[House Hearing, 106 Congress]
[From the U.S. Government Printing Office]




 
    CREDIT FOR EARLY ACTION: WIN-WIN OR KYOTO THROUGH THE FRONT DOOR

=======================================================================

                                HEARING

                               before the

               SUBCOMMITTEE ON NATIONAL ECONOMIC GROWTH,
               NATURAL RESOURCES, AND REGULATORY AFFAIRS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 15, 1999

                               __________

                           Serial No. 106-37

                               __________

       Printed for the use of the Committee on Government Reform


     Available via the World Wide Web: http://www.house.gov/reform

                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
60-254 CC                   WASHINGTON : 2000




                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia            CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South     DENNIS J. KUCINICH, Ohio
    Carolina                         ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
HELEN CHENOWETH, Idaho                   (Independent)
DAVID VITTER, Louisiana


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
           David A. Kass, Deputy Counsel and Parliamentarian
                      Carla J. Martin, Chief Clerk
                 Phil Schiliro, Minority Staff Director
                                 ------                                

   Subcommittee on National Economic Growth, Natural Resources, and 
                           Regulatory Affairs

                  DAVID M. McINTOSH, Indiana, Chairman
PAUL RYAN, Wisconsin                 DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia                    TOM LANTOS, California
LEE TERRY, Nebraska                  PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon                  BERNARD SANDERS, Vermont
HELEN CHENOWETH, Idaho               HAROLD E. FORD, Jr., Tennessee
DAVID VITTER, Louisiana

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
                    Marlo Lewis, Jr., Staff Director
               Barbara Kahlow, Professional Staff Member
                 Joel Bucher, Professional Staff Member
                       Gabriel Neil Rubin, Clerk
                     David Sadkin, Minority Counsel





                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on July 15, 1999....................................     1
Statement of:
    Hakes, Jay, administrator, Energy Information Administration.    39
    Kemp, Jack, distinguished fellow, the Competitive Enterprise 
      Institute..................................................    11
    Ridenour, David, vice president, National Center for Public 
      Policy Research; Fred Krupp, executive director, 
      Environmental Defense Fund; Fredrick Palmer, general 
      manager and chief executive officer, Western Fuels 
      Association; and Kevin Fay, executive director, 
      International Climate Change Partnership...................    58
Letters, statements, etc., submitted for the record by:
    Fay, Kevin, executive director, International Climate Change 
      Partnership:
        Letter dated August 16, 1999.............................    99
        Prepared statement of....................................    89
    Hakes, Jay, administrator, Energy Information Administration:
        Information concerning methane...........................    58
        Prepared statement of....................................    42
    Kemp, Jack, distinguished fellow, the Competitive Enterprise 
      Institute, prepared statement of...........................    16
    Krupp, Fred, executive director, Environmental Defense Fund, 
      prepared statement of......................................    71
    Kucinich, Hon. Dennis J., a Representative in Congress from 
      the State of Ohio:
        Article dated December 23, 1997..........................    38
        Prepared statement of....................................     4
    McIntosh, Hon. David M., a Representative in Congress from 
      the State of Indiana, prepared statement of................     8
    Palmer, Fredrick, general manager and chief executive 
      officer, Western Fuels Association, prepared statement of..    82
    Ridenour, David, vice president, National Center for Public 
      Policy Research:
        National Policy Analysis.................................    60
        Prepared statement of....................................    64


    CREDIT FOR EARLY ACTION: WIN-WIN OR KYOTO THROUGH THE FRONT DOOR

                              ----------                              


                        THURSDAY, JULY 15, 1999

                  House of Representatives,
 Subcommittee on National Economic Growth, Natural 
                 Resources, and Regulatory Affairs,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 3:15 p.m., in 
room 2154, Rayburn House Office Building, Hon. David M. 
McIntosh (chairman of the subcommittee) presiding.
    Present: Representatives McIntosh, Ryan, Terry and 
Kucinich.
    Staff present: Marlo Lewis, Jr., staff director; Barbara 
Kahlow and Joel Bucher, professional staff members; Luke 
Messer, counsel; Gabriel Neil Rubin, clerk; David Sadkin, 
minority counsel; and Earley Green, minority staff assistant.
    Mr. Ryan [presiding]. The hearing will come to order. David 
McIntosh, the chairman of the hearing, is running late. We are 
going to try and buy some time and wait for him, but we had 
some votes a few minutes ago that had thrown everybody's 
schedules off, so I apologize, Mr. Kemp.
    I am Paul Ryan, the vice chairman of the subcommittee. I 
have got to tell you this is a distinct honor to be sitting 
here in front of my former employer talking about this.
    Mr. Kemp. It's my honor.
    Mr. Ryan. No, it's really mine, Jack.
    First we will go to the ranking member, Mr. Kucinich, for 
an opening statement.
    Mr. Kucinich. Thank you, Mr. Ryan. I want to thank Mr. 
McIntosh publicly. I will thank him again when he comes for 
holding this hearing today.
    I support the concept of early action credits. In theory, 
this type of proposal would encourage businesses to reduce 
greenhouse gas emissions by rewarding them with credits that 
can be used to make future required reductions or sold on the 
market to another business that is not able to make reductions 
as cost-effectively or efficiently. Early action would 
encourage industry to reduce emissions of greenhouse gases now 
as opposed to 10 or 15 years from now when the effects become 
irreversible.
    What makes an early action credit even more attractive is 
that some of the largest companies in the world, those with the 
most at stake, are actively engaging in the process. A credit 
program protects businesses against the uncertainty of future 
emission reduction requirements and gives those businesses 
incentives to act in a way that benefits the economy and the 
environment. Later today we will hear more about this from 
Kevin Fay, the executive director of the International Climate 
Change Partnership, which represents some of the largest 
manufacturers, refineries and chemical companies in the world.
    Today's hearing could not come at a better time. On June 
29, the New York Times ran an article with the headline, 
``Human Imprint on Climate Change Grows Clearer.'' The 
following week, much of the company was in the grips of a 
deadly heat wave which took over 70 lives. It was just a few 
short years ago that another record heat wave in the Midwest 
killed more than 80 people in Chicago alone.
    Climate change, however, is not just about heat waves. 
Scientists have linked the increase in greenhouse gases to the 
increased frequency and intensity of extreme weather patterns 
including droughts, floods and hurricanes. Unfortunately, it 
seems as though headlines about the damage, destruction, and 
human suffering caused by those events are becoming more and 
more common. Last summer's drought in Texas and the Southwest 
combined with the severe drought 2 years earlier was described 
by public officials as ``the costliest and most devastating the 
region has seen since the Dust Bowl years.'' Researchers at 
Texas A&M determined that the 1998 drought cost the State's 
farmers and ranchers $2.4 billion in potential income, while 
the farm-dependent businesses suffered an additional loss of $8 
billion. In Florida last year, fires and drought caused an 
estimated $150 million in damage to agriculture. I am sure you 
all know that the list of weather-related damage goes on and 
on.
    We have before us an opportunity to forge an alliance among 
environmentalist and industry groups, Republicans and 
Democrats, and others who support using market mechanisms to 
reduce greenhouse gas emissions in the most cost-effective and 
efficient manner.
    I support the basis of the Kyoto Protocol. I also believe 
that reducing greenhouse gas emission and cleaning the air we 
breathe is an important domestic policy in its own right. Over 
the past 30 years this Nation has taken great strides toward a 
cleaner and healthier environment. We passed the Clean Air Act, 
the Clean Water Act, the Safe Drinking Water Act and a number 
of other laws because it was good for the American people, not 
just because we signed an international treaty. In fact, just 
yesterday Senator Jeffords introduced a bipartisan utility 
restructuring bill that sets caps on carbon dioxide emissions. 
A credit program could be used to encourage early reductions to 
meet that bill's goals.
    The U.S. economy is in the midst of the longest peacetime 
expansion in its history. We have every reason to believe that 
we can reduce greenhouse gas emissions and keep the economy 
strong. According to a recent study by the American Council for 
an Energy-Efficient Economy, the United States was able to 
stabilize its energy-related carbon emissions in 1998 while 
continuing robust economic growth. I want to restate that. 
According to a recent study by the American Council for an 
Energy-Efficient Economy, the United States was able to 
stabilize its energy-related carbon emissions in 1998 while 
continuing robust economic growth. Furthermore, total energy 
used was down last year, even though gasoline and fuel prices 
were falling for much of the year. In other words, it is 
possible to control carbon emissions without harming the 
economy or drastically increasing fuel prices.
    We have the unique occasion of being able to address this 
issue in a proactive manner as opposed to reacting to the 
disastrous consequences we may find in the future. Mr. 
Chairman, we have a long way to go. There are many different 
concerns that need to be addressed before we can enact an early 
action program. Our distinguished panelists offer many 
different perspectives and will raise a number of concerns. I 
am looking forward to hearing from the witnesses this 
afternoon. I thank the Chair for the opportunity. I certainly 
want to join in welcoming Mr. Kemp, who I have a great 
admiration for, for all of his public-spirited works and for 
his vision in working with a whole range of issues that affect 
this country. So, Mr. Kemp, welcome.
    Mr. Kemp. Thank you.
    Mr. Ryan. Thank you, Mr. Kucinich.
    [The prepared statement of Hon. Dennis J. Kucinich 
follows:]

[GRAPHIC] [TIFF OMITTED]60254.001

[GRAPHIC] [TIFF OMITTED]60254.002

    Mr. Ryan. Let me open with a brief statement that this is 
an issue that goes far beyond environmentalism. This is an 
issue that goes far beyond cleaning up our air standards. This 
is an issue that goes well into the political-philosophical 
makeup of not just this country, but the world. The Kyoto 
Protocol is not just an environmental vehicle. This Kyoto 
Protocol is becoming a political vehicle, a political power 
grab by many under many standards. I am looking very forward to 
hearing your testimony, Jack, on this issue.
    We are going to hopefully hear from a good host of 
witnesses today on early action credits, whether or not the 
devil is in the details. Are early action credits truly free 
market vehicles toward achieving ends that are scientifically 
justifiable or not, or are early action credits vehicles toward 
circumventing the U.S. constitutional process of Senate 
ratification of treaties, as the Constitution of this land 
still requires, the last time I checked? This is something that 
is of dire importance and consequence not only to our 
institution, our democratic institution, our Constitution, but 
also let's look at the scientific--let's look at whether or not 
the science jury is in or not. I think we have to take a look 
at this issue in a holistic formula as to whether or not sound 
science tells us this is a wise course to take, whether or not 
this does allow Americans to craft laws for America, whether or 
not this is constitutional, and whether or not this violates 
our sovereignty.
    At this time I would like to check with Mr. Terry if he 
would like to make an opening statement.
    Mr. Terry. No. I will yield to the chairman.
    Mr. Ryan. I would like to recognize and turn over the gavel 
now to the chairman of this subcommittee, Mr. McIntosh.
    Mr. McIntosh. Why don't you keep the gavel until we break 
for the vote.
    Thank you for starting this process, and let me apologize 
for being late. Not often do you get a chance to meet with the 
chairman of the Ways and Means Committee. He came up to me at 
the end of the last vote and said, I want to hear your concerns 
about my tax bill. We had a half-hour discussion on the floor, 
and I apologize for being late. I think that we will get an 
even better tax bill. I am happy about that.
    Now, I want to briefly explain the purpose of today's 
hearing, which Mr. Ryan has gone into and then I will put my 
full statement into the record. This subcommittee has been 
looking into the question of what the administration is doing 
to advance the Kyoto policy without going to the Senate for 
ratification. We had a hearing on May 20th in which we looked 
into whether they were follow- ing the Knollenberg language in 
last year's appropriations bill. It became very apparent they 
are not, and it's not an effective tool in preventing them from 
using a back-door implementation strategy.
    On May 27th, Senator Don Nickles and I wrote to Carol 
Browner essentially asking if EPA was implementing the Kyoto 
Protocol under the guise of existing law, how would anybody 
outside the Agency know, because their answers are so circular. 
I have yet to get a satisfactory answer back to that one. What 
we did get was incomplete, essentially saying that they have 
committed not to im- plement it. Thus EPA believes that the 
language restricting spend- ing in future bills is unnecessary, 
and we are supposed to trust their commitments. But in short, 
the agencies have not come forward in any meaningful way to 
respond to serious questions about whether they are using 
regulation as a back-door tool.
    Now we see a lot of action on proposing early action 
crediting that would reward companies for doing today what they 
would later be compelled to do under the Kyoto Protocol. It may 
sound attractive at first, but when you start thinking about 
it, you see that it creates a conflict of interest between the 
private interest and the public good. People will take actions 
and receive these illusory credits and, therefore, create 
political pressure for the Senate to adopt a policy that is 
patently bad for the country.
    Today's hearing will also look at what types of problems 
are there with the system, what sort of financial conflicts are 
there with those who are advocating this early crediting 
provision, and what would be a better voluntary, truly 
voluntary, program that could be a win-win for the country 
without taking us down the path of ratifying the Kyoto 
Protocol.
    With that, I would put the balance of my statement into the 
record and yield back the time to the chairman.
    Mr. Ryan. No objection.
    [The prepared statement of Hon. David M. McIntosh follows:]
    [GRAPHIC] [TIFF OMITTED]60254.003
    
    [GRAPHIC] [TIFF OMITTED]60254.004
    
    [GRAPHIC] [TIFF OMITTED]60254.005
    
    Mr. Ryan. Jack, we have a vote. Do you have time?
    Mr. Kemp. Yes.
    Mr. Ryan. We will recess for about 7 minutes for the 
purpose of voting and come back and swear you in and get going. 
How does that sound?
    Great. Recess for 7 minutes.
    [Recess.]
    Mr. McIntosh [presiding]. The committee will come to order.
    Let us begin immediately with our first panelist, and 
welcome, Mr. Kemp. Let me ask you, if you would, join me in 
taking an oath. Chairman Burton has asked that I swear in all 
witnesses before the subcommittee. If you would please rise and 
take the oath with me.
    [Witness sworn.]
    Mr. McIntosh. Thank you very much.
    Mr. Kemp. Thank you.
    Mr. McIntosh. Mr. Kemp, welcome to the subcommittee, and 
share with us your views.

