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



 
        GREEN CAPITAL: SEEDING INNOVATION AND THE FUTURE ECONOMY

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



                                HEARING

                               before the
                          SELECT COMMITTEE ON
                          ENERGY INDEPENDENCE
                           AND GLOBAL WARMING
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 16, 2008

                               __________

                           Serial No. 110-33


             Printed for the use of the Select Committee on
                 Energy Independence and Global Warming

                        globalwarming.house.gov




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                SELECT COMMITTEE ON ENERGY INDEPENDENCE
                           AND GLOBAL WARMING

               EDWARD J. MARKEY, Massachusetts, Chairman
EARL BLUMENAUER, Oregon              F. JAMES SENSENBRENNER, Jr., 
JAY INSLEE, Washington                   Wisconsin, Ranking Member
JOHN B. LARSON, Connecticut          JOHN B. SHADEGG, Arizona
HILDA L. SOLIS, California           GREG WALDEN, Oregon
STEPHANIE HERSETH SANDLIN,           CANDICE S. MILLER, Michigan
  South Dakota                       JOHN SULLIVAN, Oklahoma
EMANUEL CLEAVER, Missouri            MARSHA BLACKBURN, Tennessee
JOHN J. HALL, New York
JERRY McNERNEY, California
                                 ------                                

                           Professional Staff

                     Gerard Waldron, Staff Director
                       Aliya Brodsky, Chief Clerk
                 Thomas Weimer, Minority Staff Director
                 Jonathan Phillips, Professional Staff


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hon. Edward J. Markey, a Representative in Congress from the 
  Commonwealth of Massachusetts, opening statement...............     1
    Prepared Statement...........................................     3
Hon. F. James Sensenbrenner, Jr., a Representative in Congress 
  from the State of Wisconsin, opening statement.................     5
Hon. Earl Blumenauer, a Representative in Congress from the State 
  of Oregon, opening statement...................................     6
Hon. Jay Inslee, a Representative in Congress from the State of 
  Washington, opening statement..................................     7
Hon. Emanuel Cleaver II, a Representative in Congress from the 
  State of Missouri, opening statement...........................     7
    Prepared Statement...........................................     8
Hon. John Hall, a Representative in Congress from the State of 
  New York, opening statement....................................     9

                               Witnesses

Mr. David Prend, Co-founder and Managing General Partner, 
  RockPort Capital Partners......................................    10
    Prepared Statement...........................................    13
    Answers to Submitted Questions...............................    60
Mr. Dan Braun, Director, Global Environmental Finance, Stark 
  Investments....................................................    19
    Prepared Statement...........................................    21
    Answers to Submitted Questions...............................    79
Mr. Daniel R. Abbasi, Director, MissionPoint Capital Partners....    25
    Prepared Statement...........................................    26
    Answers to Submitted Questions...............................    85


        GREEN CAPITAL: SEEDING INNOVATION AND THE FUTURE ECONOMY

                              ----------                              


                       WEDNESDAY, APRIL 16, 2008

                  House of Representatives,
            Select Committee on Energy Independence
                                        and Global Warming,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 2 p.m., in room 
210, Cannon House Office Building, Hon. Edward Markey (chairman 
of the Committee) presiding.
    Present: Representatives Markey, Sensenbrenner, Blumenauer, 
Inslee, Cleaver, and Hall.
    The Chairman. This hearing is called to order. Today, as 
President Bush gets ready to tell America that he has come 
around on global warming and that he supports freezing U.S. 
global warming pollution 17 years into the future, we welcome a 
group that does have the vision and ambition to seriously 
address this problem.
    These individuals probe the technological trenches of 
Silicon Valley and other innovation hot spots to find the 
solutions that will solve the energy and climate crisis. They 
pull the strings of capitalism, enabling ambitious young 
geniuses to turn today's dreams into tomorrow's technological 
realities.
    Venture capitalists play a key role in innovation. The $26 
billion in U.S. venture capital investment in 2006 represented 
less than one percent of U.S. GDP, but the $2.3 trillion in 
revenues these firms generated made up 18 percent of U.S. GDP. 
Venture capital-based companies employed over nine percent of 
the U.S. private sector workforce. And job growth in these 
companies is occurring at nearly three times the rate of the 
rest of the private sector.
    The corporate behemoths that dominate the business pages 
are mostly mature companies. They face fierce competition that 
often forces them to outsource manufacturing in order to stay 
competitive, but low-wage developing countries cannot compete 
with an innovative economy.
    We should salute the American entrepreneurs that for 
decades have pushed the American economy to the technological 
edge, where wages and growth are high. The challenge today is 
to channel these creative energies to help solve our global 
warming problems and to help put the economy back on track.
    Governments can take two approaches to solving great 
technical challenges, like reducing global warming pollution. 
They can prescribe the answer; for example, by massively 
subsidizing nuclear power generation, as President Bush 
supports, or they can set a target and leverage the creative 
genius of the innovators of the world to find the answers.
    The first is to cling to the technological past. It also 
means compliance at the highest possible cost. That approach is 
akin to investing in a candle-maker because Thomas Edison's 
light bulb will never catch on. It is like doubling down on 
mainframes because you don't believe many people will want 
computers at their desks.
    We don't know what all the answers will be to the global 
warming problem, but investing taxpayers' dollars on 
yesterday's technologies will ensure that the world's 
innovators will have to look outside the United States to find 
the markets they need to develop tomorrow's innovations. And 
that will not be good for us. This is something that we cannot 
afford. And this hearing will help us to find a path that will 
take us down a different road.
    That completes the opening statement of the Chair. I now 
turn to recognize the ranking member, the gentleman from the 
State of Wisconsin, Mr. Sensenbrenner.
    [The prepared statement of Mr. Markey follows:]
    [GRAPHIC] [TIFF OMITTED] 61638A.001
    
