[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
POLICY OPTIONS
TO PREVENT CLIMATE CHANGE
=======================================================================
HEARING
before the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 18, 2008
__________
Serial No. 110-98
__________
Printed for the use of the Committee on Ways and Means
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COMMITTEE ON WAYS AND MEANS
CHARLES B. RANGEL, New York, Chairman
FORTNEY PETE STARK, California JIM MCCRERY, Louisiana
SANDER M. LEVIN, Michigan WALLY HERGER, California
JIM MCDERMOTT, Washington DAVE CAMP, Michigan
JOHN LEWIS, Georgia JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts SAM JOHNSON, Texas
MICHAEL R. MCNULTY, New York PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee JERRY WELLER, Illinois
XAVIER BECERRA, California KENNY C. HULSHOF, Missouri
LLOYD DOGGETT, Texas RON LEWIS, Kentucky
EARL POMEROY, North Dakota KEVIN BRADY, Texas
MIKE THOMPSON, California THOMAS M. REYNOLDS, New York
JOHN B. LARSON, Connecticut PAUL RYAN, Wisconsin
RAHM EMANUEL, Illinois ERIC CANTOR, Virginia
EARL BLUMENAUER, Oregon JOHN LINDER, Georgia
RON KIND, Wisconsin DEVIN NUNES, California
BILL PASCRELL JR., New Jersey PAT TIBERI, Ohio
SHELLEY BERKLEY, Nevada JON PORTER, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama
Janice Mays, Chief Counsel and Staff Director
Brett Loper, Minority Staff Director
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
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unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
Page
Advisory of September 11, 2008, announcing the hearing........... 2
WITNESSES
The Honorable Michael Bloomberg, Mayor, City of New York, New
York........................................................... 11
Peter R. Orszag, Ph.D., Director, Congressional Budget Office.... 16
The Honorable Carol Browner, Principal, The Albright Group LLC... 39
Dallas Burtraw, Ph.D., Senior Fellow, Resources for the Future... 41
Robert E. Lighthizer, Partner and Head of the International Trade
Department, Skadden, Arps, Slate, Meagher & Flom LLP........... 60
Timothy J. Regan, Senior Vice President, Corning Incorporated.... 70
Gary Clyde Hufbauer, Reginald Jones Senior Fellow, Peterson
Institute for International Economics.......................... 79
______
Frank Ackerman, Ph.D., Global Development and Environmental
Institute and Stockholm Environment Institute--U.S. Center,
Tufts University, Medford, Massachusetts....................... 104
Daniel R. Abbasi, Director, MissionPoint Capital Partners,
Norwalk, Connecticut........................................... 123
Jerome Ringo, President, Apollo Alliance, San Francisco,
California..................................................... 165
Peter Barnes, Senior Fellow, Tomales Bay Institute, Point Reyes
Station, California............................................ 169
William W. Millar, President, American Public Transportation
Association.................................................... 179
David W. Kreutzer, Ph.D., Senior Policy Analyst, The Heritage
Foundation..................................................... 187
SUBMISSIONS FOR THE RECORD
Accor Services USA, statement.................................... 206
Environmental Defense Fund, statement............................ 208
Humane Society of the United States and the Humane Society
International, statement....................................... 213
Industrial Energy Consumers of America, statement................ 215
James Culliton, statement........................................ 215
Julian Keniry, statement......................................... 217
Mayor Will Wynn, letter.......................................... 218
Robert J. King, P.E., letter..................................... 220
Shawnee Hoover, statement........................................ 223
Stephen A. Smith, statement...................................... 240
Thank you letter to Congressman Doggett.......................... 243
Thomas J. Gibson, statement...................................... 244
VPSI, statement.................................................. 246
POLICY OPTIONS
TO PREVENT CLIMATE CHANGE
----------
THURSDAY, SEPTEMBER 18, 2008
U.S. House of Representatives,
Committee on Ways and Means,
Washington, DC.
The Committee met, pursuant to notice, at 10:35 a.m., in
room 1100, Longworth House Office Building, Hon. Charles B.
Rangel (Chairman of the Committee), presiding.
[The advisory announcing the hearing follows:]
ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS
CONTACT: (202) 225-5522
FOR IMMEDIATE RELEASE
September 11, 2008
FC-22
Chairman Rangel Announces a Hearing on
Policy Options to Prevent Climate Change
House Ways and Means Committee Chairman Charles B. Rangel today
announced the Committee will continue its series of hearings on climate
change. The next hearing will focus on policy options for reducing
greenhouse gas emissions. A number of proposals have been referred to
the Ways and Means Committee in the 110th Congress (e.g., H.R. 2069--
The Save Our Climate Act of 2007 (Rep. Stark), H.R. 6316--The Climate
MATTERS (Market, Auction, Trust & Trade Emissions Reduction System) Act
of 2008 (Rep. Doggett), H.R. 3416--The America's Energy Security Trust
Fund Act of 2007 (Rep. Larson), and H.R. 6186--The Investing in Climate
Action and Protection Act of 2008 (Rep. Markey)). This hearing will
take place on Thursday, September 18, 2008, beginning at 10:30 a.m. in
the main committee hearing room, 1100 Longworth House Office Building.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only. However,
any individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Committee and for
inclusion in the printed record of the hearing. A list of invited
witnesses will follow.
BACKGROUND:
The Committee on Ways and Means has previously heard testimony that
human greenhouse gas emissions are having an adverse impact on our
planet's climate. These witnesses testified that the United States
``must enact and implement a comprehensive national mandatory market-
based program to progressively and significantly reduce U.S. greenhouse
gas emissions in a manner that contributes to sustained economic
growth.'' Since that hearing, a number of legislative proposals have
been introduced in the House of Representatives, and been referred to
the Ways and Means Committee, that would implement market-based
programs to reduce greenhouse gas emissions in the United States.
There is bipartisan support for action to address climate change.
Senior lawmakers on both sides of the aisle have proposed enacting
mandatory economy-wide cap and trade programs to reduce greenhouse gas
emissions. Their proposals, like other proposals introduced in the
110th Congress, would contain revenue measures (e.g., auctions of
carbon allowances) that are within the jurisdiction of the Committee on
Ways and Means. In addition, many of the market-based climate change
proposals include import requirements that are within the Committee's
jurisdiction. This hearing will mark the beginning of the Committee's
work on this important issue.
FOCUS OF THE HEARING:
The hearing will focus on the policy options that are available for
reducing greenhouse gas emissions in the United States and will examine
the design choices presented by these options. In particular, the
Committee will explore the revenue components of these policy options.
The Committee will also explore proposals to promote a comprehensive
global effort to address climate change and to ensure a level
regulatory playing field for U.S. manufacturers. The hearing will also
focus on the potential costs that could be imposed on the U.S. economy
if Congress fails to act to reduce U.S. greenhouse gas emissions and
the economic growth opportunities that would arise from implementing a
market-based program to reduce U.S. greenhouse gas emissions.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Please Note: Any person(s) and/or organization(s) wishing to submit
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Note: All Committee advisories and news releases are available on
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The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TDD/TTY in advance of the event (four
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materials in alternative formats) may be directed to the Committee as
noted above.
Chairman RANGEL. For our visitors, excluding Members--they
can take their time--please take seats. Thank you so much.
This is the first time this Committee is meeting without
the presence of our beloved colleague, Stephanie Tubbs Jones.
Before I yield to my friend, Jim McCrery, I think we all can
agree, especially those of us on the majority side, that she
was an overwhelming personality, she brought a sense of humor
during the tensions that we Democrats have, and even when we're
working together in a bipartisan way. She was a dedicated
public service pioneer, a history maker, and her memory is
going to be with this Committee and this Congress and this
country for a long, long time.
On this, I would like to yield to Jim McCrery, who has
expressed a deep fondness and--for her and her memory.
Mr. MCCRERY. Thank you, Mr. Chairman. Certainly our
gathering today without our friend, Ms. Tubbs Jones, is not a
happy occasion. We all came to know her on this Committee as a
vivacious personality, but a--to put it mildly, an enthusiastic
advocate for positions that she believed in very strongly. I
know that all of my colleagues on the Committee share my
appreciation for her life and her contributions to this
Committee and to this Congress and to her community and to this
Nation.
So, Mr. Chairman, if you don't mind, I would suggest just a
few moments of silence in her memory before we proceed.
Chairman RANGEL. I would like to have included in that
prayer the loss of Vicky Levin, who was the beloved wife of our
dear friend and my brother, Sandy Levin.
For those of you who haven't met or traveled with her, then
you have missed out on one of the most exciting personalities
and intellectual people that you will meet in life. She was a
wonderful woman and, for over 50 years, the sweetheart of
Sandy, and the mother of their four wonderful children. You may
not have known, but Sandy spent days and weeks at the hospital,
never, but never, giving up. He is a strong Member, and I hope
that we would include her memory along with Stephanie, as we
pause now for a moment of silence.
[A moment of silence was observed.]
Chairman RANGEL. Jim McCrery, I hope the witnesses don't
think we do this often. But this is the last time that we
expect this year to be meeting as a full Committee.
After a decade of us hardly knowing each other's names, Jim
McCrery and I met to decide that, whatever differences that we
had, it was the Committee, the Congress, and our country that
should take a priority. We have really worked together,
succeeded in a lot of issues. But even the Committee Members
will not know the obstacles that, working together, we have
overcome to remove the possibility of having a partisan fight.
Jim, not only are you going to be missed, but I have been
talking to Members on your side in saying that whatever we lose
or gain next year, let us try to maintain what you have done.
It hasn't been easy on your side, and I have had a lot of
difficulty on my side, because people like to fight, like to
fight. But we have done a great job under your leadership, and
we are going to meet formally to express it individually.
I would like to say, also, happy birthday.
Mr. MCCRERY. Thank you, Mr. Chairman. Right back at you.
Chairman RANGEL. Chairman McNulty of Social Security is an
old friend to us New Yorkers. Not only has he served here, in
the Congress, but he is an old-time member of the New York
State Assembly.
Since the assembly meets in our State capital, in Albany,
he still visits the capital. I don't know where he intends to
reside, but it seems to me that even though, formally, he's
leaving, we should not be too surprised if we find him in the
Congress and the Committee. Happy birthday to you.
Mr. MCNULTY. Thank you, Mr. Chairman. I want to thank all
of the Members and everyone here in Washington for the many
kindnesses which have been extended to me over the past 20
years here in Congress, and throughout my 39 years as an
elected public official, and all the blessings that I have
received throughout my life. Thank you, Mr. Chairman.
Chairman RANGEL. Happy birthday to you, as well. Our buddy,
Jim Ramstad, will be leaving. Representative Weller,
Representative--well, how many Members in--Lewis will not be
with us. Well, we can say it's--we can say that we will be
meeting on Wednesday, we will talk about that.
Let's get on with the business of the Committee, as we
attack this very serious problem that our Nation is facing,
recognizing that there is no Democratic or Republican solution,
and also knowing that this hearing is not really to find a
solution, but really to discuss the options.
As I told Congressman Camp yesterday, that we hope that if
there are other ideas that this hearing doesn't cover because
of our lack of sophistication as to exactly what we have to do
this year, I want the Minority here and the Minority that comes
back to realize that we will have hearings and try to educate
ourselves as to how we, as a Congress, Congress and country,
can tackle this serious problem.
Now, we get to Mike Bloomberg, who is absolutely bigger
than life in our city. We are just so proud that he represents
our city and our country, and in the world, in terms of being
able to feel the independence of the intellect to do the right
thing, not politically, but to do the right thing for the
people, which he has been sworn to serve. I told him this
morning that he sets an example of what a handsome,
intelligent, personable billionaire can do, once they make
their mind up that they're going to be a public servant.
We hope that this Committee will be able to serve the next
President with some ideas so that we can hit the ground
running. We have leadership from the business community that
recognize that this has to be handled in a bipartisan way. So,
therefore, we hope that Members on both sides will try to keep
their leadership, as it relates to their party, out of it as we
try to see what climate change legislation we can ultimately be
able to recommend, no matter who is the President of the United
States.
We also have to make certain that whatever we do is
consistent with the World Trade Organization rules. I am
certain that at the end of these hearings, that we will be
better informed--and to also remember that while we share
jurisdiction on this with other Committees, they still will be
looking to us as providing the leadership on which way the
Congress goes.
So, I think our first witness here--my Mayor, isn't it,
staff? Isn't my Mayor the first witness? Oh, yes.
Because so many of our Members have worked so hard on this
issue, I would like to first yield to my partner on this, Jim
McCrery, to make and to recognize whatever Members he sees fit,
to let you know that this is not the beginning, but an ongoing
process that we're just trying to bring there. So, Jim, I
yield.
Mr. MCCRERY. Thank you, Mr. Chairman, and I appreciate your
recognizing and asserting this Committee's jurisdiction over
this issue. We certainly should play an important role in
developing policy with respect to this issue and other issues
that it might affect.