 STATEMENT OF JACK KEMP, DISTINGUISHED FELLOW, THE COMPETITIVE 
                      ENTERPRISE INSTITUTE

    Mr. Kemp. Well, Mr. Chairman, first of all, thanks for 
having these hearings. Thanks for focusing the light of these 
hearings on this issue. I have absolutely no question in my 
mind that this will be a healthy debate. We don't need to fear 
it. I think all of us should welcome all sides to it. That's 
what a liberal democracy is all about, small L, small D.
    I have a confession to make, Mr. Chairman. I'm not a 
climatologist, I am not an oceanographer. I didn't invent the 
PC. I did invent the forward pass, but not the PC.
    I'm really pleased to be with you. I appreciate your 
indefatigable spirit in approaching this issue. I am sorry that 
Mr. Ryan is not here, one of my old comrades in arms and a 
terrific guy. The same could be said about Dennis Kucinich, who 
gave us some anecdotal evidence concerning today's topic.
    Dennis, I just mentioned your name. I'm glad you came back. 
I didn't want to do it behind your back.
    Dennis, I just wanted to say off the top of my head when I 
heard about various climate problems in the South and in the 
Southwest and maybe even in Cleveland, OH, who knows, I was 
reminded of my experience as a skier. My wife and I and family 
have skied a lot all over the world, but mostly in Colorado and 
Montana. I was in Vail, CO, last winter and they were bemoaning 
the fact that there wasn't a lot of snow in Vail. Of course, 
people were blaming it on global warming. And then there was a 
lot of snow in the Alps, and people who should know better 
blamed too much snow on global warming. Ten years ago there was 
no snow in the Alps and lots of snow in Vail, and that, too, 
was blamed on global warming.
    Again, I'm not an expert. I am just a layman like all of us 
here who wants to get at the truth. I said earlier, this is a 
healthy debate. It can be done with civility, I hope. We don't 
need to burn down buildings in the name of saving the 
wilderness. We really have to bring some rationality to this 
debate.
    I come today as a fellow of the Competitive Enterprise 
Institute. I have another hat as codirector of Empower America. 
I'm very close to my friends at the Citizens for a Sound 
Economy. I am a man of the center right, a progressive, if you 
will, conservative. My values are conservative, not unlike 
those of the panel. But I hope to be progressive in terms of 
working for change, progress, reform, a better future not only 
for the folks of our country, but the folks who live in those 
parts of the world that look to the United States of America at 
the end of the cold war for real leadership.
    Leadership comes from example, not from bullying people, 
and from knowing your own background. Mr. Mayor, Mr. 
Congressman, and you too, David McIntosh, Mr. Chairman, I think 
all of us, left and right, Republican and Democrat, male and 
female, ought to lead by example, not by bombing people and 
bullying tactics. Having said that, I am really thrilled to be 
here and appreciate again the opportunity that Chairman 
McIntosh has given to me and the men and women who will testify 
subsequent to my testimony.
    I'm going to create a historical record here today. I am 
going to be relatively brief. It's no secret that Jack Kemp has 
been called the Hubert Humphrey of the Republican party. 
Senator Humphrey said one time, he didn't think his speeches 
were too long, he enjoyed every minute of them. I want to 
submit my full testimony, Mr. Chairman, for the record and just 
summarize it and get to questions.
    Mr. McIntosh. Without objection, the entire testimony will 
be included.
    Mr. Kemp. H.L. Mencken, the great iconoclast, said one 
time, to every human problem there is a solution, simple, neat, 
and wrong. I think as my buddy Fred Smith has said, early 
action credits in effect are energy rationing, and it's a wrong 
solution to the problem, in my opinion, and I have some doubts 
as to the nature of the problem.
    I don't want to offend anybody. I do have respect for my 
opponents. I spent 13 years of my life in professional 
football. As I came out of that career, I found that some of 
the best friends I have in my life are the guys that used to 
beat me to a pulp on Sunday. They are friends. I expect that in 
politics. It's tough.
    Look, the issue here is bigger than Kyoto, albeit that's a 
big issue and deserves the attention of this committee. It's 
bigger, in my opinion, than the debate and discussion of global 
warming or the disputes over climatic changes. In my opinion, 
Mr. Chairman, the issue is whether or not the U.S. Congress is 
going to endorse, in effect, a third way style of command-and-
control economics and politics. By third way, I mean in the 
international arena, the idea of allowing an international 
bureaucracy to trespass on the sovereignty of that which Paul 
Ryan alluded to in his opening comments. And I know, Mr. 
Chairman, you have been a champion of protecting U.S. 
sovereignty; that is, that the United States should pass its 
laws, and it should affect the United States and hopefully 
affect other countries by setting an example, but not by 
turning our decisionmaking over to supranational authorities.
    Congressman Kucinich mentioned earlier clean air, clean 
water, and I forget the other one. I want you to know, Dennis, 
I voted for all of them. I believe in those goals as do, I 
think, most men and women of good will and civility throughout 
this country. There has been a lot of progress. We can debate 
excesses, but I don't think that anybody can debate that we 
have to have standards.
    That's not the debate here. It's whether we are, as Fred 
Smith has pointed out, going to ration energy at a time when 
many countries and continents of the world are beginning to 
emerge into what I call an Internet century, but with almost 
Fourth World capability. I spent part of the month of April in 
Ghana. It was an incredible trip, and they are talking about 
trading with the United States. I look at that map over there 
indicating places on the Earth that are going to have their 
energy rationed.
    George Gilder had an interesting article, Mr. Chairman, in 
the Wall Street Journal saying that Kyoto is kind of a zero sum 
approach to ecology. He mentioned that India, that huge 
continent of India, over a billion people, uses less than one-
tenth the energy per capita as the American people. To tell 
them, Gilder writes, that their billions of citizens cannot 
even match current Western uses of fuel oil or fertilizer and 
other chemicals is to tell them that they can't perhaps feed 
enough people or let alone gain them wealth without some form 
of a war. That's what causes wars, telling people that the only 
access to resources is to take it from someone else. I believe 
that is the predicate that has been laid down. I'm not accusing 
anybody of wanting a war, but as Gilder pointed out, nothing so 
pollutes the world as war.
    I urge you to read the morning paper that talks about what 
happened with the bombing in Serbia with regard to pollution. 
They had to send their children miles and miles away because of 
nausea and other problems.
    This is not the place to go into that, but I did want to 
make the comment that this is a zero sum approach that will 
consign millions of black and South Asian and Latino, Third 
World and Fourth World countries to poverty when you and I have 
discovered in a postcolonial, post-cold war world that the 
answer to poverty is markets, and freedom, and private 
property, and limited government, and the rule of law, and 
incentives for men and women to work and save and invest and 
invent and take us forward into an age in which technology is 
going to come up with solutions to problems that we cannot even 
see in our limited scope here on the eve of the new millennium. 
We want America to be cleaner, greener, and wealthier. That's 
the debate at least from our side of the issue.
    In my opinion, Mr. Chairman, the Kyoto Protocol and 
legislation is attracting unwarranted corporate support. I 
noticed that Vice President Gore, bless his heart, last year 
announced an emissions trading agreement between a Canadian 
company and a New York energy company. Vice President Gore 
said, ``These two major corporations are seeing and seizing an 
opportunity to protect our planet, build their bottom line, and 
grow the economy.''
    So it sounds like it's positive, but in my opinion, it's 
still a zero sum approach because there are thousands of small 
businessmen and women anxious to go into business who are going 
to be, in my opinion, compromised. The corporate community is 
naturally--many of them are naturally attracted to this 
approach, getting valuable credits for advance action that 
allegedly reduces fossil fuel emissions, but it creates, in my 
opinion, a profound dilemma. The treaty hasn't been submitted 
for ratification, and most people don't think that it's been 
submitted because it couldn't pass. With all due respect to the 
Senate, it couldn't pass. In my opinion, what the 
administration has in mind is luring corporate America into 
these early action credits so that they can buildup a rationale 
for ratification of Kyoto, to build support for Kyoto. I still 
think that it's not going to be ratified.
    I would add that it's unworkable. It is unworkable for the 
very reasons indicated by the chart, Mr. Chairman, that you 
have put up over here. It has taken time away from important 
things like cutting capital gains taxes.
    That was a serious comment, by the way.
    The science of warming, the role of fossil fuels and 
greenhouse gases and their relations to fundamental forces in 
the Earth's climate for eons, even before the industrial 
revolution, is in contention. Joel Bucher wrote in March that 
Dr. Hansen, James Hansen, the very same distinguished American 
scientist who caused so much alarm in the 1980's claiming that 
global warming would bring catastrophic temperature increases, 
recently declared before the scientific community, as Joel 
characterizes his comments in the prestigious Journal of the 
National Academy of Sciences, that predicting global 
temperatures with climate modelling is all but impossible.
    With all due respect, modelling climate has yet to reach a 
point that most men and women would agree is capable of 
deciding for us what we should be doing to have that cleaner 
and greener Earth that most men and women of common sense want.
    The Kyoto pledge to cut emissions to 7 percent below the 
1990 level, which would be by 2010, Mr. Chairman, close to a 40 
percent reduction, would, according to several economic 
forecasting firms, cost the U.S. economy well over $300 billion 
a year, close to $3,000 per household, raise gasoline prices by 
65 or 70 cents a gallon. I admit that I don't know. I don't 
have to know. But I do know that rationing has never worked 
anywhere on the face of the Earth. That's what this is. I can't 
imagine America on the eve of a millennium in which we can 
create not only more wealth for our own country, but help 
provide an example for the rest of the world, would want to 
introduce into our political economy such a Malthusian zero sum 
rationing idea. The administration's own Energy Information 
Administration estimates a $64 billion per year cost; someone 
said a conservative estimate of the cumulative cost would be 
close to $400 billion by the year 2010. Again, I'm not throwing 
these numbers out because they are perfect, I just do it to use 
it as a metaphor. There is a huge cost involved with Kyoto, 
notwithstanding the fact that it's consigning people to almost 
perpetual poverty in many parts of the world.
    I said that many of our major corporations, including 
energy producers, see early credits as a way to gain a windfall 
for steps that they would have taken anywhere, anyway, and a 
way, perhaps, to gain a competitive market advantage over 
smaller, often more entrepreneurial competitors. I don't want 
to pit the little guy versus the big guy. The American dream is 
to start small and grow your business. I'm not anti-big 
business or corporate business, but my bias is clearly toward 
the entrepreneur, the men and women who are the innovators and 
the wealth creators and the risk-takers who may fail, but can 
start again.
    The real fight in this issue, Mr. Chairman, is about our 
energy future, our economic future and that of the world. The 
Kyoto mindset implies taxes on energy use, on the use of energy 
as far as the eye can see. Direct taxes are already under 
serious review in Canada and the EU, the European Union, I 
should say. Early action credits are touted as a market 
approach by everybody who supports it. I appreciate their 
fidelity to markets. I doubt very much whether they really 
understand the market if they think this is a market approach.
    I'm not trying to be a smart aleck up here, but I am trying 
to suggest that you can't set prices, Mr. Chairman. That's why 
socialism has failed from Eastern Europe to every part of the 
world, because you can't price goods and services. You can't 
establish the value of anything if the market doesn't set those 
prices. I'm not talking about libertarian, 19th century 
Darwinian biological competition, not at all. I think there are 
places where markets must be enhanced, must be protected. I am 
for antitrust laws, but I think having the Federal Government 
get into building cars, subsidizing ethanol, overseeing 
investment subsidies, it really doesn't make much sense, in my 
opinion.
    I mentioned earlier that there is a large cost to Kyoto. I 
hope people will read ``Early Action Crediting: Growing the 
Kyoto Lobby at Small Business' Expense, a policy brief by CEI, 
and also CSE's explanation and analysis,'' which was published 
February 12 of this year. As I said, I think this treaty cedes 
U.S. sovereignty to global bureaucrats.
    I would be glad to answer any questions. I apologize for 
perhaps going on a little bit longer than I wanted to, but I 
think this is an important issue, and I welcome the debate. I 
know that I have got a lot to learn, but maybe there are others 
who have something to learn as well.
    Mr. McIntosh. Thank you, and I appreciate your forceful 
argument for true free markets.
    [The prepared statement of Mr. Kemp follows:]
    [GRAPHIC] [TIFF OMITTED]60254.006
    
