[Senate Hearing 109-420]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-420
 
                             CLIMATE CHANGE

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

                               CONFERENCE

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                                   on

                             CLIMATE CHANGE

                               __________

                             APRIL 4, 2006


                       Printed for the use of the
               Committee on Energy and Natural Resources


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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                 PETE V. DOMENICI, New Mexico, Chairman
LARRY E. CRAIG, Idaho                JEFF BINGAMAN, New Mexico
CRAIG THOMAS, Wyoming                DANIEL K. AKAKA, Hawaii
LAMAR ALEXANDER, Tennessee           BYRON L. DORGAN, North Dakota
LISA MURKOWSKI, Alaska               RON WYDEN, Oregon
RICHARD BURR, North Carolina         TIM JOHNSON, South Dakota
MEL MARTINEZ, Florida                MARY L. LANDRIEU, Louisiana
JAMES M. TALENT, Missouri            DIANNE FEINSTEIN, California
CONRAD BURNS, Montana                MARIA CANTWELL, Washington
GEORGE ALLEN, Virginia               JON S. CORZINE, New Jersey
GORDON SMITH, Oregon                 KEN SALAZAR, Colorado
JIM BUNNING, Kentucky
                     Bruce M. Evans, Staff Director
                   Judith K. Pensabene, Chief Counsel
               Robert M. Simon, Democratic Staff Director
                Sam E. Fowler, Democratic Chief Counsel
                John Peschke, Professional Staff Member
            Jonathan Black, Democratic Legislative Assistant
                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Bailey, Paul, Director, Generators for Clear Air.................    43
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................     2
Bradley, Michael, Executive Director, Clean Energy Group.........    40
Callahan, Kateri, President, Alliance to Save Energy.............    38
Claussen, Eileen, President, Pew Center..........................    62
Domenici, Hon. Pete V., U.S. Senator from New Mexico.............     1
Doniger, David, Policy Director, Climate Center, Natural 
  Resources Defense Council......................................    46
Edward, Garth, Trading Manager, Environmental Products, Shell....     7
Feinstein, Hon. Dianne, U.S. Senator from California.............    14
Grumet, Jason, Executive Director, National Commission on Energy 
  Policy.........................................................    24
Helme, Ned, President, Center for Clean Air Policy...............    21
Hobson, Chris, Senior Vice President, Research and Environmental 
  Affairs, Southern Company......................................     9
Johnson, Kirk, Executive Director of Environmental Affairs, 
  National Rural Electric Cooperative............................    45
Krupp, Fred, President, Environmental Defense....................    42
Marron, Donald, Acting Director, Congressional Budget Office.....    22
Moler, Elizabeth A., Executive Vice President, Government and 
  Environmental Affairs and Public Policy, Exelon Corporation....     5
Montesano, Craig, Director of Governmental Affairs, National 
  Mining Association.............................................    44
Morris, Michael, Chairman of the Board of Directors, Edison 
  Electric Institute.............................................    41
Morris, Michael, Chairman of the Board, President, and Chief 
  Executive Officer, American Electric Power.....................    58
Murray, Michael, Director, Legislative Policy, Sempra Energy.....     8
Pershing, Jonathan, Director, Climate, Energy, and Pollution 
  Program, World Resources Institute.............................    63
Pizer, William, Senior Fellow, Resources for the Future..........    26
Pomerance, Rafe, Chairman, Climate Policy Center.................    60
Richels, Richard, Technical Executive for Global Climate Change 
  Research, Electric Power Research Institute....................    23
Rosenzweig, Richard, Chief Operating Officer, Member of 
  International Climate Change Partner, Natsource................    61
Ruben, Andy, Vice President of Corporate Strategy and 
  Sustainability, Wal-Mart Stores, Inc...........................    10
Shaw, Ruth, Group Executive for Public Policy and President for 
  Duke Nuclear, Duke Energy Corporation..........................     4
Slump, David, General Manager, Global Marketing, GE Energy, 
  General Electric Company.......................................     5
Sterba, Jeff, Chairman, President, and CEO, PNM Resources........     6
Thorning, Margo, Senior Vice President and Chief Economist, 
  American Council for Capital Formation.........................    20
Walsh, Michael, Senior Vice President, Chicago Climate Exchange..    59
Wolfe, Samuel, Chief Counsel, New Jersey Board of Public 
  Utilities......................................................    25


                             CLIMATE CHANGE

                              ----------                              


                         TUESDAY, APRIL 4, 2006

                                       U.S. Senate,
                  Committee on Energy and Natural Resources
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:55 a.m., in 
room SD-G50, Dirksen Senate Office Building, Hon. Pete V. 
Domenici, chairman, presiding.

 OPENING STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR FROM 
                           NEW MEXICO

    The Chairman. Hello, everybody. I guess if one was planning 
a way to make something difficult, we would have planned it 
this way. It is going to be about as tough as possible to get 
this done in an orderly manner. Nonetheless, we want you to 
know we do appreciate it, and we're going to get the benefit of 
what is gathered here and what you have worked on, regardless 
on the--what intervenes and what causes us to have commotion 
because of us not being in control of the Senate. And we are 
not in control of that.
    The Senate's going to have votes this afternoon. There's an 
appropriations markup, which takes six of our members. Other 
things are going to intervene regularly. And we are about as 
far from the floor as we can be, by just an accident of 
arrangement. So, that's going to mess things up a bit, too.
    But I think what we'll do is just see what happens, and you 
bear with us. Okay? We'll try to follow our schedule.
    I have some brief opening remarks, and then I'll yield to 
Senator Bingaman, and we'll move right along from there.
    First, I want to take this opportunity to thank everyone 
who submitted comments on our white paper. We received more 
than 150 submissions, containing more than 500 individual 
documents. Our white paper is based on the Sense of the Senate 
Resolution adopted by the U.S. Senate shortly before it passed 
the Energy Policy Act of 2005. That resolution was not included 
in the conference report, but Senator Bingaman and I agreed 
that we would follow that resolution with the white paper in an 
attempt to identify a path forward on developing an approach to 
a mandatory-based mechanism.
    The white paper proposed four questions: Who is regulated, 
and where? Should allowances be free or auctioned? Should a 
U.S. system allow trading with other cap-and-trade systems 
around the world? And should the U.S. cap-and-trade system be 
conditioned on comparable action by developing nations?
    These, the response, both in terms of sheer numbers and 
breadth of input, is overwhelming. Most of those who submitted 
answers were extremely generous with their time and ideas, for 
which we are extremely grateful. A number of responses were 
adamantly opposed to the imposition of mandatory controls on 
greenhouse gas emissions. Some expressed opposition, others 
offered suggestions about how to construct a mandatory program. 
Still others wholeheartedly supported a mandatory approach. A 
number of comments suggested an upstream approach to 
regulation. Others recommended regulating downstream, large 
emitters. And still others recommended a hybrid system that 
regulates at various points along the economic spectrum.
    Responses to other questions were equally diverse. Some 
favor free allowances, to minimize any economic impacts, others 
favor the allowance auction approach. Some favored linking 
trading with other systems, and opposed linkage. With regard to 
comparable action by the developing world, some suggested 
waiting for such action by others, and some submitters urged 
that the United States move now, rather than wait, and believes 
that our imposition would encourage the development, in those 
nations, of similar or the same.
    Obviously, I have simplified, dramatically, the range of 
responses. Many are very detailed and complex, and, in some 
instances, it was very hard to even summarize them, to be 
honest. But the range of responses to the questions supports my 
feeling, when we were discussing a possible amendment to the 
energy bill--I felt then, and I feel now, that designing and 
implementing a mandatory system will be very difficult, both 
politically and economically. Consensus will be a very 
difficult thing. But I also feel now, as I did then, that we 
need to start somewhere. And this conference is our starting 
point.
    Special thanks go to those selected to participate today. 
Your comments illuminate the magnitude of the task faced by the 
committee, and, indeed, the task faced by the Congress, if it 
is to design a mandatory market-based greenhouse gas emission 
program that is fair to all affected and produces substantial 
greenhouse gas emission reductions that does no harm, does 
maximum harm to the--minimum harm to the economy and encourages 
the developing world to get on with their part of the effort.
    I do not know where we will end up, but I do believe that a 
large number of our citizens are concerned about climate change 
and I think that Congress needs to explore ways to reduce our 
contribution to the greenhouse gases to the atmosphere.
    With that, I ask Senator Bingaman to take his time and 
proceed as he sees fit.
    Senator Bingaman.

         STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR 
                        FROM NEW MEXICO

    Senator Bingaman. Thank you very much, Mr. Chairman. 
Thanks, first, to you for holding this conference. I think this 
is a very useful thing to be doing, and I echo your thanks to 
all of those who are participating and to all of those who have 
filed comments in response to the white paper that we issued. I 
think that the seriousness with which many of the respondents 
address the issues, I think, is very heartening. It's obvious 
that this is a subject that many people feel is in need of 
attention.
    Let me just take the rest of my few minutes here to call on 
Perry Lindstrom, who's with the Energy Information Agency. He, 
kindly, came over here to very briefly explain a chart that the 
Energy Information Administration prepared for us, entitled 
``Greenhouse Gas Emissions Flow 2004.'' When I finally took the 
time to look at that chart, I thought it was pretty useful. And 
so, I suggested that maybe Perry could come and briefly 
describe what's involved with the chart. I think copies have 
been made available to people.
    And, Perry, why don't you go ahead and give us your short 
explanation, and then I think the chairman intends to go ahead 
with the statements.
    Go ahead, Perry.
    Mr. Lindstrom. Thank you, Senator.
    This is just a brief overview of what the emissions look 
like in the economy in 2004, which is the latest year for which 
we have complete data. As you see, petroleum is the largest 
single category, starting on the left here, which is the--kind 
of the input, or upstream, side. And then coal is the second 
largest, followed by natural gas. If you look down here, this 
``renewables'' is mainly plastics and things of that nature 
that are burned at municipal solid-waste sites, things of that 
nature.
    So, those four categories make the energy total--subtotal. 
And then, you add to that, for the CO2 total, 
industrial process emissions, and that gives you the total 
CO2 in the economy.
    In addition to CO2, there are other gases, such 
as methane, nitrous oxide, and some high GWP gases, which are 
more esoteric, things like sulphur hexafluoride, that are also 
used in our economy.
    You move from there to the middle of the chart, this is 
where the conversion to electricity takes place. And you see 
that we have ``direct emissions'' here, which then are in the 
end-use sectors. And then, the conversion emissions, we 
allocate them out to the end-use sectors based on electricity 
sales.
    A little more complex part of this chart was allocating 
methane and nitrous oxide and the other gases to the end-use 
sectors. We had to make some judgments as to where those other 
gases would go, and you can see, from looking at the ``C'' 
section, over to the far right, that many of those end up in 
the industrial sector, in terms of our end-use allocation.
    There are some adjustments that are made under the United 
Nations Framework Convention on Climate Change. We add in the 
U.S. territories, and we--under that agreement, the 
international bunker fuels are removed from every country's 
inventory.
    I should mention that we have a memorandum of understanding 
with the U.S. EPA, and we give the energy data to the U.S. EPA, 
and they submit it every April, around April 15, to the United 
Nations, and that's our official submission, in terms of the 
U.S. inventory of greenhouse gases.
    That's basically it, in a nutshell, fairly straightforward. 
I can answer any questions, if you have them.
    Senator Bingaman. Well, instead of me asking questions, 
maybe we'll have some as we go through the first panel here.
    Mr. Lindstrom. All right.
    Senator Bingaman. Thank you very much, Mr. Chairman.
    The Chairman. Well, Senator Bingaman, I think that was a 
very good way to start this day off. It's the best explanation 
I have seen of the whole summary of it--where it starts, how it 
changes, and where it comes out.
    Now, with that, we're going to hold to the schedule, and we 
ask everybody to do their very best. We're going to go right 
around. Each one knows what they're going to be talking about. 
Each one has their mike.
    And we're going to start with you, Ruth Shaw, Duke Energy 
Corporation.

 STATEMENT OF RUTH SHAW, GROUP EXECUTIVE FOR PUBLIC POLICY AND 
      PRESIDENT FOR DUKE NUCLEAR, DUKE ENERGY CORPORATION

    Ms. Shaw. Thank you, Mr. Chairman.
    I am Ruth Shaw, group executive for public policy, and 
president of Duke Nuclear, for Duke Energy Corporation. We 
appreciate the committee's initiative in holding this Climate 
Conference, and the opportunity to participate.
    As the Nation's largest investor-owned utility with a 
diverse fuel mix and a commitment to sustainability, Duke 
Energy is considering plans for new nuclear generation, for new 
lower emission pulverized coal units, and for IGCC, with the 
ability to capture carbon, as well as other options, including 
improved efficiency.
    The assets we are contemplating will serve our nearly 4 
million electric customers across five States for 50 years or 
more, and will impact their electricity power--their 
electricity prices for at least that period of time. The 
investment required is many billions of dollars. Customers and 
shareholders need greater certainty about carbon constraints 
and costs as we make these significant decisions for our 
future.
    Therefore, Duke Energy favors U.S. policy on climate change 
that, first, is mandatory, not voluntary; second, is 
economywide in its scope, sending consistent signals to all 
sectors in all regions; is market-based, with price 
transparency; promotes development and use of new technologies, 
which are essential long-term success; is simply to administer; 
provides price certainty; and begins now, becoming more 
stringent gradually over time. We think this can be achieved 
through a well-designed cap-and-trade program that applies 
upstream, effectively sending a price signal to all energy 
users, including a safety valve, and using allowance 
allocations to address economic impact.
    A carbon tax could also be an effective approach, and we 
look forward to working with you on a greenhouse gas reduction 
program that can be part of a global solution.
    The Chairman. Thank you very much.
    Elizabeth Moler.

  STATEMENT OF ELIZABETH A. MOLER, EXECUTIVE VICE PRESIDENT, 
GOVERNMENT AND ENVIRONMENTAL AFFAIRS AND PUBLIC POLICY, EXELON 
                          CORPORATION

    Ms. Moler. Good morning, Mr. Chairman and members of the 
committee.
    I'm executive vice president of government and 
environmental affairs for Exelon Corporation, the Chicago-based 
utility company. Our chairman and CEO, John Rowe, serves as co-
chair of the bipartisan National Commission on Energy Policy. 
We appreciate the committee's invitation to appear today, and, 
in particular, the recognition you have given to the NCEP 
report in the committee's white paper.
    In my brief time this morning, I want to stress the need 
for a mandatory, comprehensive, and balanced national 
greenhouse gas program. Like Duke, Exelon believes the 
greenhouse program must be mandatory. There is compelling 
scientific evidence that global warming is both real and caused 
by human activity.
    We advocate either a carbon tax, which has many advantages, 
particularly from an efficiency point of view, or a cap-and-
trade system of the type recommended by the NCEP. It is 
critical that we start now. We need economic and regulatory 
certainty in order to invest in a low-carbon energy future. The 
committee has held hearings on climate-change issues for nearly 
30 years. The first one was in 1978, when I was still on the 
staff. It's time to act.
    Second, greenhouse gas regulation must be comprehensive. It 
must employ carbon intensity targets designed to slow, stop, 
and ultimately reverse greenhouse gas accumulation in the 
atmosphere. It must be a national program. It must be 
economywide, in order to be fair. And it should be upstream.
    Finally, any cap-and-trade program must be balanced. It 
must include a safety valve and an allocation scheme designed 
to ensure that the costs do not outweigh the environmental 
benefits. Allowances should initially be allocated for free, to 
avoid undue economic burden to consumers, but, over time, they 
should be options. And, finally, any allowance program should 
not create windfalls or distort price signals to customers.
    Thank you.
    The Chairman. Thank you.
    Now we're going to stand in recess and go vote. You're free 
to behave as you'd like.
    [Laughter.]
    [Recess from 10:06 to 10:26 a.m.]
    The Chairman. Thank you very much. We will now proceed.
    David Slump, please.

STATEMENT OF DAVID SLUMP, GENERAL MANAGER, GLOBAL MARKETING, GE 
                ENERGY, GENERAL ELECTRIC COMPANY

    Mr. Slump. Chairman Domenici, Senator Bingaman, members of 
the committee, I am David Slump, general manager of global 
marketing for GE Energy. We thank you for this opportunity to 
speak.
    GE supports congressional action now to start reducing 
greenhouse gas emissions. Any solution must include a market-
based price for carbon and incentives to develop and deploy 
zero- and low-carbon-emitting technologies. Clean energy 
technologies cannot reach their full potential unless and until 
energy choices reflect a forward price for carbon. Prolonging 
uncertainty on carbon in the United States delays and distorts 
technology decisions, particularly with respect to power 
generation where investment lives are 50 years or more.
    Technology is the answer to this dual environmental and 
economic challenge. Development and deployment of new 
technologies cannot occur in a vacuum. Clear public policy is 
needed to accelerate continued development and deployment of 
high-efficiency natural gas, renewables, cleaner coal, next-
generation nuclear, and advances in carbon capture and 
sequestration.
    Coal must continue to be a significant part of our energy 
fuel mix in a carbon-constrained world, and IGCC is a way to 
burn coal cleaner. IGCC provides a very clear example of the 
economic distortion and technology deployment caused by the 
lack of a forward predictable price for carbon. IGCC is more 
expensive in initial capital cost, but becomes the most cost-
effective coal options when carbon-capture and storage are 
valued. Absent a public policy that values carbon, IGCC is 
disadvantaged, as utilities must justify their decisions on a 
cost basis for rate recovery or financing.
    Any U.S. sector subject to carbon constraint must be 
allowed to meet a portion of its obligations through offset 
projects, including in India and in China. Such linkages will 
lower U.S. costs, help maintain U.S. energy technology 
leadership, preserve U.S. jobs, and also revitalize U.S. 
leadership in science and engineering education. We stand ready 
to work with all stakeholders to assure that this issue is 
addressed in the most cost-effective manner possible.
    Thank you.
    The Chairman. Thank you very much.
    Jeff Sterba.

        STATEMENT OF JEFF STERBA, CHAIRMAN, PRESIDENT, 
                     AND CEO, PNM RESOURCES

    Mr. Sterba. Thank you, Mr. Chairman, Senator Bingaman, 
members of the committee.
    I'm Jeff Sterba, chairman, president, and CEO of PNM 
Resources, an energy holding company headquartered in 
Albuquerque, New Mexico. We provide electric and gas service 
throughout the State of New Mexico, parts of Texas, and at the 
wholesale level throughout the Western United States, using 
coal, nuclear, wind, and natural gas.
    At PNM Resources, we agree with the comments that have gone 
before us that we believe now is the time for a healthy debate, 
at the Federal level, on climate change, and support the move 
to a mandatory program.
    Let me speak specifically on some of the design principles. 
I would suggest a climate program that, first, is economywide. 
There is no single carbon fuel or industry sector that causes a 
majority of carbon emissions and the low hanging fruit of 
carbon reductions are likely scattered throughout the economy. 
And only an economywide program will avail itself to those 
opportunities.
    Second, it needs to place the focus on the real solution: 
technology, both the deployment of existing technology and 
energy efficiency, but, more particularly, the funding of 
future low-carbon and carbon-free technology deployment.
    Third, that utilizes market mechanisms such as a cap-and-
trade program and other mechanisms that recognize the 
interrelationship between carbon reductions and economic 
vitality. So, I commend the notion of a carbon intensity 
measure as the one to work with, because it brings the two 
things together.
    Fourth, that places the point of regulation as close to the 
end user as possible, for efficiency reasons, but recognizes 
the transactions costs when millions of users are involved. So, 
I would differ a bit with the previous speakers and recommend a 
hybrid system, where the point of regulation is at the plant 
level for coal, where you have just several thousand users, and 
upstream for petroleum and natural, where there are millions of 
users.
    Fifth, that allocates to existing coal-fire-generation 
allowances of large major of their emission--of their current 
emissions. It could be reduced over a long-term timeframe.
    Sixth, that incorporates a safety valve to manage the 
impact of a cap-and-trade system.
    Seventh, that allows U.S. companies to invest 
internationally. And, last, that requires the United States to 
pursue multiple mechanisms, such as the AP6 Initiative, to 
encourage all major nations to commit in an appropriate way.
    Thank you. I look forward to your questions.
    The Chairman. Thank you very much.
    Garth Edward.

   STATEMENT OF GARTH EDWARD, TRADING MANAGER, ENVIRONMENTAL 
                        PRODUCTS, SHELL

    Mr. Edward. Chairman, Senators, thank you for this 
opportunity.
    I'm Garth Edward. I'm the manager for the environmental 
trading in the Shell group.
    Shell shares the concern on climate change, and we believe 
that action should be taken in an equitable and an economically 
responsible way. Now, let me focus on the questions that you've 
tasked us with.
    First of all, on the issue of the point of regulation, 
Shell believes that a downstream allocation approach delivers 
the best results. The entity that is regulated and has the 
allocation must be able to actually implement the technologies 
that reduce emissions. This means that generators in large 
industry, including refineries, should be covered in respect to 
their stationary source emissions. However, on the transport 
side, we believe that vehicle manufacturers may be in the best 
position to implement the technologies and choices that address 
mobile source emissions.
    In terms of allocation approaches, we believe that 
grandfathering--by that, we mean the free allocation of 
allowances, based on historical emissions--may have a role to 
play at the start of a system, but we believe that a move 
towards auctioning is likely to become necessary, and that this 
will become more attractive to business if a transparent 
recycling of revenue can be achieved, especially one that 
minimizes the draw on any working capital.
    In terms of linking with other international markets, both 
in developed and in developing countries, we believe this is 
necessary for environmental and economic reasons. However, 
careful thought has to be given to the interaction of existing 
emission markets.
    Two final points, to wrap up. We understand the attraction 
of a price cap or a safety valve, but we believe that measures 
on the supply side may be a better way to protect 
competitiveness in this country. And we do note, of course, the 
benefits of including all six greenhouses gases, rather than 
just CO2 alone. We believe that this can lead to 
significant cost savings and efficiencies.
    Thank you very much, sir.
    The Chairman. Thank you very much.
    Now we're going to back up.
    Michael Murray.

  STATEMENT OF MICHAEL MURRAY, DIRECTOR, LEGISLATIVE POLICY, 
                         SEMPRA ENERGY

    Mr. Murray. Thank you, Chairman Domenici and other 
Senators. I appreciate the opportunity to be here today and to 
participate on this very important issue.
    Sempra is based in San Diego, California, and provides 
electricity, natural gas, and value-added products and services 
to over 29 million customers in the United States, Europe, 
Canada, Mexico, South America, and Asia.
    In my brief comments today, I would like to focus on two 
points that I think we ought to talk about a little bit as we 
have the panel discussion.
    The first is the need for a national program. We fully 
support your efforts here in developing a national program. We 
think broad sector participation is critical to the success of 
this. We are concerned about the patchwork of State regulatory 
programs that are going forward. There are over 20 States now 
that are considering some type of climate action programs, from 
registries to caps to performance-based standards. And we are 
concerned for companies like ours, that operate in multiple 
states, that we'll have different sets of regulations to comply 
with.
    We also think that it should address issues of allowance 
allocations to assure companies are not significantly 
disadvantaged. This is the hybrid auction allowance approach.
    And, finally, we think that the promotion of technological 
development will really be key and instrumental to driving the 
success of this program.
    The second point is that we think any Federal program 
should recognize the actions of companies like Sempra, who have 
taken significant steps to reduce their overall carbon 
footprint. Examples of these include our major efforts in 
infrastructure of LNG facilities in the west coast and gulf 
coast to bring in clean supplies of natural gas to supplement 
our domestic supplies. Our clean generation fleet in the West, 
which is one of the cleanest combined-cycle gas fleets in the 
country, are significant energy-efficiency programs. We're very 
proud of the fact that, on our customer side, since 1990, we 
have reduced about 2\1/2\ million tons of CO2 
equipment from our customer reductions. This is about a 500 
megawatt powerplant. And, over the next 10 years, we hope to 
achieve about the same amount.
    On our own facilities, we have an energy conservation 
strategy of 10 percent energy reduction per square foot by 
2010.
    On the renewables, Sempra's utilities are well on their way 
to meeting the renewable portfolio requirements of California, 
which is 20 percent.
    And, finally, on voluntary registries, Sempra's utilities 
are a voluntary member of the California Climate Registry, 
which is efforts to determine GHG inventories and developing 
measuring metrics.
    Thank you very much. And we look forward to working with 
you as you go forward in developing this important program.
    The Chairman. Thank you very much.
    Chris Hobson.