Last February, we held our first hearing on climate change
issues. At that time, I suggested that any legislation designed
to address global climate change should be examined in the
context of America's need for energy security. On the day of
that hearing, the average price of a gallon of gasoline in the
United States was about $2.42. It's now about $3.75. Even
though global crude oil prices are falling, the devastation
caused by Hurricane Ike, particularly on our strained refining
capacity, threatens to push those prices even higher.
As we listen to today's witnesses, I hope we will keep
those prices in mind and ask those witnesses and ourselves how
much higher carbon taxes or cap and trade systems might push
energy prices in this country.
We also need to examine how those higher prices translate
into job losses, both from the contraction of our economy, as
well as from the movement of manufacturing jobs to countries
that don't take similar steps to reduce carbon emissions.
Perhaps just as importantly, we should ask whether those
higher prices would result in any measurable reductions in any
global greenhouse gas emissions and global temperatures.
When considering the answer to those questions, I believe
we ought to keep in mind how likely it is that other countries
won't match our actions. China is now recognized as perhaps
emitting more carbon than the United States. While our
emissions growth is relatively flat, China's is still going up
at a pretty good pace, as are emissions from other fast
expanding economies like India.
Those countries have made clear they have no intention of
slowing their economies with restrictions on carbon emissions.
So, if we raise energy taxes on our manufacturers, they may
respond by moving their production to countries that do not
impose such costs. I suppose offshoring manufacturing jobs is
one way, though, for us to meet new emission targets.
But if those jobs move to countries who are less carbon
efficient, then not only have we shipped jobs abroad, we have
also increased, not decreased, total greenhouse global
emissions.
I expect we will hear from witnesses today that climate
change is a global problem, meaning that a ton of carbon
emitted in New Delhi has the same effect as one emitted in New
York. So, cutting carbon emissions at home, while increasing
them abroad, will not reduce the dangers that many have warned
us about. In fact, it could exacerbate them.
Mr. Chairman, as this hearing proceeds, I hope we will ask
three questions: number one, how much will a carbon reduction
plan raise energy prices; number two, what damage will it do to
our economy; and three, how will those changes impact the
global climate? Together, I think those questions will show the
deep flaws of carbon taxes and cap and trade, flaws which we
should not ignore.
Some might suggest that doing nothing is not an
alternative. While I would prefer to do something that is
constructive, if doing something that makes us feel better
about ourselves comes at the cost of hurting our economy and
raising greenhouse gas emissions worldwide, I think we are
better off rejecting cap and trade or carbon taxes.
So, Mr. Chairman, there is a variety of things I think,
ultimately, this Committee and others should look at in this
area of global climate change. We have supported a variety of
tax changes, for example, to encourage alternative energy and
conservation. We can look at those and perhaps expand those
efforts, encourage the research and development to bring about
further breakthroughs that reduce our reliance on fossil fuels
without crippling our economy.
We could also encourage trade and equipment and technology
that speeds the spread of those advances around the world. Of
course, we, as you suggested, need to make sure that we do that
in a WTO-compliant way.
Mr. Chairman, I will close by noting that there is one
feature of this issue about which there should be bipartisan
agreement, and I have already touched on this. This hearing
should serve notice to the next Congress that so many of the
issues surrounding a cap and trade system, including the
allocation of auction revenue and measures designed to mitigate
the leakage of jobs, are squarely within the expertise and
jurisdiction of this Committee and its Members.
I won't be here next year, but I hope all Members will keep
in mind the importance of this panel's active participation in
the molding of any climate change legislation that might move
in the 111th Congress. We have lots of talent on this
Committee, Mr. Chairman. Both sides, Republicans and Democrats,
have worked hard to make sure we have some of our brightest and
best Members take seats on this Committee.
So, I will look forward to watching next year, as this
Committee takes a leading role in fashioning whatever policies
ultimately emerge from the Congress on this issue. Thank you,
Mr. Chairman.
Chairman RANGEL. Thank you, Jim. I have been advised by
staff that several Members on the outside would like to share
their views and opening remarks. In view of the fact that we
have so many witnesses and panels, I would encourage you to
keep your remarks to 2 minutes, and that we will recognize, in
this order, not necessarily--we will try to find out whether
any of the other Members would care to speak. But Mr. Stark,
Mr. Doggett, Mr. Larson, Mr. Blumenthal [sic], and you can
determine.
The Chairman yields 2 minutes to Mr. Stark.
Mr. STARK. I would yield back, Mr. Chairman.
Chairman RANGEL. Mr. Doggett.
Mr. DOGGETT. Thank you so much, Mr. Chairman, for advancing
our efforts to perfect the best possible solution to the global
warming crisis.
The science is in, the consensus is clear, that global
warming is real, and that the consequences are already
impacting us.
The cost of inaction is much greater than the cost of a
well-crafted legislative solution. The cost of continuing to do
nothing is impacting much more than polar bears. It will start
hurting consumers where they live, not just in some exotic
place in a travel magazine. It will hit families in their
pocketbooks, as they're already reeling from the high price of
our addiction to fossil fuels. Inaction endangers our health,
our wealth, and our national security.
Ninety-two Members of this House, including a majority of
the Democratic Members of this Committee on Ways and Means, are
sponsors of H.R. 6316, the Climate Matters Act. It is the first
cap and trade legislation to receive primary referral to this
Committee.
H.R. 6316 places a strong but achievable cap, a limitation
on greenhouse gas emissions, which can be coordinated in an
auction, a Treasury-administrated auction, and which will then
rely on the free market to set a cost on a pollution by the
ton.
When we introduce an improved version of this bill in the
next Congress, I sincerely hope that it will gain bipartisan
support. But whatever your view on the mechanics of this
particular bill, Ranking Member McCrery has made clear that we
should have unanimity in this Committee about our active role
on this very critical issue.
As today's witnesses will make clear, transitioning to a
less carbon-dependent economy will involve the raising of
hundreds of billions of dollars in new revenue. If we are to
maintain competitiveness, Americans must be concerned about the
trade implications of this legislation, particularly those
countries who initially declined to join the transition to a
carbon-free economy.
Revenue and trade are two cornerstones of this Committee's
responsibility. The Climate Matters bill also addresses a
third, and that's health care. Instead of massive public
giveaways or pollute-free cards, the Climate Matters Act would
auction allowances, and apply the resulting revenues to a
healthy families fund, to address the health care challenges
that plague so many American families and businesses.
The cap and trade bill, as one of our witnesses suggests,
is also a cap and invest bill investing these auction revenues
in infrastructure, in industry, in universities with research
and development, in clean energy, in our workforce.
Ten States, from Maryland to Maine in the northeast, in the
west six States--excuse me, seven States--including California
and four Canadian provinces, are already beginning to
implement, at the State level, a cap and trade system. Both of
our Presidential candidates, Republican and Democrat, have
endorsed a cap and trade system.
I think it's clear that there is a consensus that we can
either run the new economy less dependent on fossil fuels, or
get run over by it. I look forward to working in good will with
all of those willing to fashion legislative solutions, based on
good science. I believe that the Climate Matters bill, H.R.
6316, which the witnesses will be addressing, is a good place
to begin. Thank you, Mr. Chairman.
Chairman RANGEL. I thank the gentleman for his contribution
to this sensitive problem that we face in the country, and I
recognize Mr. Herger for 2 minutes.
Mr. HERGER. Thank you, Mr. Chairman. I must express my
serious concerns with the proposals to address climate trade,
such as cap and trade, that aim to reduce emissions by
increasing the cost of energy. Numerous studies that were
conducted on cap and trade legislation that was debated by the
Senate a few months ago all concluded that cap and trade would
have serious negative effects on our economy.
While the exact numbers differed, all estimates pointed to
a reduction in GDP, an increase in energy costs, all of this
occurring under an enormous expansion of the Federal
Government. At a time when our economy is suffering, and we
have seen the serious impact rising energy costs have had on
American families, I don't believe Congress should be
contemplating further increases in energy costs, and imposing
even greater financial strain on our country.
Furthermore, analysis by the EPA shows that even if the
U.S. significantly reduced its emissions, global emission
levels will continue to increase rapidly under--major
developing country emitters also reduce their emissions.
I am concerned that American citizens will be forced to pay
higher energy costs, and see their standard of living reduced
without seeing any improvement in the global level of
emissions.
I believe there are better alternatives to the proposals
being considered before the Committee today, those that
incentivize energy, innovative technology, without imposing
costly new burdens on our economy. One way to do that is
through trade liberalizations of technologies that can help us
reduce emissions.
Mr. Chairman, I would ask unanimous consent to enter into
the record this op ed written by Ambassador Schwab and
Australian Trade Minister Crean on the need for positive trade
liberalization efforts to address this climate change.
Chairman RANGEL. The Chair hears no objection; so ordered.
[The information follows:]
Mr. HERGER. Again, Mr. Chairman, I thank you for this
hearing, but I would think--I would hope that we would take
very seriously the incredibly negative potential ramifications
that moving in this direction would pose on our Nation.
Chairman RANGEL. Thank you for your contribution. The Chair
now recognizes Mr. Larson for the great work that he has done
on this issue.
Mr. LARSON. Thank you, Mr. Chairman, and I want to thank
the staff and you for putting together this outstanding panel
and these 14 panelists who will come before the Members of
Congress.
I think the question was appropriately raised by Mr.
McCrery, whether or not we face the ``fierce urgency of now,''
as Martin Luther King once ascribed, with respect to our
environment and global warming and its effects.
I look forward to the testimony of the panelists, experts
in their field, to lay out a path forward for us.
Most importantly, as we go forward, I concur with the
Members on the other side of the aisle. Let's look at what will
be revenue-neutral. Let's look at taxing polluters upstream,
but passing down the benefits downstream to the consumers,
reducing payroll taxes, and using our creativity and this
Committee's authority to create a system that will provide the
opportunity and the innovation and the tax relief that they
need, as well.
The question that this Committee will ultimately resolve
is, what is the best path forward to take? Is there a fierce
urgency of now to act, or is doing nothing a better way to go?
If we're going to act, what's the best course? What's in our
economic interests, and how do we secure it in the most
feasible, possible, cost-effective manner?
With that, Mr. Chairman, I thank you.
Chairman RANGEL. Thank you for your--thank you so much, Mr.
Larson, for your contribution. The Chair now recognizes
Congressman Camp.
Mr. CAMP. Well, thank you, Mr. Chairman, I will be very
brief. I appreciate you and the Ranking Member asserting the
Committee's jurisdiction over this issue. But to say that any
market-based approach to climate change would have significant
revenue and international trade implications is an
understatement.
Let's be clear about what cap and trade would actually do.
It would dramatically increase energy prices, specifically for
middle- and low-income consumers, and it would increase costs
for American manufacturers, and eliminate about half-a-million
American jobs each year. It would hamper growth in our economy
for the next several decades, while other nations watch us in
amusement.
While we're all interested in new and clean technologies in
response to higher energy cost and climate change, we must look
at those in light of the current economic struggles our country
is facing.
So, with that, Mr. Chairman, I look forward to the
testimony today, and I want to thank our witnesses for being
here, and I yield back the balance of my time.
Chairman RANGEL. Thank you. The last Member that indicated
he wanted to share his views on this, is Mr. Blumenauer, who
has really gained a nationwide attention for his views on this
sensitive subject. The Chair recognizes him for 2 minutes.
Mr. BLUMENAUER. Thank you, Mr. Chairman. I appreciate your
courtesy, and I appreciate the sentiment expressed by our
Ranking Member about the criticality this has for the mission
of this Committee. I think it's appropriate that we conclude
this Congress with our first major hearing with a distinguished
panel to tie these elements together, because we are in a
carbon-constrained, water-stressed, energy-short world.
One of the things that both Presidential candidates agree
upon is that the United States is going to join the rest of the
world in trying to be proactive in dealing with climate change
in the next Administration.
I have been pleased to work with my friend, Mr. Doggett, on
one version that gives some choices, that provides, I think, an
interesting intersection. Mayor Bloomberg has been a leader,
not just in the revitalization of New York City, but leading
the charge with Governor Schwarzenegger, Governor Rendell, and
others, talking about the need to rebuild and renew America.
Another item critically in the purview of this Committee,
as we face a trust fund that is going into deficit for the
first time in history, an opportunity for us to tie these
elements together, rebuilding and renewing America, dealing
with the transportation deficit, and the threat from carbon
pollution.
There are many options. We have a choice to put these
pieces together in ways that are revenue-neutral, that actually
raise revenue for other priorities, or, in fact, could reduce
burdens for other people, as we seek to end the problems
associated with carbon pollution.
But one of the things that is clear--and anybody who reads
Sir Nicholas Stern's report--I think documents very clearly
that the costs of our moving forward and doing nothing, the
risks to that, are tremendously greater than simply the short-
term, immediate steps that are offered by legislation that are
here.
I look forward to working with you and the Committee in
moving these proposals forward.
Chairman RANGEL. Thank you so much Mr. Bloomberg--
Blumenauer.