    [GRAPHIC] [TIFF OMITTED] 61638A.002
    
    Mr. Sensenbrenner. Thank you very much, Mr. Chairman.
    There is no disagreement about whether jobs created by 
investments in renewable energy are good. Of course, these 
types of investments will help the economy. And I am glad to 
see that venture capitalists and other private financiers are 
taking an interest in alternative energy, but these investments 
will help the economy most if they are created through free 
market decisions.
    Costs of renewable energy are going down. And more 
communities will make investments in these types of 
technologies because they offer many benefits.
    In some places, renewable energy is a great option for 
electricity production. In other places, renewable energies 
aren't as effective. And I am concerned that mandates will 
create unnecessary expenses that will only slow the economy.
    One need look no further than Congress' ethanol 
requirements to see the effects these energy mandates can have 
on the economy. Just yesterday the New York Times reported that 
Congress' mandate for a fivefold increase in biofuels, namely 
ethanol, was helping drive food prices so high that they are 
causing unrest and even riots in some places. And gasoline is 
still as expensive as ever.
    I agree with what we will hear from today's witnesses that 
tax credits can help spur the investment in new technology, 
which I believe is a key principle for any climate change 
policy. And I support extending these credits and, in the case 
of the R&D credit, making it permanent.
    While our witnesses today will tout the benefits of 
renewable energy, they will also claim that without government 
mandates and regulations, renewable energy will not see 
significant share in the marketplace. Venture capitalists are 
famous for the risks they take, but that doesn't sound too 
risky to me.
    I am skeptical of both the need for regulation and mandates 
and the idea that renewable energy won't expand without 
government assistance. I am especially skeptical of the idea 
that a mandatory cap and trade system is needed to bring about 
this sea change in energy production.
    There are at least four reports analyzing the economic 
effects of the leading cap and trade bill in the Senate. And 
all forecast fewer jobs and slower economic growth in the 
future, all at a time when the economy is slowing down.
    While it is true that alternative energy will create some 
jobs, the burden the cap and trade regulation will put on this 
economy will sap away many more. The EPA's model showed that by 
2030, cap and trade could cost the U.S. economy nearly a 
trillion dollars in GDP. That should give any legislator great 
pause before deciding to support cap and trade, but it seems 
like some in Congress want to rush the U.S. economy into this 
flawed system.
    One of our witnesses today, Mr. Daniel Braun, who also 
happens to be my constituent, warns lawmakers that a cap and 
trade system must be ready before it is rolled out. While I 
disagree with Dan about the need for a cap and trade system, he 
seems to have his own concerns about the speed in which 
Congress is rushing into this process. I do agree with Dan 
about the need to make the tax credits permanent, and I welcome 
him here today to testify.
    Another concern that I have with cap and trade is that it 
fails to produce tangible, measurable results to the 
environment. Europe rushed together a cap and trade system. 
And, despite that, emissions are still rising there.
    While the U.S., without a mandatory cap and trade system, 
saw a one percent drop in emissions last year, Europe's 
emissions rose 1.1 percent. Since the U.S. is not seeking to 
emulate these results, I can't see why we would want to adopt 
the same system.
    I believe alternative energy technology can help us make 
great strides in confronting climate change. And I support 
advancing these technologies but not through heavy-handed 
government mandates that will cause far more economic pain 
without delivering any environmental gain.
    I thank the Chair and yield back the balance of my time.
    The Chairman. Thank the gentleman. The time has expired.
    The Chair recognizes the gentleman from Oregon, Mr. 
Blumenauer.
    Mr. Blumenauer. Thank you, Mr. Chairman.
    I apologize in advance. I am going back and forth from the 
markup. I think you are also. But I am keenly interested, and I 
have had a chance to review the testimony. I am going to take 
in as much as I can.
    This is one of the most important aspects of our work on 
climate change. Our witnesses here today can help provide some 
guidance about how public policy can help influence the 
billions of individual decisions that we all make every day as 
consumers, government agencies about where we shop, how we 
move, where we live, what we buy.
    And being able to target, harness market forces to move in 
the right direction, to make it easier and less expensive to do 
the right thing and perhaps a little less expensive for things 
that damage the environment I think is very important.
    With all due respect to my good friend Mr. Sensenbrenner, 
we are not rushing into this. We have an opportunity to build 
on the experience that we had with other markets that we have 
established in terms of dealing with acid rain.
    We can look at our friends in Europe. And, in fact, Mr. 
Chairman, with your leadership, we have had a number of them 
here before us to testify to what they would do different if 
they were involved in it.
    In 280 days, we are going to become a country that is no 
longer on the outside of this. We are going to be dealing with 
a carbon-constrained economy, no matter who is elected 
president. He or she is committed to a cap and trade or 
something of that nature.
    We have an opportunity, as we have done with our energy 
bills, to realign the massive subsidies that are buried right 
now in the tax code and government policy. There isn't an 
invisible hand now, but listening to our witnesses, I think we 
can find ways to make that hand work better. And I look forward 
to the testimony and working with them to realign these 
policies.
    The Chairman. The gentleman's time has expired.
    The Chair recognizes the gentleman from Washington State, 
Mr. Inslee.
    Mr. Inslee. Thank you. Thank you. Thanks to the witnesses 
for being here.
    You know, in about 12 minutes, we are going to hear a can't 
do policy from the White House. In about six or eight minutes, 
we are going to hear I think a can do strategy from our three 
witnesses in our ability to really unleash the creative talents 
of Americans when you marry it up with the investment capital 
that is really waiting for the signals it needs to simply say 
that these new technologies need to have somewhere close to a 
level playing field.
    And right now because of some short-sightedness over the 
last several years in D.C., we have given all of the advantages 
to the old technologies by allowing them to put their 
pollutants into the atmosphere in unlimited amounts at zero 
cost. And we would never allow anyone to back up their garbage 
truck and dump it in the city park in unlimited amounts for 
free when a clean technology is available. That is what we are 
doing right now. We need to remedy that situation.
    And I think listening to our witnesses who are good enough 
to meet with us this morning with another group here, we are 
going to learn that there is enormous potential investment 
available with the right signals that can really skin this cat. 
And I appreciate it.
    I want to point out two Washington figures: Steve McBee, 
who is a leader in helping the U.S. economy, sitting back here; 
another great investor, Max Vekich from Cosmopolis Washington 
at one time, in any event.
    Thank you. I look forward to your testimony.
    The Chairman. The gentleman's time has expired. The Chair 
recognizes the gentleman from Missouri, Mr. Cleaver.
    Mr. Cleaver. Thank you, Mr. Chairman. Thank you for being 
here, members of the panel.
    I am in preparation of a meeting with the civic leaders in 
the metropolitan area of Kansas City, Missouri. And the subject 
of that meeting will be the subject of this hearing. And so I 
am very anxiously awaiting your testimony.
    The potential for green industry to benefit our country is 
unlimited, especially when you consider the hemorrhaging nature 
of our economy today. If the studies are correct and that green 
industry can create a half a million new jobs in the next two 
years, then this is where we ought to place a substantial 
portion of our capital.
    And as venture capital firms, such as those represented by 
those of you here today, invest in new and promising companies 
connected to the green industry, the benefit could be 
invaluable to Congress. And so I look forward to dialoguing 
with you further.
    I hate this disruption that is going to occur, but I will 
return. Thank you, Mr. Chairman. I yield back the balance of my 
time.
    [The prepared statement of Mr. Cleaver follows:]
    [GRAPHIC] [TIFF OMITTED] 61638A.003
    
