[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
  CLIMATE CHANGE: LESSONS LEARNED FROM EXISTING CAP-AND-TRADE PROGRAMS

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


                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON ENERGY AND AIR QUALITY

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 29, 2007

                               __________

                           Serial No. 110-28


      Printed for the use of the Committee on Energy and Commerce

                        energycommerce.house.gov





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                    COMMITTEE ON ENERGY AND COMMERCE

    JOHN D. DINGELL, Michigan, 
             Chairman
HENRY A. WAXMAN, California
EDWARD J. MARKEY, Massachusetts
RICK BOUCHER, Virginia
EDOLPHUS TOWNS, New York
FRANK PALLONE, Jr., New Jersey
BART GORDON, Tennessee
BOBBY L. RUSH, Illinois
ANNA G. ESHOO, California
BART STUPAK, Michigan
ELIOT L. ENGEL, New York
ALBERT R. WYNN, Maryland
GENE GREEN, Texas
DIANA DeGETTE, Colorado
    Vice Chairman
LOIS CAPPS, California
MIKE DOYLE, Pennsylvania
JANE HARMAN, California
TOM ALLEN, Maine
JAN SCHAKOWSKY, Illinois
HILDA L. SOLIS, California
CHARLES A. GONZALEZ, Texas
JAY INSLEE, Washington
TAMMY BALDWIN, Wisconsin
MIKE ROSS, Arkansas
DARLENE HOOLEY, Oregon
ANTHONY D. WEINER, New York
JIM MATHESON, Utah
G.K. BUTTERFIELD, North Carolina
CHARLIE MELANCON, Louisiana
JOHN BARROW, Georgia
BARON P. HILL, Indiana               JOE BARTON, Texas
                                         Ranking Member
                                     RALPH M. HALL, Texas
                                     J. DENNIS HASTERT, Illinois
                                     FRED UPTON, Michigan
                                     CLIFF STEARNS, Florida
                                     NATHAN DEAL, Georgia
                                     ED WHITFIELD, Kentucky
                                     BARBARA CUBIN, Wyoming
                                     JOHN SHIMKUS, Illinois
                                     HEATHER WILSON, New Mexico
                                     JOHN B. SHADEGG, Arizona
                                     CHARLES W. ``CHIP'' PICKERING, 
                                         Mississippi
                                     VITO FOSSELLA, New York
                                     STEVE BUYER, Indiana
                                     GEORGE RADANOVICH, California
                                     JOSEPH R. PITTS, Pennsylvania
                                     MARY BONO, California
                                     GREG WALDEN, Oregon
                                     LEE TERRY, Nebraska
                                     MIKE FERGUSON, New Jersey
                                     MIKE ROGERS, Michigan
                                     SUE WILKINS MYRICK, North Carolina
                                     JOHN SULLIVAN, Oklahoma
                                     TIM MURPHY, Pennsylvania
                                     MICHAEL C. BURGESS, Texas
                                     MARSHA BLACKBURN, Tennessee
_________________________________________________________________

                           Professional Staff

 Dennis B. Fitzgibbons, Chief of 
               Staff
Gregg A. Rothschild, Chief Counsel
   Sharon E. Davis, Chief Clerk
   Bud Albright, Minority Staff 
             Director

                                  (ii)
                 Subcommittee on Energy and Air Quality

                    RICK BOUCHER, Virginia, Chairman
G.K. BUTTERFIELD, North Carolina     J. DENNIS HASTERT, Illinois,
    Vice Chairman                         Ranking Member
CHARLIE MELANCON, Louisiana          RALPH M. HALL, Texas
JOHN BARROW, Georgia                 FRED UPTON, Michigan
HENRY A. WAXMAN, California          ED WHITFIELD, Kentucky
EDWARD J. MARKEY, Massachusetts      JOHN SHIMKUS, Illinois
ALBERT R. WYNN, Maryland             JOHN B. SHADEGG, Arizona
MIKE DOYLE, Pennsylvania             CHARLES W. ``CHIP'' PICKERING, 
JANE HARMAN, California                  Mississippi
TOM ALLEN, Maine                     STEVE BUYER, Indiana
CHARLES A. GONZALEZ, Texas           MARY BONO, California
JAY INSLEE, Washington               GREG WALDEN, Oregon
TAMMY BALDWIN, Wisconsin             MIKE ROGERS, Michigan
MIKE ROSS, Arkansas                  SUE WILKINS MYRICK, North Carolina
DARLENE HOOLEY, Oregon               JOHN SULLIVAN, Oklahoma
ANTHONY D. WEINER, New York          MICHAEL C. BURGESS, Texas
JIM MATHESON, Utah                   JOE BARTON, Texas (ex officio)
JOHN D. DINGELL, Michigan (ex 
    officio)
                                 ------                                

                           Professional Staff

                     Sue D. Sheridan, Chief Counsel
                         Lorie Schmidt, Counsel
                  David J. McCarthy, Minority Counsel
                    Margaret Horn, Legislative Clerk
                             C O N T E N T S

                              ----------                              
                                                                   Page
Hon. Rick Boucher, a Representative in Congress from the 
  Commonwealth of Virginia, opening statement....................     1
Hon. J. Dennis Hastert, a Representative in Congress from the 
  State of Illinois, opening statement...........................     2
Hon. Mike Doyle, a Representative in Congress from the 
  Commonwealth of Pennsylvania, opening statement................     3
Hon. Joe Barton, a Representative in Congress from the State of 
  Texas, opening statement.......................................     4
    Prepared statement...........................................     5
Hon. Jane Harman, a Representative in Congress from the State of 
  California, opening statement..................................     7
Hon. John D. Dingell, a Representative in Congress from the State 
  of Michigan, prepared statement................................     8
Hon. Michael C. Burgess, a Representative in Congress from the 
  State of Texas, prepared statement.............................     9

                               Witnesses

Brian McLean, Director, Office of Atmospheric Programs and the 
  Office of Air and Radiation, U.S. Environmental Protection 
  Agency, Washington, DC.........................................    10
    Prepared statement...........................................    88
Ralph Izzo, chairman and chief executive officer-elect, the 
  Public Service Enterprise Group Incorporated, Newark, NJ.......    11
    Prepared statement...........................................    75
Jill Duggan, head of International Emissions Trading, U.K. 
  Department for Environment, Food, and Rural Affairs, London, 
  England........................................................    13
    Prepared statement...........................................    67
Richard Sandor, founder, chairman, and chief executive officer, 
  Chicago Climate Exchange, Chicago, IL..........................    15
    Prepared statement...........................................   104
Dallas Burtraw, senior fellow, Resources for the Future, 
  Washington, DC.................................................    16
    Prepared statement...........................................    50
Anne Smith, vice president, CRA International, Washington, DC....    18
    Prepared statement...........................................   111


  CLIMATE CHANGE: LESSONS LEARNED FROM EXISTING CAP-AND-TRADE PROGRAMS

                              ----------                              


                        THURSDAY, MARCH 29, 2007

                  House of Representatives,
            Subcommittee on Energy and Air Quality,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 10:05 a.m., in 
room 2123 of the Rayburn House Office Building, Hon. Rick 
Boucher (chairman) presiding.
    Members present: Representatives Butterfield, Barrow, 
Markey, Wynn, Doyle, Harman, Gonzalez, Inslee, Ross, Hooley, 
Weiner, Matheson, Dingell, Hastert, Upton, Shimkus, Shadegg, 
Walden, Sullivan, and Barton.
    Also present: Representative Gilchrest.
    Staff present: Bruce Harris, Lorie Schmidt, Chris Treanor, 
Margaret Horn, Kurt Bilas, Peter Spencer, David McCarthy, and 
Peter Kielty.

  OPENING STATEMENT OF HON. RICK BOUCHER, A REPRESENTATIVE IN 
           CONGRESS FROM THE COMMONWEALTH OF VIRGINIA

    Mr. Boucher. The subcommittee will come to order.
    In 1990, the Energy and Commerce Committee under Chairman 
Dingell's leadership pioneered the cap-and-trade concept as a 
regulatory means of achieving air quality control. We applied, 
in 1990, cap-and-trade for the first time to the control of 
sulfur dioxide emissions from stationary sources. And that was 
done with highly positive results.
    Based largely on that successful experience, the 
Environmental Protection Agency and the States have established 
other cap-and-trade programs for fine particulate matter, for 
mercury emissions, and for emissions leading to ground-level 
ozone formation.
    Today the subcommittee will begin its consideration of 
whether cap-and-trade should be chosen as the preferred method 
for a nationwide, economy-wide, program of greenhouse gas 
controls. It is noteworthy that in order to comply with the 
Kyoto Protocol, the European Union adopted cap-and-trade to 
control greenhouse gas emissions from a wide range of emission 
sources.
    We intend to gain the full benefit of the European 
experience with cap-and-trade in this context as we design a 
mandatory control program for the United States. In today's 
hearing and during an upcoming European visit, we will ask 
those who have had this firsthand experience to advise us on 
what the European Union did properly and perhaps what could 
have been done better, were that program to be designed from 
the outset today.
    We will ask similar questions about the experience to date 
of the voluntary greenhouse gas cap-and-trade program that is 
coordinated by the Chicago Climate Exchange, and we are pleased 
to have the chief executive officer of that exchange with us 
this morning.
    We also note the decision of the Northeastern and mid-
Atlantic States comprising the regional greenhouse gas 
initiative to use cap-and-trade to reduce CO\2\ emissions from 
power plants and the announcement by five western States that 
cap-and-trade will also be employed in a regional greenhouse 
gas controlled initiative on the Pacific Coast.
    I would stress that in this subcommittee, we have to date, 
made no decisions about the method that we will adopt for a 
U.S. greenhouse gas controlled program, but obviously cap-and-
trade is a major candidate for consideration for that program. 
During today's hearing and through further inquiries, we will 
be examining closely cap-and-trade as a possible choice for the 
U.S. program.
    I want to welcome today's witnesses and thank them for 
preparing and submitting their testimony and being here in 
person in order to offer oral summaries and give us advice. And 
I would announce that pursuant to the rules of the committee, 
any member who chooses to waive an opening statement will have 
the time for opening statements added to that person's period 
for asking questions.
    With that said, I am pleased now to call on the ranking 
Republican member of our subcommittee, the gentleman from 
Illinois, Mr. Hastert, for an opening statement.

 OPENING STATEMENT OF HON. J. DENNIS HASTERT, A REPRESENTATIVE 
             IN CONGRESS FROM THE STATE OF ILLINOIS

    Mr. Hastert. Well, thank you, Mr. Chairman, for calling 
this important hearing. I look forward to hearing from today's 
witnesses about the lessons learned from the European 
experience from the carbon cap-and-trade program and the U.S. 
expertise and experience with acid rain program, which was 
enacted prior to the 1990 Clean Air Act, a bill that I was 
pleased to support.
    The key lesson, I think, that we can draw from the acid 
rain program is that the state of commercially available 
technology is critical. In 1990, technology to control sulfur 
dioxide emissions from coal-fired power plants was readily and 
commercially available. Congress determined that the most 
economic way to encourage the deployment of this technology was 
to put a cap on this emission of this pollutant in law, provide 
time to comply, and allow utilities to acquire, bank, and trade 
allowances.
    Unfortunately, no commercially available technology exists 
at this time to remove CO\2\, which I would like to point out 
is not a pollutant from electricity generation, vehicles, and 
industry that rely upon carbon-based fuels. Because no 
technology exists to remove CO\2\ emitted when we turn on the 
lights, start our cars, or manufacture goods, a cap-and-trade 
system, such as the one in place in Europe, is not an effective 
mechanism to control the greenhouse gas emissions. I have 
described such a system in the past as cap-and-pray, since a 
cap without technology requires one of several bad choices. We 
could turn off the power. We could switch fuels, which 
threatens our energy security and future economic well-being, 
or we simply tax a generation and use electricity. In fact, 
that latter is what the European system has done. It is no 
surprise to me that the price of carbon credit is closely 
correlated with the price of electricity.
    And finally I would note while Europeans are paying these 
costs, almost none of these countries are on pace to meet their 
Kyoto obligations. I have always believed good energy policy is 
good environmental policy, and the reverse is also true. Good 
environmental policy should be good energy policy. I believe 
the key to our future energy security is technology. We need to 
drive technology to reduce our carbon profile when we burn coal 
to generate electricity. We need to get more out of our motor 
fuels from clean, renewable fuels like ethanol and soy diesel, 
and we need to increase our reliance on nuclear power.
    I would like to take a second to talk about a phone call I 
had yesterday with a fellow by the name of Dean Kamen, which I 
think illustrates the point that technology and innovation are 
the key to the world's energy and economic future. Everybody 
knows Dean Kamen. He is famous for inventing the Segue, but I 
was surprised to learn that he has invented several devices 
that can help those underdeveloped countries provide 
electricity and clean water. Imagine a device that continuously 
outputs a kilowatt of electricity, enough to light 70 energy-
efficient light bulbs, all on an abundant local fuel, cow dung. 
In a village that has never had electricity, this is life-
altering technology.
    In short, Mr. Chairman, I think we can all learn from such 
examples by encouraging the development and deployment of 
technologies that we can overcome in a relatively short period 
of time. Our energy issues, whether it is dependence upon the 
unstable foreign sources of energy or the emissions of 
greenhouse gases. Once these innovations are in place, then it 
is time to discuss measures such as cap-and-trade to make sure 
that these technologies are deployed in the most economic and 
expeditious fashion.
    Mr. Chairman, I thank you for having this hearing, and I 
thank you for the opportunity to speak.
    Mr. Boucher. Thank you very much, Mr. Hastert. The 
gentleman from Pennsylvania, Mr. Doyle, is recognized for 3 
minutes.

   OPENING STATEMENT OF HON. MIKE DOYLE, A REPRESENTATIVE IN 
         CONGRESS FROM THE COMMONWEALTH OF PENNSYLVANIA

    Mr. Doyle. Thank you, Mr. Chairman. I would like to welcome 
each of you to our committee as we discuss the risks and 
benefits associated with cap-and-trade programs, both here and 
in Europe. I think it is an extremely important hearing as it 
will provide us with valuable insight as we consider whether we 
will or will not include cap-and-trade program as part of our 
global warming legislation.
    As I have stated in the past, I stand ready to work closely 
with Chairman Boucher and others on this committee to legislate 
the best possible solution as America moves forward in 
addressing global warming. I think it is critical that we work 
to ensure that we have all the facts so that we can be sure 
that the policies we pass do not put our country at a 
competitive disadvantage with our trading partners or lead to 
the exportation of jobs from this country as businesses move 
overseas to avoid restrictions or requirements we pass. From 
the Clean Air Act Amendments of 1990 and Care Act, which we 
authored in this committee, the European Union's Emission 
Trading scheme, there is no lack of empirical evidence about 
cap-and-trade regimes.
    I think it is critical that members of this committee 
understand the pros and cons of these systems before we move 
forward, both to address global warming and protect American 
jobs. This hearing will be very valuable in that regard. While 
this hearing is on cap-and-trade programs themselves, I think 
our committee needs to also look at what other options we have 
for achieving similar reductions in the emission of greenhouse 
gases.
    Although most of our panels would express a strong support 
of a cap-and-trade system, I believe it is critical that all 
options and all combination of options are considered as we 
move forward.
    Again, Mr. Chairman, I welcome each of the panelists to the 
discussion. I will consider all sides of this debate, and I 
look forward to rolling up my sleeves and working with you to 
craft the most realistic, transparent and cost-effective 
solution to the question posed by global warming, and with 
that, I yield back.
    Mr. Boucher. Thank you very much, Mr. Doyle. The gentleman 
from Texas, Mr. Barton, ranking member of the full committee, 
is recognized for 5 minutes.