Now, Mayor Bloomberg has to leave us, and so I hope that
the panel will allow me to call him first. New Yorkers have
unfairly been challenged with the idea that we have more self
esteem than we really need. One of the reasons for it is
because of the outstanding leadership that we have had from our
Mayor, who has been willing to take the risks, take the
challenges that may be unpopular, but at the end of the day,
New York City manages to come out ahead, not only in New York
and our State, but indeed, throughout the world.
So, it is a distinct honor for me to be in the position to
be introducing him, or to really be presenting him, because we
all are thankful for the thoughtfulness that you have, in what
can make this a better country.
So, I know you have to leave, but we welcome you to this
Committee. Mayor Michael Bloomberg.
STATEMENT OF THE HONORABLE MICHAEL BLOOMBERG, MAYOR, CITY OF
NEW YORK, NEW YORK
Mr. BLOOMBERG. Chairman Rangel and Ranking Member McCrery,
ladies and gentlemen of Congress, thank you for having me.
I must first put on the record the fact that I am Mayor
because of Charlie Rangel. Charlie Rangel urged me back in
about the year 2000 to run for mayor. I always listen to
Congressman Rangel. I think lots of you would have loved to be
listening in on the conversation when I called him and said,
``Charlie, I've got good news and bad news.'' Charlie didn't
quite understand we had two parties in New York. Actually, we
don't really have two parties in New York, but we'd like to
have two parties in New York. Anyway, I am here because of him.
Thank you, all of you. You are here because you are
discussing whether or not we should reduce our dependence on
fossil fuels. I don't think there is any question that we
should.
Whether it is energy independence, whether it is pollution,
whether it is economics, there are lots of reasons that we are
in a very difficult and bad situation. We are transferring our
wealth out of this country over to other countries, some of
which don't have the same values we do, and in fact, fund
terrorists that try to take away our freedoms. It is a very
worrisome thing, and something that I am pleased to see you are
addressing.
I also think that reducing our dependence on fossil fuels
will increase our economic efficiency and competitiveness,
enhance our national security, improve our air quality, promote
public health, and reduce our impact on global climate change.
Now, I did listen to Congressman Camp and Herger and
McCrery talk, and I, too--I am a capitalist. Forbes says I have
some credentials as a capitalist. But I think that if you take
a look at the impact of all of these things, they are
positives, rather than negatives. Rupert Murdoch, who has never
been known as a tree hugger, and me, from my company, we have
both said that News Corp and Bloomberg, L.P., are going to be
carbon neutral. It is a competitive advantage to improve the
environment.
I worry about overseas competition, but we are better off
if we reduce our pollution. You should take a look at the
Chinese stock markets, both of which the major markets are off
65 percent this year. A lot of that is because in China they
understand they have an enormous pollution problem that will
have devastating effects on their economy.
So, I am not terribly concerned about what they will do. I
am concerned to make sure that we don't get in a similar
situation. I am concerned that we do what is in our own
interest. We breathe air that is being polluted today. All of
the arguments that say, down the road, if we stop polluting it
doesn't matter, because China and India and other countries
pollute, maybe long-term that's right. I don't agree with it,
but maybe, long-term, it's right. But we are polluting the air
that we and our children are breathing right now, right here,
and we have to do something about this.
State and local governments have taken the lead, because of
the inaction of Congress. But I think you have a chance to
rectify that. In New York City, as you know, we have set as a
goal for the city itself to reduce by 30 percent by the year
2017 its pollution, its generation of greenhouse gases. That
means city-owned buildings, city-owned buses, city-owned police
cars, fire trucks, those kinds of things. If we do it, we hope
that we can get the private sector to reduce by 30 percent the
amount of greenhouse gases that it produces by the year 2030.
We pursued an aggressive, multi-pronged strategy. We
stressed conservation, as well as encouraged the use of
alternative fuels. We are making progress. Today we are
releasing our annual greenhouse gas inventory. We have done an
inventory of all of the pollution in New York City, because if
you can't measure it, you can't work on it.
The new survey shows that we have reduced our carbon
footprint by 2\1/2\ percent between 2005 and 2007, thanks
mainly to milder weather, and two new efficient power plants.
But, nevertheless, we are going in the right direction. Our
challenges, however, energy consumption and vehicle traffic, do
continue to grow faster than our population, and they
demonstrate why, for State and local efforts to be truly
effective, they really do have to be matched at a Federal
level.
It is a disgrace that Detroit produces cars that are
phenomenally energy efficient, but only sells them outside of
the United States. When some people say that overseas they are
laughing at us because we are talking about improving the
environment, you go to Western Europe. They are way ahead of
us, and they dislike us because they don't respect us because
we're not doing our part.
Now, if we are going to reduce carbon emissions, we really
have to use capitalism to do it. I don't think that a managed
economy would ever do that. We saw managed economies. They were
called things like the USSR and Communism, and they just didn't
work. Capitalism does work, but you've got to give an economic
incentive for people to do things. That's the essence of
capitalism.
Yes, Congressman Camp. You will raise energy prices. But
that's exactly what we should do if we want people to use less.
That's using the marketplace to achieve a goal that is in
everybody's interests.
We have to price carbon at a price where it gives you an
incentive to go and to find alternative fuels. You can use a
carbon tax, which is what I prefer, simply because it's more
straightforward to administer. I don't like taxes any more than
anybody else, but if you're going to do something, do it
efficiently. Or, you could use a cap and auction system, which
would work. Congressman Doggett, you proposed a comprehensive
cap and auction system on greenhouse gases. I still would
prefer the tax.
But in either case, we have to do something to get people
to use less, and to use it smarter. I think there are four
quick things that I would like to outline that I think are
important in your discussions, if and when you come to some
combination or some decision as to how to use capitalism to
incent people to be more efficient.
Incidentally, these things are all good for business. I
don't know any company that hasn't invested in being more
environmentally friendly and reducing their energy consumption
that hasn't benefited greatly to their bottom line. So, we're
not asking people to do things that aren't in their interests;
we are asking people to do things that are in their interest,
and collectively, in our interest.
The four things are simply the implementation should be
straightforward. What you have seen overseas when we have tried
cap and trade systems, if you start giving breaks to people,
the cost of administering, it starts to get so great that
society is burdened by the cost. That's a lousy idea. That's
why I favor the cap and tax. But you could do a cap and trade
system.
But you can't have all of the exceptions. You have to have
a system that gives people the incentive to reduce carbon
emissions, go to alternative fuels, and one that the public and
the private sector believes is efficient and is fair.
Now, second, we want to have--you have to have a uniform
price. If we start giving particular breaks to certain
industries, or to certain parts of the country, you just will
not get this done. All you will create is, I think, a big mess.
We have to make sure that the amount of--the prices that will
come out of the amount of carbon credits that you decide to
make available achieve the purpose of getting companies to
reduce their emissions, to be more efficient, or to go to
alternative fuels.
Third, I think that we have to have some ways to address
Congressman Camp or Congressman Herger--I'm sorry--one of you
had mentioned the impact on the economy. You are dead right.
Having a tax or a fee that reduces carbon emissions by raising
the cost of energy is a drag on the economy.
So, rather than create a pinata, where you can just use
this money for lots of things, using the money to offset that,
I think, should satisfy your concerns and let us do both
things.
Job retraining. We, in this country, our public education
system is not where it needs to be. Our workers are being left
out of the future economy. This is a perfect opportunity to do
that.
Reduce payroll taxes. I would like to reduce taxes just as
much as anybody else would. The people that are working and
paying the payroll taxes are the people that will be hurt. Here
is a perfect way to transfer the burden from them, who are
going to pay higher energy prices but now have lower taxes, to
the producers who are the ones that, in all fairness, because
of their actions are giving us the opportunity to pollute the
air that we breathe, and to hurt us long term.
Last, I think that carbon tariff on nations that don't sign
up to a global agreement may eventually become a necessity. I
think we shouldn't think that we can do all of this alone. But
America is a country that has always led by example. The
defeatism to say, ``Well, we can't do it because everybody else
is unwilling to do it,'' isn't where we should be. We should be
standing up. We should be leading. We should be improving our
environment.
It is disappointing to me, as I travel around the world,
that it is other countries that are investing in new
technologies, working on alternative fuel sources, retraining
their workforce. Long term, that's not good for America. I
think if America said, ``Look, let's go it alone, let's be the
leader,'' you will find the world wanting to follow us.
So, I appreciate your concerns. Nobody is more cognizant of
them than I. But I do think those are ways to address them, and
I do think this is a serious issue that we have to address now.
Long term, the global warming, short term, the pollution of
the air that you and I breath, and the economy, our economy, is
better if we make it more ecologically pure, whatever the word
is, because it is--all of these environmental things--are
stagnating our economy, and preventing us from attracting the
best and the brightest, rather than raising the costs--rather
than reducing the cost, they are raising the cost. Thank you.
[The prepared statement of Mr. Bloomberg follows:]
Prepared Statement of The Honorable Michael Bloomberg,
Mayor, City of New York, New York
Thank you, Chairman Rangel, and Members of the Committee.
It's time for our country to reduce our dependence on fossil fuels.
Doing so will increase our economic efficiency and competitiveness
. . . enhance our national security . . . improve our air quality . . .
promote public health . . . and reduce our impact on global climate
change.
Many State and local governments are already taking the lead.
In New York City, we've set a goal of reducing our output of
greenhouse gases by 30% by the year 2017--even as our population grows
to an unprecedented 9 million people.
We're pursuing an aggressive, multi-pronged strategy that stresses
both conservation and encouraging the use of alternative fuels.
We're making progress. Today, we're releasing our annual
``greenhouse gas inventory'' for New York City. It shows that our
carbon footprint shrank 2.5% between 2005 and 2007, thanks mainly to
milder weather and two new and more efficient power plants.
Our biggest challenges, however--energy consumption and vehicle
traffic--continue to grow faster than our population.
That demonstrates why, for State and local efforts to be truly
effective, they must be matched at the Federal level.
That must start with national policy that puts a price on carbon
emissions.
Set such a price--and the market will reduce emissions, by
providing an incentive to use cleaner fuels, and by leveling the
playing field for alternative forms of energy.
Pricing carbon emissions could involve levying a carbon tax, as
Congressmen Stark and Larson have proposed. This is the approach nearly
every economist prefers--as do I.
Or, as others, including Congressman Doggett, have proposed,
comprehensive ``cap and auction'' systems on greenhouse gas emissions
could also be effective.
Any such pricing regimen must be based on four essential
principles:
First, implementation should be simple and straightforward.
The best place to put a price on carbon emissions that exceed a
legislated cap is ``upstream,'' at the points of fossil fuel
production, such as coal mines and petroleum refineries.
This would mean assessing a carbon price at hundreds of locations
in our Nation, not the many thousands that would have to be monitored
if the price were to be imposed further downstream in the process of
using fuels.
Second, we should ensure a uniform price on carbon emissions that
is uniformly administered.
The government's auction of credits must cover 100% of credits.
Sweetheart deals for the well-connected would distort and undercut the
process, sowing confusion and mistrust.
Some industries argue that they will be injured. But they are the
worst polluters. They have to clean up fastest. Better that than their
hiring lobbyists to strike deals that would undermine the whole
process.
Ensuring price fairness and predictability will also encourage the
investment in alternative energy sources essential to our Nation's
future.
Third, carbon pricing must be accompanied by a commitment to
revenue neutrality.
It's been estimated that a Federal auction of carbon credits could
bring $1.1 trillion into the U.S. Treasury during the first 6 years
that such a system would be in place.
If Washington gets to treat this like a revenue pinata, Americans
will be justifiably repelled, and the cause of reducing our dependence
on fossil fuels will be tragically set back.
So Congress should offset the higher costs that consumers will bear
as a result of carbon pricing with rebates on payroll or other personal
taxes.
Fourth, and finally, while a ``carbon tariff'' on nations that
don't sign on to a global agreement to reduce their emissions may
eventually become necessary, let's lead by example, and not look for
excuses to retreat into protectionism.
Members of the Committee: It's very encouraging to see how rapidly
the debate on carbon pricing is advancing.
That's evidenced by this hearing about the best way to design such
a pricing system.
The devil, as always, remains in the details. But by employing the
principles that I've just outlined, I believe we can create a carbon-
pricing system that is fair and forward-looking.
Chairman RANGEL. Thank you, Mr. Mayor. Thank you, that you
rearranged your schedule and you could stay with us longer.
Again, the policy of this Committee is that our witnesses will
have 5 minutes to state their views.
You can see the interest that the panel has, and so
therefore we expect that Members will also restrict to 5
minutes, that we can get as much in as possible this morning if
we can adhere to the 5-minute rule.
Mr. Orszag, Dr. Orszag, who is the Director of the
Congressional Budget Office, I think the Congress, Republicans
and Democrats, have to thank you for the bipartisan research
that you do for us. We don't always follow it, but it's good to
know that you are there.