    The Chairman. Thank you, Congressman Cleaver.
    And we recognize the Congressman from New York, Mr. Hall.
    Mr. Hall. Thank you, Mr. Chairman. I will keep it short.
    The students at Arlington High School in Arlington, New 
York, Dutchess County, just came up with an idea to put solar 
panels on the roof of the new wing of their high school, which 
is being built, took the initiative to go to NYSERDA to get 
state funding and then came to our office and asked for help.
    Rather than waiting for the uncertainty of appropriation, I 
was able to find, my staff was able to find private grant 
funding for it. And we presented them with a check for $108,000 
to complete their budget for that.
    Now, that is leadership coming from the next generation. 
And not only is that going on, but we have in district, in 
Orange County a private firm that is processing municipal solid 
waste from an entire town, which previously was being 
landfilled and now has taken it through this process, producing 
ethanol, gas that could be burned to spin a turbine and put the 
power into the grid, hydrogen that could be used from the gas 
because 48 percent of the gas they product is hydrogen so that 
they can charge fuel cells. And everything is being recycled 
and nothing is being put into the ground. And the total impact 
in terms of greenhouse gases from their process is 75 percent 
less than if they landfilled the same MSW.
    In Wappingers Creek where it enters the Hudson River, there 
is a small low-head hydro private facility that is generating a 
flat two and a half megawatts of base power from hydroelectric. 
It is just happening by itself. And the more investment there 
is available to try to spur it and to make it possible to 
people with the imagination and the will I think the faster it 
will come on board. So I am excited about it.
    I am excited to hear your testimony. I yield back, Mr. 
Chairman.
    The Chairman. Thank you, sir.
    The time for opening statements of the members has been 
completed. Unfortunately, while those statements were being 
made, four roll calls were called on the floor of the House, 
which will also include a recommittal motion, which means an 
additional ten minutes.
    So I think it would be wise for us to adjourn for 
approximately a half an hour so that we could return to this 
hearing. We apologize to our witnesses, but this is just the 
nature of the Congress. So we apologize. The Committee stands 
in recess.
    [Brief recess.]
    The Chairman. If we can reconvene? Thanks for joining us. 
We have three great witnesses today. I had the pleasure of 
getting to talk to them earlier this morning. First, David 
Prend is the Managing General Partner of RockPort Capital. 
David joined Salomon Brothers in 1990. He was promoted to 
Managing Director and headed the Global Energy Investment 
Banking Group in 1998. He co-founded RockPort Partners, a 
merchant bank specializing in energy and environmental sectors. 
In 2001, he founded RockPort Capital Partners, which is a 
venture fund. And today he is also testifying on behalf of the 
National Venture Capital Association, which we appreciate their 
great work.
    We also have Daniel Abbasi, who leads MissionPoint's 
regulatory and public policy research group. He is responsible 
for originating and structuring energy and environmental 
finance transactions. He was an appointee to the U.S. 
Environmental Protection Agency. He served as senior adviser to 
the Office of Policy. And he co-chaired the Strategy for U.S. 
Environmental Technology Initiative and helped to produce our 
first U.S. Climate Action Plan.
    He is the author of a great book, which starts with the 
quote ``We are faced with the first urgency of now.'' And that 
even is coming up in presidential debates. So people are 
listening to you. I hope you will tell us the name of your 
book.
    Dan Braun then joins us. He is the Director of Global 
Environmental Finance of Stark Investments. And we appreciate 
him clearing his calendar on short notice to join us. He is 
currently co-managing an investment portfolio, which is 
centered on the theme of global environmental finance and 
climate change. We are looking forward to at least five minutes 
of good thoughts.
    Mr. Prend, if you could start.
    Mr. Prend. Sure. Thank you, Mr. Chairman, members of the 
Committee.