   OPENING STATEMENT OF HON. JOE BARTON, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF TEXAS

    Mr. Barton. Thank you, Mr. Chairman. I listened to your 
opening statement with great interest as I always do, and I 
sense that you have begun to move somewhat slightly towards the 
position that I have been espousing. So I am going to begin to 
move somewhat slightly towards the position that you are 
espousing. So we are here, but we are now kind of starting the 
process. So I want you to know that I do listen. Our former 
Speaker, also in his opening statement, I think moved.
    I want to submit my written opening statement for the 
record. I am going to speak extemporaneously for a few minutes 
because today we are here to talk about cap-and-trade systems. 
Now, I am very skeptical that a cap-and-trade system would be 
of any benefit to the true environmental situation, and I am 
fairly certain that it would be of no benefit, in fact, it 
would probably be a harm to our economy.
    One of the reasons that many people have talked about using 
a cap-and-trade system for CO\2\ emissions is because of the 
success that we had in the mid-90s and continue to have to this 
day with a cap-and-trade system with SO\2\, sulfur dioxide. 
There are major differences between those two compounds. SO\2\ 
is a harm to health. There are known quantities at which it 
affects human health. Prior Clean Air Acts had regulated the 
amount of SO\2\ emissions, and we had a health standard that 
was set by the EPA. We put the cap-and-trade program on for 
SO\2\ in the Clean Air Act Amendments of 1991, I believe, 
because President Bush made an executive decision that he 
wanted to cut SO\2\ emissions in half by a certain date. And 
the most cost beneficial way to meet that target was to go to a 
cap-and-trade.
    Well, SO\2\ is a known pollutant. It is a criteria 
pollutant. It is a harm to health. We already had regulations 
on it. CO\2\ is not. CO\2\ is a naturally occurring compound. 
There is no quantity that is known to impact health in a 
negative way. There is a theory that in high concentrations in 
the upper atmosphere, it somehow impacts the infrared scale and 
makes energy less likely to escape the upper atmosphere. Hence, 
it leads to global warming. That is a theory. It is not a fact.
    We also know from historical records that CO\2\ 
concentrations in the past have been much higher. So I dispute 
that cap-and-trade for CO\2\ is somehow a good thing because 
cap-and-trade for SO\2\ worked. Those are two entirely 
different situations.
    Having said that, today we are going to look at cap-and-
trade, and that is a good thing. We are also going to begin to 
look at solutions that make sense if we agree, for whatever 
reason, that we need to lessen the carbon intensity of our 
economy. We have several zero-emissions electricity generation 
options available right now, one being nuclear power. I am not 
aware of any group that says a nuclear plant is not a zero-
emitter in terms of carbon. Well, there is a lot that we could 
do to accelerate the permitting process and the construction 
process for new nuclear plants, which is being done everywhere 
but in the United States.
    We could also expand our solar energy issues. We could 
expand our wind energy. We could accelerate R and D on our 
hydrogen initiative the President started several years ago. So 
there are many, many things that we can do in a positive way to 
work together to begin to move to a less carbon intense economy 
in the United States.
    And so today is the step to look at the cap-and-trade 
systems. I hope nobody tries to say that what has been tried in 
Europe is a positive. I am going to be very skeptical if we go 
down that trail since it has raised wholesale electricity rates 
in Germany 30 to 40 percent.
    Having said that, Mr. Chairman, this is another substantive 
hearing, and I am extremely pleased that you and Chairman 
Dingell are trying to really develop a positive record about 
what the true facts are. With that, I yield back.
    [The prepared statement of Mr. Barton follows:]

  Prepared Statement of Hon. Joe Barton, a Representative in Congress 
                        from the State of Texas

    Thank you, Mr. Chairman, for continuing this series of 
hearings on global warming.
    Today we will focus on the question of a ``cap-and-trade'' 
program to control our CO\2\ emissions. If you recall, at the 
outset of these hearings I voiced my opposition to a unilateral 
cap-and-trade program. I said then that I see it harming the 
U.S. economy without helping the environment.
    We haven't seen evidence to the contrary in the 10 hearings 
we have subsequently held. First, with respect to economic 
harm, we heard testimony that electric rates in Germany went up 
30 to 40 percent when the cap-and-trade program was 
implemented. No witnesses contradicted that, not even the 
utility CEOs from our own country at a later hearing.
    We shouldn't be surprised because the whole point of 
rationing CO\2\ emissions is to change behavior. Sure many 
rent-seeking companies--including ones represented at our 
hearings--will be enriched if the program is written their way, 
but consumers and workers will pay in their energy bills and 
with their jobs.
    Our economic analysis has hardly begun. I look forward to 
future hearings on the impact of a carbon cap on coal prices, 
on rising gas prices due to fuel switching, on cancellation of 
new power plants fueled with clean coal, and most importation 
people's jobs.
    The migration of so many manufacturing jobs offshore over 
the past 5 years of rising natural gas prices should give us 
all pause. Exporting those jobs may make shrewd financial sense 
to many CEOs, but not to the workers I represent.
    Losing American jobs to poor competitors doesn't help the 
global environment either. Developing countries always swap 
clean air for economic growth and as we heard this week, China 
is no different. China's economic growth is explosive, and so 
is China's coal combustion. We heard that decisions in China 
about where and what kind of power plants to build are 
decentralized, effectively uncontrolled.
    We learned that less than 5 percent of China's coal-fired 
electricity plants are even fitted with ordinary sulfur dioxide 
control equipment, and that those with the equipment may or may 
not actually use it.
    But, Mr. Chairman, I cannot believe that the answer is to 
tell American consumers that they can't buy foreign-made goods 
anymore because some countries won't knuckle under to our 
demands that they ration CO\2\. As one of our witnesses said, 
``the greatest threat to the environment is poverty.'' Using 
our economic might to hold hundreds of millions of foreigners 
in poverty and deny U.S. consumers the freedom to buy what they 
choose is not a solution worthy of America.
    What are the solutions? We have many.
    These are some proposals that make economic sense and 
provide environmental benefit, without harming our economy:

      We should expand ZERO emissions electricity 
generation, including nuclear power. We must solve the problem 
of waste storage. We know what to do, it is time to act. We 
need to expand wind and solar energy. We heard testimony about 
what it takes to facilitate wind projects. It turns out it 
wasn't capping carbon, it is siting transmission so that remote 
wind and solar projects can serve loads miles away.
      We need to protect the hydroelectricity that we 
have now and look for ways to increase hydro output with 
efficiency improvements and new projects, including ones in the 
ocean.
      In partnership with industry, we need to fund 
research, development, and demonstration of carbon capture and 
sequestration. This includes Future Gen and coal-to-liquid 
projects, as well as fully funding technology to retrofit 
existing plants

    Mr. Chairman, we need to step up efforts on energy 
efficiency.

      We should accelerate efficiency improvements for 
commercial and residential energy users. Better building codes 
and smart metering are just two examples.

    Mr. Chairman, we also need efficiency improvement in 
transportation. Mobile sources must contribute to any effort to 
lessen carbon intensity.

      We reported a strong bill last year to reform 
automobile fuel efficiency standards and the President wants to 
work with us on it this year.
      We can also do more to fund and encourage 
advanced alternative fuels and advanced vehicles such as plug-
in hybrids.

    All these steps are good for our energy security, and at 
the same time reduce greenhouse gas emissions. CO\2\ is not a 
pollutant, and we should not allow ourselves to be stampeded 
into pretending that something we exhale is now our sworn 
enemy. CO\2\ is also in the breath of the American economy. It 
makes good sense to reduce it where we can, but no sense to 
overreach and kill jobs in the process. These are significant 
steps that we can take now to diminish carbon intensity and 
protect our economy and consumers from increased electric 
costs.
    Thank you, Mr. Chairman.

    Mr. Boucher. Thank you very much, Mr. Barton. The Chair 
recognizes the gentlewoman from California, Ms. Harman, for 3 
minutes.

  OPENING STATEMENT OF HON. JANE HARMAN, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Ms. Harman. Thank you, Mr. Chairman. Listening to Ranking 
Member Barton, I am starting to believe that maybe the 
political polar ice cap on this committee is starting to melt. 
At least the beginning of his statement implied that. But I 
just wanted to know, and I was chatting with my colleague, Mr. 
Doyle, that some of us all the way over here also think we need 
to do what we can with hydrogen and build the infrastructure. 
And we need to explore safe uses of nuclear power in our 
future. So just maybe we will move along smartly here.
    I do however want to endorse the cap-and-trade idea 
strongly for CO\2\. We heard from former Vice President Gore 
last week that cap-and-trade program is a time-tested means of 
harnessing the market to reduce emissions, and reduce emissions 
we must. I think there is growing bipartisan support on this 
committee about that, but I agree too that how we design a cap-
and-trade program for CO\2\ is crucial.
    I can envision a carbon market that is rigid, 
unpredictable, and inefficient. That would be bad. But I can 
also envision a market that is liquid, flexible, and allows our 
economy to cope with emissions reductions in a way that makes 
us the example to the rest of the world. The decisions made in 
this room in the coming months will make the difference, and 
the stakes are huge.
    On Tuesday I said we should use the power of the American 
economy as the engine for our cap-and-trade system. Opening our 
carbon market could be the carrot that brings the developing 
nations to the cap-and-trade table. The upside is obvious. Last 
year, much to the chagrin of many Republican and Blue Dog 
colleagues in this body, the U.S. had a trade deficit of over 
$800 billion. A carbon market could mean that our Nation could 
fill that gap by exporting carbon credits. If developing 
nations want to sell us credits and American businesses want to 
sell their own credits overseas, American ingenuity can win and 
so can our fragile environment.
    I just want to close by saying that I am bullish on 
American ingenuity and bullish on the potential of this 
committee to get it right if we work together, have open minds, 
and learn from the experience on cap-and-trade. I yield back 
the balance of my time.
    Mr. Boucher. Thank you very much, Ms. Harman. The gentleman 
from Utah, Mr. Matheson, is recognized for 3 minutes.
    Mr. Matheson. I will waive.
    Mr. Boucher. The gentleman from Utah waives his opening 
statement. The gentleman from North Carolina, Mr. Butterfield, 
is recognized for 3 minutes.
    Mr. Butterfield. Thank you very much, Mr. Chairman. I too 
want to thank you for convening this important hearing today. I 
do not have a formal opening statement to give or to place into 
the record. I simply want to thank the six witnesses for coming 
forward today to give us the benefit of your testimony, as I 
see that all six of you are ready to go. And so I am not going 
to unduly interfere with that.
    I will say to you, however, that in so many of our 
hearings, we have witnesses who come forward, and the Members 
really have already made up their mind about the issue. But 
this is not the case today. What you say today will make a 
difference. It certainly will make a difference with me because 
I don't have any fixed views on cap-and-trade, and I am sure 
many of the other Members feel the same way. And so what you 
say will be critically important. I thank you very much for 
coming. I yield back.
    Mr. Boucher. Thank you very much, Mr. Butterfield. The 
gentleman from Massachusetts, Mr. Markey, is recognized for 3 
minutes. Gentleman from Massachusetts waives.
    The gentleman from New York, Mr. Weiner, is recognized for 
3 minutes.
    Mr. Weiner waives his opening statement. All Members having 
now been recognized for opening statements; any other 
statements for the record will be accepted at this time.
    [The prepared statements of Messrs. Dingell and Burgess 
follow:]

    Prepared Statement of Hon. John D. Dingell, a Representative in 
                  Congress from the State of Michigan

    From the outset of our climate change hearings, witnesses 
have been recommending a cap-and-trade program as an important 
element of a climate change program. Today we will hear from 
experts about existing cap-and-trade programs and how those 
experiences should inform our response to climate change.
    In the 1990 Clean Air Amendments, Congress took a bold step 
when it adopted the Acid Rain Trading Program to reduce sulfur 
dioxide emissions from power plants. At that time, the cap-and-
trade approach was largely untested and very controversial. We 
sit here almost two decades later having frequently heard 
witnesses praise this extremely successful program. Power 
plants have reduced emissions faster than required by law and 
at far less cost than projected. Based in large part on the 
success of the Acid Rain Trading Program, a number of other 
cap-and-trade programs have been established to address 
environmental problems.
    Many of these programs have been quite successful, but some 
have had rocky times. Witnesses and members have noted some 
problems experienced during the first phase of the European 
Union's Emissions Trading System. This first phase was designed 
to be a learning period for the EU, and I hope to hear what 
lessons they have learned and whether those lessons are 
applicable here. If the United States decides to adopt a cap-
and-trade program to address climate change, many decisions 
will need to be made to ensure that we tailor the solution to 
address our policy goals. In addition to questions about the 
timing and level of reductions that would be required, there 
are structural questions that must be answered, such as:

      Which greenhouse gases should be covered? Just 
carbon dioxide?
      Who should be covered by the program? Should it 
be economy-wide or cover just certain sectors?
      How should the allowances be distributed? Should 
the Government auction them? Should Congress allocate them by 
statute, as with the acid rain program? If not, what Government 
entity should be given that responsibility? Should they be 
given away for free as we did with most of the Acid Rain 
allowances? If we give them away, to whom should we give them?
      Should we allow covered entities to use offsets 
to meet their requirements? If so, what offsets?
      Should we have a safety valve that fixes a 
maximum price on allowances?
      What must be done to ensure that the program 
operates openly, fairly and honestly?
      What should we do with any revenues generated by 
safety valves or auctions?
      Are there ways to design the program to encourage 
technological development?
      How many of these decisions should Congress make 
and which should we delegate to another entity?

    These are all very important questions. The answers will 
have critical environmental and economic consequences. It is 
crucial that we understand these consequences so that we can 
avoid those that are unintended.
    I look forward to hearing from today's experts so that we 
can better understand the choices before us.

  Prepared Statement of Hon. Michael C. Burgess, a Representative in 
                    Congress from the State of Texas

    Thank you, Mr. Chairman.
    I'd also like to thank our expert witnesses for appearing 
before us today. Your experience and perspective is especially 
valuable to us as we debate a potential carbon cap-and-trade 
system.
    Mr. Chairman, I found it troubling that the first hearing 
that we held in this subcommittee began with a discussion of 
private sector cap-and-trade proposals--it appeared that we 
were pre-supposing the solution before we even examined the 
problem.
    Since that time, we have held a hearing on the science 
behind climate change, and still others to gather perspectives 
from various constituencies. But we have still yet to discuss 
approaches other than cap-and-trade.
    While I absolutely believe that we should take into account 
lessons learned about the cap-and-trade mechanism, I believe 
that this discussion should wait until we have completed 
gathering information and have turned to evaluating legislative 
options.
    I also want to make a couple of points before yielding 
back. First, I am concerned about the possible size and 
complexity of a cap-and-trade to regulate carbon dioxide. The 
Sulfur Dioxide Program involved only about 120 emitters, 
whereas a CO\2\ regime could involve thousands of different 
entities.
    And second, I continue to be concerned about the increased 
costs in the United States, relative to the rest of the world, 
should we implement this program. As we've heard over and over 
again, it does not matter where the CO\2\ is emitted--just that 
it is emitted at all. If we implement a cap-and-trade regime, 
and the result is that American manufacturing--and American 
manufacturing jobs--could move somewhere else that does not cap 
carbon emissions and as a result, overall emissions will not 
decrease.
    Again, I'd like to thank the witnesses for appearing before 
us today. We greatly appreciate your thoughts on this important 
subject.
    With that Mr. Chairman, I yield back.

    Mr. Boucher. I am pleased to welcome our panel of 
witnesses, and I will say a brief word of introduction about 
each.
    Mr. Brian McLean is the Director of the Office of 
Atmospheric Programs and the Office of Air and Radiation at the 
Environmental Protection Agency. He has been a career EPA 
employee for more than 30 years and has been involved in the 
development, implementation, and oversight of all of EPA's cap-
and-trade programs for stationary sources, starting with the 
acid rain trading program. He is here as a technical expert on 
cap-and-trade programs and is not here today to discuss 
administration policy. And we are very pleased to have you, Mr. 
McLean. Welcome.
    Dr. Ralph Izzo is the chairman and chief executive officer-
elect of PSEG, the Public Service Enterprise Group 
Incorporated, a large public utility for the State of New 
Jersey and other areas.
    Ms. Jill Duggan is the head of International Emissions 
Trading in the United Kingdom's Department for Environment, 
Food, and Rural Affairs. We are particularly honored that you 
have traveled to the United States to share your experience 
with us this morning, and we welcome you, Ms. Duggan.
    Dr. Richard Sandor is the founder, chairman, and chief 
executive officer of the Chicago Climate Exchange, and we very 
much look forward to hearing about the Exchange's experience.
    Dr. Dallas Burtraw is the senior fellow at Resources for 
the Future, and Dr. Anne Smith is vice president of CRA 
International. We welcome all of our witnesses. Without 
objection, your prepared written statement will be made a part 
of the record. We would very much welcome your oral summary and 
would hope that you could keep that within the range of about 5 
minutes. And, Mr. McLean, we will be happy to begin with you.

