[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]



 
                  NEW CONCEPTS IN ENVIRONMENTAL POLICY

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON ENERGY POLICY, NATURAL
                    RESOURCES AND REGULATORY AFFAIRS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 28, 2002

                               __________

                           Serial No. 107-197

                               __________

       Printed for the use of the Committee on Government Reform


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

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                     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       MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida         EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California             PATSY T. MINK, Hawaii
JOHN L. MICA, Florida                CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia            ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
BOB BARR, Georgia                    DENNIS J. KUCINICH, Ohio
DAN MILLER, Florida                  ROD R. BLAGOJEVICH, Illinois
DOUG OSE, California                 DANNY K. DAVIS, Illinois
RON LEWIS, Kentucky                  JOHN F. TIERNEY, Massachusetts
JO ANN DAVIS, Virginia               JIM TURNER, Texas
TODD RUSSELL PLATTS, Pennsylvania    THOMAS H. ALLEN, Maine
DAVE WELDON, Florida                 JANICE D. SCHAKOWSKY, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
ADAM H. PUTNAM, Florida              DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho          STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia                      ------
JOHN J. DUNCAN, Jr., Tennessee       BERNARD SANDERS, Vermont 
JOHN SULLIVAN, Oklahoma                  (Independent)


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                     James C. Wilson, Chief Counsel
                     Robert A. Briggs, Chief Clerk
                 Phil Schiliro, Minority Staff Director

Subcommittee on Energy Policy, Natural Resources and Regulatory Affairs

                     DOUG OSE, California, Chairman
C.L. ``BUTCH'' OTTER, Idaho          JOHN F. TIERNEY, Massachusetts
CHRISTOPHER SHAYS, Connecticut       TOM LANTOS, California
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEVEN C. LaTOURETTE, Ohio           PATSY T. MINK, Hawaii
CHRIS CANNON, Utah                   DENNIS J. KUCINICH, Ohio
JOHN J. DUNCAN, Jr., Tennessee       ROD R. BLAGOJEVICH, Illinois
JOHN SULLIVAN, Oklahoma

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
                       Dan Skopec, Staff Director
               Jonathan Tolman, Professional Staff Member
                         Allison Freeman, Clerk
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 28, 2002.....................................     1
Statement of:
    Ellerman, A. Denny, senior lecturer, Sloan School of 
      Management, Massachusetts Institute of Technology..........    26
    Green, Kenneth, chief scientist, Reason Public Policy 
      Institute..................................................    37
    Nastri, Wayne, Regional Administrator, Environmental 
      Protection Agency, Region IX...............................     6
Letters, statements, etc., submitted for the record by:
    Ellerman, A. Denny, senior lecturer, Sloan School of 
      Management, Massachusetts Institute of Technology, prepared 
      statement of...............................................    28
    Green, Kenneth, chief scientist, Reason Public Policy 
      Institute, prepared statement of...........................    40
    Nastri, Wayne, Regional Administrator, Environmental 
      Protection Agency, Region IX:
        Informtation concerning mercury offset pilot program.....    68
        Informtation concerning 2002 proposed trading policy.....    73
        Memorandum dated April 10, 1998..........................    94
        Prepared statement of....................................    10
    Ose, Hon. Doug, a Representative in Congress from the State 
      of California, prepared statement of.......................     4


                  NEW CONCEPTS IN ENVIRONMENTAL POLICY

                              ----------                              


                         TUESDAY, MAY 28, 2002

                  House of Representatives,
  Subcommittee on Energy Policy, Natural Resources 
                            and Regulatory Affairs,
                            Committee on Government Reform,
                                                        Orange, CA.
    The subcommittee met, pursuant to notice, at 9:30 a.m., in 
room 209, Argyros Forum, Chapman University, Orange, CA, Hon. 
Doug Ose (chairman of the subcommittee) presiding.
    Members present: Representative Ose.
    Staff present: Dan Skopec, staff director; Jonathan Tolman, 
professional staff member; Yier Shi, press secretary; and 
Allison Freeman, clerk.
    Mr. Ose. Welcome to this morning's hearing before the 
Subcommittee on Energy Policy, Natural Resources and Regulatory 
Affairs. We are today in Orange County for the purpose of 
taking testimony on the environmental issues before the 
country; in particular, how we can move to the next generation 
of environmental improvements.
    As a member of the Government Reform Committee, I have had 
an opportunity to see how the Government spends our tax 
dollars, manages our programs, and delivers its services to the 
American people. Like any good business, Government needs to 
continually evaluate its performance and make necessary changes 
when current policies are out-of-date. Government policies to 
protect the environment are no exception to this rule.
    In 1970, the U.S. EPA was established to address the 
massive pollution problems our country faced. Through laws, 
such as the Clean Air Act and the Clean Water Act, EPA has 
sought to reduce the bigger sources of pollution: industry and 
wastewater treatment emissions. EPA took a ``command and 
control'' approach to these problems, setting strict emission 
standards and proscribing the type of technology that industry 
could use to meet those standards. Although the compliance 
costs were high, these rules did succeed in reducing pollution 
from industrial sources. Today, as a result, we have cleaner 
water and cleaner air.
    But, as our society has evolved and our economy has moved 
away from its longstanding and traditional industrial base, we 
have reached the time when we must reevaluate our performance 
in protecting the environment.
    Despite efforts to clean our air, there are still 34 
counties in California that fail to meet at least one of EPA's 
air standards. Three-fifths of smog-causing nitrogen oxides 
come from cars, trucks, railroads, and other non-industrial 
sources that are not directly regulated by the Clean Air Act.
    And, while industrial pollution has been virtually 
eliminated as a source of water pollution in California, 60 
percent of the rivers and streams that EPA has assessed are not 
fully fishable or swimmable. Think about that, 60 percent--you 
can't go down there and just jump in the old water. The leading 
sources of degradation in California's rivers and streams are 
agriculture, forestry activities, urban runoff and storm 
sewers, and municipal point sources, which are not effectively 
managed under the Clean Water Act.
    By 2025, the population of California is expected to reach 
nearly 50 million people. This State will have to accommodate 
an additional 15 million people over the next 25 years. Think 
about the amount of food, water, housing, and energy consumed 
by an additional 15 million people. To say that's going to put 
a strain on our environment is to understate the obvious.
    If we are to prepare for these changes, we must begin to 
take a different approach to environmental regulation. The old 
``command and control'' approach won't get us where we need to 
go. Today's environment is inflexible, and the compliance costs 
often are too high. The time has come for our government to 
seek innovative ways to manage our environment. High standards 
of environmental protection are a must. And, individuals must 
have the flexibility to meet those standards in new ways. 
Government functionaries should not be environmental bean 
counters but environmental managers. The goal should not be the 
number of permits issued or the amount of money spent, but, 
rather, do we clean up the environment.
    While we face some daunting problems, there are also some 
reasons to be hopeful--areas where environmental innovation and 
experimentation have, in fact, worked. For example, the 1990 
Clean Air Act Amendments introduced a novel concept for 
controlling sulfur emissions from power plants. Instead of 
requiring specific clean technology at every plant, that is, 
the equipment, sulfur emissions in total were capped for the 
whole country. Power plants were then forced to either reduce 
their own emissions, or buy credits, or purchase credits from 
other plants that reduced emissions further than they were 
required. At the time, environmental economists predicted that 
this would be a more efficient way to reduce pollution. The 
program was even more successful than originally predicted, 
with power plants reducing sulfur pollution even more 
effectively than even the economists thought. Dr. Green, you 
are going to have something to say about that.
    EPA itself has attempted to adopt more flexible management 
techniques. Project XL, which began in 1995, was an effort by 
EPA to improve environmental performance while reducing 
regulatory burdens.
    The State of California, with the help of EPA's Region IX 
office whose director is here with us today, has also achieved 
some success in terms of adopting innovative and flexible 
environmental policies. The RECLAIM program and the Bay Area 
Emissions Trading Program are two good examples. But, such 
programs are few and far between.
    The purpose of today's hearing is to look for ways that we 
can increase the frequency of such programs. California is a 
perfect place to begin this search. We have the largest 
population in the United States, we have serious air pollution 
problems, we have a huge agricultural industry, we have 
sprawling suburbs, numerous river systems, we have the Bay 
Delta, which is, frankly, a very unique asset to the State, 
hundreds of miles of coastline, we have mountains, forests, and 
deserts. Frankly, California has a plethora of environmental 
challenges.
    Last summer, President Bush was in California and stood by 
the General Sherman Giant Sequoia and called for a ``new 
environmentalism'' that embraces ``a new spirit of respect and 
cooperation'' in which ``citizens and private groups play a 
crucial role.'' New approaches to environmental policy that 
complement or even replace the current command and control 
regulations will depend on government agencies fostering the 
creativity and ingenuity of private individuals, organizations, 
and associations.
    I want to welcome our witnesses today. They include: Wayne 
Nastri, the Regional Administrator for EPA Region IX, Professor 
A. Denny Ellerman, from the Center for Energy and Environmental 
Policy Research at MIT, and Dr. Kenneth Green, Director of 
Environmental Program for the Reason Public Policy Institute.
    [The prepared statement of Hon. Doug Ose follows:]

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    Mr. Ose. Gentlemen, welcome. This committee, by practice, 
swears in every one of its witnesses, regardless of the 
hearing, so I'm going to ask each of you to rise. Thank you. 
Raise your right hands.
    [Witnesses sworn.]
    Mr. Ose. Let the record show that the witnesses answered in 
the affirmative.
    The way we work this is that you've all submitted written 
testimony--I've read the testimony, my staff has read the 
testimony, sometimes they have to read it a second time, but we 
have read the testimony. If you could go through maybe 5 or 7 
minutes to summarize your respective testimonies that would 
expedite things. Since we don't have a lot of other Members, we 
are not going to have a lengthy debate here; it's only myself, 
and then we'll just go to questions. I do have a number of 
questions.
    So, Mr. Nastri.