   STATEMENT OF DAVID PREND, CO-FOUNDER AND MANAGING GENERAL 
 PARTNER, ROCKPORT CAPITAL PARTNERS, ON BEHALF OF THE NATIONAL 
 VENTURE CAPITAL ASSOCIATION, ACCOMPANIED BY DANIEL R. ABBASI, 
    DIRECTOR, MISSIONPOINT CAPITAL PARTNERS; AND DAN BRAUN, 
             DIRECTOR, GLOBAL ENVIRONMENTAL FINANCE

                    STATEMENT OF DAVID PREND

    Mr. Prend. RockPort Capital Partners is a venture capital 
firm based in Boston and Menlo Park. Our funds comprise one of 
the largest pools of dedicated capital in the fast-growing 
sector of venture capital called clean tech. We manage about 
$400 million, and that amount is about to double.
    As was said, I am pleased to be here also on behalf of the 
National Venture Capital Association, which represents 
approximately 480 venture capital firms in the United States 
and is committed to advancing those public policies that are 
conducive to entrepreneurship and innovation and U.S. 
competitiveness.
    Over our history, RockPort Capital has invested in about 40 
companies spanning a wide range of innovations, including 
renewable energy, such as solar and wind; next generation 
transportation technologies, such as hybrid and fully electric 
vehicles; smart grid technologies that enable more efficient 
use of the existing electric generation capacity; clean air and 
water technologies; and energy conservation and green building 
technologies.
    I would like to start by saying that I think the outlook 
for continued growth and investment in the renewable energy 
sector is excellent. And it is driven by a number of factors, 
most important being the promise of exciting returns based on 
the innovation in this space.
    We are today in clean tech where the IT industry was about 
35 years ago and where the biotech industry was about 20 years 
ago. And we are dealing in a much larger total market than 
either of those two markets.
    The key issue today is what the federal government and, in 
particular, Congress can do to help cultivate the environment 
for this innovation. From what I know about the market demand 
and the technologies and, most importantly, the road maps of a 
number of these technologies, this is going to happen, 
regardless of how intelligent the energy policy we have from 
the United States.
    So I think the challenge for the government is to come up 
with intelligent policies that foster a good transition to 
minimize the pain that this economy is going to face in this 
transition from old energy to new energy.
    These technologies make sense. Other countries are 
aggressively pursuing them with policies that foster 
innovation. And there are a number of examples where other 
countries have taken the lead away from the United States 
already due to more enlightened policies.
    So that is what we are really dealing with here in our 
humble view. It is not whether this is going to happen. It is 
where the U.S. is going to stand when this is all done.
    For the purposes of my oral testimony, I would like to just 
focus on a few of the policies, suggestions that I have 
provided in the written testimony. The first is the long-term 
extension of the renewable energy investment tax credits and 
production tax credits.
    We applaud the House for passing a very robust energy tax 
package. Ideally from the investment community, we would love 
to see these extensions over a long period of time, but I think 
we recognize the difficulty in longer-term credits from a 
budget point of view. However, I am here to urge you strongly 
to reach a compromise on the two bills and get a bill signed 
into law without delay.
    I can cite several examples from my own portfolio companies 
where young, fragile companies that are doing good things for 
the economy and creating jobs in this economy are having to 
already--and, fortunately, small companies are good at being 
nimble--having to turn on a dime and move from sales in the 
United States to sales in places like Spain and Korea because 
of the uncertainty about the ITC.
    Another important area is the national renewable energy 
standard, which I would recommend in the range of 20 percent, 
combined with decoupling of utility revenues to disconnect the 
utilities' incentive to get profits from increasing kilowatt 
hour sales. What we would really like to see is energy 
efficiency and not penalize the companies for this saving 
energy.
    Third, transportation I think is very important. Rather 
than favoring just biofuels I think encouraging a results-
oriented approach, we, in particular, have four investments in 
the areas of electric drive train and hybrid vehicles.
    Even with the very meager subsidies that there are right 
now for those technologies, those technologies make a lot of 
sense from a marketplace, even without some intelligent 
incentives. If nothing else, just the CAFE standards helps to 
level the playing field among technologies, rather than 
favoring one type of transportation technology over another.
    Fourth, I would like to highlight R&D spending. I serve on 
the Advisory Board of NREL, the National Renewable Energy Lab. 
And, in fact, two of our most promising companies use 
technologies that were not developed at NREL, but the expertise 
that was resident at NREL was substantially helpful in actually 
getting these technologies to the place where they are at 
market. One of them is in the market today and doing very, very 
well. The other one is about to launch an exciting new product 
in the solar space that I think is going to revolutionize the 
solar industry.
    The Chairman earlier noted the tremendous impact that 
venture has on job growth and the economy. And I think the 
energy industry today is a new market opportunity, where 
innovation has the opportunity to create even more jobs and 
more exciting opportunities for people than these previous 
examples of success in the venture capital community.
    Every single clean tech company that we invest in today 
holds a promise of bringing a much-needed innovation. When that 
happens, there are many winners. Our investors are definitely 
winners; entrepreneurs; and more importantly, the American 
public, who will benefit from new jobs, new companies, and a 
cleaner environment. For a venture capitalist, it is definitely 
the intersection of the best of all worlds. We can do well by 
doing good.
    Thank you very much for the opportunity to testify. And I 
look forward to answering your questions.
    [The prepared statement of David Prend follows:]
    [GRAPHIC] [TIFF OMITTED] 61638A.004
    
    [GRAPHIC] [TIFF OMITTED] 61638A.005
    
    [GRAPHIC] [TIFF OMITTED] 61638A.006
    
    [GRAPHIC] [TIFF OMITTED] 61638A.007
    
    [GRAPHIC] [TIFF OMITTED] 61638A.008
    
    [GRAPHIC] [TIFF OMITTED] 61638A.009
    
    Mr. Inslee [presiding]. Thank you, Mr. Prend. And, just so 
you know, everything you said the Chair totally agrees with 
you. So that is bonus you will get. That is why you had 
additional time.
    Mr. Braun.
    Mr. Braun. Thank you, Mr. Chairman and members of the 
Committee.