  STATEMENT OF BRIAN MCLEAN, DIRECTOR, OFFICE OF ATMOSPHERIC 
      PROGRAMS AND THE OFFICE OF AIR AND RADIATION AT THE 
        ENVIRONMENTAL PROTECTION AGENCY, WASHINGTON, DC

    Mr. McLean. Mr. Chairman and members of the committee, 
thank you very much for inviting me to testify today on EPA's 
experience, designing and implementing cap-and-trade programs. 
While at EPA, I have worked on both traditional regulation and 
emissions trading, and in my remarks this morning, I will focus 
on what cap-and-trade is, what it has achieved, and why it 
works, the basic principles that we have followed.
    Cap-and-trade is a market-based mechanism for addressing 
environmental problems and contains several key elements that 
distinguish it from other regulatory approaches. First, it 
seeks to reduce emissions by setting a mandatory cap or limit 
on the aggregate emissions of an entire category of sources. 
The cap both establishes the emission reduction goal and 
provides predictability for the allowance market. All 
significant sources, existing and new, of a particular industry 
or sector should be included in to minimize the shifting of 
production and emissions to uncovered sources.
    Once the size, the timing, and scope of the cap are 
defined, allowances equal to the cap are then distributed. How 
the Government distributes allowances is an important policy 
and economic design decision. Emission allowances are valuable 
assets. Keep in mind though that whether they are distributed 
for free or by auction, it does not affect the total quantity 
of allowances under the cap, nor the environmental outcome of 
the program, nor the total cost of the program. It does, 
however, affect how the costs are distributed across the 
economy and who ultimately pays for the program.
    Allowances can be traded, bought or sold, and banked and 
saved. Unrestricted trading and banking allows companies to 
choose, and importantly, change compliance options and minimize 
compliance costs. Banking also encourages early reductions and 
provides liquidity, which can be a cushion against price 
volatility and unforeseen market events.
    The fourth element of these programs is monitoring. It is 
important that all sources accurately measure and report all 
their emissions. Along with complete transparency of data, this 
provides the foundation for ensuring both the emission 
reduction goal and the credibility of the allowance market. At 
the end of each control period, sources must surrender 
allowances equal to their emissions.
    And finally, there must be clean consequences for non-
compliance known up front to the participants. This provides 
certainty for both the environment and for the sources. Unlike 
other trading programs, cap-and-trade has a cap which ensures 
achievement of the emission reduction goal. Unlike traditional 
command and control regulation, individual source control 
requirements are not specified. So sources have the flexibility 
to experiment and the opportunity to choose and change control 
strategies without needing Government approval.
    The allowance system also rewards companies for achieving 
greater control through, for instance, technology innovation. 
As a utility vice president once said to me, the beauty of cap-
and-trade is that I can explain it to my CEO in 15 minutes.
    The results from our acid rain and NOx budget programs have 
been impressive. SO\2\ emissions from power plants are down 40 
percent. Acid rain is down 30 percent across the eastern United 
States with costs that turned out to be less than one-third of 
what we had predicted. Summertime NOx emissions under our NOx 
budget program are down 70 percent, as are the number of areas 
exceeding the ozone standard. And compliance in both these 
programs is over 99 percent.
    Cap-and-trade is also efficient to run. We work with more 
than 7,000 sources and have completed over 70,000 allowance 
transactions involving over 230,000,000 allowances. Yet the 
acid rain program takes only 50 EPA employees, and the NOx 
program 20. Given this success, in 2005, we chose this 
mechanism for the Clean Air Interstate Rule to reduce SO\2\ and 
NOx emissions further.
    So why have these programs worked? For the acid rain 
program, the answer is simple. We had good legislation, and I 
want to thank you for that. But second, in developing that law 
and its implementing regulations and in designing other 
programs, and then in the day-to-day program operations, we 
have tried to adhere to the following principles.
    First, keep your eye on the prize. Above all, Government 
needs to focus on achieving the emission reduction goal and 
letting the market work to keep costs down. Second, keep it 
simple so it is understood by all, particularly those who must 
comply with it. Third, be transparent. Transparency builds 
public support and market confidence.
    Fourth, provide certainty both in what is required and what 
the consequences will be for non-compliance. And fifth, be 
accountable. Measure and report results, including the impact 
on the economy and the environment.
    In closing, let me reiterate that cap-and-trade can be a 
cost-effective, flexible and efficient instrument for achieving 
and sustaining environmental benefits. And its success depends 
greatly both on the sound design as well as effective 
implementation. Thank you.
    [The prepared statement of Mr. McLean appears at the 
conclusion of the hearing.]
    Mr. Boucher. Thank you very much, Mr. McLean. Dr. Izzo.

 STATEMENT OF RALPH IZZO, CHAIRMAN AND CHIEF EXECUTIVE OFFICER-
   ELECT, THE PUBLIC SERVICE ENTERPRISE GROUP INCORPORATED, 
                           NEWARK, NJ

    Mr. Izzo. Mr. Chairman and members of the subcommittee, I 
am pleased and honored to appear before you today on behalf of 
Public Service Enterprise Group, or PSEG. PSEG distributes 
electricity and natural gas to more than 2 million customers in 
New Jersey and owns and operates approximately 16,000 megawatts 
of electric generating capacity into eight States. Our 
generating fleet includes about 2,400 megawatts of coal-fired 
capacity and almost 3,500 megawatts of nuclear capacity. We 
believe that global climate change represents a real 
environmental threat and a significant business challenge, but 
we also view it as an opportunity.
    We support mandatory greenhouse gas reductions on a 
national level and a cap-and-trade mechanism to achieve the 
necessary reductions. I have confidence that our Nation has the 
intellectual capital and innovative spirit with which to meet 
the climate change challenge.
    Numerous options already exist for reducing our emissions. 
These options include end-use efficiency, supply-side 
efficiency, renewable energy technologies, nuclear energy, and 
a wide range of greenhouse gas offsets. Many technologies 
within these categories can be implemented now, and the pace of 
technology development and deployment will pick up dramatically 
when the United States reduces regulatory uncertainty, 
adequately incents innovation, and establishes a market price 
for carbon.
    As noted, we believe that national climate change policy 
should be structured around a cap-and-trade mechanism that will 
deliver meaningful reductions at a reasonable cost. Our view is 
based on considerable experience with other cap-and-trade 
programs that have been successful in reducing emissions of 
sulfur dioxide and nitrogen oxide.
    A key question is how to best structure a national cap-and-
trade program and establish a CO\2\ market that will 
efficiently spur investment in new low and zero-carbon 
technologies. This will require that we improve upon the 
existing models. Under the Acid Rain Program, for example, 
virtually all SO\2\ allowances were distributed at no cost to 
power plant operators on the basis of historic emissions.
    Some would advocate that we continue this approach in a 
CO\2\ cap-and-trade program. We disagree. This grandfathering 
approach, as it is commonly known, rewards technologies with 
lower efficiency and higher emission rates while providing no 
incentives for investment in new, clean technologies. We 
support a performance-based approach also known as an updating, 
output-based allocation.
    Under this system, allowances would be distributed based on 
a facility's recent electricity output measured in kilowatt 
hours. New facilities, like IGCC and Ultra Super Critical Coal-
Fired Plants, would be entitled to compete for allowances with 
existing plants. Companies would have an incentive to improve 
the efficiency of their existing plants and the economics of 
investing in clean coal and new nuclear would be improved.
    Another alternative could entail the auctioning of 
allowances instead of distributing them. Proceeds from an 
auction could be used for a variety of public benefits, 
including consumer rebates, research and development, and 
energy efficiency credits will reduce taxes. And many 
economists agree that an auction is the most efficient and 
transparent method for distributing allowances.
    We believe that existing coal-fired power plants continue 
to be an important energy resource in the United States. 
Therefore we think it makes sense to limit the auction of 
allowances in the early years of the program. We support 
auctioning 25 percent of the allowances at the outset of a 
national cap-and-trade program and transitioning to a full 100 
percent allowance auction system over a 10-year period.
    It also will be critical to include emissions offsets both 
as a cost control measure and a source of innovative compliance 
solutions. These measures can include methane capture from coal 
mines and landfills and other options as well. A robust offset 
program can reduce the cost of a cap-and-trade program.
    Mr. Chairman and members of the subcommittee, on behalf of 
PSEG, I thank you for the opportunity to offer these comments, 
and I will be pleased to respond to your questions later.
    [The prepared statement of Mr. Izzo appears at the 
conclusion of the hearing.]
    Mr. Boucher. Thank you very much, Dr. Izzo. Ms. Duggan, we 
will be happy to hear from you.

   STATEMENT OF JILL DUGGAN, HEAD OF INTERNATIONAL EMISSIONS 
TRADING, UNITED KINGDOM'S DEPARTMENT FOR ENVIRONMENT, FOOD, AND 
                 RURAL AFFAIRS, LONDON, ENGLAND

    Ms. Duggan. Thank you, Mr. Chairman and members of the 
committee, for inviting me to describe the UK's experience of 
cap-and-trade programs. I head the International Emissions 
Trading branch at the UK Department of Environment, and I have 
worked with emissions trading programs since 2003, both on the 
UK's voluntary program and as policy lead developing the UK's 
allocation plan for the second phase of the EU program.
    My current responsibility is to help extend cap-and-trade 
programs beyond the EU whilst allowing others to learn lessons 
for the EU experience. To give some context, in the UK, all 
major political parties accept the science of climate, and 
climate change mitigation is therefore not a contentious issue, 
only insofar as how we go about it and how far we go how 
quickly.
    Emissions trading is the central plan but not the only 
measure to mitigate climate change in the UK Government's 
portfolio of measures. It is favored because it guarantees an 
environmental outcome through the cap, and it maximizes the 
incentives to reduce emissions at least cost through the 
flexibility to buy and sell allowances.
    Turning to the first phase of the EU program, that runs 
from 2005 to 2007, designed as a learning phase to ensure that 
when we got to the first Kyoto period, we had a successful, 
fully implemented scheme up and running. It was necessary to 
have this learning in order to collect and verify emissions 
data, and many of the facilities covered by the program did not 
collect emissions data up until that point; to put in place the 
institutional framework that is required for a cap-and-trade 
program so the electronic registries that monitor the holdings, 
track the holdings of emissions allowances and allow electronic 
surrender of those allowances the monitoring reporting 
protocols, the verification; and not least, to gain experience 
trading.
    Our experience in the UK voluntary program is that 
sometimes it takes a couple of years for trading to really get 
going, and I think that was the experience in the SO\2\ program 
in the U.S. And so it was important to have the 3-year period 
to get trading underway and for participants to understand how 
they could benefit from this program.
    What phase 1 has done is provide a very good basis for 
member states into the European Commission to develop and 
assess their plans for phase 2, and that is the process that is 
currently underway, with the commission assessing, to date, 17 
of the 27 plans for the second phase of the EU program. And I 
have included in my written testimony the summary of those 
allocation plans and the allowances that will be issued for 
those member states. And I think that they demonstrate both the 
commission's determination to ensure real scarcity in phase 2 
of the program, and also member states' determination to learn 
from their 2005 mission state that they now have.
    As an example, Germany initially proposed an annual cap in 
phase 2 of 482,000,000 allowances, and that has not been cut 
back to 453,000,000 allowances whilst increase in the emissions 
that it covers. And Spain has set its phase 2 cap at 16\1/2\ 
percent below its 2005 verified emissions. The UK indeed has 
set its phase 2 cap at 13 percent below 2005 verified 
emissions.
    And in doing so, we had a number of considerations. First, 
the environmental impact of the scheme, but also the impact on 
electricity prices and the competitiveness of UK industry. And 
I know there has been some discussion of electricity prices, 
but our assessment for phase 2 for setting the cap for UK 
industry at that level was that in a central case, electricity 
prices would rise by 1 percent by industrial users and by half 
a percent for domestic users.
    We have learned some real lessons from phase 1 of the EU 
program. First, the most important lesson is that markets need 
real scarcity, but also that in order to ensure that scarcity, 
you need very good data. And what phase 1 has done is provide 
us with verified emissions data from many of those facilities 
for the first time.
    We have also learned that you need more harmonization of 
rules and allocation processes to mitigate against competitive 
distortions that may happen intrastate and to make sure that we 
are undertaking as fairly as possible the effort that we do. 
Industry, we also know, needs certainty on targets and 
framework to make sure that it makes the low-carbon investments 
that we want it to do. And the European Union has recently 
announced its 20/20 target to cut emissions by 20 percent below 
1990 levels.
    But we have also have done some really good things in phase 
1. We have put the institutions in place, and it was often 
quite a painful process in which to do so, but those 
registries, those allocation methodologies, were among the most 
important protocols.
    And trading is happening. Point Carbon, the market analysis 
news service to the carbon market, estimates that a billion 
tons were traded in the EU program in 2006, and that a billion 
tons was worth around 18 billions euros. There is still a 
positive carbon price. The phase 1 price is very low. The phase 
2 price is currently around 17 euros a ton, and that has been 
reasonably steady over the past few months.
    Lastly the UK Government retains its commitment to cap-and-
trade as the most cost effective way of achieving the emissions 
reductions we need to avoid catastrophic climate change, and I 
would be very happy to answer your specific questions later.
    [The prepared statement of Ms. Duggan appears at the 
conclusion of the hearing.]
    Mr. Boucher. Thank you very much, Ms. Duggan. Dr. Sandor.

   STATEMENT OF RICHARD SANDOR, FOUNDER, CHAIRMAN, AND CHIEF 
    EXECUTIVE OFFICER, CHICAGO CLIMATE EXCHANGE, CHICAGO, IL

    Mr. Sandor. Thank you very much, Mr. Chairman. I am 
delighted to be here to share our experiences with you, and 
also noting in looking around the room that there are four of 
our members, Smithfield Foods, Meadwest Bako, Roanoke, and 
Rolls Royce all in your district. And Illinois, I am proud to 
say we have 32 members, not including hundreds of traders and 
75 members of the board who trade in the Chicago Mercantile 
Exchange. We have 4 from Pennsylvania, 14 from New York, 9 from 
Texas, 6 from Massachusetts, 2 from Georgia. Every single 
member here has member firms in our district.
    We bring to bear our experience of 40 years in academia off 
and on and 35 years as a professional investor. We have been 
involved in the development of financial futures, interest rate 
derivatives at the Chicago Board of Trade. I had the privilege 
of working with Brian in the design of the SO\2\ program. We 
did the first register trade in the EPA, and we have traded 
carbon throughout the decade of the 1990s, giving us an 
experience set.
    The Chicago Climate Exchange is a cap-and-trade allowance 
from project-based systems. It is very important to indicate it 
has 300 members. They range from IBM, DuPont, Motorola, 
American Electric Power, Tamper Electric, four of the companies 
in the Dow Jones, Intel included, many, many companies that are 
America's leaders. In sum total, the emissions baseline of the 
Chicago Climate Exchange is 330 million tons, representing 10 
percent of the United States stationary source emissions. So it 
is not a small sample.
    And what have we learned? What is our architecture? Number 
1, we start with the baseline of year 2000, and our members are 
required to cut emissions by 6 percent by 2010. This is as 
stringent as any bill that you have pending before you. The 
system allows, as I indicated, emissions reductions and most 
importantly project-based offsets. The Illinois Farm Bureau, 
the Iowa Farm Bureau, North Dakota Farmers Union, National 
Farmers Union. And one of the major things we have learned is 
the role of agriculture could be very, very significant in 
reducing greenhouse gases at the most efficient levels.
    We, for example, have seen farmers, dairy people, rangeland 
management all included in our protocols. The 6 percent 
reduction is independently verified by the NASD and monitored. 
Even though we were granted a letter of regulatory exemption, 
we chose to be regulated in order to ensure the integrity of 
our data.
    How has our volume proceeded? A year and 2 years ago, we 
traded 1.5 million tons of carbon. Last year, we traded 10.3 
million tons, and in the first 90 days, we have traded 6.5 
million tons roughly. That is a sign of companies being able to 
enter and exit without disturbing prices.
    The price history is phenomenal in that we started at 80 
cents a ton, got up to $5 a ton, and ultimately went down to 
about 3.75, where we are.
    One thing I think is a common theme among all of us is 
price. And that volume history is important because of entry 
and exit, but the price is the driver.
    Let me give you a few small examples. A professor from MIT 
called up when the price was $2, ultimately with a biodiesel 
invention. He was able to raise $10 million, and now that 
system is in practice, licensed to MIT, used by Arizona Public 
Service.
    Intrepid, which is in the animal waste digestive program, 
taking methane in, raised $17 million based on a $2 or $3 
price. Once you put price out there, invention is automatically 
spurred, and we have seen in just this little pilot with very, 
very low prices, professors from MIT, people in the 
northwestern part of the United States, doing biodigestors in 
Iowa, raising tens of millions of dollars all to bring the low-
cost solution.
    So this is very, very important as far as where we are 
concerned. Craig Vennor, who matched the genome project, raised 
$100 million to look for genetically altered microbes that eat 
pollutants. So even with this tiny price, we are beginning to 
see some things.
    The Chicago Climate Exchange, in the last 2 minutes that I 
have, basically has a family of exchanges. We are very, very 
privileged. There are seven exchanges in Europe, and the 
European Climate Exchange has an 85 percent market share. We 
trade the mandated system there and do about $60 to $70 million 
of trading a day. We run the SO\2\ futures market, which is 
also mandated, centrally located.
    One of the lessons that we have learned. It is not 
daunting. There are no showstoppers. The bad news is there are 
data gaps and inefficiencies. We think, in summary, to 
distribute the allowances free is important. To credit early 
action is critical to have the maximum number of offsets, 
domestic and international. Thank you.
    [The prepared statement of Mr. Sandor appears at the 
conclusion of the hearing.]
    Mr. Boucher. Thank you very much, Dr. Sandor. Dr. Burtraw, 
we will be happy to hear from you.