    [GRAPHIC] [TIFF OMITTED]60254.007
    
    [GRAPHIC] [TIFF OMITTED]60254.008
    
    [GRAPHIC] [TIFF OMITTED]60254.009
    
    [GRAPHIC] [TIFF OMITTED]60254.010
    
    [GRAPHIC] [TIFF OMITTED]60254.011
    
    [GRAPHIC] [TIFF OMITTED]60254.012
    
    [GRAPHIC] [TIFF OMITTED]60254.013
    
    [GRAPHIC] [TIFF OMITTED]60254.014
    
    [GRAPHIC] [TIFF OMITTED]60254.015
    
    [GRAPHIC] [TIFF OMITTED]60254.016
    
    [GRAPHIC] [TIFF OMITTED]60254.017
    
    [GRAPHIC] [TIFF OMITTED]60254.018
    
    [GRAPHIC] [TIFF OMITTED]60254.019
    
    [GRAPHIC] [TIFF OMITTED]60254.020
    
    [GRAPHIC] [TIFF OMITTED]60254.021
    
    [GRAPHIC] [TIFF OMITTED]60254.022
    
    [GRAPHIC] [TIFF OMITTED]60254.023
    
    Mr. McIntosh. Let me explore with you a little bit the 
point that you were making that this really isn't a market 
mechanism that is being created. One of the things that amazes 
me about the proposals for early action crediting is that they 
create something that could have a value in the marketplace 
only if the Kyoto Protocol is ratified and it becomes law. And 
so I don't know what label you would give to it, some kind of 
future I guess, some sort of credit that at a future date would 
have a value if the Senate ratifies the treaty. To me that 
creates a problem of incentives in that people who are granted 
those credits from the government have a great deal of 
incentive to want the treaty to be ratified because this piece 
of paper gains value in the marketplace when those restrictions 
go into place. For those who don't have the piece of paper, 
then the restrictions are all the more costly because they have 
to comply with the treaty.
    Others have characterized it as sort of an insurance 
policy. I'd like to ask you to comment on the validity of that 
assumption, the argument that if the Senate does the wrong 
thing and ratifies the treaty, at least some of us in the 
marketplace will get a little money back.
    Mr. Kemp. That really is--again, I have great sympathy, 
hopefully some understanding of their position. And with all 
due respect, Mr. Chairman, I think you were the first to really 
bring this issue to the forefront of public opinion, at least 
to the business community, that they had better watch out 
because it is a slippery slope into which they are, in my 
opinion, being ``incentivized'' is a good word, seduced is a 
pejorative. I think it is seduction, it is very seductive to 
think that you can gain an advantage when you get that credit. 
And you have got to be big, Mr. Chairman. You have got to be a 
big guy on the block in order to take advantage. You are going 
to have lots of lawyers and lots of accountants and lots of 
folks focusing on this issue. That rules out the men and women 
of entrepreneurial talent who are trying to move up that 
ladder.
    I want to say something, and be careful that I say it 
correctly. If you stop and think about the history of freedom 
of enterprise, from Adam Smith in the 18th century to today in 
Milton Friedman, I don't think there is an economist at least 
one who is market-oriented who doesn't have some fear or 
distrust of laws that make it easy for people to collaborate in 
order to keep other competitors out.
    I don't mean that to pick on anybody. I just think that 
it's a very human condition. When I was quarterback of the 
Buffalo Bills, I did not want any competition with me. I only 
wanted one quarterback on each football team. But it really 
gives advantage to the big guy. I can't imagine the party of 
Lincoln giving an advantage to the big guy over the little guy. 
This is what it does. It really does. It's economically 
unsound, it is politically seductive, and it is going to give 
tremendous power not only to the bureaucracy of the United 
States--and I don't want it for a Republican administration or 
a Democratic administration. I wouldn't want to give this to 
any of our Republican candidates nor give it to the two 
Democratic candidates or the Independent party. I guarantee, 
Mr. Chairman, and you know this far better than Jack Kemp, this 
gives tremendous power to the international bureaucracy. 
Tremendous power.
    Mr. McIntosh. Well, both directly and indirectly, because 
it assumes the ratification of the treaty, which empowers them 
tremendously.
    The second question I have is would you agree that before 
we implement any type of early action credit where the benefit 
is related to emission reductions complying with Kyoto, that we 
have to make the decision whether or not we are going to adopt 
Kyoto as policy? I have introduced a bill that says essentially 
before any further action can be done to set up this type of 
credit program, the Senate has to be given a chance to debate 
and ratify the Kyoto Protocol----
    Mr. Kemp. Yes, absolutely.
    Mr. McIntosh [continuing]. So we know whether it is going 
to be the policy of the country or not. To reverse that means 
that you are making the decision without debate, without any 
normal course under the Constitution.
    Mr. Kemp. I was absolutely shocked, Mr. Chairman, with all 
due respect, to have the President of the United States of 
America saying in December 1997 that we are going to have a 
program to pursue our course, and we are going to do it 
whatever happens at Kyoto.
    It's unbelievable. Unbelievable. He said the other day we 
are going to intervene in any part of the world in which there 
is a violation of human rights irrespective of any vote in the 
U.S. Congress. We have converted NATO from a defensive 
organization to an offensive organization without a debate in 
the U.S. Congress. This is what I call third-way politics, as 
pursued by this administration, the Blair administration, the 
Schroeder administration in Germany. Someone has got to stand 
up, Mr. Chairman, and question what is happening to political 
economic policies in the world today through third-way 
politics. It's seductive. It's mesmerizing, but it's really 
sacrificing the sovereignty of the United States of America.
    Mr. McIntosh. I think one of the great things that you have 
contributed to the sovereignty debate is that you point out it 
cuts across apparent ideological lines. When you trample on the 
safeguards in the Constitution, the division of powers, for 
whatever ends, whether they are ostensibly conservative or 
ostensibly liberal, government does a great injustice to 
liberty.
    Those are the two questions that I have. Mr. Kucinich, do 
you have any questions?
    Mr. Kucinich. Yes, I do.
    Again, thank you, Mr. Kemp, for your testimony. I have to 
say that I am with you on the sovereignty questions. As a 
matter of fact, Mr. McIntosh and I have had a chance to work 
together on some of the more serious sovereignty and 
constitutional issues in this Congress. I also have a great 
deal of respect for the legislative process and for the 
Senate's prerogative. As someone who favors Kyoto ratification, 
I would not want to see the Senate in any way be usurped. The 
decisions have to flow from the U.S. Senate on this treaty, or 
any kind of treaty for that matter. I happen to believe that a 
treaty should have some force then, but to try to implement it 
in other ways, I wouldn't favor that either.
    I would wonder, though, what your views would be--let's 
say, for example, if Kyoto was a dead issue here, and we were 
just talking about a condition in this country where we could 
incentivize aggressive behavior on the part of corporations 
who----
    Mr. Kemp. I would be in favor of that. I have even talked 
about allowing for the full expensing of the cost of equipment 
used to clean up the air and the water. Why shouldn't someone 
be incentivized? I think there should be incentives----
    Mr. Kucinich. I think that we agree on that, too. The 
concern here, and I understand the concern the chairman 
expressed, that you would not want to see an incentive 
mechanism put into place that might be an excuse for bypassing 
the process in the Senate.
    Mr. McIntosh. That's right. In fact, I have talked with 
colleagues about the possibility of substituting incentives. If 
you gave somebody basically a tax deduction and say, move 
quicker toward reducing air pollution, assuming that is a goal 
that we all share, that might be a more appropriate way to 
achieve the goal.
    Mr. Kemp. The President just spent a week running around 
the country. I'm not belittling it. In fact, I was invited on 
that tour to show bipartisan support for trying to attract 
capital into areas that are without capital. I would prefer 
that we do it through changing the Tax Code as opposed to 
having an international bureaucracy force India, China, Asia, 
Latin America and Third World and Fourth World countries to cut 
their use of energy before they ever get a chance to get out of 
the grinding poverty into which centuries and millennia have 
been allowed to occur.
    Mr. Kucinich. What I think is interesting is that where we 
can get some concurrence on the importance of incentivizing 
environmentally and even socially beneficial conduct, the 
question is this debate over Kyoto. One of the reasons why I 
favor it is because I would like to see the United States take 
leadership in this area. Let me state why: Because I think that 
we can use this as an opportunity to create greater 
efficiencies and enable our industries here to capture new 
markets and to enable us to continue our leadership and perhaps 
the controlling of and even transformation of pollution 
industries.
    Mr. Kemp. Well, I like what you say, and I think that you 
have raised a very important point, and obviously you have been 
talking with Mr. McIntosh.
    I would remind everybody that may be listening or watching 
or maybe who will hopefully read this testimony, as convoluted 
as it may sound, do you know what the cost of MIPS in the 
United States on the eve of the new century, millions of 
instructions per second computerwise? Less than $1. Do you know 
what it was 10 years ago? $10,000; $250,000 20 years ago. We 
are now, with our ability technologically, able to deliver 
instructions through computers in those little microprocessors 
at a cost of less than $1 for millions of instructions per 
second. Wow. Why don't we, the greatest Nation on the face of 
the Earth, with all our faults and all of our problems and all 
of the work that we have got to do, why don't we recognize that 
freedom of enterprise, freedom of trade, and incentives for men 
and women to invent and innovate is the greatest example that 
we can have to help the rest of the world enjoy some of the 
benefits of the wealth-creating society?
    What bothers me about this, Dennis, is that it's predicated 
upon using less energy at a time in which we are going into an 
Internet century in which the needs of electricity are going to 
be exponentially increasing in the 21st century. The answer is 
not rationing. The answer is wealth creation and freedom of 
enterprise.
    Mr. Kucinich. I would agree with you on wealth creation. I 
would also suggest, Mr. Kemp, that perhaps the answer is also 
in new technologies which do not have the same by-product in 
terms of pollution. One of the things that I notice British 
Petroleum is doing is looking more and more at solar research 
as opposed to the increased consumption of fossil fuel.
    Mr. Kemp. Just don't give them a tax credit, please. We 
have too many tax credits in the Tax Code. It's the worst Tax 
Code that I have ever even seen in my life.
    I apologize. I have absolutely--lucky for you all--run out 
of time. I apologize. But I know a lot of people want to 
testify.
    Mr. Kucinich. Could I give a one-sentence benediction from 
William Buckley? He is talking about these ideas that we are 
speaking of today. He says, ``It's quite a brilliant 
application of the idea, putting a cash price on inordinate 
consumption, which is very different from forbidding it.''
    So that's--I have been reading him since I was in high 
school.
    Mr. Kemp. There is hope for you yet, Dennis.
    Mr. Kucinich. And for you.
    Mr. McIntosh. Thank you. We appreciate you very much for 
coming and joining us today.
    Mr. Kucinich. Could I put Mr. Buckley's column into the 
record, Mr. McIntosh?
    Mr. McIntosh. I would be honored to include that in the 
record. It says, ``Conservatives Should Hail Kyoto Pact.'' I 
will have to give it close scrutiny.
    [The information referred to follows:]
    [GRAPHIC] [TIFF OMITTED]60254.024
    
    Mr. McIntosh. The next panel is Mr. Jay Hakes, who is the 
Administrator of the Energy Information Administration.
    Welcome, Mr. Hakes. If you want to stay standing, I will 
administer the oath.
    [Witness sworn.]
    Mr. McIntosh. Thank you. And please share with us a summary 
of your testimony. We will include the full written remarks 
into the record and then get to the question and answers.

   STATEMENT OF JAY HAKES, ADMINISTRATOR, ENERGY INFORMATION 
                         ADMINISTRATION

    Mr. Hakes. Thank you, Mr. Chairman, for inviting me, and I 
certainly have pared down my remarks. I am happy to talk about 
the voluntary reporting of greenhouse gas emissions, which is a 
program that is administered by the Energy Information 
Administration. In the past year interest in this program has 
grown, but this hearing is the first time that I have testified 
before a congressional committee on the subject.
    The Energy Policy Act of 1992 in section 1605(b) 
established this data collection which allows individuals or 
companies at their option to report annually on the reductions 
in the emissions of carbon dioxide, methane, or any of the 
other greenhouse gases. They can also report on carbon sinks 
such as forestation activities. The details of this program can 
be found in my written testimony, and I won't repeat that.
    I would talk perhaps about what I think has been some of 
the success of the voluntary reporting program. This program 
has been designed to be user-friendly. Using integrated 
software, we have made it relatively easy to report, given 
particularly the complexity of this fairly new issue. It's been 
easy to access and analyze the data that has been submitted. To 
encourage participation, reporters are offered many different 
ways of reporting and are allowed considerable flexibility in 
how they calculate their savings.
    As you may be aware, many companies report under this 
program and the number is growing. So far this year we have 172 
companies that report under this program, and that's well above 
the 108 that submitted reports in 1994, the first year of the 
program. Participation is particularly high in the electric 
utility industry where companies accounting for two-thirds of 
utility emissions do report under the program.
    Although there is no third-party verification of the 
reports, the energy expertise of EIA has allowed us to work 
with the companies to develop data that we do believe to be 
accurate. The hope that the reports would document useful 
examples of how to reduce emissions that could be emulated 
elsewhere seems to have been at least partially realized. For 
example, the recycling of sulphur hexafluoride first reported 
in the 1996 cycle now seems on the way to becoming a widespread 
industry practice. In turn, we have been able through numerous 
phone calls, e-mails and other communications to educate many 
companies on how to measure the emissions of greenhouse gases, 
and this is significant because until recently there was no 
reason for them to track them and, therefore, no experience.
    Despite the successes, using the existing program for new 
purposes such as documenting credits for early reduction would 
face a number of formidable challenges. Since these credits 
would have economic value, the standards for reporting them 
would probably have to be much more rigorous than under the 
current program. The flexibilities that have made the voluntary 
program a success so far may limit its adaptation to a program 
requiring greater uniformity.
    Let me just give a couple of illustrations of the issues 
that would arise. First is the issue of baselines. To award 
credit for early action, there would need to be a common 
agreed-upon baseline from which savings are calculated. To know 
how much emissions are being reduced, we need to know the 
number from which the resulting emission levels should be 
subtracted to calculate the savings. The current program allows 
flexibility in baselines that would be difficult to maintain in 
a more rigorous system to award credit. The current program 
allows reporters to calculate savings by subtracting the 
current emissions from their expected levels in the absence of 
voluntary activities.
    Although these reports provide useful information, they 
leave unresolved the issue of what is sometimes called 
additionality; that is, how can you tell whether the action 
would have been part of a normal business practice even without 
the voluntary program or whether it would have produced the 
savings that went--or whether it produced savings that went 
beyond or were additional to what would have been expected in a 
business-as-usual case. If reporters are rewarded for something 
they would have done anyway, it is conceivable that a large 
number of credits would be awarded without significantly 
reducing the expected trajectory of rising U.S. emissions. EIA 
projects that under current policies, emissions are likely to 
be 33 percent higher in 2010 than 1990.
    The current voluntary reporting program also allows 
reporters to use historic levels of emissions as their 
baselines for calculating savings. A reporter could, for 
instance, subtract his 1998 emissions from his 1990 emissions 
and use the remainder as his savings. During that period, 
however, the reporter may have sold part of its operations 
responsible for a large part of its emissions to a second 
entity. The second entity is not required to report and 
wouldn't be penalized; therefore, there could be leakage of 
savings.
    I would be glad to conclude at that point, seeing the red 
light on, and answer your questions.
    Mr. Terry [presiding]. You can keep going.
    Mr. Hakes. I just had a few more comments. The second 
problem was the problem of leakage, which I think, along with 
addition-ality, are the two big conceptual problems that these 
approaches are going to have to wrestle with. There are other 
complex issues such as property rights that are discussed in my 
written testimony, and I would refer you to that.
    The voluntary data that EIA has collected has been done in 
a very transparent manner, and it may be possible to go back 
after
the fact and recast it with new assumptions. But I think that 
is a challenge that would be difficult, but not necessarily 
impossible. So that is basically what I plan to comment on, and 
as I said, I would be glad to answer your questions.
    [The prepared statement of Mr. Hakes follows:]
    [GRAPHIC] [TIFF OMITTED]60254.025
    