                     STATEMENT OF DAN BRAUN

    Mr. Braun. It is truly a great honor to be here today to 
discuss federal policy measures that will enhance investment in 
clean energy technology.
    Before I begin my testimony, I would like to just take a 
moment to acknowledge Ranking Member Sensenbrenner. As he 
mentioned earlier in this conversation, he is my hometown 
congressman. I want to thank him for service to the Wisconsin 
5th.
    Mr. Inslee. He did some great job for the country in India. 
You should compliment him. We went there, met the Dalai Lama. 
And he made some very eloquent comments about Tibetan religious 
freedom.
    Mr. Braun. Excellent. A little bit about Stark Investments. 
We have got more than 20 years of experience. And over that 
time, we have grown to become one of the largest alternative 
investment firms in the industry, currently managing 
approximately $14 billion.
    In my role as portfolio manager, my job is to allocate 
financial capital in alternative energy technology, among other 
investments. My focus is to explore the financial implications 
of living in a carbon-constrained world. Over the last several 
years, the Stark team has allocated capital to alternative 
energy investments in both public and private markets.
    I would like to focus my testimony today on four major 
issues. And I will get through this quickly so we can get to 
questions. First is the connection between federal energy 
legislation and capital market engagement. Second, I will be 
addressing the need for an unencumbered price signal for 
carbon. Third, I will deal with market uncertainty. And, 
finally, I will touch upon some of the lessons learned from the 
European Union emission trading scheme.
    First, the recently signed energy bill and future 
legislative efforts by this body to regulate greenhouse gas 
emissions will directly affect capital market allocation. With 
regard to potential CO2 emissions reduction program, 
all eyes are on Washington. The Congress has been working 
pragmatically to pass climate change legislation. It is also 
significant that today President Bush just finished presenting 
his ideas on dealing with these types of issues.
    Institutional investors, like myself, are watching this 
activity closely because we will only be able to engage if 
there is a clear legislative mandate, a point that we discussed 
earlier today. Second, if Congress is interested in the full 
engagement of the capital markets, the most powerful action 
this body can take is to set a hard physical limit, or cap, on 
CO2 emissions and mandate a long-dated tax credit 
and loan guaranty portfolio for clean energy solutions in 
addition to cap and trade. It needs to be a combination of 
short-term and long-term solutions.
    The most important aspect of a capital market solution is 
the idea of an unencumbered price signal. Cap and trade markets 
with artificial price conditions, safety valves, off-ramp 
conditions will ultimately distort the price signal for 
greenhouse gas emissions and make it difficult for investors to 
engage completely.
    Using the basics of supply and demand, we know that a 
market clearing price will lead to the best use of financial or 
technological resources. Any artificial price condition 
disrupts that very simple balance.
    Third, I would like to address the issue of market 
uncertainty. I have listened to policy-makers and stakeholders 
talk about market-based solutions. And having encountered both 
fact and fiction, one common theme is that volatility is a bad 
thing. In fact, some degree of volatility is characteristic of 
a properly functioning market. The price of a financial asset 
or liability is very important information to institutional 
investors.
    We also heard from skeptics that there is free money to be 
made by financial players investing in alternative energy under 
a cap and trade system. I can only wish that was the case. On 
the contrary, private sector investors will apply financial 
resources to investments that will use a return as a function 
of risk. In simple terms, new technologies are extremely risky 
investments. We run a great risk of being wrong.
    Finally, I would like to discuss lessons learned from the 
first phase of the EU-ETS. The over-allocation of credits in 
the learn while doing first phase of the program caused 
financially trading credits to expire with negligible value.
    To those that use that argument to say that cap and trade 
does not work, I would suggest, to the contrary, the market 
considers all available information to arrive at a price. It is 
worth noting that the second phase of the EU-ETS has seen 
relatively stable prices because there was not this issue of 
over-allocation of credits.
    In conclusion, a necessary element involved here is the 
trust that capital markets will work. The commoditization of 
carbon dioxide emissions is not without precedent. We now trade 
greenhouse gas emissions that resulted from the 1990 amendments 
to the Clean Air Act. If done correctly, investors will fully 
engage in creating the solution set. The mandate of the capital 
market is to assume the risk of developing and commercializing 
nextgen alternative energy technologies so taxpayers don't have 
to.
    As we move beyond politics and money, we will see that this 
is a partnership between capital markets and Washington that is 
capable of achieving sustainability, energy security, and a 
low-carbon global economy.
    I respectfully submit my testimony to the public record, 
look forward to answering questions, or providing further 
comment. Thank you, Mr. Chairman.
    [The prepared statement of Dan Braun follows:]
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    Mr. Inslee. Thank you, Mr. Braun.
    Mr. Abbasi.