STATEMENT OF CHRIS HOBSON, SENIOR VICE PRESIDENT, RESEARCH AND 
            ENVIRONMENTAL AFFAIRS, SOUTHERN COMPANY

    Mr. Hobson. Thank you, Mr. Chairman.
    My name is Chris Hobson. I'm senior vice president of 
research and environmental affairs for Southern Company. And we 
very much appreciate being included in this conference today.
    Southern Company operates 40,000 megawatts of coal, 
nuclear, natural gas, and hydroelectric generation capacity to 
serve 4 million customers in the Southeast. We believe that our 
Nation's efforts and resources ought to be committed to the 
development of new technologies to address climate change, 
rather than being focused on mandatory caps and taxes. 
Developing these low-CO2-emitting technologies give 
us the opportunity to meet the challenges of climate change, 
and, at the same time, provide the energy for a growing 
economy.
    In our service territory alone over the next 15 years, we 
anticipate the demand of 11,000 megawatts of new generating 
capacity and our company as being a leader in developing those 
technologies that will serve that demand.
    We, along with DOE and Orlando Utilities, will be building 
an ITCC 285-megawatt plant in Orlando, Florida. We think that 
this technology, even though it's coal-based, would generate 
between 20 and 25 percent less CO2 emissions than 
the current fleet of coal-fired powerplants. We have taken a 
leadership effort in FutureGen, which will develop a zero-
emission powerplant that will deal with the issue of carbon 
capture and sequestration.
    We're actively involved, in our own region, on the issue of 
CO2 capture and sequestration with the Southeast 
Regional Carbon Sequestration Partnership. And we are also 
pursuing the construction of the new generation of nuclear 
powerplants, with our goal of having new nuclear capacity 
online by 2015 and 2016.
    In our written comments, we address specific questions 
posed by the committee, and there are some important points I'd 
like to briefly make. One, the impact to the American consumers 
and our competitiveness must be addressed up front. This 
program should be economywide. Allowances should be allocated 
fully to emitters. And regulated entities should always have 
the opportunity to use offsets for compliance.
    With those brief remarks, I look forward to any questions 
you might have.
    The Chairman. Thank you very much.
    Andy Ruben.

 STATEMENT OF ANDY RUBEN, VICE PRESIDENT OF CORPORATE STRATEGY 
           AND SUSTAINABILITY, WAL-MART STORES, INC.

    Mr. Ruben. Yes. Mr. Chairman, Senator Bingaman, and members 
of the committee, my name is Andrew Ruben. I am vice president 
of corporate strategy and sustainability for Wal-Mart Stores. 
On behalf of my CEO, Lee Scott, I would like to thank the 
committee for this very important conference and inviting Wal-
Mart to participate.
    In 2005, our CEO announced a vision for Wal-Mart that 
places sustainability at the core of our corporate mission. Lee 
Scott stated that environmental threats should be seen as 
Katrina in slow motion. Environmental threats are challenges 
for our business, just as they are for our communities, our 
associates, and our customers.
    Mr. Scott noted that at the top of the list of such 
challenges was the fact that increasing greenhouse gases are 
contributing to climate-change and weather-related disasters. 
Wal-Mart is not--is waiting neither for further study nor for 
legal mandates to take strong action on climate change.
    We'll eliminate 30 percent of the energy used by our 
stores. We have set our corporate goal of eventually being 
supplied by 100 percent renewable energy. We'll eliminate 25 
percent of our solid waste in U.S. stores in the next 3 years 
as we approach a corporate goal of producing zero waste. We'll 
increase the efficiency of our truck fleet by 25 percent over 
the next 3 years, and we'll double that efficiency in the next 
10.
    Mr. Chairman, these are only a few of the steps that Wal-
Mart is taking to reduce its own climate impact. But let me be 
clear, we believe this is good business. Through these strong 
actions, we are proving that reducing greenhouse gas emissions 
through innovation adds value to our shareholders and our 
customers. It's because we see climate as a critical social 
issue, and because we believe that greenhouse gases can be 
cost-effectively reduced throughout the economy, that Wal-Mart 
would accept a mandatory cap-and-trade system to control 
greenhouse gas emissions.
    Finally, as the committee develops the details of such a 
program, we look forward to sharing what we've learned in the 
past 18 months. If properly incentivized, companies like Wal-
Mart can drive innovation up the supply chain in passing those 
savings on to consumers.
    A well-designed system would also encourage companies like 
Wal-Mart to help offset any negative impacts of climate 
regulation on those least able to afford it.
    And, finally, in short, we hope to be part of the solution. 
We look forward to sharing with you in more detail the many 
ways that we could, and already are, using our position to 
drive positive change.
    Thank you.
    The Chairman. Thank you very much.
    Now, with that, we have completed the first round of 
witnesses. And now we have, what, staff? How much time do we 
have for questions? Forty-five minutes for--to go around 
between us and talk with each other, among each other, and 
exchange views.
    I'm going to start by asking Senator Bingaman if he would 
like to open with some questions. Senators, would you be ready 
to have questions, so we can stimulate some conversation?
    Senator Bingaman.
    Senator Bingaman. Thank you very much.
    One of the key issues that we're trying to get at here and 
have heard a lot about is how to allocate emissions, or how to 
allocate permits to emit.
    Let me ask Betsy Moler about Exelon's view on this. As I 
understand what you've submitted, you talk about, ``The 
approach to allocation should evolve over time in order to 
acknowledge the different circumstances among existing electric 
generators, while also encouraging a transition to more 
efficient low-carbon generation over time.'' Could you describe 
what you have in mind there with this evolution of the 
allocation system?
    Ms. Moler. I will try, Senator Bingaman.
    We would propose to start the allocation of allowances by 
giving away the vast majority of allowances for free, selling 
perhaps 10 percent, in order to mitigate the impact of the 
program on our economy. And we have endorsed a safety valve, as 
well, where DOE would sell allowances. Over time, we advocate 
auctioning more and more allowances in order to encourage the 
development of clean technologies and to increase the 
efficiency of the program.
    We have suggested one innovation--what we think's an 
innovation in the program. We propose to give the allowances, 
not to the generators, but to the local utilities, and to 
require them to pass through the financial benefits of those 
allowances to retail customers. This is particularly important 
where we have a patchwork of State regulatory programs with 
some utilities on a cost-of-service basis, and some of them 
based on a market basis. Over 50 percent of our citizens in the 
United States are served by utilities that have restructured, 
so this is not a trivial consideration.
    If you give free allowances to the generators, we think 
it'll disproportionately benefit consumers in States that have 
not restructured. So, we would give the allowances to the local 
distribution companies, the utilities, and then they would have 
to be purchased by the generators and by the fleet operators, 
or what have you, in order to actually implement the program.
    Senator Bingaman. I didn't know if you wanted to have 
someone ask a question.
    The Chairman. Yes.
    Senator Bingaman. We might get Jeff Sterba's comment on 
that same set of issues, at some point here.
    The Chairman. Jeff, do you have comment on that--on the 
comment that was made by Elizabeth Moler?
    Mr. Sterba. I would generally agree with what Ms. Moler has 
expressed, in terms of, number one, allocating the vast 
majority of them to current users. I think--we serve both 
regulated and unregulated markets--I think it is a complexity 
to allocate them to the distribution company. The vast majority 
of coal units, which, for our industry, is the real issue; 80 
percent of the carbon emissions come from coal out of the 
electric utility industry--the vast majority of coal units are 
regulated. They're in regulated rates. The benefit clearly must 
flow through to customers.
    I'm not sure that that wrinkle that she's throwing in is 
really worth the added risks and complications of doing it. But 
I do believe that they ought to be allocated to the users, 
because you've got to mitigate the impact on the ultimate 
consumer.
    I also think that her argument that over time you should 
phase down the amount that's allocated for free is a reasonable 
approach, over a long period--say, 40 or 50 years. So, on the 
margin for new resources, you're providing the right kind of 
signal to get new clean, low-carbon- or no-carbon-emission 
technologies being deployed.
    The Chairman. Thank you very much.
    Anybody else want to comment on that?
    [No response.]
    The Chairman. All right.
    Senator Alexander.
    Senator Alexander. Thank you, Mr. Chairman.
    Perhaps you discussed this, but at--with General Electric 
I'm interested in your IGCC, your coal gasification that you 
purchased from Chevron, and took steps in Florida. And, as I 
understand it, there is a new facility in Ohio with AEP. What 
can you tell us about that progress, what about the technical 
challenges and obstacles that you see there, and when will it 
be completed?
    Mr. Slump. Correct. GE acquired ChevronTexaco's technology 
mainly because our customer base was, at the time, having to 
buy a license, as opposed to a standard powerplant, and 
integrate that. They wanted a standard powerplant solution with 
a single-point accountable provider. So, we announced a 
partnership with Bechtel, and we are in a position to provide a 
630-megawatt standard plant. We've launched the FEED study, the 
front-end engineering study, with AEP for their site, as well 
as Cinergy. And the commercial operation date for these will 
begin in 2010 and beyond.
    The Chairman. Senator Murkowski.
    Senator Murkowski. Mr. Chairman, I was struck, by listening 
to most of you, that you have all indicated an economywide 
regulatory program is needed for--just from the equity 
perspective, but then, similarly, the number of respondents 
that acknowledge that this is going to be tough to do.
    Mr. Slump, I guess I'll direct the question initially to 
you. What would the impacts to the economy be if we do impose 
the economywide program, as opposed to doing a more directed 
approach--say, for instance, directed towards the electricity 
sector? Singling out you, because you've got the vast majority 
of the greenhouse gases coming from that sector of the 
industry. We're saying that, from an equity perspective, it 
makes sense to go economywide, but it's going to be difficult. 
So, what would the effect be if we just focused, or we just 
began with a single sector?
    Mr. Slump. We've proposed a third-party study to look at 
the economics and the tradeoffs of the various proposals. You 
know, the impact of the economy varies with the cap or the 
price of carbon. So, the comment we were making was just the 
80/20 rule. If you capture transportation and the utilities, 
you've captured a percent of it; and, initially, it may be 
easier to begin to implement, with less administrative burden.
    Senator Murkowski. Anybody else want to comment on that?
    Mr. Hobson.
    Mr. Ruben. I'd add----
    Senator Murkowski. Mr. Ruben. I'm sorry.
    Mr. Ruben. I'd add one comment to that. I think there's a 
way to not only capture an efficient segment of the market, 
but, at the same time, leave enough available credits to reward 
those players who might be able--for example, a player like 
Wal-Mart, who can reach up and down a supply chain, both 
creating additional benefits, either up the supply chain, such 
as, for example, with a supplier we have in southern Georgia, 
and being able to incent that supplier to reduce their 
electrical needs by 60 percent, benefiting both our consumers 
and the prices, as well as reducing greenhouses gases, or reach 
down the supply chain and offer those same benefits to a 
customer, a technology like a compact fluorescent light bulb, 
that, just by increasing the penetration of a high-efficiency 
product like that, we're able, not only to share that benefit, 
but also--not only to reduce greenhouse gases--I'm sorry--but 
also share the economic benefit of using less energy, 
potentially mitigating some of the increased costs that we'd 
see, depending on the type of policy and regulation.
    The Chairman. Mr. Sterba, would you comment on that?
    Mr. Sterba. Mr. Chairman, Senator, I think the logic that 
was just given is the best logic for why it needs to be 
economywide. There are many things that can be done throughout 
the economy. And what you want to do is incent the lowest-cost 
initiatives that can be taken in the economy to reduce carbon 
dioxide emissions, whether it's on energy-efficiency, whether 
it's in the transportation sector, through the refinement of 
the efficiency of diesel engines, or whether it be in the 
production of electricity through a coal or a natural gas 
facility. That's the value of it being economywide, is, you can 
get the lowest-cost solutions, because they are everywhere 
within the economy.
    The Chairman. Yes. I think I was going to Garth next. 
Excuse me.
    Mr. Edward. Thanks, Senator.
    A quick point. I mean, I think, all things being equal, the 
costs of compliance to the overall economy will be brought 
down, the wider the scope of the emissions trading system. I 
think that's true. It's just that the costs of implementation--
the transaction costs, if you will, if we try and reach 
everybody, in terms of monitoring and verifying and enforcing--
tend to outweigh the benefits at the margins. So, we've got to 
take a balance and go where we can achieve the best results in 
the quickest timeframe for the best transaction costs. And that 
tends to mean that we're going to focus on applying the 
regulation to those parts of the economy that actually deploy 
technology, change their capital investment plans, and so on. 
And that's why we favor a kind of--a downstream approach, in 
terms of stationary-source emissions, the power generating in 
large-industrial sector. But when we look at the transport 
sector, we do recognize that as a very important source of 
emissions, and one that must be addressed, but the upstream 
approach may not best change emissions from the transport 
sector. When it comes to transport, the ability to change the 
emissions coming from the transport sector may best be done at 
the vehicle manufacturer's level, where the purchase of a car 
is probably one of the single biggest impacts on the emissions 
from the transport sector.
    Thank you.
    The Chairman. Now, Mr. Murray.
    Mr. Murray. Thank you, Senator.
    Senator Murkowski, I think we should consider that we do 
have a fair amount of experience when we look at the broader 
scope of trading, if you look at the criteria pollutant efforts 
that we've done, where we've been able to trade stationary 
versus mobile sources. The more robust you make the trading, 
the--and I agree with the earlier comment, that we will get the 
most efficient way of getting the reductions. And that's why I 
think the broader the participants in the market, if you will, 
the more opportunities we have to make these reductions.
    We have a lot of history on criteria, stationary versus 
mobile trading, and we could look at that, and look at the 
successes and things that we've done, and be able to take from 
that, perhaps, for applying it to CO2.
    The Chairman. We want to let Senator Feinstein ask a 
question here before we run out of time.
    Senator Feinstein.
    Senator Feinstein. Mr. Chairman, I'd like to make a brief 
statement, if I might.
    The Chairman. Please.

       STATEMENT OF HON. DIANNE FEINSTEIN, U.S. SENATOR 
                        FROM CALIFORNIA

    Senator Feinstein. Let me just thank you for holding this 
hearing.
    I can't help but notice that it's the most widely attended 
hearing that I think I've been to for this committee. And I 
think it shows the gravity of the situation. I also think it 
shows the need for action.
    Now, California is going to take action. The Governor, last 
year, signed an executive order to reduce global-warming 
emissions by 25 percent by the year 2020. Yesterday, the 
speaker of the legislature and Assemblywoman Pavley introduced 
a bill that would require the California Air Resources Board to 
institute a mandatory emissions reporting and tracking system 
to monitor compliance with the emission limits. That would 
essentially reduce global warming by 145 million tons by 2020, 
or 25 percent below forecast emissions.
    The State has taken action on automobiles. It'll probably 
be litigated. The attorney general says that the State can move 
ahead independently. We believe Canada will follow.
    I think it is very critical that we take action.
    I've put together a bill, which is really based on McCain-
Lieberman, but adds more flexibility. And essentially what it 
does is caps companies' emissions at today's level from 2006 to 
2010, then reduces emission .5 percent annually from 2011 to 
2015, and then 1 percent annually from 2016 to 2020. It would 
require companies to cut overall emissions 7.25 percent from 
today's levels by 2020. Now, that's equal to 400 million metric 
tons of CO2 by 2020. What's interesting is that 
California's cut would be 145 million metric tons. That's about 
a third of what a 7\1/2\-percent reduction nationally would 
mean. I think what that points out is really the unique wisdom 
of taking national action.
    Now, I'd like to make my bill available to anyone who would 
like to look at it and comment on it prior to our introduction 
of it, so all you have to do is let us know your thoughts. But 
I'd like to ask this question.
    Ms. Moler mentioned the issue of the auction. The auction 
is disputed between business and the environmentalists. The 
environmentalists want an auction. Most businesses say, ``Hold 
off.'' The proceeds of the auction would go, obviously, to fund 
new technology.
    My question of you, if I might, is--you have said, ``Over 
time, an auction''--and I'd like to ask you to expand on that. 
You and others, as well--commented on the role of an auction if 
you did have a mandatory cap-and-trade system. Our system 
includes carbon sequestration and agriculture, providing 
credits for that, so that there is incentive for agriculture to 
get involved, as well--we've left the question of the auction 
open, and I'd like to have comments from the panel on when you 
believe an auction should come into play, how many years hence, 
and what the rationale for that time delay would be.
    Ms. Moler. We would start an auction in, say, the year 
2009-2010. Initially, the vast majority of allowances, we would 
give away for free, if you will, and have a small portion of 
the allowances subject to auction, 10 percent--90/10 is what we 
have proposed--and then, over a period of time--and it's, 
frankly, pretty arbitrary, but--how quickly you ramp up the 
auction really depends on how much you think the economy can 
handle the cost. But over a period of time, we would invert it, 
so that you eventually have all of the mission allowances 
auctioned. And we would take the money and put it in a 
sequestered off-budget fund for technology development.
    Senator Feinstein. Thank you. That's very helpful. Anybody 
else?
    Ms. Shaw.
    Ms. Shaw. We, basically, would endorse the approach that 
Ms. Moler has described. But I would add to that the--your 
comment about the wisdom of a national approach is essential. 
And that's one reason I really applaud the work of this 
committee. As laudable as some of the efforts are on a State-
by-State or regional basis, they make it extremely difficult 
for us to achieve the end goals.
    Senator Feinstein. Anybody else, on the auction question?
    Yes, sir?
    Mr. Edward. The advantages of auctioning, in particular, 
are that they promote the entry of new entrants, or new 
efficient players, let's say, in the power generation market or 
the industrial market, over time. It also deals very well with 
exit or closures of installations from an emissions trading 
system. Auctioning has many benefits, just in terms of the 
operation of an emissions trading system, and, from economic-
theory points of view, is good benefit to do with equity, and 
so on.
    The problem may arise, though, when companies come new to 
an auctioning system that auctions, let's say, 100 percent or a 
large majority of the allowances from the get-go, and that 
means that those companies are having to pay a great deal in 
order to get the allowances that effectively form their license 
to operate. And that initial payment to get those allowances 
can be a huge dent, in terms of cash flow or working capital. 
And so, there are difficulties there, from a business point of 
view.
    The way that auctioning may deal with that is by recycling 
part of that revenue, either through the tax system or back in 
some way. But some of those issues need to be dealt with.
    Senator Feinstein. You're advocating recycling the auction 
proceeds, partially, back to the businesses that are 
participating, in addition to the technology. So, in other 
words, in a certain ratio? And what would that ratio be?
    Mr. Edward. Well, I don't think we have any precise views 
about the ratio. I think it's the principle that the cash-flow 
impact to companies has to be addressed. And I think there are 
various ways to do that. Probably can explore them further. But 
that's a concern, initially, from a business point of view. 
Recognize the benefits of auctioning from a system point of 
view has a lot of benefits in the long term, but how to get it 
up and running at the start without seriously hurting companies 
from a cash-flow point of view.
    Senator Feinstein. Well, let me just ask, does anybody 
disagree with what Mrs. Moler said about holding an auction to 
2009 or 2010, and then doing it on a 90/10 basis? Is there any 
disagreement with that?
    The Chairman. There's one.
    Senator Feinstein. Mr. Hobson.
    Mr. Hobson. I don't think that we necessarily disagree. I 
think the auction program under the SO2 program has 
worked reasonably well. I think where we might part company is, 
what does the future detail of that auction look like? Does it 
stay constant? It's that ramping down that can generate real 
problems for emitters in the future. And so, I think the 
concept of an auction, with a small percentage of allowances 
being auctioned, is not a bad idea. But I think it's the ramp 
that becomes----
    Senator Feinstein. Mr. Sterba, did you have----
    The Chairman. Senator, I think we're going to get on with 
the next one.
    Senator Feinstein. All right.
    The Chairman. Senator Menendez.
    All right. I'm going to pose a proposition here. I'm 
listening to all of you, and it seems like Chris Hobson--
Southern Company's statement is a little different than most of 
yours.
    [Laughter.]
    The Chairman. Is that a fair assessment? And I don't think 
he's embarrassed at my saying that.
    Mr. Hobson. No.
    The Chairman. I gather that Southern Company, a very 
reputable, strong company in the United States, is saying 
they're going to get there a different way. They're going to 
stop emitting carbon into the atmosphere, but they're going to 
do it with technology changes in the makeup of that which they 
use to generate electricity. Am I correct that that's what you 
say you're going to do, and that you would explain to us, at 
this forum, how that's going to happen?
    Mr. Hobson. Yes, Senator. The items I articulated, such as 
FutureGen, the building of an ITCC, the development of new 
nuclear, are all technologies that will ultimately get us where 
we want to be, in terms of addressing CO2 emissions. 
And I point those out to highlight the fact that, even in the 
absence of a mandatory program, there are substantial efforts 
underway to bring these technologies to the point of 
deployment.
    The Chairman. Yes.
    Mr. Hobson. And a mandatory program, in our view, is not 
necessary to make that happen.
    The Chairman. Now, Chris, I did not bring you--bring that 
up, and your name up, and your company's, any way other than 
because it is a bona fide approach, and it's out there, and the 
American people understand it, and your constituents understand 
it. And I think it ought to be talked about here. What's wrong 
with what they're saying? And what should we be doing to make 
sure that more of what they say is going to happen, happens? 
I'd just throw that before you for a few minutes of discussion.
    Jeff, did you have your hand up? Then we'll come to you, 
Ruth.
    Mr. Sterba. Mr. Chairman, I'm glad you put this question 
out there. I really think it's more an issue of form than 
substance. There is no way that we can accomplish what needs to 
be done on greenhouse gases without technology. It is the only 
answer that we really have. So, I think all of us would agree 
with the statement that Chris has made that technology is the 
driver. And some of the technology exists today, but much of it 
does not. And that's the big investment gap that we have to 
bridge.
    So, the question then becomes: Well, how do you move this 
ball forward? And is there low-cost reductions to carbon that 
could occur with a mandatory system, that may not occur without 
it? And for, I think, us in the utility industry, whether you 
make it mandatory or it stays voluntarily--voluntary, there's 
an awful lot of things we're going to stay focused on, in 
trying to reduce greenhouse gases, because we see the call for 
that.
    But I think in other sectors, in other areas, that may 
happen a lot more slowly if it remain solely voluntary, where 
it's much more dispersed, in terms of the obligation or the--
I'm sorry, the cause of the emissions of carbon dioxide.
    So, that's where I think the--it--the difference really is 
how we get there, not, what is it going to take, in terms of 
technology? I think we all agree, that's the only solution we 
have.
    The Chairman. Yes, Ruth.
    Ms. Shaw. And, essentially, I would echo Jeff. I think the 
difference is more one of timing. We, too, are committed to 
advances in technology. But there are very significant regional 
differences. For example, even though we're looking at IGCC in 
the Carolinas, among the States that we serve, carbon 
sequestration is not possible, because of the geology. Some of 
the technologies that are available today and emit no 
greenhouse gases, including nuclear, face significant barriers 
to future construction, of which this committee is well aware. 
And financial investments will not be made until some of those 
issues are resolved.
    We simply believe that we cannot delay, and cannot count on 
a strictly voluntary approach if we're going to move forward on 
this action. We also believe the United States cannot be alone 
in the world, in terms of acting on these issues.
    The Chairman. What was the last statement?
    Ms. Shaw. We believe the United States must act, must be 
part of the global community in acting on these issues.
    The Chairman. Right.
    Andy Ruben, from Wal-Mart?
    Mr. Ruben. Yes, thank you, Senator.
    It's a very good question you've posed, and I think we 
agree with the last statements that are made. And it really--
for us, we see it one of timing, of how fast things move, and 
what market forces come into play with a system like we're 
talking about, or some type of policy.
    The initiatives and the actions that we are taking, we're 
going to take anyway--again, because we believe they're good 
business. But the timing of those, the aggressiveness, will 
change, based on what type of policy is set up in a U.S. system 
such as we're talking about.
    And just a quick example, LED lighting is a much more 
efficient lighting technology that we are--that we have just 
rolled out in all the signage programs in the front of the our 
stores.
    Now, we're currently working, because we know it will save 
50 percent of the energy, even over an efficient T8 light, in 
our freezer coolers. That, right now--we work every day to find 
better ways to roll that out faster. But some type of policy, a 
policy that rewards that kind of innovation, will accelerate 
the pace of those type of opportunities.
    The Chairman. Very good point.
    Mr. Murray.
    Mr. Murray. Yes, thank you, Senator.
    I think another thing we should always consider when we're 
looking at this is the energy efficiency aspect. And I think 
California has been a leader in energy efficiency, and just the 
information exchange with the other States, I think, is 
important, to look at technology development and what we've 
done out there, and to share that with others, and basically 
put these programs in place. You can get a lot of megawatt 
reductions with energy efficiency. And this is particularly 
important in the Southwest, where we have such huge growth, 
when you think about it, where California is growing at a rate 
of about 600,000 people a year, which is about 1,000 megawatts 
of new power that's needed every year. That's two 500-megawatt 
powerplants that are needed just for the new people coming into 
California. So, just to keep up with that demand in the West 
and the Southwest, we're going to have to institute these kind 
of programs.
    The Chairman. Okay.
    Yes, David?
    Mr. Slump. GE believes, as with others here, that 
technology is the key. But to accelerate technology, a forward 
and predictable price for carbon must be used.
    If you look around the world--China will add 170 gigawatts 
of new capacity by 2020; the United States and Western Europe, 
100 gigawatts; India, 60 gigawatts--you have to do this through 
fuel diversity. You will need coal, you will need nuclear, you 
will need renewables. So, the only way to put that into that 
investment choice is to value carbon equally.
    Where there are markets, such as India--2 weeks ago, we 
were in India and launched a rural electrification program. For 
years, people have been trying to do rural electrification in 
India. You know, over 400 million people have no power. And 
because of the Clean Development Mechanism, we were able to 
deploy 24 megawatts of biomass gas receps. The government of 
India has reduced tariffs for clean energy technologies from 15 
to 5 percent. We're working with the local governments. It'll 
provide 4,000 new jobs. And I think the point is, technology 
innovation and commercial innovation are linked, but you need a 
market price to drive it.
    The Chairman. Senator Bingaman.
    Senator Bingaman. Let me just ask--David, you say because 
of the clean technology mechanism?
    Mr. Slump. Sorry. CDM, Clean Development Mechanism.
    Senator Bingaman. The Clean Development Mechanism. And that 
is a mechanism that's set up in the EU trading system. So, what 
I understand is that because of the financial benefit to GE in 
the European trading system, you are able to make this 
investment in reduction of energy use in India. Is that 
correct?
    Mr. Slump. Partly. Actually, the way we did this is, the 
developer we're working with needed it for the pro forma to go 
forward, so we partnered him with PriceWaterhouse to do the 
exchange, but we got our standard margins and payment terms on 
importing the engines to India. I think India is the number one 
market for CDM in the world right now, twice as big; and number 
two, Brazil. And it's just a point that--where you have market 
mechanisms, maybe not perfect, you get some traction.
    Senator Bingaman. Okay. I was going to ask one other 
question of Garth. You had said in your testimony, that Shell 
favors measures on the supply side, rather than a safety valve, 
in any kind of a cap-and-trade system. Could you describe or 
elaborate on that a little bit? I'm not clear exactly what you 
mean.
    Mr. Edward. Well, I guess the concern with a safety valve 
or a price cap is to ensure the competitiveness of industries 
in the United States. And there are, maybe, different ways of 
doing that. A price cap can be difficult to maintain in 
markets, especially markets that have interaction with the 
international community. And we don't have price caps in the 
rest of the energy complex. And so, there can be difficulties 
in trying to introduce a price cap in this part of the market. 
But if we are concerned about ensuring competitiveness, rather 
than capping prices, per se, then there are, maybe, ways of 
doing that, and one of those ways if by supply-side actions, 
being able to increase the supply of allowances as 
competitiveness is challenged, or if competitiveness is 
challenged. And so, that's just one way of meeting the 
competitiveness objective without necessarily interfering 
directly in the market.
    Senator Bingaman. So, when you say ``on the supply side,'' 
you're talking about the supply side of allowances. Is that it?
    Mr. Edward. That's exactly it. There may be various sources 
of supply. The supply of allowances issued by the Government is 
one. Access to international markets is another. The 
possibility to have access to new and additional sources of 
offsets within the domestic economy is another.
    Senator Bingaman. You talk about an open architecture 
approach that encourages a global carbon market through linking 
with other systems. And that's what you're talking about there?
    Mr. Edward. That would be part of the equation. But if we 
just hold it domestically for a second, the--an increased 
supply of allowances from the Government is one possibility, 
but, also, increased access to offsets that are domestically 
generated is also another possible source of supply.
    Senator Bingaman. Thank you.
    The Chairman. All right. I think we're a bit early. We 
haven't used our full 45 minutes, but we're--I think we're 
going to finish this panel, if you don't mind, and move to the 
next one.
    Thank you all very much.
    The next panel, please?
    [Recess from 11:15 to 11:16.]
    The Chairman. Thank you very much. Very, very good 
exchange.
    We're going to get started, and, if it works, by 12:30 or 
so, we'll be out for lunch, until our 2:30 meeting.
    We're going to start right now, over on our left. Margo, 
are you about ready? You're first. And turn on your mike and 
give us your 2 minutes. We look forward to hearing from you.