    [GRAPHIC] [TIFF OMITTED]60254.026
    
    [GRAPHIC] [TIFF OMITTED]60254.027
    
    [GRAPHIC] [TIFF OMITTED]60254.028
    
    [GRAPHIC] [TIFF OMITTED]60254.029
    
    [GRAPHIC] [TIFF OMITTED]60254.030
    
    [GRAPHIC] [TIFF OMITTED]60254.031
    
    [GRAPHIC] [TIFF OMITTED]60254.032
    
    [GRAPHIC] [TIFF OMITTED]60254.033
    
    [GRAPHIC] [TIFF OMITTED]60254.034
    
    [GRAPHIC] [TIFF OMITTED]60254.035
    
    [GRAPHIC] [TIFF OMITTED]60254.036
    
    Mr. Terry. I thank you very much. I will start with one 
question. In your oral testimony here, you had mentioned some 
of the difficulties in making initial determinations to set 
baselines and what I envision is a deepening bureaucracy. Have 
you been able to establish how much staff it takes now, full-
time staff, to do a voluntary reporting program? How much it 
would have to grow and expand to make it into an overseeing 
regulating system?
    Mr. Hakes. We do both the annual inventory reporting of the 
greenhouse gases and the voluntary reporting, which are two 
different programs with three different employees and a budget 
of $600,000. The acid rain program at the EPA, which does 
sulfur trading, which is a much more elaborate program, I think 
is about $10 million. What we're talking about here is probably 
substantially larger than that. We have not had a reason at 
that point to calculate what those resources would be. I think 
that the range could be considerable, depending on how this was 
designed. I think a lot of people are designing programs; there 
are just a lot of options. But it would certainly be much 
bigger and more expensive than what we're talking about with 
the voluntary program.
    Mr. Terry. Well, does the sulfur dioxide emissions trading 
program provide a basis for estimating the administrative 
complexity and costs of the greenhouse gas emissions credit 
program?
    Mr. Hakes. Well, I think it's been used as an example and I 
think it has some advantage. It shows that there are some 
advantages to trading. But the sulfur system is much more 
complex because up to the present period it's covered about 115 
utilities and so that's a fairly manageable universe. It's 
about to expand to 2,000 utilities and that makes it bigger. 
But if you look where energy is used and combusted, that's 
obviously a much bigger, more complex universe than people who 
are emitting sulfur. There are ways of designing the system to 
limit the number of reporters but the more you do that you lose 
the downstream ability to trade. So there's a lot of 
compromises that would probably have to be made.
    Mr. Terry. I appreciate that.
    Mr. Kucinich.
    Mr. Kucinich. Mr. Hakes, thank you very much for your 
testimony. I think the Energy Information Administration should 
be commended for all of its hard work in implementing the 
1605(b) voluntary reporting program, and I agree with your 
testimony that we could learn a lot from that program as we 
debate any plan for early action credits. I have just a few 
questions for you.
    Mr. Hakes. Thank you.
    Mr. Kucinich. When did the Federal Government start its 
voluntary reporting program?
    Mr. Hakes. 1994.
    Mr. Kucinich. That would be in the Bush administration, 
correct?
    Mr. Hakes. Well, that was when it started to operate. It 
was established by the Energy Policy Act of 1992.
    Mr. Kucinich. It was established during the Bush 
administration.
    Mr. Hakes. It was authorized statutorily in the Bush 
administration, yes.
    Mr. Kucinich. Do you believe that offering incentives to 
companies that voluntarily reduce their emissions has been 
successful?
    Mr. Hakes. It's a hard question to answer. I would say that 
during the 1990's that emissions have continued to grow at more 
or less the pace they were growing before. We have had 
increases in emissions every year since EPACT was passed. And 
as I say, our projections are that emissions are likely to 
reach 33 percent above 1990 levels. So I think there have been 
some successes but the overall trajectory of the emissions 
increases does not seem to have changed very substantially.
    Mr. Kucinich. What about for companies that participate in 
a program?
    Mr. Hakes. Well, those companies have reported large 
savings and undertaken activities. I think the question of 
additionality has not really been addressed because there's no 
real baseline against which the savings can be calculated 
that's uniform. So it's hard to say whether these are 
activities that they would have done under normal business 
practices or whether they were additional activities that they 
undertook because of the voluntary programs.
    It's clear that there's a success story here in that the 
economy has been growing at a very rapid rate, more rapid than 
was expected, and emissions have been rising much slower than 
economic growth. So certainly the companies and the 
technologies are very successful in the sense of keeping 
emissions well below the economic growth. The economy has been 
growing quite rapidly, but they have not been successful in 
changing that trajectory so that the emissions are either 
stable or going down.
    Mr. Kucinich. So you don't really take a position on the 
incentivization?
    Mr. Hakes. Well, EIA is a statistical agency, not a policy 
agency.
    Mr. Kucinich. I understand that. I'm just interested in 
your opinion.
    Mr. Hakes. Well, it would be hard for me to give an opinion 
apart from my official position I think.
    Mr. Kucinich. Oh, give it a try. OK, my next question.
    Mr. Hakes. OK.
    Mr. Kucinich. As you noted, the 1605(b) program was 
designed to encourage entities to take voluntary action to 
reduce their emissions and reward them with publicity. This is 
very different, however, as I think we know, from an early 
action credit program that would award these entities with 
tangible assets for tangible verifiable emission reductions. In 
fact, a GAO report found that ``Many of the claims for reducing 
greenhouse gas emissions that have been submitted to the 
voluntary reporting program would probably be ineligible for 
credit.''
    With this in mind, is it possible to set up an accounting 
system to implement a credit program?
    Mr. Hakes. Yeah, I think it is possible.
    Mr. Kucinich. Thank you. Thank you, Mr. Chairman.
    Mr. McIntosh [presiding]. Actually that was going to be my 
first question. Do you think it's possible to implement a 
credit program? Actually, before I get into that, let me say I 
commend you for the work you are doing in terms of keeping an 
honest track of what is done out there in this area and not 
trying to be a heavy handed bureaucracy but merely truly 
implementing a voluntary program.
    You know, I'm an optimist too. I think lots of things are 
possible. But let's explore that. In your testimony you 
mentioned that it might be quite extensive and costly to do. 
Can I--and I know Mr. Terry explored some of those costs, but 
are the barriers essentially conceptual? And you mentioned a 
couple in terms of being able to discern whether it was 
something that would occur in the normal course of a business 
practice. Are the problems mainly technical in measuring the 
reductions, or are they political where you might get entities 
gaming the system?
    Mr. Hakes. Yeah, I think that they're really all three. I 
mean, I actually have tried to attend a lot of technical 
sessions on this issue, more than I normally would because I 
think the technical issues are so wrapped up into the 
conceptual and political, and there are a lot of decisions that 
have to be made that create winners and losers. I mean, how you 
calculate the baseline that may help one company and another 
way of calculating might help another company? And that's why I 
think it would be inappropriate if such a system would have the 
EIA make a decision about what the baseline should be. I mean 
that's a decision I would think the Congress would make.
    Mr. McIntosh. Let me interject. You think therefore there's 
such inherent tradeoffs that it needs to be a political 
decision by Congress rather than a technical decision?
    Mr. Hakes. In the best sense of the word, yeah. I mean, 
it's a policy decision much as the tax code is a policy 
decision. Who gets taxed. It has technical issues, it has 
conceptual issues, and it has political issues.
    Mr. Kucinich. Mr. Chairman, no one ever games that system.
    Mr. McIntosh. My office is in Longworth and having been 
blocked for 2 days now getting in and out with all the 
lobbyists over there as the tax bill is being written, that's a 
scary thought.
    But I think you make an interesting and important point 
that it can't merely be thought of as a technical decision 
because there are winners and losers that result from the 
choices being made.
    Mr. Hakes. That's definitely my view, yes.
    Mr. McIntosh. Any estimate of how expensive it would be 
once those winners and losers were chosen to actually implement 
the system?
    Mr. Hakes. Well, let me explain why that's a difficult 
question to answer. When we think about this question 
initially, the thought is, well, everybody that drives an 
automobile is emitting carbon and therefore if we had to track 
every automobile in the United States that would be a very 
expensive system and very onerous. The technical people that 
I've seen that have looked at this have usually moved away from 
that and moved back to more of an upstream approach where they 
might say tax at the oil refinery, which then sends a price 
signal up through the system. And that makes it a lot easier to 
administer.
    You lose some of the advantages of trading. So the 
policymakers have to design a system, and I'm sure they would 
take into account the administrative complexity of it, and my 
suspicion is that you might move more to an upstream system. 
But until we know the answers to those questions it would be 
hard to know how big this reporting system would have to be. If 
you do it at the upstream where there's a more limited number 
of refineries, it's certainly a lot easier than keeping track 
of every automobile.
    Mr. McIntosh. Right. And so given the pervasiveness of 
energy consumption in society, to do it with 100 percent 
accuracy you would essentially need to have a tracking system 
for every activity.
    Mr. Hakes. I don't know if the issue is so much accuracy as 
it is to maximize the trading potential. Because the person who 
is driving the automobile has choices about the efficiency of 
that automobile. And I think if we were measuring things at the 
refinery that it probably would be possible to get accurate 
counts. But energy is so widespread that one can think of areas 
where things might fall through the cracks. And this would 
certainly be a formidable challenge I think to make sure that 
everyone was treated fairly.
    Mr. McIntosh. Let me move in a different direction. The 
administration has told us all over and over again that the 
Kyoto Protocol is a work in progress. They're still negotiating 
with the other foreign countries hoping to get some of the 
Third World countries to sign up for mandated reductions in 
energy use or global warming gases being emitted. Is there a 
risk that if we adopt an early action credit at this time, that 
it will impact the negotiations over the implementing rules of 
the Kyoto Protocol?
    Mr. Hakes. Well, I think there are two major areas of that 
treaty that are unsettled, that it would be extremely useful to 
know the answer to before setting up this program. One of them 
is the level of domestic effort that will be required. The 
treaty contains a lot of offsets against what you have to do 
domestically. The most obvious one is the trading. And we 
could, for instance, purchase credits from Russia, which is by 
most estimations going to have a lot of credits to sell because 
their economy has collapsed and they haven't been using energy 
as much. But there are other offsets such as sequestration and 
other things that might allow emissions to grow in this country 
and still meet the Kyoto limits. But since the treaty is not 
interpreted the same way by all parties, we really don't know 
the answer to that yet.
    The second thing that would be very useful to know is what 
would be the equivalency between activities like forestation 
and the reductions in emissions. Because many of the programs 
that the utilities are reporting right now, for instance, are 
things like reforestation activities, but we don't--we do have 
formulas for comparing say methane emissions with carbon 
emissions but we don't have a formula for comparing 
sequestration activities with emissions activities. So it would 
be difficult to construct a system that would fairly reward 
these different activities until we had that.
    Mr. McIntosh. One other question that's a pet personal 
issue. Assuming you were going to credit all different sources, 
you mentioned the formula between methane and carbon, would 
this system create an incentive for eliminating wetlands 
because they are a source of methane gas?
    Mr. Hakes. My technical expert says that it is an extremely 
small matter statistically and probably would not be a big 
factor in the larger numbers.
    Mr. McIntosh. That is what I see in terms of the amount of 
methane gas produced, but I don't know what the formula between 
carbon dioxide and methane is.
    Mr. Hakes. We would be glad to get those calculations to 
you subsequent to the hearing and compare notes on that.
    [The information referred to follows:]

    Wetlands account for 15-20 percent of total global natural 
and man-made methane emissions. However, these emissions are 
concentrated in tropical (rather that temperate zone) wetlands. 
According to researchers Matthews and Fung, worldwide temperate 
zone methane emissions are about 5 to 10 million metric tons. 
Dividing the U.S. figure for temperate zone wetlands from the 
Department of Interior's Status and Trends of Wetlands in the 
Coterminous U.S. by the Matthews and Fung's figure for world 
temperate zone wetlands, results in the U.S. having about 57 
percent of world temperate zone wetlands. This implies U.S. 
natural wetland emissions of 3 to 6 million tons of methane, 
equivalent to 63 to 126 million tons of carbon dioxide 
equivalent (using 1 ton of methane equals 21 tons of carbon 
dioxide, the Intergovernmental Panel on Climate Change's 100-
year integration global warming potential of methane), or 17 to 
34 million tons of carbon equivalent. This is equal to about 1 
to 2 percent of U.S. GWP-weighted anthropogenic greenhouse gas 
emissions.

    Mr. McIntosh. Thank you. That would be helpful. I don't 
have any other questions.
    Do you have anything?
    Thank you very much, Mr. Hakes, and we will followup and 
let me ask unanimous consent now to keep the hearing record 
open for 10 days on some of the technical questions.
    OK. Our third and final panel for the day is the big one. 
Let me call forward Mr. David Ridenour, Mr. Fred Krupp, Mr. 
Frederick Palmer and Mr. Kevin Fay. You all stay standing as I 
administer the oath. As I explained, Chairman Burton requires 
us to swear in each of the witnesses here.
    [Witnesses sworn.]
    Mr. McIntosh. Let the record show that each of the 
witnesses answered in the affirmative, and what we will do is 
ask each of you to summarize in 5 minutes or less your written 
testimony and put into the record the complete testimony. Let's 
simply go left to right and start with--my left to right at 
least--Mr. Ridenour. Welcome. If you would like to begin, share 
with us a summary of your testimony and then we'll include the 
whole thing into the record.

