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



 
       CLIMATE CHANGE: COMPETITIVENESS CONCERNS AND PROSPECTS FOR
                     ENGAGING DEVELOPING COUNTRIES

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


                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON ENERGY AND AIR QUALITY

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 5, 2008

                               __________

                           Serial No. 110-97


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

                                 ______

                           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,    FRED UPTON, Michigan
    Vice Chairman                         Ranking Member
CHARLIE MELANCON, Louisiana          RALPH M. HALL, Texas
JOHN BARROW, Georgia                 ED WHITFIELD, Kentucky
HENRY A. WAXMAN, California          JOHN SHIMKUS, Illinois
EDWARD J. MARKEY, Massachusetts      JOHN B. SHADEGG, Arizona
ALBERT R. WYNN, Maryland             CHARLES W. ``CHIP'' PICKERING, 
MIKE DOYLE, Pennsylvania                 Mississippi
JANE HARMAN, California              ROY BLUNT, Missouri
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
                        John W. Jimison, Counsel
                   Rachel Bleshman, Legislative Clerk
                    David McCarthy, Minority Counsel



                            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. Fred Upton, a Representative in Congress from the State of 
  Michigan, opening statement....................................     3
Hon. John D. Dingell, a Representative in Congress from the State 
  of Michigan, opening statement.................................     5
    Prepared statement...........................................     6
Hon. Joe Barton, a Representative in Congress from the State of 
  Texas, opening statement.......................................     7
Hon. Charlie Melancon, a Representative in Congress from the 
  State of Louisiana, opening statement..........................     8
Hon. Ed Whitfield, a Representative in Congress from the 
  Commonwealth of Kentucky, opening statement....................     9
Hon. Tammy Baldwin, a Representative in Congress from the State 
  of Wisconsin, opening statement................................    10
Hon. Michael C. Burgess, a Representative in Congress from the 
  State of Texas, opening statement..............................    11
Hon. Mike Doyle, a Representative in Congress from the 
  Commonwealth of Pennsylvania, opening statement................    12
Hon. John B. Shadegg, a Representative in Congress from the State 
  of Arizona, opening statement..................................    13
Hon. Jane Harman, a Representative in Congress from the State of 
  California, opening statement..................................    14
Hon. John Shimkus, a Representative in Congress from the State of 
  Illinois, opening statement....................................    14
Hon. G.K. Butterfield, a Representative in Congress from the 
  State of North Carolina, opening statement.....................    15

                               Witnesses

Michael G. Morris, Chairman, President, Chief Executive Officer, 
  American Electric Power........................................    16
    Prepared statement...........................................    19
    Answers to submitted questions...............................   245
Jim Slattery, Nucor Steel Corporation............................    58
    Prepared statement...........................................    61
    Answers to submitted questions...............................   246
Richard Morgenstern, Senior Fellow, Resources for the Future.....   118
    Prepared statement...........................................   120
    Answers to submitted questions...............................   248
David Doniger, Policy Director, Climate Center, Natural Resources 
  Defense Council................................................   140
    Prepared statement...........................................   142
    Answers to submitted questions...............................   250
Gary Hufbauer, Peterson Institute for International Economics....   163
    Prepared statement...........................................   164
Christopher Wenk, Senior Director, International Policy, U.S. 
  Chamber of Commerce............................................   194
    Prepared statement...........................................   196
    Answers to submitted questions...............................   260

                           Submitted Material

Susan C. Schwab, United States Trade Representative, letter of 
  March 4, 2008, submitted by Mr. Upton..........................   233
Committee letter, dated March 6, 2007, to His Excellency Vaclav 
  Klaus, President of the Czech Republic, submitted by Mr. Upton.   236
    President Klaus response, submitted by Mr. Upton.............   238


  CLIMATE CHANGE: COMPETITIVENESS CONCERNS AND PROSPECTS FOR ENGAGING 
                          DEVELOPING COUNTRIES

                              ----------                              


                        WEDNESDAY, MARCH 5, 2008

                  House of Representatives,
            Subcommittee on Energy and Air Quality,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 10:40 a.m., in 
room 2322 of the Rayburn House Office Building, Hon. Rick 
Boucher (chairman) presiding.
    Members present: Representatives Boucher, Butterfield, 
Melancon, Barrow, Markey, Wynn, Doyle, Harman, Inslee, Baldwin, 
Matheson, Dingell (ex officio), Upton, Hall, Whitfield, 
Shimkus, Shadegg, Bono Mack, Walden, Burgess, and Barton (ex 
officio).
    Staff present: Sue Sheridan, Bruce Harris, Laura Vaught, 
Chris Treanor, Rachel Bleshman, Alex Haurek, Erin Bzymek, David 
McCarthy, Kurt Bilas, Tom Hassenboehler, Garrett Golding, and 
Michael Beckerman.

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

    Mr. Boucher [presiding]. The subcommittee will come to 
order. In preparation for the drafting in the coming months of 
a mandatory control program for greenhouse gases, Chairman 
Dingell and I have been posting on the Committee's Web site a 
series of position papers. These papers address in detail the 
essential elements of a cap-and-trade control program.
    Our purpose in exploring these issues in depth is to 
stimulate discussion and responses from interested parties as a 
key step in a consensus building for the legislation to come. 
Our goal is to develop a measure that will enjoy bi-partisan 
support, that industry will support, and that will enjoy 
support from environmental advocates.
    In my view, the only legislation which can pass the 
Congress and be signed into law will be a measure that enjoys 
such a broad consensus.
    And in determining to construct a consensus-supported 
measure, let me note that this Committee is following its time-
honored and successful tradition of drafting and passing clean 
air legislation. The three major clean air enactments passed in 
1970, in 1977, and in 1990, originated in this committee, were 
bipartisan, were supported both by industry and by 
environmental advocates, and passed both Houses of Congress 
with large, bi-partisan majorities. Two of those bills were 
signed into law by Republican presidents. One of those bills 
was signed into law by a Democratic president.
    In view of the reality that an economy-wide cap-and-trade 
program for greenhouse gas control will be far more complex 
than any of the three preceding major clean air enactments and 
potentially have significant implications for the economy 
beyond any of those three previous enactments, there is an even 
greater need to take our time, to build consensus, and to 
ensure that our measure will not cause economic disruption. And 
that is what we intend to do.
    That said, it is our goal to move a cap-and-trade measure 
through the Subcommittee, through the Full Committee, to have 
it be considered by and pass the House in time to be 
conferenced with the Senate and presented to the President 
prior to the close of congressional session, and we are working 
to meet that timetable.
    The discussions which our position papers are stimulating 
will help to build the essential consensus that is necessary in 
order to achieve that result.
    Before we turn our attention to bill drafting, we will 
release additional position papers, and the Subcommittee will 
conduct additional hearings on some of them, focusing on the 
alternatives before us that address key elements of a cap-and-
trade control measure.
    This morning's hearing focuses on the competitiveness of 
American industry following the adoption of a U.S. greenhouse 
gas control program. It explores ways that our legislation 
imposing controls can ensure maximum participation from 
developing countries in a global effort to address greenhouse 
gas emissions.
    In my view, the inclusion of a provision in our legislation 
which ensures developing country participation is essential to 
achieving that goal. We are all mindful of the 98 to 0 advisory 
vote in the U.S. Senate by which the Senate expressed 
disapproval of the Kyoto Treaty in the 1990s, and the primary 
reason that was announced by Senators for casting that rare, 
unanimous vote on a key, controversial measure was the absence 
of any imposition of responsibility in Kyoto Treaty on 
developing countries to reduce greenhouse gas emissions. We 
will not have such an omission in the legislation we move 
through this Subcommittee.
    Three leading proposals have been advanced in order to 
achieve our goals, each of which has been examined in our 
position paper on the subject; and this morning I want to say 
thank you to American Electric Power and the IBEW, the steel 
industry, Environmental Defense, and others for advancing these 
proposals for public discussion. They are thoughtful 
suggestions, and we will focus on those during our hearing 
today.
    As we examine these alternative approaches in today's 
hearing, we hope to focus on these core questions, and I hope 
that our witnesses in their prepared testimony and their oral 
statements perhaps in answer to questions will perhaps 
enlighten us on these measures. First of all, which proposal is 
more likely to lead to developing country emission reduction 
for greenhouse gases? Secondly, which is more likely to level 
the playing field and neutralize any competitive advantage the 
legislation might unintentionally create for industry in 
developing countries? And third, which is more likely to 
withstand scrutiny under trade treaties to which the U.S. is a 
party? These are the core concerns that we hope to address 
during today's hearing.
    I want to say thank you to each of our witnesses for taking 
some time to join us here. We will turn to their testimony 
shortly, but before doing that, we will welcome statements from 
other members of the Subcommittee.
    Mr. Boucher. I would first like to recognize the ranking 
Republican member of our Subcommittee, the gentleman from 
Michigan, Mr. Upton.

   OPENING STATEMENT OF HON. FRED UPTON, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MICHIGAN

    Mr. Upton. Well, I would like to thank you and Chairman 
Dingell, my friends, certainly for holding this hearing on your 
second climate change white paper, Competitiveness Concerns and 
Prospects for Engaging Developing Countries. This white paper 
does indeed hit a critical aspect of the climate change debate, 
and it will have a substantial impact on how we proceed with 
legislation. I welcome all of the witnesses, and look forward 
to their testimony this morning.
    Before we begin, I would like to submit for the record a 
letter from Ranking Member Barton and then Ranking Member 
Hastert to Vatslav Kalus along with his reply regarding global 
warming, and I would like to quote President Kalus' response to 
the question of the moral obligation of the developing 
countries to the developing countries, and this is what he 
said. ``The moral obligation of the developing countries to the 
developing countries is to create such an environment which 
guarantees free exchange of goods, services, and capital flows, 
enables utilization of comparative advantages of individual 
countries and thus stimulates economic development of the less-
developed countries. Artificial administration barriers limits 
and regulations imposed by developed countries, discriminating 
against the developing world, affects its economic growth and 
prolonged poverty in underdevelopment.'' Climate change is 
indeed a serious issue and one that this Congress must address. 
But climate policy must also mirror sound, responsible energy 
policy because it is technology rather than government mandates 
that foster environment benefit.
    I said that I am not a fan of cap-and-trade schemes 
currently being circulated because they could indeed harm the 
economy and send jobs overseas, and I would like to take this 
opportunity to associate myself with the Chamber of Commerce's 
Six Core Climate Change Principles outlined in their testimony 
today. One, preservation of American jobs in a competitiveness 
of U.S. industry. Second, promotion of accelerated development 
and deployment of greenhouse gas reduction technology. Third, 
the reduction of barriers to the development of climate-
friendly energy sources. Four, maximum flexibility. Five, 
international economy-wide solutions with minimal impact on 
industry and regional economies which developing nations, and 
last, promotion of energy conservation and efficiency.
    Unlike other environmental issues that we have tackled over 
the years, climate change is global and requires a totally new 
playbook. Even if the U.S. devised the strictest regime to 
reduce greenhouse gases, these reductions could be dwarfed and 
negated by emission increases coming from the developing world. 
We cannot place enough emphasis on the fact that this is a 
global issue requiring a global solution. Energy demand is 
going to increase rapidly in the next couple of decades. In 
fact, 74 percent of the increase in global energy use will come 
from developing countries. According to a 2007 report by the 
International Energy Agency, developing countries will account 
for more than three-quarters of the increase in global 
CO2 emissions between 2005 and 2030.
    I am pleased that this white paper recognizes that we 
cannot act without China and India's full support and their 
participation. China and India have hundreds of millions of 
citizens living in abject poverty, getting by day-to-day 
without electricity. We have heard testimony before this 
Committee that China and India's first priority will be to 
raise the standard of living for their people. When you are 
talking about populations living on less than $1 a day, burning 
cow dung for heat, reducing CO2 emissions perhaps is 
not their top priority. How can we force action on a developing 
country that is still generations away perhaps from reaching 
the standards of living that we have enjoyed for many years? 
The proposal outlined in this white paper will have real 
consequences on American jobs and industry. Trade sanctions are 
not always the best tool to compel greenhouse gas reductions, 
and even if these proposals prove to be WTO compliant, they 
could prove detrimental to our already battered manufacturing 
sector. WTO compliance is important certainly, but retaliation 
will occur before even the WTO has a chance to rule on climate-
related trade sanctions. No matter how well we write the 
regulations or how clever we are within the WTO framework, 
unwilling partners will often find some ways around those 
requirements. According to the World Bank, by removing tariffs 
and other barriers to green technologies, trade could increase 
by an additional 7 to 14 percent annually. Increasing our green 
technology expertise will also significantly reduce greenhouse 
gas emissions in the developing world.
    Complicating matters, many of my colleagues on both sides 
of the aisle view climate change and energy policies as two 
separate issues. Well, I do not believe they are. I believe we 
must address climate change through a global framework that 
focuses on innovation and technology and efficiency, rather 
than a government mandate. We should pay more attention to 
exporting American ingenuity and green technologies to 
developing the world rather than perhaps setting up a 
regulatory framework that will only increase trade barriers.
    I look forward to this ongoing discussion and working in a 
constructive manner with members on both sides of the aisle, 
and I yield back my time.
    Mr. Boucher. Thank you very much, Mr. Upton. I am pleased 
at this time to recognize for 5 minutes the Chairman of the 
Full Committee, the gentleman from Michigan, Mr. Dingell.

OPENING STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MICHIGAN

    Mr. Dingell. Mr. Chairman, I thank you for the recognition. 
I want to commend you for the superb leadership you have been 
showing in leading us forward to a resolution of the problems 
we confront on climate change and global warming. I 
particularly want to commend you for this hearing, and I look 
forward to working with you and the other outstanding members 
of this Subcommittee on both sides of the aisle on drafting 
legislation limiting the U.S. emissions of greenhouse gases 
through an economy-wide cap-and-trade system.
    I am pleased to welcome Mr. Morris and our old friend, Jim 
Slattery, as a part of the distinguished panel before us. Mr. 
Slattery, as you will recall, was a distinguished member of 
this Committee and a friend of many of us here in this room, 
and I would like to welcome him back. I also am pleased to note 
that this Subcommittee and Committee have now issued three 
white papers that focus on design of a cap-and-trade program 
on, among other things, international competitiveness, which is 
most important here. I would note why these white papers are 
issued, which some of the folks around here seem to have a 
misunderstanding of our purposes--to see to it that we elicit 
comments and responsible discussion of the issues associated 
with cap-and-trade and the other questions that this Committee 
must address with regard to global warming and climate change, 
I would note that these papers have most recently focused on 
the roles of different levels of government in carrying out 
such programs. Today's hearing is the first on these white 
papers which are intended to lay out our initial conclusions on 
various topics and, as importantly, to solicit comments from 
other members and from stakeholders and ordinary citizens who 
might be concerned.
    The subject of today's hearing is two-pronged. First, how 
does the adoption of cap-and-trade legislation to limit U.S. 
emissions of greenhouse gases affect the competitiveness of 
U.S. goods sold at international trade? Second, what are the 
best legislative alternatives or combination of tools for 
mitigating negative effects? We look forward to the views of 
the witnesses on these important matters. In the white paper on 
international competitiveness released in late January, three 
main concerns were raised. First, absent corresponding action 
by developing countries, the adoption of limits on greenhouse 
gas emissions by the U.S. and other developed countries will 
not achieve the goal of protecting the global environment. 
Second, if the U.S. were to cap its own emissions without 
corresponding actions by developing actions with whom we 
compete internationally, the relative cost to American products 
would increase and would cause U.S. jobs and industry to 
migrate to other nations that do not limit their emissions. 
Third, past debate on climate change suggests that the Congress 
would be unlikely to adopt legislation committing the United 
States to limiting its own greenhouse gas emissions in the 
absence of assurances that developing countries will take 
similar action. And I would note that the rejection of the 
Kyoto Treaty in the Senate and in popular acceptance tends to 
support that statement very strongly. Of course, crafting 
legislation to address these concerns presents Congress with a 
unique challenge since its actions cannot unilaterally bind 
other countries. Like the underlying U.N. Framework Convention 
on Climate Change, the recent Bali roadmap for negotiating a 
post-Kyoto international agreement reflects differing roles and 
intentions between developed and developing nations in 
fulfilling the 1992 Rio Treaty's goals. With this in mind, the 
white paper outlines several options suggested in prior 
testimony before this Subcommittee, some of which have been 
incorporated into legislation under consideration in the 
Senate. The white paper also solicits comments on different 
approaches. I am interested to learn whether our witnesses 
believe a hybrid approach that combines both carrots and sticks 
with respect to developing countries could best achieve the 
goal of limiting carbon emissions without harming the U.S. 
economy. I would note that this is one of the most difficult 
issues the Congress faces in crafting climate change 
legislation and that we welcome not only the ideas that will be 
presented by today's witnesses but also the views of others who 
might wish to comment on the questions raised in the white 
paper.
    Finally, I would offer three observations about this aspect 
of the legislation which we intend to draft. First, the bill 
should include provisions to induce developing countries to 
limit their emissions growth on a timetable that meets both 
environmental and trade competitiveness concerns. Second, the 
bill must be crafted in a manner that is reasonably certain to 
withstand a challenge before the World Trade Organization, the 
WTO, which realistically we must expect to be filed. And three, 
we must be clear-eyed in understanding that success in any such 
WTO proceeding is not assured and to craft legislation so that 
in that event the risks to the United States' economy are 
minimized and are held to acceptable levels.
    With that, Mr. Chairman, I thank you for holding this 
hearing, and I look forward to the testimony and the comments 
of my colleagues. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Dingell follows:]