 STATEMENT OF DALLAS BURTRAW, SENIOR FELLOW, RESOURCES FOR THE 
                     FUTURE, WASHINGTON, DC

    Mr. Burtraw. Thank you, Mr. Chairman and members of the 
committee. My name is Dallas Burtraw. I am a senior fellow at 
Resources for the Future, a 54-year old research institution 
here in Washington, DC. RFF takes no institutional positions. 
All my comments represent my own views.
    I have studied cap-and-trade programs in existence today 
from a scholarly and practical perspective for several years. 
An early lesson of these programs is that they can almost 
always be counted on to deliver their expected environmental 
results. That is whenever an emissions cap is articulated, that 
cap will be attained as long as there is credible monitoring, 
strong data systems, and credible enforcement.
    The exceptions when the environmental cap has not been 
achieved are anachronisms, and they can be easily avoided. The 
more important issue from an environmental perspective is what 
should be the level of the cap, and the responsibility for that 
is a social decision that falls your way. However, given a 
well-articulated environmental goal, a cap-and-trade approach 
is a reliable tool to achieve that goal. A primary motivation 
for choosing this tool is to achieve cost savings relative to 
traditional prescriptive regulatory approaches.
    In general, we can identify substantial accomplishments and 
cost savings here as well, but we might say the glass is only 
half full. Substantial cost savings fall short of the 
economically feasible because the programs, as they sometimes 
are adopted, depart from transparent market design in an 
attempt to accommodate a variety of special considerations that 
are important to one party or another.
    This leads to a first lesson that rises above others that 
we could offer. The key to a successful program is simple rules 
and transparent design. This is the best assurance of 
efficiency and that fairness is achieved. The SO\2\ trading 
program that was established by the 1990 Clean Air Act 
amendments perhaps comes closest in many ways to achieving this 
ideal.
    The second observation that rises above the others is the 
importance of allocation. That is the initial distribution of 
emission allowances. In the case of even a modest policy 
affecting just the electricity sector in this country, there 
will be created an outset worth $30 to $40 billion per year, 
and that wealth will be distributed into the economy. 
Complicated rules for allocation can provide a clock for unfair 
wealth transfers of huge portions.
    Where does this wealth come from? Emissions allowances are 
an intangible property right that is created by the program 
where no property rights existed previously, just as the legal 
systems in the 19th century created a property right in the 
Great American West. And it is of comparable magnitude.
    For the most part, it is consumers who fund this wealth 
creation. It is important to note that emitters do not bear 
all, or necessarily even most, of the cost of the program. 
Those costs are borne by consumers and by other businesses. So 
the free distribution of allowances to emitters, especially in 
the electricity sector, can lead to gross overcompensation, 
that is extra-normal profits at the expense of consumers 
because the value of allowances greatly exceeds the compliance 
costs of investments that emitters would be expected to put in 
place in order to comply with the program.
    By way of guidance, there are not many things you can get a 
group of economists to agree on, but one is the virtue of an 
auction for the initial distribution of emission allowances. 
Virtually all public finance economists support an auction of 
allowances because it can, for technical reasons, result in 
dramatic efficiency gains. Also an auction yields a source of 
revenue that can be used to achieve a variety of complementary 
policies, including research and development or direct 
compensation for consumers or severely affected industries.
    In summary, I am a strong advocate for efficiency and 
climate policy because it is possible that so much will be 
asked of the American people in this century that it is 
essential that we adopt policies that are efficient. cap-and-
trade is a tool to achieve that outcome. I ask you to keep two 
principles in mind. One is a determined focus on simplicity and 
transparency in the design of the program. That means a 
presumptive no to many bells and whistles that may be 
suggested. Second, remember the crucial role of allocation. An 
auction should play the most important role at the beginning of 
the program and a growing role over time.
    Despite these lessons from experience, you will be deluged 
with suggestions for fixes to potential or imagined problems. 
Those fixes are then likely to incur a whole new set of 
problems. In order that we learn our lessons from history and 
not from the school of unintended consequences, I emphasize the 
importance of principled market design.
    There could be obtained a point where it is just not worth 
it to use cap-and-trade. We have other policies such as 
prescriptive regulation to help us get started. In moving to 
cap-and-trade, it is essential that we adopt a strong 
architecture because this is an institution that may be with us 
for the better part of a century. A badly designed cap-and-
trade system can erode political will until there is a cloak 
for huge transfers of wealth. However, done right, cap-and-
trade is the preemptive choice for broad-based climate policy. 
Thank you.
    [The prepared statement of Mr. Burtraw appears at the 
conclusion of the hearing.]
    Mr. Boucher. Thank you, Dr. Burtraw, and my apologies for 
mispronouncing your name. Dr. Smith, we will be pleased to hear 
from you.