      STATEMENT OF WAYNE NASTRI, REGIONAL ADMINISTRATOR, 
           ENVIRONMENTAL PROTECTION AGENCY, REGION IX

    Mr. Nastri. Thank you, Chairman Ose. It's a pleasure to be 
here this morning in beautiful southern California, close to my 
home I might add.
    Since my arrival at EPA, I've had the opportunity to 
discuss priorities for the Agency on several occasions. I've 
consistently stressed my commitment for Region IX to be 
flexible, innovative, and to be results driven.
    As you've noted, we have prepared testimony. That testimony 
has been submitted, and as you request I will briefly summarize 
that testimony.
    When Governor Whitman came on board as the Administrator, 
she made very clear to us that we really had three goals that 
we had to achieve, that is that the air is cleaner, the water 
is purer, and the land is better protected at the end of our 
term. And, the manner in which we achieve that is really a lot 
up to our discretion, but clearly innovation has a big role in 
how we approach that.
    A number of programs that the President and Administrator 
Whitman have proposed have been based on voluntary measures, 
have been based on flexibility. They've been based on regional 
approaches, and are all approaches that, as you've noted, have 
been proven in the past and have been successful.
    We think that, as again you've noted, there's been 
tremendous success over the last few years, and let me restate 
that, over the last two decades there's been tremendous 
success. But, clearly, the low-hanging fruit of success is 
gone, and the question is how do we get to the next level of 
environmental clean-up?
    The ``command and control'' structure may not work, and so 
when we look in terms of flexibility we try to identify what 
are some of the most flexible means that we do have to achieve 
that.
    I think one of the most flexible means, when people think 
about flexibility, is a voluntary program, and in a voluntary 
program we are experimenting with industries and trying to get 
them to step up to the table to look at global climate change. 
I think that's a good example, where although the United States 
is not participating in the Kyoto protocol we are trying to 
reach many of the goals through voluntary means.
    And, so, can industries step up to the plate and meet some 
of those reductions? And, more importantly, in a manner that, 
should some future events allow us to be tied in on a more 
global basis, we can gain the advantages of some of the efforts 
we've done without losing the innovation and the timing from 
that perspective?
    I'd like to give an example of some of the successes that 
we've seen in some of the voluntary programs. One example that 
comes to my mind has to do with the mining industry in the 
State of Nevada. Mercury emissions were significant, through 
data that was brought to us through our toxic release 
inventory. We were able to go to the four largest gold mines 
and say, ``We believe there's a problem. Let's sit down 
together and discuss how we might be able to reduce these 
mercury emissions.''
    Now, this was all done in the context of having a MACT, 
Maximum Achievable Control Technology, rule that was going to 
be developed in 2007, and the mines said to us, we'll be 
willing to work with you if you can put in abeyance the MACT 
rule. And, we said, well let's see what we can come up with. 
And, we were actually able to sit down with the mines, get them 
to achieve a 50 percent reduction in less than a few years 
time, and for that we then went to Headquarters and said, 
``Look, we've gotten tremendous reductions, we saw that we 
don't need to move forward on this MACT rule, let's demonstrate 
the achievements.''
    Now, the interesting thing was, in this voluntary program 
the mines in the State of Nevada said, look, we're willing to 
do this with you, but we want to keep this on the quiet for 
now. We don't want to be held up as the industry poster boy and 
have all our colleagues extremely upset at us. So, we said, 
fine, so in one sense we don't really talk much about it, but 
in another sense we talk about a voluntary program and success 
that can be achieved. This is an excellent example.
    So, from the voluntary aspect, we think there's a lot of 
opportunity. We think that we can achieve those measurable 
reductions and go ahead and continue to meet the next round of 
environmental goals.
    There are other issues, too, that we can talk about here in 
southern California. There's the Santa Anna Watershed Project. 
There we are looking at bringing in a number of different 
municipalities, agencies, and trying to look at water quality 
protection from a holistic basis, from a watershed basis, 
instead of each municipality trying to address the various 
concerns as the water comes into their jurisdiction.
    This is also exemplified, I think, in terms of our approach 
when we talk about the Watershed Pilot Program that the 
President and Administrator discussed, but we'll be looking at 
21 pilots across the Nation and trying again to look at a 
holistic approach instead of the jurisdiction by municipality 
approach.
    So, those are two examples of the voluntary programs.
    The next approach that we are looking at in terms of 
innovation is market-based approach. You talked about the 
RECLAIM, the Regional Clean Air Incentives Market. You also 
talked about the Acid Rain Program, that program being over 90 
percent effective, it is our most cost-effective program to 
administer, requiring less than 21 people across the Nation. It 
is a model for many of the programs that we are looking at, and 
so when we look at market-based approaches we can look at 
RECLAIM.
    RECLAIM, obviously, had some issues, I want to say last 
year or the year before, in terms of what happened when the 
credits became sparse. We are certainly looking at how that can 
be rectified and what can be traded.
    In terms of other market-based approaches, we are also 
looking at water quality trading. This, I think, is a unique 
concept. I think people are comfortable with the air quality 
trading concept, but on the water quality side it's something I 
think that we are going to have to take a closer look at.
    A third aspect in terms of innovation is really looking at 
new technologies, those technologies that exist. When you think 
about EPA and innovation I always think of Superfund, but in 
Superfund you have a number of technologies that are always 
brought to bear. You have the SITE program, the Superfund 
Innovative Technology Evaluation Program. These programs 
utilize new technologies that haven't generally been utilized 
or proven elsewhere before. And, given that technology, it's a 
chance to demonstrate whether or not this works.
    In supporting new technologies, and I will address that a 
little bit more shortly, you do have to address the concept of, 
not only addressing the technical aspect of innovativeness, but 
addressing the culture aspect, and that's something, again, 
that I want to talk about a little bit later.
    The fourth aspect is systems improvement. How can we 
improve our systems so that we are doing a better job in 
serving our stakeholders, whether that be the general public, 
whether that be the State government, tribal government, or 
local government? How can we make information that we have more 
readily available and, therefore, more readily usable to make 
timely decisions? I think given all the information, given all 
the happenings that have occurred since September 11th, that 
information is absolutely vital. We need to make sure that we 
can address the information needs, so by improving our systems 
technology, and not necessarily by simply replicating various 
systems, we need to really look at how can we effectively 
manage and access data.
    That really concludes the four programs that I talked about 
in terms of our strategic vision. We are focusing on greenhouse 
gases, reducing smog, improving water quality, and diversified 
environmental protection tools. That, I think summarizes the 
comments of the testimony that was submitted.
    Now, in terms of our outlook and what I see as the 
challenge of innovation, I'd like to give you my perspective. 
The key view, or the key challenge in my short tenure as the 
RA, is the culture within EPA. It's getting people to accept 
the fact that we have a challenge before us, and how can we 
meet that challenge aggressively and not be afraid of failure. 
No one wants to be on the receiving end of someone saying, why 
did we use this technology when it was experimental, it hadn't 
been proven across the Nation, and it didn't get us the results 
we wanted, in the timeframe that we wanted, or in the budget 
that we wanted. And, that fear is something that really tends 
to suppress innovation.
    And, so, what we've been trying to do is change the 
rewards, the recognition, the culture if you will, in terms of 
how can you get people to embrace change, to say we can become 
a champion and we can now move forward in this technology. And, 
it's interesting, because it's little things within the Agency 
that I think will go a long way. It's having management, it's 
having leadership, recognizing that everything is not going to 
go perfectly, and realizing that we're going to be there to 
support them.
    One of the things that I've instituted in Region IX, 
although it may sound trite, it's actually a big hit within the 
region, and that is, whenever there is a significant project 
that garners a lot of attention, we make very clear, we'll 
bring in the team, we'll say this is the goal, this is what we 
are trying to do, you tell us how can we do it, and we get them 
to lay out the specific timetables, the goals, the milestones, 
the objectives. And, when we meet those goals and objectives, 
and we make sure that they have all the resources that they 
need, I pull them into my office and we have a party, whether 
it's cookies and ice cream, and soda, or chips and what not, 
the staff really appreciates that, and they appreciate the 
recognition that they are getting for doing it. And, when 
things don't go right, we say we've learned a lot from this. 
How could we have done this thing differently? We cannot be 
afraid to embrace change, to embrace innovation, that is so 
important to us.
    Now, not only is that an issue within the Agency, it's 
really something that we need to look to for support from our 
political leadership, because I think--I could be the one 
saying, you know, we shouldn't have done this, or we should 
have done this, very easily I could be on the receiving end of 
the congressional hearing saying, ``Mr. Nastri, why did you go 
with this approach when you knew that, in fact, that technology 
wasn't necessarily proven?'' So, we certainly look to you, 
Chairman Ose, and to other congressional leaders, to have that 
faith and confidence and to instill in us to move forward, to 
take those chances, assuredly, minimizing every single 
potential risk possible, looking at all the potential up sides 
and down sides. And, that's something that we, obviously, take 
very seriously.
    From my perspective, I think that is the biggest challenge 
that we face. I think when you look at the plethora of ideas 
that people come up with, there's no shortage of ideas out 
there for us to embrace and to move forward on. The real 
challenge is making sure that we, as an Agency, and our States, 
and our Federal Government, supports us as we take those 
challenges and move forward.
    And, that concludes my remarks at this point. I'll be 
looking forward to answering any questions you may have later.
    [The prepared statement of Mr. Nastri follows:]

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    Mr. Ose. Thank you, Mr. Nastri. We do appreciate you coming 
down.
    Mr. Nastri. Thank you.
    Mr. Ose. Our next witness is Dr. A. Denny Ellerman, who a 
Senior Lecturer, Sloan School of Management, at Massachusetts 
Institute of Technology, and the Executive Director of MIT's 
Center for Energy and Environmental Policy Research.
    Dr. Ellerman, welcome.

 STATEMENT OF A. DENNY ELLERMAN, SENIOR LECTURER, SLOAN SCHOOL 
      OF MANAGEMENT, MASSACHUSETTS INSTITUTE OF TECHNOLOGY

    Dr. Ellerman. Thank you, Chairman Ose, and it's a pleasure 
to be here. I'm very grateful for this opportunity to discuss 
innovative approaches to environmental regulation, which is a 
field to which we've directed a lot of our research at MIT.
    I'm going to direct my remarks this morning to a particular 
innovation in regulation that's known as cap-and-trade systems, 
or tradeable permit systems. This is one form of market-based 
incentive programs, which are typically contrasted with 
command-and-control programs, such as you've already referred, 
and which have served us well up to the present.
    The essence of cap-and-trade programs is, as the name 
suggests, to cap the emissions, or to limit them in the 
aggregate, and distribute permits to emit, typically called 
allowances, and then to allow those permits to be traded among 
the entities that are regulated or that are subject to the cap.
    The most successful of these programs by far has been the 
SO2 emission trading program known as Title IV of the 1990 
Clean Air Act Amendments, also known as the acid rain program. 
The concept, prior to this program going into effect, the 
concept of cap-and-trade programs, or tradeable permit 
programs, had been largely theoretical, and I think this 
program has put theory into practice and has demonstrated a lot 
of very attractive features.
    I would mention three lessons that stand out in particular, 
that we have learned from this experiment, and which have been 
repeated in other cap-and-trade programs, as well. The first, 
of course, is the reason that they were promoted in the first 
place, which was a cheaper way to achieve environmental goals, 
to be more efficient in an economic sense. All studies have 
been done of the SO2 trading program have shown that, in fact, 
the cost is less than if the same regulations had been imposed 
by more traditional command-and-control techniques.
    The second lesson is one now that appears almost 
commonplace, which is that markets in these permits will 
appear. When this legislation was initially passed in 1990, 
there were a lot of doubts as to whether markets would appear. 
I think we know now that they have, and that contributes to the 
success of it. We can take it largely for granted, that markets 
will appear if the permits are created and distributed so that 
they can be traded.
    The third lesson is the one that is a surprise to everyone, 
and it's one Administrator Nastri just referred to, which is 
environmental effectiveness. This program reduced emissions far 
more quickly and further than had been expected, I believe you 
said, even by the economists. It certainly was a large 
reduction and greater than we'd experienced in other types of 
programs, so I think we do observe that cap-and-trade programs 
can be very effective, and more effective than traditional 
forms of regulation.
    I'm often posed the question, well, why is this so? I 
attribute this to three elements of these programs, which if 
they are achieved I think means that they will be successful, 
and those three are simplicity, strict accountability, and 
flexibility. They are very simple programs, and the SO2 program 
is a classic in this sense. The requirement placed upon 
affected sources could not be more simple: to have a permit and 
to give up that permit for every ton that is emitted. There are 
no other side conditions, no technologies required, a facility 
is not even required to reduce emissions. It just has to have 
permits for every ton emitted. Since the total number of 
permits is limited, then, of course, that will require an 
aggregate reduction to be made.
    Now, with such a simple requirement, strict accountability 
is almost unavoidable. There's no other basis upon which to 
judge compliance other than whether there is a ticket 
corresponding to the ton. This is very different from command-
and-control. The requirement may sound simple--install this 
piece of equipment, or adopt certain practices--except uniform 
rules are not always equally applicable upon all sources, and 
therefore various exceptions and relaxations are made in the 
process. So, that simplicity leads to strict accountability and 
makes it possible, because now there is only one criteria and, 
in fact, requires the strict accountability that contributes to 
the environmental success.
    With such strict accountability, from an environmental 
standpoint, or from a regulator's standpoint, one can allow 
complete flexibility, which is what we observe. We know the 
emissions will be reduced and, therefore, we can be much more 
relaxed if it's a well-designed system, concerning whether the 
reductions will, in fact, be made.
    Let me close briefly by saying that cap-and-trade had been 
largely a theoretical concept. It has now moved out of the text 
books and into practice. I would stress that it may not always 
be appropriate in all circumstances. There are cases where 
there is no alternative but to resort to command-and-control 
regulations. It depends upon the nature of the environmental 
problem.
    What we do know now is that these programs, the cap-and-
trade programs, work well, and that where applicable--and I 
believe that will be in a vast number of circumstances, 
although each one will be different--that they are better for 
the environment and better for the economy than the 
conventional way of doing things, and they are an appropriate 
approach of environmental regulation for the next generation 
problems that the country now faces in the environment.
    Thank you, Mr. Chairman.
    [The prepared statement of Dr. Ellerman follows:]

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    Mr. Ose. Thank you, Dr. Ellerman.
    The final today is Dr. Kenneth Green. Dr. Green joins us 
from the Reason Public Policy Institute, where he serves as an 
Environmental Scientist.
    Welcome.

  STATEMENT OF KENNETH GREEN, CHIEF SCIENTIST, REASON PUBLIC 
                        POLICY INSTITUTE

    Dr. Green. Thank you, Mr. Chairman.
    Given the comments of the previous witnesses and yourself, 
I will, indeed, skip ahead and try to focus my testimony on the 
parts that shed the most light.
    My own interest in environmental policy originates quite a 
ways back in this local area, 27 years ago. I grew up in the 
San Fernando Valley about an hour or so north of here, which I 
guess may get a new name in a few years, or it may not, but 
we'll still have the summertime air pollution problem. I 
discovered the hazards about environmental contamination the 
hard way when I was in junior high school and running the 600, 
and was coming around one of the last turns at the 450 yard 
line and had my lungs lock up completely and staggered across 
the finish line and couldn't breathe. That was when it was 
finally determined I had asthma, when it became somewhat less 
ambiguous, and I realized that air pollution was not just 
something that is irritating to the eye, it's actually quite 
devastating to people's lifestyles.
    That interest took me forward to study more about the 
environment, study more about biology and health, but also 
there were other experiences in my childhood that taught me 
that we need to find ways to solve environmental problems and 
still preserve people's ability to live their lives and pursue 
their dreams. In my case, I bounced from having asthma and 
being unable to basically hard-core exercise. About a year 
later I was Bar mitzvahed and took my Bar mitzvah money and 
bought a small motorcycle with it, which, of course, would 
horrify many people now, and sadly enough it's probably illegal 
for the rest. But with that I could go places that otherwise 
would never have been accessible to me in terms of going out 
and looking at nature. And, in fact, there were plenty of old 
mining trails that I could take on and go over anything 
pristine; in fact, the trails I was riding on had been packed 
down in the 1850's. It was unlikely I was adding to the damage 
there, but I realized at the time that we need to find ways to 
both protect the environment and protect people's ability to 
actually profit by it, to become better people because of their 
interaction with it.
    Now, I've spent the years since then looking for those 
approaches, primarily, in air quality, but also in water 
quality, and also in species preservation, and global warming, 
and other areas of endeavor. What I found in that research, and 
also at Reason, is that the approaches that rectify those two 
different interests, which is solving the problem, but also 
protecting people's ability to live their dreams, tend to focus 
on flexibility. They tend to focus, as you said, on results, 
not on the number of permits issued, not on the number of 
lawsuits brought, not on the number of fines levied, but on 
actually achieving environmental results. They tend to focus on 
cooperative approaches that tap people's ingenuity and 
entrepreneurialism. I think part of the reason they may have 
found that their expertise was very seeded in the Acid Rain 
Trading Program is because while they had accounted for the 
standard economic benefits of using individualized incentives, 
there also was a creation of entrepreneurial opportunity. And, 
so, you have, you tap a well of creativity that gets you more 
than simply the homo economic view of, well, people will reduce 
their emissions in order to reduce their operating costs. You 
create a whole new class of people who find an interest and 
find a benefit in making that more efficient and more 
effective, and that entrepreneurialism is probably that margin 
between what the economists said they would get and what they 
actually got.
    So, I want to actually spend most of my time today talking 
about examples of where things have worked, where we have 
solved environmental problems without the bitter and 
recriminatory legislative process, or regulatory process, or 
judicial battles that steer environmental resources more to 
advocates or attorneys than to problem solvers.
    And, I agree completely with Mr. Nastri that we have had 
great successes in the past, including some through regulatory 
approaches, but those problems really were a very unsubtle 
sort; those were burning rivers, and heavily contaminated air 
sheds, and heavily damaged open waste sites, and the low 
hanging fruit really has been plucked. If we're going to move 
forward successfully, we need to emulate these programs to show 
how greater cooperativity and greater creativity can solve 
problems more effectively.
    So, one example. Let's consider the air, which is still an 
issue here in California, as you pointed out. Under the 
traditional permit-based approach for cleaning the air, 
Massachusetts was using permits, issuing them. They had 10,000 
businesses that they were regulating through 16,000 permits. 
But, almost 4,500 of those permits were for tiny mom-and-pop 
businesses that were only 5 percent of the State's total air 
pollution emissions. So, they looked for a more cooperative 
way.
    Under the Environmental Results Program, they instituted 
permit systems that were whole facility based, that is, a 
facility could agree to an industry-wide standard, but then how 
they achieved it, what equipment they used, was left up to 
them.
    And, signing on to that agreement got results. In the first 
few years, they knocked a 43 percent reduction in fugitive 
emissions from participating dry cleaners, and a 99 percent 
reduction in silver discharges by photo processors. Those are 
just two sectors that joined the pilot program.
    A similar program was implemented in New Jersey; they 
capped emissions on participating firms, but let them choose 
how to do it. For one firm alone they dropped from 80 single 
permits to a single permit. They reduced 8.5 million pounds of 
air emissions in a year because they could update their 
facilities more efficiently.
    There are still many opportunities for us to form or to 
improve some environmental rules that are still regrettably 
command-and-control oriented, and/or we still have serious 
environmental problems that are too tricky for the blunt 
objects approach. Several were named here.
    I know there are a couple that weren't named that I'd like 
to put on the record, including smog check, which is still done 
here in California. It's a program in which, despite our 
knowledge that 70 percent of the cars are not significantly 
contributing to the problem, we test 100 percent of all 
vehicles as if they were equally the same. And, down water 
protection, service water protection, which despite knowing 
that a great deal of our failure has been our focus on 
engineering nature, to channelize water flows and to use better 
and more hydraulically ambitious control systems, we have not 
looked at the question of how we can use market-based 
incentives to work with nature and to lead people to make less 
impervious surfacing that uses nature to actually prevent non-
point sources from reaching water supplies in a concentrated 
peak flow way that is known to cause a large part of the 
problems we now face.
    So, on that note, I look forward to questions and talking 
to you more about it.
    Thank you for inviting me today.
    [The prepared statement of Dr. Green follows:]