                   Statement of Hon. John D. Dingell

    Chairman Boucher, thank you for holding this hearing. I 
want to commend you for your leadership on the critical issue 
of addressing climate change, and I look forward to working 
with you and other members of the Subcommittee in drafting 
legislation limiting U.S. emissions of greenhouse gases through 
an economy wide cap-and-trade system.
    I am pleased to note that we have now issued three White 
Papers that focus on the design of a cap-and-trade program, on 
international competitiveness, and most recently on the roles 
of different levels of government in carrying out such a 
program.
    Today's hearing is the first of the White Papers, which are 
intended to lay out our initial conclusions on various topics 
and, as importantly, to solicit comment from other Members and 
stakeholders.
    The subject of today's hearing is two pronged. First, how 
does the adoption of cap-and-trade legislation to limit U.S. 
emissions of greenhouse gases affect the competitiveness of 
U.S. goods sold in international trade? Second, what are the 
best legislative alternatives--or combination of tools--for 
mitigating any negative effects? We look forward to the views 
of our witnesses on both of these matters.
    In the White Paper on international competitiveness 
released in late January, three main concerns were raised:
    First, absent corresponding action by developing countries, 
the adoption of limits on greenhouse gas emissions by the U.S. 
and other developed countries will not achieve the goal of 
protecting the global environment;
    Second, if the U.S. were to cap its own emissions without 
corresponding action by developing countries with whom we 
compete internationally, the relative cost of American products 
could increase and cause U.S. industry and jobs to migrate to 
nations that do not limit their emissions;
    Third, past debate on climate change suggests that Congress 
would be unlikely to adopt legislation committing the U.S. to 
limiting its greenhouse gas emissions in the absence of 
assurances that developing countries will take similar action.
    Of course, crafting legislation to address these concerns 
presents Congress with a unique challenge, since its actions 
cannot unilaterally bind other countries. Like the underlying 
U.N. Framework Convention on Climate Change, the recent ``Bali 
road map'' for negotiating a post-Kyoto international agreement 
reflects differing roles and inherent tensions between 
developed and developing nations in fulfilling the 1992 Rio 
Treaty's goals.
    With this in mind, the White Paper outlines several options 
suggested in prior testimony before this Subcommittee, some of 
which have been incorporated in legislation under consideration 
in the Senate. The White Paper also solicits comments on 
different approaches. I am interested if our witnesses believe 
a hybrid approach that combines both ``carrots'' and ``sticks'' 
with respect to developing countries could best achieve the 
goal of limiting carbon emissions without harming the U.S. 
economy.
    I would note that this is one of the most difficult issues 
Congress faces in crafting climate change legislation, and that 
we welcome not only the ideas that will be presented by today's 
witnesses, but also those views of others who wish to comment 
on the questions posed in the White Paper.
    Finally, I would offer three additional observations about 
this aspect of the legislation we intend to draft:
    (1) The bill should include provisions to induce developing 
countries to limit their emissions growth on a timetable that 
meets both environmental and trade competitiveness concerns;
    (2) The bill must be crafted in a manner that is reasonably 
certain to withstand a challenge before the World Trade 
Organization (WTO), which realistically we must expect to be 
filed; and
    (3) We must be clear-eyed in understanding that success in 
any such WTO proceeding is not assured; and to craft the 
legislation so that, in that event, the risks to the U.S. 
economy are acceptable.
    With that, I thank the Chairman for holding this hearing 
and look forward to the testimony.
                              ----------                              

    Mr. Boucher. Thank you very much, Chairman Dingell. At this 
time, I am pleased to recognize the Ranking Republican Member 
of the Full Committee, the gentleman from Texas, Mr. Barton, 
for 5 minutes.

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

    Mr. Barton. Thank you, Mr. Chairman. It is a little before 
11:00. This is my third Energy and Commerce Subcommittee 
hearing of the day, so what a joy it is to be on a committee 
that is engaged in trying to find solutions to our Nation's 
problems. The O&I Subcommittee issued a subpoena on unanimous 
vote to compel testimony of the president of the company that 
just had the largest meat recall in our Nation's history. Mr. 
Markey's TelCo Subcommittee is wrestling with the vexatious 
problem of whether we should mandate more sports programming on 
the basic tier, and up here, we are holding a hearing on a 
white paper about climate change and whether we should force 
the rest of the world to do as we say they should, whether we 
do it ourselves or not. And of course, we haven't even firmly 
established that there is a problem we can do something about. 
So we are at solution stages when I still think we ought to be 
in the fact finding. I will say this, and it is only my 
opinion, but it is based on a fair number of hearings and quite 
a bit of reading of the literature, the probability that 
mankind through its emissions is significantly affecting the 
temperature of the earth is much closer to zero than it is to 
100 percent. And I mean, I would almost say it is less than 1 
percent, but that is just my opinion.
    Having said that, I want to commend you and the staff for 
the white papers. They are thoughtful. A lot of effort has gone 
into developing them, and I do agree with you, Mr. Chairman, 
that if we are going to attempt to do something legislatively, 
we need to be very, very careful how we do it because this is 
not a video game, and we can literally wreck the world's 
dominant economy with all the best intentions for protecting 
our environment and our climate; and then we will look back 20 
or 30 or 40 years from now when we are, you know, last year's 
great power and say, what happened?
    I agree with the Chamber representative whose testimony I 
have reviewed that if we do anything at all, it ought to be 
within a framework on working on an international voluntary 
basis to do things that have technological relevance and also 
help in terms of reducing the so-called greenhouse gas 
emissions. I am not at all opposed to doing things that make 
economic sense and also have an environmental positive impact. 
I can say with all honesty that the U.S. economy is doing that. 
Our energy intensity, our carbon intensity, all the metrics 
that actually have a component that has an output variable show 
that we are leading the world and have been for the last 10 to 
15 years. I do not think that we can force the developing 
nations to limit their emissions on a purely emotional appeal. 
You know, if the choice is running water and heated homes or 
air-conditioned homes and mobility versus none of the above, 
they are going to choose the former, and all the environmental 
emotionalism in the world is not going to change that basic 
decision. I have had numerous conversations on-camera and off-
camera with my friends on the majority, and I am sincere in 
saying that I know that you folks are sincere in trying to do 
things that are better for our country. I just hope that before 
we act, we do begin the process of making sure that it does not 
wreck our economy and have no measurable environmental benefit 
as a consequence of that.
    With that, Mr. Chairman, I yield back.
    Mr. Boucher. Thank you very much, Mr. Barton. Any member 
who decides to waive an opening statement under the rules of 
the Committee will have 3 minutes of questioning time added to 
the questioning of witnesses, and the Chair would like to 
encourage members to keep that rule in mind as we go through 
the process this morning.
    That said, I am pleased at this time to recognize the 
gentleman from Louisiana, Mr. Melancon, for 3 minutes.

OPENING STATEMENT OF HON. CHARLIE MELANCON, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF LOUISIANA

    Mr. Melancon. Thank you, Mr. Chairman. I do not think I 
will use my whole 3 minutes, but let me start off with Budrow 
Joe. Budrow was standing on his front porch when the levees 
broke and a boat came by and said, get in the boat, we will 
save you, Budrow. And he says, no, do not worry about me. The 
Lord will take care of me. Second boat came by when he was up 
on the second floor, and they said, come on, Budrow, get in the 
boat. He said, nope. Do not worry about me. The Lord will save 
me. The next time the boat came by, he was on the roof and he 
told the people in the boat the same thing, do not worry about 
me, the Lord will save me. When the helicopter came by to pick 
him off the chimney, he said the same thing, do not worry about 
me, I will be just fine. The Lord will save me. Well, Budrow 
met the Lord face to face at the Pearly Gates, and he was mad 
as hell. And he says, Lord, what the hell are you doing? He 
says, you left me down there. The Lord looked at him and said, 
for heaven's sakes, Budrow. I sent three boats and a 
helicopter. What are you thinking?
    I guess my point is that the indicators are out there. The 
Great Barrier Reef is dying, the ice shelf is melting, we have 
got these extreme weather conditions, and I am sure there are a 
lot of other things that scientists can tell us about. If the 
scientists are 90 percent wrong, we still need to act. I would 
like to think that when I leave this earth, that it will be a 
place that my grandchildren and future generations will have a 
place to live and breathe and enjoy. So I think it is inherent 
upon us to illustrate to the world that we are willing to 
participate in trying to make the changes, and I agree with Mr. 
Barton on the fact that I do not want to wreck the economy of 
this world or this country particularly, but we need to 'fess 
up to regardless of who we work for, that we all have an 
obligation to the next generations. And with that, I yield back 
my time.
    Mr. Boucher. Thank you, Mr. Melancon. The gentleman from 
Kentucky, Mr. Whitfield, is recognized for 3 minutes.

  OPENING STATEMENT OF HON. ED WHITFIELD, A REPRESENTATIVE IN 
           CONGRESS FROM THE COMMONWEALTH OF KENTUCKY

    Mr. Whitfield. Thank you, Chairman Boucher, and we look 
forward to this hearing. We all know that Washington is a town 
that reacts to whatever the current issue is, and certainly 
global warming is that issue today. But I think we recognize 
that there are significant questions, for example, about the 
effectiveness of the cap-and-trade system operating in Europe 
today. I for one am quite concerned that we might adopt a cap-
and-trade system when we do not have the technology available 
to achieve the targets that we hear about, and if we proceed, 
then we definitely will place a great disadvantage the 
industries in our country that would jeopardize our jobs, 
jeopardize our economy, and I think create more unemployment.
    So I think it is imperative that we move cautiously and as 
one of our witnesses, Mr. Slatterly, in his testimony says 
today, we must have a program with a truly global approach 
involving major greenhouse gas emitting countries and must be 
verifiable and enforceable; and to ensure a global approach and 
to protect the competitiveness of domestic products, we must 
include legislation that would require maybe products sold in 
the United States, whether domestic or imported, that they meet 
a carbon-intensity performance standard.
    So we have to move cautiously. I think we have to be very 
careful on what we do here because the impact will be quite 
dramatic on our economy. I yield back.
    Mr. Boucher. Thank you very much, Mr. Whitfield. The 
gentlelady from Wisconsin, Ms. Baldwin, is recognized for 3 
minutes.

 OPENING STATEMENT OF HON. TAMMY BALDWIN, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF WISCONSIN

    Ms. Baldwin. Thank you, Mr. Chairman. I am really pleased 
to be here today to kick off our Subcommittee's series of 
hearings on legislation to address climate change. The 
information garnered from our sessions over the coming weeks 
and months will help us formulate what I hope will be a sound 
cap-and-trade program that will allow us to reduce our 
greenhouse gas emissions and preserve our planet for future 
generations. Our nation is the lone superpower in an 
increasingly interconnected and interdependent world, and with 
this stature comes unique responsibilities to set an example 
and to model behaviors as we would like other nations to 
emulate. Unfortunately, when it comes to reducing greenhouse 
gas emissions, we have not set much of an example until quite 
recently. With only 5 percent of the world's population, the 
United States is responsible for almost 25 percent of 
greenhouse gas emissions, and our emissions are projected to 
rise at at least 8 percent above 2004 levels by the year 2010 
and by 28 percent in 2025. Now it is true that emissions are 
rising fastest in developing countries and developing 
economies. China's emissions are projected to continue rising 
rapidly, another 65 percent to 80 percent by the year 2020. 
India is in a similar situation. But these are not the 
countries that put a man on the moon like we did or ushered in 
the Marshall Plan to rebuild Europe like we did. These are not 
the countries that the world looks to for leadership. We cannot 
use the behavior of developing economies as an excuse to defer 
action. Rather, we must demonstrate that it is possible to rise 
to this challenge, to enact meaningful legislation creating 
efficient, effective, and environmentally friendly climate 
change programs.
    That said, we also have a responsibility to our Nation, our 
businesses, our workers, and our consumers to ensure that 
American industries remain competitive, that good jobs remain 
right here in this country, and that prices and costs are 
reasonable and affordable. To ensure this, I agree that we must 
include a provision in our cap-and-trade bill designed to 
encourage developing countries to curb their greenhouse gas 
emissions. Such a provision can and should coincide with bold 
efforts to reduce our own emissions. And while, yes, the policy 
options that have been presented and are going to be presented 
are highly complex, I think we all look forward to that 
challenge, and I am hopeful that between the white papers and 
the hearings we will really shine a light on the appropriate 
way to address these issues.
    Again, thank you, Mr. Chairman. I look forward to this 
hearing and hearing from our witnesses.
    Mr. Boucher. Thank you, Ms. Baldwin. The gentleman from 
Texas, Mr. Burgess, is recognized for 3 minutes.

OPENING STATEMENT OF HON. MICHAEL C. BURGESS, A REPRESENTATIVE 
              IN CONGRESS FROM THE STATE OF TEXAS

    Mr. Burgess. Thank you, Mr. Chairman, and thank you for 
holding this hearing today. I want to commend the Committee for 
taking the time to support the white papers, to allow members, 
industry, and environmental consumer advocates the opportunity 
to evaluate any broad climate change policy. Now, according to 
the second white paper, our Committee has reached a consensus 
that efforts to reduce greenhouse gas emissions will be 
fruitless if we do not engage developing countries in the 
process. It is reported that China and India are expected to 
account for 56 percent of the projected increase in emissions 
between 2005 and 2030. So if these emissions are a cause of 
global climate change, then logically, should not China and 
India take some responsibility for a similar percentage of any 
efforts to limit the effects of climate change in the future? 
China and India are not likely to sacrifice manufacturing jobs 
nor needed economic development in their society in exchange 
for new regulations. Why would China or India want to comply 
with the U.S. Congress in its attempts to handcuff their 
progress? Instead of investing in global climate change 
initiatives this week, China reportedly increased their yearly 
defense budget by 20 percent. Clearly China's concerns as far 
as global climate change is concerned, is not on their to-do 
list.
    Newton's Third Law: for every action there is an equal and 
opposite reaction. Well, we need to make certain that any 
action we take here does not spark unforeseen and unfortunate 
consequences. For example, the 36 billion gallon alternative 
fuel mandate has had unintended consequences on the developing 
world. Saturday morning's Washington Post: Soaring food prices 
putting U.S. emergency aid in peril. The USAID officials said 
that a 41 percent surge in prices for wheat, corn, rice, and 
other cereals over the past 6 months has generated a $120 
billion budget shortfall that will force the agency to reduce 
international efforts to end hunger. According to the article, 
prices have increased as more grains go to biofuel production 
or are consumed by fast-emerging markets as China and India. 
Deeper into the body of the article, look at what has happened 
to wheat prices alone, up 25 percent in one day last week, said 
Josette Sheeran, Executive Director of the World Food Program. 
``This is really the first emergency that we faced without a 
drought, war, or natural disaster. We will have to cut the 
amount of people being served or the amount of food being 
served if we do not get more funds.'' I will submit that 
disaster has been brought to them courtesy of the U.S. Congress 
and its energy policy over the past year.
    Capital is a wonderful thing. It is powerful, but it is not 
necessarily courageous. Capital, if you mistreat it, will go 
someplace where it thinks it will be treated better; and I am 
concerned, Mr. Chairman, if we continue on this path of cap-
and-trade, we are going to drive the equation of unintended 
consequences much further than we already have. I think that 
will be deleterious for our country and the world at large.
    I will yield back.
    Mr. Boucher. Thank you, Mr. Burgess. The gentleman from 
Utah, Mr. Matheson, is recognized for 3 minutes.
    Mr. Matheson. Mr. Chairman, I thought your opening 
statement was more than adequate, and I will associate myself 
with that and waive my time.
    Mr. Boucher. Thank you so much, Mr. Matheson. The gentleman 
from Illinois, Mr. Shimkus, is recognized for 3 minutes. Mr. 
Shimkus is not here at the moment. 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. Mr. Chairman, as we 
continue our debate on global warming legislation, we need to 
keep remembering this important fact, that it is global warming 
that we are talking about, not just United States warming. This 
is not a problem that this Congress or this government can 
unilaterally address. We are going to need the cooperation of 
the world community, and it is imperative that any bill we pass 
recognizes this fundamental point.
    While it is true that the rest of the world and certainly 
developing nations will not do anything if we do not act first, 
we must be sure that by acting first we do not put our economy 
at an undue risk. We need to find a balance, where we can lead 
the world's efforts to combat global warming but also 
simultaneously strengthen American industry to deal with the 
challenges of a carbon constrained world. I think it is 
important to recognize the magnitude of the challenge if we are 
ever going to be able to adequately address it. China is now 
arguably the world's number one emitter of greenhouse gases. It 
is adding to its economy every 2 years the equivalent of the 
entire U.S. steel production while opening a new coal-fired 
plant, most with little environmental controls, every 2 weeks. 
It is critical that our policies at home address those 
environmental challenges abroad.
    I believe the question of how to best structure incentives, 
mandates, standards, or fees designed to bring about 
international acceptance of U.S. environmental benchmarks is 
one of the most fundamental questions before us as we craft 
this bill. With an eye to the limits on our options due to the 
World Trade Organization compliance standards, I think it is 
critical that we explore every option available because much 
like the greater bill, there is no silver bullet to address 
this question.
    Now, let me be clear. I am in no way referring to the WTO, 
but I am stating that compliance with the WTO will be critical 
in giving industry the tools they need to compete. I think the 
performance standard idea that we will see proposed by our 
witnesses today is an innovative idea that should be examined 
further, as are the options presented from using our tax code 
or trade policies to put a real cost on carbon. These new 
innovative ways of thinking outside the box are going to be 
crucial to moving this debate forward, and I look forward to 
hearing the thoughts of our witnesses on this matter.
    In conclusion, Mr. Chairman, today we are really getting 
into the real meat of this global warming debate. I hope all my 
colleagues will use this opportunity to learn more about the 
very real consequences of the policies we will be writing so 
that together we can put the best possible bill forward. As 
always, Mr. Chairman, I stand ready to work with you and any 
member of this Committee who is serious about addressing this 
challenge before us, and with that, I yield back the balance of 
my time.
    Mr. Boucher. Thank you, Mr. Doyle. The gentleman from 
Oregon, Mr. Walden, is recognized for 3 minutes.
    Mr. Walden. Thank you, Mr. Chairman. I am going to waive my 
opening statement and have to step out for a few minutes but 
will be back.
    Mr. Boucher. Thank you, Mr. Walden. The gentleman from 
Maryland, Mr. Wynn, is recognized for 3 minutes. Not here? The 
gentleman from Georgia, Mr. Barrow, is recognized for 3 
minutes.
    Mr. Barrow. Thank you, Mr. Chairman. Like Mr. Matheson, I 
cannot improve on the comprehensiveness of the Chairman's 
statement or on the eloquence of Budrow, so I, too, will yield 
the balance of my time.
    Mr. Boucher. Thank you, Mr. Barrow. The gentleman from 
Arizona, Mr. Shadegg, is recognized for 3 minutes.