 STATEMENTS OF DAVID RIDENOUR, VICE PRESIDENT, NATIONAL CENTER 
  FOR PUBLIC POLICY RESEARCH; FRED KRUPP, EXECUTIVE DIRECTOR, 
 ENVIRONMENTAL DEFENSE FUND; FREDRICK PALMER, GENERAL MANAGER 
  AND CHIEF EXECUTIVE OFFICER, WESTERN FUELS ASSOCIATION; AND 
  KEVIN FAY, EXECUTIVE DIRECTOR, INTERNATIONAL CLIMATE CHANGE 
                          PARTNERSHIP

    Mr. Ridenour. OK. Thank you. Mr. Chairman, thank you for 
the opportunity to testify on early action crediting. I'm David 
Ridenour, vice president of the National Center for Public 
Policy Research, a Washington, DC, think tank. The National 
Center has never received government funding and we have no 
financial stake in the decisions of this subcommittee. In 
addition to representing the National Center, I'm representing 
12 members of the Cooler Heads Coalition, coalition of 
nonprofit groups concerned with consumer costs of the Kyoto 
Protocol. Together these groups represent nearly 4 million 
Americans. It's not often that free market groups like mine 
agree with the Sierra Club, Ozone Action, Friends of the Earth, 
and National Environmental Trust. But when it comes to early 
action crediting proposals under discussion, we agree on 
several points.
    First, such programs can't possibly benefit the 
environment, second, they can't possibly benefit the economy. 
Even if one assumes that man-made greenhouse gas emissions are 
responsible for global warming and neither satellite nor 
weather balloon data support this, early action crediting could 
prove counterproductive. These programs would make it more 
difficult for small businesses and family farms to comply with 
Kyoto's emissions targets. They would allow the President to 
offer companies reducing emissions prior to 2008, when the 
Kyoto Protocol is slated to take effect, emissions credits that 
these companies could either use or sell during Kyoto's first 
emission budget period 2008-2012. But unlike the developing 
countries, the United States would not be entitled to more 
credits during the first budget period for any emissions 
reductions occurring prior to 2008. In other words, every early 
action credit the President grants would mean one less credit 
in the U.S. pool during 2008-2012. Since most small businesses 
lack the political context and expertise to negotiate deals 
with the Clinton administration, and lack the financial 
resources to reduce their emissions early, large businesses 
would likely garner most of the early credits. Thus, the 
burdens of Kyoto would rise for small firms while dropping for 
large ones.
    By making compliance more difficult for small firms early 
crediting will make it less likely the United States could meet 
the Kyoto targets and unless of course we were willing to kill 
the goose that lays the golden egg: Small businesses which 
create two-thirds of all new jobs.
    Early action crediting appears designed more to create a 
pro-Kyoto corporate lobby than to reduce emissions. As you 
know, prospects for Kyoto's ratification has been poor thanks 
in part to industry opposition. In response the Clinton 
administration included provisions in its fiscal year 2000 
climate change budget designed to build corporate support for 
Kyoto. For example, the budget included a $273 million program 
to make buildings more energy efficient. This provision may 
explain why Honeywell, which was recently awarded a DOE 
contract to work on building efficiency, now supports the 
treaty. Other examples of the administration's efforts are 
included in the National Policy Analysis No. 233, which I have 
here that I would be grateful if it could be entered into the 
record.
    [The information referred to follows:]
    [GRAPHIC] [TIFF OMITTED]60254.037
    
    [GRAPHIC] [TIFF OMITTED]60254.038
    
    [GRAPHIC] [TIFF OMITTED]60254.039
    
    Mr. Ridenour. Early action crediting is another means of 
building corporate support for Kyoto. Early crediting would 
help build corporate support because it would give companies 
earning credits a vested interest in seeing to it that the 
credits are worth something. Without Kyoto ratification, the 
credits would be worthless. Early credits are the industry's 
insurance against the possibility that Kyoto will be ratified. 
But in buying the insurance, Kyoto ratification would become 
even more likely. It's analogous to buying auto insurance to 
increase your chances that you'll actually be in a car crash. 
The fact that early action credits could influence or preordain 
the outcome of the Senate's consideration of the Kyoto Protocol 
is particularly distressing. As Senator Byrd said of a high 
profile Senate deliberation, don't tamper with this jury.
    We shouldn't tamper with Kyoto's jury either.
    The final issue concerns accounting and verification. 
Independent third parties would be permitted to measure 
corporate emissions reductions but there are no guidelines for 
who would qualify for this work. This certainly brings the 
validity of any accounting into question in my view.
    We're also concerned with the very people pressing for 
early action crediting and for third party monitoring could 
profit from it. According to the environmental group Nonprofit 
Accountability Project, the Environmental Defense Fund, through 
its quote Satellite Group Environmental Resources Trust, would 
provide monitoring services for a fee.
    Of greater certain to me, however, is the incentives that 
would be created for corporations to give and give generously 
to the EDF or similar group. Corporations will be tempted to 
pay tribute to monitors knowing that they are the final 
arbiters of who does and doesn't deserve emissions credits, who 
is a good corporate citizen and who is not.
    Third party monitoring could compromise not only the 
integrity of accounting and verification but our political 
process.
    I want to thank the chairman very much for the opportunity 
to address this hearing. Thank you.
    [The prepared statement of Mr. Ridenour follows:]
    [GRAPHIC] [TIFF OMITTED]60254.040
    
    [GRAPHIC] [TIFF OMITTED]60254.041
    
    [GRAPHIC] [TIFF OMITTED]60254.042
    
    [GRAPHIC] [TIFF OMITTED]60254.043
    
    Mr. McIntosh. Appreciate that very much, Mr. Ridenour.
    Mr. Krupp, welcome to this subcommittee and please 
summarize your testimony. We'll put the entire written 
testimony into the record.
    Mr. Krupp. Appreciate that. Mr. Chairman, members of the 
subcommittee, thank you for the invitation to testify on behalf 
of the Environmental Defense Fund. I am the executive director 
of the Environmental Defense Fund. We're an organization of 
300,000 members with offices located across the country. Our 
formal involvement with climate policy extends back at least 15 
years as our scientists, economists and attorneys have worked 
to understand the problems and suggest workable solutions.
    I would like to begin with a statement for those who seem 
to believe that the possibility of human induced climate change 
is nonexistent and that all questions surrounding that issue 
already have been settled once and for all. To those who are 
comfortable in such a position, who believe that no risk is 
posed even by the questions raised by the body of accumulating 
science on global warming, I would offer that the notion of 
rewarding companies for voluntary actions to reduce greenhouse 
gas emissions is patently absurd. If there is no possibility of 
a problem, then no policy consideration is even necessary.
    On the other hand, for those who are either convinced that 
climate change is a problem, or, perhaps this is the most 
important group, for those who believe that we as a society are 
now operating in a context of change and uncertainty concerning 
climate change, a credit for voluntary action program offers a 
compelling management option to a set of serious environmental 
and economic risks.
    With that in mind, let me provide some history on this 
issue. In early 1997 before the Kyoto negotiation began, my 
group developed a proposal for rewarding businesses that 
undertook voluntary actions that resulted in greenhouse gas 
emission reductions. The proposal reflected two key beliefs: 
First, that the threat of human induced climate change demands 
prompt and vigorous action to curb greenhouse gas emissions; 
second, that for the sake of both the environment and the 
economy, policy tools used to accomplish this should tap to the 
maximum extent possible the ingenuity and resources of the 
private sector instead of relying solely on the mandates of 
politicians and government.
    Our proposal reflected an existing reality as well that, to 
put it mildly, there has been no or little consensus here in 
Washington to support decisive action. Thus, our own preference 
for strong aggressive policies to achieve greenhouse gas 
emissions reductions is simply not in our view politically 
feasible in this time.
    In short we thought this would be a modest, prudent 
proposal. Accordingly, EDF's proposal to achieve immediate 
reductions now through a voluntary basis offered U.S. 
businesses the chance to use voluntary actions to create real 
economic benefits for themselves. Let me emphasize these two 
critical points, voluntary, real reductions in emissions and 
those real reductions occurring now, not a decade from now. At 
the same time by creating this environmental and economic quid 
pro quo a credit for voluntary action program also gives 
policymakers here in Washington a strategy for manag- ing the 
high stakes issue. Again unless one is firmly convinced that 
climate change is not and will never be a problem, then climate 
change represents an environmental and economic risk as well as 
a potentially calamitous track for future policymakers. Credit 
for voluntary action is nothing more than a tool for managing 
this suite of risks. The basic concept that we proposed is 
reflected in Senate bill 547, introduced by Senator Chafee 
along with a bipartisan group of 11 cosponsors and echoed in 
legislation that was introduced yesterday by Representatives 
Lazio and Dooley.
    The concept is simple. A company could earn emissions 
reduction credits if it succeeds in reducing its greenhouse gas 
emissions below current levels or sequestering greenhouse gases 
over the next decade. The logic of this approach and the 
related legislation is reflected in simple arithmetic. 
According to the leading analysis, U.S. greenhouse gas 
emissions could be more than 30 percent above 1990 levels if 
our economy continues on a so-called business as usual course. 
While the expected economic growth is essential, the prospect 
of the attendant emissions growth represents a triple threat to 
the environment, to business, and public policymakers.
    The credit for voluntary action proposal is aimed as 
diffusing the threats implicit in the projected emissions 
growth while preserving economic progress. Here's how. If 
greenhouse gas emissions represent a serious standard to danger 
to the environment the prospect of at least 9 more years of 
unchecked emissions increases represents an ever increasing 
environmental risk. Under a credit for voluntary action 
approach, the environment would benefit directly as companies 
work to earn credits by achieving real greenhouse gas 
reductions. At the same time for any businesses contemplating a 
future greenhouse gas limitation regime, whether created under 
the Kyoto Protocol or other domestic or international policy, 
that same unchecked emissions increase poses an economic 
threat. For if future U.S. policymakers should decide to either 
ratify the protocol or otherwise adopt comparable emissions 
limitations, then those additional emissions represent that 
much more of an expense that will have to be incurred in 
meeting such emissions limitations.
    The credits businesses could earn under the proposed 
program represent nothing less than a form of insurance against 
the high cost of a future regulatory regime since businesses 
could use those credits as a means of complying with such a 
regime. In addition, we believe that the incentive to earn 
credits that could be used in such a way would spark a private 
sector led process of searching for the most cost effective 
strategies and techniques for reducing greenhouse gas emissions 
in turn, creating a larger economic momentum toward lowering 
greenhouse gas reduction costs.
    Finally, for policymakers 9 more years of greenhouse gas 
emissions increases on the scale projected also represent a 
threat. Even the most adamant and categorical opponents of 
Kyoto Protocol characterize the science surrounding global 
warming and climate changes uncertain. Current uncertainties in 
fact may be masking a grave threat. This uncertainty does not 
provide justification for inaction. Credit for voluntary action 
provides the opportunity to manage that uncertainty.
    Simply put, the chance to earn emissions reduction credits 
for emissions reductions achieved in the short term would allow 
the environment, businesses and policymakers to opt out of the 
game. The alternative, so long as today's policy stalemate 
resulting inaction persists, sounds like the title of a movie 
from a few years ago, ``No Way Out.'' Not even those companies 
who see substantial economic risk from future compliance 
liability will have any options or tools for managing the risk.
    Finally, Mr. Chairman, let me close by saying that like 
many, if not all members of this committee, the Environmental 
Defense Fund believes that the greatest opportunities to make 
discoveries about true costs, about cost savings and about 
technological innovation are created when the resources of the 
private sector are engaged in market based incentives. This is 
precisely the strategy that would be embodied in the credit for 
voluntary action program. It's voluntary, it's market based, it 
can provide certainty where none now exists. It can let the 
market work. We strongly encourage this Congress to make that 
possible. Thank you for the opportunity to be here and of 
course I would be happy to answer questions.
    [The prepared statement of Mr. Krupp follows:]
    [GRAPHIC] [TIFF OMITTED]60254.044
    