We know that, as we try to resolve this serious issue and
fulfill our responsibilities, that we can depend on your office
for the research and the backups that we need.
Thank you for being with us. You are recognized for 5
minutes.
STATEMENT OF PETER R. ORSZAG, PH.D., DIRECTOR, CONGRESSIONAL
BUDGET OFFICE
Mr. ORSZAG. Thank you, Mr. Rangel, Mr. McCrery. Climate
change is one of the world's most pressing long-term problems.
Some degree of risk exists for the damage to be large and
potentially even catastrophic.
Reducing emissions, however, will impose short-term costs
on the economy. The political system is, arguably, not
particularly good at dealing with this kind of issue in which
there are short-term costs required in order to obtain expected
long-term benefits.
Analysis suggests, however, that smart policy design can
significantly reduce the costs involved. In particular, what
you do with any allowances under a cap and trade program, and
whether you provide flexibility, not only in terms of where and
how the reductions occur, but when, can matter a lot, in terms
of the overall costs of meeting any given climate objective.
First, the value of the allowances created under any cap
and trade program would be substantial. CBO estimates that
under the Lieberman-Warner bill, the aggregate value would be
more than $100 billion in 2012, and would rise thereafter.
The question is what the government does with that $100
billion. Does it give it away, or does it sell the permits and
use those funds for some other purpose? Just to be clear, you
can't do both at once.
Evidence suggests that the economic cost of a 15-percent
reduction in U.S. emissions might be twice as large if
policymakers gave the allowances away than if they sold the
allowances and used the revenue to reduce distortionary taxes
on either labor or capital.
Giving the permits away would also create a windfall profit
for shareholders. Despite what proponents sometimes suggest,
not prevent--again, not prevent--the price increases that are a
necessary part of a cap and trade program, and that would
disproportionately affect low-income people.
Indeed, one can think of issuing allowances at no cost to
firms as the equivalent of auctioning the permits, and then
handing the cash that is raised to the firms themselves. That
is the way that CBO is scoring proposals to give away permits,
and that is most consistent with underlying economics involved,
and I think highlights the windfall profit point.
In other words, when viewed either from a macroeconomic
perspective or a distributional one, giving the permits away
ranks relatively poorly under either criterion.
A second main way to reduce the economic costs involves
timing flexibility. A simple cap and trade program provides
flexibility to firms to reduce emissions where and how they are
cheapest to do, and that's great.
But it's also important to recognize the disjuncture
between the environmental dynamic on climate change and the
economic one. From an environmental perspective, what matters
is cumulative emissions, not whether you reduce emissions this
year or next year. From an economic perspective, however, the
cost of reducing a ton of emissions this year can vary a lot,
relative to next year. If you don't take that into account--and
a very simple cap and trade system, which imposes an aggregate
cap on emissions each year does not--you unnecessarily raise
the cost of achieving whatever it is that you want to achieve.
One can build into cap and trade programs provisions that
provide this kind of timing flexibility. So, for example, you
can build in both a ceiling and a floor on prices. You can
build in banking and borrowing provisions. But it is very
important to provide that type of flexibility if you want to
reduce the costs involved, and also to limit the volatility of
the permit prices, which, for example, in the sulfur dioxide
program, have been significantly more volatile than stock
prices.
Finally, my written testimony discusses the particular
challenges that energy-intensive sectors, like the steel and
aluminum industries, could face under a cap and trade program.
These sectors account for perhaps 15 percent of aggregate U.S.
energy consumption, and about 5 percent of GDP, and roughly the
same share of employment.
They could lose sales to imports from other countries that
do not impose as aggressive climate regimes if we moved ahead
with addressing global climate change. That substitution of
imports would not only hurt our domestic industries, but also
through the so-called carbon leakage, mitigate any
environmental benefit.
There are a variety of proposals that have been put forward
to try to address these concerns, and my written testimony goes
through the pros and cons, along with their consistency, or
potential consistency, with our World Trade Organization
obligations. Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Orszag follows:]
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Chairman RANGEL. Thank you, Doctor. Dr. Carol Browner is no
stranger to this Committee or to the Congress, having been the
longest serving EPA Director, and one who has concentrated not
only on the improvement of the environment, which she
considered a moral obligation for the United States to
participate in, but also the economic impact of it. So, we know
that we can depend on your support far beyond the 5 minutes
that you are sharing with us this morning. Thank you, and
welcome back.
STATEMENT OF THE HONORABLE CAROL M. BROWNER, PRINCIPAL, THE
ALBRIGHT GROUP LLC
Ms. BROWNER. Thank you, Mr. Chairman. It is, indeed, a
pleasure to be here today. Let me start by congratulating this
Committee on taking an interest in the issue of climate change.
I think for those of us who have worked on this issue for the
better part of the last two decades, we certainly welcome the
engagement of this Committee. I applaud Congressman Doggett for
his bill and his leadership on this matter.
Addressing climate change presents not just challenges, but
tremendous opportunities, opportunities to rethink our energy
future, and to move forward on energy independence. Taking
action now will allow us to avoid the worst climate impacts,
and can drive the creation of a clean energy economy, in which
we exchange carbon dependency for greater energy independence
and new clean energy jobs.
Not only should we consider the cost of any actions we
take, we should also consider the cost of inactions. Study
after study have shown that those costs could be very high.
There is a recent University of Maryland study looking at
the impacts of climate change on eight States. The research
shows that climate change could cost our States billions of
dollars by mid-century. The study finds that in the Midwest,
for example, agricultural losses alone may total $10 billion or
more per year.
According to another study, if emissions are left
unchecked, heat-related deaths in southern California could
increase up to sevenfold; annual rainfall in the West could
decrease by 15 percent; and along the Gulf coast, sea level
rise could lead to increased hurricane damages in Louisiana,
Florida, and Texas.
I have long believed that comprehensive cap and trade
auction legislation is the best way to reduce greenhouse gas
emissions. During my tenure at EPA, we established the acid
rain cap and trade program, in which businesses buy and sell
sulphur dioxide allowances that have been granted by the
government.
There are two things you should know about this program, in
addition to the fact that it reduced our SO2
emissions. First, it has had the highest rate of compliance of
any program to reduce pollution in the history of EPA.
Secondly, the cost of achieving those reductions have been
dramatically lower than the original estimates. The cost of
compliance have been only 30 percent of what EPA originally
estimated the cost would be to industry.
Now, for cap and trade legislation to be successful, I
think there are a couple of things to be mindful of. For the
business community--and the mayor spoke to this--we need
predictability and flexibility. They need to know what is
expected of them. What are the targets? They need to be clear
and concise. What are the timeframes over which those targets
must be met?
The business community also needs some flexibility. We have
heard from CBO some ideas. Another idea to consider is banking
and borrowing. Let the businesses work across a couple of years
to determine when they can most cost effectively achieve the
reductions we are asking them to make.
Finally, the government needs to work efficiently. Each
agency and department must function as it was designed to do.
That means Treasury can do what Treasury does well, and EPA
should do what EPA does well. The traditional work of EPA
encompasses standard setting and program implementation. The
work of the Treasury Department includes revenue, collection,
and allocation. I believe that each of these agencies should be
tasked appropriately to do what they do best, and to bring
those shared experiences to bear so that we can create an
effective program.
You know, time and time again, when we have set
environmental standards, there have been naysayers. There have
been those who have said, ``We can't do it.'' But you know
what? If we look back over the history of 30 years of
environmental commitment in this country, what we find is each
time we do set a standard, we rise to the challenge and we find
the ingenuity, the innovation, and a more cost effective way of
achieving that goal, of reducing our pollution and allowing our
families and our communities to be healthy.
I want to close by making one note--noting one thing for
the Committee. I do believe that Congress has to take the
leadership on this issue. But you should be mindful of the fact
that last year the Supreme Court found that EPA, under the
existing Clean Air Act, can, in fact, regulate carbons. So,
there is authority there. The magnitude of this is such that I
think Congress should act, but I think it is important to
remember there is some existing authority.
Again, Mr. Chairman, thank you for the opportunity, and
thank you for your interest in this matter.
[The prepared statement of Ms. Browner follows:]
Prepared Statement of The Honorable Carol Browner,
Principal, The Albright Group LLC
Thank you, Mr. Chairman and Members of the Committee, for inviting
me today to speak about one of the greatest environmental, social, and
economic challenges our country has ever faced--climate change.
Let me first congratulate the Committee for its engagement on this
issue. All of us who have been active on the challenge of climate
change welcome the involvement of the Ways and Means Committee in
shaping U.S. climate legislation.
Climate change presents our Nation with a number of great
challenges, but also a tremendous opportunity. In responding to the
climate crisis, the United States has the opportunity to rethink our
energy future and move toward energy independence. Taking action now
will allow us to avoid the worst climate impacts and will drive the
creation of a clean energy economy, in which we exchange carbon-
dependency for greater energy independence and new clean energy jobs.
This transition requires government leadership. And it is in our
best interests to act now--both economically and environmentally. At
all levels, the costs of action must be weighed against the great costs
of inaction. The University of Maryland recently published a study on
the costs of climate impacts in eight States. The research shows that
climate change could cost our States billions by mid-century. The study
finds that in the Midwest, for example, agricultural losses alone may
total $10 billion per year or more.
According to another study, heat-related deaths in southern
California could increase up to sevenfold if emissions go unchecked.
Annual rainfall in the West could decrease by 15 percent. And along the
Gulf Coast, sea level rise could lead to increased hurricane damages in
Louisiana, Florida, and Texas.
I believe that comprehensive cap and trade legislation is the best
way to reduce greenhouse gas emissions. By bringing to bear market
mechanisms, we can address the climate crisis in a cost effective and
efficient manner.
For legislation to be successful, we need a couple of things. For
the business community, predictability and flexibility are paramount.
That means a predictable market signal, indicating what reductions are
required and over what time frame. Flexibility could include the option
to bank and borrow allowances, so that individual companies can meet
their requirements at the lowest cost possible.
And for our government to work efficiently, each agency and
department must function as it was designed to do--that means Treasury
doing what Treasury does best, and EPA doing what EPA does best. The
traditional work of EPA encompasses standard setting and program
implementation. The traditional work of the Treasury Department
includes revenue collection and allocation. EPA and Treasury should be
tasked, respectively, with these elements of the climate program. In a
cap and trade system, EPA can set the standards and ensure compliance,
and Treasury can manage the revenues from allowance auctions.
Even conservative estimates of the revenue that would be generated
from the auctions are in the billions--revenue that can be used to
offset costs to American families and to invest in a new generation of
clean energy technologies.
Time and time again, when the Nation has set a new environmental
standard, the nay-sayers have warned that it will cost too much; that
it will impose an enormous economic burden on the American people. But,
once we have set those standards, American ingenuity and innovation
have found a solution at a far lower cost than predicted. This is
because once there is a standard, there is a guaranteed market for new
technologies, so that businesses are prepared to invest in innovation.
When Congress banned CFCs, which were damaging our atmosphere, many
said the ban would mean the end of air conditioning in our cars and
homes. One company saw a guaranteed market for an alternative and took
advantage of the opportunity, which reaped them a nice return. American
businesses have risen to these challenges before, and they will do it
again; all they need is predictability and flexibility.
During my tenure at EPA, we established the acid rain program, in
which businesses trade sulfur dioxide allowances that have been granted
by the government. This program has the highest rate of compliance of
any EPA pollution control program, and at a far lower cost than
predicted. For the acid rain program, the costs of compliance have been
only 30% of what EPA originally estimated.
Let me close by reminding the Committee that following the Supreme
Court's Massachusetts v. EPA decision in 2007, EPA has the authority to
regulate greenhouse gases under the 1990 Clean Air Act. If EPA does not
act, it is likely that the Agency will be sued and forced to act. Given
the magnitude of the problem, and the scale of the solution required, I
believe it is important that Congress provide national leadership on
this issue.
Thank you very much. I will be happy to take your questions.
Chairman RANGEL. Thank you, Doctor. We look forward to
working with you when we settle down to get this thing done.
We are fortunate enough to have Dr. Dallas Burtraw: author,
researcher, lecturer, and one who has gained an international
reputation and expertise in the quality in climate control.
Thank you for sharing your views with us, and you are
recognized at this time for 5 minutes.
STATEMENT OF DALLAS BURTRAW, PH.D., SENIOR FELLOW, RESOURCES
FOR THE FUTURE
Mr. BURTRAW. Thank you, Mr. Chairman, for the opportunity
to testify today. I am a senior fellow at Resources for the
Future, and RFF neither lobbies nor takes positions on specific
proposals. The views I present today are my own.
My research leads me to find that the most important aspect
in designing a cap and trade program is the initial assignment
of the market value of the allowances. This is even more
important to the long-run success of climate policy than the
initial level of the cap.
The carbon dioxide cap and trade program would constitute
the greatest creation of government-enforced property rights
since the 19th century. Depending on the stringency of the cap
and breadth of the program, it will introduce into the economy
property rights ranging from $100 billion to $370 billion every
year, in the form of tradable emissions allowances.