OPENING STATEMENT OF HON. JOHN B. SHADEGG, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF ARIZONA

    Mr. Shadegg. Thank you, Mr. Chairman, and I want to echo 
the concerns of my colleagues on this Committee who have 
already spoken of the need to proceed cautiously. As you know, 
Mr. Chairman, I have repeatedly complimented you for your 
conduct of this Subcommittee and for the thoughtful hearings we 
have had on the issue of climate change. One option before us 
clearly is the issue of a cap-and-trade program. However, the 
evidence on the viability of a cap-and-trade program and its 
usefulness and success is extremely mixed. The experiment 
performed in Europe has not led to single-sided evidence of 
success. Having watched them implement a cap-and-trade program, 
it is fairly clear that two things have occurred. One, the cost 
of energy has unquestionably gone up in certain countries, and 
two, it is fairly clear that there has not been a reduction in 
greenhouse gases. I think we are all aware of the testimony 
regarding industries that cannot operate in portions of the 
European Union because they cannot get reliable energy to 
operate, even though those companies are extremely 
environmentally sensitive. And we are aware of the testimony 
with regard to, for example, companies that have left, some 
companies that manufacture or previously manufactured cement, 
for example, in Europe now moving manufacturing operations to, 
for example, Morocco. I would simply suggest that it is 
important that we proceed with caution. If the U.S. Congress 
pursues the same remedy with the same result, I believe the 
American electorate will not be happy and will not reward us.
    In regard to that, I want to note that in this very 
Committee at prior hearings we heard testimony from a 
representative of the government in India who made it very 
clear that the struggling or developing economy of India and of 
other countries in a similar economic position simply cannot 
adopt a greenhouse gas emissions program until they improve the 
standard of living in those countries and that to expect them 
to do so is unrealistic. I believe it is not in our interests 
to punish the people in those countries or the people in 
emerging economies and that we need to proceed with great 
caution; and while the discussion here is that we are going to 
help them, I believe they will perceive it not so much as help.
    I think it is important that we proceed with caution. I 
would echo the remarks of the Ranking Member of the Full 
Committee that we look at those places where we can improve 
efficiency and also limit greenhouse gases at least at this 
stage of the operation. With that, I yield back.
    Mr. Boucher. Thank you, Mr. Shadegg. The gentlelady from 
California, Ms. Harman, is recognized for 3 minutes.

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

    Ms. Harman. Thank you, Mr. Chairman. I apologize for my 
late arrival, but I had a competing hearing. I apologize in 
advance for my early departure but I have a competing hearing.
    I would like to echo or endorse some of the things Mr. 
Shadegg just said and make an additional point or a related 
point. Climate change, as everyone has said, is a world-wide 
problem, but the United States is still today the world's 
number one emitter of greenhouse gases, and we must lead. We 
must not use the problems of the developing world as an excuse 
to avoid leading. Let me just quote from the Papua New Guinea 
representative who said, ``We seek your leadership, but if for 
some reason you are not willing to lead, leave it to the rest 
of us. Please get out of the way.'' Imagine this statement 
coming from a small Pacific island nation which cares about 
this issue.
    So my bottom line is that leadership includes helping 
others to cooperate with us, and that is what we should be 
doing. If we can help others to cooperate with us, we can slow 
down and hopefully turn back the emission of greenhouse gases 
and save our planet, and if we do not, we will not. I think the 
United States is tested. I think this Committee is tested. We 
have to be courageous. We have to figure out how to get this 
right in the first place, and I applaud the fact that we are 
having this careful series of hearings to explore that.
    Thank you, Mr. Chairman.
    Mr. Boucher. Thank you very much, Ms. Harman. The 
gentlelady from California, Ms. Bono Mack, is recognized for 3 
minutes. Well, she was here and is no longer. The gentleman 
from Illinois, Mr. Shimkus, is here and is recognized for 3 
minutes.

  OPENING STATEMENT OF HON. JOHN SHIMKUS, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF ILLINOIS

    Mr. Shimkus. Thank you, Chairman. I would like to help you 
out with the time but we did not even get a chance to talk and 
debate and get on record on this issue. Really, it is a 
national media debate now, and so this is one of a few times 
that we can actually go on record on some of the issues.
    Facts, as we say here, are very stubborn things. The 
electricity generation in this country, we are close to 
capacity now, and the Energy Information Services says we will 
need 35 percent more electricity by 2030. Thirty-five percent 
more. Think about that, folks. We have all supported bills on 
efficiency, on renewable, solar, wind, but this is 35 percent 
increase over what is being generated today and that is all 
talking about base load generation. And look at our own houses. 
Look at the electricity consumption in our own houses.
    I just also went to the competing hearing. Talked about 
buying my wife a laptop for Christmas. You know, a very 
emotional Christmas present. It was not a toaster, it was not a 
coffee maker. We also made it so that it is portable around the 
house so she can carry it around and get on the Internet. It is 
more energy. Because of our ability to have all these great 
advances, we as individuals are consuming more electricity use.
    So you take where we are at today, and we meet our demands. 
I love the energy debate, and everybody knows who has served 
with me on this Committee, the folks get it confused. We got 
electricity and then we got fuels, a liquid fuel debate. And 
this is electricity. And we are for the most part independent. 
We are not importing a lot of electricity generation for use. 
My fear is some day we may be based upon this. Today our 
portfolio is 50 percent coal. We know what the climate change 
debate will do to coal. It stops it. In fact, last year 30 
coal-fired plants went off the drawing board. And we have got 
states and governors saying no more, not even when we talk 
about capture and sequestering. So how do you meet this 35 
percent increase in demand without the lowest, cheapest, most 
cost-effective use? And what does that do for the individual 
consumer? You talk about prices going up today. Across the 
board, electricity, liquid fuels, in this economy, 
manufacturing, I just hope the manufacturing sector and 
organized labor, they had better link arms on this because this 
is a job killer if done improperly. I have got great respect 
for the Chairman of this Committee. Our districts are very 
similar, and he has promised me that we are going to do no 
harm. I am a trust but verify guy in this debate because I fear 
there will be great harm done.
    I yield back my time, Mr. Chairman. Thank you.
    Mr. Boucher. I am happy about the trust part. That is a 
good place to begin. Thank you very much, Mr. Shimkus. The 
gentleman from Maryland, Mr. Wynn, is recognized for 3 minutes.
    Mr. Wynn. Thank you, Mr. Chairman. I will waive my opening.
    Mr. Boucher. The gentleman waives his opening statement. 
The gentleman from North Carolina, Mr. Butterfield, is 
recognized for 3 minutes.

OPENING STATEMENT OF HON. G.K. BUTTERFIELD, A REPRESENTATIVE IN 
           CONGRESS FROM THE STATE OF NORTH CAROLINA

    Mr. Butterfield. Thank you very much, Mr. Chairman, for 
yielding this time. Thank you for your leadership on this 
Committee. You have tireless energy, and I thank you for all 
that you do.
    I am looking forward, Mr. Chairman, to this discussion 
about how we can achieve what I call the concurrent objectives 
of lowering America's greenhouse gas output while at the same 
time protecting America's industry and jobs. And I would like 
to welcome and to thank former Congressman Jim Slattery for 
coming today and for testifying on behalf of the U.S. steel 
industry and Nucor. Nucor is very special to me. It is located 
in my district in North Carolina, and I thank them for all that 
they do on a day-to-day basis.
    I want to commend all of you for your constructive 
suggestions. I am sure that they will come. I am ready to hear 
from each one of you about how we can approach the three 
legislative approaches that have been offered in the second 
white paper that I just got a copy of a few days ago and what 
suggestions the industry may have in this relation. And so 
thank you for coming, thank you for convening this hearing.
    I yield back.
    Mr. Boucher. Thank you very much, Mr. Butterfield.
    Seeing no additional members who have not been recognized 
for opening statements, we at this time will receive statements 
from our panel of witnesses. And without objection, your 
prepared written statement will be made part of the record. We 
would welcome your oral summary of approximately 3 minutes. I 
will just say a brief word of introduction about each of our 
witnesses.
    Mr. Mike Morris is the Chairman, President, and Chief 
Executive Officer of American Electric Power, and it is 
noteworthy on the topic of today's hearing, that in 
coordination with the International Brotherhood of Electrical 
Workers, AEP has made a proposal with regard to engaging 
developing countries, and that is one of the three alternative 
proposals that have been made to this subcommittee with regard 
to addressing that critical element of cap-and-trade 
legislation.
    The Honorable Jim Slattery is a former colleague of ours 
and former member of this Committee who served with 
distinction. Jim and I were elected the same year and began our 
service on this Committee at approximately the same time. I 
think Jim may have preceded me on this Committee by 2 years. He 
was a better lobbyist for that assignment at the time than I 
was. He served with distinction here, and we welcome him back 
today. He is speaking today on behalf of a proposal made by the 
Nucor Steel Corporation.
    Mr. Richard Morgenstern is a Senior Fellow at Resources for 
the Future. Mr. David Doniger is the Policy Director for 
Climate Change for the National Resources Defense Council. Mr. 
Gary Hufbauer is with the Peterson Institute for International 
Economics. And Mr. Christopher Wenk is the Senior Director for 
International Policy of the U.S. Chamber of Commerce.
    We welcome each of you, and Mr. Morris, we will begin with 
your oral statement and would ask that each of our panel 
members try to keep their statements to approximately 5 
minutes. Mr. Morris?

  STATEMENT OF MICHAEL G. MORRIS, CHAIRMAN, PRESIDENT, CHIEF 
           EXECUTIVE OFFICER, AMERICAN ELECTRIC POWER

    Mr. Morris. Thank you very much Chairman Boucher and 
Ranking Member Upton. Thanks much for being here. I really 
appreciate the opportunity to address this sub-issue of a very 
large challenge, and I must admit, I was quite impressed by all 
of the comments that were offered by your colleagues on this 
Subcommittee because it is clear that there is a great 
appreciation of the magnitude of the potential trade impact of 
a misinformed and misapplied global warming plan.
    To your opening comments you mentioned that the 
International Brotherhood of Electrical Workers and American 
Electric Power have brought forth what we obviously believe is 
an appropriate way to address that issue. President Ed Hill of 
the IBEW was instrumental in putting together the concepts that 
we have developed and surely have submitted to your Committee, 
and we know and we are pleased that, along with other ideas, it 
will be given great consideration. The whole notion of putting 
an impact on the U.S. economy in the manufacturing sense, 
without giving those other competing manufacturing countries an 
opportunity to join us, and if they choose not to join us, then 
an opportunity to pay an international credit allowance before 
they can import products into this country we think is well-
balanced. We have spent a great deal of time trying to think 
through the concept of how one would put something like that 
together and answer the question that was asked by the Chair of 
the overall Committee, as well as the questions that you asked 
of us. We think in fact that it is WTO-compliant. When we went 
to the professionals who do that work, then I can assure you 
that is way above my pay grade, they said to us, no one has 
ever come and asked for how would you do something WTO-
compliant. Most clients come and say, I have a problem or I 
think somebody is violating WTO, would you help me figure that 
out? We went in and said, here is the issue. This is a global 
environmental issue that needs to be addressed globally or the 
environmental calamity, whatever it is and whenever it is, will 
continue to come our way. And we need to be fair and balanced 
in trying to find a way to go about doing that.
    In its simplest of terms, the IBEW-AEP approach addresses 
the issue on an economy-wide basis of carbon intensive products 
that would be manufactured in our country or in other 
countries, the programs would be the same, the International 
Reserve Allowance would be very similar to one of our carbon 
credits, and if your country did not have a comparable program 
and it is easy to poke holes in that and say, well, how would 
you ever determine that, we will leave that to the work of the 
Committee. But nonetheless, if they have no program, then 
before that product could be imported into our country, it 
would have to purchase one of those International Reserve 
Allowances. And that would be set at the same price as the 
carbon credit is set to the U.S. manufacturer. We think that 
goes a long way to try and make certain that there is balance 
to the question that you asked. We believe as I said before 
that it is in fact WTO-compliant. We know as the Chairman said 
that would be challenge. We think the timeline when one could 
go about doing that could sink in with the actual 
implementation of a cap-and-trade program developed not only by 
the House but the Senate, then coming out of conference, 
hopefully signed into law by the President. So we feel very 
strongly about the notion of addressing this issue because I 
join my colleague from Louisiana. There is something going on 
here. There is technology that we can employ to help the 
performance of the power plants. I surely agree with your 
colleague from Illinois. We need to build additional base load 
power plants. They need to be fired by coal. We need to do that 
in the most environmentally responsible way that we can. A cap-
and-trade bill that has a timeline that allows that technology 
to be developed, that has some type of price coordination in it 
so that we don't have a negative effect right off the bat on 
the U.S. economy and that addresses the global nature that 
almost every one of your colleagues mentioned in their comments 
is the answer, and we can develop that and we would be in 
strong support of that.
    I thank you very much for the chance to be here. I look 
forward to the questions and answers.
    [The prepared statement of Mr. Morris follows:]
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    Mr. Boucher. Thank you very much, Mr. Morris. Mr. Slattery, 
we will be pleased to hear from you.

       STATEMENT OF JIM SLATTERY, NUCOR STEEL CORPORATION

    Mr. Slattery. Well, Mr. Chairman and members of the 
Committee, it is as you might imagine a pleasure for me to come 
back and see so many friends. Thank you for the opportunity to 
appear here today.
    My name is Jim Slattery, and I am a partner at Wiley Rein 
LLP, and as counsel to Nucor Corporation, I am appearing on 
behalf of the American Iron and Steel Institute and the Steel 
Manufacturers Association. American steel companies make the 
girders and beams in our bridges, the steel in our pipelines, 
the rebar in our roads, the plate in our ships, the steel in 
our windmills, and the corrosion-resistant metal in our cars. 
The steel industry directly employs 150,000 people and hundreds 
of thousands more indirectly. Our national defense depends on a 
reliable source of steel. The loss of manufacturing industries 
like steel due to the climate change legislation without global 
reach would cost millions of Americans their jobs, damage our 
economy, and threaten our national security. Even worse, from a 
climate perspective, the loss of American steelmakers would 
result in increased global emissions of greenhouse gases, 
exactly the opposite the intended result.
    My testimony focuses on how to prevent climate change 
legislation from putting our industry at a competitive 
disadvantage and how to encourage foreign firms serving U.S. 
markets to lower their carbon footprint. Mr. Chairman, if we 
cannot encourage developing nations like China, India, Russia, 
and Brazil to act, what we do in the United States will matter 
little. Carbon intensity standards would limit how much carbon 
dioxide and other greenhouse gases could be emitted from a 
given steel product sold in the United States. These standards 
would apply to both domestic and imported products. While we 
cannot force other countries to control their emissions, carbon 
intensity standards would encourage both domestic and foreign 
producers to do so by conditioning access to the U.S. market on 
compliance with the standards.
    The American steel industry is part of the solution in the 
climate change debate, not the problem. Why do I say this? We 
beat Kyoto targets 11 years early and are among the most 
efficient in the world in terms of greenhouse gas emissions. 
For every ton of domestic steel that is replaced by imports, 
greenhouse gas emissions increase by a half-a-ton or more. For 
imports from China, the world's largest producer, the 
difference is double or triple U.S. emissions. According to the 
EPA, U.S. steel producers cut their process emissions from 
around 85 million metric tons to 45 million metric tons while 
actually increasing production from 1990 to 2005. Iron and 
steel accounts for only 1 percent of direct U.S. greenhouse gas 
emissions. It is vitally important for Congress to appreciate a 
few fundamentals of steel production. Steel is a manmade alloy 
of iron and carbon. Carbon dioxide is an unavoidable process 
emission of iron production at integrated steel mills. Once 
steel is produced, it can be recycled virtually without end by 
using electric arc furnaces that they rely heavily on 
electricity and natural gas but produce fewer process 
emissions. The domestic steel industry recycles its product at 
a higher rate than aluminum, paper, glass, and plastic 
combined, including 100 percent of the steel in automobiles. 
Steel is a highly competitive, globally traded commodity, and 
energy is one of the largest input costs. Due to major 
achievements in efficiency and recycling, U.S. steel producers 
have survived massive onslaughts of imports and are finally 
recovering from years of losses. However, the competitiveness 
of U.S. steel is always under pressure, particularly from 
developing country producers who face far less environmental or 
labor regulations and often benefit from large government 
subsidies. Our customers make buying decisions based on a few 
dollars per ton, as hard as that is to believe. If cost makes 
either portion of the U.S. steel industry less competitive, 
then the balance that created our phenomenal environmental 
achievements will be lost. Under a poorly conceived U.S. 
greenhouse gas regime, global market pressures will work, and I 
regret to say that the inevitable result will be to off-shore 
production and increase global emissions at great cost to U.S. 
jobs and the world environment.
    Carbon intensity standards would limit greenhouse gas 
emissions per ton of steel for steel consumed in the United 
States, whether domestic or imported. These standards would be 
analogous to car and truck fuel economy standards and appliance 
energy efficiency standards. Whether Congress creates a cap-
and-trade system, carbon taxes, or carbon intensity standards, 
the only metric to achieve global reach is carbon intensity. 
Congress has no ability to impose carbon caps on the total 
emissions from economies like China, Russia, India, and Brazil. 
To determine carbon intensity, a steel producer would one, 
identify the quantity of each input; two, multiply the quantity 
by the greenhouse gas factor identified by the EPA; and three, 
add up the total emissions; and four, divide the total 
emissions by the total tons of steel produced. Congress would 
direct the EPA to set the standard so that a predetermined 
percentage of U.S. production would meet the standard. Any 
producer, foreign or domestic, that failed to comply within a 
fixed amount of time could not sell their products in the 
United States. The key is that these standards would apply to 
domestically produced and imported products equally.
    Our firm has conducted an intensive analysis and concluded 
that such standards would be consistent with U.S. obligations 
under GATT.
    I would be remiss if I did not tell you that the U.S. steel 
industry still has grave doubts about a cap-and-trade regime. 
We think the American Electric Power approach is inadequate as 
currently drafted in S. 2191. Our competitors producing steel 
in countries like China, India, and Brazil do not need handouts 
from the U.S. Government to reduce emissions when they have 
equal access to capital and technology in this global 
marketplace.
    The American steel industry has led the world in reducing 
greenhouse gas emissions, but legislation that fails to achieve 
global reach will push production off-shore and produce greater 
greenhouse gas emissions. Carbon intensity standards for 
products such as steel offer a straightforward, GATT-consistent 
method of reducing domestic emissions while helping to preserve 
American competitiveness. Other steps will also be needed as 
detailed in my written testimony.
    And in conclusion, Mr. Chairman, I would just like to 
recognize a colleague of mine, Jim Bruce, a former staffer in 
the Senate Energy Committee that did a remarkable amount of 
work on this and is one of the fathers of this idea. So thank 
you very much, and I look forward to your questions.
    [The prepared statement of Mr. Slattery follows:]
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    Mr. Boucher. Thank you, Mr. Slattery. Mr. Morgenstern.

