
Mr. Blumenauer. Mr. Bowles, you referenced the trade-off in
terms of the one percent increase, five percent longer-term
savings in energy. Can you talk about in a little more detail
how you think you can seize on that and make that sort of
difference?
Mr. Bowles. Yes. I mean, just the key point, I think, of
the question is--and I would agree with everything John just
said--that we have a tremendously inefficient and creaky
electricity system in the United States. We need to upgrade
transmission. We need real-time metering. And we need a hell of
a lot more end-use efficiency. It is the lowest-hanging fruit.
So when Congress thinks about what should we be doing to
use these auction proceeds, I think a lot of the whole panel
agrees that auctioning makes sense. Once you got the proceeds,
what do you do? How do you prioritize it? I would use the
criteria of, how can we save the most for consumers, low-income
middle class? I mean, how can we lock in the greatest
environmental benefits?
I think things like appliance standards, which Congress has
moved forward on, vitally important. Building codes are at the
state level. We in Massachusetts are joining the International
Energy Conservation Code, vitally important. So I think you can
do a great deal of that.
On the efficiency side, there is a tremendous amount of
return. We did an economic analysis. In fact, it was done under
the Romney administration--I am happy to share it with the
Committee--that showed the disproportionate returns that would
come from allocating the auction proceeds to energy efficiency.
We could see savings above five percent in commercial,
industrial, and residential parts of the electricity sector. So
that's the lowest-hanging fruit and I think the biggest
opportunity for savings.
The Chairman. The gentleman's time has expired. The
gentleman from Oklahoma, Mr. Sullivan.
Mr. Sullivan. Thank you, Mr. Chairman.
I would like to thank all of the panelists for being here
today. I guess this question is for anybody who wants to answer
it or as many of you that want to answer it. What certainty do
we have that any cap-and-trade program would achieve carbon
target certainty? And also with all of the trading going on,
where do you see the tangible reductions taking place? Anybody?
Mr. Burtraw. On the second part first, our modeling and
modeling by the EIA suggest that over the first couple of
decades of a climate policy, although the electricity sector is
responsible for about 40 percent of the CO2
emissions in the country, it's expected to account for two-
thirds to three-quarters of the emission reductions that would
be achieved. That is why there is so much attention given to
the electricity sector.
The other part of your question is, how can we be sure that
a cap would be obtained and not violated? That has been the
predominant success of capped programs previously. The issue
when there have been emission increases has been when a cap was
initially set at a level that was regrettable and not as tight
as perhaps it could have or should have been.
Mr. Sullivan. Yes, sir?
Mr. Zapfel. Yes. When we designed our carbon market in
Europe, we studied very carefully the experience in the U.S.
The main thing to achieve the emissions reductions is to have a
very credible and robust compliance and enforcement system.
The price of a carbon allowance today in Europe is roughly
20 to 22 euros per ton of CO2. If you fail to
surrender the emission allowance, there is a financial penalty
levied on the company of 100 euros per ton of CO2.
So that creates a very strong incentive to comply with the cap.
And the reductions come not from the trading of the
allowances but come from the carbon price signal that you
create in the economies. So you make it worthwhile to innovate,
to push forward on the technological front and bring the
emissions down.
Mr. Bowles. I would just add--and thank you for the
excellent question--that one of the benefits of auctioning is
you have price discovery and you figure out what it is worth to
have one of these allowances.
If you just give them away, you don't have that
information. So you can adjust your cap at the federal level to
say, ``Are we hitting our target? And do we need to send a
louder price signal into the economy?'' I think it's a real
benefit of the cap and the auction approach that you don't get
necessarily from a carbon tax approach.
Mr. Sullivan. Anyone else? How much time do I have left?
The Chairman. The witnesses can take 2 minutes and 23
seconds.
Mr. Sullivan. Okay. I've got----
The Chairman. You can yield it back or ask a question.
Mr. Sullivan. I've got one more question. I'll ask anybody.
The Chairman. Okay. Please?
Mr. Sullivan. Would you say that the allowances and their
prices should be set by Congress, the administration, or the
market? What if the price of allowance skyrocketed to an
unsustainable level? What would be the backup plan? I guess you
kind of talked about a little of that.
Mr. Bowles. Let me just comment quickly on what we have
done in the Regional Greenhouse Gas system. So there are two
different triggers based on price that allow access to a larger
market for offsets. So there is a large market for carbon
offsets, which are other ways to achieve greenhouse gas
reduction. So it starts out in a New England market, then goes
national, and goes international based on price triggers. So as
price goes up, you have an increasing pool of alternative ways
to reach compliance.
I don't know if that answers your question.
Mr. Sensenbrenner. Would the gentleman from Oklahoma yield?
Mr. Sullivan. Yes, I will yield.
Mr. Sensenbrenner. I was just advised that the Times of
London reported this morning that the United Kingdom under the
new European system that Mr. Zapfel described would end up
having to pay an additional 6 billion pounds, or $12 billion, a
year in order to comply with this.
You know, I am just wondering what the hit on the British
economy would be, which is an economy that is much smaller than
the American economy, with this kind of essentially a
bureaucratic hit. Maybe Mr. Zapfel can answer that.
Mr. Zapfel. I cannot confirm the figures that you put
forward. We have undertaken a substantial evaluation for the EU
overall. We have come to the conclusion that our far-reaching
climate and energy targets, so not just the reductions via the
weighting scheme, overall can be achieved at a fairly
affordable cost of roughly half a percent of our GDP. All of
this needs to be compared to the----
Mr. Sensenbrenner. If the gentleman will yield further, a
$12 billion hit on the economy of the United Kingdom is not
insignificant. And this is what the largest and most respected
newspaper in the United Kingdom analyzed what you have just
announced today. It ain't free.
Mr. Zapfel. As I said, I cannot confirm those figures.
Overall for the European economy overall, the costs are fairly
insignificant. We also have to look at the cost of non-action,
as has been outlined in the Stern report, which can be a lot
more considerable than cost of bringing down our emissions.
Let me also use the occasion because you said no emissions
have been reduced. There is some research. Your statement
refers to the first period, the first trading period, 2005 to
2007, which was for us in Europe a learning period.
We didn't have the benefit, as you have in the U.S., with
air pollutant trading programs, SOx and nitrogen trading
programs. So we started from scratch in Europe. Our emissions
cap was not binding in 2005 to 2007. Also, we do not have our
Kyoto commitments kicking in in 2005 to 2007.
We brought down the emissions cap for the trading scheme in
the second phase already about 10 percent compared to the first
phase, which makes sure that we will see emissions reductions
in the second phase. And, as I stated in my introductory
statement before, this emissions cap will come down by another
11 percent so that we are 21 percent below 2005 emissions by
the year 2020, which guarantees emissions reduction and the
environmental integrity of the European common market.