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    Mr. Ose. Thank you, Dr. Green.
    I want to thank each of our panelists, and I learned early 
on that when I decided to run for office the first thing I had 
to do every time I went out in public was introduce my wife. I 
commited a somewhat faux pas in not thanking Chapman University 
this morning for hosting us here, so I want to do that while 
I'm thinking of it.
    Gentlemen, each of your comments suggest that there are 
things that we are going to have to continue on with but we 
also have opportunities over here being under air and water, to 
take advantage of new technologies and what have you.
    Now, we had a hearing in Washington recently about 
elevation of the EPA to Cabinet-level status. One of the things 
that we talked about here was the data on which many decisions 
are made, that it's sparing at best, that there's a lack of a 
data collection system at EPA.
    I don't remember which of your testimonies--I think it was 
Dr. Ellerman, who said there seems to be more of a focus on 
process than there is on accounting, or having a numerical 
count, or a quantification of the impact. I guess my first 
question would be, when you look at command-and-control versus 
cap-and-trade are you actually measuring the impact on the 
environment, are you measuring reductions in actual pollution, 
or are you measuring number of permits issued?
    Dr. Ellerman.
    Dr. Ellerman. Let me respond to that. The number of permits 
should approximate what we believe would be the level of 
emissions that would avoid pollution or would mitigate the 
particular environmental problem.
    If you take the Acid Rain Program as an example, at the 
time it was passed the belief and the estimate was that a 50 
percent reduction of sulfur oxide emission would be required to 
reduce deposition to a level where natural systems could 
recover from damages from acidification.
    That was the rationale for the cap, and so that then 
becomes a proxy for that environmental problem, for solving 
that environmental problem. Now, it may change over time. 
President Bush's proposal for the Clear Skies initiative, for 
instance, proposes a further reduction in that SO2 cap. When we 
talk about the environmental problem, there can be several 
steps.
    There's no question emissions have gone down. Deposition 
has gone down dramatically in the areas in the northeastern 
part of the country that was the main area of concern. The 
tests that have been taken of ecosystems, show, in fact, that 
the sulfur component of acidification has reduced. It takes a 
longer time for these systems to recover, and nitrogen oxides 
continue to be a problem in the acidification of these 
sensitive areas, but the sulfur component has definitely 
reduced.
    So, I think it can be said that we are not simply tracking 
permits. That is the regulatory tool, if you wish, that in some 
ways replaces the command. It's just this limit, and it has to 
be based upon environmental science, and assessments of 
technology, as to what's a level of emissions that will avoid 
unwarranted damages.
    Mr. Ose. All right.
    Give me an example of a command-and-control approach.
    Dr. Ellerman. The Acid Rain Program was before Congress for 
about 10 years before it was finally passed. The early 1980's 
legislative proposals were, in fact, command-and-control, and 
they would typically require that scrubbers would be mandated 
for a certain number of plants, and the number varied from 
proposal to proposal but the idea was that all the big plants 
will be required retrofit scrubbers in order to reduce the SO2 
emissions.
    Mr. Ose. If you have a stack and you've got something 
coming out of the top of the stack, you've got to put a 
scrubber on it.
    Dr. Ellerman. Yes, that would have been the requirement.
    Now, that would have the same effect of reducing emissions, 
and I think we should not kid ourselves, command-and-control 
can be effective. As you've said in your opening statement, the 
command-and-control system has reduced the gross sources of 
environmental pollution.
    It's just that it's costly to start with. In some places 
scrubbers cost much more than they do in others, and as we have 
learned, that unequal incidence of cost leads to relaxations of 
requirements, which is----
    Mr. Ose. Hardship reasons.
    Dr. Ellerman [continuing]. Yes, for equity reasons, which 
implies hardship. One of the beauties of the cap-and-trade 
system is that it allows parties to find an automatic offset.
    Mr. Ose. Now, you did some comparative analysis between a 
command-and-control approach versus a cap-and-trade approach.
    Dr. Ellerman. Yes.
    Mr. Ose. In terms of, not only its monetary efficiency, but 
also its net impact to the environment in terms of reductions 
in pollution.
    Did the cap-and-trade approach achieve the same goals as 
the command-and-control approach; was it less, greater?
    Dr. Ellerman. Yes, it did. It achieved the goal, and I 
would say more, it accelerated the goal, because of the banking 
provisions and allowing plants to reduce sooner, and to get 
credit for early reductions.
    Actually, not only did it achieve the same reductions, and 
I would argue more because there were no relaxations, but it 
moved the reductions forward in time.
    Mr. Ose. Your point being that the owner of that smokestack 
could buy something, buy a scrubber that, perhaps, exceeded the 
requirements, and then the incentive remained in that 
acquisition because you could then take those savings and apply 
them to future year testing.
    Dr. Ellerman. That's exactly correct.
    Mr. Ose. And, that's the acceleration you are talking 
about, you bring it up sooner.
    Dr. Ellerman. That's right.
    Mr. Ose. Now, Administrator Nastri, you have talked about a 
similar trading program here in southern California known as 
RECLAIM, and I want to make sure I understand how RECLAIM 
works. Can you just step us through that?
    Mr. Nastri. Having been on the board of the South Coast 
AQMD you would hope that I'd be able to give you a detailed 
explanation of RECLAIM.
    Mr. Ose. Generic is fine.
    Mr. Nastri. All right, generic.
    The concept was that industry knows what industry does 
best, and that as an environmental board or environmental 
agency we know what's best for the environment. How could we 
work with industry then to come up with a way to get the 
emissions that we wanted for them to get? And, RECLAIM is what 
came out of that.
    The Regional Clean Air Incentives Market identified a means 
by which companies could control their fate in terms of their 
operations, and they would create excess credits that would be 
then available on the market. A cap was established for the 
region, that was a declining cap over time. So, those companies 
that took the incentive to invest in pollution control 
equipment, and generated the credits, were then able to sell 
those credits to other companies that for whatever reasons felt 
it wasn't cost effective for them to invest in control 
technology, that it was more cost effective to buy those 
credits. They would, in turn, buy those credits.
    And, so, a market was created, NOx was a big component of 
that, and this is a really big issue here because of the type 
of fuels that we use compared to back East. The market or the 
program in the first few years, I think, worked very well. We 
were able to get those immediate reductions, and it was because 
companies could say, you know what, we don't have to operate 
all this time and we can generate credits. It created an 
incentive for them to be as efficient as possible to generate 
those credits, thereby accelerating the timeframe in reducing 
emissions, as Dr. Ellerman talked about, and creating more 
incentive to do that.
    Now, with the declining cap and the credits going, the 
market base--and I want to say it was a year and a half or so 
ago when we had the energy crunch in California, and in that 
particular case what happened was, we had a huge demand for 
credits that was caused by the utilities needing to increase 
their output for the energy demand situation. That, in turn, 
drove up the price of credits to the point that people who had 
been paying, you know, marginal amounts for credits were now 
faced with, literally paying thousands, tens of thousands of 
dollars, for these credits. And, they were in a position that 
they could not do that.
    The unfortunate thing is that in this market program many 
people would simply operate the way they would normally 
operate. Then at the end of the year, before their permits were 
renewed or their credits were settled, they would all of a 
sudden come on the market and realize, oh, my God, there's no 
way that we can afford these credits and now we are being faced 
with hefty penalties, or how do we get the credits. And, that 
was something that the board addressed in terms of their needs 
to be better equity between the larger companies that can 
afford whatever the cost was for those credits and the smaller 
companies.
    And, so, the South Coast then embarked on a program to sort 
of separate the market and to try to bring some sense of 
balance to the marketplace on the credits program. And, that's, 
basically, how the program operates. It lets the facility 
decide how best to operate.
    Mr. Ose. Let me try some examples here, and you correct me 
when I'm wrong.
    Mr. Nastri. OK.
    Mr. Ose. Let's say whatever the cap is, it has a numerical 
quantification of 1,000, and over time that 1,000 number is 
going to go down incrementally. So, like 3 years from now it 
might be 900, 3 years after that it might be 800, in terms of 
the total amount allowed.
    I'm a small business owner in the area. I have a dry 
cleaner or a printing business, so I've got to go out and get a 
permit for any volatile organic compounds that I emit. Based on 
my historical usage, I know I'm going to need a permit under 
the 1,000 scenario for X number of credits, and if I look out 
there in the future, 3, 5, 10 years, I know the availability of 
those permits is going down. So I have to change my 
manufacturing process over the 3, 5, or 10-year period, to 
reduce the amount of volatile organic compounds I emit, or I go 
in the marketplace and buy them from someone else who may have 
reduced them in their manufacturing process.
    And, the relative price of those credits at any given time 
goes up and down with demand, and the point you are making is 
that when the energy producing companies had to turn on all of 
their peaker plants that typically had run on the basis of 
hours per year in past years as opposed to days or weeks per 
year now, they exceeded their air quality emissions standards. 
Then they went out in the marketplace to buy permits, to buy 
credits, and drove the price up accordingly, and all the small 
businesses got shut down.
    Mr. Nastri. That's correct.
    Mr. Ose. Dr. Ellerman, are there substantial differences 
between the sulfur dioxide program that you are familiar with 
and the RECLAIM program that Mr. Nastri just described?
    Dr. Ellerman. Yes.
    In California, in late 2000 and early 2001, the critical 
issue is the absence of ability to trade over time. In the SO2 
program, any credits not used in the current period can be 
banked and used in subsequent periods. The California RECLAIM 
program permits very limited banking and borrowing, 
essentially, a 6-month overlap between what are called cycles. 
Much of the early abatement that is often cited could not be 
used to help relieve the demand for the period of the critical 
demand.
    Mr. Ose. Because they were expired.
    Dr. Ellerman. Because they were expired, instead of being 
left to have an indefinite date of expiration. That created a 
great shortage. The number of permits available in 2000-2001, 
during this crisis, were very limited, and there was no 
flexibility over time.
    Mr. Ose. Is there a finite duration to the credits in the 
Federal program?
    Dr. Ellerman. In the Federal SO2 program, a permit is good 
from the year it is made valid, or the vintage, such as 1995, 
1996, whatever, but it's good until used. So, it's indefinitely 
good in the future.
    Mr. Ose. It doesn't depreciate or discount over time.
    Dr. Ellerman. No.
    Mr. Ose. It's a fixed number for whatever.
    Dr. Ellerman. The ultimate cap is fixed over time, but any 
credits that are saved in one period that are not used can be 
used in any future period.
    Now, just the power of interest on money will cause one to 
want to use them sooner, rather than later. The key point and 
the lesson from the RECLAIM program is that, particularly when 
you have a program of limited geographic scope, temporal 
flexibility is needed. The SO2 program is national, so had 
there been sulfur emissions at generating plants in southern 
California, even if there had not been banking, or the same 
sort of limits on trading over adjacent periods of time, they'd 
have had a much larger area to draw on, and that would have 
affected the prices.
    But, some programs, of course, have to be local.
    Mr. Ose. So, under the Federal program, a coal electricity 
plant in Pennsylvania, just high sulfur coal, can come into the 
South Coast Air Quality Management District and buy credits to 
use against their emissions there.
    Dr. Ellerman. Yes, anywhere in the country.
    Mr. Ose. Across air basins, it doesn't matter.
    Dr. Ellerman. Because of the nature of the problem, and the 
acid rain case is one where there's much less spatial or 
geographic concern than there is in the Los Angeles Basin. You 
could not make the RECLAIM program a national trading program; 
it would make no sense to trade NOx emissions in New York with 
California.
    Mr. Ose. I saw that comment in the testimony, and I have to 
ask if you can trade sulfur dioxide credits across the air 
basin why not just align the duration of the credits so that 
you can trade across air basins for nitrous oxide?
    Dr. Ellerman. The origin goes back to the environmental 
problem, and what we are doing in cap-and-trade programs is 
creating a market to provide results and to solve an 
environmental problem. So, it starts, in each case, with what 
is the environmental problem.
    In the acid rain case, the concern is primarily deposition 
in the eastern part of the country. Sulfur dioxide emissions in 
the west do, in fact, arrive in the east, and so there is some 
trading. Now, the correspondence is not exact, but it's good 
enough.
    The NOx RECLAIM program is aimed at ozone problems in the 
Los Angeles Basin, which is by nature a more local problem, 
and, therefore, the geographic scope has to be more limited 
because emissions in other parts of the country don't affect 
ozone concentrations in the South Coast Air Basin.
    Mr. Ose. Mr. Nastri and I have been working on a problem 
having to due with air flows out of the Bay Area into the San 
Joaquin and Central Valley, which is the exact exchange of air 
that you are referring to on a national basis.
    Dr. Ellerman. Right.
    Mr. Ose. So, I might reverse the argument on you, at least 
as it relates to the Central Valley or the Bay Area air 
quality.
    Dr. Ellerman. Yes. I don't know whether in the RECLAIM 
case, it may have been possible to have a broader geographic 
scope. That is an issue for the scientists to deal with, in 
terms of the transport of the pollutants. All I'm saying is 
that some programs will be smaller geographically than other 
programs, depending on the nature of the problem.
    We can think of greenhouse gases as the ultimate. We know 
that the problem is global in scope and the effects of the 
emissions are the same because of atmospheric mixing. There may 
be other environmental problems that would be similar. I'm sure 
Administrator Nastri knows better, whether the Bay Area and the 