STATEMENT OF RICHARD MORGENSTERN, SENIOR FELLOW, RESOURCES FOR 
                           THE FUTURE

    Mr. Morgenstern. Thank you, Mr. Chairman. I appreciate the 
opportunity to appear here to consider how to achieve domestic 
emission reductions of CO2 and other greenhouse 
gases without placing undue burdens on any one sector and 
without shifting production and the corresponding emissions to 
other countries.
    Today I will briefly report on some recent research by 
myself and some colleagues, and I will discuss several options 
to alleviate the impacts.
    As is widely understood, the impact of a carbon price is 
fundamentally tied to the carbon intensity of individual 
industries and to the ability of firms to pass on the higher 
costs to their customers. We estimate that energy costs in most 
manufacturing industries as broadly defined at what the 
Commerce Department calls the two-digit level, are less than 2 
percent of total costs. However, they are more than 3 percent 
in energy-intensive industries such as refining, non-metal 
mineral products, primary metals, and paper and printing. 
Larger impacts, in fact, considerably larger impacts are seen 
when more narrowly defined industrial categories are 
considered. For example, for the aluminum and chlorine 
industries, costs are about 10 times higher.
    We generally find adverse effects on domestic production of 
less than 1 percent for every $10 per ton of CO2 
charge. There are exceptions. Motor vehicle manufacturing and 
chemicals and plastics are about 1 percent and primary metals 
are about 1\1/2\ percent. Of course, if we looked at narrower 
industrial categories, we would inevitably see larger impacts.
    Turning to the options for lessening these impacts, I would 
note at the outset the difficulty of achieving this without 
some cost either to the environment in the form of higher 
emissions or to the overall economy, largely because we would 
be substituting more expensive abatement options that would 
have to be undertaken by other industries or other individuals 
throughout the country. Trade-related actions are not costless, 
either. They might raise legality concerns as we have heard, 
and they risk provoking countervailing actions. Further, they 
can also drive up domestic product prices for key materials 
which will itself threaten other industries in our country.
    I focus here on three options today, performance standards 
instead of a market-based or cap-and-trade approach, free 
allowance allocation under a cap-and-trade system, and the 
trade-related policies which have been alluded to.
    The first option, performance standards, comes in many 
varieties, for example, tradable emission standards. The 
particular version discussed in the white paper and discussed 
by Mr. Slattery moments ago includes embodied emissions. This 
is a considerably more complex approach than is used for 
example in CAFE standards or other product standards that we 
have commonly used in this country. However, well-crafted 
performance standards of any type definitely have the potential 
to encourage efficiency improvements without putting as much 
upward pressure on production costs. In doing so, they may 
reduce the shift of production to other countries. At the same 
time, because performance standards do not encourage end users 
to reduce their consumption of carbon-intensive goods, they 
will leave behind some low-cost abatement opportunities, 
thereby raising the overall cost to all the rest of us of 
achieving a particular emissions target.
    The second option concerns the free allocation of 
allowances under a cap-and-trade system, and there are two 
important points to make here. The first concerns how many 
allowances will be given away free, and the second concerns the 
methodology, how the allowances will be given away. In most 
existing programs such as the acid rain program for example, 
virtually all the allowances have been given away for free 
based upon historical emissions, known as grandfathering. More 
recent proposals in the climate field, in addition to providing 
for a larger auction, have proposed to allocate free allowances 
in a way that recognizes firm level changes in output over 
time. Certain Senate proposals tie this directly to employment. 
This latter approach is known as updating. Compared with an 
allocation based on grandfathering, an updating allocation can 
have important differences by creating incentives to maintain 
or even expand domestic production and it can thereby reduce 
the potential for emission leakage. The principal advantage of 
using free allocation is that it can compensate firms for 
losses resulting from the new policy without excluding those 
firms' emissions from the cap. Traditional grandfathering can 
compensate owners for losses in value, but it does not 
necessarily discourage firms from shutting down production and 
moving abroad. In contrast, updating allows firms to gain 
larger allocation allowances if they expand their production or 
if they expand their employment, for example. Although 
incentives of this type are----
    Mr. Boucher. Mr. Morgenstern, if I could ask you to wrap 
up. Your time has expired----
    Mr. Morgenstern. Sure.
    Mr. Boucher [continuing]. And we are now getting recorded 
votes on the floor. I would like to get at least one more 
statement in before we have to recess.
    Mr. Morgenstern. OK. Let me cut to the chase here, Mr. 
Chairman. I will skip over my discussion of trade-related 
policies. I think the Committee is well-versed on that. Let me 
close by noting that one can mix and match these options. For 
example, one might consider starting out with a generous 
allocation for the most severely affected industries, perhaps 
one based on updating free allocations tied to current output 
or employment. This free allocation could then be phased out or 
phased down, either at a date certain or once trade-related 
measures were in place or major trading partners had adopted 
comparable measures.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Morgenstern follows:]
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    Mr. Boucher. Thank you, Mr. Morgenstern. We have three 
recorded votes pending on the floor, and it is our intention to 
recess the Subcommittee in about another 8 minutes, and what I 
am hoping is that potentially within 8 minutes, we can have two 
statements of approximately 4 minutes each.
    So, Mr. Doniger, that is your challenge, 4 minutes if you 
can do it.
    Mr. Doniger. We could go at the same time.
    Mr. Boucher. Let us try it one at a time and see how we do.

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

    Mr. Doniger. Thank you, Mr. Chairman. I am happy to be here 
on behalf of Natural Resources Defense Council's 1.2 million 
members and activists.
    What this Committee does has to be framed above all by the 
science. Global warming has started. The time for effective 
action is very short. We are looking at catastrophe if we let 
global average temperatures rise by more than another 2 degrees 
Fahrenheit. To avoid this we have to cut emissions in half by 
2050 and that means that the leadership has to come from the 
industrial countries, to cut their emissions by as much as 80 
percent over that time period. Delay makes everything harder. 
Wait 10 years, and the necessary rate of emission reductions 
doubles. In short, a slow start means a crash finish.
    The task is very challenging. It cannot be done without 
cooperation of both north and south, but it can be done. The 
United States, if it has a claim to leadership in the 21st 
Century, has to be instrumental in forging that coalition 
between north and south. Above all, early enactment of a U.S. 
cap-and-trade program is the single-most important step that we 
can take to unlock the global negotiating gridlock. We will 
also need a totally different foreign policy from the next 
president that places global warming in the top tier.
    At Bali, the big emerging economies showed unprecedented 
willingness to negotiate real actions. This is a big change 
from their prior stance against any new commitments. Some big 
developing countries are already taking significant domestic 
measures to reduce their own domestic energy use and pollution. 
For example, the Chinese are improving industrial and vehicle 
efficiency and more rapidly deploying renewables. China has 
even established special tariffs to discourage exports of 
cement, iron, and steel. The export tariff on steel equates to 
about $50 a ton.
    To be sure, solving the climate problem means that they 
have to do more. We cannot get their agreement to do more 
unless we in the U.S. show our willingness to join other 
industrial countries in reducing emissions.
    Some manufacturing industries and their unions are 
understandably concerned about potential competitiveness 
impacts in the first few years of a U.S. program. In our view, 
Congress can address those potential impacts with two tools. 
One of them, the IBEW-AEP trade proposal, is before you in the 
white paper. The other, a limited use of free allocations for 
the years before the trade proposal takes effect has not yet 
been considered by the white paper.
    To me, the importance of the IBEW-AEP proposal is that it 
would give the executive branch additional diplomatic leverage 
in negotiations with other countries for agreement on 
comparable actions, and it would also provide an equalizer 
later on if for one or more of those countries the negotiations 
do not succeed.
    Some want an earlier start date for the trade proposal. I 
would caution against that because there are dangers in putting 
the import proposal into effect too quickly. Brandishing the 
trade stick before 2020 would, in my judgment, inflame the 
climate treaty talks and pose more WTO risks.
    Fortunately, there is another tool that I mentioned that 
you could use: to allocate for a limited time a small number of 
allowances--it would not take more than 10 percent of the 
allowance pool--to specific industries that demonstrate their 
competitive disadvantage from domestic carbon control 
requirements. Any such free allocations should be conditioned 
on the recipient firms' maintaining domestic employment, and 
they should be phased out by the time the trade provision 
starts in. Free allocations will not be needed beyond that 
point because competitiveness issues will be resolved either by 
success in the negotiations or by the triggering of the trade 
provision.
    In short, we can solve the competitiveness concerns and go 
ahead with cap-and-trade with these two tools. Thank you, Mr. 
Chairman.
    [The prepared statement of Mr. Doniger follows:]
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    Mr. Boucher. Very good, Mr. Doniger. You were just a little 
over 4 minutes. Mr. Hufbauer, we will be glad to hear from you.

      STATEMENT OF GARY HUFBAUER, PETERSON INSTITUTE FOR 
                    INTERNATIONAL ECONOMICS

    Mr. Hufbauer. Thanks very much, Chairman Boucher, and 
members of the Committee. I want to commend the well-drafted 
white paper. I need to mention that a representative of the 
National Foreign Trade Council was originally going to speak 
where I am speaking. I have appended his statement written 
independently of my own, but the conclusions are quite similar.
    The Peterson Institute is working with the World Resources 
Institute on these issues, and a book titled Leveling the 
Carbon Playing Field will soon be published. I commend it to 
you.
    Now quickly turning to the questions, the first point I 
would make is that any meaningful cap-and-trade or other carbon 
limitation system will impose very large costs on this economy 
and other economies. To dodge that fact, I think, is to dodge 
reality.
    Second, the control systems adopted by different countries 
will differ. There is not going to be a uniform system, and the 
fact of differences and the possibility of various hybrid 
systems means that there will be enormous pressure in this 
country and elsewhere both for lobbying for free allowances and 
other preferences, and also for straight import protection. 
Sauce for the goose is sauce for the gander. Any import 
limitations we impose--citing carbon problems--can be imposed 
on us. This is going to be a two-way street. So if we go ahead 
and start imposing restrictions willy-nilly, we can expect 
return payment.
    Next, I think that the legislation would be vastly improved 
if the Committee would call for WTO discussion on an 
appropriate code that would identify permissible emission 
measures. That is in addition to Kyoto II or the Bali roadmap. 
The Bali roadmap at most will set targets and time paths but it 
will not address the details of permissible emission measures.
    I would caution this Committee against taking at face value 
assurances from brave lawyers that such-and-such a proposal is 
immune from WTO attack. I go into this subject in some detail 
in the testimony. There is hardly any trade restrictive measure 
that would not invite WTO attack, but we do not need to trash 
the world trading system, as Mr. Upton has noted, to get 
meaningful carbon emissions. What we need to do is have a WTO 
negotiation ahead of time--a good-faith negotiation led by the 
United States.
    So let me just stop there and say that global cooperation 
started early by the United States will achieve a lot more than 
a heavy-stick, unilateral approach. Thank you very much.
    [The prepared statement of Mr. Hufbauer follows:]
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    Mr. Boucher. Thank you very much, Mr. Hufbauer. We are 
going to recess the Subcommittee at this point and return 
following the last of the three recorded votes. I appreciate 
the patience of our witnesses, and we will be back with you in 
approximately 25 minutes.
    With that, the Subcommittee stands in recess.
    [Recess.]
    Mr. Boucher. We would ask our witnesses if they could 
resume their seats at the table.
    When we recessed, we had completed the statements of 
witnesses through Mr. Hufbauer, and Mr. Wenk, we have yet to 
receive your statement. So at this time, we will be happy to 
hear from you.