The Chairman. The gentleman's time has expired. And the
Chair will recognize the gentleman from Washington State, Mr.
Inslee.
Mr. Inslee. Thank you.
I think Mr. Greenstein mentioned that someone argued that
this would be corporate welfare if you don't have an auction
system. I just want to ask about the logic of that.
Going back to this issue of the tragedy of the commons, my
understanding is that people who argue that essentially say,
``Look, there is an asset. The atmosphere only has a limited
carrying capacity for CO2.'' And if we're going to
give rights away to people to pollute that, you are giving away
a scarce asset. It has an economic value.
And, therefore, it would be a sense of welfare of giving
away a public asset for free. It would be like giving away gold
from our national parks or the like. Is that the logic? And
does an auction solve that problem?
Mr. Greenstein. Well, an auction does solve that problem,
but you don't have to go to that logic to reach the corporate
welfare conclusion. And the term isn't mine, although I would
agree with it.
What is interesting is the ``corporate welfare'' term in
this context actually is Greg Mankiw's term. He is a leading
conservative Republican economist at Harvard. He was the Chair
of President George W. Bush's Council of Economic Advisers.
What Mankiw was saying--you don't even have to go to the
commons thing to get it. What Mankiw was saying was, ``Look, if
in a cap-and-trade system you give to energy companies and
other emitters allowances that exceed in value the increased
costs they will incur under the new system, then you're giving
them a form of welfare. It's one thing if you simply offset the
increased costs that will occur, but if you go beyond that and
you just give them these permits, which they can sell for
billions of dollars above and beyond what is needed to offset
their costs, that is corporate welfare.''
That is what CBO is essentially saying as well. CBO's term
is ``windfall profits.'' Mankiw's is ``corporate welfare.'' It
is simply saying you give them more than they need to offset
their costs. You are giving away billions of dollars in gain to
these companies and their shareholders. That is clearly a form
of windfall.
Mr. Inslee. I appreciate that.
Mr. Podesta, I really appreciate you are basically saying
that environmental policy in this case isn't economic policy,
it's a view I share. I want to let you know you are not alone.
I was just looking at a report from McKinsey and Company.
It just came out in December. They concluded that almost 40
percent of abatement could be achieved at negative marginal
costs. In other words, 40 percent of your savings of
CO2 you would actually reduce your costs. There
would actually be a profit margin for the U.S. economy, if you
will. And it talked about the barriers to achieving those 40
percent improvements or principal capital accumulation to do
the work, the rehabbing your house, the acquisition of new
heating and cooling system, more efficient cars, the whole nine
yards.
I just wondered if you could give me any more thoughts
about how we could fence off the revenues from a cap-and-trade
system to be used for the legitimate purposes of that, both
R&D, help to consumers to weatherize their homes, help to them
to obtain new efficient equipment. What is the best way to do
it? I know you gave us some ideas, but what is the best way in
the real life to do that?
Mr. Podesta. Well, as I said--and maybe I could provide
some more information for the record, Mr. Inslee--I think that
creating accounts in which the Congress decides where that
money is going to go, either by allocating permits to it, which
is the approach taken in the new Lieberman-Warner bill, or by
auctioning 100 percent of the permits, which is our preferred
approach, segregating that money and making those important
investments but ensuring that that money is available, either
through tax credits, which, again, we hope to see, I think, the
production tax credits reauthorized in this session of Congress
on renewable energy or through direct investments that could be
operated either through the states or directly, is the best way
that takes, again, a good chunk of that money and apply it to
the very real challenge.
The other place that we would spend some money is on
innovation itself, into boosting the R&D portfolio of the
United States. We have seen enormous returns of investment in
the past, particularly at DARPA and the DOD programs, but if
you think about the information technology revolution driven by
federal investment at the front end, I think you can imagine at
least an energy innovation virtuous cycle driven by investment
at the federal level into these new technologies.
We see a lot of venture capital pouring into that arena
right now, but I think if you had the right kind of investment
portfolio from the federal government, that would really
quicken the change that we need.
Mr. Inslee. Thank you.
The Chairman. The gentleman's time has expired. The Chair
recognizes the gentleman from California, Mr. McNerney.
Mr. McNerney. Thank you, Mr. Chairman.
Mr. Podesta, you laid out in your testimony how the revenue
from a cap-and-trade scheme based on auction might be equitably
distributed. I think that is a terrific approach. Can you recap
your proposal and then comment on how free giveaway of the cap-
and-trade system would distribute revenue?
Mr. Podesta. Well, I think that, you know, again, we have
had your European experience described here this morning. I
think going to the second part of the question, I think if you
have a free giveaway and no watch and no allocation of revenue,
what is likely to happen is rates will go up. The generating
companies will pocket the money. Their shareholders would do
very well. And the people at the other end will do very badly.
So we support the kinds of proposals that Mr. Greenspan--
Mr. Greenstein was--he's still a liberal. [Laughter.]
Mr. Greenstein was talking about taking 45 percent of the
auction share and rebating that to people, either directly
through the tax code or, particularly for low-income people,
where that mechanism doesn't work very well, to do it through
other kinds of income supports, which Bob, of course, is the
expert on, and then taking 45 percent, making these public
investments that I described.
And then we also recognize that and I think the work that
CBO has done suggests that 10 to 15 percent of the revenue
might go to companies and communities particularly hard hit by
increasing the costs of production of energy.
I am thinking here particularly in places hard hit that are
coal-producing and those kinds of arena. The CBO estimates that
that looks like to be about 10 to 15 percent of the revenue. So
we would say put that back into those communities, help them
weather the transition to a new economy.
Mr. Greenstein. Can I add one quick point on that? There
have been questions from several members to John on, how do you
make sure the money actually goes for these purposes? And there
have been discussions of trust funds and the like. I think we
need to separate out the discretionary part of the budget, the
appropriated part, from the other parts, entitlements, taxes,
and so forth.
You would need some kind of trust fund mechanism like that
for the discretionary part. You wouldn't--and I wouldn't
recommend it--for the consumer relief part. If you're giving
part of the consumer relief through an expansion in the earned
income tax credit or a new tax credit, such as Mr. Larson has
in his bill that's based on the first certain amount of the
payroll tax that is paid, we don't have anything in the tax
code where the IRS has to look each year at how much money is
in a particular trust fund and make the tax credit go up and
down every year.
You just do the tax credit. You work with CBO and the Joint
Tax Committee. You have an estimate of how much revenue is
going to come in from the auctioning of the proceeds. You
design the appropriate tax credits that you need. You make sure
the scores all fit, and you go forward.
So trust fund thing would be needed for the discretionary
part. For the tax part and the direct spending part, you need
some direct spending for the low-income people, as John
mentioned. You just write that into the cap-and-trade bill, and
you go forward.