  STATEMENT OF ANNE SMITH, VICE PRESIDENT, CRA INTERNATIONAL, 
                         WASHINGTON, DC

    Ms. Smith. Thank you, Mr. Chairman and members of the 
committee. Thank you for inviting me to participate in today's 
hearing. I am Anne Smith, a vice president of CRA 
International. My testimony today represents my own research 
and opinions. It does not represent any positions of CRA.
    Cap-and-trade is one possible form of a market-based 
approach to regulation. These approaches can be very effective 
for reducing emissions at the lowest possible cost, but to be 
effective, cap-and-trade must be tailored, not worn off the 
rank. I will explain why a good greenhouse gas cap-and-trade 
program should not look just like an SO\2\ program on steroids.
    If we design it that way, we will run into at least three 
serious problems. First, emissions allowance prices are 
notoriously volatile. Emissions traders love that volatility, 
but consumers do not. For SO\2\, the volatility had little 
effect on final costs passed through to consumers. Prices on 
CO\2\ emissions, however, will more readily appear in 
consumers' costs of living.
    For example, the carbon price swings that have occurred in 
the EU ETS so far have caused the cost of coal-fired 
electricity generation to rise and fall by almost 200 percent. 
It is not entirely coincidental that the average EU business's 
electricity rates, across the whole EU, rose by 16 percent in 
2005. So clearly a well-designed cap-and-trade program must 
eliminate such price spikes. This can be done by letting the 
Government sell extra permits at a pre-established affordable 
price to anybody who wants to buy them. It can be done even 
more easily and simply using other market-based approaches such 
as emission fees.
    The second problem of copying the SO\2\ model relates to 
the international dimension of greenhouse gases, which is not a 
concern for SO\2\. The fact that a price on CO\2\ directly 
increases costs of productions means that domestic businesses 
will see their costs increasing as the price of carbon is 
added. And it will make them less able to compete with their 
competitors in uncapped countries.
    If we reduce our greenhouse gas emissions domestically but 
they are offset by increases elsewhere in the world, large sums 
of money could be spent by us on controls with no actual 
environmental benefit. The bottom line, any domestic cap-and-
trade program that is implemented in advance of internationally 
coordinated efforts should be designed with permit price caps, 
and low ones at that.
    Third, in contrast to SO\2\ and NOx, greenhouse gas sources 
come from a wide vast array of sources. Covering all of these 
sources is not possible with a cap that is imposed at the point 
where emissions occur, as we do with SO\2\. Imagine imposing a 
cap on all automobile tailpipes. Fortunately, there is actually 
a very simple way to achieve nearly universal coverage of 
greenhouse gases: cap them upstream before they are ever even 
emitted.
    How? By capping carbon in the fossil fuels rather than 
capping the emissions as those fuels are burned. The EU ETS 
program followed the SO\2\ model by capping CO\2\ at the point 
of emission or downstream, rather than upstream. As a result, 
that cap covers less than half of EU's greenhouse gas 
emissions. The other half continues to grow, making it very 
likely that the EU may not meet its emissions targets.
    An upstream approach could have covered those other 
emissions too. The upstream approach is neither radical nor 
novel. It was used successfully in two of our earliest cap-and-
trade programs for the phase-down of lead in gasoline and the 
phase-out of chlorofluorocarbons.
    Some are concerned about an upstream approach because they 
think that it will affect their permit allocations. You can 
completely separate the decision about the point of regulation 
from any decisions about who should receive the permit 
allocations. And I think that you should make this separation 
very clearly.
    In summary, there are reasonable approaches that will work 
for a greenhouse gas cap, but they look very different from the 
widely touted SO\2\ and NOx cap-and-trade programs. 
Unfortunately, many policymakers want to run away from the 
market-based approaches and go back to prescriptive 
regulations.
    This would be very costly. For example, I have estimated 
that a renewable portfolio standard, as an alternative to a 
cap, would cost four times as much as any simple pure cap-and-
trade program to produce the same amount of emissions 
reductions.
    I close on the need for more and better R and D. Market-
based policies stimulate innovation that is incremental in 
nature and deployment of emerging new technologies. But sadly 
and contrary to widespread belief, cap-and-trade programs 
cannot stimulate the kinds of technological progress that are 
necessary to enable the much, much deeper emissions cuts that 
are required to achieve climate stabilization. And the current 
preoccupation with how to impose near-term greenhouse gas 
controls is crowding out attention to this much more important 
bottleneck for reducing climate change risks. Thank you very 
much for your time. There are more details in my written 
comments, which will be in the record, I hope.
    [The prepared statement of Ms. Smith appears at the 
conclusion of the hearing.]
    Mr. Boucher. Thank you, Dr. Smith, and I want to say thank 
you to each of our witnesses for their well prepared and 
presented testimony this morning. This is one of the more 
interesting hearings that we are having in our series on 
climate change, and I truly appreciate the information that you 
provided to us.
    We just received a notice for a recorded vote on the floor 
of the House, and we have approximately 10 minutes before we 
have to leave for that. What I am going to attempt to do is 
keep this hearing going throughout the entire recorded vote. 
Mr. Hastert and I are going to ask our questions and then 
depart, while other members propound theirs.
    Let me begin, Ms. Duggan, with you. And again thank you for 
traveling here from a long distance to share your experience 
with us. The testimony we have received about the European 
Union's experience with cap-and-trade has not been uniform. 
Some have suggested that it has been a good experience. Others 
have said that it could have been a better designed system, 
that there have been significant flaws in that first phase. 
Would you care to respond to that? How would you characterize 
the overall experience? Specifically, I understand your first 
phase was designed to be somewhat experimental. How would you 
say the experience has been with that first phase? What have 
you learned from it? What do you intend to do differently in 
the second phase?
    Ms. Duggan. The first phase, as you rightly point out, was 
designed as an experimental phase. And I mentioned in my 
opening statement, there are good reasons to actually have that 
experimental phase prior to the 2008-12 Kyoto period where 
member states do have obligations under Kyoto. And therefore it 
was very rushed. Implementation was rushed. Trading was due to 
start on the first of January 2005. The UK, although it worked 
hard and put a lot of resources into this, did not have its 
final approval and its registered life until May of that year, 
and we were one of the earliest States to achieve that 
milestone.
    And so one of the things that happened in 2005 and early 
2006 was that final decisions were made on allocations. 
Registries came live, and allocations were made. So volatility 
in the market in the first phase was essentially due to the 
decisions of allocation and the availability of allowances. And 
I think if we had more time, then clearly all of us would have 
preferred to have had that happen in more harmony prior to the 
start of the scheme. So I think that one thing is that trading 
schemes do take quite a long time to design, and getting that 
institutional framework in place is time consuming and often 
difficult.
    We have had, in the first phase, 95 percent free 
allocation. That does not mean that facilities get 95 percent 
of need. It means that as a minimum, States, once they made 
their allocation decision, should give 95 percent of that 
allocation for free. But different States made different 
allocation decisions, and I think that one of the things that 
came apparent last May, when the first results were announced, 
was that some States had either cut their emissions or they had 
set those allowances. Other States didn't. UK, having had 
experience of its own voluntary trading program and more 
emissions data, I would suggest than many, actually our cap was 
35 million below what the electricity power sector needed, and 
27 million below need altogether. So we were one of the ones 
that was buying in from elsewhere.
    Mr. Boucher. Let me ask this other question if I might 
because I only have 2 minutes left.
     Could you describe the effect from the vantage point of 
industry in the United Kingdom of the implementation of cap-
and-trade there? Has there been disadvantage to industry? And 
if so, to what extent? And have particular industrial sectors 
suffered unusual disadvantage in comparison with others? And 
describe, if you would also, the effect of the implementation 
of cap-and-trade to the average consumer of energy in the 
United Kingdom. So from the vantage point of both industry and 
consumers, what has been the experience?
    Ms. Duggan. The experience--the UK industry, we made a 
decision to put the burden on large electricity producers for 
phase 1 and for phase 2 of the program because they are 
insulated from international competition, and they have an 
ability to pass through costs so that they would be less 
impacted, if you like.
    Other sectors of industries that were covered by the 
program were allocated at predicted need, and in fact, in that 
very first year, as I said, the electricity producers with, I 
think, 37 million short of allowances and the rest of the UK 
industry was in aggregate 10 million long in allowances. So 
that although they faced some increase in electricity prices, 
they also had allowances that they could sell in the market. 
They could mitigate against that by reducing their energy use 
and selling the allowances back to the electricity producers.
    Clearly, some sectors are more subject to international 
competition than others, and the analysis that we have done to 
date shows that of all the sectors that potentially could be 
covered by the scheme, the aluminum sector is the most 
vulnerable to international competition. In the UK, they have 
only been included insofar as they have combustion 
installations that meet the definition of the program. And they 
therefore have had a free allocation to cover that. There is 
clearly a need for a more analysis, but they are the most 
vulnerable sector that we have seen. Other sectors are 
relatively insulated from international competition. Some are 
regionally traded. It is one of the things that we are looking 
at, but we only have one year's data to date. The second year's 
data will come through soon.
    Mr. Boucher. And finally, the price of electricity at the 
retail market, how has that been affected?
    Ms. Duggan. The price of electricity did go up during 2005.
    Mr. Boucher. By how much?
    Ms. Duggan. I don't have the exact figures. I will get back 
to you. The largest part of that increase was due to the rise 
in natural gas prices, and I think the U.S. also saw increases 
in electricity prices over the----
    Mr. Boucher. For unrelated reasons, yes.
    Ms. Duggan. Yes.
    Mr. Boucher. OK. Well, my time has expired. Thank you. And 
let me recognize now the gentleman from Illinois, Mr. Hastert, 
for 5 minutes.
    Mr. Hastert. Thank you very much. A couple questions I want 
to ask and very quick answers if I could. Ms. Duggan, in 
European Union, and is it intra- or inter-trading? Do you trade 
within a country, all the trading with UK, or will you trade 
with Germany for instance?
    Ms. Duggan. Both. We trade with any facility or any trader, 
and Europe can trade with any other facility anywhere in 
Europe.
    Mr. Hastert. All right. So to me, I am just trying to look 
through this thing. So the environmental benefits goes to those 
people who are low emitters under the cap. So their customers 
aren't necessarily benefited from the low emissions if they 
sell the credit. If they sell the credit then to somebody who 
emits more CO\2\ over the cap, then that cost is passed on to 
that company. They buy those credits so there is a cost, and 
then that money is passed through to the consumer, right? So 
electricity prices go up?
    Ms. Duggan. Electricity prices go up.
    Mr. Hastert. And emissions basically stay the same, right?
    Ms. Duggan. It depends on the overall cap.
    Mr. Hastert. Well, let us say in your country itself. Say 
the new plant that you brought in on T-side, the big plant that 
burns natural gas off the North Seal. It is huge, and so it has 
very low emissions. And you take and sell those credits then to 
somebody down in Wales that has a coal plant that is not very 
modern. So you have somebody trading caps or trading credits 
here, and so people with coal costs go up to those people who 
buy that energy at the same time the price is set, plus the 
emissions are set at T-side. Is that correct?
    Ms. Duggan. Yes.
    Mr. Hastert. Very good.
    Mr. Hastert. Then let me ask the gentleman, Mr. McLean. 
When we put in the SOx and NOx emissions and we did when the 
EPA and others did this clean air thing, was the commercial 
ability to clean up SOx and NOx available?
    Mr. McLean. There were several options available.
    Mr. Hastert. So the commercial ability to do that was 
available. How about the commercial availability today across 
this Nation to take CO\2\ and sequester it?
    Mr. McLean. Those options are becoming available. It 
depends on where you set the cap. If you don't make it a 
stringent cap, there are plenty of options to reduce 5 percent. 
If you set a cap at a 50 percent reduction, yes, you would have 
difficulty.
    Mr. Hastert. All right. And then, Ms. Smith, basically you 
said prices on CO\2\ cause a cost of coal-fired increase of 
almost 200 percent. So is that the cost of putting this on the 
facility itself? Or is it the cost of buying the credits and 
passing them onto the consumer?
    Ms. Smith. That is the price of buying the credits when 
they were at the highest level that occurred in the EU ETS 
system, which was about $35 a ton of CO\2\.
    Mr. Hastert. Have you done any projections on let us say 
the coal-fired plants in the south central part of the United 
States, Virginia and West Virginia and Ohio and Indiana and 
southern Illinois, the coal coming from those plants? What kind 
of increase in cost might there be? Any idea at all?
    Ms. Smith. It depends, as Mr. McLean was saying, on the 
stringency of the cap, but if you set a cap at about a 50 
percent reduction, such as we did do under the SO\2\ market, 
you would probably see prices very much in the range of, well, 
tens to hundreds of dollars a ton of CO\2\ to get a 50 percent 
reduction, if we were trying to do it with current technology 
in today's world.
    Mr. Hastert. So what, for instance, would that cost be when 
you pass that onto a customer per kilowatt hour?
    Ms. Smith. Well, the price increase in coal-fired 
generation doesn't translate--say it is a 200 percent increase. 
That does not translate into a 200 percent increase in the cost 
of electricity.
    Mr. Hastert. I didn't say that.
    Ms. Smith. Right, but when you say try to say what would 
happen across the whole electricity system at the same price, 
it would be perhaps a 20 percent, 30 percent increase in the 
price of electricity?
    Ms. Smith. Yes.
    Mr. Hastert. Thank you. My time is up. Thank you, Mr. 
Chairman.
    Mr. Boucher. OK, thank you very much, Mr. Hastert. There 
being no majority members in the room, other than the chairman, 
and the chairman having to go vote, I am going to exercise the 
option of recessing the committee momentarily. I think our vice 
chairman of this committee, Mr. Butterfield, will be returning 
shortly. So stay where you are. We are going to recess until he 
returns, and when he returns, he will be in the Chair and will 
propound his questions, as will other members in order. With 
that said, the committee stands in recess.
    [Recess.]
    Mr. Butterfield [presiding]. The committee will come back 
to order. Let me thank the witnesses for your extreme patience 
this morning. We had a roll-call vote, and most of the members 
are now on the floor. The chairman had asked that I leave early 
and cast my vote and get back to the committee to resume these 
deliberations.
    It is now time for the questions from the various committee 
members, and I am going to start. And I think I am going to 
address this question to you, Mr. McLean, if you would. Sir, I 
feel very strongly that climate change is a global issue, which 
must be addressed by our country as a whole and in cooperation 
with the world. If the Federal Government fails to make the 
responsible choice in crafting a solution to this problem, is 
it possible that our States could develop mandatory greenhouse 
gas reduction programs that would be effective enough? And 
could there be some major problems with this type of patchwork 
approach to regulation?
    Mr. McLean. Sir, I understand your question, and it raises 
sort of an overall policy question about how to proceed, the 
timing to proceed, the relationship between the Federal 
Government and the States. And it sort of getting beyond my 
area of expertise to sort of call that judgment, but I 
understand what your concern is. And I think it is a legitimate 
concern that ought to be weighed in your deliberations as to 
when to act and how to----
    Mr. Butterfield. Dr. Burtraw, you want to take a stab at 
that one?
    Mr. Burtraw. Sir, I think that for a meaningful policy that 
addresses climate issues, it really is fundamentally a Federal 
and international issue. But I think there is an important role 
for leadership in the States, and if ever there was a case 
where the States are a laboratory of new ideas, this is where 
we are seeing it today. And there are some important 
architecture design issues that--they merged in RGGI and 
California, I think they can be very useful for you to consider 
for a national model.
    Mr. Butterfield. Dr. Izzo?
    Mr. Izzo. We would agree with you that it is critically 
important that it be a national cap-and-trade program. While we 
have been very supportive of what has gone on in the RGGI 
states, I would be less than accurate if I didn't admit that we 
have been challenged with many of our coal investments to 
recognize how to proceed given that several of the RGGI states 
have different points of view of what the future will hold, yet 
many of those States have a common clearing price for wholesale 
electricity. So you have uncommon cost structures, common 
clearing price, and some huge competitive dislocations with 
those disparities.
    Mr. Butterfield. There are some people who argue that a 
cap-and-trade system to reduce greenhouse gases will lead to 
much higher energy cost and job loss. We heard testimony 
earlier this week that in India, for example, there is a strong 
resistance to employ any environmental protections which might 
slow economic growth. Is it possible that a cap-and-trade 
system could actually spur technological innovation as 
businesses seek to reduce their greenhouse gas output, thereby 
creating new jobs in industry? Dr. Sandor?
    Mr. Sandor. I do think a cap-and-trade system will spur new 
technology. Every experience that we have had with regard to 
inventors, we probably see, I would say, 50 to 150 proposals 
from inventors, be they small firms or large firms. And I do 
believe ultimately there will be a green tech revolution from 
the date that we see, and the processes will come from the 
small inventors, as they did in the Web. This price discovery 
allows individuals and people that finance in private equity 
firms to raise capital and to do things out of the box that 
might not be done otherwise.
    Mr. Butterfield. Thank you. Finally, Dr. Burtraw, let me 
ask you my final question. Sir, in the past, efforts to curb 
emissions and pollution have often left poor communities and 
minority communities far behind. One concern with a cap-and-
trade system is that it may be easier to reduce emissions in 
the newer factories located in affluent areas rather than 
undertake the more costly effort to deal with the older 
factories that are often in low-income communities and tend to 
have high emissions of greenhouse gases. Do you have any 
suggestion on how we can help to ensure environmental justice, 
as we call it, in our low-income communities?
    Mr. Burtraw. Sir, I take that question very seriously. I am 
serving on the market advisory committee in the State of 
California as they look at designing and implementing AB 32 in 
that State. And this issue is very sharp and keen in that 
context.
    The CO\2\ is not a local pollutant, but the reason that it 
becomes such a key issue with the subject of environmental 
justice is that its emissions of CO\2\ are correlated with the 
emission of other toxic pollutants that can have a local 
effect. And so advocates who want to see a reduction on these 
other types of hazardous air pollutants use any tool that they 
can grab a hold of to try to achieve the benefits for their 
local community.
    I think the more appropriate thing to think about is 
designing the CO\2\ policy, rather than trying to constrain the 
way that you would achieve CO\2\ reductions, and a cost-
effective way, is to recognize what can be done to achieve 
economic justice as a superset for what includes environmental 
justice.
    And one of the most interesting models in this regard is, 
again I will point to the RGGI example, the Regional Greenhouse 
Gas Initiative, which is mandating a significant portion of 
emission allowances, at least 25 percent, should be set aside 
for strategic energy investments. And modeling what we have 
done for the State of Maryland, we showed that by putting that 
allowance revenue into end-use efficiency investments, 
electricity prices could restabilize even as Maryland joined 
the Regional Greenhouse Gas Initiative.
    Mr. Butterfield. Thank you very much. At this time, the 
Chair recognizes the ranking member of the full committee, the 
gentleman from Texas.
    Mr. Barton. Thank you, Mr. Chairman. Thank you for coming 
back early so we could keep going. I want to ask Ms. Duggan my 
understanding--I don't know that this is a fact. That is why I 
am asking it--that Great Britain primarily made a decision to 
meet its targets under Kyoto by really eliminating domestically 
produced coal or reducing the amount of coal and going to a 
Norse Sea gas and maybe even LNG from Norway. Is that true or 
not true?
    Ms. Duggan. I think there was certainly a move to use gas 
in the 1990s, though one of the things I wanted to say in 2005, 
even under the EU emissions trading program, there is a switch 
that year from gas to coal in the UK. There has been a number 
of measures, and the UK is constantly looking at ways in which 
to reduce its carbon emissions. And that work continues, and so 
there has been a variety of means to do so.
    Mr. Barton. Is it fair to say that the use of coal has 
declined?
    Ms. Duggan. I cannot categorically answer that. I will get 
back to you and put something in the text.
    Mr. Barton. Fine. I just asked because you are from Great 
Britain. Ms. Smith, our EPA witness in his prepared testimony, 
and I am told in his verbal testimony, talks about leakage. If 
you don't design the system well, people move to where it is 
not regulated. Do you have any evidence that would indicate 
that if we really put a significant cap-and-trade system on in 
the United States that we wouldn't just have a lot of industry 
migrate to places like China, where they have shown no 
inclination at all to limit their carbon emissions? And no. 2, 
do you think China would ever join an international group that 
would actually be effective at reducing air emissions?
    Ms. Smith. Regarding leakage, we can't say we have hard 
evidence because we haven't tried the experiment. But there has 
been a lot of modeling exercises that we had done and others in 
our modeling community have done, which do indicate that there 
is a great potential for leakage. It is not 100 percent 
leakage, meaning every ton reduced in a capped country does not 
reappear as a extra ton in another country that is uncapped. 