 STATEMENT OF CHRISTOPHER WENK, SENIOR DIRECTOR, INTERNATIONAL 
                POLICY, U.S. CHAMBER OF COMMERCE

    Mr. Wenk. Thank you very much, Chairman Boucher, Ranking 
Member Upton, and members of the Subcommittee for inviting the 
Chamber of Commerce to testify today on this very important 
issue.
    My name is Christopher Wenk, and I serve as the Senior 
Director of International Policy at the Chamber, the world's 
largest business federation. My background is in trade policy. 
Rather than the science of climate change and the state of 
research and development, I will confine my testimony to the 
international aspects of this issue.
    Without question, there are serious trade implications to 
the current debate over the various climate change proposals on 
the table that should give everybody pause. Let us consider the 
following facts. America's international trade in goods and 
services accounts for roughly 27 percent of our country's GDP. 
Nationwide our exports directly support 12 million good-paying 
jobs and indirectly support millions of other jobs. More than 
57 million Americans are employed by businesses that engage in 
international trade, and the benefits reach every state in our 
Nation. The combined effects of trade agreements over the past 
half-century have raised the annual income of an American 
household by $10,000. In 2007, the United States exported a 
record $1.6 trillion in goods and services and continues to be 
the world's largest exporter. These facts cannot be overlooked. 
Further, one should not also overlook the fact that the climate 
change discussion involves trading relationships that the 
United States has with countries around the world.
    A key focus of today's hearing is engaging developing 
countries on climate change. The Chamber believes that neither 
least-developed nor developing countries can be forced to 
comply with the domestic greenhouse gas emission regulatory 
regime without possible significant risk to not only U.S. 
exporters and workers but also to the economies of developing 
countries.
    For example, S. 2191, legislation to cap greenhouse gas 
emissions sponsored by Senators Lieberman and Warner, exempts 
countries that are de minimus emitters from having to buy 
import allowances. However, several developing countries 
besides China and India could possibly be considered 
significant emitters. These countries include Nigeria, Ecuador, 
Indonesia, Malaysia, and South Africa to name a few. These 
countries also export to the United States raw and intermediate 
products like oil and minerals that require them to purchase 
import allowances. One could argue that the imposition of the 
import allowance requirement on these countries would have a 
negative impact on their economic development. There is also 
the question of whether climate change legislation would make 
the United States vulnerable to a challenge under the WTO or 
NAFTA, for that matter. As noted on page 13 of the white paper, 
there is a general expectation that a WTO challenge is likely 
regardless of what approach Congress takes. However, I think it 
is safe to assume that we could screw up trading relationships 
around the world before we even got to a possible WTO dispute 
settlement proceeding. In this time of economic uncertainty, 
the Chamber urges Congress to not risk provoking a trade war 
with countries like China or India where the United States 
exported almost $83 billion worth of goods combined in 2007. 
Most recently, Brazil scored a big victory at the WTO over 
America's cotton subsidies. Brazil has reserved the right to 
impose annual sanctions of up to $4 billion on the United 
States. If the United States fails to comply with this ruling, 
Brazil has said that it would target American goods as well as 
trademarks, patents, and commercial services for retaliation.
    The bottom line is that there is no guarantee that our 
trading partners will not retaliate against us in the WTO or 
otherwise based on actions by Congress. Further, according to 
the U.S. Commerce Department, in 2007, the United States 
imported almost $113 billion in energy products like oil, 
gasoline, and natural gas from Canada and Mexico. Wouldn't 
border measures require our two largest trading partners to buy 
massive amounts of import allowances? Just imagine the impact 
that would have on the economies of these two important allies 
and possibly on our NAFTA obligations.
    Finally, the Chamber believes that trade policy can 
contribute in a meaningful way in efforts to reduce climate 
change through trade liberalization and not trade restrictions. 
Last fall the United States and the European Union submitted a 
proposal as part of the ongoing Doha round of WTO negotiations 
to increase global trade in and the use of environmental goods 
and services. It would place priority action on technologies 
directly linked to addressing climate change and energy 
security. Significantly, WTO members currently charge duties as 
high as 70 percent on certain environmental goods, impeding 
access to and use of these important technologies.
    Once again, the Chamber is grateful for the opportunity to 
provide testimony today. However, I believe that this hearing 
today will raise many more questions than it will answer. I 
would also urge the leadership of this Subcommittee and the 
full Energy and Commerce Committee to work with your colleagues 
on the Ways and Means Committee which has jurisdiction over 
international trade issues to explore the issues not only that 
were raised in the white paper but also addressed at this 
hearing.
    Thank you very much.
    [The prepared statement of Mr. Wenk follows:]
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    Mr. Boucher. Thank you very much, Mr. Wenk. Let me 
recognize myself for a round of questions, and I will address 
my first question jointly to Mr. Morris and Mr. Slattery.
    You are the authors or the co-authors of the two competing 
leading proposals that we have before us for protecting 
American industry and assuring the participation of developing 
countries when greenhouse gas controls are adopted in this 
country, and what I would like to ask you to do is to put on 
the table before you both of your proposals and critique those, 
one against the other, against these three questions and tell 
me which of your proposals in your opinion is superior on each 
of these three points. So I guess what I am asking you to do is 
advocate for your respective position on these three points, 
but to some extent, critique the other party's proposal as 
well. This is not an invitation for a negative campaign, but 
you can choose to be a little bit negative if you desire.
    So the three questions are these. Looking at your two 
proposals together, which of them is the most likely to achieve 
the following: One, reducing greenhouse gas emissions in 
developing countries; two, protecting the American industry 
that is exposed to trade at a time when we have carbon dioxide 
constraints domestically in the United States; and number 
three, passing muster under WTO and potentially other trade 
agreements to which the United States is a party. And so that 
is the challenge, and we will look forward to your answers. Mr. 
Morris, would you like to go first?
    Mr. Morris. Certainly. Thank you, Mr. Chairman. Let me try 
to frame as best I can what I think are some differences, and I 
must admit that I do not know that we are that widely apart on 
this issue. I think we are both trying as constructively as we 
can to come up with a program that would satisfy the issue at 
hand. It would seem to me, however, if you are looking at the 
overall reduction of greenhouse gases in a developing country 
that the IBEW-AEP proposal surely would be more attuned to that 
because it is predicated on your opening comments about a cap-
and-trade program. If you use carbon intensity or form of 
production as your measure, you would be lowering carbon output 
by that ton of product, whatever it is; but at the same time, 
if it is not a hard cap that steps down over time, you would be 
at best lowering then maybe flattening out. I do not know that 
you would ever get on the other side of the curve.
    Mr. Boucher. And you are suggesting that Mr. Slattery's 
proposal does not contain the hard cap but instead----
    Mr. Morris. I believe that to be the case.
    Mr. Boucher [continuing]. Is a carbon intensity 
measurement?
    Mr. Morris. Exactly. At least that is as I heard the 
comments and have had an opportunity to look at the program.
    As to your second undertaking, as I tried to say in my 
opening comment, the IBEW-AEP proposal is really directed at a 
very limited group of carbon-intensive manufacturing processes 
in a definable group of countries with which one would deal and 
have bilateral discussions and negotiations with the intent of 
having them join us in a constructive, opportunistic way or if 
not, then actually have them join in a protective way in that 
before their manufactured product could actually be imported 
into this country, they would have to pay for the International 
Reserve Allowance, which would put us on what I think is an 
absolutely equal footing.
    So wrapped in the second question in our answer, I think it 
probably more appropriately addresses itself to the multitude 
where clearly Congressman Slattery's approach is very limited 
as to the steel industry that he is here to represent. Rest 
assured, the last thing that IBEW or American Electric Power 
want to do is have a negative impact on the steel industries. 
They are big companies of ours, customers of ours, big 
employers in this country, a very important business for this 
country to have.
    As to your last question, as again I mentioned in my 
opening comments, we took a great deal of time, energy, and 
effort to try to create what we thought would be a WTO-
compliant approach to this issue. I surely agree with the 
professor when he said it would be folly to believe that it 
will not be challenged. We believe that it will be. To the 
extent that the WTO in Geneva in fact offers opinions to 
questions asked before you bring in front of them a challenge, 
that is a great idea. There is no unending pride of authorship 
of what we have done. If someone can come forward and say, we 
think IBEW-AEP is missing WTO-compliance at this particular 
point, I would hope the Committee would change it as they 
implement it. We are impressed and pleased that both Lieberman, 
Warner, and--had included that concept, and it will be 
developed over time; and clearly, we believe ours is a superior 
proposal and we would hope that you include it in the House 
materials as well.
    Mr. Boucher. Thank you, Mr. Morris. I think you would make 
an excellent candidate, by the way. You couched your negative 
remarks in a positive context just the way a good candidate 
should.
    Mr. Slattery?
    Mr. Slattery. Mr. Chairman, first of all, your question 
contemplates that there is a conflict between the AEP concept 
and the performance-standard concept. And that is not 
necessarily the truth. I mean, that is not the fact. You could 
do the AEP concept, you could also do performance-standards we 
envision. So there is not necessarily an inherent conflict. 
With respect to which----
    Mr. Boucher. Let me just interject. If you are suggesting 
that we can meld these two proposals and take the best aspects 
of both, you might elaborate on that potential and tell us the 
mechanics of how that would work and which particular pieces of 
the two proposals should be selected----
    Mr. Slattery. Sure.
    Mr. Boucher [continuing]. For that unified approach as you 
answer the question.
    Mr. Slattery. OK. First of all, the only specific AEP 
proposal that I am aware of that has been out there is the 
language contained in Senate 2191, and there are specific 
provisions in that particular proposal that in our judgment are 
terribly inadequate and very specifically the whole notion of 
having a base year established in the 2012, 2014 time period in 
effect tells the Chinese, do everything you can to ramp up your 
emissions between now and 2014. Be as dirty as possible because 
after all, in 2014, that will be the base year from which 
future emission reductions will be computed. And then to 
suggest the Chinese have nothing to do, or others, not just the 
Chinese, but other global competitors do not have to do 
anything until 2020 as the Senate language contemplates in our 
judgment is really unworkable and is inefficient and is 
terribly inadequate. So we have some very serious base year 
issues.
    Now, beyond that, the other thing that troubles us, and I 
trust that you can understand our reticence on this point, and 
that is given the Administration's current reluctance to 
currently address the currency issues with countries like 
China, for example, we are in this situation where when we look 
at the AEP proposal, for it to be effective will require in the 
future an administration to aggressively assert to the Chinese 
or others that your climate change and climate legislation is 
inadequate. It is not comparable to ours. That is going to be a 
tough call for some future administration to make. And then 
after making that determination, we are into this question of 
what kind of allowances then are going to be required of the 
Chinese, for example, when they enter our market? Now, I would 
ask you, who is going to buy those allowances for a Chinese 
competitor of a U.S. steelmaker, for example? I can show you 
that, for example, a company like Shanghai Bow Steel, state-
owned. It is a company as large as the largest U.S.-based 
companies. It is larger than Nucor. It is larger than U.S. 
Steel. And they are state-owned. There are several other 
Chinese companies that are state-owned. So they come to our 
marketplace with allowances, presumably provided by their 
government. Today's news as was just handed to me when I walked 
in here today, China has ruled out increases in state set gas, 
power, and oil prices. They have ruled out any market 
adjustment for their cost of energy. These are our competitors.
    As you can see, you have state-owned energy sources, state-
owned steel makers, competing directly with U.S. industry.
    Mr. Boucher. OK.
    Mr. Slattery. And how is that going to unfold? So let me 
also respond to the question about----
    Mr. Boucher. Very briefly because our time has expired.
    Mr. Slattery. OK. As far as the WTO issue is concerned, 
bottom line is, we are both I think in the same position on 
this that you will find trade lawyers on both sides saying that 
the proposals are permissible under GATT, and we strongly 
believe that. We have done a lot of legal analysis on it, and 
we believe that the proposal that we are talking about is 
permissible.
    So the last point I want to make is that with the 
performance standard, this should not be viewed as some sort of 
border measure necessarily, and it should not be viewed as a 
protectionist type measure. We are not seeking protection. We 
are seeking equal treatment. We are saying to domestic 
producers, we are saying to foreign competitors, if you want to 
sell into this market, produce a product that meets a certain 
standard, a certain performance standard with respect to your 
carbon intensity. That is similar to what we say with appliance 
energy standards, it is similar to what we say with respect to 
toy manufacturers in China that want to ship products into the 
United States. We do not permit them to ship products here with 
lead paint. They do it, but it is against our regulations. So 
my point----
    Mr. Boucher. I thank you, Mr. Slattery, and thank you, Mr. 
Morris. I will have some follow-up questions as I know other 
members will on precisely this set of issues. And let me 
announce that we are going to have a second round of questions 
so that we can get to some of those matters, and yes, we are 
going to be here a little while.
    Mr. Upton is recognized for 5 minutes.
    Mr. Upton. Well, thank you, Mr. Chairman. I just want to 
say that I appreciate everyone's testimony. This morning I 
received a letter, and I am going to ask unanimous consent to 
put it into the record.
    Mr. Boucher. Without objection.
    Mr. Upton. I have actually not studied it yet. I just 
skimmed it briefly, but it is from Susan Schwab, our U.S. Trade 
Rep, Executive Office of the President, so it was cleared 
obviously by the Administration, and she says this just to lift 
a sentence or two from this 3-page letter, ``We have serious 
concerns with some ideas that are currently circulating, 
particularly the enthusiasm for using import provisions. It 
might be perceived as unilateral trade restrictions directed 
against other countries to push them to move rapidly to reduce 
their emissions of greenhouse gases. We believe this approach 
could be a blunt and imprecise instrument of fear, rather than 
one of persuasion that will take us down a dangerous path and 
adversely affect U.S. manufacturers, farmers, and consumers. It 
is no accident that trade ministers in Bali unanimously agreed 
that trade restrictions run the risk of tit-for-tat retaliation 
and even an all-out trade war where no one wins and everyone 
loses. My trade counterpart in Europe, Commissioner Peter 
Mendelssohn, strongly cautioned against including trade 
restrictions in the European Commission's recent package of 
proposals setting out the second phase of emissions cap-and-
trade system, resulting in the omission of these measures.'' To 
me, that seems a pretty blunt warning that in fact trying to 
use the WTO or trying to influence the WTO. I think all of us 
agree that we should not proceed unless China and India are on 
board, and there are just enormous questions as to how that 
happens. But the idea that maybe the WTO is our escape valve or 
our safety valve to make sure that they are on board, at least 
does not seem like it fits with what the Administration is 
saying based on this letter, again, dated yesterday but I just 
received it this morning or what happened with the--or Bali, 
and Noel will have the report from the meeting in Hawaii at 
some point that happened just a couple weeks ago.
    What is your reaction to this? I have not seen it and you 
have not seen it, either. What are your thoughts as it relates 
to this passage?
    Mr. Slattery. Well, if I could just respond briefly, the 
bottom line is----
    Mr. Upton. It is like it undercuts any argument here.
    Mr. Slattery. Yes, well, it is extremely difficult for our 
industry to understand how in the world you can characterize a 
measure that we are proposing as being a trade barrier if we 
are saying to the domestic producers and international 
competitors that you must meet a certain standard. We do not 
see that as a trade barrier. We are not desiring it to be a 
trade barrier. We believe that to put that in place, it is 
going to hopefully encourage a race to the top, so to speak, a 
race to better performance for steel makers and other energy-
intensive manufacturers all over the world. So as long as we 
are committed to equal treatment, which we are, it is hard for 
us to see that as being a trade barrier.
    Mr. Upton. Well, you made the point in your testimony of 
the real positives that the U.S. industry has made.
    Mr. Slattery. Yes.
    Mr. Upton. 1.2 tons of carbon emitted for every ton of 
steel produced.
    Mr. Slattery. That is correct. On average.
    Mr. Upton. On average. And in China, it is about, you 
thought, about 2\1/2\ but it could be as much as 4\1/2\ tons of 
carbon produced for every ton of steel produced. So there is 
quite a difference in terms of efficiency.
    So you could look at something like, well, both countries 
are going to reduce by 80 percent. Fifty percent, let us say. 
Just pull a number out of the air. That would mean that they 
would go to 2\1/2\ tons and we would go to .6 tons of carbon, 
still quite a wide discrepancy. But then what if the Chinese 
say, or the Indians, they decide that they would go at a per-
capita basis based on the populations of the two countries. 
That is how they want to comply. So they have a whole different 
standard, and under that, I think we are about 22 times worse 
at 1 ton per carbon emitted for 1.2 tons versus even 2\1/2\ or 
3 tons that they have now. So I mean, we are not in the same 
playbook.
    Mr. Slattery. Well, if I could, let us look at what is 
going on out in the real marketplace right now, the Chinese and 
others, but let us look at China. They are bringing on line 
every 2 years a steel production capacity that exceeds the 
current U.S. capacity.
    Mr. Upton. Right.
    Mr. Slattery. This whole notion of saying to those new 
entities out there coming into the marketplace, in a global 
economy, competing with us for global capital, competing with 
us for global technology. This is not a mom-and-pop, backwoods 
operation. We are talking state-of-the art steel production 
capabilities. And the question is, what can we do here to 
encourage them as they bring all this capacity on line to bring 
it on line with clean, good, new state-of-the art technology; 
and we contend the best way to do that is to say to them, if 
you want access to our market, we are going to require a 
carbon-intensity standard here, and the technology is available 
with your new operations to employ that in the marketplace 
right now. And if they do that, which we expect them to do by 
the way, then no problem.
    Mr. Upton. I know I have exceeded my time, so I am going to 
follow up on the second round, but I want to ask the same type 
question as it relates to coal. Two plants, again, they are 
expanding tremendously, the Chinese. My sense is they have 
nowhere near the type of emissions that we have in this 
country, so again, they are running away at breakneck speed 
compared to what we have already.
    I yield back, and I look forward to the second round.
    Mr. Boucher. Thank you very much, Mr. Upton. The gentleman 
from Louisiana, Mr. Melancon, is recognized for 5 minutes.
    Mr. Melancon. I would like to pass at this time, Mr. 
Chairman.
    Mr. Boucher. Thank you, Mr. Melancon. The gentlelady from 
Wisconsin. Ms. Baldwin is recognized for 5 minutes.
    Ms. Baldwin. Thank you, Mr. Chairman. The proposals 
presented today generally focus on ways to ensure American 
companies do not go overseas or go out of business, both of 
which are extremely important. But there is the other prong to 
this discussion as we develop this legislation over the weeks 
and months to come and that is encouraging developing nations' 
emerging economies to decrease their greenhouse gas emissions.
    So I am sort of wanting to tease out a little bit more of 
whether the proposals presented here today are going to have a 
real difference in China or India or other nations' emission 
levels, and I guess I want to start with Mr. Doniger for your 
response to that.
    Mr. Doniger. Well, thank you, Congresswoman. The agreement 
in Bali is really a breakthrough because as I said the 
developing countries moved off their position that they are not 
willing to take on any new actions or commitments. What they 
are saying is we need to see the industrial countries--which 
have had the longest run on putting carbon in the atmosphere 
and which have the highest per capita emissions and have a lot 
of technological and economic capabilities--take responsibility 
for our emissions. That is why I think the cap-and-trade 
legislation that you are working on, to show that we are ready 
to take our place in this, is so important. That is one of the 
key elements of getting an international agreement. We have to 
have a foreign policy which puts global warming at the top of 
the list, not at the bottom of the list, so that it becomes 
important in the overall picture of things the United States 
wants to get from China and India, Mexico, Africa, South 
Africa, Brazil. It has to be important. It has not been 
important. And we have to, in my opinion, be willing to meet 
their needs for technological assistance in certain areas. By 
all means, they have lots of resources. But they can't be 
expected to entirely self-finance the big jump to clean 
technologies that we want to be taking here and we want them to 
be taking. In the Bali agreement the Administration agreed to 
three topics to discuss in the way of financing. One is clean 
technology deployment. The second is help with countries whose 
emissions are primarily in deforestation, to cut that 
deforestation. And the third area is in countries such as in 
Africa and some of the small island states, which are being 
overwhelmed by impacts, to help them cope with the impacts. It 
will not take a lot of money. We can build into the cap-and-
trade allocation system funding that would help on a 
sustainable, stable way to create those incentives for 
cooperation with other countries.
    If you do those things, then the trade measure will become 
a last resort for the recalcitrant. But I think we do not have 
recalcitrants across the board. We have countries which 
recognize global warming as a severe problem for them as well 
as us, and they are indicating that if we act, they will act, 
too.
    Ms. Baldwin. In follow up, in your testimony both on page 7 
in your written testimony and also as you were here speaking 
earlier, described some of the actions that China is taking. 
And you know, it is something clearly not enough in my mind; 
but I was particularly interested in your mention of the 
special export tariffs to discourage export of I think it was 
cement, iron, and steel. And I am wondering if you could tell 
us a little bit more about your knowledge of these tariffs and 
the effect that they will have in your opinion on the global 
market and prices.
    Mr. Doniger. Well, China is concerned that they have become 
the dirty manufacturing place for products that go to other 
countries. Of course, they are building their steel industry 
and cement and so on for their own domestic consumption. But 
with respect to the exports, they are putting on these tariffs 
to discourage excessive exports. The motivation is that the 
overly high levels of production for export are stressing their 
energy supplies and are creating a lot of pollution. So this is 
an indication that China takes their energy and pollution 
problems with increasing seriousness. Now, they have got a lot 
to do, and we have a lot to do here. We need to put this higher 
on the to-do list with them than we have before.
    Ms. Baldwin. And I want Mr. Slattery----
    Mr. Boucher. The gentlelady's time has expired.
    Ms. Baldwin. Oh, I am sorry.
    Mr. Boucher. We are going to do----
    Ms. Baldwin. I was looking at the one up there.
    Mr. Boucher. We are going to do a second round and so----
    Ms. Baldwin. OK.
    Mr. Boucher [continuing]. We will come back. The gentleman 
from Illinois, Mr. Shimkus, is recognized for 5 minutes.
    Mr. Shimkus. Thank you, Mr. Chairman. I appreciate the 
panelists and their answers to the questions because it just 
gives us more comments based on the experience dealing with 
this, Mr. Doniger, and I am going to just respond to your last 
comment. I just disagree. We had a senior trade rep from China 
that Chairman Boucher sat with. Twice he was asked, and never 
really answered the question, would the Chinese go into a 
mandatory international cap-and-trade program. Chairman Boucher 
asked it, another member from the other side of the aisle asked 
it. He basically said no. So the country that sends us tainted 
toys, we have problems with intellectual property, 
disagreement, I think we are kidding ourselves if we think they 
are going to all of a sudden say yes because their basic 
response is, hey, listen, you had 200 years to develop--this 
was his response. You had 200 years of using a carbon-based 
system to become the major power in the world today, and now it 
is our turn. I am going to have some questions for some other 
folks. There are some points I want to make.
    The second to Mr. Slattery, and I appreciate that part of 
this was notes based upon your testimony. I mean, I just want 
to respond to the--but the question was, having heard that from 
the Chinese official, what is your response based upon your 