Mr. McNerney. Thank you.
Mr. Bowles, in a state like Massachusetts and also in
California, we're starting to see the effects of RGGI and AB
32. Do you have any specific recommendations in terms of how to
make sure that the federal programs complement those, instead
of what other possibilities there are?
Mr. Bowles. Thank you for the excellent question. One thing
I just would try to underscore for this whole discussion is a
lot of the cost-negative items that Mr. Inslee mentioned from
the McKinsey report, which I commend to the Committee to read,
are really implemented by the states, things like building
codes, energy efficiency, building renewable power plants,
zoning, smart growth. A lot of the easy stuff we need to do is
going to be implemented by the states.
So I really encourage the Committee and the Congress to
look at giving financial incentives with some of those auction
proceeds to say if you, state, are doing all those things plus
rate decoupling, maximizing efficiency, then we're going to
support you.
You need to create some incentive because the states are
the units that regulate the utilities and have such a big role
where a lot of the easy things are going to be done first.
Back to your broader question. Look, I think the Congress
could do us in California and 17 other states a great favor by
making sure EPA got out of the way on the CAL LEV standards.
They are vitally important and goes beyond what the CAFE
increase, which is terrific, does. Obviously we're seeking EPA
implementation of the Mass v. EPA case on the Clean Air Act.
And so I think there are a lot of things that the Bush
administration could do to get out of the way of states like
Massachusetts and California. But thank you for the question.
Mr. McNerney. Thank you. I yield.
The Chairman. The gentleman's time has expired. The Chair
recognizes the gentlelady from South Dakota, Ms. Herseth
Sandlin.
Ms. Herseth Sandlin. Thank you, Mr. Chairman.
I thank all of our witnesses today for helping illuminate
further in acknowledging and helping quantify what costs may be
associated with making this transition but also identifying the
economic opportunities that exist and ensuring that we don't
ignore the fact that there are costs to inaction.
I do want to describe sort of a set of circumstances,
though, as it relates to the part of the country that I
represent, the great plains in rural America, and just get your
thoughts if you could comment on if we do move to a cap-and-
trade and as we discussed the issue of free allocations versus
auctions and then reinvesting and recycling the revenue, just
to get your thoughts on whether or not we phase this in and
give time to adapt, as Mr. Zapfel described, or if we move to
something more 100 percent auction nearly immediately with what
we set up because I have some concerns about that in light of
the circumstances present in, say, South Dakota.
On the positive side of cap-and-trade for South Dakota, I
see greater incentives to develop our wind resources, greater
incentives to develop solar resources throughout our area in
the Southeast and other regions, reinvestment in our
hydroelectric facilities, the investment for carbon capture and
sequestration because we are a very heavily coal-dependent
region of the country.
There are also economic opportunities here for agriculture
as it relates to certain farming and grazing practices as
carbon storage and transitioning to integrating new
technologies for cleaner burning coal in our coal-fired
facilities that service our rural electric cooperatives. But
that is sort of the difficult side here of cap-and-trade that
when you have rural electric cooperatives, you have rural
consumers, you have very poor consumers in certain parts of the
Great Plains that live on Native American reservations when we
are still working to develop the transmission that some of you
talked about, the need to sort of reinvest in the
infrastructure of our transmission capacity for wind, time to
measure just precisely--and the Chicago Climate Exchange is
trying to do this for agriculture. It seems to me that we need
a little time to adapt.
And that's why I think that, at least for now, I sort of
favor more of a phase-in approach, rather than something that
is nearly a 100 percent option immediately within the system.
So if you could comment on that and then, Mr. Zapfel, if
you could also comment on perhaps as you describe, maybe an
initial misjudgment in the European system being that they were
free allocations versus an auction, now you're making that
transition, but I understand that you chose not to help
measure, quantify and measure, for agriculture to participate
in the cap-and-trade system in Europe. And if you could comment
on that?
Mr. Greenstein. Could I make a comment on the phase-in
issue? We should note that under all of the bills, there is a
major phase-in in the sense that the emissions reduction target
is a small amount of emissions reduction initially. And that
phases in very gradually over a number of decades. That is the
major phase-in.
With regard to the permits, one could do something where
you give away a large share of the permits for free initially
and then phase that down. The Lieberman-Warner bill I think
gives away 40 percent or more of the permits for free
initially. And on paper it eventually phases it to zero.
My concern is, the politics being what they are and the
power of the companies being what they are, I believe that if
Lieberman-Warner were enacted, we would never get to zero. The
Congress would come back and change the law well before we got
to zero and that we could end up getting stuck permanently at
too high a level.
That doesn't mean you couldn't do any phasing at all, but I
think the notion of starting with--I don't know--more than 15
or 20 percent of the permits being given away, starting with
any higher percentage and just assuming you're phasing it way
down I think is dangerous.
I think it risks the potential that before the phase-down
occurs, companies get the law changed. And then the various
purposes for which you thought you had money, such as a number
of the things you just mentioned, can't get the resources to be
funded.
Mr. Burtraw. I would like to just add the phase-in in terms
of the changes in electricity prices is going to be immediate.
So the program can be put in place, and you can talk about
allocation in different ways, but you are going to see an
immediate change in product prices.
So there is no phase-in to talk about except in some
portions of the country in the electricity sector, where there
are two alternatives in those regions of the country where
there are regulated prices and a free allocation to firms will
get passed through to consumers and soften the blow initially.
But the problem is that treats the country in a very asymmetric
way because you have roughly half the country under cost-of-
service and half the country with competitive electricity
markets. I think that's inviting a new civil war.
So an approach that has emerged recently that has
surprising support from very disparate companies would be free
allocation to load serving entities. These are the retail
electricity companies that deliver electricity services
directly to customers. And they could be expected to pass
through to customers the value of the emission allowances.
This has a politically attractive appeal that it would keep
electricity prices low and would look like a phase-in as we
enter the new constrained carbon regime. The problem, as other
speakers have already mentioned, is this constitutes
essentially a subsidy to electricity consumption that you don't
get for natural gas or transportation fuels or to industry and
commerce. And so to put this in place, to enshrine this, would
dramatically raise the cost of carbon policy nationally. We
don't want to get our feet stuck in cement there.
So if you want to look for a phase-in, allocation to load,
as is the component of the Lieberman-Warner bill, is a
reasonable way to start, but I would urge you to think about
that as a rapid transition to a full auction and recognize
coming from the Great Plains, you know, this creation of this
$350 billion a year in intangible property right is analogous--
the last time we saw this in American history was the
assignment of property rights in the great American West
because this is going to be on a recurring annual basis. This
is an enormous new property right.
And the question is, to whom will it accrue over the rest
of the century? And that's why the auction is such an important
question.