                   STATEMENT OF DANIEL ABBASI

    Mr. Abbasi. Good afternoon, Mr. Chairman and members of the 
Committee. My name is Dan Abbasi. And I am a Senior Director 
with MissionPoint Capital Partners, which is an investment firm 
in Norwalk, Connecticut that is exclusively focused on 
financing the transition to a low-carbon economy.
    The Committee requested our perspective as clean energy 
investors on the outlook for the renewable energy industry and 
what policies, including what carbon regime, would best promote 
deployment and innovation.
    So I appreciate the opportunity to summarize my testimony 
to the Select Committee at this important moment in national 
policy-making on these issues and would ask that my written 
testimony be submitted for the record.
    Mr. Inslee. So ordered.
    [The prepared statement of Daniel Abbasi follows:]
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    Mr. Abbasi. MissionPoint Capital was founded and is chaired 
by Mark Schwartz, former Chairman of Goldman Sachs (Asia) and 
CEO of Soros Fund Management. Our team has deep energy and 
environment domain expertise based on senior roles in finance, 
technology, policy, and operations at such firms as General 
Electric, ABB, SwissRe, United States Environmental Protection 
Agency, Key Span, and FMC.
    Our carbon-centered investment thesis is really grounded in 
two convictions: first, that unabated climate change is the 
greatest foreseeable risk facing humanity today; and, second, 
that mitigating it constitutes one of the greatest investment 
and job creation opportunities in history.
    Evidence indicates that climate change is accelerating, 
even to the point of routinely astonishing field scientists. 
And MissionPoint aims to respond by accelerating in turn the 
formation and deployment of capital to reduce emissions in the 
window that remains open to us to avoid the most severe impacts 
of climate change.
    At MissionPoint we are investing hundreds of millions of 
dollars in private companies that can generate clean energy and 
carbon emissions and taking an active role in building those 
companies. Examples include solar development and technology 
companies, including one called SunEdison; a wind operations 
and maintenance services company called UpWind; a specialty 
finances company called Hannon Armstrong, which is overcoming 
financing obstacles to energy enhancements, including in the 
federal government; a carbon offset development and finance 
company called Greenhouse Gas Services, which we have launched 
with General Electric and AES; a carbon trading infrastructure 
company, a company called Advanced Aerofoil Technologies, which 
manufactures advanced turbine components to increase efficiency 
at natural gas plants and also offers software that optimizes 
operation of gas and coal plants reducing fuel use as well as 
emissions.
    So we believe that mitigating carbon is primarily a 
commercialization and adoption problem, not an innovation 
problem, meaning that the technologies in many cases are 
already in existence and simply need to be pulled through into 
widespread usage. This belief leads us to focus less on new 
venture investing that we do venture investing when we find 
exceptionally transformative opportunities and innovations but 
really more on growth stage companies.
    So fundamentally we believe that the energy sector is in 
the midst of a profound transformation. The two primary 
criteria we used to demand of our energy were that it be cheap 
and reliable. And now today we have added, really, two more, 
which are secure and clean.
    So optimizing that four-dimensional equation really does 
change things. It requires us to bring new levels of 
entrepreneurship to the energy sector than it has really ever 
seen before.
    Renewable energy is thriving with 20 to 40 percent year 
over year compound growth rates because it answers well to the 
two new criteria, secure and clean, and is getting much more 
competitive on the first two: cheap and reliable. It is 
becoming more affordable as it scales.
    The declining cost curves are a robust trend. We are seeing 
potential for grid parity, for solar, unsubsidized solar, as 
soon as 2015. Renewables are also achieving high reliability 
with added experience and operating hours.
    So key point number one from us is really that our outlook 
for growth investment in job creation in the strategic industry 
is bullish based on direct hands-on experience with our 
portfolio companies as well as on high industry growth rates 
and on the strategic value of the industry on the dimensions I 
have mentioned.
    I would expect that the job creation potential here would 
be particularly welcome given the economic conditions in our 
country today and would just add there that the renewable 
industry is particularly job-intensive. For example, one 
megawatt of solar produces according to some studies on the 
order of seven to ten times the number of person-hours of 
employment as one megawatt of conventional power.
    Key point number two--and here I am underscoring what the 
prior panelists have said--is that our ability to continue to 
invest in realizing this bullish forecast and accelerating the 
growth of this industry really does depend on a comprehensive 
and stable set of supportive policies, including a long-term 
extension of the investment and production tax credits that 
remain in limbo today and, at long last, putting a price on 
carbon as a rule of the road, which we believe will just be 
enormously catalytic.
    So first on the investment tax credit and the production 
tax credit, the boom-bust cycle of expiration of these credits 
has historically driven a clear drop-off in renewable power 
installations. Those of us in the industry spend time 
estimating, underwriting, and trying to share the extension 
risk around these credits, pondering the imponderables of 
whether and when Congress may act.
    And the compromised one-year extension cycles really don't 
give enough time to get a wind project placed into service, let 
alone something like a geothermal project. So we can't 
underwrite business plans in these situations.
    Once it is operating, the ten-year horizon of the 
production credit is not always sufficient to provide the 
needed return on these capital-intensive projects. So, really, 
Congress does need to send a stronger, more stable, and long-
term signal to the investment community. The durations really 
should be matched to the long project life cycles as well as 
the long project cash flow durations.
    So it is pretty straightforward. Uncertainty in the 
financial world translates to higher costs of capital, which 
translates to project is delayed or canceled. And by one 
estimation, the current expiration risk is putting at risk 
42,000 megawatts of new construction.
    One of our portfolio companies, SunEdison, is an example of 
a company whose innovative deployment model for solar power has 
counted on the ITC in these early years but that is rapidly 
scaling the industry down its cost curve by deploying solar 
systems on Wal-Marts, Kohls, other big box retailers and other 
commercial entities.
    So we hope you can navigate the pay-go face-off between the 
oil and gas and renewable industries and get this done soon. 
The face-off is somewhat ironic to us because it really 
underscores that both industries are, in fact, subsidized.
    And also the way that we think about the climate change 
narrative is that it is really not between these industries. In 
fact, we believe we are going to have to continue to invest in 
the fossil fuel sector but do so in a way that aggressively 
manages the carbon liability in the decades ahead that they 
will be with us.
    The low-carbon playing field, both the policy and 