proposal that says, hey, you know, we can have these 
performance standards.
    Mr. Slattery. Several things. First of all, you know, I am 
one of these trust-but-verify people, and you know, when I look 
at this whole situation, there has been talk here, for example, 
about clean technology. How can we incentivize the Chinese, the 
largest steel producers in the world, the second-largest 
importer of steel into the United States, to responsibly 
address this problem? I would suggest to you that with 
performance standards and telling them if you want access to 
this market, then you are going to produce a product with a 
certain carbon footprint that is going to be applied uniformly 
to domestic and all foreign competitors. If we say that to the 
Chinese and tell them right now that this is coming in a few 
years, whatever you all ultimately decide to do, then what will 
the Chinese response be? I would suggest to you that we have 
incentivized them to install the best technology available and 
not the cheapest and the dirtiest that can, you know, maybe 
meet their urgent demand for supply, but rather to put in place 
the cleanest and the best so that the products produced there 
will have access to the U.S. market.
    Mr. Shimkus. If I can, I think that is a good summation. I 
want to move to Mr. Wenk for a second because of his testimony 
because you also talked about other provisions especially with 
our obligations under NAFTA, of current political debate these 
days. And I would say that that even makes a more interesting 
question with the trade issues based upon this proposal and the 
other issues of whatever the carbon regime we put in. Can you 
talk about trade aspects?
    Mr. Wenk. Thank you, Congressman. You know, there obviously 
has been a lot of focus on the white paper and in this hearing 
today about the WTO aspects of any possible climate change 
legislation, but you know, there are trade implications across 
the board here, Congressman. I think very close to home here 
are two of our biggest trading partners, Canada and Mexico, our 
NAFTA trading partners. And you know, in 2007, they exported 
$113 billion of raw materials to the United States. And I think 
a real fundamental question of any cap-and-trade program is how 
this would impact possibly our NAFTA obligations, and I think 
that these are things that need to be looked into a little bit 
more. But I think we cannot overlook the fact that, sure, there 
are WTO obligations that we need to be certain cognizant of, 
but there are also NAFTA obligations. And if there were some 
sort of cap-and-trade program, there may be give a special pass 
to Canada because they signed onto Kyoto and they maybe met 
some of their commitments. But then the question becomes about 
Mexico perhaps. So I think there are some real questions even 
closer to home here with Mexico and Canada and our NAFTA 
obligations.
    Mr. Shimkus. And let me just finish and go across to the 
whole board, and if you want to add, depending on the 
Chairman's discretion, we have got two proposals. We have got a 
cap-and-trade, we have got this performance standard. Chairman 
Dingell had mentioned earlier in this Congress last year about 
not fooling the public that there would be no cost to be paid, 
based upon whatever regime we go. Why not be just clear and 
above-board that we are going to enact a carbon tax?
    Mr. Morris. Gosh, I have got so many great answers for all 
these other questions. To the last question that you asked 
before that and I will try to get to that issue, the IBEW-AEP 
proposal would work perfectly for the Chinese, even if they do 
not want to participate. We would find out that they do not 
have a comparable program, and a ton of steel would have a 
carbon allocation cost to it; and if that were $10 a ton, the 
importer would pay it. So if Ford Motors is buying steel from 
them, Ford would pay $10 and put them on exactly the same 
footing as Nucor selling steel to Ford.
    But to your question, if we have a tax, China surely is not 
going to put a tax on their people; and that would just simply 
add cost to the U.S. market price. Chairman Dingell is exactly 
right, and you addressed the same question. There is a societal 
cost associated with CO2 capture, storage, control, 
whether you go to natural gas as your fuel source, whether you 
go to solar or wind, however we address this issue, there is a 
cost. And we as an industry, we as a company, have been trying 
to be extremely honest about that. And the more we understand 
that, society will make a decision whether they believe that 
cost is acceptable versus the cost of the potential long-term 
impact on the environment. But we should never be blind to the 
notion that these are all free goods. They are not.
    Mr. Shimkus. Mr. Chairman, I know my time has expired. It 
is a big panel. I will just yield back and we will follow up 
with the next round.
    Mr. Boucher. Thank you very much, Mr. Shimkus. Let me 
apologize to the gentlelady from Wisconsin for shortening her 
time. There was in fact time remaining on the clock, although 
from the vantage point of the Chair, it appeared that the light 
was red. And there was considerable discussion behind this dais 
about whether the problem was a clock malfunction or a Chairman 
malfunction. However it was, there was a malfunction. And we 
will add to the gentlelady's time for the next round, the time 
by which her questioning was foreshortened.
    The gentleman from Utah, Mr. Matheson, is recognized for a 
total of 8 minutes.
    Mr. Matheson. Well, thank you, Mr. Chairman. I appreciate 
the witnesses' testimony. I think this is a very complicated 
issue of which I think we are all still trying to get our arms 
around. I have a series of questions that I want to ask the 
panel.
    Mr. Slattery, in your testimony, you state the products of 
energy-intensive industries like steel, whether domestically 
produced or imported, must be subject to the same requirements 
starting at the same time with no exceptions and no discretion. 
If Congress adopts a mandatory cap-and-trade program, do you 
support having that mandatory cap applied to all sectors of the 
economy? Does your proposal exempt steel from what would be an 
economy-wide cap or is the steel industry willing to live with 
the domestic cap-and-trade system in addition to the 
performance standard for goods manufactured overseas?
    Mr. Slattery. Congressman, first of all, as I indicated in 
my oral testimony, the industry as you might imagine has some 
serious concerns about how a cap-and-trade system would be 
implemented; and the devil is in the details, to make a long 
story real short. Now, very specifically, as I tried to 
indicate earlier, the steel industry is sort of two-pronged, it 
is the EAF, electric arc furnace operation, and the BOF 
integrated operation. They are interdependent. The EAFs cannot 
exist without the BOFs, and they each have unique problems. So 
for example, on the BOF side, you have process gas problems 
that have to be addressed. It is an unavoidable emission. On 
the electric arc furnace operation, we have a horrible upstream 
indirect emission problem related to the cost of electricity. 
And you know, if you put this operation under a cap, you have 
to make sure that there is adequate allowances for, and I will 
just speak specifically about the electric arc furnace side of 
it because if you do not have adequate allowances, then what 
happens is in some cases you may have electricity rates going 
up by maybe 50 percent if you are to believe what has been said 
by the president of Duke Energy. Then how does our industry 
respond to that when 10 to 20 percent of our inputs are 
electricity.
    Mr. Matheson. So you are saying----
    Mr. Slattery. So give us adequate allowances----
    Mr. Matheson. So you are not categorically saying no to the 
cap, you want to know how it is structured?
    Mr. Slattery. We want to know how it is structured and we 
want to be a participant in solving this problem is what I am 
here to say.
    Mr. Matheson. Under your proposal, would we need to have 
domestic performance standard as well to make it work? Because 
we have heard some interested parties believe that you would 
need to have a domestic standard and that such a process would 
be duplicative. Can you comment on that?
    Mr. Slattery. The way we see this, the performance standard 
is the part of it that is designed to achieve what we call 
global reach. In other words, how do we incentivize our global 
competitors to get in the game and help us solve a global 
problem. How do we do that? And we contend that with 
performance standards that are enforceable by American industry 
that you will have in place the tools that you need to most 
strongly incentivize the kind of activity that you want.
    Mr. Matheson. It would be the same whether it was foreign 
or domestic?
    Mr. Slattery. That is correct. That is correct.
    Mr. Matheson. Let me ask you----
    Mr. Slattery. All of the players have to be treated the 
same.
    Mr. Matheson. Does your proposal apply to unfinished 
commodities such as cement and aluminum and steel? Is that a 
correct statement?
    Mr. Slattery. I am not here representing those industries, 
but the concept of performance standards in our opinion----
    Mr. Matheson. Is for unfinished commodities?
    Mr. Slattery [continuing]. Would be applicable to other 
energy-intensive business products.
    Mr. Matheson. So how do we do with having imports of 
finished products that could come in? Would that avoid carbon 
restrictions if I am bringing in a finished product as opposed 
to just raw steel or how would we deal with that?
    Mr. Slattery. In the first instance we would be dealing 
with the raw material, but ultimately it would be applied to 
the finished products, too.
    Mr. Matheson. Let me shift to the boarder adjustment 
proposal, Mr. Morris. Your proposal would require countries 
that are large emitters of greenhouse gases to purchase enough 
international allowances to cover the emissions producer and 
manufacturing. In order to meet fairness concerns that may be 
raised by the WTO, should this proposal apply to all greenhouse 
gas emitters that fail to take comparable action to reduce 
greenhouse gases as the United States has done as opposed to 
just being applied to large emitters?
    Mr. Morris. There is a de minimus exclusion that is 
required under the WTO, so you would be going after the large 
manufacturing competing countries that have industries that 
have large carbon footprints associated with them. So that 
would be the target of what you would do.
    Mr. Matheson. I am sure you know that in some countries 
that are developing where we import products that are energy-
intensive, their manufacturing sectors are receiving subsidies 
from the government. How does your proposal prevent or stop 
other nations from subsidizing the cost of these international 
carbon allowances?
    Mr. Morris. The importing agent would pay the carbon 
allowance. So again, if the buyer of the product manufactured 
were Mike's Concrete Company, I would have paid the cement 
manufacturer to import that cement into the country before I 
turn the cement into concrete. So whether or not they then 
would lower the price, there is no way for us to control that.
    Mr. Matheson. And you are talking about these allowances, 
there is an unlimited capacity for allowances for employment--
--
    Mr. Morris. They would be created by the office of the 
president or the independent agency which you would write into 
the law that would be responsible for determining the 
comparability of another country's program and the actual 
process that one would go through to do that.
    Mr. Matheson. Since the ultimate goal is to reduce global 
greenhouse gas emissions, what I am hearing is your proposal 
helps create a leveling of the economics of this if we place 
restrictions on this country, making higher cost to produce 
something to meet carbon restrictions. We are going to say, OK, 
if you are importing something, you have got to buy allowances. 
The importer does so on an equal playing field. I am trying to 
get my arms around how that is going to result in other 
countries actually lowering actual greenhouse gas emissions.
    Mr. Morris. The hope would be that they would implement a 
comparable cap-and-trade program in the housed country so that 
they would not have to pay the import allowance as they came 
into this country. That is the notion of our carrot side of our 
program because to the point that was made by Mr. Doniger, if 
in fact from Bali we get the impression, and I am not certain I 
buy that yet, but we at least heard some very different 
statements by a number of countries, it would encourage them to 
do that. They have an opportunity to join in this addressing of 
a global issue. Should they choose not to do that, then they 
are going to have to pay an allowance, and it will have an 
impact on their cost production.
    Mr. Matheson. If I can restate that to make sure I 
understand, your proposal is assuming that there is going to be 
an effort to get a cap-and-trade type program in these other 
countries?
    Mr. Morris. That would surely be our hope. I mean, if we 
are going to handle this in a global sense, we have to have 
global partners. We constantly hear those kinds of 
conversations, but yet we have not seen that kind of action.
    Mr. Matheson. I got less than a minute. Let me ask a 
broader question for this round. It seems like a lot of this is 
predicated on the notion that the United States is the great 
consumer in the world and that we consume so much, we can help 
drive policies elsewhere because we are the market where 
everyone wants to sell their goods, and yet we are basing a 
global economic circumstance where greater consumption is 
taking place elsewhere. We were told the new steel production 
and cement production in China is really for internal 
consumption. So at the end of the day, is the access to U.S. 
markets the great carrot if you will that we hope it is that we 
hope to influence all these other countries to do this? I 
question if these other countries are going to feel motivated 
by that or if they are just going to go sell their products 
elsewhere.
    Mr. Morris. They might well do that, but what we are trying 
to say is we are creating a law in the United States that will 
affect the United States manufacturing cost in the United 
States companies and jobs. We are only trying to create 
something that tries to put some equality and balance in it.
    Mr. Matheson. Mr. Doniger, do you have a----
    Mr. Doniger. Thanks, Congressman, good question. We cannot 
get there if the Chinese, the Indians, the South Africans, and 
so on do not want to get there. They are coming to want to get 
there because they are seeing impacts in their own countries, 
they are seeing how it all knits together, the same as we are. 
And I do not think we are going to get the economy-wide cap-
and-trade programs in those countries in one fell swoop. But we 
could get to agreements for their electricity sectors, 
agreements for their steel sectors, agreements for cement. We 
have a 150-year head start on developing the information 
systems to know the emissions of Mr. Morris' company and Mr. 
Slattery's clients every day. The Chinese do not have that yet. 
They are building that. They can move forward in these key 
sectors, and that is where most of the emissions problems are 
and that is where most of the competitive problems are.
    Mr. Matheson. Thank you, Mr. Chairman.
    Mr. Boucher. Thank you very much, Mr. Matheson. The 
gentleman from Pennsylvania, Mr. Doyle, is recognized for 5 
minutes.
    Mr. Doyle. Thank you, Mr. Chairman. Mr. Morris, in your 
testimony you stated that there should be an appropriate 
allocation of allowances at no cost to the electric power 
sector in order to blunt the otherwise inevitable electricity 
price spikes. In your estimate, what do you believe the range 
will be in your territory and how long do you estimate you will 
need these no-cost allowances in order to prevent these spikes?
    Mr. Morris. The contemplation on an allocation of 
allowances to the electric industry is really a mirrored image 
of what this Committee did in 1970, 1977, and 1990 and the 
socks and knocks undertaking. The contemplation is that those 
allowances would be monetized and that that capital would be 
used to add the equipment or build the new power production 
facility that our colleague from Illinois clearly pointed out 
needed to be done in the future. So just as we have done in the 
Clean Air Acts before, you would step those allowances down 
over time.
    If you simply do not do that and you have an auction, and 
who really are the proponents of an auction, Goldman-Sachs, all 
the New York banks, if you buy them for $20, I submit they do 
not intend to sell them for $5. So you know, that to me is just 
a profit motive, where ours is an implementation of technology 
to make certain that we in fact do respond to the cap-and-trade 
program that we feel strongly ought to be implemented.
    To your specific question, American Electric and Power is 
the lowest cost energy provider in the 11 states where we do 
business with our 5.1 million customers. I would expect this 
could have an impact of 20 to 30 percent on that rate 
structure; but again, as I said to the Congressman from 
Illinois, this is a societal decision that needs to be made by 
the voters of this country, and you are in the process of doing 
that now. And if this country decides that these are acceptable 
costs, then that is exactly the way it will unfold. So I do not 
think we should run from this because we think it is costly, 
but I surely do not think we should live in a make-believe 
world that this is a free move.
    Mr. Doyle. Thank you, and I want to compliment you and your 
company for taking a stand in support of a cap-and-trade 
system. You know, one of the concerns we have heard about your 
proposal is that other nations can get around it due to the 
fact that these countries simply do not follow fair trade 
practices. An example, in China where the steel companies there 
produce steel at an artificial price because the government, 
you know, supports it. How can we add to your proposal in order 
to address some of the concerns that people have in that 
regard?
    Mr. Morris. At the point of importation to the United 
States, the importer is going to pay that fee. And that will 
equalize to a producer of steel or a producer of cement or a 
producer of aluminum at least this one subset of what is going 
on. There is no way in the world a cap-and-trade law passed by 
this Congress and signed by this President will be able to 
affect the safety programs in China, the wages that are paid in 
India, the overall cleanliness of how they go about doing those 
issues; but as to this subissue, we think what we have put 
together here is a very appropriate way to do it. And again, as 
I said before, if someone has a great idea to add to that 
value, we would be the first to support it. We are only trying 
to address the issue. It is mobile and we want to be sure that 
in the implementation of a cap-and-trade program in this 
country, we do not inadvertently put a huge burden on our 
manufacturing customers when the companies that they compete 
with worldwide do not have that same point.
    Mr. Doyle. Thank you.
    Mr. Morris. So as to that subissue, I think we have 
addressed it as to the larger issue. We cannot make them pay 
$80 an hour for labor. We just cannot.
    Mr. Doyle. Thank you. Mr. Doniger, one of the thoughts I 
have been sharing with the environmental community that most of 
us, and I believe the majority in Congress, agree with this 
goal of reducing emissions 60 to 80 percent by the year 2050. 
The argument now is how do we get there? And I do not think 
there is any silver bullet. I think we need to put everything 
on the table.
    In your viewpoint, are the performance standards that you 
heard outlined today by Mr. Slattery, is this something we 
should consider as long as they are under the tent of an 
economy-wide cap-and-trade system or is this something that you 
are just dismissing outright and what other aspects of the 
proposal could you and others in the environmental community 
support?
    Mr. Doniger. Mr. Doyle, we do support performance 
standards, as you said, under the tent of the cap. It is very 
important to have performance standards, especially where 
through them you can achieve cost-effective reductions even 
faster, or with a lower carbon price signal than you would have 
to have without the performance standard. So they complement 
each other, and they are very important.
    I do think you have to allow for the fact in any of these 
proposals that developing countries are going to come along, 
but they are not going to do the same thing at the same time we 
do. And so it is a relationship that we need to develop.
    I will give you the example of the phase-out of ozone-
depleting chemicals, the most effective international agreement 
we ever had, the Montreal Protocol. The developed countries 
went first, the developed countries offered some assistance to 
developing countries, and the developing countries are phasing 
out on a 10 year delayed timeline. The whole thing is working. 
We have eliminated more than 85 percent, 90 percent of the 
ozone-depleting chemicals all around the world in developed and 
developing countries. And China and India are full parties to 
that, and they have binding limits on their fluorocarbon 
industries, just like we do here, it is just staged a bit in 
time. And that I think is a model that can work, and it is a 
model that they have played as full partners in for 20 years.
    Mr. Doyle. Mr. Chairman, if my color vision is correct, I 
think I am in the red, so I will yield back.
    Mr. Boucher. Thank you very much, Mr. Doyle. Let me pursue 
some additional inquiries with our panel this afternoon. Mr. 
Morris, your proposal has received probably the most commentary 
since it was announced earlier, at an early point last year in 
fact; and one of the comments that has been made about it is 
that in order to obtain the maximum potential for WTO-
compliance, there would be a lag time required of maybe as much 
as 8 years during which time there would be an effort made to 
enter into agreements among a number of nations, multilateral 
agreements, that could lead to a finding of WTO-compliance. And 
a critique of your proposal is that that is a pretty long time, 
and I think in fact some of the members on this panel raised 
that issue when they were making comments about that approach.
    So my question to you is, is there some way that that long 
period of as much as 8 years could be lessened and still not 
weaken the potential that your proposal would pass WTO muster?
    Mr. Morris. Clearly as this contemplation went through the 
process of trying to pick a timeline that you would have to be 
out in the world negotiating to be WTO-compliant, it was the 
contemplation that a law, if passed in 2009, would not be 
through the regulatory process until maybe 2013, and then you 
would have 3 or 4 years to work this out which would take you 
out to 2017 or 2018. Inadvertently, someone said, well, let us 
then pick 2020. So the timeline could easily be collapsed. And 
to my friend, I think Mr. Slattery said that is the one thing 
that is unacceptable about the AEP program is the timeline, and 
China would do whatever they would do during the period. That 
simply is fixable, and you could begin the bilateral 
negotiations while the EPA or DOE or whomever would have the 
responsibility of crafting the program. Remember, there is no 
way to pass legislation tomorrow and have implementation 2 days 
later. It will take some time to get that done. It would be 
during that period that you would do it. And again, I think 
there was a proposal down the table that you might see WTO 
clearance, and I do not know whether or not the WTO court in 
Geneva offers opinions of a design as to being compliant or 
not. It may well be, but they only react to complaints and that 
is something obviously we can submit to you in a written 
answer. But you could easily collapse the timeline. And if that 
is the only deficiency in our concept, we could fix that 
without much difficulty.
    Mr. Boucher. You are saying the WTO might not render 
declaratory judgments.
    Mr. Morris. That is true.
    Mr. Boucher. Mr. Hufbauer, your hand is raised. Do you have 
a comment?
    Mr. Hufbauer. Mr. Chairman, yes, the WTO does not render 
declaratory judgments but what I had in mind was that the 
United States should start now, not in 3 years, not in 5 years, 
but now, under this Administration, to begin to negotiate a WTO 
code which clarifies the green space for GHG measures--
including cap-and-trade, performance standards, and so forth--
that can be imposed. I do not think those clarifications will 
come out of Kyoto II, which will not take effect until 2012. So 
we should start in the WTO right now. Maybe no one is willing 
to negotiate with us, but we should go forward and make the 
effort.
    If you have a chance, or your staff has a chance, to read 
the testimony I submitted--which just scratches the surface--
you will find a lot of ambiguity in the current WTO articles 
and decisions. If we decide as a nation, and if other nations 
do the same, that what we are going to do is just litigate 
differences over the next years, that means 10 years at least 
of litigation. Great for the lawyers, but not so great for the 
carbon control system. So we should go forward sooner with a 
new WTO code that designs some space for the kinds of systems 
which are being advocated and discussed today and including 
other systems because other countries will have different 
approaches.
    Now, if I could just borrow on your forgiveness for about 
30 seconds more, one problem that I have--which has not been 
discussed today--with both the performance and the cap-and-
trade systems is that the promoters of these have not 
specifically said that a firm based in India or based in China 
which meets our standards should not be penalized. In other 
words, we should not attribute that firm with country averages 
which are very poorly calculated and might be inappropriate for 
individual firms in those countries.
    Mr. Boucher. Well, that is an excellent point. My sense was 
that that concept was inherent essentially in both proposals. 
Mr. Slattery, would you care to comment----
    Mr. Slattery. Very specifically. We clearly contemplate 
facility type performance standards, and that is possible.
    Mr. Boucher. Mr. Slattery, let me ask you. I was pleased to 
hear you say that your proposal could be modified to convert 
what is a carbon intensity standard into a firm cap, and you 
said you would like to obviously be a part of the discussion in 
which that modification is made, but you held open the 
possibility that could happen. I think that is an important 
statement and an important step. In the initial question that I 
asked you some time ago, I suggested that you might want to 
consider some way to meld the AEP IBEW proposal to your 
manufacturing standard proposal and had asked if you had some 
suggestions on how that might be done. Would you like to 
elaborate on that at this point or is that something you would 
like to give extended consideration to and supply a written 
document to us?
    Mr. Slattery. I would be happy to accommodate the Chairman 
and the Committee in any way possible, and let me just say that 
I can comment briefly right now on that point. Mr. Morris and I 
have already discussed the idea of us getting together and 
visiting extensively about this and understanding precisely how 
we might be able to come to the Committee with a proposal that 
would achieve what you have just asked.
    As I said earlier, I do not see anything inconsistent with 
performance standards and the vision that Mr. Morris has 
outlined with respect to what we call the AEP IBEW proposal. It 
is not inconsistent. And we believe that the performance 
standards are sort of in addition to, if you will. And again, I 
have already elaborated on why we believe these performance 