 STATEMENT OF MARGO THORNING, SENIOR VICE PRESIDENT AND CHIEF 
       ECONOMIST, AMERICAN COUNCIL FOR CAPITAL FORMATION

    Dr. Thorning. Thank you very much for the opportunity to 
appear before this very important hearing.
    I'd like to take my time to compare, briefly, the pros and 
cons of a cap-and-trade approach to reducing greenhouse gas 
emissions to one based on a voluntary approach.
    In the European Union, the emission trading system is not 
working very well. Their environmental agencies shows that 
they'll be 4 percent above their 1990 targets in 2010, not 8 
percent below. Companies have been faced with higher energy 
prices--in part, due to their emission trading system.
    A cap-and-trade system will not provide the investors 
certainty or drive the technology that's needed to reduce 
greenhouse gas emissions. Caps such as those proposed by 
policymakers in Washington are just the first step. As many of 
us know, the call is to reduce greenhouse gas emissions 60 to 
80 percent by 2050. So, a small first step is just the 
beginning of additional reductions, which increase uncertainty 
for investors. Furthermore, unlike EU firms, U.S. firms would 
be compelled to comply with emission reduction targets. They 
would have to meet these targets or be shut down; whereas, the 
EU has a more flexible system that will allow continued 
production. Caps would also increase electricity prices, reduce 
economic growth, and reduce the uncertainty about the return 
that could be expected on investment. Furthermore, they won't 
drive the technology that'll be needed, because of the fact 
that a current government can't bind a future government as to 
prices that will be in effect as a safety-valve price or for 
the targets that would be in place.
    So, I think a focus on the administration's approach, which 
is based on voluntary approach and a strong drive for new 
technology to reduce greenhouse gases, is the most efficient 
way to go forward. EIA data shows that a high-tech scenario 
reduces emissions, reduces electricity prices, and increases 
GDP, compared to a mandatory reduction in greenhouse gas 
emission intensity.
    Finally, reforming the U.S. tax code to reduce the cost of 
capital for new investment by increasing depreciation 
allowances for energy investments could pull through the 
cleaner, more efficient technologies that we need, and reliance 
on mechanisms like the Asia-Pacific Partnership to transfer 
technology to developing countries can also be a strong factor 
in global greenhouse gas reductions.
    Thank you.
    The Chairman. Would you repeat the last statement, 
regarding foreign investment, please?
    Dr. Thorning. The Asia-Pacific Partnership, which is 
focused on development--economic development and on technology 
transfer to countries like India and China, can have a very 
strong impact on reducing global greenhouse gas emissions.
    The Chairman. Thank you.
    Mr. Helme.

           STATEMENT OF NED HELME, PRESIDENT, CENTER 
                      FOR CLEAN AIR POLICY

    Mr. Helme. Thank you, Senator. It's a pleasure to be here 
this morning.
    I'm Ned Helme. I'm the president of the Center for Clean 
Air Policy. It's an environmental think thank based here in 
Washington, and also in Brussels and in Toronto. We were the 
principal consultants for the European Commission in the design 
of their emissions trading program that, as you know, is up and 
running, and we've worked a lot, Senator Feinstein, with 
Governor Schwarzenegger and with the folks in California, on 
the design of the California program, and also with the 
Governments of India, China, Brazil, and Mexico, on the designs 
of their programs to move on climate change and reduction of 
greenhouse gases.
    I've got five points I want to make this morning:
    First, we strongly favor an economywide approach and a 
mandatory approach, as you've heard from other speakers, and 
for the same reasons.
    Second, in terms of point of regulation, we would favor a 
hybrid approach, as Jeff Sterba outlined to you; basically, one 
which would put the six or seven major industrial sectors and 
the electric generators as points of regulation, along with 
natural gas distribution companies and oil refiners. That way, 
you get the advantages of capturing the small sources, like 
residential and commercial transportation through the upstream, 
and you get the advantage of going after the major industrial 
point sources, where they really have an ability to identify 
good opportunities for emission reduction if they're regulated 
directly.
    As a footnote to that, it's not a problem, in terms of the 
number of sources that we'd regulate. If you went on a hybrid, 
it would take about 8400 sources in the United States would be 
regulated, less than are currently regulated in the European 
Commission system. If you went upstream, it would be about 
2,000 sources. So, clearly workable, from a technical point of 
view.
    In terms of allocation, we favor the auction, as was 
discussed. One point I want to add is that the auction, if you 
recycle the revenues in the form of tax reductions, reduces the 
total societal cost of the program significantly, so you're 
going to have a cheaper program for society if you go that 
route. I would agree with Betsy Moler that it makes sense to 
start the auction slowly.
    What we found--we did a study with Charles River 
Associates, looking at this, and found that it would take about 
9 percent of the allowances to hold the shareholders harmless 
of the major corporations that are involved in this--a little 
more for coal, probably 35 percent; a little more for 
utilities--but it's doable. So, you have plenty of allowances 
left for other purposes, and we would favor some tax relief and 
also technology innovation, using the allowances as an 
incentive for companies to develop new technologies that 
wouldn't happen under the kinds of caps we're probably able to 
pass, legislatively, in the near term. So, I think the 
combination of setting aside a pool of allowances, letting 
companies compete for those allowances if they're going to do 
coal gasification sequestration, if they're going to do 
advanced nuclear, if they're going to do advanced wind 
technology, much like California now does for their renewables 
program. The company that asks for the fewest allowances to do 
that technology gets the award. And I think it's a great way to 
create competition for pushing these new technologies that we 
need. We aren't going to get it with the kind of caps we can do 
in the near term. We need additional incentives to get those 
new technologies.
    Thank you very much.
    The Chairman. Thank you very much, Ned.
    Donald, we're looking forward to hearing from you, please.

  STATEMENT OF DONALD MARRON, ACTING DIRECTOR, CONGRESSIONAL 
                         BUDGET OFFICE

    Mr. Marron. Great, thank you, Mr. Chairman.
    I'm Donald Marron, Acting Director of the Congressional 
Budget Office. Thank you for inviting CBO to participate in 
today's conference.
    In keeping with CBO's mission, my comments will focus on 
the key economic issues that arise in designing a cap-and-trade 
system, but do not actually make any specific policy 
recommendations.
    In response to the first question, ``who is regulated, and 
where?'' we agree with many of the previous panelists, that an 
economywide approach would be the most economically efficient, 
and that administrative costs would probably be minimized in an 
upstream approach. An important limitation of a purely upstream 
approach, however, is that, in itself, it doesn't provide any 
incentives for emissions capture or emissions sequestration.
    In response to the second question, the allocation of 
emission allowances, really, the key issue there is that the 
emissions potentially might have a significant amount of value, 
and that Congress has to make choices about who's going to 
receive that value.
    There are three basic options that we've heard about. The 
first option would be to sell the allowances, and then use the 
resulting proceeds to reduce distortionary taxes. I think 
economists are generally in agreement that that approach has 
the overall greatest economic benefit, and that minimizes the 
overall economic burden that would be placed in the economy 
from the regulations. However, it would also do nothing to 
directly offset the burdens that would be placed on effected 
producers and consumers.
    A second option would be to sell the allowances and then 
use the proceeds to finance R&D adaptation efforts, things like 
that. Such efforts may be valuable, but it turns out there's 
very little economic rationale for linking expenditures on them 
directly to the revenues that come from the allowance auctions, 
or selling the auctions--selling the allowances.
    A third option would be to allocate allowances to offset 
some of the costs that are borne by producers and consumers by 
the introduction of the regulations. Unfortunately, identifying 
who actually bears those costs would be extremely difficult. 
Market forces, not the identity of the regulated parties, will 
ultimately determine who bears the costs. Consumers would pay 
higher prices. Some companies would earn lower profits. Some 
workers would earn lower wages. Indeed, even the Government 
would bear costs through higher prices. Each of those groups 
might have a reasonable claim for some allocated allowances. At 
the same time, there will also be some winners. Some companies, 
for example, would actually have higher profits because of the 
introduction of the regulations. Sorting through those impacts 
to determine an appropriate allocation of allowances would be 
very challenging.
    Thank you.
    Senator Bingaman [presiding]. I think the chairman intended 
we just go right ahead.
    Richard, why don't you tell us EPRI's point of view?

 STATEMENT OF RICHARD RICHELS, TECHNICAL EXECUTIVE FOR GLOBAL 
   CLIMATE CHANGE RESEARCH, ELECTRIC POWER RESEARCH INSTITUTE

    Dr. Richels. Thank you very much, Senator.
    Good morning. My name is Richard Richels. I'm technical 
executive for global climate change research at the Electric 
Power Research Institute, in Palo Alto, California, Senator.
    EPRI is a not-for-profit public-interest organization 
conducting research on issues of critical importance to the 
electric power industry. I will highlight five points from our 
written submission.
    One, economic efficiency--that is, achieving our 
environmental goals at least cost--is critically important. 
Climate policy will have costs. The difference between an 
efficient and inefficient system can be at the order of 
hundreds of billions of dollars, and can determine the very 
success of a program.
    Two, technology advances are central to controlling the 
cost of addressing climate change. The value of near-term 
policies will ultimately be judged by how effectively they 
create technology innovation.
    Three, a cap-and-trade system should have as broad a 
coverage as possible in order to reduce emissions where it is 
cheapest to do so, and to provide the framework for an 
efficient, long-term transformation of the economy. This is 
true both domestically and internationally. Stabilization of 
atmospheric concentrations cannot be achieved without the 
active involvement of both developed and developing countries.
    Four, the point of regulation is not important, from the 
standpoint of economic efficiency, as long as coverage is the 
same, but very important in determining administrative 
feasibility, complexity, and costs.
    And, five, the allocation of permits is unlikely to affect 
the net costs of a policy significantly. However, it can 
greatly impact different households, companies, and regions of 
the country. The issue of who pays is a question of equity and 
a matter for the political process.
    Thank you for the opportunity to share some of the insights 
from our research with you. I look forward to your questions.
    The Chairman [presiding]. Thank you very much for your 
comments.
    Now we're going to move to Jason--how do you say your last 
name?
    Mr. Grumet. Mr. Chairman, it's Grumet.
    The Chairman. Grumet.

    STATEMENT OF JASON GRUMET, EXECUTIVE DIRECTOR, NATIONAL 
                  COMMISSION ON ENERGY POLICY

    Mr. Grumet. Thank you, Mr. Chairman, Senator Bingaman, and 
Senators Murkowski and Feinstein, for the opportunity to be 
here today on behalf of the National Commission on Energy 
Policy.
    I'd like to start with a general reflection, and then make 
a couple of specific points.
    At the outset, I think it's worth trying to distinguish 
between the basic notion of the costs to society of a program, 
and the equity issues, which I think are really the focus of 
today's discussion. And just to illustrate, from a question of 
overall societal costs, the proposal by the Energy Commission, 
in essence, seeks to reduce emissions by about a percent a 
year. The EIA concludes that the costs of that, the costs of 
the control technologies to achieve those reductions, would be 
somewhere between $1 and $4 billion a year, and, on the basis 
of that conclusion, reaches the ultimate conclusion, which I 
like to repeat daily, that our proposal would have no material 
effect on economic growth.
    Now, equity considerations are critically important, but 
rather different. Equity considerations are essentially the 
question of, how do we divide up the 99 percent of permissible 
emissions among the various stakeholders in society? And that's 
what you have to do at the outset of a market-based program. 
The beauty of a market-based program is, then the market itself 
decides the most efficient way to achieve those reductions. But 
these questions are of critical importance, from fairness, 
equity, and, ultimately, political viability.
    But I guess I want to stress, at the outset, that it is 
possible to have a meaningful step towards reducing greenhouse 
gas emissions that meets with the Sense of the Senate 
obligation not to undermine the economy here in the United 
States.
    On specifics, just for a moment, out of the 150 or so truly 
excellent submissions, of course, someone raised every 
different possible point. But I'm encouraged that there do seem 
to be some centers of gravity forming. I believe there is a 
general preference for an economywide program and an 
appreciation that to achieve that, administratively, you would 
have to move upstream in the energy food chain, either all the 
way upstream or--hybrid, in my book, is all basically upstream. 
NCEP believes that it's important that allocations are used to 
mitigate the costs of the program on those who bear those 
costs. We agree with the Center for Clean Air Policy and 
others, that actually you need a very small fraction of those 
allowances to compensate the major energy users. This is good 
news and bad news. It's bad news, because that contradicts, I 
think, basic conventional wisdom, so it's hard to develop a 
policy consensus around that. It's good news, because it means 
that there are, in fact, a lot of allocations available to 
compensate broadly the people who will bear the costs of this 
program, and to pursue broader social desires.
    So, let me just close by recognizing that there are very 
strong disagreements remaining about whether, and how, to 
pursue a program. But I do believe that if this committee and 
the Congress decides that it is, in fact, appropriate to 
proceed, there is an analytical consensus forming that will 
enable that to happen.
    Thank you.
    The Chairman. Thank you very much, Jason. Jason, maybe, at 
the end of this session, I'm going to ask you to make a little 
presentation, so that those listening might understand what 
this upstream/downstream/sidestream hybrid----
    Mr. Grumet. I welcome the warning, Senator, thank you.
    The Chairman. Can you get ready for that? If you need a 
chart, think about it. If not, get ready.
    [Laughter.]
    The Chairman. Samuel Wolfe.

 STATEMENT OF SAMUEL WOLFE, CHIEF COUNSEL, NEW JERSEY BOARD OF 
                        PUBLIC UTILITIES

    Mr. Wolfe. Good morning, Mr. Chairman, Senator Bingaman, 
and members of the committee. Thank you very much for the 
chance to participate here today.
    The Chairman. You're welcome.
    Mr. Wolfe. New Jersey and several other States have spent 
much of the last 3 years designing a regional program to cut 
greenhouse gas emissions from powerplants. We wanted a program 
that would get real reductions in greenhouse gas emissions, 
that would minimize the cost to energy consumers, and that 
would make our region's economy more competitive rather than 
less competitive with respect to the rest of the country.
    The key to accomplishing all three of this goals--all three 
of these goals was the decision to hold back at least 25 
percent of the emission allowances for the benefit of 
consumers, and specifically to leverage the value of those 
allowances to spur investment in energy efficiency, and also to 
encourage the development of renewable energy resources.
    So, the result of this is that growth in our economy does 
not have to be accompanied by growth in greenhouse gas 
emissions. And what means for the cost of the program is, we're 
keeping down the demand for these allowances, keeping down the 
price of these allowances, as a result, and so, in that way, 
trying to keep down the overall direct cost of the program.
    In addition to that, investing in energy efficiency in 
renewable energy means that we're less dependent on fossil fuel 
electricity, and we're making better use of the energy that we 
have. So, the result is that we are keeping down the pressure 
on electricity prices, as well, and, indirectly, since so much 
of the electricity in our region is generated from natural gas, 
keeping down the pressure on natural gas prices, at the same 
time. So, as a result, I think we've positioned ourselves to be 
more competitive than regions that generate and use electricity 
less wisely.
    Now, we don't accomplish any of this, and we certainly 
don't have any effect on wholesale prices, if we were to simply 
hand all the allowances over to the electric generating 
community. And the Congress is true, too. By holding back 25 
percent or more, we're not having any effect on wholesale 
prices as a result of that, either.
    So, just to sum up, I would respectfully suggest that a 
wise national program would share the same goals as a regional 
program, achieving real reductions in greenhouse gas emissions, 
minimizing the cost to energy consumers, and making ourselves 
more competitive with respect to the rest of the world, rather 
than less competitive.
    And I'd also suggest that leveraging a greenhouse gas 
program is not simply a matter of damage control, it's really 
an important reason to do the greenhouse gas program in the 
first place. We're going to be making an awful lot of 
investment in our energy infrastructure over the coming years. 
And whether that's a matter of investing more in railways to 
transport coal, powerplants to burn it, transmission lines to 
deliver electricity to places where it can't get right now, you 
know, if we put that investment in those directions, we're 
doing nothing more than perpetuating what we're doing right 
now, and we're--and we have the chance, with a wise national 
program, to, instead, put our country on a course towards 
really equipping ourselves to be as competitive as possible in 
the 21st century.
    Thank you.
    The Chairman. Thank you very much.
    William Pizer.