investing, is much bigger than renewables. The way to stimulate 
this is to make sure that the stable policy framework is built 
on a foundation of carbon pricing. We believe this should be 
through a cap and trade system.
    Putting a price on carbon will reward investments in 
companies like Advanced Aerofoil Technologies, which reduce 
emissions to fossil fuel power plants. And, you know, we would 
acknowledge that these kinds of investments are not as iconic 
or photogenic as the large and centralized carbon flows that we 
see in these large fossil fuel assets and reducing them, but it 
is very important that we address them.
    Mr. Inslee. Mr. Abbasi.
    Mr. Abbasi. Yes?
    Mr. Inslee. I want to make sure we get to some questions.
    Mr. Abbasi. Yes.
    Mr. Inslee. So maybe you could wrap up.
    Mr. Abbasi. Yes, I will wrap up.
    So, in conclusion, we also believe that the carbon capture 
and storage industry is strategic in this, but it is, 
relatively speaking, a pure play investment and does require a 
price on carbon. And we would encourage you to do that.
    The U.S. is right now the runaway leader in moving and 
compressing and injecting carbon dioxide. It is a critical 
technology. And we would like to see the price on carbon 
facilitate that.
    Concluding, just our quick design points are we would 
prefer cap and trade over carbon tax. We would prefer a 
stringent emissions target with a prompt start by 2010, a 
periodic reassessment provision that is based on objective 
indicators and an upstream point of regulation. We also have 
some contributions, some ideas about the carbon border levy and 
will look to discussing those in the questions.
    Thank you very much.
    Mr. Inslee. Thank you. And Mr. Abbasi has some other great 
ideas in his book, Americans and Climate Change, that he has 
authored, which is on the Chair's nightstand. So I appreciate 
that.
    Mr. Abbasi. Thank you.
    Mr. Inslee. I would like to start with Mr. Blumenauer. I 
had a chance to question you this morning. Mr. Blumenauer, 
would you like to start?
    Mr. Blumenauer. Thank you, Mr. Chairman. And I appreciate 
that our witnesses have more information here than they have a 
chance to do. And I appreciate your courtesy because I am in a 
markup in Ways and Means across the way.
    I guess I am concerned about putting three things on the 
table and because there won't be time, really, to elaborate on 
them now. It is something that I would like to follow through 
with you folks on.
    One, I haven't heard you mention the opportunities to 
adjust how we regulate electricity and other utility rates. As 
you know, some utilities around the world are looking at having 
part of the rate of return contingent on carbon performance and 
other indicators. I have got a hometown utility that pioneered 
decoupling so that the gas utility wasn't penalized for 
conservation.
    But I am interested if you could help us with thoughts, 
ideas about how we might use innovative regulatory schemes to 
incent utilities, to allocate costs in the right way, and that 
it might provide an incentive for the adoption of new forward-
thinking and advanced energy technologies that we embed that in 
the rate regulatory system so it happens automatically and they 
are awarded more appropriately allocated costs. And it is a 
conversation I would pursue with any of you individually.
    The second concern I have--and Mr. Abbasi referenced it--in 
the Ways and Means Committee, we have tried to shift subsidies 
from a mature oil industry that has proven that they can make 
lots of money selling the world's most profitable commodity, 
expensive commodity, to shift it in other areas, the extent to 
which we could have your help fine-tuning ways that other 
subsidies might be reallocated so that the tax code is more 
even-handed.
    The third area that we would be keenly interested in 
thoughts and observations is how the federal government could 
lead by example. I appreciate what you say in terms of being 
thoughtful about the regulatory scheme. You know, we are trying 
to embed the production tax credit in the next stimulus package 
because we are going to lose jobs if we don't do that.
    But the federal government as the largest landlord, 
landowner, and employer, and consumer of energy has an 
opportunity to practice the best practices by our own, the 
products that we buy, the standards that we set, and would be 
keenly interested in your thoughts and observations about how 
we might be able to use the vast power of the federal 
government itself, the Department of Defense General Services 
Administration, to achieve that.
    I have got a couple of more minutes here that I would turn 
over to you folks for any thoughts or observations on it. But 
my staff and I would love to follow up with you in greater 
detail on those three points as you see fit if somebody wants 
to jump in.
    Mr. Prend. Sure. I will take the first one: regulating 
electricity. I think that that is a very good point. I applaud 
the utility in your home district. Decoupling is definitely 
something that I think gets at one of the big problems in 
energy industry right now, which is that there is this huge 
amount of invested infrastructure that any new technology and 
new business has to get over before it can thrive. And I would 
point out that a lot of that infrastructure was originally 
funded by a lot of government incentives.
    I think there are a number of ways to go about that. I 
think the trick, as you pointed out, is coming up with another 
way to make it profitable for the utilities to save energy, not 
just manufacture more energy.
    And one of the things that one of our portfolio companies 
has done, a company called Converge that went public last year, 
was to look at the existing regulatory framework and say, ``How 
can we outsource'' what they call negawatts, which is saving 
power in times when there is a peak demand? And the regulatory 
bodies were able to incorporate that kind of a thing into the 
framework.
    Investment is another question. And I think there does need 
to be some sort of regulatory framework that allows investments 
to be recouped on some sort of reasonable rate of return for 
energy-saving projects that might be invested in by the 
utilities.
    I think from our perspective, the challenge is the public 
utility commissions of each state are very protective of their 
turf. And it seems to us that it has been hard for the federal 
government to get into that arena. To the extent that the 
federal government can get into that arena, I think it would be 
a real positive because this patchwork that we have with 
different states with different investment incentives does make 
it harder for a small company that doesn't have the resources 
of an Exxon or a Duke Power to be able to figure out that whole 
landscape.
    Mr. Blumenauer. Thank you. Thank you for that courtesy.
    Mr. Abbasi, did you have comments?
    Mr. Abbasi. Two quick examples, and then I will defer to 
Dan. One is the energy-saving performance contracts. This is an 
existing contractual vehicle that has been in existence since 
1978, I believe. One of our portfolio companies, Hannon 
Armstrong, has been a leader in securitizing the cash flows 
from those.
    We have not understood why, but this year the Defense 
Department has really not been using that authority to the 
extent that they have in the past. It is looking like somewhere 
in the neighborhood of 20 percent of the prior usage.
    And this comes at a time when the actual energy efficiency 
standards have been strengthened through EPAct 2005 and the 
January 2007 executive order issued by the president looking 
for 3 percent year over year reductions in energy intensity, 
reaching 30 percent by 2015.