    [GRAPHIC] [TIFF OMITTED]60254.045
    
    [GRAPHIC] [TIFF OMITTED]60254.046
    
    [GRAPHIC] [TIFF OMITTED]60254.047
    
    [GRAPHIC] [TIFF OMITTED]60254.048
    
    [GRAPHIC] [TIFF OMITTED]60254.049
    
    [GRAPHIC] [TIFF OMITTED]60254.050
    
    [GRAPHIC] [TIFF OMITTED]60254.051
    
    [GRAPHIC] [TIFF OMITTED]60254.052
    
    Mr. McIntosh. Thank you, Mr. Krupp. And we will get to 
questions after the end of the panel presentations.
    Mr. Palmer, welcome to the committee, and please share with 
us a summary of your written remarks.
    Mr. Palmer. I appreciate it, Mr. Chairman. I want to 
congratulate you on your leadership on this important issue. 
Let me briefly describe who I am here representing today, 
Western Fuels Association. I am CEO of it. Western Fuels is a 
coal cooperative. We are owned by rural electric cooperatives 
and municipal electric utilities. These utilities put in coal 
fired power plants some 15 and 20 years as the result of 
project energy independence in the Carter years. They have 
invested billions of dollars in these assets. The Rio Treaty, 
the Kyoto Protocol, the Chafee early action legislation are all 
designed to curtail the utilization of coal as a boiler fuel in 
the United States. And that's what brings me to the committee 
today.
    My message to the committee today is a very simple and 
straightforward one and it is this: I think what's happened in 
the last 5 years with the development of the Internet and the 
telecommunications revolution and technology that surrounds it 
may very well moot the issue of the Rio Treaty and Kyoto 
Protocol. The growth of the Internet is now generally 
recognized. Indeed very recently the Commerce Department 
produced a study called the Emerging Digital Economy II. It's 
an excellent study. I have it here in front of me. I refer to 
it in my testimony. It's 42 pages of detailed information on 
the explosive growth of the Internet in the United States and 
abroad. Intel's vision is for a billion people to be connected 
on line within the next 5 to 10 years. That would entail not 
only a billion people but tens of millions of businesses doing 
E-Commerce on line. The next 50 years the world's population is 
projected to grow to some 10 billion people. So in the next 50 
years we will have well in excess of a billion people on line.
    The people that we work with on energy matters we went to 
them and asked them what the electricity implications of this 
means with respect to the explosive growth of the Internet. And 
I would note here that the Department of Commerce left out a 
huge part of the examination in their study. Nowhere in this 
study will you see any discussion about the electricity 
implications of the growth of the Internet. It's simply not 
there, and it's something that needs to be addressed.
    Our preliminary work suggests, Mr. Chairman, that for a 
billion additional people to be connected on line worldwide 
would require the installation of generating capacity in the 
world equal to what exists in the United States today. That's 
not going to be solar and it's not going to be wind and it 
isn't going to be biomass. It's going to be primarily coal 
fired electricity and natural gas. This discussion we're having 
today over global warming or the threat of catastrophic global 
warming is one that began in 1988 before the Internet emerged. 
The Internet didn't emerge until 1995. It is now becoming clear 
that the Internet is going to cause a tidal wave of electricity 
demand worldwide that will result in more and more carbon 
dioxide emissions going into the air, created by human beings. 
Whether the Environmental Defense Fund, the Sierra Club, the 
Natural Resources Defense Council, the Clinton administration 
or anybody else likes it or not, it's going to happen, and the 
impediment to the Internet and the development of the American 
economy will only come from our own government if we make 
another major mistake in energy policy the way we did in the 
1970's with the Fuel Use Act and stand in the way of the market 
that is developing this wonderful technology and the energy 
assets that are required worldwide to serve it. For that 
reason, Mr. Chairman, we oppose the Chafee early action 
legislation. We oppose the Kyoto Protocol, and we believe that 
the Rio Treaty will be soon recognized to be an anachronism.
    In closing let me say this. There have been references to 
the science here today. I'm not going to talk about it. I have 
my own views on it. I think the science is bogus on the 
question of catastrophic global warming. Of course people are 
going to impact climate. No question about that, no argument 
from me. That's not the issue. The words of the Rio Treaty, 
however, focus on dangerous interference with the climate, not 
will there be any climate change by humans. Of course we change 
the climate. We impact the climate. But there has been no 
science suggested, developed, examined, or underscored by any 
of the environmental groups, by any of the government agencies 
that are involved in it, by any of the governments that are 
involved in the U.N. deliberations that should or could deny to 
the American people the robust utilization of fossil fuels as 
our economy has enjoyed over the years.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Palmer follows:]
    [GRAPHIC] [TIFF OMITTED]60254.053
    
    [GRAPHIC] [TIFF OMITTED]60254.054
    
    [GRAPHIC] [TIFF OMITTED]60254.055
    
    [GRAPHIC] [TIFF OMITTED]60254.056
    
    Mr. McIntosh. Thank you, Mr. Palmer, and I will have a 
couple questions for you when we get to that session. Our final 
witness on this panel is Mr. Fay. Welcome. Please summarize 
your written remarks and we'll put them entirely into the 
record.
    Mr. Fay. Thank you, Mr. Chairman. My name is Kevin Fay. I 
serve as executive director of the International Climate Change 
Partnership, the coalition of U.S. industries and associations 
as well as international associations interested in the policy 
development process with respect to global climate change, and 
we appreciate the opportunity to be here today. We were 
organized in 1991. We're one of the largest industry coalitions 
in the world dedicated to this issue. We have consistently 
stressed the need to provide legally binding assurances that 
voluntary actions to reduce greenhouse gas emissions be 
credited in the event any future mandatory scheme is to be 
adopted by the government.
    It's been suggested that supporting credit for early action 
may unwittingly create support for the Kyoto Protocol or that 
instituting a credit for early action program is tantamount to 
implementation of the Kyoto Protocol. We do not agree. ICCP 
believes that the Kyoto Protocol is incomplete and should not 
be ratified in its current form and should not be implemented 
without the advice and consent of the Senate. While the treaty 
does make a good start, we believe, in establishing a market 
based framework for addressing the issue on a global basis, it 
is a work in progress. It sets ambitious targets to be met in a 
most difficult timeframe and does not yet provide for 
developing country participation. Further, the treaty 
negotiators have also failed to yet identify an appropriate 
long term objective.
    We believe that credit for early action legislation can and 
should be Kyoto Protocol neutral. Regardless of the fate of the 
treaty, investments made in energy efficiency, in the reduction 
of greenhouse gas emissions should be legally protected if and 
when any mandatory program is implemented. The predicate for 
this stems not from the Kyoto Protocol but from the Framework 
Convention on Climate Change which the United States signed 
during the Bush administration and sent to the Senate and was 
ratified in 1992. This agreement is what establishes 1990 as 
the baseline for measuring greenhouse gas emissions and also 
requires signatories to make measures to reduce them. 
Responding to this commitment and to the subsequent U.S. 
climate change action plan, many companies have already taken 
steps to reduce their greenhouse gas emissions. Enactment of 
credit for early action legislation represents in our view open 
door compliance with the Framework Convention and sends a 
positive public policy message that those who acted in response 
to this national commitment will not be penalized. Companies 
that have already taken action or are contemplating doing so 
want to ensure these contributions are not ignored if and when 
a mandatory phase of emission reductions begins. Failure to 
recognize these contributions could unfairly force companies to 
make even greater reductions through increasingly more costly 
options. This would have the perverse effect of penalizing 
those companies who acted early. Assurance of baseline 
protection is an important step in this process. In addition to 
removing existing disincentives to action, a credit for early 
action program could provide an additional incentive for 
technical as well as policy innovation. Now is the time to 
experiment with the broad range of options and to more 
precisely determine the costs and benefits of various 
opportunities for reductions.
    This type of experimentation and innovation, which only 
occurs in the United States, in terms of dealing with these 
issues in our view not only spurs economic growth but could 
provide an insurance policy against truly wrenching economic 
impacts in the event that much deeper cuts in the emissions 
were to becoming necessary in the future.
    Finally, while many have touted the success of market based 
mechanisms in reducing environmental compliance costs, the fact 
remains that our experience with such mechanisms is very 
limited. An active credit for early action could provide useful 
experience and educate both government and industry alike as to 
policies that perhaps should be avoided. It has been argued 
that small businesses and farmers will be hurt by a credit for 
early action program. Again we do not agree. ICCP is currently 
encouraging a simplified approach to credit for early action 
that will allow small businesses to participate with minimal 
administrative or bureaucratic burdens. Discussions have also 
included the issue of credit for changes in land management 
practice that could allow farmers to participate. In addition, 
the program should create a market for the technical 
innovations that are often made by small entrepreneurial 
companies. And last but not least we should keep in mind that 
is an entirely voluntary program. There are no mandates for 
small business or farmer participation.
    We believe the precedent for crediting early action was 
established in the 1990 Clean Air Act Amendment when companies 
who moved early on sulfur dioxide emission reductions received 
additional consideration in the subsequent sulfur trading 
program. Drawing on the statutory precedent is important for 
the climate change issue. However, given the scope of 
industries covered and the enormous task to be undertaken, the 
government should go on record now by developing experience in 
advance of any regulatory requirements.
    The United States is on record in support of a responsible 
action to address greenhouse gas emissions. We have ratified 
the Framework Convention on Climate Change. Congress has funded 
a variety of activities under the climate change action plan, 
and other significant government programs. It is not 
unreasonable to request assurance from the government these 
activities, whether past or in the future, not place the 
voluntary actors in future regulatory jeopardy. There are a 
number of legislative proposals that seek to address this short 
term aspect of climate change policy. We commend S. 547, 
introduced by Senators Chafee, Lieberman and Mack and others, 
to create--to eliminate these disincentives and provide credit.
    We commend the efforts of Senators Murkowski and Hagel in 
their legislation to compel more systematic attention to the 
long term challenge of climate change and to focus on the 
necessary role of research and technology in meeting that long 
term challenge. We also commend the newly introduced 
legislation by Representatives Lazio and Dooley to help advance 
the debate on these issues in the House. None of these 
initiatives meet all of our objectives but we are committed to 
working with the appropriate parties to address these concerns, 
such as provision for growth and product coverage.
    We believe it is time to start forging a bipartisan 
national strategy for addressing the climate change challenge. 
That strategy should begin by liberating the leadership, which 
Jack Kemp called for earlier in his testimony, of U.S. industry 
in this global cause. U.S. industry will be a major player in 
developing technologies to reduce greenhouse gas emissions, 
making investments in equipment, facilities and products, and 
generating reductions in their operations. Enactment of 
legislation that removes disincentives for early action and 
that preserves investments already made will help to retain our 
competitive edge and provide significant economic and 
environmental benefits for our Nation as well as for the world.
    Thank you very much.
    [The prepared statement of Mr. Fay follows:]
    [GRAPHIC] [TIFF OMITTED]60254.057
    
    [GRAPHIC] [TIFF OMITTED]60254.058
    
    [GRAPHIC] [TIFF OMITTED]60254.059
    
    [GRAPHIC] [TIFF OMITTED]60254.060
    
    [GRAPHIC] [TIFF OMITTED]60254.061
    
    [GRAPHIC] [TIFF OMITTED]60254.062
    
    [GRAPHIC] [TIFF OMITTED]60254.063
    
    [GRAPHIC] [TIFF OMITTED]60254.064
    
    Mr. McIntosh. Thank you, Mr. Fay. And let me say that Mr. 
Kucinich had to go to Rules Committee about an amendment he is 
putting forward and will try to be back, but he wanted everyone 
to know that is why he's not here right now. My first question 
is to Mr. Fay, and picking up on your closing statement, are 
you saying that American businesses will not take leadership in 
reducing emissions without the type of incentive provided by 
the early action credit program?
    Mr. Fay. I think the American business is taking leadership 
every day in developing technologies every day, but the fact 
remains that what's happened with the passage--with the 
ratification of the Framework Convention and the establishment 
of 1990 as the baseline for measurement of any future action on 
climate change--it potentially puts any actor in jeopardy if 
their economic activity has increased, even if they have 
tremendously reduced their emissions, if in fact a future 
regulatory program is adopted that establishes a different 
baseline. No. 1.
    No. 2, that baseline, 1990, is starting to get pretty far 
away. What most business are finding, it is tremendously 
difficult to go back and even produce a significant data base 
to establish what the emissions were at that point. And so it 
is time to get experience with what are the emissions that are 
occurring for those entities, and how do they measure that. We 
don't have a good handle on that.
    Mr. McIntosh. So to solve both of those problems you don't 
need a credit, you need a baseline.
    Mr. Fay. We think at a minimum as a credit for early action 
it should be some baseline action or baseline assessment 
process, yes.
    Mr. McIntosh. Which seems reasonable--to find out exactly 
how many emissions we do have. Very different beast than a 
credit program. You think in the absence of a credit program 
that businesses would reduce their level of experimentation 
with new technologies?
    Mr. Fay. I think that it's not a question of whether they 
would reduce their experimentation. I think it's a question of 
whether they would take overt steps different from their 
businesses as usual course. We're innovating all the time. 
That's not a question. Could it affect product implementation? 
Perhaps it could, yes.
    Mr. McIntosh. What do you mean by affect product 
implementation?
    Mr. Fay. If it could affect the investments that achieve 
say short term changes versus research in the longer term, 
technological evolution, that most would suggest, if you agree 
with the climate change theory, are going to be necessary in 
order to reduce the emission concerns.
    Mr. McIntosh. Which way does the credit program change 
that?
    Mr. Fay. We think the credit program eliminates both 
disincentives and possibly creates some incentives. I think it 
works first toward eliminating disincentives for some of the 
short term actions.
    Mr. McIntosh. OK. So with the credit program you'll have 
more short term actions and fewer long term investments in 
experimentation?
    Mr. Fay. I think you'll be more willing to take some 
shorter term actions that may be marginal.
    Mr. McIntosh. OK. And then finally, the commitment that 
your members have made to reducing emissions, will that be 
lessened in any way if there's not an early action credit 
program?
    Mr. Fay. It's not a question of whether it will be 
lessened. It's a question of whether the impression is that 
they feel as though they're being placed in a position of 
future regulatory jeopardy. If they take steps to reduce----
    Mr. McIntosh. Before we get to that, when you say it's not 
a question, does that mean the answer to the question is no?
    Mr. Fay. Repeat the question again.
    Mr. McIntosh. Will your members do less or have less of a 
commitment to reducing greenhouse gas emissions if we don't 
pass an early action credit program?
    Mr. Fay. I think it does affect short term investment on 
marginal investment, yes.
    Mr. McIntosh. So some of your members will in the short 
term do less to reduce their emissions.
    Mr. Fay. I think it's a question of where they apply their 
capital. It could affect where they apply their capital.
    Mr. McIntosh. And that could lead to fewer----
    Mr. Fay. In the short term, yes.
    Mr. McIntosh. Which of your members would reduce their 
efforts?
    Mr. Fay. Well, I will not get into speaking for individual 
company decisions on capital investments decisions.
    Mr. McIntosh. So you don't know of any that would do that, 
you think there might be some.
    Mr. Fay. No, I will not get into speaking for individual 
company investments decisions. I would be happy to come back 
and talk with you on that. I'm not prepared to address that 
specific topic in terms of those companies today.
    Mr. McIntosh. OK. And we have unanimous consent to keep the 
record open. Why don't you give us a complete answer to that 
within the next 10 days so we can put that into the record.
    [The information referred to follows:]
    [GRAPHIC] [TIFF OMITTED]60254.065
    