But leakage does seem to have a potential to occur at the level 
of maybe 5 to 15 percent of the emissions, and that is pretty 
significant when it is occurring at the cost of industry within 
one's own country.
    We also see that even in State programs where a unilateral 
state might impose a cap unilaterally on self without the 
States surrounding it doing that within the U.S. And we see 
that kind of leakage number occurring across State numbers.
    Mr. Barton. OK.
    Ms. Smith. The second question was whether China would ever 
follow us in a cap-and-trade program. I am not an international 
lawyer. I really don't have an answer to that, but I will say 
that I don't believe, by putting a cap on our own Nation, that 
we will get the countries such as India and China to follow us. 
I don't see any incentive for them to do that.
    Mr. Barton. OK.
    Ms. Smith. Though I do think we need to coordinate the 
policies before applying the caps.
    Mr. Barton. OK, Mr. McLean, I am told that you are the 
director at the EPA of the office that has actually implemented 
the SO\2\ cap-and-trade. Correct me if I am wrong. SO\2\, we 
primarily regulated and capped at smokestacks at the stationary 
sources. I don't think we did anything for mobile sources. Is 
that true?
    Mr. McLean. That is correct. Utilities were about 70 
percent of the SO\2\ in this country, and so that is the sector 
we focused on. Transportation for SO\2\ is a very small portion 
of it.
    Mr. Barton. Now, if we are going to cap-and-trade CO\2\, my 
information is that it is about a third generated by stationary 
sources, about a third by mobile sources, and then about a 
third by so-called natural sources. How do you cap-and-trade 
mobile sources and natural sources?
    Mr. McLean. Well, first of all, yes, utilities are about a 
third and then other industrial sources are another 20 percent 
or so. So about 50 percent are utilities and industrial 
sources, and about a third are mobile sources. The rest tend to 
be commercial, residential, sort of making up that 100 percent.
    We have not used this technique to deal with the mobile 
source sector and what I can say is when we dealt with NOx, we 
focused on utilities and industrial sources which were about 30 
percent of the total NOx emissions in the eastern United 
States. And that was the focus of the cap-and-trade.
    So 70 percent wasn't even covered under cap-and-trade. We 
used other tools to----
    Mr. Barton. My time is expired, but Mr. Chairman, if we are 
going to seriously review cap-and-trade, I would stipulate that 
the entire totality of the emissions has to be capped and 
trade, and that is something we need to pursue.
    Thank you for your time, and I thank the witnesses for 
being here.
    Mr. Butterfield. Thank you very much, Mr. Barton.
    The gentleman from Pennsylvania, Mr. Doyle, is recognized 
for 5 minutes.
    Mr. Doyle. Thank you, Mr. Chairman.
    Mr. Sandor, I am very concerned that we ensure that any 
legislation we enact includes provisions that encourage our 
trading partners, especially in rapidly developing countries 
like China and India, to also make significant reductions in 
their greenhouse gas emissions.
    Now, in your testimony you stated that you have engaged the 
leaders of both of these countries on the issue of market-based 
initiatives that address environmental concerns. I am 
interested to hear more about that, specifically, what have you 
talked to them about and how would you gauge their level of 
interest, and more importantly, their desire to actually start 
pursuing these strategies?
    Mr. Sandor. Let me share with you my experience. I have 
been to China three times in the last 5 months, and I have been 
to India two times. We have started forming something similar 
to CCX called the Indian Climate Exchange, and it involves the 
same caliber of companies that the Chicago Climate Exchange, 
some of the leading industrialists, et cetera.
    We found that at least in the private sector--now, I can't 
speak for their leaders, OK, and the policy people. I can tell 
you that there are the counterparts to my members like DuPonts, 
IBMs, Safeway stores, Duquesne Power and Light, that there is 
many of those that are over there that say we want to learn 
what you are doing and we would like you to help us establish 
an exchange.
    Our experience is that in the industrial sector--now, make 
no mistake, even in China, there is a lot of wealth being 
created by the private sector, and those folks, not their 
leaders--again, I can't speak to the leadership, but I can tell 
you we sense the same latent demand for action among the 
industrialists there that we sense here. Everybody said without 
the absence of a law, you would never get anybody to join a 
legally binding private sector agreement to reduce greenhouse 
gases. And we have engaged 10 percent of the United States in 
that debate with no law. And it is my business view that we can 
duplicate our efforts in Asia and then track them in. We have 
five Chinese companies. We have two Indian. We have seven 
Brazilian companies that have taken on reduction targets. So 
our experience, again one small piece of data.
    And then third, I had the pleasure of being invited to 
speak at Beijing University. I happen to be a professor at 
Northwestern University. At that talk at Beijing University, I 
would say the students were every bit as literate, if not more, 
about cap-and-trade and emissions trading. They actually asked 
me, the 21-year old, why the price in Chicago was this, and how 
come it differed from the price in Europe. So the universities 
there are teaching cap-and-trade to the students in China as we 
speak.
    Mr. Doyle. I will bet you not many students in American 
universities know what cap-and-trade is.
    Mr. Sandor. Well, the other thing, which I think is just 
incidental to this, I came with Mandarin slides and threw them 
out after one presentation because everybody was bilingual.
    Mr. Doyle. Thank you, sir. I want to ask Mr. McLean 
probably my last question. Mr. McLean, as Congressman Barton 
said, carbon poses different challenges than does SO\2\. And 
given your experience administering the acid rain program, how 
would you structure this program to meet these challenges? And 
do you think that we should take an economy-wide approach, as 
others have testified? Or do you believe the committee should 
just focus on specific industries to meet the reduction goals?
    Mr. McLean. OK, I will try to give you an answer based on 
experience that we have had. As I said, there are many policy 
instruments out there. cap-and-trade is one of the market-based 
instruments. There are traditional regulation, and my office 
also runs voluntary programs.
    We have not applied cap-and-trade to the entire problem, 
either for SO\2\ or for NOx. We have applied it to those 
sectors where we thought it would work well, where it could be 
run effectively, and we could get reduction.
    Mr. Doyle. So let me ask you this because my time is almost 
up. What do you believe is the real world achievable reduction 
that a perfect cap-and-trade program could bring about in the 
next 5 years?
    Mr. McLean. I can't really give you an answer to that 
question.
    Mr. Doyle. You don't want to wing that one?
    Mr. McLean. No, thank you.
    Mr. Doyle. Thank you, Mr. Chairman. I see my time is up.
    Mr. Boucher. Thank you very much, Mr. Doyle. The gentleman 
from Michigan, Mr. Upton, is recognized for 3 minutes.
    Mr. Upton. Three minutes or 5 minutes?
    Mr. Boucher. I am sorry. Five minutes. You are worth every 
second of 5 minutes.
    Mr. Upton. I know I wasn't here to get the additional 
three, and I do want to apologize for being late. We had a 
meeting downtown, and it was very difficult to get back. So I 
missed your testimony and some of the questions here, but I 
appreciate your willingness obviously to be here this morning.
    Mr. Shimkus. Same meeting I was at.
    Mr. Upton. I was at the same meeting as you were, Mr. 
Shimkus. We tried to get an early bus to leave, and we couldn't 
do it. We commandeered it, but it didn't work. They had guns. 
It was the President.
    Ms. Duggan, I think you answered about the UK meeting its 
Kyoto targets, and I just wonder what percentage of their 
electricity production comes from natural gas, nuclear, and 
coal. Do you know?
    Ms. Duggan. I believe that nuclear counts for about 20 
percent. I don't have the figures on coal and gas.
    Mr. Upton. So about the same nuclear as it is here. And do 
you know if the UK is expanding its nuclear capability to 
provide electricity?
    Ms. Duggan. We published an energy-wide paper last year, 
looking at the future of energy for the UK, and a bill will be 
published shortly. I am not sure exactly when. And that will 
set out the UK strategy for energy policy going to the future.
    Mr. Upton. OK, Dr. Izzo, your company currently produces 
about 45 percent of its electricity from nuclear, as I 
understand it. Do you have any plans to increase your nuclear 
energy production as a way to reduce CO\2\?
    Mr. Izzo. Yes, we do. In fact, this autumn coming up, we 
will complete a 120-megawatt upgrade at one of our nuclear 
facilities, and we are actively considering----
    Mr. Upton. And where is that facility?
    Mr. Izzo. That is in Salem County, New Jersey, and we are 
actively considering the submission of a license for a new 
facility in New Jersey.
    Mr. Upton. And how long did it take, as you looked at this 
facility in Salem Country, how long did it take you, from the 
point that you decided that is where you wanted to go, how long 
did it take to get through the regulatory process to actually 
get to where you are today? How long ago did you start?
    Mr. Izzo. The upgrading process took about 2 years. A new 
nuclear plant, from decision point to production of a kilowatt 
hour, will probably take 10 years.
    Mr. Upton. Dr. Sandor, we appreciated your testimony, and 
there are a number of us from the Midwest that are not too far 
from Chicago. So you may get a call from us in the next couple 
weeks wondering if a couple of us might come by and visit your 
exchange.
    Mr. Sandor. We would be very pleased. As you know, some of 
our significant members are in Michigan. Dow Corning, Michigan 
State University.
    Mr. Upton. I am a Wolverine, I want you to know.
    Mr. Sandor. OK. Well, we are talking to the university here 
in Michigan, plus I have a home on Lake Michigan so----
    Mr. Upton. Which town?
    Mr. Sandor. Halfway between St. Joe and Southaven.
    Mr. Upton. So you are in my district. So you are in one of 
the fire lanes?
    Mr. Sandor. Yes.
    Mr. Upton. Which fire lane?
    Mr. Sandor. Fire lane nine.
    Mr. Upton. Nine, OK.
    Mr. Sandor. Wilderness Dunes.
    Mr. Upton. I know exactly where it is. Look forward to 
seeing you, and I think Mr. Shimkus and Mr. Hastert intend to 
come to try and visit. I live in St. Joe, Dr. Sandor. I live 
just north of the river. Dr. McLean, as we talk about 
monitoring greenhouse gases accurately, we heard earlier in the 
week about both China and India. China, of course, putting on 
line literally two new coal-fired plants literally every week. 
India, we heard some very disappointing information as it 
relates to the Indian part, I guess you could say, in terms of 
where they are and what they might likely do. How difficult is 
it to monitor the emissions in either one of these two 
countries? And what type of cooperation do you might see coming 
ahead as we look at some possible legislation moving?
    Mr. McLean. Well, there are several parts to that. First of 
all, in the U.S., we monitor CO\2\ from power plants. We have, 
since the 1990 amendments, put that in. So that is a third of 
the emissions in the United States. For the last several years, 
we have been working with China on several projects, one of 
which is to introduce and help them implement a cap-and-trade 
program for SO\2\ and hopefully NOx-modeled on the U.S. 
program.
    Part of that is monitoring, and we have been working 
specifically with them on the monitoring areas because they 
recognize that that is going to be critical. So they are 
starting to put in place pieces that will build a solid 
regulatory base to----
    Mr. Upton. And in my last 5 seconds, what are we doing with 
India?
    Mr. McLean. We are also working with India. India is a more 
difficult country to engage with structurally, but we do have 
work that we are doing there in different areas, different 
pollutants. We are working with them on methane and other 
issues.
    Mr. Upton. And India is getting the hydroelectricity, 
right, from Bhutan?
    Mr. McLean. I am not familiar with their electrical 
structure.
    Mr. Upton. OK, thank you. I yield back. Thank you, Mr. 
Chairman.
    Mr. Boucher. Thank you, Mr. Upton. The gentleman from 
Michigan, Mr. Dingell, the chairman of the full committee, is 
recognized for 5 minutes.
    Mr. Dingell. Mr. Chairman, thank you for your courtesy. 
Welcome to our panel. Ladies and gentlemen, I have three 
statements which I would like to make here, and if anyone 
disagrees, please indicate so by the sign of no.
    One, there was not a comprehensive emissions baseline to 
begin with, so as a result, the market was overallocated with 
emissions allowances. I am referring to the European Union's 
adoption of a cap-and-trade program. Is that true? All right, 
the second question again refers to the European Union's 
adoption of a cap-and-trade program. Ladies and gentlemen, the 
3-year emission reduction period in phase 1 and even phase 2 of 
the program from 2008 to 2012 is too short to allow for long-
term capital planning and emissions reduction strategies. Do 
you agree, ladies and gentlemen, or do you disagree?
    Ms. Duggan. In terms of target, I agree that business 
certainly needs long-terms targets, but if we had the 
allocation plans for phase 1 for 10 or 15 years, we would have 
been in real trouble.
    Mr. Dingell. Thank you. Now, I am referring again to the 
same situation. EU members propose caps that varied widely in 
stringency. Is that correct or not?
    Ms. Duggan. I think that is probably true for phase 1 
because there wasn't good emissions data. I don't think it is 
true for phase 2; although, they have different targets for 
Kyoto.
    Mr. Dingell. All right. Now, we are getting down to the 
point that I am concerned with. And, ladies and gentlemen, 
again remember I have only 5 minutes to do this business. In 
your opinion, ladies and gentlemen, do any of the concerns 
which I have raised represent insurmountable problems that 
could not be addressed in a U.S. cap-and-trade system? Can 
these be dealt with?
    Mr. Sandor. I think they can all be dealt with and with a 
great deal of ease.
    Mr. Dingell. Very well. Now, Ms. Duggan, it is my 
understanding that one of the reasons the EU adopted a test 
period from 2005 to 2007 was to allow the EU to develop the 
kind of hindsight that has just been exhibited. Is that a 
correct statement?
    Ms. Duggan. That is correct, yes.
    Mr. Dingell. Now, I think we can say then that the benefit 
of hindsight is that you will enter the Kyoto compliance period 
of 2008-12 with these problems resolved. Is that correct?
    Ms. Duggan. Many of them resolved as far as possible, yes.
    Mr. Dingell. Now, would any of the members of our panel 
want to make further comment? Dr. Burtraw?
    Mr. Burtraw. Thank you. One of the problems in the EU going 
forward, I think, is a legacy of in the EU, you have 25, now 
27, participating sovereign nations at a level of sovereignty 
that doesn't exist among States in the United States, and a lot 
of accommodation had to be made due to that sovereignty. You 
have less harmonization in the policies in the different member 
states, and one of those kinds of rules has to do with the 
treatment of new sources and treatment of sources that retire. 
This introduces a lot of unexpected and perverse incentives in 
terms of investment behavior within the EU. That is a kind of 
policy that could not be fixed going into phase 2. I know that 
it is on the agenda to be looked at going forward beyond 2012.
    Mr. Dingell. Ms. Duggan, you had a comment.
    Ms. Duggan. I would like to respond to that. One of the 
differences that Dr. Burtraw refers to is that the Germans had 
intended to guarantee new entrants 100 percent allocation for 
14 years. The commission have not allowed that, so there is 
indeed more harmonization on new entrant rules of phase 2.
    Mr. Sandor. I would just like to add one thing. In our 
experience in financial inventions, whether it is mortgage-
backed securities, interest rate derivatives, the initial start 
of the invention rarely looks like the sophisticated product 10 
years at a time. Our belief is you can't let the perfect be the 
enemy of the good. Many of the things that we have, we chuck 
the things that don't work. We try to enhance the things that 
do work, and in invention, it is very dangerous to have the 
perfect. It is often the enemy of the good, so our experience, 
whether it is the Web or anything like that, final looks at 
inventions don't look like the initial ones.
    Mr. Dingell. Thank you. Now, would it be fair for me to 
observe then that we could use a cap-and-trade system similar 
to the EU system or similar to some of the programs we have in 
this country, but it would require some very careful attention 
in terms of trying to learn from the inadequacies of those 
programs and then try and come up with proper mechanisms to 
address them so that we would have a good workable program. Do 
you agree with that, ladies and gentlemen? Thank you. Ma'am, 
you have been very patient, yes.
    Ms. Smith. I would just like to say that the design of that 
program does not provide coverage that is really needed. So 
within that cap in the EU, it may function well going forward 
once some of the kinks have been worked out of the system. But 
it will not be providing sufficient coverage of all emissions 
of greenhouse gases across the EU because it doesn't deal with 
50 percent or more of the sources at this point in time. So a 
different architecture in the U.S. would allow us, with a very 
simple system, to get that coverage and therefore not have the 
runaway emissions outside of the cap that are dogging and will 
continue to dog the EU, I believe.
    Mr. Dingell. Thank you. Ladies and gentlemen, I appreciate 
your patience. Mr. Chairman, I thank you for your courtesy.
    Mr. Boucher. Thank you very much, Chairman Dingell. The 
gentleman from Illinois, Mr. Shimkus, is recognized for 5 
minutes.
    Mr. Shimkus. Thank you, Chairman. Appreciate the panel. I 
think Mr. Hastert, Mr. Upton, and I will probably make it up to 
the Chicago Climate Exchange. We are trying to do that soon. I 
did read the article in Newsweek. I think it was in Newsweek. 
There was a soybean grower in Wisconsin, who was part of the 
exchange, which I find interesting. I do have a large 
agricultural district. There are questions that you don't need 
to address right now, but I think when we come up there, it 
would be basically issues such as how can producers sell 
credits so that they might have--I know no-till farming is an 
issue. How do they measure how much they sequester? So I will 
look at some of those things when we come up.
    A cap-and-trade system will undoubtedly mean for 
electricity generation in this country, fuel switching. And we 
saw it before in the SO\2\ debate, and I am from southern 
Illinois, and I had numerous mines closed down. There is a 
place called Kincaid, Illinois. Commonwealth had a coal-fired 
generating plant and a mine across the street. For this power 
plant to meet its new clean air guidelines, they shipped in 
western coal, and they closed down the coal mine. Not real 
efficient, and that happened in all of southern Illinois. And 
so that is why a lot of us are skeptical, especially if there 
is not an international agreement that would ensure that the 
world community addresses climate and a carbon standard.
    And I also find it curious that my colleagues on the other 
side are now such great believers in exchanges when, let the 
buyer beware. The first time financiers use the market, based 
upon the fluctuation and the risk, why do we have people with 
capital going to these markets? They want the big fluctuation 
of prices because the financiers want to make the profits 
through this market. That is what they like, and my friends on 
the other side will say they are reaping excessive profits by 
using NYMEX. Or they are using the energy exchanges or the 
Mercantile Exchange. It is the real rich people of the world, 
and they are extorting these markets. So be careful. You may be 
safer having a market based on private sector people wanting to 
do good things, versus having us help dictate, direct, and 
determine a carbon exchange.
    And it will happen. We have seen it on this committee ever 
since I have been here. When the energy prices go whacko--I 
mean we did it on the gas issue. Blame the marketer. Blame the 
guys who are in these exchanges. So I just find it curious. Now 
it is going to be the salvation to the global warming debate.
    Dr. Smith, great point. I would like to elaborate just 
briefly because we are also going to address RPS stuff here. 
And did I hear you say that if we are going to go in this 
direction, which I am not sure we need to do, there are four 
times more benefits trying to do a legitimate cap-and-trade 
system versus mandating the RPS?
    Ms. Smith. I did say something close to that.
    Mr. Shimkus. Not bad for a layman. I paid attention.
    Ms. Smith. Achieving the exact same emissions reductions 
that an RPS could provide will cost four times more if it is 
done only within RPS and not with the cap-and-trade program. 
And the reason is because a cap-and-trade program needs to be a 
comprehensive, economy-wide cap-and-trade program. It allows 
incentives to take on far more types of reductions that are 
cheaper than some of the renewables that we force by the----
    Mr. Shimkus. Thank you. And I want to get Dr. Izzo real 
quick because the same people who want cap-and-trade and 
decreased carbon are not supporters of nuclear power, and we 
have to have nuclear power. So you are expanding, and I applaud 
that. Would addressing your onsite storage of nuclear waste 
help you? And would moving to interim storage in the desert be 
helpful? And is it safe to say that Yucca Mountain, which would 
be a long-term repository that is under a mountain in a desert, 
is a better location to store high-level nuclear waste than 
onsite in New Jersey?
    Mr. Izzo. The answer to all three of those questions are 
yes.
    Mr. Shimkus. Thank you very much. I yield back my time.
    Mr. Boucher. Thank you very much, Mr. Shimkus. The 
gentleman from Utah, Mr. Matheson, is recognized for 8 minutes.
    Mr. Matheson. Thank you, Mr. Chairman. I appreciate the 
panel's testimony. Dr. Smith, in your written testimony, you 
talked about how to achieve real reduction, there needs to be a 
lot of technological advances beyond what is going to be easy 
to do. If we are going to move down the path of creating a cap-
and-trade system, how should we incorporate consideration of 
the rate and pace and time of technological innovation in terms 
of how that cap-and-trade system is designed?
    Ms. Smith. Well, the simple answer is that if you tighten 
the cap to a point where you are starting to push beyond what 
you can do at low cost with current technologies, then you 
perhaps have a cap that is getting ahead of the game on the 
technologies. So it argues for far less reduction in the near 
term and making much more rapid and deeper cuts later in time 
to get a lower cost outcome out of the same kind of overall 
approach. This takes into account that to get stabilization of 
atmospheric emissions and to stabilize climate risks, we need 
to look at the cumulative amount of emissions over a very, very 
long period of time, out through the next century. We don't 
need to worry about exactly what the emissions are this year or 
in 2015 or even through 2020 per se if we can make up those 
reductions later when the technologies come in.
    But the problem is nothing is sitting out there in the way 
of incentives to make those technologies appear, and the cap-
and-trade program doesn't provide sufficient incentives for 
those kinds of massive revolutionary types of technological 
change to occur. The cap-and-trade program only incentivizes 
incremental innovation with nearly marketable technologies, and 
it will do that well. But that is not enough to get us to 
climate stabilization.
    Mr. Matheson. And is it fair to say that the concept that 