There is no inherent claim to the property value created
under this program. Policymakers might frame the decision about
allocating emission allowances this way.
Imagine you are implementing a new program that will create
well over $1 trillion in value in the next decade. Now, how do
you want to allocate that value? The decision has both
efficiency and distributional consequences, which brings me to
my first point: the award of free CO2 emission
allowances is equivalent to a grant of cash, as we have heard
before, this morning.
As such, it does not affect the production decision of
plant managers. A corollary idea is that, in a competitive
market, how the emission allowances are initially distributed
does not affect the price of goods and services in the economy.
By analogy, if you were buying a house, it would not occur
to you that its price might depend on whether its previous
owner had bought or inherited the house. Similarly, the
managers of firms should be expected to realize the maximum
possible value for allowances that might be received for free.
Otherwise, they would have some explaining to do to their
shareholders.
The allocation of emissions allowances is likely to involve
a familiar tradeoff between efficiency and distributional
outcomes. However, that is not true in considering free
allocation to shareholders of incumbent firms. Free allocation
does not perform well on efficiency or distributional grounds.
Free allocation would not offer the efficiency advantages of
reducing pre-existing taxes. It is decidedly a regressive
policy, because the value of the free allowances accrues
primarily to higher-income households, and creates the
possibility of windfall profits.
Also, free allocation directs about 10 percent of the
allowance value overseas to foreign owners of shareholder
equity, and that value is not available to any income group in
the United States.
Using the allowance value, instead, to reduce the income
tax or the payroll tax has great appeal to me, as an economist,
because of the efficiency advantages of lowering taxes on
labor. Unfortunately, our research indicates this efficiency
advantage may come out of distributional costs, as lower-income
households would receive less of the benefit of tax reduction,
and would bear a relatively larger burden.
In contrast, too modestly progressive policies would be
expansion of the earned income tax credit or a cap and dividend
approach that would return revenue directly to households. The
dividend approach would also increase taxable income, yielding
revenue that would approximately offset the increases in costs
for government under cap and trade. So, budget neutral, in
other words.
Assigning a portion of allowance value as investment
efficiency is also modestly progressive. It would reinforce
program goals, and lessen the impact of climate policy.
However, this approach is problematic, because the institutions
and policies that would be used to achieve this outcome are not
well specified.
In my written comments I address special issues in the
electricity sector, and other important elements of cap and
trade, including cost management and the protection for
domestic firms against unfair international competition.
I want to close by emphasizing that the true crucial
elements of good design for cap and trade are transparency and
simplicity, because these attributes reduce risk and inspire
investor confidence. Climate change is inherently complicated,
and an uncertain challenge. Climate policy must strive to be
the opposite, if the voting public is going to embrace a
national commitment to address the problem.
Complicated formulas create the perception, deserved or
not, of favoritism and game rigging that is likely to erode
public support. Simple tax reform, or even simpler still,
direct dividends to households, are approaches that would
provide the most convincing signals to the public that we are
addressing climate change as a common national initiative.
We should recognize at the outset that an important part of
climate policy may be the need to go back to the American
public in the future for further commitments. When it comes to
the design of cap and trade, a transparent and simple approach
is the strongest principle one can cling to for good market
design, and to make sure the American public understands the
policy, and understands the national effort to try to solve
this problem.
Thank you for the opportunity to testify.
[The prepared statement of Mr. Burtraw follows:]
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Chairman RANGEL. Let me thank you for your contribution. I
just want all of you to know that the Chairman feels awkward
that we are restricting you to 5 minutes after all of the work
that you have done, not only in preparing the testimony, but
all of the knowledge that you have that we really need in order
to make positive decisions.
So, do not be surprised if we don't call upon you in a very
informal way to come and sit around a table to see how we can
work out the obstacles that are in front of us.
But I want to thank you, Doctor.
Our next witness, Robert Lighthizer, is an expert in trade
and trade policy. Indeed, he has served as a Deputy Trade
Representative, a U.S. Trade Representative. So, as an expert
and as an ambassador, we welcome your contribution. You are
recognized for 5 minutes.
STATEMENT OF ROBERT E. LIGHTHIZER, PARTNER AND HEAD OF THE
INTERNATIONAL TRADE DEPARTMENT, SKADDEN, ARPS, SLATE, MEAGHER &
FLOM LLP
Mr. LIGHTHIZER. Thank you very much, Mr. Chairman. It's a
pleasure to be here today. I would like to briefly address a
topic that, in my view, is absolutely central to your
consideration of climate change legislation. Namely, the
potential impact on U.S. companies that face significant
foreign competition, and the steps that Congress might take to
address those competitiveness concerns.
It is not my intent to comment on the wisdom of pursuing
cap and trade programs or other mechanisms that would impose
new mandatory costs on U.S. producers. The question obviously
presents significant issues for Congress and for this
Committee. My remarks are confined to the competitiveness
challenges that would be presented to American workers and
companies if new costs and burdens are imposed.
There should be no mistake. If this issue is not dealt with
effectively, it will cause grave and perhaps irreversible harm
to American manufacturers. Equally important, failure in this
regard will, in all likelihood, undermine the environmental
consequences of climate legislation.
The globally competitive industries adding new costs to
American products will simply lead to the substitution of
imports from countries with lesser environmental requirements.
Taking steel as an example, estimates suggest that production
in places like China and India may be anywhere from two to four
times CO2 intensive than U.S. production. It is not
hard to see how disparate climate costs could not only wipe out
American industries, but could seriously worsen the global
climate problem at the same time.
I would like to make three core points. First, there are
strong arguments that, in enacting climate legislation, the
United States can, consistent with WTO rules, place the same
requirements on imports that are placed on domestic production.
This is not an area of clear precedent. It is always hard to
predict what the WTO appellate body will do, particularly given
some of the very troubling decisions we have seen from that
body.
But it is my view the better argument is that neutral and
equal application of regulatory requirements to imports would
be permissible. Hopefully, this can be done in conjunction with
a negotiated international agreement that will clarify rules
and ensure consistent treatment for traded products.
Second, you should avail yourself of this argument so that,
consistent with international rules, we can apply any new
climate burden to imports. We cannot simply ignore this issue,
and hope for an international agreement down the road, because
there may be very little left of our basic manufacturing at
that time.
Indeed, if Congress concludes that it cannot address the
competitiveness issue in climate legislation, either for WTO
reasons or otherwise, it should rethink the entire approach we
are taking to climate challenge.
Third, while critical, we should recognize that placing
equal requirements on imports only addresses part of the
problem. It does not do anything about exports, or maintaining
our competitiveness in foreign markets. For that reason,
proposals that avoid the imposition of new costs on industries
that face strong global competition--for example, by granting
sufficient free allowances under a cap and trade system--might
be optimal and would, at the same time, address both import and
export sides of the equation.
To the extent new costs or burdens are placed on domestic
production, however, it is critical that imports face the same
requirements, to ensure that we remain competitive in our own
market.
In conclusion, the competitiveness issue is not an
ancillary topic, but goes to the very core of the climate
debate. There is, in my view, sufficient flexibility in the
global system and rules to allow Congress to meaningfully
address this concern. But it will require careful thought and
work to craft a proposal that both meets WTO requirements, and
is actually effective in leveling the playing field. Both of
these are essential objectives.
Obviously, Congress will want to fashion an approach that
stands the best chance to satisfy the WTO. But I would caution
that simply putting in place a fig leaf that purports to
address the competitiveness challenge, but in fact would not
create a truly fair playing field, would be the worst option.
It would hang our workers and companies out to dry, and
ultimately lead to greater, not fewer, greenhouse gas
emissions. Thank you, Mr. Chairman.
[The prepared statement of Mr. Lighthizer follows:]
Prepared Statement of Mr. Robert E. Lighthizer,
Partner and Head of the International Trade Department,
Skadden, Arps, Slate, Meagher & Flom LLP \1\
I. INTRODUCTION
I am pleased to testify regarding the relationship between climate
change legislation currently under consideration by Congress and U.S.
obligations under the Uruguay Round Agreements that established the
World Trade Organization (``WTO'').
---------------------------------------------------------------------------
\1\ Mr. Lighthizer is an attorney who leads the International Trade
Department of Skadden, Arps, Slate, Meagher, and Flom LLP. The views
expressed here are his own and not necessarily those of his firm.
---------------------------------------------------------------------------
I would like to say at the outset that I do not intend to comment
in general on the wisdom of pursuing a cap and trade program or other
mechanisms that would impose new, mandatory costs on U.S. producers.\2\
There are obviously very significant issues in this regard that will
require consideration by Congress and this Committee. My remarks are
confined to addressing some of the competitiveness challenges that
would be presented to American workers and producers if new costs and
burdens are placed on them, and some of the options available to
Congress to address those challenges.
---------------------------------------------------------------------------
\2\ I do briefly discuss below one alternative to a cap and trade
system, namely a sector-based ``standards'' approach that has been
advocated by some in industry.
---------------------------------------------------------------------------
I believe that this is one of the most important issues facing
Congress with respect to climate change legislation. It is an issue
that received a great deal of interest in the context of the Senate
climate debate that occurred earlier this year, and will no doubt
remain paramount. Put simply, the ability to ensure that domestic
producers are not placed in an untenable competitive position due to
burdens under any new climate legislation will be essential to both the
environmental goals of the legislation and the long-term health of our
manufacturing sector.
The importance of competitiveness issues to the success of climate
change legislation is clear. No other country is so open to imports as
the United States. Figure 1 below shows that last year our current
account deficit exceeded $750 billion. While oil imports have been a
part, Figure 1 shows that our overall deficit is chiefly the result of
our trade imbalance in nonpetroleum goods. As this fact indicates, U.S.
manufacturers in a wide range of industries face fierce import
competition. Under these circumstances, relative changes in costs and/
or economic incentives will invariably lead to the rapid substitution
of foreign products for domestic products--and consequent severe injury
to domestic industries. Thus, any measure (including climate change
legislation) that places significant additional costs on U.S.
manufacturers without imposing similar costs on imports will plainly
harm U.S. workers and businesses, put additional pressure on core U.S.
industries, and lead to a further worsening of our trade deficit.
Figure 1
[GRAPHIC] [TIFF OMITTED] T2201A.039
The impact of poorly-designed climate legislation will not be
limited to the loss of jobs and industries in this country. If new
climate change legislation does not adequately account for the
international competitiveness issue, it will create an incentive for
manufacturing to leave the United States and be replaced by production
in nations that often have far less rigorous environmental standards.
This will result in higher volumes of greenhouse gas emissions
worldwide--a result that directly contradicts the goals of climate
change legislation. As shown in Figure 2 below, using the steel
industry as an example, the substantially higher greenhouse gas
intensity of steel production in places like China and India would mean
that any shift in production to those countries would dramatically
worsen global levels of CO2.
Figure 2
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Congress should keep this context in mind as it considers how to
reconcile new climate change legislation with our WTO obligations. In
light of this background, as well as an analysis of U.S. obligations
under the WTO agreements, I wish to emphasize several critical points.
First, it is absolutely imperative that the United States
take meaningful actions to prevent imports from countries with less
rigorous standards from undermining the effectiveness of any climate
change legislation Congress may approve.
Second, while the WTO agreements and case law provide no
definitive guidance on these issues, there are sound arguments that the
United States may place equal requirements on imports to account for
emissions associated with those products, and to ensure that any new
climate change legislation does not place U.S. workers and businesses
at an unfair disadvantage vis-a-vis foreign producers. Hopefully, this
can be done in conjunction with a negotiated agreement internationally
that will clarify rules and ensure consistent treatment of traded
products.
Third, given the importance of this issue, we should
clearly avail ourselves of the strong arguments available that the
United States is permitted to place equal requirements on foreign
products based upon emissions associated with those products. Indeed,
if it were concluded that the United States does not have such
authority, the implications would be profound--and would in my view be
more than sufficient grounds for Congress to rethink the entire
approach it is taking to the climate change challenge.
Finally, we should recognize that placing equal
requirements on imports only addresses part of the problem. It does
not, in particular, address concerns that new climate requirements will
undermine the competitiveness of U.S. products sold in foreign markets.
For that reason, proposals that, where feasible, address
competitiveness issues from both an import and export standpoint (e.g.,
by avoiding the imposition of new climate costs on industries facing
strong global competition) may be optimal, particularly in the absence
of a global approach to solving climate problems. To the extent new
requirements are placed on domestic producers, however, it will remain
critical to ensure that imports are subject to the same requirements--
so as to ensure the viability of U.S. producers in their own market.
II. LEGAL BACKGROUND
New climate change legislation would potentially implicate U.S.
obligations under several provisions of the WTO agreements. Although
there is a great deal of uncertainty in this area of the law, there are
sound arguments to be made in support of the view that the United
States is permitted to place the same regulatory burdens on imports
that are imposed upon domestic products.