 STATEMENT OF WILLIAM PIZER, SENIOR FELLOW, RESOURCES FOR THE 
                             FUTURE

    Mr. Pizer. Thank you, Mr. Chairman and members of the 
committee, for the opportunity to speak here today.
    I should say that my comments don't reflect any sort of 
institutional position of Resources for the Future, which is an 
independent, nonpartisan, nonadvocacy organization that doesn't 
take positions on matters of public policy. So, these are my 
own comments.
    What I'd like to do, really, is just make two points--
first, about the difference between upstream and downstream 
points of regulation. And I guess I would like to point out 
that, in the European emissions trading scheme, which is the 
only example we have of a CO2 program right now, 
which is a downstream program, they actually don't measure 
emissions directly; they measure fuel use, and they apply 
emission factors to that fuel use, which is exactly the same 
thing we do in an upstream program. So, it's not obvious to me 
that some of the differences that people suggested with regard 
to what it'll encourage or incentivize are really there.
    The second point I'd like to make is that a lot of people 
have pointed out the capacity to differentiate between where 
things are regulated and where the allocations are going to 
occur. And I would suggest that, not only can we do that, but 
we probably should do that, and that's because the costs of the 
program do not generally follow where the regulation occurs. 
And, again, I would point to the experience in the EU ETS so 
far, where, in power markets, the German power markets, what 
we've observed is that even though the power companies are 
required to turn in allowances for the CO2 emissions 
associated with the fuels they use, what we see is that power 
prices in those markets have actually risen sufficiently to 
cover most of the cost of those allowances, even though they're 
getting the allowances, 95 percent of the allowances, for free.
    Now, this is not to say that in the U.S. power markets, we 
shouldn't be giving out allowances for free. It just means to 
say that when we choose where we're going to give out 
allowances, it shouldn't be blindly applied to where the 
regulation is--actually occurs. And I think we actually can say 
some pretty intelligent things about where the costs are borne 
and who might deserve to get allowances in order to be more 
equitable.
    Thank you.
    The Chairman. Thank you.
    Well, that finishes the panel. And, Senator Bingaman, that 
brings us to questions. And if you'd like to go first?
    Senator Bingaman. Thank you. Let me ask--sort of, follow up 
on Billy Pizer's comment there.
    As I understand it, EIA's estimate is that the cost of a 
mandatory program, such as the one that NCEP, this National 
Commission on Energy Policy, has proposed--the cost would be 
roughly $4 billion a year. I think Jason referred to that. At 
the same time, the program would allocate somewhere between $30 
and $40 billion worth of allowances. I guess I'd like your 
explanation as to how those two numbers relate. I mean, does it 
make sense to be allocating $30 to $40 billion of allowances? 
And what will that--what will the ultimate economic effect of 
doing that be, relative to the $4 billion cost of implementing 
the program, overall?
    Mr. Pizer. Sure. The $4 billion--or the $3 to $4 billion 
that Jason mentioned reflects the cost to the economy of 
undertaking specific activities to reduce emissions, like 
switching fuels or applying more energy-efficient technologies, 
or what have you. And so, that's the real cost, in terms of 
resources.
    The $30 to $40 billion represents the value of the 
allowances. And this isn't a real cost, in an economy sense; 
it's a transfer from whoever doesn't have the allowances, and 
needs them, to whoever is allocated the allowances for free, or 
to the Government, if they're auctioned. It's much the same way 
as if housing prices go up. It's not a really cost, in the 
sense that someone owns the house, and they get the higher 
price. It's just a transfer between who has the allowances and 
who needs the allowances.
    Senator Bingaman. Mr. Chairman, you might--did you want to 
have Jason go through this description?
    The Chairman. I did, but I want to make one other 
observation.
    I noted that sitting over here were two people. Ned, you 
mentioned that you did work for the European community, and our 
first witness talked about the failure of the program. And I 
wondered how compatible you were, sitting there together.
    [Laughter.]
    The Chairman. Well, first, I assume that you told them how 
to do it, and they didn't follow your instructions. Is that----
    [Laughter.]
    Mr. Helme. Not at all, sir. I think they've done very well. 
I don't think the program's a failure at all. My sense is that 
it's quite successful. It's underway. Prices are a little 
higher. What Billy Pizer was pointing to, in terms of the 
German situation, just as someone on your earlier panel raised, 
in Europe the electricity markets are not fully deregulated. 
And so, companies are actually able to capture monopoly pricing 
in some situations. And there's a lot of debate now that 
companies are basically passing on costs, saying it's because 
of the allowances, and basically capturing some big rents. And 
I think that'll be fixed, over time, as a major debate in 
Europe. But, remember, this is the first year. They've got a 3-
year pilot phase. The real program kicks in in 2008. But, I 
would argue, it's been quite successful, so far.
    The Chairman. Yes, ma'am?
    Dr. Thorning. I'd like to give a little different 
perspective on that. As I'm sure most of you know, the European 
emissions system only covers one-third of all power generation. 
For the Europeans to actually put in place a system that covers 
all emissions would be political suicide, because energy prices 
and trading prices would have to rise such that it would simply 
be unsustainable. So, I believe that the European emission 
trading system will not ultimately prevail, and that they will 
gradually be moving toward a more realistic approach, reducing 
global greenhouse gas emissions. In my discussions with 
officials and companies in the EU, I sense a growing unease 
about where they're going with this. And Italy has already said 
it wants to opt out of the second commitment period.
    So, I think we need to look carefully at the lessons we can 
learn from Europe, and not make the same mistakes they're 
making.
    Mr. Helme. Can I respond?
    The Chairman. Absolutely.
    Mr. Helme. In terms of the, (a) all of electricity 
generation is covered, not one-third. About 45 percent of total 
emissions are covered, in terms of the overall sectors. You 
threw me off by your comment.
    In terms of the politics of this, the way the European 
Commission works, once you have a regulation in place, as they 
do, it requires an action by the Commission to pull it back. 
The member states can't stop it. In fact, there's a lot of 
debate about extending the program to aviation, to 
transportation, et cetera. And, I would argue, that would be 
smart, but their programs of taxes and the efficiency standards 
that they have in other sectors are less cost effective than a 
trading program, that, over time, you will see this program 
expand to other sectors, because--precisely what you heard in 
the first panel, broader trading brings costs down, you get 
more environmental bang for your buck, and that's what you 
want. So, I think--I have quite the different view from my 
colleague here.
    The Chairman. All right. Well, I guess time will tell.
    Now we're going to have Jason give us a little explanation 
of how this works.
    Jason, are you ready?
    Mr. Grumet. Sure. This nice chart, to my left--and, I 
guess, up on the screen--provides a useful visual aid. Thank 
you for that.
    A few words about point of regulation, which, I think, in 
general, is really the question of, where in the energy food 
chain do you place the burden to collect and surrender permits 
to the Government? Boiled down, it's an administrative issue. 
It really, as has been said, has no bearing on the costs of the 
program, and, ultimately, no bearing on the ultimate effect of 
the program. It does bear significantly, though, on your 
options with regard to the scope of your overall program. But, 
from a substantive sense--and, I would say, from political 
sense--it bears strongly on the question of who gets the 
goodies at the outset of the program. And I'll say a word about 
that.
    What this chart shows is essentially the range of options, 
from the top of the food chain, fuel extraction, which would be 
oil wells, point of entry of petroleum. It's the economy coal 
mines and--with natural gas, there are a number of options, but 
the top of the food chain would be natural gas wells. Going all 
the way down to the right, you see the true downstream 
expression, which would be, you know, light sockets, small 
businesses, automobile tailpipes. I think that when most people 
talk about a market-based program, they're imagining something 
generally on the upstream side of the equation. To go all the 
way downstream, I think that the statements from Shell, that we 
should really focus on the auto companies, would be perceived 
by the auto companies as advocacies for CAFE, which is really 
more of a command-and-control option, as would be setting new 
efficiency standards or, in some ways, requiring limitations 
on, you know, use of energy.
    So, I think the real debate kind of fits into the top half 
of the equation, what Jeff Sterba and others described as a 
hybrid program, where you would regulate the large stationary 
smokestacks, which is the full scope of the program in the EU, 
at that point of combustion, and everything else above that. To 
my mind, it's really essentially still an upstream expression.
    And I guess there's two, kind of, closing points that--I 
don't pretend to have the monopoly on this topic--as both Mr. 
Helme and Ms. Thorning point out, the European Union only 
focuses on the large, stationary-source emitters. It does not, 
in fact, have full program coverage. It covers about half of 
the economy. To move beyond that half of the economy, my view 
is, you have to actually move the program farther upstream, 
that to go smokestack by smokestack, you start getting very, 
very small smokestacks after about half of the emissions are 
covered. You have to start regulating bakeries and, you know, 
small businesses. Not going to happen. So, if you really want 
full program coverage, that actually, in some ways, pushes you 
farther up the food chain.
    The second point, which I think is less substantive, but 
politically, in some ways, more important, is that there is a 
perception, based on history, that who you regulate is the 
entity that should get the lump sum of the allocation, at the 
outset. That has been our history with the acid rain program 
and other stationary-source control programs. Billions--Rich 
Richels and others can explain to you better than I why carbon 
is different, but I think there is a perception that if you are 
regulated, you're going to get more of the allocation at the 
outset. And I would suggest to you that some of the preferences 
we're hearing about point of regulation are actually derivative 
from the broader question of who gets the allocation to start 
the program. And so, I think there is a clear political linkage 
between the two, while there is no necessary substantive 
linkage between those two questions.
    I would pause there.
    The Chairman. Okay. Does anybody want to comment on--as a 
panelist here, on that chart, on that explanation?
    [No response.]
    The Chairman. Okay.
    Senator Murkowski. Mr. Chairman?
    The Chairman. Yes.
    Senator Murkowski. Can I just ask for you to follow up, 
then, on your last comment there? You're suggesting that the 
downstream users, the household--the little folks, even though 
they're not subject to the regulation, you're suggesting that 
they share in some of the allowances. And you've indicated that 
perhaps Mr. Richels or Mr. Pizer can speak more to that. Can--
--
    Mr. Grumet. I'll frame it, and then pass it on.
    The Energy Commission believes strongly that the 
allocations--the free allocations should be given to the people 
who bear the burdens of the program. And, you know, different 
people have their different estimates, but you've heard the 
word--the number, 10 percent, thrown around, that the actual 
regulated entities are only likely to bear, cumulatively, about 
10 percent of the costs of the program. And that is because 
they pass those costs on. If the cost of coal increases because 
they have to purchase in permits, that will then get passed on 
to the electric sector. And so, even if the electric sector 
wasn't regulated, they will still bear costs from this program. 
And then, they, being good, smart capitalists, will pass those 
costs on, through higher electricity prices, and large energy 
users, like the aluminum companies, and others will bear some 
cost of compliance. And so, actually, the point of a carbon 
constraint is to send a price signal all the way through the 
economy so that everybody has an incentive use energy more 
wisely. And so, in that regard, there is a logic to trying to 
allocate broadly. There are a lot of different ways in which 
people suggest that be done, but the notion of an auction as a 
mechanism do so that is simply that you would raise revenue 
that then could be disbursed broadly through society. But there 
are other suggestions that people actually give direct 
allocations to a cement--to the cement industry to cover some 
of their costs of higher energy costs, and then they would sell 
those allowances to the energy producers, or whoever needs 
them, to create some greater equity.
    The Chairman. Okay. Good question--comment.
    Yes, Richard?
    Dr. Richels. With regard to the--thank you. With regard to 
the issue that you could somehow make the electric utility 
industry whole by allocating between 5 and 10 percent of the 
permits to them--and, earlier, Ned mentioned the study by CRA--
there was a subsequent study by CRA, I believe, that took a 
very careful look at the analysis that came up with the 5 to 10 
percent number, and found some very unrealistic assumptions 
underlying that analysis. I won't get into the detail, but one 
of the analyses were that the utilities would receive the 
permits in perpetuity. When they calculated the number of 
permits that would be required to make the utility whole under 
what they consider to be more realistic assumptions, the number 
was more like 75 percent.
    Now, I'm not saying that 75 percent's right. I'm not saying 
that 10 percent is right. What I think that the Senators need 
to understand is that there's a great deal of uncertainty 
underlying some of the numbers that are being tossed around.
    The Chairman. Ned, before you--I know you had your hand up, 
but I had on my mind asking you a question. You threw around--
mentioned a number, 8400.
    Mr. Helme. Yes, sir.
    The Chairman. About that number.
    Mr. Helme. This is the number of entities--you know, 
plants, sources--that would need to be regulated if you did the 
hybrid, the combination that Jason and I have been talking 
about, where you regulate the industrial point sources over a 
certain size, and you go to natural gas distribution companies 
and oil refiners and natural gas processing plants. There's 
about--this is several years ago--there were 8400 facilities. 
And the EU program today is, like, 12,000 facilities. So, 
clearly that hybrid kind of thing, which would cover basically 
100 percent of the economy, could be done with 8400 facilities, 
which is quite workable, in terms of a regulatory program. 
Whereas, if you went downstream as--you know, down to the 
individual bakery and dry-cleaner, you're talking about 
hundreds and hundreds of thousands of sources. So, in contrast, 
an upstream system that's just coal mines, coal preparation 
plants, natural gas pipelines, distribution, refineries, is 
about 2,000 sources. So, either way, it's quite workable.
    But, I wonder, as to Rich's comment about the studies--I 
think the other key point here for Senators to think about is 
the amount of allowance you need to give to, let's say, the 
utility industry is completely a function of how tough the cap 
is. Okay? In the study I cited, we were looking at a cap at 7 
percent below 1990 levels, basically the equivalent of the 
Kyoto target for the United States. The kind of study that 
Jason's talking about, for the proposal NCEP put together, is a 
much less stringent cap. And so, less allowances are required. 
In our study that the CRA did, we found the utility industry 
needed 26 percent of the allowances, and in Jason's study it's, 
like, 10 percent, but that's because it's a less stringent cap. 
So, remember that when you think about this, obviously the 
tougher the cap, the higher the cost, the more you need to give 
to the companies to offset their--the loss to their 
shareholders. So, that's the way to think about this.
    The Chairman. Senator Murkowski.
    Senator Murkowski. I want to follow up on the 8400 comment. 
That's today. That's the number today. How do we deal with the 
fact that we've got a growing population? How do we account 
for--if you've got a cap-and-trade program--this is what some 
of those who object to it say--you can't account for an 
increasing population. How do we keep those sectors--for 
instance, the coal industry, which many of us are concerned 
about--how do we keep those from seeing rising unemployment 
rates? We've got a society, an economy, that's constantly 
moving, constantly in flux. How do we account for those?
    Mr. Helme. Well, there's two answers, I think. One is, in 
terms of the number of facilities, it's a function of how many 
cement plants, steel mills, refineries, powerplants, et cetera, 
are built. So, I would argue that--not going to be that many 
more. I mean, it might be more than 8400, it might be 10,000, 
over time, but not such a problem. But your other question is 
trickier. It's, sort of--when I say it's enough to give 26 
percent to the utility industry to hold their shareholders 
harmless, that's not the same as saying--for the coal industry, 
it's 34 percent--that's not the same as saying, ``I'm taking 
care of the communities,'' or ``I'm taking care of the 
workers,'' or, ``I'm taking care of the railroads.'' That's 
saying, ``I'm taking care of the shareholders of coal 
companies, electric utilities companies, steel companies, et 
cetera.'' That's not the same thing.
    And the point I think Jason was making, that we have a lot 
of allowances left over when we take care of those 
shareholders. A portion of that certainly could be put to the 
workers. I mean, if we're going to have an effect on oil 
refinery workers, they could be compensated.
    So, the point here is, you've got plenty to play with. 
There's a lot more money on the table in a carbon program than 
there was in the SO2 trading program. So, there are 
ways to design this. And I think we can say, ideally, from an 
economist's perspective, you want to auction as much as you 
can. But from a political perspective, it's all about equity, 
who--as Rich Richels said, who do we want to give this to? And 
there's plenty of opportunity to do that.
    The Chairman. Mr. Pizer.
    Mr. Pizer. I just wanted to add to Ned's comments and say, 
you don't want to get the impression that you can make 
everybody okay. I mean, this is a program that's going to cost 
$4 billion to someone. But the point is, is that you can use 
the allocation, if you do it carefully, to try to control the 
distribution of those impacts and make sure that the 
communities or the companies that would otherwise be more 
adversely affected, are somehow compensated. And I think that, 
you know, we have some idea, and you've heard some different 
estimates today. I was actually going to point out that I think 
the estimate that Jason referred to, that said 5 to 10 percent, 
was actually 5 to 10 percent of the total. Whereas, I think the 
number that Ned was talking about was actually 20-something 
percent of the power sector's actual emissions. So, when you 
take those together, they're actually not that far apart.
    The Chairman. Okay.
    Mr. Pizer. Well, the point was, is that this is 10 percent 
of a pool for the entire economy. So, if you talk about that, 
relative to the emissions in the power sector, it's actually 
closer to 20-something percent. I think that the estimates that 
we've heard, while they're going to be subject to debate, 
clearly, there are numbers that can be dealt with in the power 
sector to deal with them.
    The Chairman. All right.
    Senator Bingaman.
    Senator Bingaman. I wanted to ask Samuel Wolfe to comment a 
little more on this public benefit allocation that you folks 
are contemplating in this RGGI program. How does that relate to 
what Senator Murkowski was asking about there? I mean, how do 
you see this working? And would each State make its own 
decision as to what allocation to make to what purposes? How 
would it work?
    Mr. Wolfe. Thank you, Senator.
    It would be a State-by-State decision about, first of all, 
whether to stay at the 25-percent floor or whether to go above 
that level. It would also be, I think, a State-by-State 
decision on exactly how to invest the proceeds of that portion 
of allowances, but with set-aside to benefit consumers. I think 
the best way to do it is to see where you can best leverage 
that money, if, say, by investing--and some of what we've seen 
in the modeling that's been done for the Regional Greenhouse 
Gas Initiative is that by investing that money in energy 
efficiency, we see a very quick and very large reduction in the 
cost of CO2 allowances, and that means, again, a 
very quick and large reduction in the cost of the program. So, 
that seems to be a much better leveraged way to take advantage 
of the resources that we're creating when we create a cap-and-
trade system.
    Just to expand on that concept, one thing that I think 
we're all circling around here is the idea of making regulated 
entities whole. And it's worthwhile just taking a moment to 
explore what that means.
    One way to help reimburse them for their costs is certainly 
to hand them allowances. But in a large chunk of our electric 
generating fleet in this country they're not subject to utility 
regulation; and so, they are going to recover their costs of a 
greenhouse gas cap through the wholesale electricity markets. 
And they are not going to change their behavior in doing that; 
they're not going to seek to recover any less money through the 
wholesale markets, if they're handed a larger stack of 
allowances. Really, it's two separate things. And the 
allowances that they're being handed are basically almost a 
direct pass-through to the shareholders, in addition to the 
money that's going to be recovered through the wholesale power 
markets.
    The Chairman. Senator Feinstein.
    Senator Feinstein. Thank you very much, Mr. Chairman.
    I wanted to go back, just for a moment, to what California 
is doing, because it's certainly the most aggressive action in 
the Nation, so far. And they have a macroeconomic study from 
the University of California at Berkeley that actually shows 
that these limits will produce new jobs and new employments, 
and, actually, as a boon to the economy of the State.
    I see you nodding, Mr. Helme. I'd like everybody to comment 
on that, because the fear has been economic disadvantage by 
moving in this direction. Everything I see is economic 
advantage in moving in this direction, because, sooner or 
later, global warming is going to begin to impact every 
company, as well as every other kind of entity on the planet, 
if we don't address it.
    Mr. Helme. We work extensively with them, and did our own 
sort of bottom-up microeconomic study that mirrored the kind of 
findings they had. So, I think it's--you're right, in terms of 
the level of reductions that are required in the caps in 
California, it is a very positive picture. A lot of that 
positive picture comes from the Pavley auto standards, where 
you're saving a lot on gasoline consumption, that far exceeds 
the cost to the automakers that goes in building in additional 
price of the hybrid cars, and that sort of thing. So, a big 
piece of those benefits from that, and also for energy 
efficiency. But I agree with you.
    Senator Feinstein. Right. Anybody else on that? Please.
    The Chairman. Please. Margo?
    Dr. Thorning. I'd like to mention that there is some work 
on the ACCF's Web site looking at the impact on California of 
trying to meet emission reductions. And we found, with our 
general equilibrium model, by--I think Charles River Associates 
also prepared that study--significant cost to California, in 
terms of jobs and employment. So, I think you need to look very 
carefully at the two different microeconomic simulations and 
assess the question of how realistic the assumptions are.
    And, second, just to draw us back one more time to our 
friends in Europe, Europe is, of course, growing at 1 percent 
or less a year, and the higher energy prices they're facing are 
definitely having an impact on their ability to provide jobs 
and sustain well-being. So, I think it would behoove us to take 
a good look at the voluntary approach, which the EIA's own 
recent analysis shows is more productive, in terms of reducing 
greenhouse gas emissions and reducing electricity prices, than 
is a mandatory emission intensity reduction program.
    Senator Feinstein. Mr. Marron, and then Mr. Richels.
    The Chairman. Just before we go to the next person, could I 
ask Ned--you mentioned two main reasons that the economic study 
came out positive. Repeat them again.
    Mr. Helme. The two biggest pieces of benefits are the 
benefits from the California car standards, where you get a lot 
less consumption of gasoline, because it's much stricter 
standards, and so that's a big saving for consumers, and more 
than offsets the additional costs to the automakers of 
producing the more efficient vehicles. And, second, the 
extensive energy efficiency program and removals program that 
they're building, which has huge--again, it's like appliance 
standards--the homeowner gets a more efficient dishwasher, and 
obviously saves energy for a long period of time, so big 
benefits there.
    The Chairman. All right, thank you.
    Now, who was next on this?
    Donald.
    Mr. Marron. Yes, I want to just say that from the 
macroeconomy point of view, introducing the kinds of 
regulations that have been discussed today would almost 
certainly have net costs, leaving aside whatever benefits come 
from preventing, possibly, or changing, the degree of global 
warming. And I guess the easiest way to think about that is to 
think about the various products that we produce today in the 
economy--say, electricity--if a cap-and-trade system were 
implemented, firms would either be paying more for the fuel 
sources they get, switching to more expensive fuel sources, or 
installing various kinds of capital that might capture and 
sequester emissions. All of those things are a net cost. They 
may employ people, but, from a macroeconomic point of view, 
what you basically observe is a switching of jobs from one 
role, where people used to produce some other products, into a 
role in which they're helping, in essence, execute other 
requirements of the regulation. And so, again, I think, from an 
overall economy point of view, the key issue would be whether 
the costs that are imposed by the regulation are balanced by 
more than offsetting benefits from the environmental benefits. 
They're not going to be offset by benefits within the economy.
    Senator Feinstein. Mr. Richels.
    The Chairman. Richard, did you want to comment?
    Dr. Richels. Actually, I couldn't have said it better than 
Donald. I mean, what you're talking about is what economists 
typically refer to as a ``free lunch.'' I don't think we should 
fool ourselves into thinking that there's a free lunch out 
there to be had. It could be the best lunch we ever paid for, 
but I think we're doing consumers a disservice by telling them 
that we can get all this done at zero cost.
    I think that the California study, we need to start taking 
a more careful look at that. I've summarized the IPCC economic 
analyses, the Intergovernmental Program on Climate Change 
analyses, for the last three reports. There's been a lot of 
tension between the top-down modelers--I'm pleased to say Billy 
is an example of a top-down modeler, as well as myself--and the 
bottom-up modelers. Bottom-up modelers tend to think that 
there's a lot of--awful lot of inefficiencies in the economy, 
so much inefficiencies that if we could just take advantage of 
those inefficiencies, we can put the economy on track, and 
it'll be a win-win for the environment and the for the economy. 
I just am not convinced that that's the case.
    Senator Feinstein, EPRI will be doing an analysis of the 
California situation, looking at the costs of California going 
it alone. And, typically, we find that when a State goes alone, 
there is a cost to that State. There's a migration of jobs out 
of the State, there's a migration of employment, there's a 
decrease in net income.
    And, you know, the best of all situations--we say we want 
as wide a coverage as possible--well, we want it to be 
globally, is what we would really like to see. I mean, that's 
the way to really protect the environment. The United States 
could reduce its emissions to zero, and it's not going to 
stabilize atmospheric concentrations. Without international 
cooperation, then we'll have to go to some kind of country-by-
country action and hope that, at the end of the day, we'll be 
able to put together some kind of patchwork quilt.
    But I'd hate to see us put ourselves in the position where 
we have to put that patchwork quilt together at the State 
level, because that's going to be extremely difficult to do. 
And I commend you on coming forward and trying to move 
California, where I just moved out of after 28 years, into a 
more national perspective.
    Senator Feinstein. Okay.
    The Chairman. Thank you.
    Now, we're just getting near the end of this. Let's go, 
Jason.
    Mr. Grumet. If I can pile on. First I'd like to say, 
Richard, I hope you didn't move because of the job dislocation.
    [Laughter.]
    Dr. Richels. Well, I would have done that later.
    Mr. Grumet. I am neither a top-down or bottom-up modeler. 
But I think it's important to recognize the frame of this 
issue, and that is that for a long time there have been some 
who have been saying this is free and easy, and there have been 
some who have been saying it's economically ruinous. And 
neither, I think, is the case.
    There are clearly significant opportunities to have 
benefits, in addition to the environmental benefits, from 
encouraging efficiency and trying to internalize these costs of 
carbon. And I think many of those will be long-term benefits, 
they'll enhance our economic competitiveness overseas, they'll 
provide all types of benefits. At the same time, there will be 
real costs of this program.
    And, I think, to Senator Murkowski's broad, and, I think, 
most important question, how do we make sure that those costs 
are, in fact, consistent with our broader desires for economic 
well-being? And that's a question of program design at a 
metalevel, which is really not invoked in the white paper. 
That's a question of the pace of emission reductions, whether 
or not you have cost certainty to overcome the kinds of 
unhappiness that they've been experiencing in Europe, where the 
costs are about three times what had been initially perceived, 
and whether, in fact, you also invest resources in new 
technologies to provide an incentive.
    And I guess I would just say, at the end of the day, the 
first panel nailed it, that this is about technology. And the 
question is, how do you create the incentives for technology? 
There's a polar argument which says, do it all through markets, 
do a kind of Kyoto-like--you know, put it all on business. We 
don't think that's going to work. There's an all--a voluntary 
notion, which says, put it all on the tax base, have it all 
done through taxpayer-funded incentives. Don't think that's 
going to work.
    What the Commission believes is, you need a combination. 
You need a modest market signal, to provide a long-term message 
to the ingenuity of America to start to make different 
decisions and to have the benefit of generating some revenue to 
provide incentives. So, you have kind of a pull and push, which 
gradually moves us forward. And, I think, with that kind of 
combined approach, we can take a meaningful first step.
    The Chairman. All right. Getting close now.
    Richard.
    Dr. Richels. I just want to add to that. I totally agree 
that cap-and-trade, or whatever market mechanism we need, makes 
a lot of sense, as far as economic efficiency is concerned. But 
without a technology policy that goes along with it, it's going 
to be very difficult to do the heavy lifting that's going to be 
required downstream. And that's not going to come about through 
cap-and-trade. We need, somehow, to incent the public sector 
and the private sector to make sure that the carbon-free 
technologies are available in the future, when we're making 
those 50-percent reductions or 80-percent reductions that will 
be required to stabilize atmospheric concentrations.
    The Chairman. Okay.
    Ned.
    Mr. Helme. I just want to clarify that I agree with Jason's 
point, on the larger, longer term. Clearly, it's not going to 
be a free lunch, by any means. You're going to face additional 
cost. And I agree with Richard's point, here at the end here, 
the reason we really need to push technology--and that's why I 
propose this reverse auction, where you put some of the 
allowances out there--is that if you look at the SO2 
program in 1990--you remember, the acid rain program--the cost 
estimates for SO2 scrubbers and for NOx 
SCR controls were much--factor of two, factor of three higher 
than they are today. We've got a cap. We drove the technology. 
The competition of that trading market created a lot of 
innovation in the technology. And today we have very reasonably 
cost technologies. And that's why none of the utilities are 
objecting to the CAIR rule or--and so on, because they know 
what it costs, and it's not absurd, in terms of the costs.
    And our hope with climate is the same way. We need to drive 
the technology. We don't have the technologies today. You know, 
we're talking about gasification sequestration, but it's 30 
percent more expensive than--you know, traditional 
supercritical coal. That can happen. If we drive those 
technologies--same with nuclear, same with advanced 
renewables--if we drive those technologies now, by the way you 
design the program, by creating a set of allowances that make 
it attractive for people to build those technologies and not--
today they can't make--recover their costs doing that, for the 
most part. So, I think that's where we want to go. And we'll 
see the same pattern, I would argue. Those technologies will be 
competitive by 2020, and we'll be able to get there.
    So, I agree with a lot of our panelists here, that that's 
where we need to go.
    The Chairman. Okay. Margo? And we're going to wrap this up.
    Dr. Thorning. I certainly concur we need to drive 
technology, but I--focus this on the strong role economic 
growth can have in pulling through the technology that we need. 
For example, in Europe, emissions intensity has only fallen by 
7.6 percent from 1997 to 2003, in spite of their mandatory 
push. Here in the United States, emissions intensity has fallen 
by 12.6 percent over that same time period, because we're 
growing in, on average, 3\1/2\ percent a year. Europe is only 
growing at 1 percent. So, economic growth can play a really 
strong role in pulling through the technologies that we need. 
And another incentive that, as I had mentioned before, we need 
to focus on is making our tax code competitive with the rest of 
the world.
    The Chairman. All right.
    Senator Bingaman.
    Senator Bingaman. Let me just ask Ms. Thorning. It's true, 
though, that most of our growth is in the service sector as I 
understand it. Also, we are much less efficient than Europe, as 
a general matter, in use of energy. Therefore, we can reduce 
our energy intensity more easily. Am I right about either of 
those?
    Dr. Thorning. Well, I would suggest that, because the 
United States has a whole different structure and is--you know, 
the distances are greater, energy prices have been cheaper--
that it's not necessarily easier for us to make the kind of 
switches toward lower greenhouse gas emissions. But because 
we're able to invest in new capital, because our economic 
growth is stronger, we've made better progress than has Europe. 
And Europe is increasingly a service-sector economy, as well. 
And, by the way, in the service sector, there's a lot of 
manufacturing buried in there, because there's been a change in 
the structure of how services are provided to the manufacturing 
sector.
    The Chairman. All right. We stand in recess until 2:30. 
Take your belongings with you and return to this room at 2:30.
    [Recess from 12:11 to 2:36.]