standards are important. In our judgment, you can clearly do 
both. Again, our major concern about the IBEW-AEP proposal is 
that it does not go far enough. We are very concerned about a 
future administration vigorously enforcing it, making the 
judgments that have to be made to trigger it, and we are also, 
as a very practical matter, very troubled by the fact that our 
competitors, for example in China, are state-owned, they have 
access to state-owned energy that is subsidized; and when you 
talk about them being required to pony up allowances to access 
our market, the immediate question is, who is going to buy 
those allowances----
    Mr. Boucher. Well, with all due respect, you are going to 
have that problem with your standard approach also. I mean, 
that is a condition that we face, and it is going to have to be 
a part of every consideration we make concerning participation 
by China and other developing countries.
    Well, my time has expired. Let me simply encourage the two 
of you perhaps to have the conversation that you mentioned and 
to the extent that you can make a proposal to us, that marries 
the better aspects of both your proposals. That would be very 
welcome.
    Mr. Upton for 5 minutes.
    Mr. Upton. Thank you, Mr. Chairman. I want to follow up 
with Mr. Morris as I did with Jim on the last round. We know 
that China's use of coal, and the world has grown from 20 
percent to about 30 percent now and it is expected to get to 
use 40 percent of the world's coal in the next 15 years or so, 
we know that China's emissions have grown by 80 percent since 
1990 and they are expected to grow another 65 percent by the 
year 2020. You were quoted in last week's National Journal as 
saying China is going to keep building coal plants, India is 
going to keep building coal plants, the United States is going 
to keep building coal plants, this is an electrified world and 
I do not see it de-electrify. I have been to U.S. coal plants. 
I have not been to any of China's. My sense is that our 
emissions work and certainly the money that the utilities have 
spent on it is far greater than what we see in China. You will 
know that answer better than me, but I hope to some time see 
that answer myself, along with Chairman Boucher. But my 
question to you is as we look to last year, 2007, utility 
companies have abandoned plans to build at least 30 new coal 
plants. I read this weekend that I guess the Sierra Club has 
announced that they are going to fight every single coal plant 
anywhere in the United States to stop it from happening. So 
would you say that the cutback in coal generation which is 
happening now as it relates to this last year will result in 
higher costs for consumers here, possible electric shortages in 
the near future. I think I saw in that same article in National 
Journal you thought we would have real severe energy shortages 
as early as 2012, 2015, and does that put us at a real 
competitive disadvantage for the U.S. industry, and then how 
does that all relate to what may happen under a cap-and-trade, 
knowing full well that again, like we have seen with the steel 
industry where they emit so much more carbon per ton of steel 
produced, my sense is that they are way ahead in terms of 
carbon emissions as it relates to their coal production, too.
    Mr. Morris. That is a far- and wide-ranging question----
    Mr. Upton. I know.
    Mr. Morris [continuing]. And I will do my best to answer it 
in the time allotted to you and me. The fact of the matter is 
it is very difficult to gather information on what China is or 
is not doing. I am led to believe by some of the suppliers that 
last year they added 70,000 megawatts of coal-fired generation 
to their fleet of production, and they are using what we call 
super-critical technology which is one notch below what 
American Electric and Power is proposing in our newest stations 
which would be ultra-super-critical, something that the Germans 
and the Japanese are also working on. And again, the concept 
there, Congressman, there is higher pressure, higher steam, 
less coal consumed for more megawatts out-reduces the carbon 
footprint. So they are moving in the right direction and in 
fact retiring some of their oldest and dirtiest plants in that 
process. So I think some of that is good news. But the fact of 
the matter is what I said before, particularly as to your 
question about the Sierra Club, is that we as a nation, to the 
comments made by Mr. Shimkus of Illinois, need to build some 
new power plants that operate 24 hours a day, 7 days a week. 
And those really do need to be fueled by either clean coal 
technology, and I do not agree with Mr. Reid of the Senate that 
there is no such phraseology. There is improved coal 
technology, and we will bring that forward as a company and as 
an industry, or new nuclear which I think is another perfect 
answer to that question. And so the point of coal plants 
falling off-line today may well lead us to a South African 
challenge, and I think we are all aware that South Africa has 
run out of base load capacity. They shut down various 
industries 2 or 3 days a week. Their 2008 financial forecast 
has gone from a 6 percent GDP to about a 1\1/2\ GDP. That is 
the future I am afraid we are looking at.
    Now, you have asked a very important question on top of 
that. If we were to do a cap-and-trade program and we implement 
it over a series of years, I have said this now about seven 
times, it will only be if society realizes that those costs are 
equal to the challenge of leaving behind a planet for our 
children and grandchildren that we as a nation and we as 
generations can be proud of. I think that this country is 
moving in that direction. And in this industry, my company in 
particular, there is not among the investor in utilities anyone 
who is saying just say no. What we are all saying is let us be 
honest about the timeline, let us be honest about the costs, 
let us be honest about the technology that will need to be 
developed. It is there in the lab and it is being upgraded to 
field conditions, but let us be realistic about what we are 
facing here.
    Mr. Upton. My time has expired so I will yield back to the 
Madam Chair.
    Ms. Baldwin [presiding]. Thank you. I think in our second 
round it comes to me now, so I will recognize myself for some 
follow up.
    As I was last questioning Mr. Doniger, I did want to give 
Mr. Slattery a brief chance to respond. You did already address 
some of the issues with the discussion of performance 
standards, but in your testimony, you indicate that China, 
India, Brazil have huge incentives not to limit their 
greenhouse gas emissions because it gives their products a 
powerful competitive edge in international commerce. And it is 
kind of interesting that China has indeed imposed the export 
tariff. I wonder if you want to comment on that in light of 
your testimony on page 13 but also what is the expected effect 
in the international steel industry of this tariff and 
hopefully briefly because I do have some questions for Mr. 
Morgenstern who I think has been eager to talk. Mr. Slattery 
first.
    Mr. Slattery. The long and short of it is that the Chinese 
are currently the largest exporter in the world. The tariff 
that they have put in place really does not have any effect on 
this question that we are talking about here today. And my 
comments were really more focused on the domestic reality. In 
other words, if we impose additional cost on the domestic 
industry, either direct cost or indirect cost, with the 
increase in the cost of electricity that Mr. Morris has 
referred to, that profoundly affects the competitive position 
of the U.S. industry globally. And I just want the Committee to 
be aware of that. We cannot ignore that. If the Chinese and 
others, but particularly the Chinese, are in a position where 
as I have already indicated to you they have state-owned energy 
sources available to them at below market prices, subsidized 
energy available to them, they have state ownership, and you 
can imagine if you are in the United States trying to compete 
with this when you realize that they also have access to global 
capital, the same global capital that we struggle for and they 
have access to state-of-the-art new technology that we are all 
struggling for, and I would say in that context, if we say to 
the Chinese, put in place state-of-the-art technology that is 
going to get the carbon intensity, the carbon content of the 
products that you wish to ship to the United States at the 
lowest possible level, then we will encourage them to employ 
that state-of-the-art technology.
    Ms. Baldwin. According to your testimony, Mr. Morgenstern, 
obviously cap-and-trade systems are broad, market based 
strategies that offer significant cost and efficiency 
advantages, but you seem to say that those advantages are 
eroded with every carve out exemption or special treatment 
Congress might offer to a particular industry or constituency. 
And your testimony describes that protecting these vulnerable 
firms could result in weaker program targets or partial or full 
exemptions from carbon policy among others. I know that you 
have mentioned some of the industries that we might expect to 
hear from in terms of asserting that they are vulnerable and 
asking for particular consideration as we put this legislation 
together. So I would just ask you what other industries are 
going to be coming to Congress claiming that we must ease the 
burden because they are vulnerable, and if we do, what is the 
total result going to be of industry after industry coming to 
us in terms of an effective program for greenhouse gas 
emissions? Your testimony sort of talks about all the things 
that might be done starting on page 5, but I would like to hear 
a little bit more about what the consequence will be.
    Mr. Morgenstern. Thank you, Madam Chairman, for the 
question. I had the opportunity to serve in the Clinton 
Administration as a lead official at the EPA at the time on the 
BTU tax, and frankly, it was a horrible experience because 
every industry that you can imagine came knocking on our door 
and every industry made claims. Many of them were clearly valid 
claims but for others it was not so clear, and frankly, at that 
time, the government had very little capacity to distinguish 
the valid from the not-so-valid claims. This is potentially a 
huge problem. Once you start walking down this road, the 
potential for a lot of special provisions and a lot of special 
hardships to come to you or to an agency that you would 
delegate to make these decisions is enormous. So I think you 
have to be very careful about it. Part of the answer to your 
question is that you would need to establish a fairly rigorous 
process which, I presume, would be delegated to an executive 
branch agency. EPA or DOE have been mentioned as obvious 
candidates. You would also need to establish some criteria for 
the agency to follow, ideally criteria that could be tied to 
transparent, readily measurable factors. With such a process, 
there is a high potential for the system to fail.
    Another point I was going to make is that the process of 
setting the standards that are being discussed by Mr. Morris 
and Mr. Slattery is probably going to be pretty difficult for 
the government to do because they have to obtain credible 
information not just from the domestic industries, but also 
from foreign companies operating abroad. And I think that would 
be quite difficult. To expect that to happen very quickly is 
unrealistic. That is why I brought up the idea of a transition 
period wherein you allow some accommodation for the affected 
industries which would phase out once other countries acted to 
reduce their emissions or trade sanctions were in fact imposed.
    Ms. Baldwin. Next I would recognize Mr. Matheson.
    Mr. Matheson. Well, thank you, Madam Chair. I think an 
issue that is going to have to be addressed regardless of any 
of these options that is pursued is going to be how we can 
ensure that, whether it is in either Mr. Slattery's or Mr. 
Morris' proposal, how do we ensure that performance standards 
are being met or how do we account for this and have an 
accountable system where one is really playing by the rules?
    Mr. Slattery. That is a very, very important question, and 
we contend that the best way to do that is to permit individual 
companies in this country to have an actionable cause of action 
and do it several ways. I mean, you could do it from RICO, you 
could do it through trade law provisions, but the important 
thing is to empower U.S. industry, U.S. injured parties to 
enforce the standards and do what you do now with a 
countervailing duty case or anti-dumping case. I mean, that is 
a model, that is a way, maybe not the only way but it is 
certainly a way.
    Mr. Morris. And again, I think that is why the IBEW-AEP 
proposal is a little more robust because the contemplation 
would be the creation of either the president having the 
responsibility and obviously with some delegation or the EPA or 
someone else would make an evaluation government-to-government 
of whether or not they have a comparable program; and if in 
fact they did, then they would not--and this is not to be 
confused with the border techs. I know we keep calling that but 
it really is an international reserve allowance that is paid by 
the importer of the product that did not have a comparable 
program. And that really I think is the better way to go about 
doing it because then you get it above an industry. I would be 
the first one to complain that country X is making a megawatt 
hour of electricity in a different form than I am, and that is 
wrong. But that would take me forever. And I need to be back 
home making the most cost-effective electricity I can for my 
customers. However, if the government were deciding whether or 
not Brazil's program was up to the standards that were 
required, I think that would be a very important way to do it.
    Mr. Slattery. This is a very, very important issue that you 
are targeting on here because, you know, It is a little bit 
like in the trade world, if you bring what we call a safeguard 
action, a Section 201 case, and if you pursue that through the 
International Trade Commission, the International Trade 
Commission might conclude, yes, you have sustained serious 
injury as a result of these imports. And then you go to the 
White House, and the White House ultimately makes the 
determination as to what remedy is going to be employed to 
correct the serious injury. The President only has broad 
authority, can do zero, nothing. And I can tell you that for 
those individuals that have pursued a remedy and got to the 
White House and incurred the horrible cost involved in 
litigating something like this and then to have no remedy 
available, it is enormously frustrating. And that is why there 
needs to be real, tough measures available to injured 
individuals in this country who are complying with the 
standards you put in place and doing it at great cost and then 
to permit others to not comply with the standard is totally 
unacceptable. You have to have real enforcement mechanisms.
    Mr. Matheson. And I would suggest that applies to any 
effort we are going to do, any international agreement or 
whatnot. I mean, the ultimate goal is to reduce greenhouse gas 
emissions. Again, there is this accountability component we all 
have to----
    Mr. Slattery. Absolutely. Huge.
    Mr. Matheson [continuing]. Get our arms around. OK.
    Mr. Slattery. Thank you for raising it.
    Mr. Matheson. Thanks, Madam Chair. I yield back.
    Ms. Baldwin. Mr. Doyle is recognized for the second round.
    Mr. Doyle. Thank you very much. I wasn't going to stay for 
a second round but my friend, Ed Markey, came in the room and 
made a statement that he was here to add balance to the hearing 
which I wonder what that comment was about the rest of us 
sitting up here. And now he is sitting next to Mr. Inslee, so I 
think I better stay anyway before I yield to those two.
    I just have a quick question. It is more of a curiosity for 
Mr. Wenk from the Chamber. Does the U.S. Chamber of Commerce 
have an official stated position on global warming? Do you guys 
believe it exists or what is your position on that?
    Mr. Wenk. Thank you very much, Congressman. You know, as I 
said in my testimony, I am providing a trade perspective on 
this issue so I am not the energy and environment guy that we 
have at the Chamber, but you know, the Chamber has provided all 
sorts of correspondence to the hill last year, March 19th, to 
Mr. Dingell and Mr. Boucher, last April to Mr. Barton and Mr. 
Hastert, outlining our concerns and priorities with the 
legislation that was about to----
    Mr. Doyle. I know that. I am just curious. Does the Chamber 
have a position on whether or not global warming is a problem? 
I mean, do you think it is a problem you think we should be 
doing something about? Yes or no.
    Mr. Wenk. We absolutely do, Congressman----
    Mr. Doyle. Oh, good.
    Mr. Wenk [continuing]. And as Mr. Upton actually said in 
his opening statement, we have set some guidelines that we 
think should be looked at in terms of putting together any 
legislation on this issue, preserving American jobs and the 
economy; be international in scope; incentivize and accelerate 
technology research, development, and employment; reduce 
barriers to the introduction of that technology to all nations; 
and promote energy efficiency.
    Mr. Doyle. OK. My curiosity has been satisfied. With that I 
will yield to my good friends, Mr. Markey and Mr. Inslee, for 
their thought-provoking questions.
    Ms. Baldwin. The Chair recognizes Mr. Markey for 5 minutes.
    Mr. Markey. I thank the Chair, and I thank the gentleman 
from Pennsylvania. There is a natural, psychological adjustment 
all of us are going to have to make after last night as 
Pennsylvania now becomes the center of the political universe 
for the next several weeks. And I appreciate the slight 
adjustment that we all have to make now to Secretary Doyle. So 
I do not know which agency it will be, so we are all going to 
have to be much more deferential at least for 7 weeks. I thank 
you for yielding.
    Mr. Morgenstern, there is much talk about cost containment. 
Will regulating some sectors through performance standards 
rather than including them in a cap-and-trade system as Nucor 
is proposing increase or decrease the total cost to society of 
reaching a concrete emissions target?
    Mr. Morgenstern. Increase.
    Mr. Markey. Increase. Thank you. Does anyone disagree with 
that? Thank you. Mr. Morgenstern, I agree with many of the----
    Mr. Slattery. Would you mind reasking that question?
    Mr. Markey. It is great to have you back. It is like hall 
of fame weekend having you. Second, I agree with many of the 
witnesses today that the United States must create incentives 
for global warming and encourage other countries to follow our 
footsteps. In the meantime, we can and should also develop 
provisions to prevent the leakage of jobs or emissions before 
international action is assured.
    Many industries, Mr. Morgenstern, are going to come to us 
and say that they are going to be severely impacted through 
this climate legislation. Can you help us sort out who will be 
industries most and least impacted?
    Mr. Morgenstern. Mr. Chairman, I have been working on that 
problem, and in my submission I listed a number of them. I also 
have some papers that I would be happy to----
    Mr. Markey. Can you give us like a top five in each 
category?
    Mr. Morgenstern. Sure, top five. Let me read from my 
testimony, Mr. Chairman, so I do not misstate it. The top five 
that are likely to be impacted in terms of the cost impact are 
going to be refining, non-metal mineral products, primary 
metals, and paper and printing. Of course some of these 
industries are going to be able to pass forward the added costs 
onto their customers, and so you really have to think about two 
components, the added energy costs along with their ability to 
pass it along.
    Mr. Markey. And which industries will not be impacted, 
although they are protesting they will be impacted?
    Mr. Morgenstern. Well, there is a long list that will not 
be. Something like 80 percent will not be impacted in any 
significant way. But these tend to be very small industries and 
not really the ones that are in discussion on this hearing. But 
energy-intensive industries are at risk, particularly the ones 
that face tough import markets.
    Mr. Markey. And I have to save a question for you, Jim, so 
we have a balanced questioning period here. You mentioned that 
you believe an intensity standard should be implemented company 
by company, rather than based upon a country's average 
emissions rate. Would we not risk then that a country would 
sell its units, for instance to us, and sell its dirtiest steel 
to other countries without performance standards, thus 
resulting in no real change in their performance?
    Mr. Slattery. Very good question and clearly we anticipate 
that if you put in place tough performance standards 
establishing very tough carbon intensity standards that it will 
do several things. First, it will incentivize the Chinese and 
others to employ as quickly as possible state-of-the-art 
technology producing the cleanest steel as possible that will 
hopefully meet the standard in the United States. Now, you are 
correct they will, in all probability, internally use the 
product that is needed there that may not meet the standard 
that we set for export to our country. But what are we doing? 
We are encouraging and incentivizing the utilization of the 
best technology and we are saying to world, and hopefully the 
world, and there are some indications that Europeans for 
example are very interested in this idea also. So maybe we can 
be a global leader in establishing this kind of a concept in 
saying to the world this is the standard.
    Mr. Markey. Mr. Morgenstern, can you comment on that what 
the likely effect is?
    Mr. Morgenstern. I am sorry, can you repeat the question 
again?
    Mr. Markey. I have to in balance not repeat the question 
because I did not do so earlier. So I thank the Chair, and I 
yield back the balance of my time.
    Ms. Baldwin. The gentleman from Washington, Mr. Inslee is 
recognized for 5 minutes.
    Mr. Inslee. Thank you. Jim, I think you wanted to ask the 
question. Mr. Markey asked the question about if anybody 
disagreed with the proposition that a performance standard 
would effectively cost the rest of society, and Mr. Morgenstern 
said it would. Do you have a different perspective on that?
    Mr. Slattery. Well, to the extent that you increase the 
cost of the product because you are requiring it to meet a 
certain standard, there may be some short-term increase in the 
cost of the product. But over the long term, it would be 
probably de minimus. But you know, in terms of any sort of 
great societal cost, you know, hopefully it won't be that 
great. It certainly is not going to be near the kind of cost 
that one would incur in our industry, at least in a portion of 
our industry that relies so heavily on electricity. Jack the 
electricity cost up 50 percent and you have dealt a competitive 
devastating blow to that sector of the industry.
    Mr. Doniger. Congressman, the question in my view is a 
little broad because there are performance standards that are 
able to capture cost-effective, cost-saving measures that are 
not being done through normal market signals because of 
barriers. And those are the kinds of performance standards we 
want. We might not want performance standards that just plain 
raise costs. So you have got to sort them out. I would like to 
submit for the record a McKinsey & Company report that was done 
for a number of companies and for environmental groups that 
shows that between now and 2030, if we capture all the cost-
saving measures that are out there with effective policies, the 
cost savings will cover the cost of the things that cost money. 
In other words, the net cost of making reductions that we need 
to make between now and 2030 could be near zero.
    Mr. Inslee. Yeah, I think they concluded that of all the 
things we need to do, 40 percent of all those things would 
actually be net gains economically. Pretty impressive. Mr. 
Morgenstern?
    Mr. Morgenstern. Mr. Inslee, the issue is that if we let 
some companies or industries reduce fewer emissions, we ignore 
certain opportunities for cost-effective mitigation, then 
someone else is going to have to mitigate more, at higher 
overall cost. The reason I answered Mr. Markey's question the 
way I did was that by adopting a two-step approach, we are 
foregoing some of these low-cost emission reduction options and 
they are going to be made up by someone else at higher cost. 
Hence, the overall cost will be higher.
    Mr. Inslee. I may misunderstand this. I thought I 
understood it but maybe I do not, but if you go to a 
performance standard, that would not necessarily excuse an 
industry, it may increase a burden of compliance with that 
industry but it would simply say competitors off-shore would 
have to meet that same level of performance. So that would not 
be excusing them, would it? Am I missing something?
    Mr. Morgenstern. I am sorry if I used the term excused, but 
I think a more precise way to say it would be that if we 
allowed a standard that was not as stringent as would have been 
imposed by the cap-and-trade which would presumably be the 
direction that the standard would take, then the outcome that I 
indicated I think would be the one.
    Mr. Inslee. OK.
    Mr. Slattery. If I could just insert that the U.S. steel 
industry, between 1990 and 2005, has already mitigated 
dramatically emissions. So in 1990, the U.S. steel industry was 
responsible for 85 million metric tons of greenhouse gas 
emissions. That number was dropped to 45 million metric tons in 
2005. Dramatic progress, dramatic reduction in greenhouse gas 
emissions on the part of this industry that today accounts for 
approximately 1 percent of direct CO2 emissions in 
the United States. So we contend that the steel industry today 
is part of the solution and a big driver in this, even as 
production was going up, I would point out, a big driver has 
been the need to reduce energy consumption.
    Mr. Inslee. I just got to see Mr. Morgenstern's proposal 
about, I would consider, mitigation costs where if you have an 
auction and then a rebate to an industry that might face 
mobility issues for higher costs, and I just had the scantiest 
review of it, but Jim, is there any qualitative reason why that 
would not work relative as opposed to a performance standard, 
or anyone who has a response to that?
    Mr. Morris. Yucca Mountain.
    Mr. Inslee. Pardon?
    Mr. Morris. Yucca Mountain, a federal fund that would then 
be reallocated out to the industry to implement technology. It 
was a grand idea. We tried it once. It hasn't worked and I do 
not think it would work here, either.
    Mr. Inslee. Because you just don't think it would get 
allocated?
    Mr. Morris. Well, I think it would get into the general 
fund. It would be looked at against the large balance of trade 
or the large deficit in the government, and it just simply 
would not come back in an appropriate way. If it did, if you 
could assure that was going to happen, that might be a good way 
to do it. But that is why companies like ours and many others 
stand for the concept of allocating to those of us who are 
going to make capital improvements, rather than waiting for the 
government to get the money and then reallocate it. And I would 
offer FutureGen as another perfect example of that.
    Ms. Baldwin. The gentleman's time for questions has 
expired. All time for questions have expired. I want to once 
again thank our panel of witnesses for their opinions, their 
expertise, and their generous allocation of valuable time. And 
with that, this hearing is adjourned.
    [Whereupon, at 2:00 p.m., the subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
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           Michael G. Morris, Answers to Submitted Questions