The Chairman. And the gentlelady's time has expired. But
could you, Mr. Zapfel, deal with this issue of how Europe is
treating the agriculture sector? I think it is important for us
to hear that.
Mr. Zapfel. Yes. It is a pleasure to do so.
Our common market is not as it is discussed here, an
economy program. We see the common market as one of the
essential elements of bringing down our emissions.
We have reviewed now whether we should include credits from
agriculture and forestry, but we remain of the opinion that for
the time being, they should stay outside of our carbon trading
mechanism for mainly two reasons. First of all, we need high-
quality monitoring/reporting of the emissions, which we do not
see we can do yet in those sectors. And, secondly, we also
haven't been able to address the questions of permanence and
leakage yet. Especially in the forest, if you grow forests but
in the same time other places you cut down forest, so the
permanence in the leaking is important.
As Mr. Sensenbrenner, Congressman Sensenbrenner, has
pointed out, the environmental integrity of the common markets
delivering emission reductions is essential, also for the
public. So, for that reason, we have proposed that agriculture
and forestry credits stay out of the system up to 2020.
The Chairman. Great. The gentlelady's time has expired. The
Chair recognizes the gentleman from Connecticut, Mr. Larson.
Mr. Larson. Thank you, Mr. Chairman. And thank you for
putting together this incredible panel. And it is with a
certain amount of trepidation that I go forward with my
questioning knowing the vast amount of work that you and my
good friend and colleague Jay Inslee have done on cap-and-
trade.
My only regret is that you didn't have Polar bears here
today so that we could have more of the press here on such a
weighty issue of discussion of the cap-and-trade system versus
something that I think still needs to be pursued in terms of
dialogue and discussion in terms of a carbon tax.
Now, I say that, and I want to thank Mr. Podesta because I
thought he started off and framed this in the appropriate--
we're in a crisis. And this crisis has to be solved. And it has
to be solved now.
The inconvenient truth is that, as you heard our good
colleague from Wisconsin say, that, well, the most direct and
straightforward transparent way to deal with this, of course,
would be for a carbon tax. But, of course, he wouldn't be for
that. And neither would a lot of colleagues because of the
anathema attached to taxes.
And, of course, we have an aversion to taxes in this
country. For example, we fund a war or, well, we don't fund the
war with taxes. We go into debt with a war and tell the
American people that it is being paid for. So I believe that
the choices are difficult and they become more clear.
And I thank Mr. Greenstein also for I think illuminating
the choices that we face here: one that deals with the
certainty of emissions, the other with the certainty of price.
I come down on the side of the certainty of price.
I am proud to have initiated legislation along with Mr.
Blumenauer and Mr. Miller that pretty much follows what Vice
President Gore--and, my God, if we can get Vice President Gore
and the President of the Chamber of Commerce to agree that this
is the way that we should go in terms of a carbon tax and that
it should have to offset the mitigating factors and the
regressivity of it a direct payroll reduction that corresponds
in it so that you can get down-the-road relief for people that
actually need it, then I think we've got something,
notwithstanding I am interested in this whole auctioning thing.
I have to say, I have to give this the Augie and Ray's
test. Now, most of you don't know what Augie and Ray's is. It's
a little hamburger/hot dog joint in East Hartford, where most
of the people that I know gather. But they're pretty down to
Earth, you know, and they read people pretty well, debate the
Red Sox and the Yankees, yadda yadda yadda.
But here is the deal. You say auctioning to them, and
they're looking at me like I am on Mars. And I've got to be
honest. How would it work? Who administers it? Mr. Greenstein
and even Mr. Sensenbrenner make some sense when they say, isn't
there a more direct, specific, easier way for us to administer
something, albeit it may be a tax? And how is this all going to
transpire?
This is not going to be--and I heard Mr. Greenstein talk
about the Lieberman-Warner bill. Gee, is this a hedge fund
windfall? How would this be administered? How do the proponents
of this see this auction actually taking place? Who controls
it? Who sets up the auction? Who is purchasing? What is going
on here? Mr. Bowles? Thank you.
Mr. Bowles. Let me just comment from our experience in New
England, Connecticut being an important member of the RGGI
process. The easiest thing to do is what we are doing first,
which is power generation only. Covered plants in the RGGI
footprint are 25 megawatts and up.
They bid into the ISO every day into the bid stack to
figure out whether they're going to dispatch power or not. So
they do it every day. They know how to do it. It's not
complicated. All we have to do to set up the auction process is
get one of the auction vendors in the RGGI organization----
Mr. Larson. What is an auction vendor?
Mr. Bowles. Auction vendors are folks who run the
NOX program, people who administer any number of
other----
Mr. Larson. You can see my problem here.
Mr. Bowles. Yes, but----
Mr. Larson. You say, ``auction vendor.'' You say it runs
the NOX program. I would say, ``The NOX
program'' at Augie's. They would be saying, ``Are you talking
about the Sox or the Nox? What are you talking about here?''
Mr. Bowles. I guess all I am suggesting to you is that----
Mr. Larson. You are doing a very good job, by the way. I
didn't mean to interrupt you, but I am trying to make a point
here about how this will all take place.
Continue, please, Mr. Bowles. I'm sorry.
Mr. Bowles. I was just going to say I think the answer to
your voters is to simply say, ``Power generators do this every
day. Nothing much changes except that we're going to make them
pay for this little thing to help protect the environment. And
we're going to find a way to pass that back into more savings
for you'' because, like Massachusetts, Connecticut is also just
passing least cost procurement through legislature. And there
is going to be a bunch of savings available.
So I guess I would say in the power sector, it is quite
simple, and it happens today. I think it is more complicated to
move into other sectors, particularly to explain. But thank you
for the question.
Mr. Larson. Mr. Greenstein.
Mr. Greenstein. I don't think the big complexity is
administering the auction. You know, we had auctions of the
electromagnetic spectrum. The FCC administered that. We could
establish a new federal agency to run the auctions. I do----
Mr. Larson. Would that be a more efficient way to do this?
Mr. Greenstein. I do want to say that, all else being
equal, I would prefer a carbon tax to a cap-and-trade. Having
said that, I don't want to let the perfect be the enemy of the
good. I am not sure you could pass a carbon tax. I think you
would be more likely able to pass a cap-and-trade than a carbon
tax.
And if you have a cap-and-trade with an auction, what that
auction really does is to make the cap-and-trade more like a
carbon tax, not fully, just partly. I mean, if you can pass a
carbon tax, more power to you, but I think part of how we got
here is the sense that that would be hard to pass.
Mr. Larson. Thank you.
The Chairman. The gentleman's time has expired. I think if
we could pass a carbon tax, it probably would be less power to
us subsequently, but I think that's a lesson that we have
learned.
The Chair recognizes the gentleman from New York, Mr. Hall.