over the long run technology has got to take us to a different 
place to achieve significant reductions, and so you are 
suggesting that a cap-and-trade system should have caps that 
are not so onerous in the short term and maybe ramped up to 
more stringent caps in the long term? Is there any rational way 
for us to figure out how to design that structure over time for 
how caps are implemented over time?
    Ms. Smith. My personal view is the rational way to go about 
that is to think about what price we should be willing to pay 
now and in the future and to link and integrate that thinking 
with what we believe we can do technologically on the cost of 
technologies in the future. How can we bring their costs down 
to an affordable price? What is that price target? What is the 
timing of that? And that allows us to back out to what we ought 
to be spending today, simply by applying simple present value 
type rules that economists use all the time. So it is not about 
where you set the cap in any year. It is about what is the 
right price to be paying over time now and into the future.
    Mr. Matheson. And would you suggest that, in terms of we 
are in the public policy setting position and we are 
considering cap-and-trade as an option, that if that option is 
considered the part and parcel of that, we also need to take a 
look at if there are incentives that we can create in the 
public policy arena to generate this greater emphasis on 
development and technology? Because you said in the current 
marketplace and even with the cap-and-trade, we are not setting 
up necessarily the best incentives for this development of new 
technology?
    Ms. Smith. We need specific policies aimed specifically at 
the challenge of figuring out how to design R and D incentives 
correctly and to target them so that they will be productive at 
what we need, which is new energy systems that are zero or low 
carbon. That is different than the cap-and-trade program.
    Mr. Matheson. Right, I understand.
    Ms. Smith. It is a separate policy.
    Mr. Matheson. And would you say that for all the R and D 
programs that Congress has voted for in the last few years, and 
we are all looking to develop new technologies, you would 
suggest that the current set of public policies in place to 
incentivize research to develop new technologies are inadequate 
for the type of reductions that you think probably need to be 
achieved?
    Ms. Smith. I believe that they are inadequate. I think the 
issue is perhaps less about funding and more about getting the 
incentives right and the targeting of the program so that the 
money is going to the right kinds of activities, the ones that 
will be successful and produce the right kinds of solutions 
too.
    Mr. Matheson. OK, Ms. Duggan, Dr. Smith's testimony talks 
about the notion of an upstream application of cap compared to 
a downstream. In the EU system, it is a downstream cap. Have 
you considered any ramifications? Or has it been considered 
where the EU system should transfer to more of an upstream cap 
than capture it broader economy-wide focus?
    Ms. Duggan. I think certainly the UK voluntary program 
looked at that, and there is constant consideration 
particularly when looking at new sectors, such as surface 
transport and others, that perhaps the current approach may not 
be the one that is most appropriate for other sectors. I think 
there is always a balance between simplicity and complexity in 
capturing the behavior changes that you want. But it certainly 
is something that is under consideration for other sections.
    Mr. Matheson. I would think that when you are looking at 
those different balances, one of the other factors is one-half 
of your emitters are not subject to the system. That would be 
another factor in looking at balancing simplicity and 
complexity.
    Ms. Duggan. Indeed, but just because they are not covered 
by the EU program doesn't mean to say that they are not covered 
by other measures. And the UK recently announced another 
domestic program with a full auctioning, mandatory program that 
will cover commercial concerns, such as retail and some others. 
So we are constantly looking at where the emissions are and how 
we should deal with them. But whilst we favor cap-and-trade, it 
is looking at how best to incorporate those into cap-and-trade 
systems.
    Mr. Matheson. OK. Dr. Sandor, do you see any implications 
from the exchange perspective between upstream and downstream? 
Do you think your exchange could accommodate either type of 
focus?
    Mr. Sandor. Yes, we would operationalize any policy. Our 
experience though suggests that, including Wasuch in your 
district, that the further downstream you go, the more you are 
going to affect behavior change. And that is the tradeoff. You 
want to get to the individual who won't be responsive to 
behavior change, and that is a hard balance. As you say, some 
aren't covered, some are. But our belief is we can cover and 
will cover. No matter what you provide, we will operationize 
the law that you, the leaders, make.
    Mr. Matheson. OK, and you actually anticipated the last 
question I wanted to give to Dr. Smith. I understand where the 
upstream is preferable in terms of capturing all the carbon 
emitters. But, as Dr. Sandor pointed out, the downstream tends 
to give price signals to individual users to most accurately 
affect behavior. How do you balance those two competing 
approaches?
    Ms. Smith. Both approaches give the same price signal. It 
is just a question of where the price signal appears in the 
system. So if you set the price signal at the time when you 
sell the gasoline, it will move its way right on down to the 
consumer just as easily as if you tell him he has to pay for 
every ounce of CO\2\ that comes out of his tailpipe and make 
him find the permits for it. One is more complex and difficult 
to implement, but both of them give the same price signal as 
long as the market price of carbon is the same. And that is 
more dependent on the stringency of the cap than it is on how 
you have implemented it.
    Mr. Matheson. So you are not too concerned about this issue 
of individual users seeing price signals if we do an upstream 
approach?
    Ms. Smith. They should see price signals.
    Mr. Matheson. Yes, OK. That is great. Mr. McLean, I just 
wanted to finish with you. I have 10 seconds. I will make this 
quick. You have been involved with the other programs the EPA 
has implemented. Do you foresee, if there was an upstream 
approach, that that creates unique challenges for EPA in terms 
of--compare the experience you have had so far.
    Mr. McLean. No, it would be different. As people have said, 
we would look at each sector and think about what would be the 
best way to address that particular sector and take into 
account the things that Dr. Smith said as well as Dr. Sandor, 
that we don't have a firm view at this point.
    Mr. Matheson. OK. Thank you, Mr. Chairman.
    Mr. Boucher. Thank you, Mr. Matheson. The gentleman from 
Oregon, Mr. Walden, is recognized for 5 minutes.
    Mr. Walden. Thank you very much, Mr. Chairman. I apologize 
to the panel for not being able to be here to hear your 
testimony; although, I have been trying to work my way through 
it and will take and read it later today.
    I represent a district out on the west coast. Our State of 
Oregon has 7 percent of its energy, I believe was the figure, 
derived from coal production. Most of ours comes from 
hydroelectric with a pretty good and growing amount of wind 
energy. And I think one of the questions my constituents would 
have in any cap-and-trade program is who gets capped? And at 
what level do you start? And certainly based on how many 
megawatts your output is versus your CO\2\ emissions makes a 
big difference. And so I would be curious to hear from the 
panel, as we look at a cap-and-trade system, how do you deal 
with a region of the country that starts with very, very low 
emissions? And do we end up getting placed here along with the 
coal emitters here and then everybody is told to go down and we 
can't?
    I mean these are things that my constituents want to know. 
We hear about price signals. To them, that means how much is my 
bill going to go up because somebody is going to get paid in 
this deal. We have had folks from Wall Street here who can't 
wait to have a new trading system in place. Well, somebody is 
going to make money on that, and I am all for a private sector 
guy. But I also pay a lot of electric bills in my business and 
personally, and so do my constituents. So perhaps somebody 
could enlighten me. Dr. Izzo?
    Mr. Izzo. We would agree with you. Our proposal is that the 
allocation method be tied to the number of kilowatt hours that 
an electric generator produce, so as to constantly incent 
people to produce more kilowatt hours and fewer tons of CO\2\ 
for the very reasons you outlined. If you simply grandfathered 
all the emissions credits, you are rewarding people who have 
produced the greatest amount of CO\2\ and not creating an 
incentive for them to then lower their CO\2\, should they 
choose not to.
    Mr. Walden. Other panelists, do you want to talk to me 
about how you deal with hydro or what you recommend?
    Mr. Sandor. From a balance point of view, I do think that 
this has got to be all six gases. I might say Portland, Oregon 
is a member of the Chicago Climate Exchange.
    Mr. Walden. Right, and has actually reduced their carbon 
footprint.
    Mr. Sandor. Yes, fantastically.
    Mr. Walden. We are trying to do our part. In this business 
of government, no good deed ever goes unpunished. We are trying 
to avoid getting punished.
    Mr. Sandor. I have two points of view, and I know some of 
my fellow panelists don't agree. There are those who would not 
be in favor of Portland getting credit for what has been done. 
Members of this panel state that they shouldn't because there 
are bad people as well. I would say you have got to have credit 
for early action. That is No. 1.
    Number 2, you have got to have six greenhouse gases so the 
low-hanging fruit that can be accomplished by changes that 
reduce other greenhouse gases like methane or NOx, any of 
those, the hydrofluorocarbons, et cetera, can help get rid of 
it. And I do think if you take the other questions where you 
have modest targets to begin with, you can achieve them with a 
great deal of project-based credits. And then if you tighten it 
later on, you are going to induce the technology. And our 
experience is even low prices, as I said with the MIT 
professor, they go that way.
    Mr. Walden. I only have a minute left. Let me ask you a 
different question, and that is this. In the West, we have--
like my State is--more than 55 percent Federal land. And I have 
disputed with others about how those forests get managed. One 
forest fire in my district in 2003 emitted double the amount of 
carbon into the atmosphere, in the matter of weeks that it 
burned, as the entire State of Oregon in a year. We are always 
going to have fire, but they don't have to be catastrophic. 
Trees can be carbon sinks if forests are managed properly. And 
I am curious if there is any discussion in a cap-and-trade, 
carbon reduction discussion for how Federal policy over 
management of Federal lands should come into play.
    Mr. Sandor. We have dealt with the forest service on that, 
and we have also talked about water markets as well because 
these are not separable. And I think that there can and will be 
more interaction with the Federal agencies. I would hope so. We 
have an open door and would like to educate them, and we face 
this project with parks management in Costa Rica and in other 
areas. So it is not a unique problem.
    Mr. Walden. Any other comments from panelists just on that 
question? I realize my time has expired.
    Mr. Izzo. I would encourage that to be part of any offset 
program consideration.
    Mr. Walden. All right. Mr. McLean?
    Mr. McLean. Just one comment on how we deal with forests 
because when they burn, then they grow back. And then they 
absorb. So that sector you have to think of in sort of over 
time how it operates.
    Mr. Walden. I do. I clearly do, and in fact, I would like 
them to grow back faster. And the House approved a bill to do 
that after a fire, but the Senate, well you know, didn't quite 
get around to it.
    Mr. Izzo. I won't comment on that.
    Mr. Walden. I wish you would. Mr. Chairman, my time is 
expired. If other panelists have quick comment, if not, thank 
you Mr. Chairman.
    Mr. Boucher. Thank you very much, Mr. Walden. The gentleman 
from Massachusetts, Mr. Markey, is recognized for 8 minutes.
    Mr. Markey. Thank you, Mr. Chairman. See, the Republicans 
are the opponents. The Senate is the enemy. That is the point 
that----
    Mr. Walden. On that, we agree.
    Mr. Markey [continuing]. Oregon was making, yes. And I 
apologize to everybody, but I am in this national competition, 
the Luca Brasi sound-alike contest, so I apologize for my voice 
today. Ms. Duggan, last week the subcommittee heard testimony 
from several electric utility CEOs who recommended that we 
create a cap-and-trade program in which virtually all of the 
emission credits were allocated flaw-free to the generations of 
greenhouse gas emissions based on their historic emissions with 
as little as 5 percent of the credits actually being auctioned. 
Such a structure was sharply criticized in a recent report by 
the National Commission on Energy Policy that is stating that 
the allocation of most of these allocations for free to energy 
producers creates the potential for large windfall profits. 
What was the experience in Europe?
    Ms. Duggan. The experience in phase 1 was not dissimilar, 
except there wasn't 95 percent of 100 percent of need.
    Mr. Markey. Not dissimilar meaning windfall profits----
    Ms. Duggan. There were indeed windfall profits in phase 1, 
and one of the things that is happening in phase 2 is that, 
although, there is a maximum of 10 percent auctioning in phase 
2, that still means that we can set the cap below need for 
electricity producers. And indeed in the UK, we have set the 
cap at about 30 percent below need for electricity producers, 
and they will face some auctioning. But there have been 
windfall profits.
    Mr. Markey. Windfall profits. Mr. Burtraw, could you 
comment on that?
    Mr. Burtraw. Well, yes, I agree directly that there is 
evidence there were windfall profits. House of Commons report 
found that in the UK and similarly in Germany. That is 
extranormal profits, the change in revenues is greater than the 
change in their costs.
    Mr. Markey. How big were the windfall profits?
    Mr. Burtraw. These reports are suggesting they are in order 
of 2 to 3 billion Euro per year in each of those cases.
    Mr. Markey. In each country?
    Mr. Burtraw. Yes.
    Mr. Markey. In each country for the utilities?
    Mr. Burtraw. The power sector, yes.
    Mr. Markey. The power sector. Yes, Ms. Duggan.
    Ms. Duggan. I just wanted to come back on that. It depends 
on the assumptions you make and the assumption of the price of 
allowances at the time, and UK Government assessment of the 
size of windfall profits recognizes that indeed they were 
windfall profits. That those full costs pass through to 
industrial users but not to domestic users during 2005. And 
they were in the region of 800 million. Nevertheless, they were 
there, and it is one of the things that we are considering 
allocation methodology for the review for future phases.
    Mr. Markey. Yes. Well, a recent study on how the German 
Government allocated credits, reports that the German utilities 
were set to make windfall profits, and between 31 and 64 
billion Euros up until the end of 2012. Does that experience 
suggest that regulators may have a hard time ensuring that all 
of the financial windfall associated with the allocations of 
free credits to the utility industry are actually passed along 
to the ratepayers? And you were mentioning this point about 
consumers, Dr. Burtraw. Could you get into that please?
    Mr. Burtraw. Well, yes, the source of those so-called 
windfall profits are changes in product prices that consumers 
are the ones that are paying, and so these costs rise, the 
opportunity costs, the emissions allowances are passed through 
in product prices. The question is who is going to be the 
recipient of this wealth transfer. And that is one of the 
reasons that people point to an auction as equitable as well as 
efficient mechanism to implement the program.
    Mr. Markey. OK, Ms. Duggan, based on the European 
experience, do you think that we should be auctioning off most 
of these credits and use the resulting revenue for public 
benefits, such as accelerated R and D on new technologies, 
energy efficiency, or even reducing taxes on businesses or 
individual consumers that might be faced with higher energy 
prices?
    Ms. Duggan. I think the use of auctioning for future phases 
is under discussion this year as the commission and member 
states review the directive for emissions trading. I know 
Sweden has stated publicly that it believes that there should 
be full auctioning for large electricity producers. The UK 
Government's position is there should be more use of 
auctioning, but I wouldn't want to preempt the outcome of any 
cross government discussions on that. We have looked with 
interest at the RGGI proposals.
    Mr. Markey. The RGGI proposals meaning the proposals in 
eastern United States with the nine States that are now moving 
towards an auctioning system as opposed to this allocation to 
the utilities giving them 95 to 100 percent of the credits. Do 
you agree with that, Dr. Burtraw? Let me go to you, Dr. Sandor. 
What do you think makes the most sense?
    Mr. Sandor. We would propose less auctioning and more 
insurance and reliance through pass through provisions and 
windfall gains going to the electricity users.
    Mr. Markey. Going to the consumers?
    Mr. Sandor. To the consumer, right, to make sure it is 
passed on. The auction limits the price discovery process.
    Mr. Markey. How would we ensure that it goes to the 
consumer or to the businesses that consume electricity?
    Mr. Sandor. I will get back to you after the hearings with 
some thoughts on that without getting too laborious here, but 
that is what we would favor because we think it is continuous 
price discovery and efficiency that is important and do 
recognize the need to pass on benefits to consumers, but market 
efficiencies are better served by--well, 100 percent auction 
would be perfect price discovery, as you know. But you have 
these other equities. I appreciate that.
     And we have to factor that in, but moving on the system 
that led to this German mess and other countries' messes is 
something we won't replicate.
    Mr. Markey. Thank you. Let me go quickly to Mr. McLean. 
When this committee drafted the Clean Air Act Amendments of 
1990, it set up the cap-and-trade program for sulfur dioxide 
emissions. I was able to add a provision to the bill that 
allowed utilities to obtain allowances for qualified energy 
conservation measures that were determined by the EPA to 
increase the efficiency of the use of electricity provided by 
an electric utility to its users. Under the provision, for each 
ton of sulfur dioxide emissions avoided by an electric utility 
during the applicable period through use of these qualified 
energy conservation measures, the EPA would allocate a single 
allowance on a first-come-first-serve basis up to a cap of 
300,000 allowances.
    How has that provision of the law worked out over the 
years, Mr. McLean? And what lessons would you say that the 
experience with that provision of the 1990 bill would have for 
us in the subcommittee today, were we to try to add a similar 
provision to the cap-and-trade bill for carbon?
    Mr. McLean. Yes, a couple points about that. First of all, 
that was the first time that we had ever done that, that you 
had done that, and we had implemented it. So there is something 
to be learned. I think when we spent the incentive in that you 
get one allowance for roughly an equivalent ton reduced from 
conventional power. Our experience was that we expected that 
reserve to be overwhelmed, and it was not. And I think the 
reason was that we probably had set it too much in balance. 
That we probably should have, and to encourage more, would have 
set a higher ratio.
    Mr. Markey. So we set it too low. We should have set it 
higher if we wanted to----
    Mr. McLean. If you wanted to incentivize the transfer, but 
I think the idea of setting a specific reserve is a way to deal 
with that particular issue.
    Mr. Markey. And are you nodding your head in agreement, Dr. 
Sandor?
    Mr. Sandor. Yes.
    Mr. Markey. And how high should it have been? Could you 
give us quickly?
    Mr. Sandor. I would have to relook at that, but clearly 
setting it at that level was not enough.
    Mr. Markey. If you, Mr. McLean and Dr. Sandor, could tell 
us how high you thought we--looking back at that sector, that 
would help us. I thank the chairman.
    Mr. Boucher. Thank you very much, Mr. Markey. Gentleman 
from Arizona, Mr. Shadegg is recognized for 5 minutes.
    Mr. Shadegg. Thank you, Mr. Chairman. Let me start by 
asking you, Dr. Sandor or Dr. Burtraw. Mr. Markey has just 
asked a series of questions having to do with the market and a 
series of questions focusing on the windfalls that occurred. I 
am concerned that this isn't really a valid market, and I am 
concerned that whenever we decide to try to create a market, 
which is what we are trying to do, somehow we have to figure 
out how to create it correctly, or we do create windfalls. 
Obviously Mr. Markey is deeply concerned about those windfalls.
    And I guess I am concerned that it is the Government price 
setting at the outset which results in the creation of such 
windfalls. And I don't know how I can explain to my 
constituents something like occurred in England where, as I 
understand it, two things happened at once. One, the price of 
electricity goes up by 16 percent. I can assure you that my 
constituents are going to be extremely unhappy if their 
electricity goes up by 16 percent. If the cost of their 
electricity goes up by 16 percent and they don't know why, or 
they believe it is greenhouse gases, and then they read that 
somebody is saying this is a windfall profit.
    But I have some pretty smart consumers, and they are going 
to say well, wait a minute. Why were there windfall profits? 
And somebody is going to say well, Congressman, it is because 
you created this cap-and-trade program, and I believe that 
there is going to be, pardon my expression, heck to pay for me 
creating, and I guess some argument is made that, Dr. Sandor, 
you say well, just do it. It may be a mistake. You may cause a 
problem. We heard that same testimony 2 days ago. Well, just do 
it. I think that just do it doesn't work very well for an 
elected official who has to go home and say the cost of 
electricity just went up by 16 percent, and somebody is making 
a windfall profit, neither of which would have occurred had you 
figured out a better way to achieve this in. Go ahead, Doctor.
    Mr. Sandor. Number 1, if we take a look at the SO\2\ 
program with bonus allowances----
    Mr. Shadegg. Look, the SO\2\, I think, is simply not 
applicable. SO\2\ came from a limited number of sources. This 
comes from a vastly greater numbers of sources. This SO\2\ is a 
discrete pollutant as compared to carbon dioxide.
    Mr. Sandor. No, I am not suggesting--the analogy I am 
making is there were windfalls in SO\2\.
    Mr. Shadegg. No, I am making the analogy that there were 
windfalls in Europe.
    Mr. Sandor. Both of those. But let me just say from my 
point of view, as a professional economist, OK, and putting on 
that hat, the allocation of what you do doesn't matter. A man 
by the name of Ronald Cose won a Nobel Prize for that and says 
for the efficiency of the market, it doesn't matter. OK, that 
is leading to the right price. It is not my particular role, as 
from in the equity point of view, from an exchange thing, to 
really bring the expertise. I can tell you I would look to find 
a way that that windfall, through the regulatory process, is 
going to the consumer. But that is more the expertise that you 
have as politicians than I have as a trader and an economist.
    Mr. Shadegg. I can tell you from a standpoint of economics, 
it may not matter initially, and I understand the witness from 
England is saying look, in phase 1, here is what we suffered 
through. But in phase 2, we went to an auction process, and in 
the auction process, we resolved that. You are shaking your 