    [GRAPHIC] [TIFF OMITTED]60254.066
    
    [GRAPHIC] [TIFF OMITTED]60254.067
    
    [GRAPHIC] [TIFF OMITTED]60254.068
    
    Mr. McIntosh. The reason I've asked you these questions is 
because I want to know what behavior will change versus what 
desire there is for people to make money. Because it strikes me 
that when companies make money off of an early action credit, 
somebody else is going to have to pay for it in the future in 
terms of taking even greater reductions that they may make at 
some future date.
    Mr. Fay. I don't think we're suggesting that we're trying 
to make money on early action credits. I think what we are 
suggesting is we don't want to be in a position of creating 
again, regulatory jeopardy in the future if their actions, if 
their actions that were taken today don't count 10 years from 
now. But the question is would they.
    Mr. McIntosh. But the question is would they not take those 
actions today.
    Mr. Fay. And I would have to suggest that there are actions 
that may not be taken today.
    Mr. McIntosh. That's what I would like you to supply for 
us--some concrete examples of that. Let me now turn to Mr. 
Palmer. I've got a question for you. You mentioned the 
Internet. Have you seen any projections in terms of the 
percentage of the electricity generated that will be used by 
the Internet say 5, 10 or 15 years out?
    Mr. Palmer. If you take the historical path, the studies 
that we did with the Internet begins with coal. And these are 
preliminary conclusions because no one has looked at this, and 
I might just add as a digression here I think it might be very 
useful for this committee to ask the GAO to take a look at 
electricity implications of what Congress has done here and the 
administration itself. We have to answer these questions if 
we're going to grow the Internet because you need electricity. 
But the preliminary conclusions in our study, the ``Internet 
Begins with Coal,'' is that current U.S. demand is about 8 
percent as related to the Internet. And 30 to 40 percent of all 
increased U.S. demand since the Internet became a big thing, 
1995, the growth and electricity demand is related to the 
Internet. It you take that and extrapolate it there are about 
60 or 70 million Americans on line today and there are a total 
of 150 million people approximately on line worldwide. You 
could come up with some numbers with respect to what happens 
when you go to a billion.
    Now, the conclusion that we have in our report is that when 
you go to a billion, worldwide, you need electricity generating 
capacity equal to what's on the ground in the United States 
today and what is on the ground in the United States today is a 
very large number. We burn a billion tons of coal in the United 
States today in power plants.
    Mr. McIntosh. Per year you said.
    Mr. Palmer. Per year, 1 billion tons. In close to 500 power 
plants. I'm suggesting, Mr. Chairman, that it is going to swamp 
all of the policy experts' projections with respect to 
electricity demand. It makes people like Amery Lovins, who made 
his living preaching negawatts, and it makes him yesterday's 
news. The notion that we are going to conserve our way to a 
brighter future is nonsense. You have to burn fossil fuels to 
make electricity and the coming demand worldwide because of the 
Internet is enormous and it's not stoppable.
    Mr. McIntosh. I'll have to think a little bit to wrap my 
hands around the billion or----
    Mr. Palmer. Billion people on line.
    Mr. McIntosh. Speaking in the United States you indicated 
there were about 60 million people connected to the Internet.
    Mr. Palmer. 60 to 70 million are the numbers I see most 
commonly used.
    Mr. McIntosh. What are the projections for the number of 
people ``on line'' in 5 or 10 years?
    Mr. Palmer. Our growth is actually projected to be 
percentagewise not as great, so we might go to 150, you might 
get a little over a doubling, but it's the rest of the world 
where the growth is going to be the greatest. But even in the 
United States the growth will be dramatic.
    Mr. McIntosh. And so if it doubled the number of users does 
that mean, is it fair to say that Internet-related electricity 
demand goes from about 8 percent to about 15 percent?
    Mr. Palmer. I think that's right. Well actually it depends 
on what happens to the rest of the economy. And this isn't in 
the study, but I do think we see it in our business that the 
Internet driving, the economy through the new startup companies 
in the Internet. You see it with young people that you know, 
maybe members of your family that go to work for the dot coms. 
I have a daughter who has done that, the startups, the boutique 
firms. It's happening everywhere all the time. This 
extraordinary growth in the U.S. economy that we have is 
nationwide and it tends to be very even no matter where you go. 
I believe it is related to that. So if you have more economic 
growth generated by the Internet, then the Internet itself, 
those numbers may change. But I would say it would be safe to 
conclude that if you have a doubling of people on the Internet 
in the United States that the electricity supply required for 
the Internet would go to 15 to 20 percent based on the study, 
this preliminary study we've done.
    Mr. McIntosh. Just so I can again get my hands around that 
billion people figure, the electricity that you said required 
to fuel that will be equal to the amount produced by the United 
States.
    Mr. Palmer. Yes.
    Mr. McIntosh. What percentage will that be assuming a 
static amount of electricity used for other purposes for 
worldwide consumption.
    Mr. Palmer. The United States today is 25 percent of the 
total electricity demand worldwide. We are criticized for this 
by the way. The environmental community thinks we live too 
well, that we need to cut back the way we live. That we need to 
change the way we live. We use by far more energy than any 
other society on Earth. We're 25 percent of that total. So if 
you double worldwide production, in the next 5 to 10 years 
because of the billion people that Intel says are going to be 
on line, 1 billion additional people, you're adding an 
increment of 25 percent to worldwide electricity demand by 
definition. And I think that probably is going to understate 
it, which is going to be a lot of CO2 in the air.
    Mr. McIntosh. From the Internet. So therefore between 20 
and 30 percent, we would have to work out the math, of 
worldwide electricity consumption in the future will go to the 
Internet.
    Mr. Palmer. Will go to the Internet.
    Mr. McIntosh. And Internet-related demand currently is a 
very small percentage.
    Mr. Palmer. Right now it's a very small percentage.
    Mr. McIntosh. Thank you. I wanted to get in my own mind 
where we were headed with that and what the magnitude was. I do 
have a couple more questions but let me turn now to Mr. Terry 
see if he has any.
    Mr. Terry. The new motto is recycle, reuse and log off?
    Mr. Palmer. That's it. We're going to ration Internet 
access. So put in for your time slot.
    Mr. Terry. Well, I'll remember that when I want to check 
out the Huskers Web site the next time out. For the 
Environmental Defense Fund, there's no reason for you to just 
sit there, let me ask you a question. One of my concerns in 
this allocation is who are the winners and the losers by way of 
big business versus small businesses. I missed the first part 
of your testimony, but I know that you've hinted about it and 
or discussed it in your written testimony. Let's talk about it 
a little bit more.
    The crediting program would if reallocate the compliance 
credits from firms that don't act early to those who do--I 
think that's the way it works--you nonetheless maintain that 
small businesses would enjoy some form of economic benefits, 
that the overall burden on the national economy would be less. 
I'm getting lost on that to tell you the truth. For one, it 
assumes that small businesses would not be able to compete in 
this, which is probably an accurate statement. But also it 
seems to recognize that they would benefit because of what I'll 
call a ``trickle down theory.'' But I'm getting lost how 
they'll benefit from that. Perhaps you could explain to me how 
small businesses that wouldn't be able to compete for these 
will enjoy this benefit?
    Mr. Krupp. Absolutely. That's a very fair question and a 
good one. I think what you're really asking is a design 
question. Can you on the Hill together with those in the 
private sector design a system that allows small business a 
level playing field and equal access to participate. I'm 
confident that you can. In fact the proposal that was 
introduced yesterday by Congressman Lazio and Congressman 
Dooley and about 10 other Congressmen does allow small 
businesses to play and allows small businesses to earn these 
credits through a variety of means, first of all by making 
sequestration credits available. It's easy to see how 
sequestration credits could be monetized and parceled out and 
purchased by small businesses. Second, it facilitates the 
playing by small businesses which would be expected to face 
higher transaction costs by allowing a pooling concept, a bunch 
of small businesses, associations of dry cleaners could get 
together, associations of any sort could get together and pool 
their actions.
    So, in terms of the premise that it's important that small 
businesses be allowed to play, I completely agree. And I think 
there are ways through intelligent design that a good credit 
for early action bill can anticipate that and I would include 
the proposal by the Congressmen introduced yesterday in that 
category.
    I would say that you're quite right that as the expected 
emissions growth goes down because there are incentives to make 
that business as usual curve go down, the burden on the whole 
economy, including small businesses, would go down. So that is 
yet another advantage.
    Might I mention that I've become aware of an enterprise in 
Iowa recently, Sherwood Forestry, a couple of enterprises, 
actually, Americo 2 and Sherwood Forestry, both of which are 
small businesses devoted to working directly with farmers to 
harvest carbon dioxide sequestration credits on a strictly 
business basis. Now, our information is that one of these 
businesses is working in cooperation with the Iowa Farm Bureau.
    This is the sort of participation not only by small 
conventional business, but also by small farmers and farming 
businesses that Senator Lugar, actually a Republican from your 
home State, as you know, Mr. Chairman, of Indiana--he has 
actually introduced a bill on the Senate side to facilitate 
such transactions to allow more small farmers to play. It's 
really a design question and a very legitimate concern, and one 
that can be addressed.
    Mr. Terry. I appreciate that. Even though I represent an 
urban area of Omaha, NE, it's a rural State. Our Farm Bureau 
was in here asking for $14 billion in bailout because of the ag 
economy. I was wondering how they are going to pool those 
resources. Maybe the government should just go ahead and buy 
the credits for them. I am still at a loss of how small 
businesses are going to be able to accumulate the assets to 
participate and play in this.
    Let me go on, though. I want to ask Mr. Fay one question 
here. One of the ICCP's credit for early action principles is 
no limit should be placed on the amount of emission reductions 
or enhancement of things for which early action credit could be 
earned. But all of the experts--the Center for Clean Air 
Policy, the Pew Center, Resources for the Future--acknowledge 
that the early action program would reallocate Kyoto budget 
period credits from those who do not act early to those who do. 
This principle seems downright greedy. In fact, someone might 
even suspect the ICCP advocates of early action crediting 
because ICCP member companies expect to corner the market. Fair 
discussion.
    Is that a reasonable suspicion or not in your opinion?
    Mr. Fay. It's not a reasonable suspicion at all, Mr. Terry. 
The reason that we have said that there shouldn't be any limits 
is because if entities are able to produce verified reductions, 
there is no legitimate reason, in our view, for them not to be 
credited with those reductions. That doesn't deal with the 
issue of--what we have set as one of our principles is that you 
should be credited with the reduction.
    We are not saying that the value of the credit should be 
determined at this time. That will be determined when 
ultimately the Congress gets around to adopting some future 
programs. So there shouldn't be a question of whether you have 
earned the credit, did you actually reduce the ton. But what 
that is precisely worth, that is not going to be decided until, 
if and when there is a mandatory program.
    But you shouldn't start discounting credits. If an industry 
has taken steps and reduced a million tons of carbon, they 
ought to be credited with reducing a million tons of carbon. 
It's pretty silly to start discounting that now.
    If you have got to the point where there was a mandatory 
program, you might be limited in how many of those credits you 
could use at one time. That perhaps might be a reasonable 
proposal. But if the incentive is to encourage taking steps to 
reduce tons, it is--it would be a silly exercise, particularly 
at this stage in a voluntary program to start saying, well, you 
can't have credit for--you can only have credit for half of 
what you actually did. That, as an exercise, is--in our view, 
is pretty silly.
    It is not a question of trying to corner the market to 
other people's disadvantage. We would like to see those credit 
programs be designed ultimately to establish the fact that the 
reductions occurred and not ultimately to disadvantage any 
future actors if there is a mandatory program. We are not 
saying there should be a mandatory program in the future.
    Mr. Krupp. Congressman Terry, if I might add, the idea that 
big businesses may stand to gain more credits, if you look at 
the fact, if we are trying to bend down the business's usual 
curve, big business who are the big emitters are the ones that 
we are trying to incent. So if one thinks climate change is 
real or may be real, if one thinks there are risks to the U.S. 
economy by allowing the curve to continue and face regulatory 
action in the future that would be harsher if we don't bend 
down the curve, then, yes, the idea is to come up with a system 
that will get big emitters to emit less. So I would acknowledge 
that to you.
    I would also note, though, that the United Kingdom, Canada, 
New Zealand, Norway, Denmark, in their highest levels of 
governments and their parliaments are moving ahead to establish 
these programs. When you think of the benefits that would 
accrue to their economies as they develop new technologies, new 
ways to power the Internet with less energy, new ways to have 
more efficient cars, it becomes a real risk that if we don't 
adopt a similar system, we will be left behind competitively 
from a competitiveness standpoint. That troubles me.
    I see this proposal as a very modest proposal in view of 
the risks.
    Mr. Terry. Let me give you the forum here.
    Mr. Ridenour. I would like to throw in my 2 cents here. It 
has been suggested that this emissions crediting system would 
allow us to spread out over time and avoid the wrenching 
consequences of Kyoto. It is an insurance policy, we are told.
    But they wouldn't allow us to avoid these wrenching 
consequences. Early crediting would simply redistribute them as 
you have wisely suggested, to small business. The plain fact of 
the matter is that small businesses don't have the kind of 
lobbying power here in Washington, DC, to be able to get early 
credits. The Kyoto Protocol, as you have also suggested and 
groups such as the Pew Center have suggested, requires that any 
credit that is given by the President of the United States, 
would have to come out of the total that is allowed for the 
United States under the Kyoto Protocol. That's assuming, of 
course, that there aren't changes to the Kyoto Protocol. But 
right now as it stands, it would come out of our allotment.
    That is something that should concern us a great deal. 
Remember, small business creates two-thirds of all new jobs in 
this country. We are talking about competitiveness here.
    I also want to point out that if we are really concerned 
about people who are disadvantaged in this country, blacks and 
Hispanics, we can't possibly support early action crediting. 
What kind of businesses do you suppose they have? They are 
small businesses. We should not snuff out their chance at the 
American dream.
    Mr. Terry. I have got some folks in my office, but this is 
fun. Can I have one more question?