                           AFTERNOON SESSION

    Senator Bingaman [presiding]. Okay, why don't we go ahead 
and get started here.
    Senator Domenici has been delayed with a meeting of the 
Appropriations Committee on the supplemental appropriation 
bill, but he's going to be here as quick as he can. But he 
indicated that we should go ahead and start.
    So, why don't we just do what we did this morning, go 
around and have everyone make the points that they would like 
to make, and then we'll have some questions. Hopefully by then 
we'll have some additional Senators so we can have some give-
and-take discussion.
    Kateri, thank you for being here, with the Alliance to Save 
Energy. Go right ahead.

           STATEMENT OF KATERI CALLAHAN, PRESIDENT, 
                    ALLIANCE TO SAVE ENERGY

    Ms. Callahan. Thank you, Senator.
    My name is Kateri Callahan, and I serve as the president of 
the Alliance to Save Energy, which is a nongovernment and 
bipartisan organization dedicated to advancing energy 
efficiency worldwide. And, as the first panelist, I'd like to 
thank and commend you, Senator Bingaman and Senator Domenici, 
for organizing this conference and for inviting the Alliance to 
be part of what I consider to be a very important national 
dialogue.
    The Alliance has two overriding recommendations today. 
First, we would like to urge that any national climate strategy 
employ energy efficiency to the greatest extent possible, 
because there's an impressive body of study that suggests that 
such technologies and practices are the most cost-effective 
means we have at our fingertips to controlling greenhouse gas 
emissions. And, second, while we engage in what could be a very 
protracted debate on national climate policy, we would like to 
urge the Congress to go ahead and immediately adopt policies 
that will drive energy efficiency in every end-use sector. We 
believe that such measures are likely to complement any kind of 
an overarching national scheme that's finally enacted. And, 
meanwhile, we can begin to reduce greenhouses gases 
immediately, while also growing our economy.
    We already have solid evidence that efficiency can, and is, 
delivering tremendous carbon savings to our economy. Our own 
research, Senator, indicates that energy efficiency policies, 
the building and appliance standards, the incentives we've put 
in place, and technology improvements, since the mid-1970's are 
allowing us to avoid the use of approximately 40 quadrillion 
Btus, or roughly 40 percent of the energy currently consumed, 
and that we avoiding the emission of almost 2 billion tons of 
CO2 every year.
    These impressive savings don't come close to tapping the 
full efficiency gains. For example, the modeling that was 
undertaken by RGGI, the Northeast greenhouse gas initiative, 
showed that doubling that region's energy efficiency policy 
impacts could cut electricity growth by two-thirds by 2024 and 
would keep carbon emissions flat, and it would do all of that 
while adding jobs, at a cost of less than 3 cents a kilowatt 
hour in improvement to the economy.
    So, to reap the promise of energy efficiency in any 
national climate strategy, we ask that the Congress make 
explicit provisions for such technologies and measures. For 
example, if you undertake an upstream cap-and-trade program, 
we'd urge that you follow the lead of RGGI and allocate a 
significant portion, at least 25 percent, of the allowances or 
revenue from such an auction--or from the auction of such 
allowances directly to support energy end-use activities and 
other public benefits. And, again, as stated earlier, we 
believe it's critical to move forward today in front of any 
agreement on a national climate strategy to reduce greenhouse 
gas emissions, and we think you can cost effectively do this by 
implementing and funding the provisions--the energy efficiency 
provisions that were in EPAct 2005. We also urge you to 
consider adopting additional measures, including policies to 
improve the fuel economy of our light-duty fleet, to extend and 
expand the current suite of tax incentives--energy efficiency 
tax incentives that are in place, and, finally, to institute 
something I know you're interested in, Senator, a national 
energy efficiency resource standard and/or a public benefits 
fund that could be modeled on successful programs that States 
have underway to deliver--or to invest in energy efficiency.
    We believe this dialogue is critical to the development of 
a sustainable energy future in the United States, and that 
energy efficiency represents the cheapest, the quickest, and 
the cleanest mechanism that likely will be considered all 
during this debate. We also believe, however, as I mentioned 
earlier, that we can take action now, a no-regrets policy, put 
in place Federal legislation that will drive energy efficiency, 
in transportation, in buildings, in the energy supply sector, 
and we can do that while we debate broader programs and make a 
meaningful impact on greenhouse gas emissions.
    Thanks for your time, and I look forward to your questions.
    Senator Bingaman. Thank you very much.
    Michael Bradley, with the Clean Energy Group. Go right 
ahead.

STATEMENT OF MICHAEL BRADLEY, EXECUTIVE DIRECTOR, CLEAN ENERGY 
                             GROUP

    Mr. Bradley. Thank you, Senator.
    My comments today represent the views of the six Clean 
Energy Group companies which support the Clean Air Policy 
Initiative.
    Since 2000, these companies have actively supported a 
Federal multipollutant legislative approach for reducing 
NOx, SOx, mercury, and CO2 emissions from 
powerplants. These companies include Calpine, Entergy, Exelon, 
Florida Power & Light, PG&E, and the Public Service Enterprise 
Group. Collectively, these companies own or operate more than 
140 gigawatts of electric generating capacity in 40 States. 
This represents about one-sixth of the total U.S. generating 
capacity.
    Our members support the adoption of a mandatory greenhouse 
gas regulatory program based on a fair and cost effective 
program design. We believe that the scientific evidence on the 
risk associated with climate change is sufficient to warrant 
immediate legislative action. We agree with many of the 
participants today that an economywide regulatory system could 
be effective in controlling greenhouse gas emissions. However, 
the practical reality is that the economywide approach will 
require tremendous political lift. I think we're seeing that.
    We believe strongly that a sector-specific cap-and-trade 
program initially focused on electric generating would be a 
good first step in setting us on a course to begin reducing our 
Nation's greenhouse gas emissions. A cap-and-trade program for 
the electric generating sector could be designed to readily 
integrate into a broader economywide program at a later point 
in time.
    As the industry makes substantial investments in both new 
and existing powerplants, we are better served by having the 
right economic signals in place to guide these capital planning 
decisions.
    In terms of program design, my comments today will focus 
primarily on the methodology used for distributing allowances 
to the electric generating sector.
    One of the options that we have seen proposed in the 
responses to the four questions over the last month is to use 
the allocation to compensate higher emitting facilities by 
basing the allocation on a facility's share of historical 
emissions. We disagree with this approach. We don't think that 
this approach is good public policy, nor do we think that it 
would be good business practice.
    An allocation based on compensation fails to drive 
innovation and the deployment of new high efficiency generating 
technologies. An allocation based on compensation penalizes new 
market entrants that would be excluded from the allocation 
entirely. And, finally, an allocation based on compensation 
penalizes companies that have invested in generating fleets 
with a lower carbon intensity prior to the imposition of the 
cap.
    Instead, we advocate an alternative approach that requires 
companies to earn allowances based on their current 
performance. Allowances are a valuable commodity that should be 
used by policymakers to drive investment decisions that will 
lead to better environmental and lower costs.
    Specifically, we advocated updating output-based 
allocation. Under this approach, allowances would be 
apportioned based on the facility's recent power output. This 
creates a very strong financial incentive for improving 
powerplant efficiency. Also, an updating--output-based 
allocation approach encourages the deployment of new innovative 
technologies by providing a mechanism for new powerplants and 
new projects to be integrated into the cap-and-trade program on 
an equal basis. From a business perspective, we feel this 
approach is the right approach, because it treats companies 
equitably based on their ability to deliver low-cost energy 
supplies.
    In the absence of an equitable distribution allowance 
approach, such as an output-based allocation, we would support 
an alternative allowance allocation approach, such as an 
auction, to ensure a fair distribution of the burden under 
national greenhouse gas programs.
    Thank you very much.
    Senator Bingaman. Thank you very much.
    I am reminded here, we need to try to get this done in a 
couple of minutes, if people can possibly do that. But 
appreciate the good comments that we're hearing.
    Michael Morris is here to represent the Edison Electric 
Institute. Welcome, and go right ahead.

     STATEMENT OF MICHAEL MORRIS, CHAIRMAN OF THE BOARD OF 
              DIRECTORS, EDISON ELECTRIC INSTITUTE

    Mr. Morris. Thank you very much, Senator. Appreciate the 
opportunity to try to be the first to get done within a couple 
of minutes. I'll do all that I can in that regard.
    Senator Bingaman. We wish you well.
    Mr. Morris. I'm sure you were addressing the previous 
speakers, not me, right?
    [Laughter.]
    Mr. Morris. We really are here to represent the Edison 
Electric Institute. I think you're very familiar with it, 185 
member companies and 65 international affiliates, as well. We 
would like to commend you and your colleagues for the 
opportunity to be here and comment on the white paper.
    EEI strongly supports voluntary technology, carbon 
intensity-based approaches to the global climate issue. We 
believe that this can--and, in fact, already has--achieved 
significant results. Technology is the key to addressing the 
greenhouse gas issue as we go forward. Strategies should be 
adopted that develop and implement a zero- or lesser-emitting 
generation technologies, taking into account the economic 
turnover of capital stock. Robust voluntary measures that 
reduce carbon emissions and emission intensity surely will get 
us in that direction.
    Emphasis on the reduction of carbon intensity is important, 
because we think that's essential to make certain that we don't 
dampen economic growth as we go forward. In addition, we would 
support a robust budget support for the implementation of the 
issues that came up in the Energy Policy Act of 2005. And I 
know you're a strong supporter of that, as well.
    We note the critical international dimensions of the 
climate change issue and the importance of investment overseas 
in technology and best practices.
    The reality of rapidly increasing emissions from major 
developing nations such as China and India demonstrate the 
importance of the international partnerships and other 
voluntary technology-based multinational agreements like the 
Asia-Pacific Pact. We feel very comfortable with that, and 
believe it's the right way to go. American electric power and 
EEI will continue to work in that direction.
    As we look at the issues in front of us, we believe that it 
ought to be an economywide system that surely is based on the 
point of the actual pollution themselves. We would talk about 
downstream and upstream analysis, as we go forward. And clearly 
we are strong supporters of the allocation method, rather than 
the auction method, and will address that we get to the 
questions.
    I'm seeing the signs behind you that say I'm out of time.
    Thank you.
    Senator Bingaman. Well, thank you very much.
    Fred Krupp, we're glad to have you here, and you're 
speaking for the Environmental Defense Fund.

              STATEMENT OF FRED KRUPP, PRESIDENT, 
                     ENVIRONMENTAL DEFENSE

    Mr. Krupp. That's right, Senator, Environmental Defense. 
And it's an honor to be with you here today. And I want to 
commend both you, Senator Bingaman, as well as Chairman 
Domenici, for your leadership on U.S. climate policy and the 
progress you've made in opening this dialogue and allowing us 
to delve more deeply into this most serious challenge.
    The first principle of effective climate policy is 
establishing a clear emissions target related to the problem 
we're trying to solve. That problem is the increasing 
concentration of greenhouse gases in the Earth's atmosphere, 
which are causing an accelerated warming of the planet.
    Just last month, the Journal of Science published an 
article that found that the rate at which Greenland, the ice 
sheet, is draining into the ocean has doubled over the last 
decade, suggesting that a tipping point leading to the complete 
loss of the Greenland ice sheet and a 20-foot sea-level rise 
may be closer than previously predicted.
    Because of the increasing flood of similar evidence, we 
must now establish real limits, not emissions caps that would 
allow greenhouse gases to rise. They would ultimately make our 
task more difficult and more costly.
    In response to your questions on the point of regulation 
and allocation, we believe those decisions flow from the basic 
design of the program. In order to achieve reduced greenhouse 
gases at the least possible cost, the basic design of the 
program must include both a real emissions limit and an 
opportunity for all sectors of the economy to contribute to the 
solution. This is because Environmental Defense believes the 
most powerful tool to manage the cost of climate policy is the 
ingenuity of the American people responding to the incentives 
in a market economy. A stable and predictable emissions limit 
creates the demand for emissions reduction and offset 
technologies. Market demand and innovative entrepreneurs will 
provide a better mix of technologies than any government 
employee could choose. Similarly, the fundamental elements of 
emissions trading and banking in a competitive market serve to 
grind down costs far better than any government program could.
    Finally, I believe farmers can play an important role in 
meeting the climate challenge. Farmers can raise the crops that 
would become renewable fuels in ways that produce less carbon 
than traditional fossil fuels. This can provide a win-win 
solution for energy security and climate policy.
    In addition, we think agricultural offsets are one of the 
most powerful tools to reduce costs. EPA's analysis of the 
Clean Air Planning Act last fall predicted that--carbon dioxide 
allowances prices between $1 and $2 if the use of offsets is 
unlimited. At the same time, they would provide new revenue 
streams for farmers as the world markets for farmers become 
ever more challenging.
    Thank you.
    Senator Bingaman. Thank you very much.
    Next, Paul Bailey, who is speaking on behalf of Generators 
for Clean Air.
    Go right ahead.

        STATEMENT OF PAUL BAILEY, DIRECTOR, GENERATORS 
                         FOR CLEAN AIR

    Mr. Bailey. Sir, if I fail to meet the 2-minute challenge, 
it won't be Jonathan's fault. He has warned me.
    Senator Bingaman. All right.
    Mr. Bailey. So, we'll see how I do.
    I thank you for this opportunity today, Senator Bingaman. I 
also wanted to express our appreciation to the committee staff 
and the National Commission on Energy Policy staff, because 
they've been helping us over the last few months in explaining 
issues to us and responding to questions. And we appreciate 
that.
    Although the members of this group--there are nine utility 
companies that belong to the group--although the members have 
different views regarding mandatory climate change legislation, 
all wish to be responsive to your request for input on the 
white paper. I will briefly summarize their major points.
    If Congress enacts mandatory climate change legislation, it 
should apply economywide and should encourage all greenhouse-
gas emission reductions and offsets. Reducing utility 
compliance costs and electricity price increases should also be 
a major criterion for deciding on point of regulation and 
allocation of allowances. The electric sector should receive an 
allowance allocation based on its pro rata share of covered 
greenhouse gas emissions. Legislation should allocate 
sufficient allowances to fossil generation to minimize utility 
compliance costs and increases in electricity prices to 
consumers.
    A 95 percent allowance allocation to fossil generation 
would minimize both compliance costs and electricity price 
increases. On the other hand, auctioning allowances would 
increase compliance costs dramatically, without any additional 
environmental benefit. GCA is generally opposed to any auction. 
Allocation of allowances within the electric power sector 
should be based on either historic greenhouse gas emissions or 
historic heat input adjusted for type of fossil fuel combusted.
    We support a safety valve for allowances--a safety-valve 
price for allowances to protect the economy and provide cost 
predictability. For similar reasons, Congress should consider 
mechanisms to ensure that compliance costs are recovered and 
that unregulated fossil generation is not penalized.
    Lastly, Congress should also consider ways to avoid a 
patchwork of State requirements, in favor of a uniform Federal 
program.
    Thank you.
    Senator Bingaman. Well, thank you very much.
    Next is Craig Montesano, with the National Mining 
Association.