The provisions and standards applicable to a measure that is
applied to imports will vary significantly depending on whether it
takes the form of a border measure or an internal measure enforced at
the border. Article XI of the General Agreement on Tariffs and Trade
(``GATT'') generally prohibits any measure restricting imports at the
border (i.e., a border measure) other than normal import duties, taxes,
or charges. However, a measure that is applied to both imports and the
like domestic product, even if it acts to restrict imports, is not
subject to Article XI. Indeed, a note to Article III of the GATT
expressly provides that
[a]ny internal tax or other internal charge, or any law,
regulation or requirement . . . which applies to an imported
product and to the like domestic product and is collected or
enforced in the case of the imported product at the time or
point of importation, is nevertheless to be regarded as an
internal tax or other internal charge, or a law, regulation or
requirement . . . and is accordingly subject to the provisions
of Article III.
In other words, a measure that is applied to both an imported
product at the border and the like domestic product (i.e., an internal
measure that is enforced at the border) is to be considered under
Article III of the GATT, rather than Article XI.
In turn, the ``national treatment'' provisions of Article III:4 of
the GATT provide that the United States must accord to imported
products ``treatment no less favourable than that accorded to like
products of national origin in respect of all laws, regulations and
requirements affecting their internal sale, offering for sale,
purchase, transportation, distribution or use.'' Thus, if the United
States imposes new legal or regulatory requirements on certain
products, imports of those products must be treated no less favorably
than like U.S. products. The requirements in question may be enforced
on imports at the border, but they cannot discriminate against such
imports. In this regard, the WTO Appellate Body has explained that
``the purpose of Article III is to ensure that internal measures not be
applied to imported or domestic products so as to afford protection to
domestic production. Toward this end, Article III obliges members of
the WTO to provide equality of competitive conditions for imported
products in relation to domestic products.'' \3\ Nevertheless, a WTO
member like the United States may draw distinctions between like
products without according to imported products less favorable
treatment than that accorded to domestic products. The key is whether
there is protection of domestic products in the marketplace.\4\ Indeed,
the Appellate Body recently stated that it was willing to accept a
``detrimental effect on a given imported product'' as long as it could
be ``explained by factors or circumstances unrelated to the foreign
origin of the product.'' \5\
---------------------------------------------------------------------------
\3\ WTO Appellate Body Report, Korea--Measures Affecting Imports of
Fresh, Chilled and Frozen Beef, WT/DS161/AB/R, WT/DS169/AB/R (Dec. 11,
2000), at para. 135.
\4\ WTO Appellate Body Report, European Communities--Measures
Affecting Asbestos and Asbestos-Containing Products, WT/DS135/AB/R
(Mar. 12, 2001) (``EC--Asbestos (AB)'') at para. 100.
\5\ WTO Appellate Body Report, Dominican Republic--Cigarettes, WT/
DS302/AB/R (May 19, 2005) (``Dominican Republic--Cigarettes (AB)'') at
para. 96.
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An issue that has been the subject of much debate is whether
measures that distinguish between products on the basis of their
process or production methods, rather than the physical characteristics
of the products themselves, can be found to sufficiently affect the
products so as to be subject to and upheld under Article III of the
GATT. Environmental restrictions that focus on the manner of production
are examples of such process-based measures or ``PPMs.'' In the Tuna-
Dolphin cases, two panels constituted under the former GATT dispute
settlement system found that measures that conditioned the sale in the
United States of both domestic and foreign tuna on the adoption of an
environmentally-friendly fishing technology violated the GATT.\6\ The
panels found that such process-based regulatory measures fell outside
the scope of Article III and instead were improper restrictions on
imports under Article XI of the GATT.\7\
---------------------------------------------------------------------------
\6\ See United States--Restrictions on Imports of Tuna, 30 ILM
(1991) 1594; United States--Restrictions on Imports of Tuna, 33 ILM
(1994) 936.
\7\ See id.
---------------------------------------------------------------------------
However, the Tuna-Dolphin decisions were never adopted and,
therefore, carry no legal weight in the WTO. Moreover, there are good
reasons to question the basis for the product/process distinction
created by the Tuna-Dolphin panels. A process-based measure of the type
most likely to be at issue in the climate debate would appear to
constitute a measure ``affecting [the] internal sale, offering for
sale, purchase, transportation, distribution or use'' of the product so
as to be subject to Article III:4.\8\ While not resolving this issue,
several decisions issued by the WTO provide a sound basis to argue not
only that process-based measures are subject to Article III, but also
that they should be found to satisfy the national treatment standards
established therein where they are origin-neutral.\9\ Based on the lack
of legal support for the Tuna-Dolphin decisions and the developments in
recent cases decided by the WTO, a number of commentators have
concluded or suggested that the product/process distinction no longer
has any validity (to the extent that it ever did) and that neutrally-
crafted process-based measures or PPMs could or should be upheld under
GATT Article III.\10\ This type of analysis should provide adequate
grounds for Congress to pursue regulatory measures that apply in an
even-handed manner to both domestically-produced and imported
products.\11\
---------------------------------------------------------------------------
\8\ See WTO Panel Report, Mexico--Taxes on Soft Drinks, WT/DS308/R
(Mar. 23, 2006) at paras. 8.108-8.113 (adopting broad interpretation of
the nexus required between taxes and other regulatory requirements and
the products that they affect so as to warrant analysis of such
measures under GATT Article III:4).
\9\ See id.; EC--Asbestos (AB) at paras. 100-02, 113-115, 122;
Dominican Republic--Cigarettes (AB) at paras. 93, 96.
\10\ See, e.g., Joost Pauwelyn, ``U.S. Federal Climate Policy and
Competitiveness Concerns: The Limits and Options of International Trade
Law'' (Nicholas Institute for Environmental Policy Solutions, Duke
University) (Apr. 2007) at 19-26 (hereinafter ``Pauwelyn''); Robert
Howse and Elisabeth Tuerk, The EU and the WTO--Legal and Constitutional
Issues 283, 297-98 (Grainne de Burca et al. eds. 2001); Robert Howse
and Donald Regan, ``The Product/Process Distinction--An Illusory Basis
for Disciplining `Unilateralism' in Trade Policy,'' 11(2) Eur. J. Int'l
Law 249, 252, 254-56, 258-68 (2000); Henry L. Thaggert, ``A Closer Look
at the Tuna-Dolphin Case: `Like Products' and `Extrajurisdictionality'
in the Trade and Environment Context'' in 1 Trade & the Environment:
The Search for Balance 69, 80-81, 83 (James Cameron et al. eds., 1994).
\11\ I have focused herein on the likely analysis with respect to
Article III:4, but it should be noted that a climate measure might well
also be covered by (and defensible under) Article III:2--dealing with
border adjustment of indirect taxes and other internal charges. Indeed,
in the event a climate change measure (including, e.g., a requirement
to submit emissions allowances under a cap and trade program) were
analyzed as a ``tax'' or ``internal charge,'' the provisions of Article
III:2 would provide an additional ground to permit the border
adjustment of such a measure. See, e.g., Pauwelyn at 21-22.
---------------------------------------------------------------------------
Figure 3
[GRAPHIC] [TIFF OMITTED] T2201A.041
Another issue that may require consideration relates to the so-
called ``most favored nation'' (``MFN'') provisions of Article I of the
GATT. In this regard, and to the extent a climate regulatory measure
was applied to imports from some foreign countries but not others
(e.g., because those countries had in place their own climate
measures), questions could well arise with respect to compatibility
with Article I--which prohibits discrimination between imports from
different countries. Certain arguments might be available under Article
I to defend application of neutral criteria to exclude countries that
have in place comparable climate regimes, but this is an uncertain
area.\12\ Having said that, to the extent country exclusions under a
climate measure were found to be problematic under Article I, the U.S.
would have a number of options, including: (i) not excluding any
foreign countries; (ii) negotiating new rules internationally to allow
such exclusions; or (iii) simply defending the exclusions based upon
one of the GATT ``exceptions'' (which are discussed below).\13\
---------------------------------------------------------------------------
\12\ One consideration would be whether exclusion of certain
countries might be justified based upon ``like product''
considerations. The U.S. might also be able to argue that the standard
for excluding certain imports is applied in the same way to imports
from all sources and thus meets MFN requirements.
\13\ See Pauwelyn at 32-33.
---------------------------------------------------------------------------
Even if a regulatory measure were found to violate the provisions
of Articles I, III or XI of the GATT, this violation may be excused by
one of the exceptions provided for in Article XX of the GATT. In
particular, Article XX(g) provides an exception for ``measures . . .
relating to the conservation of exhaustible natural resources if such
measures are made effective in conjunction with restrictions on
domestic production or consumption.'' To be entitled to an exception
under GATT Article XX(g), three conditions must be met:
First, the resource to be protected must be
``exhaustible.'' Even a resource that is renewable, such as clean air,
may be found to be ``exhaustible.'' \14\
---------------------------------------------------------------------------
\14\ See WTO Appellate Body Report, United States--Import
Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R (Oct.
12, 1998) (``US--Shrimp (AB)'') at para. 128; WTO Panel Report, United
States--Standards for Reformulated and Conventional Gasoline, WT/DS2/R
(Jan. 29, 1996) at para. 6.37.
---------------------------------------------------------------------------
Second, the measure at issue must be a measure ``relating
to'' the conservation of the resource. To satisfy this condition, the
Appellate Body has suggested there must be a ``substantial''
relationship between the measure and the conservation of the resource
and the means adopted must be ``reasonably related'' to the ends.\15\
---------------------------------------------------------------------------
\15\ US--Shrimp (AB) at para. 141.
---------------------------------------------------------------------------
Third, the measure must be ``made effective in
conjunction with restrictions on domestic production or consumption.''
The Appellate Body has said that this requires only ``even-handedness''
in the treatment of domestic goods and imports, not ``equality of
treatment.'' \16\
---------------------------------------------------------------------------
\16\ See id. at paras. 144-45; WTO Appellate Body Report, United
States--Standards for Reformulated and Conventional Gasoline, WT/DS2/
AB/R (Apr. 29, 1996) at pp. 20-21.
In addition to the three conditions that must be met under the
specific requirements of GATT Article XX(g), a regulatory measure must
satisfy the introductory clause or ``chapeau'' of Article XX to qualify
for an exception under that provision. The chapeau of Article XX
requires that measures not be applied ``in a manner which would
constitute a means of arbitrary or unjustifiable discrimination between
countries where the same conditions prevail, or a disguised restriction
on international trade.'' The WTO Appellate Body has interpreted this
chapeau to require that an environmental measure be sufficiently
flexible and take into account the different conditions that may exist
in different foreign countries.\17\ In addition, the Appellate Body has
suggested that the country taking a measure must engage in ``serious,
across-the-board negotiations with the objective of concluding
bilateral or multilateral agreements'' on the problem that the measure
is designed to address.\18\ This does not require the actual conclusion
of an agreement, but that a country make good faith efforts to reach
agreements with all countries affected.\19\ Finally, according to the
Appellate Body's analysis, the implementation and administration of a
measure must comply with principles of ``basic fairness and due
process.'' \20\
---------------------------------------------------------------------------
\17\ WTO Appellate Body Report, United States--Import Prohibition
of Certain Shrimp and Shrimp Products (Implementation Under Article
21.5 of the Dispute Settlement Understanding), WT/DS58/AB/RW (Oct. 22,
2001) (``US--Shrimp (Implementation Under Art. 21.5)'') at para. 144.
\18\ US--Shrimp (AB) at para. 166.
\19\ Id.; US--Shrimp (Implementation Under Art. 21.5) at paras.
122-124, 134.
\20\ US--Shrimp (AB) at para. 181.
---------------------------------------------------------------------------
Figure 4
[GRAPHIC] [TIFF OMITTED] T2201A.042
Notwithstanding the above analysis, I should caution that it is
impossible to predict with any certainty in this (as in other) areas
how the WTO Appellate Body will rule--particularly given the lack of
clear precedent and the performance of the AB. In fact, I and a number
of other commentators have been critical of the AB's decisionmaking in
recent years, noting a tendency to stray from the clear terms and
intent of the relevant agreements and repeated examples where the AB
has effectively created new obligations under those agreements. This
only adds to the uncertainty in assessing likely judicial rulings in
the climate/environmental area--and offers yet another reason why the
Committee may, in the future, wish to engage in a thorough review of
the jurisprudence at the WTO and the adherence of the AB to the proper
standard of review.
III. INTENSITY-BASED STANDARDS
Although the climate-change proposals currently receiving the most
attention involve a cap and trade approach, I want to briefly discuss
an alternative approach that has been suggested by certain industry
officials. Under this approach, the U.S. Government would require
everyone selling in this market--including both domestic and foreign
producers--to live up to the ``best practices'' and articulated
standards in terms of the carbon intensity of their manufacturing
operations. Per-unit standards could be created for particular
industries/product areas (e.g., iron, steel, aluminum, etc.) that
result in significant volumes of greenhouse gas emissions. Of course,
different standards would be employed for different manufacturing
processes with respect to each product. Such standards could also be
paired with incentives to encourage producers to develop and implement
new practices that would further reduce greenhouse gas emissions.\21\
---------------------------------------------------------------------------
\21\ Yet another alternative approach that could be adopted would
be to impose a carbon tax on imports that is equivalent to the internal
cost imposed on domestic products by climate change legislation. Such a
carbon tax could be defended as a ``border tax adjustment'' that is
permitted under WTO rules for product-related or indirect taxes (such
as value-added taxes or sales taxes).