San Joaquin Valley may be, in fact, one air shed, but that is 
an empirical and a design issue.
    Mr. Ose. I'm not asking Mr. Nastri for a comment, but as a 
representative of the Central Valley I would argue that it does 
have an adverse impact to our ability to deal with our 
environmental problems, to have this inflow, and it's the cross 
basin flow, whether they are the Central Valley, Bay Area, or 
some other location in the country, that I think at least makes 
a case for some flexibility. Mr. Nastri, I think, has a 
comment.
    Mr. Nastri. Mr. Chairman, I'd just like to add that I think 
Dr. Ellerman hit it right on the head when he talked about the 
geographic impact and the nature of the pollutant and its 
effect. And, the NOx impact is very localized.
    The issue of NOx transport and impact within the Central 
Valley I think is real. You mentioned, can you look at this as 
one air shed. I think you can look at it as a contributing 
factor to the Central Valley airshed. When you look at the data 
that we do have, if you look at the northern part of the 
valley, you do see a contribution from the Bay Area of, I 
think, estimates are up to 20 percent.
    Now, that is less in the southern portions of the Central 
Valley, but there's still a contribution, it still leads to the 
ozone problem.
    So, when you talk about creating a market-type program, 
based on transport and based on impact, that might very well be 
a good candidate for it.
    Mr. Ose. OK. So, there are ways we might want to look at 
the RECLAIM program, particularly, as it relates to the 
duration or term of the credits.
    Dr. Ellerman. Yes.
    Mr. Ose. You would argue in favor of that, so far as the 
members of the South Coast board have not gotten to that point, 
but it's a suggestion.
    Dr. Ellerman. Yes, and I think there's one other aspect I 
take from the RECLAIM experience of general applicability, 
which is to consider borrowing as well. In fact, the cap, the 
NOx cap was busted in 2000. Mitigation fees are paid, the South 
Coast Air Quality District is taking measures to offset the 
exceedences, but, more was emitted in the current period and 
less will be emitted in the future, because of both command-
and-control requirements being placed on the generators and 
other program offsets that do, in fact, pay the exceedences 
back.
    Now, I take one of the lessons from RECLAIM is that, when 
we have a more local program, having temporal flexibility is 
even more important, and not just banking, but also borrowing, 
because that, in fact, is what happens when a program breaks 
down in the manner exhibited by RECLAIM where the generators 
were taken out of the program and set aside.
    Mr. Ose. So, your point is not only, if you will, the 
excess reductions at any given point in time, but the ability 
to borrow prospectively against reductions you might achieve in 
the future.
    Dr. Ellerman. Yes.
    Mr. Ose. Dr. Green, I may have misspoke when I talked about 
my anecdotal proposal or any compounds, I'm not sure that 
RECLAIM covers that. Does the RECLAIM program target both 
nitrous oxide and VOCs?
    Dr. Green. Well, it was going to be expanded to cover VOCs, 
but I believe they decided not to.
    One of the things that wasn't raised in the previous 
discussions that I wanted to mention was that in looking at 
RECLAIM, one of the other problems with RECLAIM is that in the 
early days of the program the way credits were initially 
allocated often created very large surplus credit situations, 
where there was no bite from the market. You'd have long 
stretches where you did not have the actual ramping up, a 
transition phase, that would have let groups be at a point 
where they could have weathered the power crisis when it got 
there, because of the initial market allocation of permits. 
That's very important if they move to expand RECLAIM further, 
if they want to say use the RECLAIM model for trading 
particulate matter, or use the RECLAIM model for bringing in 
VOCs or other pollutants as pollutants become more evident; you 
wouldn't want to make that same mistake again. You'd want to 
make sure that you set up your credit allocations and your 
declining caps so that you have market signals from early on 
that move the situation along so that you don't have sticker 
shock, essentially, when you get to the point where the market 
suddenly starts to bite, and that it bites in a completely 
unsustainable way.
    So, that was the situation, I think, that makes RECLAIM 
somewhat unique, and RECLAIM is a fascinating case study 
because in a way it sort of shows what happens when you have 
rules of limited flexibility. You have RECLAIM which had a lot 
of flexibility, but then you have the other rules about power 
generation, which have led to higher cost power and generations 
from out of State and so forth. You wind up with a promising 
environmental rule, RECLAIM, being sort of suspended and/or 
weakened because of other decisions that were made.
    Mr. Ose. ``Overwhelmed'' is a good term.
    Dr. Green. Overwhelmed, because there are other decisions, 
other command-and-control decisions, that were made regarding 
how power could be generated.
    Mr. Ose. I don't want to leave that point by not noting 
that what the South Coast Air Quality Management District did, 
I thought, was pretty forward thinking and a step, definitely, 
in the right direction, at least, I mean, from a small business 
point of view, large business consumer.
    Dr. Green. Oh, definitely.
    Mr. Ose. It's a positive step.
    Dr. Green. Right, and, in fact, it was part of an overall 
movement at the time to find ways of allowing permit trading 
and credits to be traded between different forms of emissions.
    I was an intern at Hughes Aircraft at the time, and they 
were running a ride sharing program, and one of the things they 
were tending to do was to find ways to trade credits from being 
able to demonstrate emission reductions on their own. They had 
a fleet which they could monitor; they set up their own smog 
monitors. They demonstrated pound reductions in emissions, but 
there was no mechanism in the regulatory structure at the time 
to get credit for actual pounds of emissions reduced. All you 
could get credit for was compliance with regulations that said, 
well, here's a ride sharing rule, here's an equipment rule, 
here's, you know, at best we have a control technology. There 
was no way to step forward and say, ``We see an opportunity to 
reduce 300 tons, or however many tons, of emissions this year, 
we'd like to get credit for it against other things that we 
can't afford to do.'' That was part of the overall setting at 
the time; I think it was very forward looking.
    Mr. Ose. Transferability.
    Dr. Green. Right, you could transfer credits, that's right, 
you could trade more credits.
    Mr. Nastri. Mr. Chairman, I'd just like to add that I think 
the shortage of credits is something that's recognized as a 
problem, not just in RECLAIM, but certainly within the State of 
California. And, EPA Region IX and our Headquarters is working 
very closely with the South Coast Air Quality and with other 
air districts to identify what are some of the potential 
opportunities that may exist that we, in fact, can generate the 
type of credits that Dr. Green just talked about.
    A good example, I think, in your area, would be rice 
burning credits. We are going to be developing a pilot program 
to look at credits that could be generated.
    Mr. Ose. We're grateful for that.
    Mr. Nastri. And, we enjoy working with you on that.
    I think there are other areas, too. South Coast just passed 
a series of Mobile Source rules, and are looking at other 
incentives to generate credits. We are looking and working very 
closely with them, as well, on that matter.
    Mr. Ose. Let me go back now. The Acid Rain Program was 
sulfur dioxide. The RECLAIM program, because of the nature of 
the air basin, is nitrous oxides. Do we have anything that 
targets volatile organic compounds specifically?
    Dr. Green. On a trading aspect?
    Mr. Ose. No.
    Dr. Green. Well, I think there are still, perhaps, a few 
tradable credit systems within some specific rules of the 
district. Primarily, VOCs are controlled through elements of 
the State Limitation Plan, and the local air quality management 
plans of the various control emissions bases, or control 
districts here in California.
    Mr. Ose. OK. So, how much of our ozone problem is caused by 
VOCs?
    Dr. Green. That depends, really, it's a very location 
specific question, and it really depends----
    Mr. Ose. Right here.
    Dr. Green [continuing]. This area, my understanding is we 
are NOx-limited, which means that there's enough VOC in the air 
that the chemical reactions that lead ozone are going to be 
much more controllable through changing the amount of nitrogen 
oxide than changing the amount of VOCs. In other words----
    Mr. Ose. So, you are adjusting the mix accordingly.
    Dr. Green. Right, but we have so much VOCs that you are at 
saturation level, you would have to eliminate all the VOCs, or 
see a huge chunk of the VOCs, to have any impact on ozone 
formation, compared to the amount of NOx you'd have to use, and 
a much bigger proportion of the VOCs is biogenic, which means 
you have difficulties dealing with foliage and issues in the 
natural background levels of VOCs, whereas almost all the NOx 
are combustion byproducts.
    Mr. Ose. So, in the South Coast area you are saying that 
the amount of VOCs in the air, as a percentage of the whole, is 
so large that you might as well just go pick on another piece?
    Dr. Green. No, it's not necessarily the percentage of the 
whole, it's the necessary amount for the chemical reactions to 
go forward to produce ozone. The key question is, what do you 
get the benefit of reducing more, in terms of dropping ozone 
levels, do you get more of a benefit by using VOCs or more of a 
benefit by using NOx?
    Mr. Ose. So, you are actually measuring the net impact, you 
are modeling it anyway.
    Mr. Nastri. Yes, I agree, the modeling effect is being 
addressed, but in terms of the overall impact to smog 
formations in the basin, the relative contribution of both is 
such that they have to be addressed. There has been a lot of 
discussion in terms of, well, if you only regulated NOx you 
wouldn't have smog, because you wouldn't have the right type of 
reaction in the atmosphere, or if you only regulated VOCs that 
again you wouldn't have smog.
    And, so, there have been components of both industry and 
other groups that say, ``Do them, not us.'' But the fact of the 
matter is that there's so much in both that we have to do both. 
And the relative contribution, we are never going to get all of 
the VOC and we are never going to get all of the NOx but by 
reducing the total contribution of each we can reduce the 
amount of smog formed, and that's been the general strategy, go 
after what you can.
    Dr. Green. It's also very tricky, you can actually over-
reduce one element to make the problem worse. You can actually, 
if you drop your NOx level too low you can shift the chemical 
reaction in favor of VOCs, which will actually move it faster. 
So, it's an equilibrium, you really are trying to----
    Mr. Ose. Step it down.
    Dr. Green [continuing]. Step down equilibrium without 
actually shifting it out of balance. It's pretty tricky.
    Mr. Ose. And, that leads to something that was discussed 
earlier when you were talking about transport issues. I think 
we are just beginning to learn how much we have to learn about 
transport, not only between airsheds, but within States, 
between States, and now between countries. It's becoming more 
apparent that you have, actually, international transfer 
issues. So when trading programs are designed, I guess the 
lesson there would be to keep them open to expansion and to be 
prepared for the prospect that not all States' knowledge 
regarding the argument of the precursors and/or pollutants, 
that you are going to have to be able to evolve your trading 
program, and so evolvability is a key element to the program 
design.
    Right, so I just want to make sure I've got this in my 
head, so when I go back to Washington I'm not speaking too 
foolishly. The acid rain thing, that primarily was driven by 
high sulfur coal being burned at power generation in the East. 
Our problem out here is mobile sources, cars and the like, with 
nitrous oxide coming out of the tailpipe. What is the state of 
our understanding as to where all four organic compounds are 
coming from? Do you have a breakdown for that?
    Mr. Nastri. I don't have the exact breakdowns, but I just 
wanted to clarify that in terms of the nature of the problem--
yes, NOx and its source from mobile sources is a significant 
contributing factor to the ozone problems we have. But if you 
look within the Central Valley and other areas, in terms of 
VOCs, if you look at some of the ammonia emissions, they have a 
big effect on our PM problem, and VOCs also contribute to the 
smog aspect. So, we have NOx and we have PM resulting in terms 
of the ammonia emission. Then we have VOC which also 
contributes to some of the smog issues.
    So, it's not just one, there's a plethora.
    Mr. Ose. So, where are the volatile organic compounds 
coming from?
    Mr. Nastri. VOCs come from biogenic sources. VOCs come from 
various compounds. I think architectural coatings and paints 
are a big source.
    Mr. Ose. Solvents.
    Mr. Nastri. Solvents, which are moving away from those 
types of VOC compounds, ammonia.
    Dr. Green. Also, unburned hydrocarbon coming out of 
tailpipes contributes to VOC problem, as an evaporative source 
off of the vehicles and off of ancient technology.
    As Mr. Nastri was pointing out, though, these problems are 
sort of interwoven, and your VOCs are precursors for 
particulates, as are your NOx emissions. A lot of these 
pollutants actually form outside of the tailpipe, they form in 
sort of an atmospheric soup from the precursors. So, the exact 
relationship and the chemistry that you get at times is not 
always clear.
    Mr. Ose. Well, that begs the question--and this is directed 
at Dr. Ellerman--just from a market science perspective, can 
you create a cap-and-trade program for any of these products 
similar to the one for sulfur dioxide?
    Dr. Ellerman. There are two prerequisites to a cap-and-
trade program that I ask people to keep in mind.
    Mr. Ose. Accountability, flexibility, and simplicity.
    Dr. Ellerman. Well, those are the reasons for success, 
let's go back to the prerequisites, which are in my written 
testimony. The first of those is measurability, ability to 
measure the emissions. If you can't measure the emissions you 
can't have a cap-and-trade program. And, in many of our early 
environmental regulations we did not have the ability to 
measure, or it was very expensive, so you just said put this 
piece of equipment on and then you went out to inspect it. In 
fact, the equipment was there and it was operating, and that 
was the best you could do. We can do much better now. So, 
measurability is the first issue. If you can't measure it, you 
can't have a cap-and-trade program.
    The second issue, and it's the one we discussed earlier, is 
approximate equal environmental effect. You have to consider 
the environmental problem, it's going to be different for every 
program. You have to believe the emissions have an 
approximately equal effect, and I would stress approximately 
equal.
    A colleague of mine comments about the SO2 program that the 
enabling myth of Title IV is that location doesn't count. We 
all know from an atmospheric standpoint that certain emissions 
count a lot more in creating the acidification in the northeast 
than others, but the program treats as if they are all equally 