Mr. Hall. Thank you, Mr. Chairman.
And thank you to all of the witnesses. I think part of what
needs to happen is as you are educating us, we need to go out
to our constituents and to the country and help to educate them
so that they will understand that the corner store or, you
know, the deli that I go to in my district when people talk
about a carbon tax versus a cap-and-trade, to help them
understand what that is. It's not, as you say, given the
NOX and the SOX and, you know, the
successful change in chlorofluorocarbons that was wrought by a
similar kind of governmental process. This is proven ground.
I also come from a place myself, moral place and a
philosophical place, that says that there is, there should be,
and there exists an implicit environmental bill of rights and
that every one of us, every child born on this planet, has a
right to breathe clean air and to have clean water to drink and
unsoiled soil for their food to be grown in.
And so I object to the idea that, oh, we're interfering
with business. Somehow we got way ahead of ourselves and
polluted the planet and the ecosystem to the point where we're
not only dealing with or trying to deal with climate change,
but we're also suffering from asthma epidemics and emphysema
epidemics in our inner cities, especially among our children.
And last summer across the entire State of New York, there were
a number of days when we had dangerous air quality alerts in
rural parts of the state, where you wouldn't expect that. And
it's because of the pollution moving from other power plants in
the Midwest or wherever across state lines.
And so by trying to deal with greenhouse gas emissions, we
will also be dealing with our dependency on foreign sources of
oil, a balance of trade deficit, creating new jobs in new
industries and new technologies here, making ourselves more
independent, keeping our sovereignty, not having to fight wars
in unstable parts of the world, et cetera, et cetera. So there
are so many. It's a win-win-win thing we're talking about. Cap-
and-trade is only one small aspect of it.
So having made that little bit of a speech, I want to ask
Secretary Bowles. In particular, I am interested in the idea
that efficiency seems to be endorsed unanimously as one of the
most effective and immediate steps we can take to cut
greenhouse gases and our power bills.
But under the current system, it is counterintuitive for
utilities to pitch in since they make their money by selling
power. In your testimony, you reference efforts to decouple
sales from revenue. Could you elaborate on those efforts and
what types of investments we could make with auction revenues
or allowance incentives that we could use to bridge the gap?
Mr. Bowles. Thank you for the excellent question. And thank
you for your statement, very well-said, at the beginning. I
would agree.
New York State just did a rate decoupling, as I am sure you
know. The public utility commissions of the states regulate
utilities. They have got a history of rate-making that is, by
and large, tied to volumetric sales of power, whether or not
those utilities own the power generation or not.
So in the half of the country, as Dallas mentioned, that
has a deregulated power system, New York and Massachusetts and
all of New England, our utilities don't own the power
generators. They own just the wires. So they bring it to your
house. And the power generators own power generation.
So we have inherited a system in the past where it made
sense to measure rate recovery for the utilities based on the
volumetric sales. It seems like a simple thing. Instead, the
criteria should be on performance and reliability, outages,
things like that, least cost service, so making sure that the
utilities are bringing good power and reliable power to your
doorstep but not incenting them or discouraging them on the
volume of power that they sell.
And that is really the crux of rate decoupling, is severing
that link, that manifest economic incentive that says to the
utilities, ``Maximize power sales in order to maximize revenue
for your shareholders.'' Instead, we need the utilities to be
indifferent or, in fact, incented on a performance basis to be
partners in energy conservation.
I think the utilities--New York has got a terrific model
with NYSERDA. In different states, the utilities, such as
Massachusetts, actually run the efficiency programs. And that
is a good thing because they are very close to their partners,
but they need the type of oversight to make sure their spending
is done well.
So I think a federal incentive in terms of conditioning
some of the auction proceeds back to states who have done
decoupling and have done least cost procurement, things of that
nature, really makes a ton of sense for getting that low-
hanging fruit.
Thank you for the question.
Mr. Podesta. Very briefly, the same applies to the natural
gas market as well.
Mr. Hall. Thank you.
The next question I have is, how directly do you think we
should try to--I guess I am done.
The Chairman. Ask one more question.
Mr. Hall. Okay. I will ask my last question. What would you
think of, Mr. Podesta, for starters, for instance, a proposal
to target auction revenue by using the sales of credits for
power plants to do something like helping car companies to put
electric vehicles into mass production or to build alternative
fuel infrastructure?
Mr. Podesta. Well, I think that, again, that is exactly the
kind of incentives that you want to encourage. That not only
helps, to go back to your opening statement, on the overall
CO2 problem and the global warming problem, but I
think if we could move the transportation fleet more onto the
electric grid through plug-in hybrids and other types of new
generational vehicles, you have also dealt with the oil
security problem, which is another pressing problem the United
States faces, both from a balance of trade perspective but,
most importantly, I think, from the sources of oil and where
that money is actually flowing to in the United States.
So I think that is important. And I think that some of
those proceeds and we would recommend that some of those
proceeds go to the U.S. auto companies in the form of tax
rebates to re-tool to get onto this new generation of vehicles
that, either through plug-in hybrids or, as General Motors is
moving towards, a slightly different platform, the Chevy Volt.
Mr. Hall. Thank you very much. I yield back. Thank you.
The Chairman. The gentleman's time has expired. The Chair
recognizes the gentleman from Missouri, Mr. Cleaver. And I
think there is going to be a roll call coming up in just a very
little bit, up on the House floor. But if each member for a
second round would like to have two minutes to ask if they have
one compelling question, we can recognize them for a second
round. On the first round, to complete the first round, we will
recognize the gentleman from Missouri, Mr. Cleaver.
Mr. Cleaver. Thank you, Mr. Chairman. I apologize I was
late. I've had another committee hearing.
And I only have two questions. And I guess I should preface
it by saying I support either cap-and-trade or carbon tax,
either way. But I am going to take a little negative slant
here. And I hope this hasn't already surfaced.
When I was mayor of Kansas City, we had a municipal
ordinance that would allow us to fine slum landlords $2,000
each time their property was cited as violating the city code.
And we discovered after about five years that there were some
landlords who actually built the fines into the cost of doing
business because, you know, you are only going to get caught
every month or every other month. And so they just built it in.
What happens if there are power plants or entities
participating in the program from just placing the cost of
polluting into what they spend to do business? And it's not a
matter of stopping. It's just a matter of I'm going to pay the
cost.
Mr. Bowles. I guess I just would say that I think that
really summarizes the argument for auctioning, instead of
allowances, because the power generators will charge their
customers for the economic value of that permit because they
can sell it to someone else or they can expend it when they run
or they can save it for the future.
So I would say that concern is best addressed through
having an auction, whether it is a clear transparent
understanding of what the value is. And then you also have the
revenue that you can go back to help out low-income energy
consumers to get control of their own energy bill through,
things like energy efficiency.