STATEMENT OF CRAIG MONTESANO, DIRECTOR OF GOVERNMENTAL AFFAIRS, 
                  NATIONAL MINING ASSOCIATION

    Mr. Montesano. Thank you, Senator. We'll try to meet your 
mandatory requirement today on the time.
    Senator, in our post-Katrina world, the National Mining 
Association believes Congress should consider climate policy in 
the context of energy security, technology development, and 
U.S. economic competitiveness. From this perspective, America's 
abundant supply of coal should be viewed not as a problem to be 
overcome, but as a solution to our growing dependence on 
foreign energy sources, a solution that requires only the 
proper investment in technology to fully realize its potential.
    In fact, clean-coal-based electric generation and coal-to-
liquids technology can play a vital role in addressing both our 
economic and environmental challenges. But this will be far 
less likely if Congress imposes a mandatory cap on greenhouse 
gas emissions. Rationing the use of our most abundant and least 
costly fuel will result in higher costs for U.S. manufacturers 
and consumers, especially in the 26 States that rely on coal to 
generate more than half their electricity.
    Moreover, mandatory control systems in countries where they 
are in place are proving to be unworkable, amassing a record of 
missed targets, bureaucratic uncertainties that retard economic 
growth while yielding negligible reductions in greenhouse gas 
emissions.
    By contrast, America's pro-technology voluntary 
multilateral approach is achieving economic productivity, 
matched with impressive reductions in greenhouse gas intensity. 
The Asia-Pacific Partnership embodies this approach. It is a 
serious commitment by the world's largest energy consumers to 
find long-term sustainable solutions to both clean development 
and emissions reductions.
    Finally, the 2005 Energy Policy Act will greatly enhance 
the positive trends of which I speak, and America's coal 
producers look forward to working with the committee in fully 
implementing the Act.
    So, in conclusion, we hope the solutions proposed at this 
hearing will address the energy and emissions challenge posed 
by China and India, and acknowledge the importance of energy 
efficience and clean coal technologies for reducing America's 
reliance on foreign energy sources.
    Thank you for fostering this constructive discussion on 
climate today.
    Senator Bingaman. Well, thank you very much.
    Kirk Johnson is here, with the National Rural Electric Co-
ops. Glad to hear from you.

STATEMENT OF KIRK JOHNSON, EXECUTIVE DIRECTOR OF ENVIRONMENTAL 
          AFFAIRS, NATIONAL RURAL ELECTRIC COOPERATIVE

    Mr. Johnson. Thank you, Senator Bingaman, Senator Salazar. 
It's a pleasure to be here before the committee.
    My name is Kirk Johnson. I am executive director of 
environmental affairs for NRECA, and I'm here representing the 
930 electric cooperatives around the country who provide power 
to the 39 million Americans, who are not just our consumers, 
but who are also our owners. And so, we come at this from a 
slightly different perspective, being consumer-owned utilities.
    I'd like to address a couple of general policy matters 
before we get to the specifics of your questions.
    First off, I think, very much, Congress got it right last 
year, in the Energy Policy Act, by including the technology-
based programs for our clean coal development and other 
programs to address the climate change issue. It garnered well 
over 60 votes, and we think that is the way forward on the 
climate change issue.
    We also think the administration is getting it right on the 
international front by focusing on the Asia-Pacific 
Partnership. We believe that will be a more productive 
international effort than Kyoto or whatever might be following 
after Kyoto. And so, we think that's also going in the right 
direction.
    It's interesting to note that the Kyoto Protocol appears 
to--or it appears the European countries will not meet their 
targets under the protocol. And it reminds me of a very famous 
quote from Albert Einstein, when he said, ``The definition of 
insanity is doing the same thing over and over again, and 
expecting a different result.'' I don't think we want to do 
that.
    To get to the specific questions posed by the white paper 
that you want to be here to discuss today, we, NRECA, support a 
voluntary technology-based program. And we have not supported 
mandatory climate programs in the past, and nor do we now. But 
if the Congress does decide that additional measures are 
required, we would give a few ground rules for those.
    First, we think any policy must be sound economic policy, 
sound energy policy, sound environmental policy, and sound 
national security policy. We believe any approach must be 
economywide. We think there probably should be a safety valve 
or other type of economic off-ramp. Any approach must include a 
global component. And we firmly believe that allowances should 
be allocated, rather than auctioned, which simply imposes a tax 
on the American economy unnecessarily.
    So, again, thank you very much for the opportunity to be 
here. I look forward to a productive dialogue.
    Senator Bingaman. Okay. Our final participant on this panel 
is David Doniger, with the Natural Resources Defense Council. 
Thank you for being here.

 STATEMENT OF DAVID DONIGER, POLICY DIRECTOR, CLIMATE CENTER, 
               NATURAL RESOURCES DEFENSE COUNCIL

    Mr. Doniger. Thank you, Senators.
    I would like to make two points. First, we're facing very 
real dangers that require urgent action. Most serious climate 
scientists warn that we need to cut emissions at least in half 
by the middle of this century to avoid truly dangerous climate 
impacts. These emissions cuts must begin in the next 10 years 
if we want to pull this off with a minimum of economic impact. 
Delay makes the job much harder.
    As this graph shows, a slow start would mean a crash 
finish. The rate of reductions that would be necessary to 
achieve a given target if we start later becomes much steeper 
and much more economically disruptive.
    Senator Bingaman, you deserve a great deal of credit for 
working towards mandatory legislation, but the bill under 
consideration would only slow emissions growth and postpone 
decisions on cutting emissions for another 10 years. With 
respect, we do not have that much time.
    It is possible to be more ambitious and yet still centrist. 
A long-term declining cap, tracing out the line in the--the 
green line on that chart--would meet the environmental 
challenge and also give businesses clear market signals to 
guide their investments. We have offered an alternative to the 
safety valve--borrowing--which can be used to prevent 
unexpected spikes in compliance costs without breaking the cap.
    My second point is that emissions allowances, which would 
be worth billions of dollars each year, should not be given 
away for free to current polluters, giving them huge windfalls 
at consumers' expense. Rather, allowances should be used to cut 
costs and promote investments in energy efficiency and cleaner 
technology. So, we would recommend that at least half the 
allowances should be used to help consumers invest in energy 
efficiency measures that hold down costs and another quarter of 
the allowances should be used to help industries invest in the 
big change technologies that we need to cut emissions in half. 
And that sum also should be used to help communities adapt to 
the changes that can't be avoided. And we look forward to 
discussing these ideas today and in the future.
    Thank you.
    Senator Bingaman. Well, thank you very much. Thanks for 
your very interesting statements.
    I'm joined by the chairman here. Did you want to ask any 
questions, to start with, or should we just go ahead with 
questions? We've heard from each of the witnesses.
    The Chairman [presiding]. Let's proceed. Thank you very 
much, Senator Bingaman.
    And thanks to all of you for your understanding. I don't 
know what you could do. Maybe you're not understanding, but you 
couldn't----
    [Laughter.]
    The Chairman [continuing]. You couldn't do anything about 
it, because I can't, either. So, I'm back.
    And, Senator, if you'll just tell me where we are, we'll 
proceed.
    Senator Bingaman. Well, we've heard from each of these 
witnesses. And now I think we're ready to present questions 
and----
    The Chairman. Okay, let's go. You start, and I'll follow.
    Senator Bingaman. Okay.
    The Chairman. Thank you very much.
    Senator Bingaman. Let me ask about--one of the 
disagreements that we seem to have built in here is the 
question of, if you do an allocation of permits, on what basis 
do you do it? I pick up that there is a difference of opinion. 
Mr. Bailey, you said, as I understand it, why don't you repeat 
how you think the allocation should occur. I believe, Mr. 
Bradley, you said it should be on an updated output-based 
allocation. And I think that's different from what you're 
suggesting. Mr. Bailey, could you explain whether you disagree 
with Mr. Bradley--and, if so, why?
    Mr. Bailey. Well, Michael and I have a different 
perspective on this. He favors updated output allocation. And 
my group, which is about 20 percent of the coal-fired 
generation in the country, favors allocating emissions--
allocating allowances based on either emissions--in other 
words, if you produced 1 percent greenhouse gas emissions in 
some baseline period, you'd get 1 percent of the allowances. Or 
you can distribute allowances based on heat input, which is 
sort of analogous to that, also.
    Senator Bingaman. You're advocating that, whether or not 
these particular companies actually incur costs. Am I 
understanding that correctly?
    Mr. Bailey. Yes, sir. That's merely a way to allocate 
allowances beneath that cap among the companies. That's exactly 
right.
    Senator Bingaman. It seems to me that a lot of the 
witnesses I've heard from have been in favor of allocating 
these permits in order to reduce the economic impact on 
different entities in the economy. And if you got the ability 
to pass on the additional cost that's imposed, I don't know why 
you would want to--why it would make good sense to give you the 
permits.
    Mr. Bailey. I think, Senator, there are two issues here. 
And I get them confused sometimes, myself. One of the issues 
is, the electricity sector gets a certain number of allowances. 
And that may be what you're talking about. We can address that, 
also. I'd like to address that. The other issue is, regardless 
of the number of allowances, how those allowances should be 
distributed among the companies. So, I was addressing that 
latter question, given some number of allowances. The question 
you raised about how many allowances, let's say, the 
electricity sector should get, we looked at this. We were the 
ones who suggested a 95 percent allowance allocation. And we 
looked at that from the primary standpoint of reducing 
compliance costs and impact on electricity consumers. That's 
the only way we looked at it. We did some very simple math. We 
provided that in comments.
    If you look at EIA's analysis under a National Commission 
on Energy Policy-type program, just pick one year, say in the 
year 2015, the increased fossil fuel costs are about $19 
billion in that year. So, those are costs that somebody's going 
to have to pay for. You can do that either of two ways. You can 
handle those costs either of two ways. For example if you 
auctioned all allowances off--there were no allowances given 
away free--then electricity price's compliance costs would 
increase by $19 billion in that one year alone. So, over, let's 
say, a 10-year period or so, the increased compliance cost 
would be about $200 billion. But I'm just focusing on the year 
2015 right now.
    If fossil generation got a 90-percent allowance allocation, 
which some people mentioned this morning, that cuts those 
compliance costs by a factor of 10, so you've gone from $19 
billion a year in 2015 to about $2 billion a year in 2015. If 
you provide a 95-percent allowance allocation, you've cut that 
again by a factor of two, and you're talking about compliance 
costs of about a billion dollars.
    So, we looked at it merely from the standpoint of reducing 
compliance costs and electricity price increases. That was the 
only reason that we proposed that number. The allowance 
allocation, whether you had 100 percent auction for $19 billion 
or a 95 percent allocation for a billion dollars, none of 
those--all those have the same environmental effect. The 
emission reduction would be the same under those. So, we 
propose that merely as a way to hold down electricity price 
increases.
    Senator Bingaman. Mr. Doniger.
    Mr. Doniger. I think that Mr. Bailey's analysis is based on 
the model of a regulated utility and an assumption that if the 
allowances are given for free, they will not have any economic 
value to those companies and they will not be passed--there 
will not be any increases in electricity prices. Well, we don't 
know that that's the case, in that there is a market value to 
these allowances, and those allowances can be sold, and 
companies can reap a very large windfall.
    We've made a proposal, which would deal with the fact that 
some of the electric utilities are under regulation, and others 
are not. And that proposal would be to give the allowances, in 
either case, to the distribution entities, with a proviso that 
those allowances would be used to pass through savings to 
ratepayers and also to invest in energy efficiency for business 
and residential customers to hold down costs. In a regulated 
scenario, the company may be--it may be vertically integrated, 
so it may be the same as giving this to the generator. But in a 
deregulated scenario, there's a market transfer that will occur 
between the distribution company and the upstream generator. In 
either case, you would be getting the value of the allowances 
into the hands of consumers in the form of energy efficiency 
investments or in the form of lower rates, and we think that's 
a durable way to deal with the distinction between regulated 
and unregulated jurisdictions in the electricity sector.
    Now, that's just the thumbnail sketch of an idea. It 
happens to be quite similar to what Betsy Moler suggested this 
morning. And we would be happy to explore it with the committee 
and with others to see if there's a way to bridge the gap 
between the--those who are talking about this from regulated 
versus an unregulated perspective.
    The Chairman. Mike Morris.
    Mr. Morris. Thank you, Senator.
    First off, 80 percent of the fossil-based generation is 
still regulated in this country. And I would argue that some of 
those States that have deregulated are rethinking their 
approach to that as we go forward. So, the point made by David, 
I'm not sure that that holds water on a wider range.
    The fact of the matter is, credits that are given to 
utilities would defer a cost that, but for that, they would 
have to buy a credit or invest capital in some technology, and 
a customer's electric rates would go up. That's why we did the 
allocation based on the input method when we looked at the 
SO2 and NOx allocation process.
    To touch on one of Michael Bradley's points, to say that 
that would then stop technology from being put in place, 
because we have all these credits, we wouldn't use them, is 
simply wrongheaded thinking. American Electric Power, Duke, 
Southern Company are all going forward with integrated gas 
combined-cycle technology facilities, all of which are 
extremely expensive and very much technologically driven. So, 
even with those credits in hand, we're going forward with that. 
So, part of the premise that is used by Michael, I think was a 
bit of a misstatement. I want to make sure that we get that on 
the record so that people realize how we use those. And to the 
extent that credits were in excess of the actual emissions 
targets that we have, and they were monetized, that goes back 
to your customer by way of a credit to the fuel cost. So, there 
is no gain. If, in fact, you went to an output--to someone who 
incurs no cost, then it would be a huge gain. And if those 
people were willing to credit whatever they got by selling 
those back to their customers as a credit to the fuel costs 
over the overall cost of delivery of electricity, that might be 
a fair way to look at that. But, short of that, it's just an 
economic grab.
    Mr. Bailey. Senator, could I add one thing?
    The Chairman. Where was this? Paul?
    Mr. Bailey. Yes, sir, right here.
    EIA did an analysis of the Energy Commission-type program 
some time ago, and we took a look at that. And we're not the 
first ones to work with a 90- or 95-percent allowance 
allocation. Actually, EIA's results, macroeconomic results, 
some of which were very modest for a program like this, 
compared with other mandatory climate change programs, those 
results were so modest, in part, because EIA assumed a 90-
percent allowance--95-percent allowance allocation through the 
year 2013, and, after that, an allowance allocation of 90 
percent. So, there is a case study in how an adequate allowance 
allocation can hold down these impacts we're all concerned 
about.
    The Chairman. Now, we need the other Michael.
    Mr. Bradley. Yes. Let's make it clear. Input is based, as 
Paul indicated, 1 percent of the emissions, they get 1 percent 
of the allocations. Output, it's--1 percent of the electric 
generation that's delivered gets 1 percent of the allocations. 
Similar to your car. Your car is regulated on a per-mile basis.
    When it comes to some of Mike's comments, what we're 
talking about, from the Clean Energy Group's perspective, is 
allocating in a manner that sends a signal to create and 
continue to grow clean and efficient generation, zero-emitting 
generation, like renewables and nuclear, as well as low-carbon 
generating emission, like natural gas, combined-cycle natural 
gas. We're talking about creating a market signal for 
efficiency, for clean energy, which sends a very different 
signal for investments, going forward, than if you base your 
allocation based on historical emissions. The more you pollute, 
the more allocation you get, is essentially what the basis 
comes down to.
    We have advocated strongly in favor of Senator Carper's 
bill. And in his CO2 title, there's an allocation 
scheme that treats all forms of generation equally, except for 
nuclear. Nuclear is just allocated based on the increased 
capacity that has been added to those facilities since 1990. An 
investment has been made. We would be worse off if it hadn't 
been made, in terms of CO2 emissions today. And keep 
in mind that the emissions--CO2 emissions from the 
electric sector have increased by approximately 27 percent 
since 1990. The portion of greenhouse gas emissions coming from 
the electric sector since--in 1990, it was about 36 percent, 
now it's about 39 percent. So, the sector itself is growing. 
It's meeting demand. It's delivering what it has to deliver. 
But it's not becoming less intensive, in terms of 
CO2 emissions.
    The Chairman. All right. If Paul would take that, one more, 
and then we'll move on to another one.
    Mr. Bailey. Okay. Just to put this in perspective a little 
bit, coal-fired generation, there are 26 States that get more 
than half their electricity from coal. Those are the States 
that these companies operate in, and those are the States we're 
concerned about being harmed economically by the wrong 
allocation scheme.
    The Chairman. Yes.
    Mr. Bailey. I'm about to lose my point here. Sorry, I've 
lost my train of thought here.
    The Chairman. That's fine.
    Fred?
    Mr. Bailey. I apologize.
    The Chairman. If you get it back, put your hand up.
    Mr. Krupp. Mr. Chairman, thank you.
    As I listened to the back and forth about allocation, it 
reminds me that what's really primary here is, what's the level 
of environmental performance, and what's the level of design 
quality, so that we grind down the costs and have the least 
possible cost and the most innovation to the economy? I can 
understand that this allocation issue is going to be very 
important in the weeks and months ahead to your constituents. 
But I think we should bear in mind, it's really secondary to 
the primary issues of environmental performance, the cap, and 
design performance to grind down the costs. And if we keep 
sight of that, there probably is more than one answer to this 
allocation issue in--it's an equitable question, and an 
important one. I don't mean to minimize it, but I do think it's 
secondary.
    Mr. Bailey. I got my thought back, Mr. Chairman.
    The Chairman. Just a minute.
    Mr. Bailey. Yes, sir.
    The Chairman. Fred, secondary in the context you have just 
put it, but maybe not secondary from the standpoint of us 
having to work something out with constituents of our country. 
It may be very primary as to how we're able to allocate. That 
may be our toughest job.
    We could arrive at those others, because in--matter of 
fact, they're not pinching anybody, right? They're theory. 
They're what you'd like to do. They're goals. But when you get 
to the other, people are going to be able to--institutions, 
entities are going to be able to measure what we're talking 
about, right?
    Mr. Krupp. Yes. Mr. Chairman----
    The Chairman. It's difficult.
    Mr. Krupp [continuing]. I understand what you're saying, 
and I completely agree with you. The primary thing that history 
will judge a bill on is the level of environmental performance, 
and, did it drive the cost down? But history will also judge 
the leadership that you, Mr. Chairman, provide, and your skill 
in bringing together parties, and Senator Bingaman's skill in 
bringing together parties, on what I've termed a secondary 
question, bringing together parties behind a cap-and-trade 
mechanism so that there is one, to begin with.
    The Chairman. I understand.
    Mr. Krupp. We need your leadership on that, absolutely.
    The Chairman. I understand.
    Mr. Krupp. And you're expert in that. I don't pretend to 
be.
    The Chairman. I understand.
    Fred, you had a quick rethought? Now, that--when you get a 
rethought, that means it's got to be short.
    [Laughter.]
    Mr. Bailey. We took a look at the Carper bill that Michael 
Bradley likes, did some analysis of it, and we found that that 
penalized coal-fired generation about $3 billion a year, based 
on an output allocation providing allowances for nuclear 
generation.
    Thank you for your patience, sir.
    The Chairman. All right. Okay.
    Ms. Callahan. May I make a comment on allocations, too? I 
mentioned in my testimony that we believe that there ought to 
be a significant share of the allocations set aside for energy 
efficiency and other public goods. RGGI has taken that approach 
and suggested to the States a 25-percent-or-more allocation. 
That is being proposed, because, to the point of cost 
effectiveness, there are measures that can be taken at the end 
use, particularly in the electricity sector, that could be more 
cost effective. And, in fact, the RGGI modeling has shown that 
there could actually be positive impacts to the economy and the 
creation of jobs by setting aside these energy efficiency 
allocations and upping their commitment, in terms of policy, to 
those activities.
    The other thing I wanted to mentioned, that in order to get 
to that, RGGI had to change their modeling. And the modeling 
that we're doing now, in looking at the costs of implementation 
of cap-and-trade programs, often doesn't recognize the benefits 
of energy efficiency and appropriately model. So, the RGGI 
modeling that was done, and the work there, is really 
groundbreaking and can evidence what can happen, in terms of 
using energy efficiency as a cost-effective mechanism.
    The Chairman. Before I give this mike back to Senator 
Bingaman, I was coming next to you on the subject you're 
talking about, because I'm having some difficulty 
understanding, although I'm intrigued, by your suggestion that 
significant reductions in greenhouse gas emissions can be 
realized by marked improvements in our ability to use energy 
more efficiently. I guess I'm just going to ask you, would you 
just elaborate? Where are these savings going to be achieved? 
How do we reduce greenhouse gases, the emissions, and then--
under a mandatory reduction program--and then have it designed 
in such a way that it encourages these efficiencies that you're 
talking about?
    Ms. Callahan. Well, sir, the way that it would operate--and 
it may not be a direct one-for-one--they're indirect emissions 
at the end use. And the way that you're creating--or--the 
emissions reduction is by avoiding the emissions, in the first 
place. You're not using the energy that you once were for the 
same end product or the same good. So, for example, in 
California, where they have employed energy efficiency building 
codes, appliance standards that are greater than they are in 
many parts of the country, they also have very significant 
public benefits funds, public education and outreach programs. 
Their electricity use is about 40 percent less than the 
national average in that State, per capita. So, I'm hoping I'm 
addressing your question on this, but it would be investments 
that would be set aside for energy efficiency improvements at 
the end use by homeowners, by commercial buildings, by energy 
users, electricity consumers, natural gas consumers.
    The Chairman. Okay. Nothing exotic or extraordinary, just 
very straightforward. Some people wouldn't call them 
efficiencies. You do. I understand that. That's good. At least 
I understand what you're saying.
    I have a question to the National Mining Association, and 
then I will go back to you, Senator.
    Craig, the Energy Information Administration, in its latest 
long-range outlook, suggests that the United States will 
require half again as much electricity in 2030 as it now 
consumes. As much as 60 percent of that will be generated by 
the use of coal, which is kind of startling to a lot of people. 
The use of coal is not going to go down during the next 25-year 
projection of American use--going up--even though they're going 
to put some nuclear in, for the first time. We don't know how 
many. They at least show 'em, which is rather incredible, they 
do. How would a mandatory greenhouse gas reduction program 
alter the EIA estimate on the United States and how heavily we 
will remain dependent on domestic coal reserves for electric 
generation? Could you tell us why--that's one. And we'll talk 
about the developing countries, as a second question.
    Mr. Montesano. Okay.
    The Chairman. Could you answer that?
    Mr. Montesano. Thank you, Senator.
    I think the answer to the first question is, it puts us in 
a very bad fix in the United States, as far as energy. You 
mentioned the projections for coal-based electricity use. Now, 
coal-based electricity use since 1970, has increased 136 
percent. By 2020, it's supposed to go up another 36 percent. I 
think that you can just bank on that number getting higher and 
higher.
    The Chairman. Right.
    Mr. Montesano. And that is complicated by another fact, 
that by 2050 there will be 1 million more persons here in the 
United States than there are now. And there will be an 
associated energy demand with that, particularly in the 
residential and commercial sectors.
    Understanding, as we do, some of these parameters, I think 
the problem becomes, then, what an artificial restriction of 
coal does to our domestic energy picture.
    Now, assuming, for a second, that nuclear power isn't quite 
up and running. The siting, permitting, and waste-disposal 
issues haven't been worked out yet. And assuming that 
renewables haven't reached the point where they can address 
that demand. Well, that leaves natural gas. The problem with 
natural gas is, No. 1, the EIA estimated that our domestic 
supplies of natural gas, which are 3 percent of the world's 
proven reserves, are not going to be enough simply to supply 
the needs of the lower 48 States. Well, then, where do we get 
our natural gas from? Well, 58 percent of the world's reserves 
are controlled by Russia, Iran, Qatar, and then, our good 
friend to the south, Venezuela, holds another chunk of that.
    If we are forced to rely on LNG from abroad, I think, 
again, that puts us in a very bad fix, but especially because 
we are competing with China, which is gobbling up petroleum 
left and right. So, I think that a pretty good preview of 
things to come, Senator, was something that happened, I 
believe, in--it was either December of January, where there was 
a deal brokered by a Massachusetts congressman with Citgo, the 
Venezuelan petroleum company, to supply natural gas to the 
State of Massachusetts. Now, I don't think we want to be 
there--as a Nation, I don't think we want to be dependent on 
foreign supplies. In fact, I think we want to enhance our 
domestic supplies. And I think we can do that through clean, 
coal-based electric generation and coal-to-liquids technology. 
And I think that once we realize those technologies, we will 
be, I think, better poised for our energy demands.
    The Chairman. Yes, David?
    Mr. Doniger. Thank you, Senator.
    This doesn't have to be an issue of whether we're going to 
use more or less coal, or more or less of any fuel. It should 
be an issue of whether we're going to use those fuels with more 
or less emissions. And the future of coal is going to be 
sturdier if we get to very low carbon-emitting coal plants, 
like IGCC with carbon disposal, than if we're continuing with 
our only choice to be to build conventional coal plants and 
drive the climate problem to disaster.
    So, that is where we have a huge opportunity, first, from 
having the price signals that come from a carbon cap, and, 
second, from using a good, solid chunk--we recommend at least a 
quarter--of the allowances to go to power companies and others, 
for example, who are prepared to build the IGCC plants with the 
carbon storage, and move that along a lot faster. That's going 
to be good for the coal industry, as well as for the stable 
future of the electric industry. That's the formula for getting 
out of this tradeoff between more coal and more emissions.
    The Chairman. That's true. The problem is that you can't 
get them built.
    Let's move over here. We had some questions. Let's take 
Michael Morris.
    Mr. Morris. Thanks again, Senator.
    Let me try to address that issue. I think it's very 
important that if we have a mandatory cap, that new coal 
technology with the integrated gas combined-cycle 
implementation and ultimate carbon capture and sequestration 
will work for the new coal activities. But let's not forget, on 
the energy demand cycle that you spoke of earlier, not only the 
growth that we'll see between now and 2030, but the physical 
ability to satisfy demand today requires that we keep as many 
of the current coal fleet plants online that we can. And the 
retrofit technology that we're working on through EPRI and 
other activities are heading in the appropriate direction, but, 
to date, a very expensive, and, most importantly, a very 
parasitic amine technology takes about 30 percent of the energy 
production capacity away from a plant. So, if you had 1,000 
megawatts, and you retrofit with amine, and you're down to 700 
megawatts, you've exacerbated, rather than helped, your 
situation.
    With the new ammonia technology that EPRI is working on, 
the parasitic impact is only 10 percent, and that may be a way, 
as that technology continues to develop, that we can do 
retrofit.
    So, I have no disagreement with David and the comments that 
he makes, but we need to make certain we have adequate energy 
to grow the economy of today, let alone the economy of 2030 and 
2050.
    The Chairman. Right.
    Mr. Morris. So, we have to have those plants in the----
    The Chairman. Right. Fred.
    Mr. Krupp. Michael, I'm an American, and I completely agree 
with you, we need to have energy. We need to have low-cost 
energy. But there are some retrofit technologies that are 
available today that are pretty cheap. I was in Kansas not long 
ago and saw farmers that, together, own a million acres of 
land, the Agri-Mark group of farmers. And they are able to 
sequester carbon, about three-quarters of a ton per acre per 
year for 25 years. And I think they'd be willing to sell those 
offsets--I know they would--for quite a modest price.
    This brings me to the fact, we need a robust future for 
coal in this country. There's no question, we've got a lot of 
it. We have to be able to burn it. But one thing that's really 
important as you go forward and mark up a bill is, let's make 
sure there's a robust opportunity for these farmers, who can 
change their practices and provide a retrofit technology today, 
for the burning that's happening today, for very cheap--let's 
make sure that those offsets are robustly available in the 
bill.
    Mr. Morris. Excuse me, Senator, I just want to make sure--
that's not a retrofit technology. That is an offset. And we do 
that through the Chicago Climate Exchange. A number of 
operating utilities are doing just that, creating credits with 
better farming technology. We totally support that. We think 
that's an excellent idea.
    The Chairman. I think we're going to get way off base here 
and have just a general discussion, an argument, about this. 
The truth of the matter is, the utility companies--utility 
companies do know, Fred, what's available for their industry, 
and they aren't going to come here before us and tell us 
something that's not so. They know about the farmers, but that 
doesn't help what the problem is described that they have. 
Farmers--is a great thing that's occurring, and we're proud of 
it, but it doesn't solve the fact they need a bill to move 
1,000 megawatt plants, and they've described the dilemma 
they've got.
    Mr. Krupp. But, in terms of today's capacity, if you set a 
modest limit, it would allow them to continue to operate the 
plants, at very modest costs.
    The Chairman. Yes.
    All right. Now, we're going to move right along here, 
Senator Bingaman, unless you have something urgent. You can 
have a couple, and then we'll----
    Senator Bingaman. I have one question, and it's not urgent, 
but I would ask it, if we've got time.
    David, let me ask your view on this whole issue of offsets. 
I mean, what are appropriate offsets? There's a lot of talk, a 
lot written in these responses to our white paper about offsets 
outside the cap. What do you think is an appropriate offset to 
allow, and what do you think is not?
    Mr. Doniger. Thank you, Senator.
    First, in the draft bill that you have developed, you've 
proposed--and we think this is a good idea--that a slice of the 
allowances should be dedicated to--as a reward for offset 
activities, such as Fred described, and encourage those 
activities with a slice of the allowances from within the cap. 
Where we get concerned is with the idea that offsets would coin 
new allowances beyond the cap, because the prior experiences 
that we've had with this--and this goes back almost 30 years, 
through several different variations of the Clean Air Act--is 
that it's very, very difficult to ensure that offsets are 
really additional to what would have happened anyway.
    We've seen, in the Energy Policy Act's 1605(b) Program that 
electric utilities, in particular, have registered with DOE 
millions of tons of supposed reductions that really represent 
no difference in the business-as-usual activity. And sorting 
out the rules for how you would tell what's a valid offset has 
been an impenetrable problem. But funding them from within the 
cap means that the environmental cap is maintained, and we 
support that. We think that's a great way to get incentives to 
the farmers for biofuels and for soil sequestration and so 
forth.
    But there is also a bit of a dilemma here. We rely on the 
market signal from the cap to generate incentives for 
innovation to drive new technologies. On the other hand, if 
there's unlimited offsets, and you have a near-zero price of 
carbon, where was the incentive to develop new technologies?
    Senator Bingaman. Let me just do one follow-up and ask, 
Michael Morris referred to the Chicago Climate Exchange--they 
have a system for permitting offsets and verifying offsets. 
How, in your view, does that work, if you're familiar with 
that? Is that designed in a way that you think makes sense, or 
not?
    Mr. Doniger. Well, I don't want to speak to all the rules 
that the Chicago Climate Exchange uses, but I do believe that 
if you tried to scale up what they're doing from--when you're 
dealing with pilot programs, you can give the kind of care and 
attention that it takes to vet these offsets, but when you try 
to mass produce them on a big scale, especially when both the 
providers and the potential users have an interest in the 
largest number of offsets at the lowest possible price, you end 
up with a quality-control program--problem. You end up with it 
being very difficult to ensure that the offsets are really all 
they're cracked up to be.
    And the international treaty, the CDM, which you heard 
about earlier, they're really struggling with that, because 
they have a international board to try to vet the quality of 
the offsets, and there's lots of complaints about bottlenecks, 
``Why are you scrutinizing this? Just let me go, let me have 
this, let's get going.'' And the quality starts to go down as 
the volume goes up.
    So, we don't have a great solution to that, but keeping 
things within from--the reward coming from within the cap puts 
a discipline on this that would really help ensure that quality 
and keep the numbers from going out of control.
    Mr. Morris. Senator, if I just might add, because we're one 
of the founding members of the CCX, it is an audited event. For 
a farmer to say he's created 1,000 credits, that activity 
actually gets audited to ensure that they're real. I couldn't 
agree with David more, no one wants to create credits out of 
whole cloth. And the utility industry has not done that. I 
think he made that statement. That's just absolutely wrong. 
And, to Senator Domenici's comment earlier, to what purpose 
would we do that, to be hammered for doing something that's 
wrong? Not going to happen.
    So, the larger the program gets, the more difficult the 
audit is to make sure that someone who says, ``I've got a 
credit''--because he's gonna be paid for that--and we're not 
going to send them money unless we're sure that there's a real 
credit that's been created. And having it above or below a cap 
is immaterial as to its reality. So, I think the logic is 
missing in David's comments.
    Thank you.
    Mr. Krupp. Mr. Chairman, might I just mention one thing, 
constructively, that you all could do, even before you mark up 
a bill, and that would be to direct the Federal agencies to 
come up with standards, both for geological sequestration, 
where there are similar problems, that things can leak, as well 
as for agricultural and forest offsets. I think that could be 
done right away, and that would be terrific.
    I, for one, hope that this problem is so big that if 
there's the potential--the greenhouse gas problem is so big 
that if there's the potential for cheap carbon credits by 
allowing farmers and foresters to play, that will let them play 
and make sure, of course, that the credits have integrity--by 
one study, as much as 146 million metric tons are available in 
our agricultural industry, enough to get us a third of the way 
back to 1990 levels, if we just set up the cap and write the 
rules. That's very promising.
    The Chairman. I know we're supposed to be finished, but, 
you know, what Senator Bingaman and I have been toying with is 
a proposal that has a safety valve in it. And some of you have 
commented that you didn't think the concept was a very good 
idea. Now, if you did think it was a good idea, don't comment 
now.
    [Laughter.]
    The Chairman. We don't need no more of that. But for any of 
you who didn't think it's a good idea, or don't, you can have a 
couple of minutes here to tell us why. So, we're going to do 
that, if you put up your hands.
    Mr. Montesano. Mr. Chairman?
    The Chairman. Yes?
    Mr. Montesano. The one problem that the National Mining 
Association has with the idea of a safety valve is that it's 
part of a larger compliance problem with mandatory bills that 
eat into funding that would otherwise be used by companies to 
conduct research and development. And a healthy economy is one 
that's actually going to lower emissions more than an unhealthy 
economy. And we think that safety valve as part of a 
bureaucratic--part of a compliance regime, would be problematic 
for us to work with.
    The Chairman. I don't get it. I don't get what you're 
saying. Can you try it again?
    Mr. Montesano. If companies are paying--you know, basically 
paying for compliance costs, and the costs of meeting, you 
know, the standards set forth in a mandatory problem, that's 
money that they can't use otherwise for R&D. I think that's the 
problem that we have with it.
    The Chairman. Well, a safety valve doesn't say anything 
about that. It says that, at some point, after you've done 
that, if it isn't working, we'd cut it off.
    Mr. Montesano. Well, the safety value also--remember that 
EIA did a study on the safety valve, and the safety valve 
drastically increases in prices over the years.
    The Chairman. Fred--David?
    Mr. Doniger. Senator, I appreciate your asking this 
question. There's two cost-control issues that I think a safety 
valve is intended to deal with. One is the instability in 
prices, the chance that you'll have a price spike, unexpected 
problems, in the short term, that would--sorry.
    The Chairman. Hold it a second.
    Mr. Doniger. Yeah.
    The Chairman. Okay, thank you. Thank you. Go ahead.
    Mr. Doniger. If I may, there's two cost issues that I think 
the recommendation for a safety valve is trying to deal with. 
One is the instability in prices. It could spike up and down, 
not be stable. Short term problem.
    The Chairman. Right.
    Mr. Doniger. The other problem is a sort of long-run issue. 
If you knew what the price was, it still might go up, or it 
might go down, depending upon how technology develops.
    Well, the first problem seems to be, really, the dominant 
one. People react to price spikes. If you had a long-term 
carbon cap, such as we were suggesting there, then you could 
have both banking, which is already built into your program--
people do things early, as a hedge against future price 
spikes--and borrowing, which would allow them to do things 
late, as a way of dealing with price spikes. If you had banking 
and borrowing, you would not have price spikes. You would have 
a long-term stable price. It would be affected by what the real 
cost is of meeting the cap.
    And so, what we're proposing is that you consider using 
borrowing as the main cost-control tool, and the safety valve 
becomes a trigger for Congress thinking, every 5 years or 10 
years, ``Is this thing--in light of the science, in light of 
international cooperation, and in light of the costs, is this 
thing too weak or too strong?'' and use the periodic review, 
informed by the prices, to decide what you should do. But don't 
have an automatic safety valve that breaks the cap.
    The Chairman. Okay. Now, Craig, you have the luxury of 
playing the chairman. See, if you were me, you could have said, 
to me, ``You don't get it''----
    [Laughter.]
    The Chairman [continuing]. Instead of the reverse, because 
I didn't get it. I got it now. And I thank you for your answer.
    Okay. I understand. We're going to go on now to the next 
group. Thank you, everybody. It's been a great session.
    [Recess from 3:40 to 3:47.]
    The Chairman. All right. Are we ready to start? One, two, 
three, four, five. Is that right? Six.
    All right. This is our fourth panel. And we are pleased to 
have you.
    This is the Trading and International Competitiveness 
Panel, and they're responding predominantly, as I understand 
it, to questions 3 and 4 of the white paper. That is, ``Linking 
and Developing Country Action,'' correct? Should a U.S. system 
be designed to eventually allow for trading with other 
greenhouse gas cap-and-trade systems around the world, as 
Canadian Large Final Emitter system or European Union? And, 
question 4, if a key element of the proposed U.S. system is to 
encourage comparable action by other nations that are major 
trading partners and key contributors, should the design 
concepts in the NCEP plan, to take some action and then make 
further steps contingent on a review of what these other 
nations do, be part of the mandatory market-based program? And, 
if so, how?
    American Electric Power, Michael Morris, you're first.