head. Expand on your point, ma'am.
    Ms. Duggan. I think there are two things. One, the 16 
percent increase in electricity price--and I am not sure if 
that was the right figure--was due to an increase, largely, 
two-thirds of it at least, was due to an increase in gas, not 
because there was an increased demand because of the carbon 
price in gas. In fact, there was switching from gas to coal in 
the UK during that time, but because of supplies of gas for 
other reasons. And, as I pointed out earlier, I believe that 
for other reasons, you had increases in electricity prices in 
the U.S. in the year as well.
    But I think the point that you can actually deal with 
windfall profit through allocation methodology--I am shaking my 
head because we are not going to full auctioning in phase 2.
    Mr. Shadegg. I think the 16 percent price increase was, in 
fact, linked to the imposition of the cap-and-trade system in 
Europe. Dr. Smith, they occurred at the same time, so it is 
going to be hard to explain to voters or to constituents that 
they are not a result of one of the other. Dr. Smith, you 
talked about increased impacts as a result of price uncertainty 
and price volatility. Would you expand on that?
    Ms. Smith. Well, price volatility, because the prices will 
be passed through into electricity and other energy prices, if 
the system is actually economy-wide as it ought to be, then 
that will translate into volatility in the prices of goods and 
services throughout the economy. It will be a little bit 
dampened. It will be a little bit, with time lags, et cetera. 
But nevertheless, as long as you have a system that gives you a 
huge amount of uncertainty about where prices will be for 
carbon, you have got a huge amount of uncertainty about what 
the cost of living is going to be very soon thereafter.
    Mr. Shadegg. Let me just ask one last question. If we were 
to implement this, would you suggest that it have a lead time 
during which it was advisory and not obligatory? That is it 
was, in some way, to allow it to fluctuate before it actually 
damaged the market, before it actually did that, a period of 
years to let it function before it was implemented, or is that 
not a possibility?
    Mr. Boucher. Very quickly, Dr. Smith. Very quickly please.
    Ms. Smith. That is impossible to do. The only way to manage 
that volatility is to put a price cap on the market directly.
    Mr. Boucher. Thank you very much. The gentleman's time has 
expired. The gentleman from New York, Mr. Weiner, is recognized 
for 8 minutes.
    Mr. Weiner. Thank you. I appreciate it. I won't use all my 
time. Lest we be lest with, I believe, what people who know 
Latin would call an ad hoc ergo propter hoc facility, could you 
just clarify again what you think in your experience--this is 
hearing about what experiences we have and how we can learn 
from them--from your experience and from the data you have 
collected as a professional who looks at this, not as someone 
who occasionally steps in and looks at it, accounted for that 
rise in cost?
    Ms. Duggan. The main reason for the rise in electricity 
prices in Europe and in particular in the UK during 2005 was an 
increase in the price of gas. The price of gas increased so 
much that actually, rather than having fuel switching as we had 
hoped from fuel to gas, there was fuel switching from gas to 
coal. And that was even when the price of carbon was at 30 
Euros, and it was estimated at that time that the price of 
carbon would need to have been about 70 Euros a ton to actually 
begin to have price switching from coal to gas.
    That is not to say that is an example of success of the 
scheme. It is saying let us get the facts right on that. That 
was not the reason for the rise in electricity prices. It has 
been estimated that of the increase in electricity prices, 
perhaps up to one-third might have been caused by the carbon 
price at its highest.
    Certainly the carbon price for phase 1 is now significantly 
lower. It is around one Euro to one and a half Euros, and 
therefore it would be surprising if that was causing an 
increase in electricity prices at the moment. I accept that 
there were windfall profits due to the design of the allocation 
methodology, which was designed in that way to recognize the 
costs of industry and therefore to give them free allocation 
when they hadn't known a carbon price was about to be imposed 
on them.
    Mr. Weiner. Right. Well, we have a vote. I just have one 
brief question. It seems that the greatest threat to any system 
working would be anything that impinges on the transparency of 
the marketplace here. Is technology, as it advances, making it 
harder to cheat? Is it making it easier to cheat in terms of 
how much emissions are being recorded or being reported? Do we 
need to create a giant regulatory scheme in order to make sure 
we know what emissions are being put out there? Or is the 
system pretty much been tried and true to where we have the 
transparency the market demands? Dr. Sandor?
    Mr. Sandor. We do have 14 members in New York including IBM 
and Kodak, so we appreciate your support. Let me say we have a 
more comprehensive system in the U.S. than the EU with six 
gases in the pilot program versus one initially. And so we have 
been measuring all six gases, and I would say that technology 
has been very, very easy.
    Mr. Weiner. And the marketplace has voted with its feet in 
that if there were a sense that they were trading on things 
that weren't fully accountable, then the marketplace wouldn't 
succeed. You wouldn't have traders who were willing to step in 
there and do this transaction if they weren't confident that it 
was being done in a fair way?
    Mr. Sandor. Number 1, I think that is unambiguously 
correct, and No. 2, we have market evidence of that. The 
credits that are traded on the exchange in Chicago are priced 
four times higher than those that are not verified and traded 
in the over-the-counter markets. So the markets are already 
distinguishing where there is better verification, there is a 
higher price.
    Mr. Weiner. Thank you. Thank you, Mr. Chairman. I yield 
back.
    Mr. Doyle [presiding]. I thank the gentleman. The Chair 
recognizes the gentleman from Oklahoma, Mr. Sullivan, for 5 
minutes.
    Mr. Sullivan. Thank you, Mr. Chairman, and I want to thank 
the panelists for being here today. And I was out for a little 
while, and I am sure maybe you have been asked the questions I 
may ask, but I would like to ask them myself if I can.
    And this is for everyone on the panel. Based on the models 
provided by the acid rain program and the European experience, 
what will a cap-and-trade program cost the United States in 
dollars per year do you estimate?
    Mr. Izzo. We have run several models, and the answer is it 
depends on where that cap is set. There are probably seven 
gigatons of CO\2\ reduction that can take place that are 
economically wise to do even if the emissions were priced at 
zero dollars. However, to get to some of the 400 to 500 PPM 
levels that people have talked about, prices could get as high 
as $40 to $50. So the answer is it really depends. There are 
some that are prudent to do today. Others that will need price 
signals upwards of $40 a ton.
    Mr. Sullivan. Anyone else?
    Ms. Smith. Yes.
    Mr. Sullivan. Yes, Ms. Smith.
    Ms. Smith. We have done some modeling work as well, and to 
answer it in terms of dollars per year, the SO\2\ market costs 
a couple billion. And what we are finding, it is true. It 
depends on what your cap is, but what we are finding is even 
with the very loose types of caps that are sort of the high end 
of what is being proposed, you are looking at tens to maybe 
$100 billion a year. And, of course, with the much tighter caps 
such as the high end of what is being proposed, we are looking 
at hundreds to thousands of billions a year in costs.
    Mr. Sullivan. Anyone? Mr. McLean?
    Mr. McLean. Yes, the comment was that the stringency of the 
cap determines everything. We analyzed Senator Carper's bill 
last year, and it had a modest cap with offsets.
    Mr. Sullivan. Yes.
    Mr. McLean. And the cost was less than half a billion 
dollars a year. It was relatively small, had virtually no price 
impact. We are currently looking at the McCain/Lieberman bill, 
which is a much more significant reduction, and we will be 
analyzing that bill. So I think it very much depends on the 
shape and size of the bill.
    Mr. Sullivan. Anyone else?
    Ms. Duggan. I clearly can't comment on the cost to the U.S. 
What I can say is the UK Government believes and is committed 
to cap-and-trade as the cheapest way, the least costly way, to 
achieve the emissions reductions we need. I would point to the 
Stone Review commissioned by the UK Government that says that 
action is cheaper than inaction.
    Mr. Sandor. Just as a matter of information, as in the 
exchange, we are forbidden from commenting on prices and costs. 
It is not within the law. I might say that [former Senator] 
David Boren was a member of the advisory committee for the 
Chicago Climate Exchange, and OU was the first public sector 
university in America to join the exchange.
    Mr. Sullivan. That is good.
    Ms. Smith. I would just like to respond to the statement by 
Mr. McLean about the cost of the Carper bill being extremely 
low. We have done some analyses and studied, in fact, that 
analysis that EPA did. And I just want to point out that the 
costs were very low based on some assumptions that we would 
disagree with, but most importantly, it was driven low by a 
presumption that there would be a lot of purchasing of what is 
called Russian hot air by the Europeans et cetera in that 
marketplace for international permits, and that that was a very 
significant part of the reason they came up with a very low-
cost estimate. But that is not viewed as politically acceptable 
at this point in time.
    Mr. Sullivan. OK, and I have one more question. On Tuesday, 
we heard testimony that we cannot expect China and India to 
reduce their greenhouse gas emissions at any point in the near 
term or the near future. Do you support including developing 
countries in any type of cap-and-trade program adopted by 
United States? Dr. Burtraw?
    Mr. Burtraw. I believe there is an architecture in the 
proposal by Representatives Udall and Petrie that is very 
innovative. I want to encourage you to look further at, and 
there is a slice of allowance value that is set aside for some 
programs for the developing world, including technology 
transfer. But the allocation of those resources to the 
developing world is contingent on a finding that they are 
taking steps towards joining an international carbon regime, 
same kind of funding the State Department does with respect to 
making progress on human rights.
    Seems like a mechanism such as that could be an onramp for 
expanding participation from the developing world.
    Mr. Sullivan. Ms. Duggan?
    Ms. Duggan. I would point out that China does, in effect, 
participate in the EU trading program because credits from the 
clean development mechanism, of which there is a significant 
investment in China, are allowed with certain limits in the EU 
program.
    Mr. Doyle. Gentleman's time has expired. And last but not 
least, the gentleman from Washington, Mr. Inslee.
    Mr. Inslee. Thank you. If I do my math right, Ms. Duggan, 
if one-third of the price increase of 16 percent may be 
attributable, worst case scenario, for about a 6 percent 
increase in cost. I just want to ask you each individually are 
there any of you that would not pay 6 percent more on your 
residential electrical bill to prevent the loss of the Arctic, 
the substantial desertification of a substantial part of the 
globe, and the loss of the Baltimore oriole? Are there any of 
you who would not pay 6 percent to prevent that from happening 
to the planet? Dr. Izzo?
    Mr. Izzo. Not only would I be willing to pay for it, but I 
would suggest that it is an important price signal to send to 
consumers to encourage conservation.
    Mr. Inslee. I appreciate that. I don't see anybody saying 
they would not be willing to pay that. Dr. Izzo, I think you 
have suggested moving to essentially a complete auction in 
about 10 years, as I understand your testimony. Could you 
describe why you think that is about the appropriate period of 
transition?
    Mr. Izzo. For a couple of reasons. Number 1, as I talked 
about before, there are quite a bit of reductions that need to 
take place which are not economically viable today. Even though 
seven gigatons should be done right now, there is a substantial 
amount in the renewables area and in the nuclear area that 
requires some additional technology and advancement.
    We believe nuclear is a part of that solution. If we made a 
decision to build a nuclear plant today, it would probably take 
10 years before a kilowatt hour could come from that plant, so 
that was how we picked the 10-year period.
    Mr. Inslee. And I am intrigued, Dr. Izzo, about your 
discussion of the output-based system because, as I understand 
your testimony, it would create the best incentive for 
efficiencies as opposed to just a grandfathering permanently. 
Could you again describe why you think that is pivotal to give 
the right incentive for efficiencies?
    Mr. Izzo. Sure, what consumers are looking for from us as 
producers are kilowatt hours. They are not looking for CO\2\. 
So what we think makes sense is to then reward companies that 
produce more kilowatt hours with less CO\2\. And by updating 
that every year and determining how to allocate those 
resources, you are encouraging new entrance to provide new 
technologies that are low-carbon or zero-carbon emitters.
    Mr. Inslee. Anybody else like to comment on that on the 
panel?
    Ms. Smith. Yes, I would like to comment on that. The 
problem with that sort of updating approach is that it actually 
incentivizes businesses to stay in business and to continue to 
produce even when they may be high emitters. And so you end up 
with an extremely high inefficiency. The cost of a cap with 
that kind of updating can be much higher than the cost of a cap 
without that kind of updating, so it does create inefficiencies 
in the system.
    Mr. Inslee. I am not sure I understand that. I am going to 
have to call you at some point and talk about that. Dr. 
Burtraw, did you want to----
    Mr. Burtraw. Well, I would just like to add to this that 
there are a variety of ways that you can give emission 
allowances away for free, and some of those ways have 
incentives embedded in them. And some of the ways can suppress 
the change in electricity prices that would otherwise occur. 
And the proposal by Dr. Izzo would accomplish a lower 
electricity price in the first years of the program and create 
some incentives for switching to lower emitting technologies.
    But doing all of that, I would also subsidize electricity 
consumption and lead to more electricity consumption in the 
early years of the program. The part of Dr. Izzo's proposal 
that I particularly enjoyed hearing him say was that he is 
suggesting this is a transition to a full auction, and so the 
decision of what path to take to a full auction is one where 
you are making tradeoffs over equity and compensation goals in 
the program.
    Mr. Inslee. Dr. Izzo, you had proposed, as well, that there 
be allocations to non-emitting technologies. As I understand, 
it would include hydroelectric. And I have a parochial interest 
coming from Washington State in that regard. I will disclose 
that. But on the other hand, if you don't do that--isn't there 
a counter argument? People argue that that is sort of a gift or 
giveaway or some type of snow on your hat as my economist 
professor used to call it? But if you don't do that, 
essentially I would argue the reverse. I mean this is a 
national asset which is a carrying capacity of the atmosphere. 
Why should one user who happens to have clean electricity not 
be given some portion of that national asset just because they 
happen to use a clean energy source?
    Mr. Izzo. I agree completely. I mean we have to make sure 
that we distinguish two factors. The environment benefit is 
achieved by setting the cap. How you allocate them is 
determined through pace. I agree with Dr. Burtraw that over 
time we want to go to an auction system that gives complete 
transparency. We could talk about the use of those proceeds.
    But in the interim, we want to reward and further incent 
people who have made decisions to go with non-emitting 
technologies and update that so that new entrants can enjoy 
those benefits as well.
    Mr. Inslee. I appreciate that both because it is 
economically sound and quite popular out in the State of 
Washington as well. Thank you very much.
    Mr. Doyle. I thank the gentleman. I see we have a minute 
and 38 seconds to get to the floor to vote. I understand there 
are some members coming back. We are going to recess shortly, 
and then reconvene the hearing as soon as a member comes back 
in the chair.
    [Recess.]
    Mr. Wynn [presiding]. We have the requisite two members for 
a quorum. I believe it is a Democrat's turn for questioning, 
and I believe that means the questioning turns to me. I would 
like to thank all the witnesses for their testimony today. I 
want to inquire about this question of cost because I seem to 
be in somewhat of a conflict.
    Ms. Duggan seems to indicate that the EU experience was 
based on increases in natural gas, but Dr. Smith said that we 
have to be very cautious about price spikes. And Dr. Burtraw 
cautioned at the end of his testimony what we have to do is be 
careful that this doesn't become a cloak for a transfer of 
wealth. So all of that puts me in a little bit of a quandary. 
Maybe I will start with you, Dr. Smith. You were concerned 
about price spikes. Can you tell me why? Or do you disagree 
with Ms. Duggan?
    Ms. Smith. I don't fully disagree with her. I will explain 
that point, but the first thing I want to say is no matter what 
you do in the way of grandfathering or auctions, there is going 
to be a price passed through to consumers. Whatever the price 
of carbon is, the system will allow that price to pass through. 
And changing the way you move the wealth around isn't going to 
alter that.
    Now, on the point about price volatility. Price volatility 
creates some difficult planning costs for businesses. In a 
sense, you are really just asking people to plan against a tax 
but not telling them what the tax rate is. And so that creates 
actually costs inside businesses to manage that. Traders love 
it, but it is really not beneficial to the economy as a whole 
to have that volatility if you don't need it. And we don't need 
it because this is a regulated system. So you can put on a 
safety valve or a price cap on the system, or you can just 
directly impose a price with an emissions fee and get away from 
all of that volatility and still have the price signal that you 
want coming through to incentivize the emissions reductions.
    Mr. Wynn. So it is safe to say we don't have to have these 
price spikes. They are not inevitable in a cap-and-trade 
system.
    Ms. Smith. They are just waste.
    Mr. Wynn. Is that your conclusion? Does anyone disagree 
with that? Dr. Sandor?
    Mr. Sandor. I just want to say one thing for the record, 
and that is traders don't unambiguously like volatility. It is 
very dangerous to traders who trade options. The most 
successful futures markets in the world are Euro dollars and 
bonds, and they have a very significant lower volatility than 
the energy complex, No. 1. Number 2, I do very much agree with 
Ms. Duggan that whether an irrelative price of fuels are 
drivers of that volatility more than anything else. If we ask 
any energy trader, they will tell you that is the first thing 
that they look at. And volatility per se is caused by those, 
and those are the drivers.
    Mr. Wynn. OK. Well, thank you. Now, in light of that 
comment, Dr. Burtraw, what about this transfer of wealth that 
you seem to be concerned about?
    Mr. Burtraw. The creation of a cap-and-trade program 
creates this new property right, and the question is to whom is 
that property right going to be distributed. Giving away the 
emission allowances is one form of compensation that companies 
could receive or that consumers could receive or could be kept 
in the public sector through an auction.
    There is another form of compensation where it is just 
changes in the electricity prices or product prices generally. 
If you give away all of these emission allowances, this new 
property right, to emitters, the possibility exists for 
dramatic overcompensation to those companies.
    Mr. Wynn. Is that what happened in Europe?
    Mr. Burtraw. That is what has happened in Europe.
    Mr. Wynn. Was that a miscalculation that can be avoided, or 
is that an uncertainty that we will have to deal with, should 
we adopt that in this country?
    Mr. Burtraw. Sir, I have great respect for what happened in 
Europe, and they put together a program at a breakneck pace 
that is of historic magnitude. But they had to make some 
decisions in doing so that I think we would not want to 
replicate here.
    Mr. Wynn. OK. Well, hopefully we can avoid it. Is there any 
sense that there would have to be a Federal subsidy to offset 
consumer costs? We tend to treat this rather cavalierly. We 
describe it as volatility and other things. To the consumer, it 
is great heartache. Yes, Dr. Burtraw?
    Mr. Burtraw. The changes in energy prices would be a 
heartache to consumers. In the long run, economists firmly 
believe that changes in prices are what is needed to officially 
implement carbon policy in the United States. In the short run, 
there could be measures, such as suggested by Dr. Izzo, that 
could help mitigate that. But in the long run, I think we want 
to see the transition to a time when people recognize the 
social cost of carbon emissions and the decisions that they 
make on a daily basis.
    Mr. Wynn. My last question. Off ramps and safety valves, 
are they conducive to stability, or do they interject further 
instability? Dr. Burtraw?
    Mr. Burtraw. Yes, this is like Jeopardy. Thank you. Dr. 
Smith mentioned that the SO\2\ program had departed in one way, 
and that there is more dramatic price volatility in the CO\2\ 
market. In fact, if you look at all the markets, there has been 
a lot of price volatility. And the most important consequence 
previously has been the dramatic price fall in the SO\2\ 
market, which meant that Congress did not get everything it 
paid for, and a lot of investments maybe weren't as worthwhile 
as people had hoped they would be.
    But the point is that you could have cost management on the 
low side and on the high side that could dramatically improve 
the performance of the program in terms of achieving goals 
without unnecessarily surprising investors and making them look 
stupid either on the low side or on the high side.
    Mr. Wynn. Right. Well, my time is up, and although there is 
no one else that hasn't asked questions, I will not abuse the 
time. I want to thank all the witnesses.
    Mr. Shimkus. Mr. Chairman.
    Mr. Wynn. I am sorry.
    Mr. Shimkus. No, just for a point of clarification just 
because my 5 minutes was pretty quick. I believe in the 
markets, and I believe in exchanges. My point was that not 
everyone does, and they do think there is manipulation. And 
they do think there is price gauging. I believe in raising 
capital, assuming risk, rewarding that, and I just put that on 
the record.
    The other thing is that there is an assumption here that, 
because of all our numerous hearings, that if we go down this 
route, there is going to be increased cost, whether we can 
manage that effectively through our U.S. Government cap-and-
trade program. First of all, we can't assume we are going to 
affect China and India.
    The other thing is if we dramatically change our economy 
and we impose great cost increases--the concern is in 100 
years, does the global temperature's climate change 5 degrees 
or 3 degrees. Now, you do the math and effect cost benefit 
analysis of this. I think many of us are going to say that this 
is not the way to put our dollars, $180 billion, in a program 
that is of questionable scientific benefit to us. And I yield 
back.
    Mr. Wynn. All right. I thank the gentleman. Again, I thank 
the witnesses for their testimony, and we appreciate your 
presence here today. There are no further requests for time for 
questioning, the hearing is adjourned.
    [Whereupon, at 1:05 p.m., the subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
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