But others may have answers as well.
Mr. Greenstein. I would add that the whole purpose of the
cap-and-trade system is really to raise prices in a sense for
fossil fuel energy and create the incentive for private actors
in the market, companies and consumers, to switch to cleaner,
more efficient forms of fuel.
In fact, I think--so to the degree that a company keeps
prices higher putting all of this in, then whether it's wind
and solar or all sorts of other forms of alternative energy
that may not be that economically attractive now, they become
very economically attractive because they become cheaper.
One other quick point on that is when you are thinking
about how to use the proceeds. Certain things that can't happen
now without government subsidies in the energy sector no longer
need government subsidies under a cap-and-trade because the
price point has changed.
And, in fact, listening to the discussion this morning, Mr.
Chairman, I started to become a little concerned that I would
offer a caution. When you design the legislation, make sure you
don't squander some of the proceeds on efficiency incentives
that the government isn't needed anymore, that the market
itself will drive as a result of the changes in prices that the
cap-and-trade will come about.
I'm not saying you don't need any energy efficiency
subsidies, but I think you may need less than you think you
would need if the cap-and-trade works the way it is supposed
to.
Mr. Cleaver. Thank you. Actually, you answered my second
question, Mr. Greenstein. Thank you.
The Chairman. And Mr. Burtraw, do you want to respond to
Mr. Cleaver?
Mr. Burtraw. Yes, sir. I just wanted to point out that for
fossil fuel consumption, the electricity sector, there are in
place continuous emission monitors that record on a 15-minute
basis the emissions from the power plant. So this is
electronically reported. And also major fuel users report to
the EIA their fuel use. It's fairly transparent to calculate
the carbon content of fuels that are being used.
So that is one fortunate aspect of this problem that with a
lesson we have learned from that sulfur dioxide trading
program. With certain penalties in place, you can expect to
achieve virtually 100 percent compliance under this program.
The Chairman. The gentleman's time has expired. Now we will
go to a lightning round here, give members if they want two
minutes to ask any follow-up questions they would like to make.
The Chair recognizes the gentleman from Washington State.
Mr. Inslee. Thank you.
We went to Europe last summer and looked at the cap-and-
trade experience. And it was described to me as a great
scandal, the situation where there was an allocation without
auction. And then there are windfall profits in the billions of
dollars taken by utilities in Europe.
And consumers in Europe were outraged by this when they
found out they had been gamed by this system that this asset
had been given to the utilities and then they turned around and
put it in the rate base and charged the consumers the implicit
value of not selling the asset. And they said not selling the
asset was a cost to the utility which then they turned around
and sent right to the consumers.
So what I was hearing from Europe is that give-away system
turned out to be a scandalous affair and I presume is one of
the things that is driving the move now towards more of an
auction.
I just wonder, Mr. Zapfel, if you could comment on that.
Was I reading that situation correctly? And then I want to ask
Mr. Burtraw to what extent could that be replicated in the
United States?
Mr. Zapfel. Thank you, Congressman.
I would not go as far as considering it as a scandal, but I
think what we have learned in practice is that the same thing
happens that, for example, Mr. Burtraw would show, even if you
give away the allowances for free in some sectors, it is very
easy to pass them on in the prices.
So this conceptual effect has very much proven it would be
so also in practice. And this is, as I have stated already in
my introductory statement, one of the main multi-weighting
factors that we move over to auctioning now.
So I would not see this as--we had initially this
perception in Europe that our mechanism was failing because
this was happening, but now as we go ahead on this, more and
more people look into this and research this. This is
demonstrating that the carbon market is, in effect,
functioning, that the price signal is created, and the price
signal works itself through the economy. And the efficiency
advantages of the common market can be realized in practice.
What we talk about with allocating allowances is a
distributional effect. And where in society do you want to put
the distributional effect? Do you want to give it to the
taxpayer in the first place or do you want to give it to the
shareholders of the power company?
Mr. Burtraw. Sir, to a first order, we would estimate that
the change in product prices will not depend on how that
allocation occurs. So if you are giving away this valuable
asset to firms, that is a transfer that is a form of
compensation. There is a second form of compensation they
receive, which is the changes in revenues, the changes in
product prices. And this opens the possibility for potentially
dramatic overcompensation or what people have called windfall
profits.
So the same thing I would expect to occur in the U.S., as
was observed in the EU if there was free allocation of emission
allowances to generators or to emitters throughout the economy
generally.
Mr. Inslee. Thank you.
The Chairman. The gentleman's time has expired. Mr.
Podesta, you would like to respond.
Mr. Podesta. Actually, I would just like to disagree with
my friend Mr. Greenstein for a second. I think the chances of
the Congress overinvesting in public goods is small. And I
think that the amount of money that we're talking about to
incentivize states to decouple rates to do home weatherization,
to add the kind of efficiency boost in the early days of this I
think would be money well-spent and, again, creates a virtuous
cycle of efficiency, productivity in the economy, and job
creation.
And so I wouldn't worry just about the price. I think sort
of applying some of that revenue against that efficiency
portfolio would be a very good thing for you to do as you
design this cap-and-trade.
The Chairman. Mr. Greenstein, 20-second rebuttal?
Mr. Greenstein. I am all for weatherization. I think when
you write this bill, you will be besieged by various industries
and interests, promoting all sorts of subsidies and tax credits
that are billed as green and pro efficiency. And a substantial
share of them will not be necessary. The market signal will do
it. And if you give into them, you won't have enough money for
other key things, like consumer needs.
The Chairman. The gentleman's time has expired. The
gentleman from California, Mr. McNerney.
Mr. McNerney. Thank you.
The Chairman. Two minutes.
Mr. McNerney. One of the auctioning schemes I am aware of
starts with the first year of the auction giving out permits
equal to the amount of carbon produced in the prior year and
then reducing that level by a percent or two per year until
over a 30-year period you have reached your long-term goals.
Now, that would allow businesses to plan ahead for
auctioning price increases and so on. Is there another scheme
that makes more sense than that or is that basically what you
are advocating, whoever would care? Mr. Greenstein.
Mr. Greenstein. I am sorry. Clearly everyone is talking
about phasing in the tightening the cap over time. I think that
is the key. No one is talking about going to, say, a 50 percent
emissions reduction in 10 or 15 years. The key I think is to
have that emissions cap gradually tighten over an extended
period of time, have people know where that cap is going over
an extended period of time. And that is the key thing I think
for the planning of the future.
Mr. Podesta. The old McCain-Lieberman bill stair-stepped
down. It had more dramatic reductions at a stair-step level.
But I think that a phased reduction is a more sensible way. It
is easier to plan. And it permits you to hit your target and
again get the pollution savings that are necessary.