STATEMENT OF MICHAEL MORRIS, CHAIRMAN OF THE BOARD, PRESIDENT, 
      AND CHIEF EXECUTIVE OFFICER, AMERICAN ELECTRIC POWER

    Mr. Morris. Thank you very much, Senator. And since I was 
on the last panel, I won't have to thank you for the chance to 
be here, but I'll do that anyway.
    I want to specifically--because I know that the 2-minute 
warning will get to us in a hurry, talk specifically to the 
questions.
    As to question 3, we absolutely believe that it should 
ultimately be linked to other trading programs on an 
international basis, as well as a much broader and more 
flexible creation of potential credits. The farming things that 
we just heard about, a panel ago, would apply to any country 
that is dedicated to agriculture. So, creating credits in other 
environments and using those as part of an international 
trading platform, I think would be an excellent way to go on 
that question.
    As to the other, developing nations being involved, it's 
essential. If you truly believe that the goal here is control 
of the greenhouse gas growth worldwide, then you have to have 
the world involved in it. And if we don't do that, we find 
ourselves in very awkward positions. We believe very strongly 
in that. However, we do not believe in the current paper 
concept of having a two-tier, ``We'll get started, and if they 
come along, great; but, if they don't, then Congress will 
reconsider and throttle back.'' I've lived through some of 
that, and the likelihood of that happening is probably very, 
very small.
    So, I would go into the program either with an absolute 
commitment, like the Byrd-Hagel undertaking of some years ago, 
and, if not that approach, at least set up an automatic ratchet 
down if the other countries don't act in the way that they are 
committed to or the way that we would hope that they would.
    Short of that, I think what we'll find is a period of time 
when, in fact, America is doing the things that it's committed 
to do, and others are not, with the associated economic impact 
that that would have on the manufacturing base of this country, 
when our manufacturing competitors are just, willy-nilly, going 
on their way. So, I would think automatic, rather than 
reconvene, reconsider--that would be a good way to go.
    Thank you very much for your time.
    The Chairman. Thank you very much.
    Michael.

  STATEMENT OF MICHAEL WALSH, SENIOR VICE PRESIDENT, CHICAGO 
                        CLIMATE EXCHANGE

    Dr. Walsh. Thank you, Senator.
    If Congress considers it appropriate to pursue legislation 
in this area, we think that you're going to want to ask the 
following question, what really works out in the field? And, 
since 2003, the members of the Chicago Climate Exchange have 
formed not only the first North American market, but the first 
international greenhouse gas reduction and trading program, 
that includes all six gases, agricultural and forestry offsets. 
And, indeed, this market, if--as a country, would be the second 
largest emission group under cap-and-trade in the world. It's a 
diverse market. And the good news is, it works, and it works 
well, now, on an international basis.
    Now, we've brought to the design of this program a lot of 
hands-on experience, a couple of decades of experience working 
with these markets, SO2 auctions we administered, 
and so on. We also operate the largest carbon trading system in 
Europe, the European Climate Exchange. And that is another 
dimension of the international market that's in place now.
    CCX members take a legally binding commitment to cut 
absolute emissions 4 percent over 4 years, 6 percent by 2010. 
They use standardized rules to measure and qualify emissions, 
all subject to independent audit. It's a comprehensive rules 
system involving a registry, a trading platform, and predefined 
project-based domestic and international offsets for 
agriculture, methane, and forestry. So, the international links 
are in place now.
    We've got about 140 very diverse members, but my input 
today really reflects the views of the exchange, and not those 
members, members such as Ford and DuPont, American Electric 
Power, Baxter, Tampa Electric, Waste Management, Rolls Royce, 
International Paper, IBM, many international companies. We've 
got cities, like Chicago, Oakland, and Portland. The State of 
New Mexico, the first State to take the commitment to reduce 
its own emissions, taking that leadership action.
    The Iowa Farm Bureau is, right now, aggregating hundreds of 
thousands of acres of farm--and selling the credits as a new 
crop in the market. So, it's working now.
    Let me close with some key lessons that we think are useful 
for informing any policy discussion.
    First, learn from proven methods. Use existing measurement 
and verification protocols, and don't reinvent the wheel.
    Second, keep it simple. We asked all of our members to 
simply take a 4 percent emission cut. Why define major winners 
and losers?
    Third, standarized offset rules work, and can work in the 
international context.
    Fourth, the market should, and can, define and credit early 
emission reductions. The market concept works now. We should 
build international linkages, from the outset.
    And I look forward to discussing some ideas for making that 
happen in the open discussion.
    Thank you, Senator.
    The Chairman. Now, yours is voluntary.
    Dr. Walsh. Voluntary, but legally binding. They sign a----
    The Chairman. Oh, you have----
    Dr. Walsh [continuing]. Contract once they join the 
exchange. That's correct, Senator.
    The Chairman. Yeah.
    Now we're going to take Rafe.

            STATEMENT OF RAFE POMERANCE, CHAIRMAN, 
                     CLIMATE POLICY CENTER

    Mr. Pomerance. Thank you, Senator. And thank you for 
holding this conference to elucidate the debate----
    The Chairman. You're welcome.
    Mr. Pomerance [continuing]. And your structure, hopefully, 
of a real mandatory system.
    I want to answer the questions 3 and 4 in the context of an 
overall program. And, briefly, what I believe, and the Climate 
Policy Center believes, that that program should be economywide 
to capture all emissions and level the playing field. Second, 
it should be upstream-regulated--the point of regulation should 
be upstream, for simplicity. Third, there must be a safety 
valve to protect the economy. Fourth, there should be linkages 
in this program to actions by key developing countries to 
ensure global progress. And, fifth, and finally, there should 
be wise use of allowances for a number of different purposes; 
not just compensatory purposes, but purposes of solving the 
climate problem and protecting the treasury.
    Now, having said that, a number of these elements were 
present in the Bingaman amendment of last year, and in the 
Udall-Petri bill that was introduced in the House last week.
    On question 3, should we design the system to be 
compatible? At this time, my answer is no. The Kyoto Protocol, 
of which I was a negotiator, is quite different than the system 
that I advocated, in terms of an overall program. And, in 
particular, the safety valve makes them incompatible. And the 
other part I'd just say is that, if that were to happen, it 
would require, I would sense, an enormous amount of 
international negotiations to make it work. But it doesn't--
they're actually literally incompatible in important ways.
    On the developing-country linkage, the answer is, yes, that 
a first step by the United States, with a safety valve, with an 
escalator, that escalator could be linked to ensuring that it 
would rise at a certain rate, but only if developing-country 
actions in key developing countries passed the test by the 
executive branch. In other words, we would create an incentive 
for China and India to take comparable actions, by saying, ``We 
will take the first step, but we'll only go so far, unless you 
respond.'' And it's possible, in fact, to use some of the 
allowances to help them make the changes that are required.
    Did I hit 2 minutes? Thank you.
    The Chairman. Fine. You did very good.
    Mr. Pomerance. Thank you.
    The Chairman. Richard.

   STATEMENT OF RICHARD ROSENZWEIG, CHIEF OPERATING OFFICER, 
   MEMBER OF INTERNATIONAL CLIMATE CHANGE PARTNER, NATSOURCE

    Mr. Rosenzweig. Thank you, Senator. Thank you, Senator 
Bingaman, Chairman Domenici.
    In addressing questions 3 and 4, very briefly, 2 minutes--
I've never been limited to 2 minutes before, so I'll talk fast.
    With respect to linkage, we would think that you'd want to 
create the opportunities to develop a program which has 
opportunities for linkage. And it's for a very simple reason. 
You want entities to be able to buy, sell, trade with each 
other. It's the comparative advantage of trade. The more 
sources that are participating, and the more opportunities 
there are, the more it will drive down costs and facilitate 
reductions in environmental activities.
    This is no different than the reason for an economywide 
program--to bring transport into an economywide program, as 
opposed to just regulating a couple of sectors. You have those 
economic benefits.
    There are several issues that have to be considered in 
doing this. The cost cap is one. It can have a perverse effect 
with respect to potential arbitrage opportunities across 
boundaries. It's going to have to be considered.
    Second, compliance instruments. All the various legislation 
allowed different types of instruments to be used by regulated 
entities for compliance. This, once again, creates 
opportunities for different types of activities that may or may 
not be what a country had in mind.
    Last, we'll call it comparability of effort. Some 
governments just simply are not going to allow linkage with a 
country who they--whose target is far less stringent. They are 
not going to want to allow that government's regulated firms to 
be sellers in such a market.
    The other types of linkage with respect to developing 
countries. Right now, that's being done through the project-
based mechanisms. The United States can do one of three things. 
I can, sort of, allow U.S. firms to buy certified emission 
reductions, which--according to the international standards, 
or, I think, to actually play a leadership role in this area, 
there is an opportunity for the United States to create new 
standards for domestic offsets that can actually inform the 
debate post-2012, in the first commitment period of the Kyoto 
Protocol.
    Thank you.
    The Chairman. Thank you.
    Eileen.