culpable.
    Now, you know, as a Congressman, that all legislation needs 
enabling myths, that's part of how things happen.
    Mr. Ose. Dr. Ellerman, I'm shocked.
    Dr. Ellerman. But, I think there's an irony in this, which 
is that we would not have had the reductions we've had without 
that enabling myth, which I think, again, is a more general 
political principle as well.
    Mr. Ose. So, what enabling myth should we use?
    Dr. Ellerman. Each problem has its own.
    Dr. Green. If I can intrude, I would have to say that last 
statement is dangerous--it's not dangerous, it's tricky, 
because it assumes that progress only comes from a regulatory 
standpoint. In fact, if you look back at the early history of 
the United States, the movement, in terms of the 
decarbonization of fuels, the reduction of mass use in 
manufacturing, the, in fact, decreased environmental footprint 
of industrial endeavor has preceded, in very many cases, any 
regulatory approach whatsoever. This is including here in 
California where, in fact, there's a very good example, which 
is that the regulations here were local before they were made 
State, and before they became Federal. If you look at the 
improvement curves for air quality, what you find is that the 
trends were well established before the next level of 
Government enshrined them into law beyond the local level.
    So, I think one has to tread carefully on the assumption 
that without what we have we wouldn't have seen improvement. 
One of the things that was mentioned earlier is that there are 
benefits of command-and-control. We also need to keep track of 
the fact that they also provide inferences as well, which is, 
you have situations like New Source Review where if a company 
wants to change a piece of equipment to gain an environmental 
benefit, it may face a regulatory hurdle in doing so because 
it's unwilling to go through the permitting process in order to 
create environmental improvement. While we tend to track 
environmental improvements, we don't track opportunity costs. 
There's no way to actually capture the opportunity costs of 
something that doesn't happen as a result of resources being 
diverted in a direction due to regulations that were overly 
specific.
    Mr. Ose. Now, this is an interesting area too, the kind of 
law of unintended consequence. One of you talked about an 
example of a company that had cleaned its emissions and then 
took the residue from the cleaning and created a new business 
line using that chemical that they had extracted from the 
emission. I can't remember the name of the chemical. They, 
basically, take lemons and make lemonade.
    Dr. Green. Would this be in the publications submitted, 
because one of the things they discussed there is how several 
companies under toxic waste actually have taken waste products 
and then turned them into beneficial products.
    Mr. Ose. I don't remember the----
    Dr. Green. There was a case in which--it's an interesting 
story, because the company was more or less villainized under 
TRI--there's a situation in which a company that generated 
something called pickle liquor, which is a spent sulfuric acid 
remnant of manufacture, and under TRI that pickle liquor is 
considered a discharge to the environment. Yet, it's used in 
water purification, it's a water purification input. So, the 
company took the pickle liquor and sold it, actually, below 
cost to the local municipal water treatment provider, as a 
community benefit. And yet, it was considered again as a TRI 
released to the environment.
    Mr. Ose. Wastewater treatment.
    Dr. Green. That's right, I should specify, it's used in 
wastewater treatment.
    But, you do have situations of that sort, where you have an 
unintended consequence of something being defined as a waste, 
which can also be a useful product in some sort of process that 
has environmental benefits as well.
    Mr. Nastri. I was going to say, I am with the Environmental 
Protection Agency. We do pass a lot of rules and regulations. I 
think that if you look at the history of environmental gains 
made over the last 30 years or so, significant gains have been 
made as a direct result of command-and-control. And, I firmly 
believe that those gains remain on a much more accelerated 
schedule had they not been implemented.
    I think when you look at regulations, you might experience, 
both as a government official and as a business person, those 
regulations are what keep things going. They are the ones that 
often times develop that innovation, because a challenge will 
come up and they say, ``Alright, how can I do better than that, 
how can I do it without necessarily having to have this come 
down on us?''
    Mr. Ose. You must be reading my script up here. Speaking of 
regulatory hurdles, in terms of the RECLAIM program, what do we 
need to, at least at the Federal level, what would we need to 
consider in terms of expanding RECLAIM to include more of these 
pollutants? First, is it possible? Dr. Ellerman, you indicate 
that it is, as long as you have measurability and approximately 
equal impact.
    Mr. Nastri, how do we help expand this? Our objective is to 
lower the amount of pollution in the environment, how do we 
expand this?
    Mr. Nastri. Well, let me ask the question to make sure that 
I understand it. Is the goal to expand RECLAIM to a national 
basis then, or is it to expand RECLAIM within the Los Angeles 
Basin, or to take RECLAIM and transfer it somewhere else?
    Mr. Ose. My objective is to find a way where we rationalize 
and provide certainty for businesses and the jobs that they 
bring to the table, and we have a measurable positive impact on 
the environment. That's what I'm after.
    And, I mean, it's kind of like stepping down between 
nitrous oxide--I don't know which comes first, I mean they are 
both equally important.
    Mr. Nastri. I guess thinking out loud, Mr. Chairman, the 
goal of RECLAIM was to address, again, on a very regionalized 
basis, a very impacted airshed. And, so, to take that model 
nationally you would almost have to say on impacted airsheds 
this model can be applied.
    Now----
    Mr. Ose. And, we could tweak it, of course.
    Mr. Nastri. Oh, absolutely, but as a basic framework of 
establishing caps, establishing credits, establishing a trading 
program, letting companies have the flexibility of changing 
fuels, or installing control equipment, or a whole host of 
other options that are available to them, we let them make that 
option. But, you do set up the basic framework.
    And, it would have to be set up in a way that would be 
conducive to achieving real benefits for that particular 
market.
    You know, as we talked about here, there's an aggressive 
strategy to go after VOC, NOx, and PM. That strategy may not be 
necessary, nor effective, for instance, on the East Coast, 
where their contaminants are different because of the fuels 
that they use. But, the basic framework could apply, and I 
would leave it to the experts in the particular areas to assess 
what would be the actual benefit in terms of, do we go after 
VOCs, do we go after NOx. But clearly the framework, I think, 
tweaked, taking into account some of the long-term variability, 
although I did want to point out that when you talk about the 
temporal aspect of banking and borrowing you do tend to impact 
the immediate quality aspect. And, when you are in an extreme 
situation, you are being forced to go down, down, down. You do 
not want to have that variability, where all of a sudden you 
are having blips and you go back up.
    Mr. Ose. Well, the borrowing aspect would be particularly 
conducive to deterioration. I don't know how the credit is--I 
mean, the fact of the matter is that you've accelerated the 
positive impact onto the environment.
    Dr. Green. Well, that can be accounted for, though, in the 
definition of non-attainment. You are saying you are right 
there up against your non-attainment cap, you can't afford, 
even if you have a certain period of crisis and you have a 
bunch of people borrowing credits, you could blow your non-
attainable level by having your emissions go up a few times in 
a row. That could take you from being an attainment area to 
being a non-attainment area, or prevent you from going out.
    But, in terms of the way that could be dealt with, it 
doesn't have to be dealt with in the structure of a trading 
program. It can be dealt with in the structure of defining non-
attainment areas.
    Mr. Ose. But, that's my point, it's the borrowing aspect, 
and it goes to the banking aspect. They have two different 
impacts, in terms of taking an attainment area that's right at 
the margin into a non-attainment area.
    Dr. Ellerman.
    Dr. Ellerman. I would argue that for any specific extreme 
event that causes non-attainment, banking and borrowing would 
have equal effect. It would be true only when one reduced more 
than required in this earlier period and if the nature of the 
problem is such that has no effect upon the air quality two 
periods later, then one would say that's without effect.
    In the acid rain program, it's deposition or an cumulative 
pollutant; it's a different type of a problem, so the banking 
is OK.
    My argument for considering banking and borrowing in 
RECLAIM is that we don't shut down sources when an extreme 
event occurs, we have non-attainment. The question is, when we 
have the non-attainment event, and then we adopt various 
measures to try to deal with it, and make up for it whether it 
is better to let people anticipate the possible event and let 
them take the actions. If that extreme event happens, I would 
argue typically we don't end up shutting down the sources, as 
was the case in southern California.
    Mr. Ose. Now, in your testimony, you indicated that the 
banking of credits created a predictable response----
    Dr. Ellerman. Yes.
    Mr. Ose [continuing]. In terms of the attainment versus 
non-attainment, two, or three, or four increments of time in 
the future. But, at the end of the day, after you got through 
that temporary, I'm going to call it the notch issue----
    Dr. Ellerman. Right.
    Mr. Ose [continuing]. After you got through that temporary 
notch you ended up with a much better impact. Would it not be 
the same here?
    Dr. Ellerman. It's different in acid rain, because it is a 
cumulative pollutant. In other words, what matters at the end 
of the day is the total deposition over some period of time, 
where the argument on NOx and ozone each summer is different, 
or each period is independent of the other.
    Now, I think there is some effect, that if you do have a 
tight enough requirement that it leads to the type of 
measures--let's say putting SCRs on the utility--that you bring 
the average level down sufficiently. Then that, of course, 
brings the exceedences down as well, so it can have those 
effects. That's a more complicated argument.
    I think one has to think that in acid rain, and in global 
warming type issues, between periods it's all cumulative, so if 
you reduce in this period it's just as good as reducing in the 
next period. And, in ozone, it's a much trickier proposition.
    Dr. Green. It's what they call a ``stock versus flow 
problem,'' and in global warming and acid rain you buildup a 
long-term stock. It's not the daily flow of pollutant up and 
down that matters, it's the long-term shifting of the total 
stock of pollutant that's circulating through the environment.
    And, with long-lived pollutants that are broad disposition, 
it's much easier to set up a predictable trading system and 
have predictable effects with it. That's not to say it can't be 
done, and I think, in fact, in RECLAIM it can be expanded.
    One of the things I was going to ask Mr. Nastri about is, 
my understanding is that the delegation of authority for air 
quality into the basin structure we have now is an element of 
the Clean Air Act, is a Federal regulatory approach, that might 
create parochial interests, which would prevent what you are 
talking about which would be a statewide limitation of RECLAIM 
between the basins. That may be an area where what you have is 
a law defining the actual boundaries of an air basin with 
regard to an individual pollutant. That may not be applicable, 
or may not be most logical, from a scientific standpoint in 
managing that pollutant.
    Mr. Ose. Well, I will tell you that parochial interests 
manifest themselves in my political world, on a State-to-State 
basis, and that's a reality. So, I would commend you for making 
that observation.
    Dr. Green or Dr. Ellerman, are there other areas, say 
outside South Coast, or the L.A. Basin, where it might make 
sense to try and implement cap-and-trade programs for air 
pollution--the Bay Area, the Central Valley, what have you?
    Dr. Green. Within California specifically?
    Mr. Ose. My interest is California, today.
    Dr. Green. My feeling would be that anywhere you have non-
attainment areas with transport going on, that it's that 
transport and non-attainment element that would define where 
you draw the circle and institute a trading program inside the 
circle.
    Mr. Ose. Can I explore something here, before we leave that 
thought? You know, we tend to focus on non-attainment areas, 
but it seems to me we ought to focus on both non-attainment and 
attainment areas, as a means in preventing the attainment areas 
from becoming non-attainment areas. Do you understand that 
logic? So, I'm not jealously guarding this or that area, this 
is an open book for me.
    Dr. Green. And, they do, near non-attainment areas are 
areas that are close to getting into non-attainment, have a 
unique status under the Clean Air Act. They submit plans, 
generally, more voluntary approaches that are designed to keep 
them from becoming non-attainment areas. But, I think you are 
absolutely correct, and that's what I was getting at, which is 
that the decision as to whether an area, or whether emissions 
from an area need to be included in some sort of a cap-and-
trade scheme has to transcend whether or not they reside in a 
non-attainment area. It has to move to whether or not they 
contribute to a problem, to an exposure.
    But, by the same token, we also need to define non-
attainment areas and look at the question of exposure, because 
even within a non-attainment area you may have a situation 
where 90 percent of your public is not exposed, actually ever 
exposed, to the level of pollution that would be harmful, and 
yet, you have certain sensors in certain areas that are putting 
an area in non-attainment, even though most of the population 
is not exposed, and that's an issue which needs exploration.
    On the one hand, you'll hear people say, well, air 
pollution moves around. But the answer to that is, well, but if 
it moves around that freely all the sensors would read the same 
thing all the time, and clearly they don't.
    So, some of these issues need further unpacking; I think 
that goes without argument.
    Mr. Ose. So, are there other areas besides South Coast or 
the L.A. Basin where it makes sense to try and implement a cap-
and-trade program?
    Mr. Nastri. Let me answer first, Chairman Ose. I think that 
there are; I think that wherever you have exceedances of 
standards there's a good opportunity. I think the Central 
Valley is a great opportunity for establishing cap-and-trade 
programs. You have that area which is currently severe, almost 
requesting a bump up to go extreme. That in and of itself, I 
think, lends itself to saying, alright, we know we've got an 
extreme problem here. How can we now address emissions in this 
basin?
    And, there are a number of things that we know we have to 
go after. We know that CAFOs are a big source of PM. We know 
that AG is a big source of NOx from the AG pumps. We know that 