    So there is an existing vehicle. And what these contracts 
do is they allow the government to not appropriate the up-front 
funding for the energy efficiency investment and then to reap 
that, the benefit of those. So it is an energy saving share 
that is facilitated through this third party finance. To date 
it has been quite successful over the years, 400 projects, 5.2 
billion in savings, somewhat smaller on the net basis but a 
very substantial savings.
    So we are somewhat perplexed by why that isn't being used 
to its fullest extent. And I guess we would encourage you to 
the extent there are formal or informal things you could do to 
prompt them to use that and would be happy to work with you to 
facilitate that.
    A second very quick one is I understand the Defense 
Department has requested that contracting authority for power 
purchase agreements be extended from the current limit, which 
is 10 years, up to 20 years, which is much more in line with 
what a typical renewable power developer needs to have in order 
to finance their project.
    So this is what municipalities are doing. This is what 
private sector buyers are doing, utilities, and so forth. It 
would be great to have the federal government, as you said, the 
largest user of energy, to also have that authority.
    Mr. Inslee. Great.
    Mr. Braun. And, Congressman, I would like to take the 
opportunity to respond completely to all three of those points. 
I realize that you are on your way to a markup meeting, 
committee meeting. So I will take the next week or two and get 
back to you with those responses.
    I would like to touch on the third point that you 
mentioned. This whole idea of how can the federal government 
lead by example. The House of Representatives is a member of 
the Chicago Climate Exchange. It is essentially to lower the 
carbon.
    Mr. Blumenauer. Right.
    Mr. Braun. I think that is, frankly, admirable in terms of 
leadership on this issue. This morning we were talking about 
what the glide path might look like for cap and trade 
legislation. Well, this is a very long-dated proposition. The 
whole idea is, what can we do in the interim period, in 
essence, to get some momentum behind this? And I think that was 
an extraordinary measure taken by Speaker Pelosi in the House 
of Representatives in the Capitol.
    Mr. Blumenauer. It got a lot of flack for it, but yes, I 
agree.
    Mr. Braun. That is true.
    Mr. Blumenauer. I agree.
    Mr. Braun. That will only happen when something new is 
done.
    Mr. Blumenauer. No, no, no, no. I think it is terrific. 
That is great.
    Mr. Braun. But I think you can keep doing that type of 
thing. You are basically sending a very powerful message to 
every part of the economy that, look, this is coming. And we 
have got to start to deal with it.
    Mr. Blumenauer. Well, I appreciate your courtesy and look 
forward to following up with each of you in detail on that 
because these are things that are extraordinarily of interest 
to me and I am convinced that in each of these areas, we can do 
things that don't cost and literally don't have a budget impact 
but that can send the signals that you are talking about. And I 
really appreciate your examples. It is very, very helpful to 
us.
    Thank you, Mr.----
    Mr. Inslee. Thank you.
    And, Mr. Abbasi, with your permission, we will look into 
this with the Pentagon to see if we are missing the boat here 
recently on that. So if we can work with you in this regard?
    Mr. Abbasi. Sure.
    Mr. Inslee. We have a vote shortly. So I am going to ask 
just a couple of quick questions. First, in as brief form as 
you can, why are tax incentives not enough? Why do we need a 
cap and trade or renewable electricals standard or decoupling? 
Why isn't just handing out some tax credits enough?
    Mr. Braun. I will handle that one first, Mr. Chairman. In 
my opinion, an unencumbered price signal in a cap and trade is 
a very pure price signal. A properly functioning capital market 
for any commodity will deliver the lowest possible cost of 
abatement.
    The difficulty with a tax credit or a tax, carbon tax, is 
that it is an artificial price condition. I have mentioned in 
testimony that was submitted that when an artificial price 
condition is introduced into a market, you begin to move away 
from what can be thought of as optimal allocation of resources 
towards a solution.
    Now, I don't know if the price of carbon in the United 
States is a dollar, $10, $100, but the only way to find out 
really where the market-clearing price is is to use a cap and 
trade system.
    Mr. Inslee. Mr. Abbasi.
    Mr. Abbasi. The point earlier about the need for us to 
reach beyond just the renewable sector, really, there are 
tremendous opportunities on supply-side efficiency. As I said, 
in the fossil fuel sector, that is where most of the carbon is 
flowing today and where the reduction opportunities are also 
very significant as well as on the demand side, just tremendous 
opportunities.
    What we really need is a broad pricing signal to motivate 
and discipline really all market participants. And by that I 
mean investors, entrepreneurs, large corporations, even 
consumers to respond. If you unleash the market, we know that 
it is not predictable, but we do know that we will unleash 
tremendous entrepreneurship in finding every last emission 
reduction opportunity at the lowest cost possible. That is what 
the market is good at. So what it needs is just that rule of 
the road.
    We really think of that as the foundation. And then these 
more targeted investment tax credits and so forth for specific 
sectors, like the renewable sector, are very, very important 
given the stage in those technologies development. But this 
over-arching platform of a carbon signal will pervade the 
economy and produce tremendous opportunities.
    Mr. Inslee. And I was talking to some folks in the 
electrical industry the other day. And they were expressing 
fear of speculation and speculators in a carbon market. And 
that might be perhaps exacerbated by the run-up in gas prices 
we have experienced.
    Some of our concerns--and, actually, there has been some 
volatility in those markets because of some questionable 
trading going on or at least non-transparency in the markets.
    What should we do to allay or answer those fears? And are 
there things to do in this market to prevent, to make sure 
there is transparency and no gamesmanship that we experienced 
in Enron in this regard?
    Mr. Prend. I will start with that one, Mr. Congressman. I 
would----
    Mr. Inslee. We have got about 60 seconds. I have got to run 
and vote.
    Mr. Prend. Okay. So ITC I think is the most important thing 
from a small company investment point of view. I would not even 
put cap and trade as the second. I think cap and trade is an 
important part of an overall approach, but from a small 
company's point of view, as opposed to maybe a slightly 
different view from these gentleman, I think it is something 
that is a part of an overall policy but is not the most 
important thing.
    I think the ITC is, by far, the most important because that 
is something we have today. And to take it away is like 
imposing a huge new tax increase on these small nascent 
industries.
    Mr. Inslee. Well, as we discussed, we are going to try to 
get that done as quickly as possible. We have a lot of other 
questions, look forward to working with you. Thanks for your 
testimony. It is very valuable. We are going to share with 
others. This is the can-do folks. You are the can-do people. 
And we appreciate you joining us. Thanks very much.
    With that, we are adjourned.
    [Whereupon, at 4:16 p.m., the Committee was adjourned.]
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