But I think the most important issue at the end of the day
is what you are trying to get to. And I would say Europe has
adopted the target of hitting a two degrees Centigrade rise in
temperature above pre-industrial level by 2050. That is I think
an appropriate target. And sort of creating the curve to get
you to that point in 2050 with early action between now and
2020 and 2025 is really critical.
Mr. Bowles. Could I just comment on that, Mr. Chairman,
just to say I draw a distinction between a phase-in of a cap
versus a phase-in of auction versus allowance. I think a
weakness to my mind of some of the Senate bills is the phasing
in of auctioning. I mean, an auction process is manifestly
superior in terms of returning benefits to the ratepayer and
consumer. I think phasing in the cap, of course, makes sense.
Mr. Greenstein. I fully agree with that.
The Chairman. The gentleman's time has expired. The Chair
recognizes the gentlelady from South Dakota.
Ms. Herseth Sandlin. Okay. Let me pursue that a little bit
further because I know you think and, to a degree, I agree with
you the auction is the way to level the playing field. But
there are certain regions of the country that start out at a
disadvantage. And I am very concerned.
Mr. Podesta, if you could respond to this? Because, as you
laid out how you see the percentages of how you allocate the
revenue, I don't see sufficient revenue there to dramatically
improve our transmission capacities.
So when I am in South Dakota and we are dealing with the
Western area power administration of the West and the Midwest
independent system operator to the East and we have got all
this wind that we can't get out that would benefit the
electricity providers and other businesses in South Dakota, I
mean, I would be more willing to identify it as a weakness in
terms of the phase-in of the auction if there were some
combination of the investment in the infrastructure with a cap-
and-trade. And so if you could comment on that?
Mr. Podesta. Well, I think, again, there are two different
issues involved with that. We apply ten percent to try to
soften the blow, if you will, on communities that are
particularly affected. You know, you could argue it's 15
percent, but it's probably not much more than that.
There is a second question, which is, does giving away the
auction permits actually result in the investment or does
auctioning the permits and then having the money available to
make those investments, which is the better system?
I think the people on the panel all think that a more
transparent system is auction the permits and then use the
proceeds of the permits to upgrade the grid, make the R&D
investments, et cetera.
Ms. Herseth Sandlin. And I don't think I disagree with you
on that. My concern is the 100 percent auction at the outset. I
mean, I am looking at it as building in some time. And maybe
the weakness of the Senate bills is they build in too much
time, they start too low.
Mr. Podesta. Right.
Ms. Herseth Sandlin. But you can understand my concern
about----
Mr. Podesta. I think that if you are going to move in that
direction, though, you also may want to condition what those
permits are being granted for with respect to the reinvestment,
for example, in the grid upgrade so that they are not just
being passed back as a sort of benny, as was the European
experience that Mr. Inslee has described in a larger sense to
the shareholders of those companies.
Ms. Herseth Sandlin. Okay.
The Chairman. The gentlelady's time has expired. The
gentleman from Missouri, Mr. Cleaver.
Mr. Cleaver. Thank you, Mr. Chairman.
For the last two years, I guess the people who are in the
Northeast area of our country have been very, very pleased
because there has been a ten percent reduction in greenhouse
gas emissions but not because of any intentionality on the part
of power plants. The weather has been mild. And as a result of
the weather being mild and there is a ten percent decrease in
emissions, isn't that dangerous when we are talking about
trying to create incentives for people to reduce their
emissions?
I mean, what if the cap is above? It may be too high above
the emissions. Doesn't that just have a negative impact?
Mr. Bowles. I would just comment----
Mr. Cleaver. And how do we handle it?
Mr. Bowles [continuing]. To say that that is an argument
for multi-year compliance periods because you do have weather
events and you have got increases and decreases in energy use
during that.
So I would say the Regional Greenhouse Gas Initiative is a
three-year compliance period. We also in our trading scheme
have unlimited banking going forward. So if you buy a permit,
you can use it in the out years. And so I think that is best
dealt with through market rules.
But I agree you will have fluctuation based on weather
events.
Mr. Cleaver. Mr. Burtraw.
Mr. Burtraw. Yes. I would like to add I really echo your
concern. I think as we look across the performance of emissions
trading systems previously, although there is a lot of concern
about price spikes and cost containment, empirically the most
important phenomena has been price collapses or prices have
turned out to be much less than we thought because, well, it
turns out economic incentives work and a lot of innovation
comes to the market.
So one of the ways to protect against that is a reserve
price in an auction, which makes--and that is a standard
feature of good modern auction design. You are going to find it
on eBay the next time you try to go auction something there.
And so it puts in a floor on the value of emission allowances
within an auction and thereby provides sustainable expectations
for innovators and new investors going forward.
Mr. Cleaver. Do all of you agree with that? [No response.]
Then I guess I must agree as well [Laughter.]
Mr. Podesta. Particularly if eBay does it.
The Chairman. All right. The gentleman's time has expired.
I am going to ask a final question here, and I am then going to
ask each one of you in reverse order of the original statements
to each give us your one-minute summary of what you want the
Select Committee on Global Warming to know as we are going
through this year and trying to make recommendations on how to
construct a program to deal with this issue. We are also
waiting for Mr. Blumenauer to return. And hopefully he can make
it here before the end of that process.
Mr. Burtraw, let me ask you this question. When we did the
acid rain bill back in 1990, all of the allowances were given
away. And everyone says that worked great. What is different
with this problem, the CO2 problem? Why is that
lesson from 1990 not applicable to this issue of dealing with
greenhouse gases because that is a very commonly asked
question? And all of you on this panel seem to disagree with
that approach of giving away the allowances. And the acid rain
process did work. So what is the difference?
Mr. Burtraw. There are two things that are different.
Number one, that was only targeting the electricity sector. And
in 1990, 100 percent of the electricity sector was under cost
of service regulation. So if the regulators were awake and
doing their job, they were going to make sure that companies
could not charge consumers for something they had received for
free.
So consumers were well-protected under traditional cost of
service regulation. Today we have had half the country in the
electricity sector move away from that for their very own good
reasons.
The second is that, again, that was only in the electricity
sector. And today we're looking at a program that is going to
affect the entire economy. So with that type of free allocation
in the electricity sector, it made sense in that it suppressed
electricity, any change in electricity, prices any more than
needed to happen there, but when we go economy-wide, that type
of an approach for those regions of the country in the
electricity sector that are still regulated will constitute a
subsidy to electricity consumption. And that is going to cause
a disequilibrium in marginal costs across the economy and raise
the costs of carbon policy significantly.
Our modeling, for example, suggests that it could push up
national allowance prices by 15 percent. That means all of the
other sectors of the economy are going to have to work that
much harder.
The Chairman. Great. Thank you.
I received a letter from the Southern Alliance for Clean
Energy regarding the subject of today's hearing. And I would
like to ask unanimous consent that it be included in the
record.