petroleum production is a big issue. We need to establish the 
framework that says, in order to get to clean air by 2010, 
these are the type of emission reductions that we are going to 
have to see. Then, let's let industry step up to the plate and 
say, this is how we think we can achieve it. Working together 
through a partnership, and this is something that we in Region 
IX are doing very closely with the San Joaquin Air Pollution 
Control District, and a number of the other stakeholders, a big 
part of AG--I mean, actually are very optimistic that the farm 
bill is going to provide us with some of the conservation funds 
to go after some of those AG problems, and to look into the 
development of best management practices that will reduce PM 
releases from AG operations.
    So, I think it's an excellent opportunity to look at 
establishing this type of area.
    Now, the question will be, as Dr. Green pointed out, within 
the political structure of the Central Basin and the Bay Area 
can we establish a common framework that they'll all agree to 
and move forward, or will we have to tip them?
    Mr. Ose. Dr. Ellerman.
    Dr. Ellerman. Yes.
    Mr. Ose. You are the scientist.
    Dr. Ellerman. Well, I was hesitant to respond to your 
question because of my lack of familiarity with the specifics 
in California.
    Mr. Ose. Well, let me invite you to the Central Valley.
    Dr. Ellerman. But, I would endorse what I understand both 
the other panelists to have argued and I'd like to reinforce 
the point that the notion of a cap is implicit all through the 
Clean Air Act. Attainment is the perfect example. Attainment 
suggests a cap, and, in fact, in the offset program and in the 
process of bringing new sources into non-attainment areas, 
there is a cap and trading process that is extremely 
inefficient and very costly. What are called DERCs, and ERCs, 
emission reduction credits, and discrete emission reduction 
credits are traded. It's very costly, slow, and difficult; and 
it creates problems for new entrants into a market.
    One of the challenges, and the cutting edge of research in 
tradable permit systems, is not the new areas, like CO2 and 
mercury but actually going back into the guts of the Clean Air 
Act to transform some of these requirements, which are not 
working quite as well as they may have in the past, or, 
perhaps, they never did, by making the various types of offsets 
and trading more feasible and easier to take place.
    Mr. Ose. Is that statutory or regulatory? I'm hoping you 
can tell me regulatory.
    Dr. Ellerman. I think that is going to depend on each case, 
I don't know, that's a legal issue. I think the approach of 
having the local regulators and industry come together to try 
to suggest ways out of this is in everybody's interest. Maybe 
it does require some statutory fixes; I don't know.
    To the extent it does, I will suggest that there is going 
to be a need for some enabling myths to be embraced, to permit 
this to take place.
    Mr. Ose. That's a great phrase.
    The reason I'm bringing it up, obviously, is I'm from the 
Central Valley, I'm very close to agriculture.
    Dr. Ellerman. Right.
    Mr. Ose. I know that EPA Region IX is working with the San 
Joaquin Valley about a number of things, including the diesel 
water pumps and the like. One question I had in reading this 
article in the Freseno Bee, the credit that a farmer would 
receive from taking the old diesel water pump off, I mean the 
number quoted in here for the pollution reduction credits is up 
to 40,000 per ton. Is that an annual payment? Is it a one-time 
payment? It's unclear in this document. For instance, the 
credits that are purchased here, they are issued annually? In 
other words, if I have a dry cleaning business, I go get a 
permit, every year, or I just get it once? How do I get credits 
here, if I'm a polluter, how am I getting credits? How are you 
factoring in the award of credits to me?
    Mr. Nastri. I am going to take a venture. But we do have an 
expert on RECLAIM in the audience and I'd also like to ask her, 
but it's my understanding that, every year, if you are going to 
have to go for credits you do that every year. But, Dr. Coy, 
no? One time? I'm talking about VOC credits.
    On the VOC aspect, Dr. Coy, who is the Deputy Executive 
Officer of the South Coast Air Quality Management District, 
suggested, or stated, that you would purchase your first 
several years of VOC credits, and after that there would be a 
reconciliation.
    Mr. Ose. So, if I have a process, manufacturing or 
otherwise, and submitting all organic compounds into the 
atmosphere, I'd go down to South Coast Air Quality Management 
District and I write a check for the estimated amount of 
emissions? You are saying yes, and she's shaking her head no.
    Why don't the two of you talk about this.
    Mr. Nastri. OK.
    Mr. Ose. And, I'll ask these guys some other questions 
while you resolve that. We'll get to the bottom of this.
    Now, Dr. Green, speaking of watershed-based trading, we are 
going to come back to Mr. Nastri on these other things, but 
speaking in terms of the watershed-based cap-and-trade stuff, 
is it harder or easier to do with water than with air? I'll 
tell you why this is so important, California just has a water 
problem.
    Dr. Green. Sure.
    Mr. Ose. And, it always has.
    Dr. Green. I think it would be easier with water than with 
air, in fact.
    Mr. Ose. Why?
    Dr. Green. Part of it is water is more easily monitored. 
Its flows are better defined. You have a two-dimensional 
problem with water and a three-dimensional problem with air. 
And, so, I would think that from the standpoint of monitoring, 
tracing upstream origins or up-flow origins of pollutant 
problems you would have--and this is purely theoretical--you 
would have an easier time of it with water than with air. In 
fact, early on in the earlier history of market maintenance, 
and purely environmental protection, and environmental 
security, and environmental quality--I would say from the 
standpoint of if you are going after point source water 
problems, or point source water contamination problems, it 
would be easier to use trading with those than it is with air.
    Non-point source water pollution problems, on the other 
hand, would probably yield to an entirely different approach, 
or a third approach. They would be looked at as the concept of 
groundwater or surface water utility, which for a non-point 
source the key issue is preventing surface concentrations of 
pollutants, which then run off in spikes and are channelized 
through engineering approaches and cause mainly damage to 
surface water. They also lead to the kind of pollutant spikes 
that contaminate aquifers, because it hits all at one time and 
overwhelms the ability of the natural bacterial and biological 
mediators to prevent that from happening.
    Mr. Ose. OK. We are going to come back to the watershed 
thing.
    Mr. Nastri, on the permits, my question was, how do I get 
the permits as a small business in the first place?
    Mr. Nastri. For VOC, you would buy these credits on the 
market through a broker or some other means. You would then go 
to South Coast and you would apply for a permit with the actual 
credits in hand.
    Mr. Ose. OK.
    Mr. Nastri. And then, South Coast would grant the permits 
to construct, you'd begin your operations.
    Mr. Ose. And, those credits have a term.
    Mr. Nastri. Yes.
    Mr. Ose. OK.
    Mr. Nastri. Well, let me restate that. The credits for VOCs 
would be in perpetuity. It's the RECLAIM that has the term. 
RECLAIM is on an annual basis.
    Mr. Ose. OK. You are buying capacity first.
    Do they discount or depreciate, or do the VOC credits 
decline over time, or is it a fixed number?
    Mr. Nastri. The VOC credits themselves are fixed.
    Mr. Ose. OK.
    Mr. Nastri. You can go out on the market and buy more 
credits if you have to.
    Mr. Ose. OK.
    So, if your manufacturing process exceeds your expectations 
in terms of emissions, you've got to go back out in the 
marketplace and buy more?
    Mr. Nastri. Correct.
    And then conversely, if you are short you can sell them.
    Mr. Ose. Is there a maintenance to prevent the same thing 
from happening that happened with NOx with regard to if you 
have a sudden huge demand for VOC emission, capability for 
price spike prevention?
    Mr. Nastri. I'm not aware if the South Coast has addressed 
VOCs within that framework or not.
    Mr. Ose. OK.
    Let me go to the Fresno and San Joaquin Valley example. A 
farmer takes his diesel pump off and replaces it with an 
electric pump. He's going to get some quantification of credit 
for the emissions that were coming off that diesel pump.
    Mr. Nastri. Right.
    Mr. Ose. And, he's going to be able to sell those credits. 
In the case of a diesel pump, those would be nitrous oxide, and 
the term of those credits is a 1-year window?
    Mr. Nastri. It's over the life of the equipment, I believe.
    Mr. Ose. OK.
    Mr. Nastri. Yes.
    Mr. Ose. So, it's a one-time sale.
    Mr. Nastri. Right.
    Mr. Ose. So, if the pump--let's say the guy has got an old 
pump out there on the canal lifting water out of the irrigation 
canal and out onto the fields, he can continue to run that pump 
or he can change it, swap out, buy an electric pump, and sell 
the credits.
    Mr. Nastri. Yes.
    Mr. Ose. And, an electric pump, do the electric pumps cost 
the same as the diesel pumps?
    Mr. Nastri. The electric pumps, I believe, are actually 
less expensive.
    Mr. Ose. To operate or to acquire?
    Mr. Nastri. I think both.
    Mr. Ose. OK. You see where I'm trying to get to, I'm trying 
to figure out what's the incentive, how does the farmer get an 
incentive to take those diesel pumps out? The diesel pump he 
already has, it's not costing him anything other than operating 
costs. You take that off, you've got to get an electric pump 
that costs presumably less to run, as it would be more 
efficient lifting water and pumping it out. What's this 
electric pump cost?
    Mr. Nastri. That I don't know, but I can find out for you.
    Mr. Ose. And, how does that cost compare with the value of 
the credits that he'd get by shutting down his diesel pump? 
That's the essential question right there. But, Mr. Nastri, 
your office is working on this plan?
    Mr. Nastri. Yes.
    Mr. Ose. In the Central Valley?
    Mr. Nastri. Yes.
    Mr. Ose. Or, the San Joaquin?
    Mr. Nastri. Yes.
    Mr. Ose. Thank you.
    Dr. Ellerman, you had something you wanted to say?
    Dr. Ellerman. Yes, let's take that case. I think you can 
provide that incentive. Let's imagine this farmer and that 
Region IX actually creates a cap over these SO2 emissions, or 
whatever the relevant emissions are from this pump, and over 
all of them in the area, and at the same time gives that farmer 
the rights to continue using that pump, or to sell those 
rights. They have a value in the market. They are now given the 
value of the market, and if he has the opportunity, and he can 
calculate very easily--this pump will have another 20 years of 
life, or 10 years of life, or whatever it happens to be, and 
it's going to emit so much. I have these permits that have been 
given to me from the Government, and I can go ahead and 
continue using them, but I can also sell them and I'll make so 
much. And, I can buy this electric pump and I don't need those 
permits, so I, in fact, will make that calculation; that's 
exactly the calculation.
    What's new here is that now he can actually sell those 
credits, because that cap has been set up including that, even 
though that does not cost him anything, and that's what 
Congress called----
    Mr. Ose. But, he can only sell them in that air basin.
    Dr. Ellerman. That's right, to other sources for whom it 
may be more expensive to reduce emissions. And, the assumption 
here is that the electric pump is cheaper, in fact, and he now 
has the incentive that command-and-control would not provide. 
It might allow the farmer to emit more, but if the farmer emits 
less it's nice, it's thank you for doing it, but the farmer 
doesn't get any money.
    Mr. Ose. So, the farmer is going to look at the financial 
impact of keeping them or switching out the pumps. The buyer of 
the credit is going to look at the financial impact of, what's 
it cost me to abate my pollution now, what would it cost me to 
buy the equipment to make the impact I need, what are the cost 
of credits compared to the cost of the new equipment?
    Mr. Nastri. And, I'd just like to add, there's another 
factor to consider. That is the avoidance cost of permitting. 
By that, within the Central Valley, a big factor, as you may 
recall, the Title V settlement that we had with the State of 
California will identify major farms that have a lot of these 
pumps as major sources. So, they'll now have to apply for a 
permit.
    Part of our goal is, if we can trade out enough of these 
pumps they no longer trigger the Title V threshold. Therefore, 
they don't have to sign up for permits, which, as you know, 
these farmers don't want to be permitted, regulated, or 
anything else. So, we think we can avoid that by coming in with 
a program that would reduce their emissions.
    Now, whether they go electric or whether they go with new 
reduced diesel, because the problem is, unfortunately, that 
with many of the Ag operations these diesel units run 
literally, you know, 50 to 100 years. You've got pumps, 
engines, that are out there that are unregulated that have been 
operating for the last 50 years. You guys aren't going to 
change it unless there's some incentive for that. And, so, I 
think the avoidance aspect of being permitted is a big factor 
as well.
    Mr. Ose. I would encourage you to work on the incentive 
side of things, rather than the threshold of the paying side of 
things.
    Mr. Nastri. It all works together.
    Mr. Ose. OK. Now, we've covered that pretty well, and I do 
appreciate the fact that Region IX is trying to make this 
happen. I think you are on the right track, but I would just 
say that you need to lean more toward the incentive side than 
the paying side.
    Dr. Green.
    Dr. Green. I was going to say, I think the way you cast 
that question, actually, is fantastic, in that you really have 
boiled the question down to the absolute nub, and that is, if a 
person has a piece of equipment that is functional and will 
continue to be useful, and some costs have been recouped, it's 
purely a matter of operating costs. How do we tie the amount of 
money it will take to cross the threshold to a different 
technology into the overall process of determining allowances, 
credits and value given for a given piece of equipment over a 
certain length of time and life expectancy.
    And, I think you really have nailed that down. I would say 
that again, you really have to look at your initial permit 
allocation with great care, when you start on a trading system, 
because these are the kind of questions that are really very 
hard to get at in the aggregate level. Only the individual 
farmer knows how much it costs him to fix that piece of 
equipment. It may be 50 years old, that means a new part for it 
is going to be hand made, not off the shelf, and so those 
questions are the key.
    Mr. Ose. Is there availability of new technologies that are 
somewhere reasonably within the realm of making that 
transition? It's fine to say, well, we'd like everybody to go 
straight to fuel cells. I mean, it wouldn't be fine to say 
that, but if you could say there are alternatives available if 
you have a fuel cell line?
    Dr. Green. Well, but the transition error would be so huge 
you could never really functionally tie it into a meaningful 
permit value to achieve an emission reduction. So, the 
technology alternatives also have to be considered at the time, 