---------------------------------------------------------------------------
This type of approach would have two major advantages. First,
because all producers active in this market would be subject to the
same rules, this approach would give U.S. producers an opportunity to
compete on even terms with foreign producers. Second, by holding
producers worldwide to the most rigorous standards, it would exert
significant downward pressure on greenhouse gas emissions. As our trade
deficit demonstrates, producers worldwide are eager to ship their goods
to this country. Congress could use that fact to encourage greener
production at home and abroad and a level playing field in our market.
Intensity-based standards would encourage a ``race to the top,'' where
manufacturers worldwide compete to satisfy our requirements.
Moreover, there are strong arguments to show that intensity-based
standards would be consistent with the United States' WTO obligations.
In this regard, such standards should satisfy the national treatment
requirements of Article III:4 of the GATT because they would treat
imported products no less favorably than like domestic products. As an
initial matter, it could be argued that imported products and domestic
products that are produced through different manufacturing processes
and that have different carbon intensities are not like products to
begin with and that, as a result, there is no violation of national
treatment if such products are treated differently. But even if they
are considered like products, intensity-based standards would not
discriminate against imports. To the contrary, imported products and
domestic products would be treated exactly the same. Any distinctions
that would be made between products would be based on the carbon
intensities of the products. Such distinctions would be unrelated to
the origin of the products and would not be made to afford protection
to domestic production. Accordingly, there would be strong arguments
that this type of approach complies with the requirements of GATT
Article III:4.
In any event, even if intensity-based standards were not upheld
under GATT Article III:4, they could be defended under the exception
provided in Article XX(g) of the GATT. No concern about the protection
of the environment is currently considered to be more important
internationally than the conservation of the Earth's atmosphere through
the reduction of greenhouse gas emissions and the resultant protection
of the Earth's climate. In fact, there cannot be any real question that
the planet's atmosphere is an ``exhaustible natural resource'' in the
sense of Article XX(g). Intensity-based standards would also clearly
``relate to'' the conservation of the Earth's atmosphere and related
climate. By requiring producers to comply with the best practices and
highest standards for carbon intensity in their respective industries,
intensity-based standards would reduce greenhouse gas emissions to the
greatest extent possible and would certainly be ``reasonably related''
to that end. And as noted above, the standards would apply equally to
domestic products and imports so that there clearly would be even-
handedness in the imposition of the restrictions.
Furthermore, there are good arguments that intensity-based
standards would satisfy the requirements of the chapeau of Article XX,
even if one assumes that the specific requirements read into that
chapeau by the Appellate Body in other litigation apply to this issue.
The standards would take account of the local conditions in foreign
countries and would not simply require that foreign countries adopt
U.S. programs or policies. Foreign countries would be free to adopt any
programs or policies, and foreign producers would be free to choose
whatever manufacturing processes or technologies enable them to meet
the intensity-based standards established by the United States. In
particular, developing countries and producers in such countries would
be provided with sufficient flexibility to take whatever steps are
appropriate to satisfy the U.S. standards. The United States has also
engaged and is engaging in ``serious, across-the-board negotiations''
to reach a multilateral agreement to address the problem of climate
change. Thus, the United States is actively seeking to resolve this
issue on an international level. Finally, intensity-based standards
should unquestionably be applied in a transparent, predictable, and
nondiscriminatory manner so as to comply with the principles of ``basic
fairness and due process'' established by Article XX. Thus, intensity-
based standards would present good arguments with respect to the
necessary elements to be entitled to an exception under Article XX(g)
of the GATT.
IV. INTERNATIONAL COMPETITIVENESS PROVISIONS IN THE CONTEXT OF CAP AND
TRADE LEGISLATION
A. Principles Relating to Effective International Competitiveness
Provisions
Congress currently has before it a number of proposals to use some
type of cap and trade program to limit greenhouse gas emissions. These
legislative proposals would, under certain circumstances, require
importers to obtain allowances to account for emissions associated with
imported products. I do not today intend to offer specific analyses of
these legislative proposals. I will say that, while many of these
proposals appear well-intentioned, much more work remains to be done to
develop mechanisms that are both efficacious and meet WTO concerns.
Adopting a competitiveness provision that does not truly address the
problem and that fails to create a level playing field would be the
worst possible option--hanging our workers and companies out to dry and
ultimately leading to greater, not fewer, greenhouse gas emissions
worldwide.
Cap and trade legislation designed to cover the entire U.S. economy
is inherently complex, and ensuring that such legislation does not
result in a competitive disadvantage for U.S. producers will require
careful thought and consideration. Nevertheless, there are a number of
basic principles that should clearly inform any effort to regulate in
this area, and that would help ensure that the legislation does not
cause severe injury to the U.S. manufacturing sector and American
workers. At the very minimum, Congress should make certain that: (1)
any additional regulatory costs and burdens imposed on domestic
products under the legislation should be equally borne by imports; (2)
applicability of competitiveness provisions to imports is not subject
to discretionary determinations that could undermine such provisions;
(3) new regulatory requirements (including requirements to obtain
emission allowances) should be fully applicable to imported products at
the same time that they are imposed on domestic producers; and (4)
imports from foreign countries should be fully subject to such
requirements unless those countries are undertaking truly equivalent
climate measures.
The type of provisions that must be avoided include the following:
Granting broad discretion to exempt foreign countries
based upon vague and open-ended standards that could let out major
emitters early in the program;
Providing discretionary authority to reduce the
obligation of importers to obtain allowances based on factors that
would not reduce obligations for domestic producers;
Delaying the application of requirements to imports until
some time after new obligations are placed on domestic producers;
Failing to include adequate provisions to address the
competitiveness challenges faced by downstream products and that would
allow such products to compete on a fair footing with imports;
Including arbitrary exclusions for small-emitting nations
that could be very difficult to defend under WTO rules;
Granting more favorable treatment for importers in the
use of foreign allowances and credits than is provided for domestic
producers.
Inclusion of provisions like these will not and should not receive
support from workers and companies facing competitiveness challenges
under any new climate legislation.
Fortunately, there are strong reasons to believe that enhanced and
meaningful competitiveness provisions--consistent with the principles
articulated above--could be incorporated into climate legislation
without violating our WTO obligations.
B. WTO Considerations Relating to Strengthened International
Competitiveness Provisions
Strengthened and effective competitiveness provisions should not
present any significant additional WTO concerns--and could in fact make
such legislation more defensible under the WTO by ensuring the most
equal possible treatment among imports and domestically-produced
products.
Again, competitiveness provisions in this regard would likely be
subject to the national treatment requirements of GATT Article III:4.
Because strengthened competitiveness provisions as described above
would not discriminate against imports--but indeed would seek to ensure
that the same costs and burdens are imposed on both domestic and
imported products--there are strong grounds to argue that Article III:4
would be satisfied. Any distinctions that would be made between
products would be based on the carbon emitted in their production and
would simply ensure the very equality of treatment between imports and
domestic products that is sought by GATT Article III:4.
Cap and trade legislation with effective international
competitiveness provisions should also be found to satisfy the
requirements for the exception provided in Article XX(g) of the GATT.
As established above, the Earth's atmosphere is clearly an
``exhaustible natural resource'' under Article XX(g). A regulatory
system that is consistent with the international competitiveness
principles identified above would ``relate to'' the conservation of
this ``exhaustible natural resource'' because it would account for
emissions associated with imports, and would serve a vital role in
ensuring that the environmental purpose of the bill is not undermined
through importation of more carbon-intensive products. Moreover, the
enhanced international competitiveness provisions would comply with the
third condition of Article XX(g) in ensuring even-handedness in the
treatment of domestic products and imports.
The requirements of the chapeau of Article XX--including the
specific requirements that the Appellate Body has read into the chapeau
in the context of other litigation--would also likely be met. The
legislation would be sufficiently flexible in that it would not mandate
the adoption of any particular system for the reduction of greenhouse
gas emissions. Both importers and U.S. producers would have similar
requirements in terms of the need to obtain allowances for the level of
the carbon emissions associated with their products, and they could
trade to obtain additional allowances if necessary. This would allow
producers in developing countries, in particular, to decide for
themselves what is the most feasible and appropriate way to reduce
their emissions. Even if a developing country producer decided not to
reduce emissions, it could still obtain access to the U.S. market
through the purchase of additional allowances.
The international negotiations requirement would also likely be
satisfied here because the United States has engaged and is engaging in
negotiations to address the problem of climate change on a multilateral
level. Lastly, any cap and trade system that is adopted could and
should provide for emission allowances to be administered in a manner
that complies with ``basic fairness and due process.'' Accordingly, if
cap and trade legislation is somehow deemed to violate Article III:4 of
the GATT, solid arguments can be made that such legislation should
nevertheless be upheld under GATT Article XX(g).
V. CONCLUSION
In conclusion, the need to fully and effectively address the
competitiveness issues posed by climate change legislation is clear.
Without such a resolution, the core policy goals of the legislation in
terms of environmental protection will be undermined, and U.S. workers
and the economy will suffer enormous harm. As outlined above, there are
compelling arguments to find that the WTO system has sufficient
flexibility to allow Congress to address these concerns and ensure that
climate measures impact domestic products and imports in an even-handed
manner. As such, any legislation in this area should ensure that equal
burdens are placed upon imports and domestic products.
Chairman RANGEL. Thank you. At the appropriate time I hope
Mayor Bloomberg would be able to respond to your observation.
We have Timothy Regan as our next member. I still think he
is with Corning. He has had an outstanding background, and we
look forward to your testimony here, this morning.
STATEMENT OF TIMOTHY J. REGAN, SENIOR VICE PRESIDENT, CORNING
INCORPORATED
Mr. REGAN. Thank you, Mr. Chairman. Mr. Chairman, we come
here to share a unique perspective. Corning is, on the one
hand, an environmental technology company. We invented the
materials that have removed billions of tons of harmful
emissions from multiple sources.
On the other hand, we're a very, very energy-intensive
manufacturer. We melt silica, and we cure ceramic, both of
which use a lot of energy.
One point I want to make--and I think it's probably already
been made, but I want to emphasize it--if our trading partners
were to adopt a cap and trade system like the one that we
decide to adopt, and they do it simultaneously with us, then I
wouldn't be here today, taking up your valuable time.
There are some unintended consequences if we act
unilaterally, and those unintended consequences are
characterized in terms of loss of high wage manufacturing in
the sectors that I represent here today, and they take the form
of what we call environmental leakage. The world will not
harmonize. We will probably go first. So, I would urge you to
take into consideration these unintended consequences as we
move forward.
Energy intensive manufacturers are in a difficult position
under a cap and trade program. It's going to raise prices, as
we all know, of energy. Energy is an incredible source of the
cost of production for the industry. In some cases, it's eight
times higher than it is for manufacturing. We are going to have
to absorb these costs. Because we operate in world markets,
it's going to be very hard to pass these costs on.
So, we are going to be put in a cost price squeeze. So, why
should you care?
Well, I think the reason why policymakers should care
really involves two issues. One is that the industry is
important, economically. Yes, we are small. But we are a source
of high-wage employment. In 2006, energy-intensive
manufacturers on average, paid 51 percent more in compensation
to our employees than the rest of the economy.
Another reason we're important is because we're a large
part, significant part, of the industrial base. We represented
20 percent of the U.S. manufacturing output in 2006. Another
thing that is important is we're a large source of productivity
growth. Over the last 3 years, we generated about 10 percent
productivity growth, versus 4.6 percent of the economy. So, we
really do drive real wages, and that's why we can pay more than
other parts of the economy to our employees.
The second issue to be concerned about is this whole
question of environmental leakage, which has already been
described.
Now, we think you can devise a cap and trade program that
will achieve emissions reductions, and at the same time avoid
some of these adverse consequences. We think it should be
designed around a couple of principles. Let me share them with
you.
First, you have to narrowly identify the eligible sectors
for compensation under such a program.
Second, you really want to neutralize for a time period,
for a transition period, the cost of carbon that is incurred,
both directly and indirectly, by these eligible sections.
Directly, we produce emissions, we're going to have to cover
those emissions. We're going to buy electricity, there is going
to be an emission cost associated with electricity.
Third, you need to neutralize the indirect costs of energy
that the industry is going to absorb, and those need to be
understood. There is going to be a lot of fuel switching, for
example, to natural gas. That will drive up the price of
natural gas. That will then affect the cost of manufacturing
for companies that use it as a feed stock, or to power our
furnaces.