Without objection, so ordered.
Let me turn now to our concluding one-minute statements.
And we will begin with you, Mr. Greenstein.
Mr. Greenstein. I think the case has been well-made at this
hearing for auctioning the permits and also for the need, both
substantively and politically, for consumer relief. So I won't
use up much of my one minute on that.
However, there is one issue I mentioned in my testimony we
never came back to. And it's kind of I think maybe not on the
radar screen. So let me spend 30 seconds on that.
We really do need to pay attention to the fact that the
price point, the increase in prices, which will create
incentives for various efficiencies, will also raise the price
of everything from heating school buildings, education at the
state and local level, to a variety of federal programs from
the Pentagon's cost to veterans' cost of living increases.
And you need to make sure that there is some room within
the allowances to deal with those costs that the public sector
is going to incur. You don't want an impact of cap-and-trade to
be cuts in local education budgets or cuts in veterans'
programs. I know it is not as politically attractive as this
incentive and that incentive, but I think it is a key part of
what needs to be taken into account or we end up having cuts in
basic services, increases in other taxes, or big increases in
deficits down the road as a result of the impact of higher
energy prices on the important things that local, state, and
the federal governments do.
The Chairman. Thank you, Mr. Greenstein.
Mr. Podesta.
Mr. Podesta. Again very briefly, the cost of doing nothing
is a lot more than the cost of doing something. And I think if
we get this right and I think cap-and-trade is at the heart of
a new energy policy, it can really power the economy forward.
It is not as sexy as sort of complex, undecipherable
financial instruments, but maybe if we put the minds of the
people who currently are on Wall Street trying to do that
towards innovation in this sector, it will create jobs, it will
create efficiency, it will create productivity, and it will be
a great boon to places like South Dakota as well as the rest of
the country.
The Chairman. Thank you, Mr. Podesta.
Mr. Bowles.
Mr. Bowles. Mr. Chairman, I would ask your permission to
include a longer appendix as part of my testimony I've prepared
for the Committee.
The Chairman. Without objection, it will be included.
[The appendix offered by Mr. Bowles follows on page 129.]
Mr. Bowles. I would echo John's point about the clean
energy economic opportunity. The United States, the great
inventor of technology that is exported to the world in so many
areas, has been lagging behind. Governor Patrick has made this
a central part of his economic development strategy. And I
think we need to start looking at it in the opportunity context
more.
Second, I just would tell the Committee we have also built
in greenhouse gases to our state environmental review process.
And we have seen new proposals for green buildings. We saw the
Harvard Allston campus agree to the first legally enforceable
cap on greenhouse gas emissions from a real estate development
project. That is another area that we can get into that I think
is important.
And, third, I would just say send clear signals and level
the playing field. Don't penalize early action states as you
move forward. And measures like auctions really set an even
playing field. And I encourage you to move forward as quickly
as you can.
Thank you, Mr. Chairman.
The Chairman. Thank you, Mr. Bowles.
Mr. Zapfel, again a special thanks to you for being here
today.
Mr. Zapfel. Thank you, Mr. Chairman.
I would want to go back to the broader context in my
closing statement of beyond the auctioning. I think we have
seen, both in the United States and in Europe, we see, that
environmental markets can deliver sulfur and nitrogen oxide
markets here. The common market starts to deliver in Europe.
So there has been I think some of the debate you were
having here now should you go for a cap-and-trade system. We
had the same debate in Europe. But now three or four years
after introducing our system, it has become a feature of daily
business in Europe. And we got used to it. We got used to
having a common price of some $30 a ton of CO2. And
nobody has ever revised down our macroeconomic cost
projections. So the economy can continue to steam ahead with a
common price.
EU is ahead in the common market while you are ahead in the
effluent pollutant markets. We have learned a lot from you on
the effluent pollutant experience. We stand ready to continue
to transfer this dialogue, transfer this experience to where we
are ahead on the common market.
We are not ahead everywhere. On auctioning I think we are a
bit of a latecomer. And we can collaborate even more. So I
think together, the U.S. and Europe, we can make headway in
building a global common market and solving the big challenge
we have ahead of us, bringing the emissions, greenhouse gas
emissions, down significantly over the decades to come.
Thank you for this opportunity to testify.
The Chairman. Thank you, Mr. Zapfel.
And you are the cleanup, Mr. Burtraw.
Mr. Burtraw. Yes. Thank you.
Well, first of all, I would just like to leave the
impression that auction design is actually fairly simple.
Emission allowance is a very simple commodity compared to the
spectrum auction or the daily electricity auctions. And this is
not the time to go into it in great detail, but, really, it is
dramatically simple.
So do not be intimidated by the notion that designing and
putting in place an auction for emission allowance is going to
be a difficult thing to accomplish. It is probably one of the
more simple auctions that could be designed. And it is not at
all uncommon for the government to now charge for things that
previously it gave away for free to put such a mechanism as
that in place.
And, secondly, I would just like to leave the question in
your mind with you of where does this value come from in the
first place. It really comes from citizens in the U.S. in terms
of their value isn't being taken out of the economy or sent
away and burned but, rather, it's changing the way that
property rights are assigned throughout the economy.
An approach that I think is a candidate approach with all
others, I mean, an economist prefers an auction because of the
opportunity to use auction revenue to promote economic growth
and other program goals, but also another approach that could
be a candidate would be to use an FDR type of an approach and
see that these emission allowances belong to citizens and they
could be directly allocated to citizens. That would be the most
way to achieve the most progressive income distribution as a
consequence.
The Chairman. Thank you, Mr. Burtraw, very much. And I
agree with you on that spectrum auction point in 1993 working
with the Clinton administration. We moved over 200 megahertz of
spectrum. We created a third, fourth, fifth, and sixth cell
phone license in every community. And it revolutionized the
wireless marketplace moving from analog to digital.
Up until then we had given away the spectrum, but by
changing the model, we actually created a more entrepreneurial
environment and derived more revenues for the federal
government. I don't think it is as complex. I do agree with you
on that as well.
Before closing, I would like to thank the outstanding
panel. I think we are unanimous in that that this was a first
class panel and an excellent way to kick off this important
debate this year. I think we have learned that robust auctions
and well-targeted revenue recycling must be a core element of a
cap-and-trade system. This is the only way to ensure that we
can meet the goal of saving the planet while keeping the
playing field level, ensuring consumers are protecting, and
spurring innovation and economic growth as we move to a low-
carbon economy. I think it is also clear that we need to look
closely at mechanisms for oversight of auctions and the carbon
market to ensure simplicity, transparency, and fairness.
With that, this hearing on carbon auctions is adjourned.
Going once, going twice, sold.
[Whereupon, at 11:58 a.m., the foregoing matter was
concluded.]
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