and be considered from a fully holistic standpoint, which is, 
if the diesel pump has been there 50 years, how are they 
getting the diesel to it? Do they run it out every day on a 
tractor or do they already have a small diesel line that runs 
from a central repository? Can they get electricity out there?
    Mr. Ose. It sounds like decisions that every business 
person up and down the State makes every day in their 
respective enterprises.
    Dr. Green. That's right, they each have the fine level of 
knowledge necessary to make it work, and that's the really 
tricky part when someone say we want to move from diesel to 
electric, or move from diesel to something else; that's the 
problem, is that decisionmaking can really only be made at the 
level of the individual who knows best where they are in the 
life cycle.
    Mr. Ose. My only point is, I prefer the incentive side to 
the paying side.
    Dr. Green. And, I would actually say one other thing, which 
is, I think we actually take avoidance, the avoidance factor 
should really be completely off the table, because so long as 
there's an avoidance factor there is no market.
    You cannot have an incentive-based program if on the other 
hand the agent is going to say, well, command-and-control works 
even when it doesn't, because it poses an alternative that 
drives you to do something different. That's not a great 
dynamic.
    Mr. Ose. That's a different philosophical argument we are 
not going to have today.
    I want to go back now to the watershed thing. I do 
appreciate your comments on the market structure, because the 
design of the market does matter.
    Mr. Nastri, we've talked about, primarily, air so far. I 
want to talk about watersheds at this point.
    Mr. Ose. Mr. Nastri, you talked about a pilot project on 
watershed-based trading for water, and water pollution. Now, is 
this similar in concept to the cap-and-trade program on the air 
that we've been talking about, or is it still under 
development?
    Mr. Nastri. I think it's still under development. We 
actually just came out with the Water Quality Trading Program, 
which is actually out for draft comments. So, at this point I 
don't have a good enough base I think to really comment on 
where it stands. It is very conceptual.
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    Mr. Ose. And, it is a pilot project?
    Mr. Nastri. Yes.
    Mr. Ose. So, it's just this single watershed that we are 
talking about for the moment?
    Mr. Nastri. Right, and we are actually looking to expand, 
as I mentioned earlier, to 21 pilots across the Nation. But 
again, those haven't been implemented. They'll be coming up. 
They'll be nominated by the Governors, I think, this fall.
    Mr. Ose. And again, you are working on the market design at 
this point?
    Mr. Nastri. Yes.
    Mr. Ose. There's a fellow sitting next to you that might 
have some suggestions on market structure.
    Mr. Nastri. We'll be sure to consult with Dr. Ellerman.
    Mr. Ose. All right.
    Now, Dr. Ellerman, you've talked about the few basic 
conditions that need to be in place for markets to work, the 
prerequisites you cited, and the characteristics we've cited. 
Now, do you think it's possible on water and watersheds to 
create a cap-and-trade program similar to the one we have on 
the air side of things?
    Dr. Ellerman. The experience has not been as encouraging. 
There hasn't been as much experience, and the experiences of 
some of the early experiments were not particularly 
encouraging, but there is the Tar-Pamlico case in North 
Carolina that from what I understand has been successful. I 
don't remember the details enough to comment on it.
    In general, in watersheds, we are dealing with small 
markets. We have the same problem again of the small markets. 
Airsheds are in some ways easier, because you've got large 
areas that you can trade over, and for watersheds or water 
systems that could be less, but I think that's, again, a matter 
of the specific problem we are trying to deal with, defining 
what would be that market, and whether you can organize and 
create a market for it.
    I think we should be encouraging, we should attempt to do 
so, and I think to the extent we can do so we can expect to 
have the same success we've seen in air systems.
    Mr. Ose. Would you expect the same constraints on a 
watershed trading system to exist as exist on the air basin, 
that is, you can't trade your credits outside your watershed?
    Dr. Ellerman. I would think that off hand, it seems to me 
absolutely yes, that it would be tighter. Air moves around in 
all sorts of different directions, I'm not aware of any 
argument that water in one watershed actually moves over to 
other watersheds. The lines are much clearer.
    I note Dr. Green made a very interesting comment, that 
actually it's easier to measure the water than it is the air. 
That's really quite an interesting comment, and I think that's 
right. You've got fewer dimensions, it's much more contained, 
so it might be easier to work out these problems.
    In air, where the meteorology is changing all the time, 
there's a chaotic element that makes it harder to deal with.
    Dr. Green. We also have a lot of new technology available 
in geographic information systems, mapping systems, that give 
even greater detail with regard to water flows.
    One thing that I think does need to be considered, and 
we're getting at it, which is, would this be only within 
watersheds? We do have situations of nesting watersheds. You 
may not have a situation where a downstream watershed 
contaminates an upstream one; you certainly have the reverse. 
And, so, again, in the initial conditions of establishing the 
market, you are going to have to pay close attention to what 
you define as the unit of trading or as the market unit, so 
that you have the ability for upstream or downstream trading 
between watersheds that are nested. Because few watersheds 
exist in isolation, anymore than air basins exist in isolation. 
It's not usually a case where you have just this whole area of 
water that discharges purely to the ocean that takes no water 
from the surrounding areas. So, you are going to have to look 
at the nesting and interweaving nature of watersheds.
    But, nonetheless, it's a physical resource for which we 
have more technology.
    Mr. Nastri. I think, from my perspective, my concern over 
watersheds is that, as Dr. Ellerman mentioned, in airsheds you 
have fairly significant dispersal, and often times it's fairly 
rapid. In a watershed, in a stream, you don't have that 
significant dispersal immediately. You may have it over time, 
but when you look at the localized effects of pollution in that 
one particular area you may have a fish kill in one particular 
area that by the time it was downstream it wouldn't affect the 
overall quality. But because it is such a localized impact, 
that's where I sort of have trouble understanding how the water 
quality trading would work, unless you were only moving toward 
a reduction from existing standards and not allowing 
exceedances, because to allow exceedances would, I think, 
potentially cause an increase in harm to human health and the 
environment. So, that aspect of developing the program, itself, 
would have to be addressed.
    I also agree with Dr. Green in the sense of nested 
watersheds. I think within California we all tend to think of 
CALFED, and the number of watersheds that feed into this 
overall watershed aspect. I think that if you do take into 
account the cumulative aspect of the loads within streams, and 
the relative value when you are creating your market, in 
essence, you'd almost have to create a series of impacted zones 
along your entire market that would thereby set the value of 
the credits that you would generate.
    Dr. Green. We've also actually stepped straight into 
another subtle distinction, which is what Mr. Nastri is 
pointing out about surface water spikes and fish kills, and the 
cap being set with regard to current standards of peak loading 
for surface waters. It's different than what your goal is going 
to be if you are trying to protect sub-surface waters.
    And, so, from the standpoint that within a watershed only a 
small amount of water at any given time is moving in the 
watershed, it's actually moving through surface water 
structures. You have to look beyond simply the question. That's 
one question that would trigger setting a cap, another question 
that would set a cap is going to be the capability of the local 
environment to filter, percolate, and protect the ground sub-
surface water as well as the surface waters.
    Mr. Ose. I think this is a fascinating issue, because I was 
born and raised in Sacramento, a large urban area, on the 
Sacramento River, on the American tributary to the Sacramento. 
You go upstream from Sacramento, you've got the Feather, the 
Bear, and a host of other smaller creeks and what have you. 
You've got Cottonwood Creek, which is a tremendous creek when 
the rains hit. Can you take credits purchased off Cottonwood 
Creek to address a problem in Sacramento, or can you take 
credits purchased in Feather River to address an issue, for 
instance, with the regional sewer plant on the Sacramento River 
downstream to Sacramento?
    Mr. Nastri. You'd have to look at the load, what's the 
potential load in that particular area, and the contribution to 
Sacramento.
    Mr. Ose. You are almost creating a property right.
    Mr. Nastri. Yes.
    Dr. Green. That's why the industry flow right model is 
vaguely related. This is a directional question, as to where 
you can trade a credit in the market. There's a directional 
component to where you can trade, where in theory you can trade 
the credits.
    Mr. Ose. Do you measure your impact on the watershed at the 
point at which the watershed empties into the ocean, or do you 
measure it at spots along the path, or how do you quantify the 
impact you are looking for?
    Mr. Nastri. You actually measure it at spots along the 
path. That's actually what EPA is trying to do with the 
development of the Total Maximum Daily Load, which assesses the 
ability of any particular water body stream to carry any 
particular pollutant.
    Mr. Ose. If that's the case, why wouldn't you be able to 
trade those credits across watersheds?
    Dr. Green. Why wouldn't you?
    Mr. Ose. Why wouldn't you?
    Mr. Nastri. Only insofar as they are nested and impacted.
    Mr. Ose. A TMDL is a TMDL, though. I mean, this is the 
part----
    Mr. Nastri. Well, then it gets to the localized impact, 
though. Why should somebody in southern California, that's 
paying to clear up their creek, be able to provide any offset 
or relief to somebody up in Sacramento? They are two totally 
disjointed watersheds, one having no impact on the other. But, 
the Cottonwood does have a direct impact on the Sacramento and, 
therefore, that should be allowed.
    Mr. Ose. That's an interesting question. I'll be curious to 
see the comments on your draft notice there.
    Mr. Nastri. I'll make sure we forward them to you.
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    Mr. Ose. Dr. Green, do you know of any watershed trading 
programs, and then secondarily, do you know of any successful 
ones, and what are the characteristics of successful versus 
unsuccessful, that you've been able to discern, if any?
    Dr. Green. I'm not aware of any watershed trading programs, 
specifically, where what they are looking at is trading 
pollutants within a watershed under a cap. I'm not aware of any 
cap-and-trade systems that exist for watershed protection.
    There's an analogous process for protecting sub-surface 
water, which is more or less a cap-and-trade process on 
imperious surfaces, and a watershed utility embodies something 
like a cap-and-trade approach to impervious surfacing in that 
you pay a certain amount based on how much impervious surfacing 
you really do and the way you develop facilities, there's a 
price signal to control how much you do.
    But, I'm not aware of any specific watershed trading 
programs around the country that have worked or that are 
implemented.
    Mr. Ose. OK.
    Let me go on to the information and data issue, which I 
talked about in my opening remarks. At the national level we 
are having a problem, in terms of gathering and analyzing the 
data that we do have. Do we have that same problem at a 
regional level? Mr. Nastri.
    Mr. Nastri. Yes. The data collection costs, the analytical 
costs, are extremely expensive, and we rely to a great extent 
on States and local agencies to collect that data. We are 
trying to find the resources to increase the data, and I agree 
that without that type of data it's difficult to set TMDLs and 
some of the other issues, but it is a problem.
    Mr. Ose. One of the things that occurs to me is between 
Federal, State, and local--the Federal EPA, and Cal EPA, and 
say the local health departments--we ought to have a 
significant body of data somewhere, in terms of what the air 
quality algorithms are, or what the water TMDLs are. Are we 
spending resources at the Federal level that repeat the tasks 
that are being done at the State level, or local level? In 
other words, are we presently using our resources efficiently, 
in terms of the collection of data? Are we doing it once? Are 
we doing it two or three times, depending on whether you are 
Federal, State, or local, or do you know?
    Mr. Nastri. I don't think I know well enough to answer your 
question 100 percent, because there's a couple of different 
facets that I can answer your question. The actual data 
collection itself, and by that I mean the water sampling events 
and the analytical costs, I think that there isn't much 
duplicity going on. There aren't enough resources for that. So, 
the question becomes, the data that is generated, is that being 
managed efficiently?
    And, on that I would probably say I think there's alot of 
room for improvement, because when I talk about the data 
management I think that what we found in the past is that you 
are getting data bases established at the local level, and then 
you are finding another data base that's been established at 
the State level, and then you are finding another data base 
that was established at the Federal level. Is that effective 
use of funds? I don't think so.
    Is there a way that we can create a single data repository 
and have individual agencies access that data without 
necessarily repeating the data base itself? Yes, that's what we 
are trying to work on with all the States right now, in 
establishing a common language so that we can actually 
manipulate, utilize, and access the data efficiently, instead 
of simply recreating it.
    And, that's something that we are working on.
    Mr. Ose. Dr. Green, you talked in your written testimony 
about the local partnership issue, where often times the local 
non-profit or NGO's would be in the field working on something, 
and while they wouldn't have all the information, all of the 
empirical data, perhaps, that a governmental agency did, they 
had an intuitive understanding of a system and how it worked.
    How do we get local folks involved that have this intuitive 
understanding of how an ecosystem operates? How do we get them 
meaningfully involved in this process? They might know 
intuitively that the wind blows from the east on most days, or 
when the wind blows you get a tide of this nature or that 
nature. How do we get this involvement, how do we do this?
    Dr. Green. I think a key element is in creating awareness 
of the fact that there's a prospect for these processes to 
work, that is, there's enough flexibility within the regulatory 
process. I think there are things like Excel and agency efforts 
where the agencies make an effort to alert the local leaders to 