    Mr. McIntosh. Sure. You have been with us diligently all 
day long.
    Mr. Terry. Getting back to Mr. Fay, I guess we are going 
right to left from our perspective at least. In your testimony, 
you write that, ``the failure of the credit voluntary emissions 
reductions could, unfairly,'' force early reducers to make more 
costly reductions later.
    But isn't this a problem of your own making, a problem 
groups like the ICCP have brought upon themselves by promoting 
the concept of a mandatory global treaty?
    Mr. Fay. I don't think that I am going to characterize us 
as promoting a mandatory global climate treaty. We were 
organized to provide what we consider to be responsible input 
into a policy process. We have attended all of these 
negotiations.
    It is pretty amazing to go to a negotiation for 10 years to 
watch 170 countries, including our own government, including 
Republicans and Democrats, and there is no country opposed to 
dealing with climate change. So if you want to look big 
business in the eye and say, well, climate change isn't an 
issue, it would be pretty hard to convince them of that based 
on the activity that we have seen to date.
    We do believe that there is some compelling scientific 
concern out there that this is an issue that is going to be 
dealt with. We also believe that technology, hopefully, will 
deal with this problem or survive the policy processes so that 
technology can deal with the problem. We think that we are 
going to have the technology solutions to do that.
    But there is no question the policy process is moving on 
ahead and no one seems inclined to say there is not going to be 
a climate change policy. What we are saying is, if you are 
going to do this, it should be done on a market basis. Every 
economic study that I have seen says that the market-based 
approach reduces costs 40 to 80 percent. But if you are going 
to do this, that's a policymaker's decision. And at the same 
time we should try to do this as cost effectively as possible 
so that we can manage our way through this and so that we can 
introduce the technologies to achieve the objectives that, 
frankly, the policymakers have yet to identify.
    Mr. McIntosh. Thank you for joining us, Mr. Terry; I 
appreciate it.
    I do have a couple of more questions, just following up on 
Mr. Terry's and our earlier discussion, Mr. Fay. Am I incorrect 
in understanding that one of your core concerns is the fairness 
of the baseline that gets established in the future? Would that 
concern be solved if either at the time the protocol is 
ratified or as a separate policy statement in advance of that, 
the Senate and Congress agreed that when they establish the 
baseline for compliance they will adjust from 1990 forward, 
based on what industry changes has happened?
    Mr. Fay. That goes a long way toward addressing our 
concerns, yes. I would also be willing to accept Mr. Kemp's 
offer of a tax expensing provision in lieu of a credit, if they 
would like to do that, too.
    Mr. McIntosh. Well, I will tell you my concern about an 
early action credit program goes way down when the credit that 
is received is a tax credit or even a credit against other 
environmental compliance, because you don't have these perverse 
incentives in the policy debate on Kyoto. That's really a 
timing question. Once the decision has been made by the Senate 
to ratify that treaty then, sure, have the credits for actions 
that are already established policy. OK.
    Mr. Fay. Let me just say, though, that we started talking 
about credit long before there was a Kyoto. We don't see this 
as Kyoto driven. The problem is the Framework Convention that 
we ratified and is the official statement of the United States 
on climate change: that climate change is a problem, that 1990 
is going to be our baseline and we have made a national 
commitment to reduction measures and, now, all of the 
discussions about mandatory programs in the future. Well, 
between 1990 and whenever we get to that mandatory program, 
things are going to change. Companies like Intel, the 
semiconductor industry is five times the size they were then.
    Mr. McIntosh. You read ``Kyoto'' as a shorthand for 
mandatory requirements in the future, which I don't think is 
established policy of the country.
    Mr. Fay. No. I am saying that our credit protection 
discussion is not--our opposition is not based on the fact that 
Kyoto is out there. It's based on the fact that all of the 
discussion that we have seen on climate, every indicator that 
we have seen is that at some point somebody is going to propose 
a mandatory program. We are not saying that we want a mandatory 
program. We would love to do it on a voluntary basis if we 
could.
    Mr. McIntosh. Let me be clear, my concern about a program 
for early action credit is giving you credit toward any future 
mandatory program because it creates perverse incentives for 
adopting that policy. Credits toward other things, such as tax 
credits, I am happy to do; I think that makes sense. You create 
incentives for people to do something that is socially useful. 
That's assuming the science is correct or assuming, as Mr. 
Krupp pointed out, that in uncertainty you want to take some 
policy action.
    Thank you. I think that you have cleared up in my mind the 
different concerns that your group has, although I really would 
like some of those specifics that we talked about.
    Mr. Krupp, let me ask you, have you had a chance to see a 
story--I think it appeared today in the GreenWire, titled, 
``Critics say EDF tainted by association with ERT?''
    Mr. Krupp. I have.
    Mr. McIntosh. You haven't seen that?
    Mr. Krupp. I have seen that.
    Mr. McIntosh. So you are familiar with it. Some critics say 
that EDF would profit from the policy of which it is a leading 
supporter, essentially this early action credit policy. Now, 
some people believe that EDF was the chief outside consultant 
in developing some of the language of that legislation 
specifically over in the Senate. Is that perception a correct 
one?
    Mr. Krupp. I think EDF was one of a series of constituent 
groups that participated in discussions that led to the Senate 
bill.
    Mr. McIntosh. Did you work at all or did EDF work at all on 
the measurement and verification section?
    Mr. Krupp. I am sure we consulted on the entire bill.
    Mr. McIntosh. I assume that you are familiar with this. 
That section would permit qualified independent third parties 
to measure, track, and report emission reductions on behalf of 
participants. You are more familiar with this legislation than 
I am, having consulted and given opinions to the Senate in its 
drafting. What type of organizations are qualified to measure, 
track, and report emissions reductions and would EDF or 
Environmental Resources Trust or EEI, I guess, would any of 
those entities fit the description of qualified independent 
third party?
    Mr. Krupp. Let me--EDF, I am told, would not fit the 
description. It's unclear whether ERT would or not. Perhaps it 
would be useful, Mr. Chairman, since you have raised the 
question if I--I understand it is a legitimate question to ask 
when the money is involved, what is going on--if I explained a 
little bit about ERT and EDF.
    Mr. McIntosh. I'm sorry, Mr. Krupp, but would you repeat 
that last----
    Mr. Krupp. Since you have raised this issue, perhaps you 
would like me to explain, and I would appreciate the 
opportunity to explain a little bit about EDF's role and ERT's 
role.
    Mr. McIntosh. Absolutely. In fact, that was going to be my 
next question. Please do.
    Mr. Krupp. I think when money is involved people have a 
right to ask questions. I don't take offense at people asking 
tough questions of us, just as we ask tough questions of 
ourselves and others. Especially since there are folks who 
don't like emissions trading to begin with, I can understand 
why these questions would be asked.
    Let me make three points----
    Mr. McIntosh. Also, if I can interject, so you know where I 
come from, I like the concept of emissions trading in general. 
I commend what EDF has done in some of the other areas, in acid 
rain and any other policy areas. So it's not an automatic that 
I'm opposed to those types of ideas. I tried to explain earlier 
some of the factors that lead me to be concerned about this 
particular legislation. But you are right, there are probably 
some people out there who are opposed to----
    Mr. Krupp. I appreciate that, Mr. Chairman, that you were 
part of the Bush administration that came up with the historic 
innovation of acid rain emissions trading, and I am very 
appreciative of that. But the Environmental Defense Fund's 
advocacy of these market-based solutions, as is illustrated by 
that particular example, when we advised the White House--and 
``advised'' is the right word in all of these cases--about how 
to establish a market-based policy for acid rain is part of a 
long tradition at the Environmental Defense Fund of believing 
that market-based solutions offer flexible opportunities to get 
performance, get environmental benefits.
    We have worked with legislators on water marketing in 
California, part of the Miller-Bradley act that was enacted at 
CDPIA. We have worked with companies from McDonalds to--as 
various as from McDonalds to British Petroleum on various 
voluntary programs to get environmental gains, just as we have 
continued to litigate and engage a whole wide variety of tools.
    So at no time has the Environmental Defense Fund's advocacy 
been affected by the fact that a couple of years ago we did 
help to create an independent 501(c)3 organization whose 
mission, I might say, is my second point, is also environmental 
protection. The whole concept that there is a supposed conflict 
of interest between two independent 501(c)3s, both nonprofits, 
both with environmental missions, one that chooses advocacy and 
one which chooses transactions, strikes me as odd. I just don't 
see it. But to the extent that the Environmental Resources 
Trust ever earns fees or revenues that exceed expenses, as I 
understand their operations, those revenues would be plowed 
right back into environmental projects. In no case will funds 
ever flow from the Environmental Resources Trust to the 
Environmental Defense Fund.
    My third and final point is that because the missions of 
these organizations are both environmental missions, because 
both organizations believe in market-based transactions, I 
think the fact that EDF has a continuing relationship and that 
three of our staff members serve on the board of Environmental 
Resources Trust is a useful confluence that allows for 
synergies because if one believes that these market mechanisms 
are good ways to achieve environmental progress, as we do, then 
having the ability to work with an organization that is doing 
demonstration transactions like ERT is good from the 
perspective, my perspective as head of the Environmental 
Defense Fund.
    So I don't see the case for a conflict; I see a real 
confluence. But there are no revenues that are going to flow 
back to the Environmental Defense Fund from this whatsoever.
    Mr. McIntosh. OK. You have addressed the conclusion which 
that article moved toward, and I am glad that you were able to 
put that on the record. Let me, though, ask you a couple of 
questions about ERT. I think that I understand the difference 
between EDF and ERT. You are telling me they are separate 
entities with some overlap on the board, and you EDF helped ERT 
to get started, but they are run as independent organizations.
    You may not be able to answer some of my questions about 
them, but let me ask you if you know. Does ERT have contracts 
or memorandums of agreement to monitor and certify emissions 
reductions with any company at this point, particularly any 
utility?
    Mr. Krupp. Yes.
    Mr. McIntosh. They do? Do you know what that arrangement is 
and what that company is?
    Mr. Krupp. The company is Niagara Mohawk.
    Mr. McIntosh. What is the nature of that memorandum of 
understanding and, in particular, how is ERT compensated for 
providing the monitoring services?
    Mr. Krupp. It's--there is compensation for the reporting of 
emissions that is provided to ERT by Niagara Mohawk under that 
memorandum.
    Mr. McIntosh. And I think this came from a press release 
from ERT, but they were to receive some of the compensation as 
a commission on reductions sold or transferred, is that right, 
and then some emissions credits themselves?
    Mr. Krupp. That was discussed but, no, that is not the way 
that it works.
    Mr. McIntosh. OK. Share with me then how it does work.
    Mr. Krupp. I think I just did. There is straight monetary 
compensation for the provision.
    Mr. McIntosh. OK. It's a flat fee that they are paid?
    Mr. Krupp. Yes.
    Mr. McIntosh. OK. And they are capable of entering into the 
business of monitoring those emissions credits for which they 
understandably would ask for a fee to do that work?
    Mr. Krupp. Yes.
    Mr. McIntosh. Let me ask this.
    Mr. Krupp. Mr. Chairman, I guess the services that are 
provided really are reporting as opposed to monitoring. ERT 
would have to interact with others who would do the monitoring.
    Mr. McIntosh. So the company or monitors--they hire someone 
else to monitor, and the ERT certifies that they are correct?
    Mr. Krupp. Essentially, yes. An independent public registry 
is provided by ERT.
    Mr. McIntosh. Based on my experience in the Bush 
administration that you referred to, an independent registry 
gives people a great deal of comfort that, in fact, reductions 
are occurring. I understand the purpose of it.
    You can understand, I think, dealing in public policy as 
you do, the concern that arises that there would be, if not an 
actual monetary benefit to the Environmental Defense Fund, an 
appearance that there may be a potential here to benefit from 
this legislation.
    Would you support language being added to the legislation 
that prohibits companies or charitable organizations, whatever, 
from receiving compensation other than compensation for the 
monitoring service from those individuals or those entities 
that they monitor? In other words, people with conspiracy 
theories could construct a scenario where ERT is monitoring 
Mohawk and Mohawk is also approached by EDF for a financial 
contribution. Would you agree that it would be important, to 
maintain the integrity of the legislation, that that be 
prohibited?
    Mr. Krupp. I think there is a simpler solution, Mr. 
Chairman. Environmental Defense Fund doesn't accept 
contributions from anyone that emits. We have never accepted a 
corporate contribution from a utility or manufacturer, period.
    Mr. McIntosh. So yours are more broad in avoiding that 
appearance of conflict?
    Mr. Krupp. I think that we have found, in effect, a 
solution. We are not supported by companies that emit 
pollution, manufacturing business and the oil business. Out of 
our $30 million budget last year, I would be surprised if one-
tenth of 1 percent of our income came from corporate 
foundations, and if so, I think Newman's Own gave us a gift.
    Mr. McIntosh. Two questions then arise. I think that you 
are correct in pointing out that that would solve the problem 
for you. I assume that you would make pledges to not change 
that policy if EDF or ERT entered into the monitoring business.
    Mr. Krupp. We are not going to change that policy.
    Mr. McIntosh. Given that, do you think that it would be 
good to change the legislation so that other non-profit 
organizations would have the same legal restraints that you 
have adopted voluntarily?
    Mr. Krupp. I would be happy to look at any suggestions that 
you draft and comment on specific language.
    Mr. McIntosh. Good. I appreciate that.
    I appreciate your candor on this, and hopefully we have 
given you the opportunity to respond to that article.
    I have no further questions. Anybody else?
    Mr. Ryan.
    Mr. Ryan. Where is Jack Kemp?
    Mr. McIntosh. Catching a football.
    Mr. Ryan. I just want to apologize, Mr. Chairman. Like you 
got dragged into an office with the Ways and Means chairman, I 
did with the majority leader on some important issues--
important to Wisconsin. So sorry about being late.
    Mr. McIntosh. Diary farmers?
    Mr. Ryan. It has something to do with part of our daily 
diet; let's put it that way. At this time I really have no 
questions.
    Mr. McIntosh. Thank you, Mr. Ryan. As I said, we will keep 
the record open for 10 days. If the minority has any additional 
questions, since Dennis wasn't able to get back, you can 
forward those on to the witnesses.
    Thank you for participating. I appreciate it greatly. The 
hearing is adjourned.
    [Whereupon, at 5:44 p.m., the subcommittee was adjourned.]

                                   -