               Question Submitted by Hon. John D. Dingell

    Question 1. Your testimony of March 5, 2008, points out 
that several elements of the IBEW-AEP proposal, such as which 
developing nations are covered by an international allowance 
requirement and how to define "comparability" of other nations' 
climate regimes, could be assigned either to an independent 
agency or to the President.
    There are significant differences between those two 
options. With an agency determination, Congress can specify 
that decisions fulfilling statutory intent be made on the 
record by rule. The rules for judicial review in that context 
are clear. If the President, however, were given responsibility 
for making such findings, the nature of any public 
participation is less obvious.
    Which option do you favor, why, and how do you assess the 
tradeoffs?
    Response: AEP assesses the tradeoffs between the two 
approaches precisely as you have laid them out in your 
question. However, on balance, AEP has come to believe the 
preferable option of the two is to place the decision-making 
authority in an independent agency or commission that is 
specifically charged with the responsibility of making the 
"comparable action" determinations under the international 
program.
    The establishment of an independent agency represents a 
change of view. Since APE's appearance during the March 5 
hearing of the Subcommittee on Energy and Air Quality, AEP has 
continued to consult with various stakeholders, many of whom 
expressed a strong preference to have the decision-making 
authority for the international allowance program vested in an 
independent entity whose decisions would be subject to 
transparency and public participation, as well as judicial 
review.
    Accordingly, AEP has been persuaded that it would be 
preferable to vest the decision-making authority in an 
independent U.S. agency, to capture all the benefits of 
transparency, public participation and judicial review, without 
sacrificing efficiency and a comprehensive perspective on 
global climate change. To achieve these ends, the Congress 
would need to create a new independent agency that would have 
the requisite expertise to handle the tasks identified in the 
international allowance program.
    In sum, AEP has been convinced that an independent U.S. 
agency would best serve the interests of U.S. climate change 
legislation in the operation of the international allowance 
program. We would be pleased to work with the Committee to 
develop these ideas further.
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         Richard D. Morgenstern, Answers to Submitted Questions

                 Questions Submitted by Hon. Jay Inslee

    1. If the U.S. enacts a climate policy that adds GHG 
pollution to the costs of energy-intensive industries, 
international competition would drive some to relocate to a 
different country with a weaker climate policy. To prevent 
those jobs and emissions from "leaking" out of our economy, 
what criteria would you use to specifically identify the set of 
firms that should receive compensation as part of the policy?
    Response: The likelihood that significant segments of 
energy intensive manufacturing industries would relocate abroad 
in response to a price based domestic climate policy depends on 
a number of factors including the carbon price itself, the 
carbon intensity of the industry, the cost/feasibility of 
changing production processes, and the ability to pass along 
the added costs in the form of higher product prices. Of 
course, the time dimension is also relevant: in the short term 
there may be more limited opportunities to modify production 
processes, while more options may be available over the longer 
term.
    Unfortunately, it is not practical for the government to 
estimate precisely the vulnerability of individual industries 
to these different factors, especially for narrowly defined 
industrial categories. At best, we can use rough proxies such 
as the industries' energy intensity and the extent of 
competition it faces in international markets. In research I 
have done with several of my colleagues at Resources for the 
Future, we have used U.S. Commerce Department data (at the two 
digit NAICS level) to identify the most energy-intensive, 
trade-sensitive sectors. \1\ It is also possible to develop 
some more detailed information at the more precise 6-digit 
level. A careful evaluation of such information, presumably by 
a federal agency with relevant technical expertise, could be 
used to develop a more refined analysis of the most vulnerable 
sectors.
---------------------------------------------------------------------------
    \1\ Morgenstern, Richard D., Joseph E. Aldy, Evan M. Herrnstadt, 
Mun Ho, and William A. Pizer. 2007. "Competitiveness Impacts of Carbon 
Dioxide Pricing Policies on Manufacturing, in Assessing U.S. Climate 
Policy Options, (Raymond J. Kopp and William A. Pizer, editors), 
Resources for the Future, Washington, D.C.
---------------------------------------------------------------------------
    In carrying out such an analysis, two factors are most 
critical: 1) energy costs as a percent of the industry's total 
costs, and 2) the extent of international competition faced by 
the industry. Since the measurement of international 
competition is not always straightforward, a suitable, 
transparent indicator would need to be developed. One candidate 
indicator would be the value of imports from unregulated 
countries (i.e., those without comparable climate policies) as 
a percent of domestic production. A more comprehensive measure 
would also include exports, which compete with products from 
unregulated countries.
    2. Can you estimate the total emissions from these sub-
sectors?
    Response: Once the most vulnerable industry segments are 
identified, direct CO2 emissions can be readily calculated 
based on their combustion of fossil fuels. Indirect CO2 
emissions from electricity use can be approximated by various 
methods, depending on the fuel use by regional utilities. 
(These need not be calculated for compliance, of course, as 
long as the electricity sector is covered, but they can provide 
a useful metric of the energy cost burden to the sector of the 
climate policy, to the extent that the electricity sector is 
able to fully pass its own costs.) If desired, CO2 emissions 
associated with the use of non fossil fuel inputs, or the 
emissions of nonCO2 gases, can also be estimated at the 
facility or industry level.
    3. How would you decide how much to compensate each firm?
    Response: Ideally, compensation to adversely affected firms 
would be sufficient to discourage the firms from moving to 
nations that do not have comparable climate policies. In 
practice, it is more difficult to determine the "optimal" 
amount of compensation at a sector level, much less a firm 
level. One approach, focusing only on firms in the most energy-
intensive, import-sensitive industries, would be to cover most 
or all of the added costs associated with the new policy, at 
least at the outset. These added costs should be evaluated 
based on sector-specific averages or reasonable technology 
benchmarks, as opposed to a firm-specific basis, to ensure a 
level playing field among competitors at home. Over time, the 
compensation amount could decline to reflect the opportunities 
the firms would have to make new investments to lower their net 
costs and/or to reflect the increased burdens on their foreign 
competitors as other nations embrace comparable climate 
policies.
    4. Would that compensation be based on their updated 
current output or their past emissions?
    Response: In order to minimize windfalls and provide 
incentives for firms to maintain or expand their output, a 
system based on updated current output would be vastly 
preferred. While such a scheme would create incentives to 
expand production of carbon intensive outputs, in this case 
that may be an acceptable trade-off, since foreign production 
may well be more carbon intensive than the domestic production 
it replaces. Basing compensation on past emissions does not 
provide an incentive to maintain or expand domestic output and 
it may generate windfalls to firms that reduce production but 
still receive free allowances.
    5. How would that compensation be delivered?
    Response: In the context of a cap and trade system, the 
compensation could be delivered in the form of free allocation 
of allowances during a transition period. As provided in S. 
2191, for example, allocations of allowances for individual 
firms are updated annually on the basis of a three year moving 
average of a firm's proportion of production employees within a 
given industrial sector. Other metrics would also be possible, 
for example, the dollar value of output or value added in the 
sector. Alternatively, using similar metrics but in a system 
without free allocation, one could offer rebates for 
maintaining or expanding employment or output in lieu of 
additional free allowances. The economic effect is basically 
the same.
    6. Would your proposal require a border tax adjustment in 
addition to direct compensation?
    Response: With the updating allocation mechanism in place 
in S. 2191 energy intensive firms are receiving valuable 
allowances to offset the higher costs associated with the 
climate policy. Starting in 2017 there is a gradual reduction 
in the allowances received, declining to zero in 2030. One 
could envision a comparable phasing out of rebates in a system 
without free allocation. Since in all likelihood a WTO-legal 
border-tax adjustment would have to recognize the extent of the 
free allocation or rebates, the size of any border tax 
adjustment would likely be zero or minimal in the early years. 
More generally, the larger the amount of free allocation or 
rebates, the lower the allowable border-tax adjustment.
    At the same time, the updated allocation or rebate performs 
the function of mitigating the competitiveness impacts of a 
climate policy. Thus, border adjustment is less necessary from 
a carbon leakage standpoint to the extent that the updating or 
rebate mechanism is in place. The trade-off between updated 
allocation or rebates on the one hand and border adjustment on 
the other involves several factors. One is compatibility with 
WTO obligations. To what extent can WTO-compatible border-
adjustment taxes on imports fully account for the embodied 
emissions? Can relief for exports be incorporated in a WTO-
compatible way, without undoing incentives to reduce the carbon 
intensity of production processes? If border adjustment 
policies must assume a weaker metric to be WTO-compatible, 
implying weaker protection against carbon leakage, updated 
allocation or rebates may be a more effective alternative. The 
second has to do with revenue implications: more government 
revenues are foregone with updated allocations or rebates than 
with border adjustment. All these policies, when associated 
with triggers that provide for their reduction or removal as 
major trading partners take on comparable climate policies, can 
help incentivize international action. Arguably, border-tax 
adjustment may be seen as a red flag to free trade advocates, 
but it can also more directly target those trade partners 
lagging in terms of climate policy action. 
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