      STATEMENT OF EILEEN CLAUSSEN, PRESIDENT, PEW CENTER

    Ms. Claussen. Thank you, Senator Domenici, Senator 
Bingaman.
    I'd like to address the issue of the comparability of 
national efforts by disentangling two distinct, but related, 
objectives. First, achieving adequate action by all major 
emitting countries, and, second, protecting U.S. firms against 
competitive impacts.
    The first of these objectives is best achieved through 
multilateral commitments, engaging all the major greenhouse 
gas-emitting nations in a fair and effective long-term effort. 
Twenty-five countries account for 83 percent of global 
emissions. Engaging these major economies requires a flexible 
framework that allows different countries to take on different 
types of binding commitments. We believe the United States 
should play a leadership role in developing such a framework.
    But ensuring broad comparability at the national level will 
not necessarily achieve the second objective, protecting U.S. 
firms against competitiveness impacts. It's not the 
competitiveness of the U.S. economy as a whole that is at 
issue. To the degree that there are competitiveness impacts, 
they will fall on specific sectors, energy-intensive industries 
whose goods are traded internationally. These sectors might 
remain vulnerable, even if efforts by all major emitters are 
broadly comparable, because countries could choose to exempt a 
given sector from controls, giving that sector an advantage 
over the foreign competition.
    At the international level, one way to ensure a level 
playing field is to establish multilateral agreements along 
sectoral lines. These could be one element of a flexible 
framework.
    At the domestic level, in designing a national cap-and-
trade system, we should set the caps at modest levels, allow 
offsets, and grandfather allowances in a way that protects 
vulnerable firms or sectors. We could also dedicate funds, 
possibly by auctioning a portion of allowances, to provide 
technology assistance to affected industries and transition 
assistance for their workers.
    Let me just say, in closing, that the single most important 
step the United States can take to encourage stronger efforts 
by other countries is to begin in earnest to address our own 
greenhouse gas emissions.
    Thank you very much.
    The Chairman. Thank you very much, ma'am.
    Jonathan.

STATEMENT OF JONATHAN PERSHING, DIRECTOR, CLIMATE, ENERGY, AND 
          POLLUTION PROGRAM, WORLD RESOURCES INSTITUTE

    Dr. Pershing. Thanks very much, Senators. It's a pleasure 
to be here.
    My name is Jonathan Pershing, and I am the director of the 
Climate, Energy, and Pollution Program at the World Resources 
Institute, which is a nonpartisan research and policy think 
tank here in Washington.
    I think that this discussion in the conference, and the 
effort, is at a critical time. Science is clearly telling us 
that action is urgent if we're to forestall the climate 
problem.
    I'd like to make several points based on our submission and 
the analysis that we've done.
    The first, we can learn a lot from existing programs. We 
have a series of U.S. programs--the SOX, the NOX 
program, now the RGGI program; we have the CCX program. We also 
happen to have the advantage of the EU program, and those 
lessons are ones that apply here, even though they have 
somewhat different circumstances.
    On the international side, clearly international action has 
got to happen. According to the U.S. Energy Information 
Administration, in 25 years from now, in absolute terms, the 
United States is going to have more growth in its emissions 
than India, Russia, Korea, Mexico, and Brazil, combined. And 
it'll be about the same time as--size as China, which has four 
times our population. So, to give you some sense of scale, it's 
quite critical. But we can't just, therefore, wait for them to 
act. We're 20 percent of the problem. We've got to act, 
ourselves. And the issue of the technology drivers that you can 
create become a central part of the future. If this is a 
technology program, as this morning's panel indicated, we 
clearly need to move that forward. And others are ahead of us 
in that curve.
    I'd like to make a brief point about linking. In principle, 
it's very desirable. The economics of markets means that the 
more countries and the more players we have, the lower the 
price is going to be. But not all markets are legally and 
equally robust. We need to have institutional integrity. That 
means systems where compliance rules are strong, trustworthy, 
where reporting is open and transparent, and monitoring and 
verifications assured. That may not apply to all developing 
countries, if any. And we should not be bound by that.
    And, finally, if I say that we need to have China and India 
in, that's quite clear. But it does not mean they need to do 
the exact same thing that we do. Something different might 
reasonably apply. It may not be a market in trading, it may be 
a system of offsets for project-based activities that we can 
look to.
    Thank you.
    The Chairman. Thank you very much.
    Senator Bingaman.
    Senator Bingaman. Well, thank you all very much. Very 
interesting testimony.
    Let me ask Michael Walsh, first, and maybe then Michael 
Morris. You folks have been doing this for about 2 or 3 years 
now--3 years, right?
    Dr. Walsh. Almost 4, sir.
    Senator Bingaman. Nearly 4 years. And you have in place a 
legally binding system, which you believe is reducing 
greenhouse gas emissions--as having the effect of reducing 
greenhouse gas emissions that would otherwise be produced by 
your members. And the AEP is a member, as I understand.
    What would be wrong--as at least a theoretical basis--what 
would be wrong with just taking what you have come up with, by 
way of requirements for your members, and essentially mandating 
that everybody in the country comply with those?
    Dr. Walsh. Well, to be clear, Senator, it's not that we 
believe the emissions are down. The independent audit body, 
NASD, which is a congressionally sanctioned entity, has 
verified to us that emissions are down faster than we have 
required under our commitments. And at very modest cost, I 
might add. So, these are audited, and those numbers are 
adjusted for dispositions of facilities. So that, on a real 
basis, these emissions are, in fact, down.
    Senator, it's up to our elected officials to determine 
whether it's appropriate to apply that structure. It's a very 
conservative structure. We don't give out as many credits to 
farmers, as some people have quoted in the numbers today. We 
discount our offsets quite frequently, to be extremely careful. 
Maybe we could be a little bit more liberal. We have some 
safety valves in the system that may not be appropriate for a 
national policy. But, by and large, we strived, with our many 
members who helped us to design this, to have a functioning 
system that is a respectable and credible and serious audited 
system. So, we think it may offer useful insights for 
policymakers here and around the world. I want to emphasize, we 
had members from Brazil sign a legally binding contract to 
reduce emissions, members from Canada, members from other 
countries.
    Senator Bingaman. Well, let me ask a, sort of, follow-up. 
The cost of a permit to emit a ton of carbon in your system is 
about $2.50, right?
    Dr. Walsh. Yesterday's close was about $3, so a farmer in 
the Midwest is getting about $1.50 an acre per year in his new 
environmental service crop.
    Senator Bingaman. Okay. Now, the cost in Europe to emit a 
ton, on the European Exchange, is about $30.
    Dr. Walsh. That's correct.
    Senator Bingaman. What would the cost--of course, there are 
many differences. One obvious difference is that in Europe, 
their system is mandatory. It applies to a specific segment of 
the economy. What would be the cost--what would happen to the 
cost of a permit to emit a ton of carbon in your system, with 
your requirements, if it were mandatory for everyone in the 
country?
    Dr. Walsh. Well, as an exchange official, Senator, you 
probably can understand I really can't make a conjectural 
remark about where price might go. We have many----
    Mr. Morris. Sarbanes-Oxley?
    Dr. Walsh [continuing]. We have many professional 
marketmakers and entities that have a position in the exchange. 
It would be a function of, does new supply in the market come 
in faster than new demand? And we have opened the market to all 
six greenhouse gases, so that IBM or Waste Management can cut 
fluorocarbons and methane at very low cost. And as we--if we 
saw a signal towards a bigger market, instead of having half a 
million acres of farmland enrolled now, we might be out in 
Curry County getting all kinds of ranchers and grazing land 
enrolled, as well, and landfills in Las Cruces, as credit 
suppliers. Many people were hesitant to get involved in the 
market, on the sell and the buy side, until they saw that it 
was working. So, it's impossible to say, and I couldn't. Even 
if I had a hunch, I wouldn't be able to reveal it to you, sir.
    Mr. Morris. Senator, if I might just add to your question, 
because I think it's an important one, the fact of the matter 
is, the Chicago Climate Exchange is voluntary, and that's the 
appeal to people like Ford, IBM, DuPont, and American Electric 
Power, and others. And it does work. The notion--to Senator 
Domenici's question earlier, you volunteer to get involved, 
but, once involved, you've signed a legally binding contract 
that, if you fail to live up to, you're in violation of the 
NASD standards, and you'll be on the--you know, above the fold 
in the Wall Street Journal for being someone who did a 
fraudulent activity. So, it has with it the beauty of the 
integrity.
    And, to the point that was asked in the earlier panel, 
about the auditing of the actual creation of the credit, very 
important. If you took your program and made it nationwide, it 
would work. I know it would work. The price, unknown. If we had 
allocation of credits, because that would be part of the way 
you'd create it, we would surely step up into the $8 or $9 or 
$10 a ton. If you put your safety valve in, that might work to 
suppress that price as we go forward.
    But what American Electric Power stands for, and, I think, 
what we all hope, is that voluntary actions will really lead 
this country in the right direction. The Asia-Pacific activity 
that we did in Australia--I happened to be there when we did 
it--China and India were there trying to learn from us and 
others, from Japan or from Korea and from Australia, what 
they're doing, how--what we're doing to control greenhouse gas 
emissions. And those are the kinds of things----
    So, mandatory, without those huge emitters in the game, 
takes the American economy and puts a real damper on it, going 
forward. And, again, we need to have them in a Reagan-like 
``trust and verify'' program. And if we're going to have that, 
``we start first,'' it has to be an automatic step down if they 
don't live up to their end of the goal, or we'll be, again, 
economically behind the eight ball. But, your idea would work, 
I'm certain of it.
    The Chairman. Now, let's move over and ask some of you.
    I'm constantly amazed to read the views of people that say, 
``If we'll just do something, Chinese will do something.'' And 
the other day I read a very long dissertation about China, in 
which they said the very opposite, just--they took the position 
in--exactly the opposite of that. Can any of the four of you 
just talk to me a little bit about----let's just take China. 
It's clear that China is a controlled environment, in terms of 
economics. They decide they're going to buy nuclear 
powerplants, they place an order for 20, right? No horsing 
around. They figure how many new powerplants they need, and 
they say this, and they tell somebody, ``Locate 'em, and build 
'em,'' right? ``We don't care how dirty it is, or what.'' So, I 
assume it's the same if they decided to change their mind on 
pollution. Would you agree, Rafe? They could fix it, and they--
if they wanted to?
    Mr. Pomerance. I'd just give my view on this. Everyone has 
tried to predict what the Chinese or the Indians would do in 
the future on this problem. What is their behavior going to be? 
And their per-capita incomes are very low, so the usual answer 
is, ``Not much,'' because they're unwilling to spend capital. 
Well, how do you answer the skeptics' question? The way we 
would--we certainly know that they're not going to act if we 
don't act. That would be pointless, just as we say it's 
pointless for us if they don't. We're much wealthier, we have 
the ability to act. So, what--how might we do this?
    Our suggestion is, the United States takes the first step, 
but within that step is a review to examine what the Chinese 
have done in response. And if they don't measure up to the 
standard that we create, we don't go further. That would induce 
the possibility of a negotiation. I think that all 
governments--with what I understand about the climate system, 
the way it's going, all are going to be subject to incredible 
international pressure to act in some reasonable fashion as 
time goes on. And I include the Chinese. I was in--present in 
the--many meetings, and there are many domestic measures--I'm 
no expert--that the Chinese have taken, for their own reason, 
to date.
    Thank you.
    Mr. Rosenzweig. A couple of things. I think anyone who's 
looked at climate knows that you're not going to address the 
problem over 100 years without the Chinese, other large 
developing countries coming into the system. But I think it's 
important for the United States to, sort of, step back and, 
sort of, recognize what the Chinese, I'm sure, have said to all 
of my colleagues, former negotiators here, is that the 
developed world is responsible for about 80 percent of the 
concentrations in the atmosphere. So, that may warrant the 
United States taking the first step.
    I'm just going to, sort of, take one other point here, 
which is, we did a lot of work with respect to metrics in 
evaluating countries' performance in dealing with climate 
change. And we developed a series of economic, environmental, 
and technological metrics in order to evaluate that. And we 
looked at four developing countries. We looked at China, India, 
Mexico, and Brazil, for obvious reasons, given their size. And 
so, I think to take this to write legislation that says, ``The 
United States will look and then determine how to go forward,'' 
probably needs to be done in a fairly general way, because it's 
very complicated.
    And here's the results of just looking at their 
environmental performance. China's performance, from the 
dataset we had, improved their emissions intensity by about 45 
percent, I believe, over 10 or 15 years; their absolute 
emissions went way up. India's emissions intensity improved 
much less; their absolute emissions went way up. Mexico's 
emissions intensity improved; their absolute emissions went way 
up. Brazil, who probably has done more than all of these 
countries, from a climate perspective, emissions intensity did 
not improve, because they have this little problem of having no 
water, so they use a lot more gas to generate power.
    So, looking at metrics is an awfully difficult, complicated 
thing to do, and it's also important to note that the Chinese 
improvements were mostly based upon economic reforms, taking 
subsidies out of the economy, not addressing climate. So, as 
you look at metrics, I think it's important to, sort of, stay 
general.
    The Chairman. Before you get rid of the mike, you would 
agree, however, would you not, that if they decided they wanted 
to--they are the kind of governance and economy that could just 
get it done?
    Mr. Rosenzweig. I think there's going to be several ways 
that developing countries can play in this system. It's going 
to have to be determined through international negotiations.
    The Chairman. Yes.
    Mr. Rosenzweig. I think Jonathan's comments have that about 
right. But, yes, I think there are certainly things----
    The Chairman. I'm not talking about negotiations, but just 
as a matter of--we have a harder time accomplishing it than 
them. That's why we're doing all of this.
    Ms. Claussen. Yes.
    The Chairman. They wouldn't have to have all these 
meetings, right?
    [Laughter.]
    Mr. Rosenzweig. They might be more efficient, from a 
governance perspective.
    The Chairman. Well, they just tell somebody to do it, 
right?
    Ms. Claussen. Yeah. I mean, if I could just make a couple 
of comments. We just completed a dialogue with 25 individuals 
from 15 countries with seven companies, so it was a real mix of 
people, to try to figure out what kind of arrangement we could 
have, post-2012, sort of after Kyoto was over, to, sort of, 
think ahead. And we had a couple of people there from China, 
also from India and Brazil, and a lot of American companies, 
and actually some Senate observers, as well. So, it was mixed 
group. And I think there was great willingness on the part of 
everyone to consider something, post-2012, that is broad, 
flexible, allows them to do different kinds of things, as long 
as they are meaningful and verifiable. And the Chinese were 
right there.
    So, I really believe that if we were to try to do something 
ourselves, and then move forward we would find them willing to 
do some things that would also be meaningful.
    The Chairman. Jonathan.
    Dr. Pershing. Just two additional points, perhaps, to add. 
The first one is, if one compares India and China--because 
those are the two that you frequently look at--I'd just take 
the example over the past 25 years in electrification. India 
currently has about 500 million people who do not have access 
to electricity. Twenty-five years ago, China had the same 
number. Today, still the same 500 million in India, only about 
10 million in China.
    The Chairman. Really?
    Dr. Pershing. So, you can get some sense about--as you--
just very directly answering your questions, Could they do it? 
I believe they could do it. It doesn't necessarily mean that 
they would adopt a program the same as ours. It could mean that 
they do things for reasons of energy security, which we clearly 
have as a priority, as well, that deal with things like 
transport efficiency. They have just done this massive push to 
gas, which is having the same size net reductions as the 
current combined offset projects around the world, one dash-to-
gas in China. So, you see these fundamental opportunities that 
they could meet. So far, they have not. And, in fact, they have 
rejected the idea of adopting a trading program.
    I would suggest that an area that you could support would 
be to push, for example, the State Department to be your 
interlocutor. You can get a judgment as to how effective or 
valid or valuable relative and comparable efforts have been.
    The Chairman. Senator Bingaman.
    Mr. Rosenzweig. China's also become the largest seller, as 
well, of project-based offsets in the world.
    The Chairman. All right.
    Mr. Rosenzweig. In one year, they have decided they wanted 
to do this, and they're, by far, the biggest seller.
    The Chairman. Okay.
    Senator Bingaman. Let me try to understand how the various 
permits or allowances--I guess the words are, sort of, used 
interchangeably in this process--but how these international 
markets would relate--those allowances that are generated in a 
system in this country that has a safety valve, how that would 
relate to what is generated in Europe, which has no safety 
valve, with what is generated on the Chicago Climate Exchange, 
which has no safety valve, how--I mean, if there were some kind 
of world market for allowances and permits, is it clear that 
there's a clearing mechanism for those different types of--and 
different-valued permits? Dr. Walsh, you're the expert on that.
    Dr. Walsh. Well, you've got a lot of expertise here today, 
sir.
    I just spent the weekend in Europe with a roomful of some 
of the very top energy and emissions traders throughout the 
continent, and they're eager to see U.S. leadership--in part, 
because they know that we would pursue a more flexible, six-
gas--perhaps a little more comprehensive offset system than 
what the European system allows now. So, where we're going and 
how those markets will interface is difficult to predict.
    Currently, the Chicago Climate Exchange accepts 
international credits from the Clean Development Mechanism and 
from the European Union allowance system. We are at a 
significant price differential. How that would pan out if we 
opened up our markets to international trade is difficult to 
predict. However, if we did see something like a $7 or $8 price 
gap in the United States, and the European demand was strong at 
$30, clearly the credits would flow to that higher priced 
market. All else constant, whether it be business relationships 
or credit or payment worthiness issues, putting those aside, 
the markets would seek out the highest and best opportunity, 
one would expect, sir.
    Senator Bingaman. Well, some of the discussion in the 
previous panel about capped--about offsets outside the cap--
give me a little explanation as to how you see that. If each 
country has a separate cap, and offsets are being generated in 
China, you know, how does--what is meant by this concept of 
``outside the cap''? David Doniger was saying that he thought 
it was a big mistake to allow offsets outside the cap. I think, 
Michael Morris, you were saying you thought wherever the 
improvement in the environment occurs, so much the better, 
there's no reason to limit that.
    Dr. Walsh. Senator, let me preface my answer with the 
following observation. To a significant degree, the debate 
about offsets has become a bit of a tempest in a teapot. If we 
were to stack up the emission reductions realized by the 
Chicago Climate Exchange members, and stack 'em 50--they'd be a 
50-foot-tall pile--only one foot of that would be offsets. 
Offsets do not come flowing in like Niagara Falls. We see that 
in the Clean Development Mechanism, which has a high price at 
the end of that rainbow. We see that in the Chicago Climate 
Exchange.
    So, there's been a--frankly, a bit more debate than I think 
is worthy. One can clearly define, in a conservative, 
verifiable way, what an offset is. And if you provide those 
clear instructions, you still will see a relatively modest pace 
of uptake on offsets.
    Now, that said, there is some view that if you were to call 
for a--say, a 4-percent cut in emissions, as CCX does, over 4 
years, and were to allow in, let's say, up to one-fourth of 
that, 1 percent, as offsets, that, in fact, some view that you 
wouldn't really achieve the 4-percent cut, you would only 
achieve a 3-percent cut, because, well, those offsets are 
somehow--are new and different and extra. But we don't see it 
that way. If the cut occurs in Brazil or in China or in Canada, 
and it's verifiable, we think that's a cut.
    So, I think there's some confusion on that issue, but a lot 
of folks have a different viewpoint on inside or outside the 
cap.
    Senator Bingaman. So, you're saying that, ``outside the 
cap,'' the 25 percent of the reduction that you would permit to 
come from offsets would be outside the cap? Is that the way 
you're understanding that term?
    Dr. Walsh. The example I gave you was a scenario where 25 
percent of the reductions--in fact, it's only--it's been less 
than--less than 5 percent of our reductions--25 percent of the 
reductions were occurring offsite, not at the smokestack of our 
members, but were occurring on farms and through forest growth 
or methane capture. I don't understand, Senator, why anybody 
would consider that not to be a desirable thing to have happen. 
These are win-win things that are both reducing carbon 
emissions and providing local environmental benefit. Some 
people think that that is not enough of a cut, or is not a 
valid contributor to progress. I would beg to differ.
    Senator Bingaman. Yes, go ahead, Jonathan.
    Dr. Pershing. I think one of the big questions around the 
offsets market has been how robust they are. One of the issues 
that David Doniger raised earlier was that there is some 
suspicion that you can't accurately monitor and verify them. 
One of the approaches that's been taken in a number of markets 
as they develop is to try and create benchmarks. So, there's 
some standard that's set, and that's a standard that's 
universally applied. And if you do that, you have more likely 
integrity of all the market structures you're going forward 
with. And when you do that, you have more confidence in those 
market options. That has two effects. The first is, it 
maintains market integrity. The second, it allows you to look 
at those offset benefits, probably anywhere in the world, that 
meet that benchmark. And that's got a huge economic value.
    Senator Bingaman. Rafe.
    Mr. Pomerance. Just to try to elucidate this a bit more, I 
think that David Doniger made a proposal to use--if I recall 
correctly--use allowances to, in effect, buy offsets. In that 
case, you don't have to worry about their verifiability. 
They're just good projects. And they don't, sort of--they're 
not in the accounting of the cap. The outside-the-cap is, if a 
Nation has 100 units of allowable emissions, and it decides to 
buy ten units outside the country, through the Clean 
Development Mechanism, say, then its allowable domestic 
emissions would be 110. But there is a real question about--in 
many people's minds--about the verifiability of the offset. So, 
he's sort of--would--I believe, was taking an insurance 
approach to offsets, which is to use the value of the 
allowances to buy offsets.
    Mr. Rosenzweig. I disagree with David. Offsets are good. I 
think it's important to step back and look at what they're 
trying to accomplish with a first stage of a climate program. 
And you want to encourage activities that may not occur without 
the incentive to do it.
    The problem with offsets is the transactions costs, which 
basically do not allow developers to secure financing to 
develop their projects. There are several different ways that 
the world is learning to implement, to develop modern 
verification standards, and to ensure that they are real, 
verifiable reductions.
    So, as a first step, we would, you know, disagree with 
David. We think that you can create offsets outside the cap 
that create a lot of beneficial activities. That would also 
work fairly well if you're going to go with a safety valve, 
that you would probably create a whole bunch of environmental 
activities that may not occur if there were not a safety valve.
    So, I would, sort of, suggest that the two things play hand 
in hand.
    Thank you.
    The Chairman. I have no further questions.
    Michael Walsh, I just wanted to indicate that my office 
will be calling to see if we can set up an appointment with 
either you or whomever, so you can come to the office and tell 
me more about the program, in detail, specifically, so I will 
understand it.
    Dr. Walsh. We look forward to that opportunity, Senator.
    The Chairman. I think it's important that I do that, and do 
that as soon as I can.
    Now, with that----
    Senator Bingaman. Mr. Chairman, I thought you--I thought 
you were going to volunteer to join the Chicago Climate 
Exchange, have your office join.
    Dr. Walsh. Well, Senator, you should be aware that we have 
an open-door policy, not only to corporate emitters in Brazil 
and elsewhere, but to organizations like the World Resources 
Institute, that wanted to define and help us build the system 
and offset their own emissions. So, we've got the thought 
leaders, but we've also got the prayer leaders, from the 
Jesuits of Santa Clara, California, who are one of our original 
investors, and are also offsetting their members in our 
exchange. So, you'll be in very blessed company if you want to 
become a member, sir.
    [Laughter.]
    The Chairman. I have not yet said I'd be a member, but 
you've given me a very good reason, with that new group----
    [Laughter.]
    Dr. Walsh. Thank you, Senator.
    The Chairman [continuing]. There. I'm sure I'll be close to 
them quickly----
    [Laughter.]
    The Chairman [continuing]. What they do. Maybe I can act 
like them, right? In any event----
    All right. Thank you, everybody. I notice a lot of your 
were patient, stayed a long time. A lot of coverage stayed the 
whole day. And we think it was beneficial to us. We will not 
deny that it was hard work for us, and for you, too. But our 
schedules are the things that make our lives tough. But for 
that, it would have been a very nice, fun day with all of you.
    Thank you. We look forward to the compilation of this, and 
see what comes next. You all wait and see.
    [Whereupon, at 4:28 p.m., the conference was adjourned.]

                                 

      
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