the fact that they are open to alternative solutions to that 
which is laid out in the specifically defined regulatory 
structure, that they want to tap that local knowledge and be at 
the table.
    The local examples that I talked about in the testimony, 
the Feather River Alliance and so forth, they do have a 
component of the Government, whether it's State and local or 
Federal, at the table saying, ``We are interested in finding a 
way to solve this problem other than the one you may have 
codified in a particular regulation. We can find ways to work 
with that regulatory framework to enable innovation and 
creativity in the use of your local knowledge of State, and 
place, and economy, and balance interests within districts, in 
a way that produces environmental improvement and still 
maximizes your abilities to run your community the way you want 
to run it.''
    So, I think a key element is that active outreach by the 
agency that says, ``We are interested in this kind of 
innovation.''
    Mr. Ose. If I can make one observation on that. One of the 
first things I did upon becoming a Member of Congress was, I 
went over to the nearby high school, where they had an 
international baccalaureate program, and in the science section 
of that baccalaureate program there were like six or eight 
kids--I think actually one of them is now at MIT--and, I mean, 
these kids were up here and I'm kind of down here in the lower 
gene pool. They are actually the team that goes into the nearby 
creeks and collects the empirical data that then the local, 
State, and Federal agencies base their decisions on. Is that 
the kind of partnership you are talking about?
    Dr. Green. Well, that's certainly one of them. The people 
who use the local watershed are going to have better knowledge 
about the condition of that watershed, and that's going to 
include the people who are based locally at universities. My 
own university, UCLA, which isn't getting enough air time here, 
had an environmental program in which researchers went out and 
actually monitored airsheds here, in fact. At UCLA, we are 
responsible for a lot of the South Coast Air Quality Management 
District, resolving questions of inventory and emissions and so 
forth. But, that is clearly a part, tapping your local 
university knowledge base to gather the data.
    One of the things that Mr. Nastri was talking about is the 
reason you don't have a lot of duplicative nature in water 
quality collection readings is that they tend to roll up. The 
data that they hold at the State level they hold because it was 
gathered at a local level for a local program. The information 
that the Federal Government has is because the State 
governments turn over their water quality data to the Federal 
Government.
    The problem you have is that, between the States and 
between the localities they haven't really defined their water 
quality indicators in ways that are planned to make them 
interchangeably usable, and to draw the good ones. That's one 
of the reasons why you really need to drive down to that local 
level, because those indicators aren't necessarily going to be 
the same, and will, in fact, be an arbitrary and, perhaps, an 
unscientifically arbitrary way of saying, well, we are going to 
establish national indicators of quality. It's not always that 
easy.
    Mr. Nastri. Mr. Chairman, if I could add to that. Within 
California, the State has primacy for the safe water and clean 
water implementation. The issue of how do we get the local 
organizations, local stakeholders, local public, to become 
engaged is really something that's very important to me. It's 
important to me because a lot of these groups come to EPA 
saying, why isn't EPA doing something about the State, and why 
is EPA being forced to develop this or that various type of 
program? And so, the key is to develop stakeholder outreach 
programs. The key is to meet with these groups in their areas, 
with our State partners, and say--what are your concerns, what 
is the program that's being done to address that, and what, if 
any, improvements need to be made to that.
    There are a number of programs here in southern California 
where locals have brought information up to the regional board. 
They weren't satisfied with the response that they were getting 
at the regional board and, therefore, they brought it up to us 
at EPA.
    We at EPA are doing a number of different outreach efforts. 
In fact, for some of the programs, we actually do the 
analytical work for samples that are collected by some of these 
organizations. We also provide funding for them to continue 
some of their work. So, I think we are actively engaged. Can we 
do more? Absolutely, and we're going to be making a significant 
effort to do that. In fact, this afternoon I'm meeting with, I 
hate to say this, but about 60 representatives from cities all 
interested in various aspects of the TMDL development, and 
EPA's role as it passes off to the State the whole process. So, 
we are making that outreach.
    Mr. Ose. I want to applaud you for doing that, because I 
know the cities and counties in my district, and I presume they 
are reflective of everybody's district, they are all terribly 
concerned about what the TMDL thing means to them from an on-
the-ground viewpoint.
    Frankly, I live across the street from the creek that this 
team from the high school monitors and now my 9 and 7 year-old 
are starting to say, ``Well, I want to go with the team 
today.'' So, I mean, this is coming, and I do want to applaud 
your trying to press forward on this.
    I'm sensitive to each of your time; I said we'd be done 
around noon, and it's 11:40 now. I want to go to the particular 
issue here, and that's the Supplemental Environmental Projects 
process where Region IX is using these as an alternative to the 
assessment of a cash penalty. Keep in mind our objective is to 
improve the environment, rather than generate cash. I think 
this is a very appealing concept. I'm curious how frequently, 
and I'm going to refer to them by their acronym, SEPs, how 
frequently are SEPs being used in Region IX, generically? I 
mean, three dozen, five?
    Mr. Nastri. Well, I'll give you just a ball park number; in 
the 7-months that I've been on the job we've probably done 
about 10 SEPs. A lot of times they'll relate to companies--the 
SEPs that we try to look at. We try, and we are actually 
constrained by the SEP requirements. And the actual money 
that's being spent goes into that area that's been impacted.
    So, for instance, in Hawaii, there were a number of 
discharges that were made. What we were able to do there was 
get the company that was responsible for those discharges to 
buy emergency response equipment for the local responders. We 
were able to do the same thing here in Torrance, where 
emergency response was provided to local emergency responders.
    There have been other SEPs that we've looked at. They are 
related, again, to water-type issues, where we are looking at 
providing water infrastructure to that local area--funds for 
improvement to the infrastructure.
    Mr. Ose. How does Region IX assure itself that the SEP 
adequately addresses the problem that's on the table, so to 
speak?
    Mr. Nastri. Well, the SEP is almost a side bar to the 
problem that's on the table, because until the problem is 
solved we don't even get to the SEP. So, once the problem is 
solved then it becomes an issue of, do we want to push for 
penalties or do we want to push for some other creative 
mechanism that we think benefits everyone?
    No one likes to pay penalties. We like to see the benefit 
sort of spread around, so we always push for SEPs. Now, in 
instances where we believe there was an egregious action by a 
party, we'll try to go for both penalties and SEPs. So, we used 
the SEP as the preferred method, but again, a lot will depend 
on the intent of the party.
    Mr. Ose. Let me reverse that, let me reverse the question. 
Under a SEP, in a business where somebody has a problem, they 
enter into the SEP; what kind of assurance do they have that's 
a safe harbor?
    Mr. Nastri. Well again, the company would have to have 
settled with us, and the SEP is just a portion of that. Simply 
by offering themselves up to engage in a SEP doesn't provide 
them any relief.
    Mr. Ose. So, if they've engaged in a SEP, I mean they don't 
get to the SEP until they get through this other thing.
    Mr. Nastri. Correct.
    Mr. Ose. OK. So then, my second question is, having gotten 
through the other thing, and done the SEP, are they now in a 
safe harbor position?
    Mr. Nastri. No.
    Mr. Ose. I'm trying to get into the certainty thing, are 
they still subject to challenge on their original thing or 
their SEP?
    Mr. Nastri. They would not be subject to challenge on the 
original item that brought the SEP about. If there were a new 
action that was a violation, then we would go after them for 
that.
    Mr. Ose. Outside the constraints of the program.
    Mr. Nastri. Outside, correct.
    Mr. Ose. OK.
    I do think that if people violate the law, they ought to be 
held accountable, but if our choice is to collect a cash 
penalty and turn it over to the Treasury, or have them spend 
the same amount of money on fixing a problem, or two or three 
similar problems, I'm in favor of that.
    You have, say, 10 SEPs in operation now. How do we go about 
expanding those? Is it a case-by-case basis?
    Mr. Nastri. It really is a case-by-case basis. In those 
instances where an honest mistake was made, we are not looking 
to impose penalties. I mean, I very much agree with your 
philosophy, and if we think that we can simply correct a 
problem so that it's not an ongoing issue, and if the company's 
willing, and we think that there's a good opportunity to do it, 
we would go through the SEP process. The way that we go through 
the SEP process, I think, is important to understand, because, 
you know, we want to use this as a tool. We can use SEPs for 
outreach to other companies to say, look, by doing this you can 
benefit in this particular way.
    And so, we really look at it as something positive, and we 
really tout that the company came forward, did the right thing, 
is helping the community. I mean, they get a lot of, I think, 
positive benefit out of that, as opposed to, you know, these 
guys are bad actors and we are going after them.
    Mr. Ose. Well, maybe they were.
    Mr. Nastri. Well, if they were, we would go after them.
    Mr. Ose. Dr. Green.
    Dr. Green. I think the key point, which is how do you 
institutionalize the favoring of environmental improvement over 
fines and/or paperwork compliance values, and perhaps some of 
what Wayne is getting at here is that perhaps one answer is to 
find ways to constrain fines only to situations of bad intent. 
You don't simply say, well, we favor it where we don't have a 
bad actor, but somebody had an accidental paperwork non-
compliance, so we don't want to fine them.
    On the other hand, you may not even want them to have to 
deal with the SEP either, but one thing to consider is that 
question of how do you institutionalize a system that would 
say, if we have a problem, how do we first look at getting an 
improvement, and how do we make sure that we're only using 
punitive approaches against bad actors? We maybe need to look 
at it from that standpoint, of constraining punitivity and 
expanding the SEP approach, because you achieve the same end.
    Mr. Ose. Well, I will tell you, if there's egregious 
behavior I don't have a problem with----
    Dr. Green. No, I don't either. I don't think anybody does.
    Mr. Ose [continuing]. But going back to my comment about 
incentives versus paying, if there's somebody out there 
considering X, Y, or Z, and X is clearly illegal, and Y is on 
the border, and Z is no problem, if I could get them to go to Z 
through a SEP or some other incentive, that's what I'm trying 
to get to.
    Dr. Green. It won't be through a SEP unless they've already 
gone through the Y or the illegal thing.
    Mr. Nastri. Yes, they have to get to the legal aspect 
before we get to the SEP. But there is a policy, Mr. Chairman, 
that sort of outlines the penalties, and when SEPs are 
appropriate. I can forward that to you and your committee for 
review, if you'd like.
    [The information referred to follows:]
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    Mr. Ose. I would appreciate that, because if you have been 
an egregious violator, and you are found accountable, and you 
are held accountable for that, and then you mend your ways, and 
you enter into a SEP of one sort or another, I would hope that 
it's got a certainty to it, in other words, a safe harbor 
provision of some sort or another if you comply with the SEP. 
You might get visited to make sure you are complying with the 
SEP, but once you've complied with the SEP you have that 
certainty.
    Mr. Nastri. Yes.
    I think that the certainty in this case is the remedy. The 
SEP is the benefit, so to speak, so there would be no 
compliance with the SEP, other than the fact that they provided 
the funds, or they did whatever it was that they committed to 
do, as part of the SEP.
    But, if they met their legal obligation to stop emissions, 
or stop discharges, or----
    Mr. Ose. Or, give back in compliance.
    Mr. Nastri [continuing]. Exactly.
    Mr. Ose. I find this a very appealing concept. I think it's 
very creative, and I want to compliment you on that.
    Mr. Nastri. Thank you, we appreciate that.
    Mr. Ose. Now, I have about 170 more questions here. We can 
stay for the rest of the afternoon, or I can send them to you 
in writing. I'm going to opt for sending them to you in 
writing, again, because I know your time is valuable and I want 
to respect it. So, we are going to go ahead and wrap up.
    I do want to say that I have appreciated you coming down 
here and testifying today. California, has so many different 
opportunities, but it also has a similar number of challenges. 
What I've heard today from Mr. Nastri, from the Federal side, 
Dr. Ellerman on the market side, Dr. Green from the research 
side, frankly, I think your made some pretty good progress 
toward coming up with some solutions. And, interestingly 
enough, they are not the--in business we always called it the 
cram-down solution, you might use command-and-control in this 
instance. They are incentive based, instead of pushing people 
into something we are kind of bargaining with them, and I find 
that particularly attractive.
    These concepts of tradable credits, I think offer real 
promise. Granted, we've refined it on acid rain, we've still 
got to work on it here on water. RECLAIM is at least a 
measurable success, even if it still needs some tweaks, in 
people's opinions. But out of that, we get less pollution, and 
we get lower compliance costs. I don't know of a better 
epithet, if you will; those are positive, both of them, less 
pollution, lower compliance costs, those are positives.
    Now, Congress, I think, is interested in both. Out of 435 
of us, I will tell you, I don't know of anyone who says, ``I'm 
for more pollution,'' or ``I'm for higher costs.'' There's 
nobody in Congress who says that; we all want less pollution 
and lower compliance costs. So, I applaud the three of you for 
your efforts. We'll leave the record open for 10 days for the 
purpose of other Members submitting comments from across the 
country.
    This subcommittee and this chairman look forward to working 
closely with Mr. Nastri, and welcome any input you have Dr. 
Ellerman and Dr. Green. We intend to make this a success. Less 
pollution, lower compliance costs.
    We are adjourned. Thank you, gentlemen.
    [Whereupon, at 11:45 a.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]

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