Fourth, the mechanism that you use should affect both
imports and exports. Energy-intensive manufacturers export--we
account for about 13 percent of U.S. exports. We have
manufacturing facilities in the United States that export 100
percent of their output.
I want to emphasize that compensation systems don't have to
be free allowances. They can be in the form of tax rebates, or
in the form of some assistance for health care costs, et
cetera. But those kinds of systems, if designed properly, can
avoid the problems we're talking about, and they can be useful,
in terms of addressing the competitiveness problem as it
relates to both exports and imports. I want to emphasize that
point.
Now, if you can't develop such a system of compensation,
because there are all kinds of competing needs--then you need
to go to border adjustment. If you go to border adjustment, we
would strongly recommend that you try to minimize your WTO risk
of challenge, but don't let it become a block.
Finally, while we understand that all this will be
temporary, we would caution against premature termination.
We want to do our part. We are an environmental company.
We're not afraid to do our part. But we want to help design a
system that is going to deal with these unintended
consequences, and we want to work with you to do that. Thank
you very much.
[The prepared statement of Mr. Regan follows:]
Prepared Statement of Timothy J. Regan,
Senior Vice President, Corning Incorporated
I. Introduction
Mr. Chairman, it is an honor to appear before you today to speak to
you about the critical issue of climate change and the policy options
for addressing it.
I am a Senior Vice President with Corning Incorporated, a
manufacturer of critical glass and ceramic components used in a variety
of high-tech products ranging from fiber optic telecommunications
systems to environmental control systems and liquid crystal displays
(``LCDs'') for computer and consumer electronics. We are headquartered
in Corning, New York, and have facilities in 12 other States.
While we have been manufacturing in the United States for over 157
years, we are very much a high-tech company that consistently spends at
least 10% of our revenue on research, development, and engineering.
Corning is a four-time winner of the President's Medal of Technology
for our inventions like fiber optics.
I am here today to discuss the climate change issue for two
reasons. First, we are an environmental technology company. We invented
the ceramic substrate material that is critical to the operation of
catalytic converters and devices that reduce emissions from diesel
engines. Since it was first put into use in 1975, our technology has
removed over 1.5 billion tons of pollution from American skies and 3
billion tons worldwide.\1\
---------------------------------------------------------------------------
\1\ See Corning Press Release citing the Manufacturers of Emission
Control Association (``MECA'') (February 15, 2005), ``.
---------------------------------------------------------------------------
Second, we are a significant consumer of energy in the forms of
electricity and natural gas. As such, we will be significantly affected
by climate change legislation that increases the cost of energy from
both sources. For example, Census data shows that energy constitutes 17
percent of the value of shipments for flat glass, which is over eight
times the average proportion for manufacturing generally in the United
States.\2\ Fundamentally, we are in the business of melting silica and
other compounds and curing ceramic, all of which use enormous amounts
of energy.
---------------------------------------------------------------------------
\2\ See Figure 1, p. 4, and Annual Survey of Manufacturers: General
Statistics: Statistics for Industry Groups and Industries, U.S. Census
Bureau, 2006.
---------------------------------------------------------------------------
I am not here today to endorse a specific proposal to address the
climate change problem. Rather, I am here to help you assess the impact
of a cap and trade system on energy-intensive manufacturing and to
suggest some principles that you might use in a cap and trade program.
I believe the debate on cap and trade is still in a formative stage,
and I commend the Committee for sponsoring this inquiry to examine the
policy options for moving forward.
Energy-intensive manufacturing is particularly vulnerable in a cap
and trade system because:
such a system will necessarily increase the cost of
energy as it will create a new cost of carbon that must be absorbed by
manufacturers directly and indirectly as it is passed downstream to
them by their energy suppliers;
energy constitutes a large portion of the cost of
production for energy-intensive manufacturing like glass, steel,
ceramics, and chemicals; and
the competition in energy-intensive manufacturing is
global in nature making it difficult to pass through the increased cost
of energy downstream to end users.
With respect to global competition, I would like to emphasize that
energy-intensive manufacturing firms face competition in both import
and export markets. Unfortunately, the debate so far has focused on
imports. The impact on exports has been largely ignored. Corning and
many other energy-intensive manufacturers are significant exporters.
I believe that the policy challenge is to construct a cap and trade
system that can effectively reduce carbon emissions without causing job
loss in high-wage manufacturing or ``environmental'' leakage. Such
leakage occurs when production shifts from the United States, where
emissions are regulated and energy costs are high, to countries where
emissions are not regulated and energy costs are low. This outcome is
undesirable because it would result in the loss of high-wage
manufacturing jobs and merely shift the geographic source of emissions,
not reduce them.
Let me assure the Committee that we are willing to do our part to
help solve the climate change problem as the United States leads the
world in adopting effective measures to reduce greenhouse gases. But,
we believe that special measures should be incorporated into any U.S.
cap and trade program to address the unintended consequences of job
loss in energy-intensive manufacturing and environmental leakage that
could occur unless and until our trading partners implement a
comparable system of regulation to reduce greenhouse gases.
Fortunately, a consensus is beginning to evolve on the need for these
special measures.
II. Energy-Intensive Manufacturing Poses a Unique Challenge
Energy-intensive manufacturing needs special attention in a cap and
trade program for three reasons. First, it is a critically important
segment of the U.S. economy. Second, this sector is particularly
vulnerable to an increase in energy cost driven by a cap and trade
system. And third, failure to address special challenges of energy-
intensive manufacturing will lead to the loss of high-wage jobs and
environmental leakage.
Energy-intensive manufacturing \3\ is critical to the economy
because it is a source of high-wage jobs, it represents a large portion
of the U.S. manufacturing base, and it is a major source of
productivity growth.
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\3\ For the purpose of the analysis contained in this testimony, I
will use a definition of energy-intensive manufacturing that is
included in most of the major proposals to date. These include glass,
ceramics, iron, steel, pulp, paper, cement, rubber, chemicals, and
aluminum and other nonferrous metals. Appendix A identifies the
specific industrial codes used by Census to track these industries.
---------------------------------------------------------------------------
Energy-intensive manufacturing generates high-wage employment that
is substantially higher than the norm. As indicated in Table 1 below,
energy-intensive manufacturers provided their employees with average
wages and benefits at $78,609 for 2006. This is a full 51% higher than
the U.S. overall average of $51,934 and 16% higher than the average for
U.S. manufacturing generally at $67,545. Adopting measures in a cap and
trade system to assist energy-intensive manufacturers will help protect
these high-wage jobs.
Table 1
Relative Average Annual Compensation for 2004-2006
[millions of current dollars]
------------------------------------------------------------------------
2004 2005 2006
------------------------------------------------------------------------
Overall U.S. Average $47,885 $49,818 $51,934
------------------------------------------------------------------------
All U.S. Manufacturing Average $62,682 $64,869 $67,545
------------------------------------------------------------------------
Energy-Intensive Manufacturing Weighted $73,053 $76,595 $78,609
Average
------------------------------------------------------------------------
Sources: U.S. Department of Commerce, U.S. Census Bureau, Annual Survey
of Manufactures, Statistics for Industry Groups and Industries, 2004-
06. U.S. Manufacturing Total: U.S. Department of Commerce, Bureau of
Economic Analysis (BEA), Annual Industry Accounts, Gross Domestic
Product (GDP) by Industry, 2004-06.
Energy-intensive manufacturing is also critical to the economy
because it represents a large portion of the American manufacturing
base. As indicated in Table 2 below, the value added by energy-
intensive manufacturing to the economy in 2006 represents 20% of the
value added by all U.S. manufacturing. So including measures in a cap
and trade program to address the challenges of energy-intensive
manufacturing will help secure a large portion of the American
manufacturing base and the high-wage jobs associated with it.
Table 2
Relative Industry Value--Added (GDP component) for 2004-2006
[millions of current dollars]
------------------------------------------------------------------------
2004 2005 2006
------------------------------------------------------------------------
All U.S. Manufacturing $2,090,063 $2,167,245 $2,324,545
------------------------------------------------------------------------
Energy-Intensive Manufacturing $397,112 $433,449 $464,909
------------------------------------------------------------------------
Energy-Intensive Manufacturing 19% 20% 20%
Share
------------------------------------------------------------------------
Sources: U.S. Department of Commerce, U.S. Census Bureau, Annual Survey
of Manufactures, Statistics for Industry Groups and Industries, 2004-
06. U.S. Manufacturing Total: U.S. Department of Commerce, Bureau of
Economic Analysis (BEA), Annual Industry Accounts, Gross Domestic
Product (GDP) by Industry, 2004-06.
Finally, energy-intensive manufacturing is critical to the economy
because it is an important source of productivity growth. Such growth
is important because it drives growth in real wages. Table 3 reflects
the average value added per employee for energy-intensive manufacturing
relative to the rest of the economy and to manufacturing in general.
The change in value added per employee is a good measurement of
relative productivity growth.
Table 3
Relative Average Productivity (value added per employee) for 2004-2006
[current dollars]
------------------------------------------------------------------------
2004 2005 2006
------------------------------------------------------------------------
Overall U.S. Average $83,989 $88,037 $91,922
------------------------------------------------------------------------
All Manufacturing Average $152,413 $167,936 $177,485
------------------------------------------------------------------------
Energy-Intensive Manufacturing $325,304 $362,811 $393,550
Weight Average
------------------------------------------------------------------------
Sources: U.S. Department of Commerce, U.S. Census Bureau, Annual Survey
of Manufactures, Statistics for Industry Groups and Industries, 2004-
06. U.S. Manufacturing Total: U.S. Department of Commerce, Bureau of
Economic Analysis (BEA), Annual Industry Accounts, Gross Domestic
Product (GDP) by Industry, 2004-06.
These data show that productivity growth in energy-intensive
manufacturing at 10% far exceeds that of the economy overall at 4.6%
and all manufacturing at 7.9%. In other words, productivity growth in
energy-intensive manufacturing is over twice that of the economy
overall. So including measures in a cap and trade program to address
the problems of energy-intensive manufacturers will help maintain a
primary source of productivity growth in the economy.
In addition to being critical to the overall economy, energy-
intensive manufacturing is also very vulnerable to the effects of a cap
and trade program. I describe below how such a program will likely
increase both the direct and indirect costs for energy-intensive
manufacturing. There are many paths through which these costs increases
will be channeled.
Unfortunately, energy-intensive manufacturers are very vulnerable
to these cost increases for two reasons. First, energy is a significant
portion of their cost of production, a proportion greater than that of
most sectors of the economy. Second, because energy-intensive
manufacturers face global competition, they will encounter difficulty
passing on these increased costs downstream to their customers.
Figure 1 demonstrates graphically the significance of energy costs
for energy-intensive manufacturers. On average, such costs represent 5%
of the value of shipments of energy-intensive manufacturers. This is
over twice that of other manufacturing at 2%. In certain sectors, the
difference is even more significant. For example, in the glass sector,
energy represents 17% of the value of shipments for flat glass
manufacturing, 15% for glass container manufacturing, and 12% for other
glassware manufacturing.
[GRAPHIC] [TIFF OMITTED] T2201A.043
Source: Census Data Annual Survey of Manufactures: General
Statistics: Statistics for Industry Groups and Industries; 2006 U.S.
Census Bureau.
Clearly, the cost of production for energy-intensive manufacturers
will increase significantly by any increase in energy cost that is
driven by a cap and trade program.
These increased costs cannot be easily passed on by energy-
intensive manufacturers downstream to their customers because they face
competition in both export and import markets. As indicated in Table 4,
energy-intensive manufacturers depend heavily on export markets. A full
11% of their output was exported in 2006, a level which is twice that
for the economy overall. Some of Corning's facilities export nearly
100% of their output. And energy-intensive manufacturers face import
competition with imports accounting for 19% of consumption overall.
Import competition is most apparent in the primary metals sector at 30%
of consumption.
Table 4
Export Intensity and Import Share of Energy-Intensive Manufacturing for 2006
----------------------------------------------------------------------------------------------------------------
Export Intensity Import Share (imports
(exports as a % of as a % of
output) consumption)
----------------------------------------------------------------------------------------------------------------
Nonmetallic Mineral Products 5% 16%
----------------------------------------------------------------------------------------------------------------
Primary Metals 10% 30%
----------------------------------------------------------------------------------------------------------------
Paper Products 9% 15%
----------------------------------------------------------------------------------------------------------------
Petroleum and Coal Products 6% 13%
----------------------------------------------------------------------------------------------------------------
Plastic and Rubber Products 17% 24%
----------------------------------------------------------------------------------------------------------------
Chemical Products 9% 15%
----------------------------------------------------------------------------------------------------------------
All Energy-Intensive Manufacturing 11% 19%
----------------------------------------------------------------------------------------------------------------
Source: U.S. Department of Commerce, Bureau of Economic Analysis (BEA), Annual Industry Accounts, Annual Input-
Output (I-O) Accounts, Summary Make and Use Annual I-O Tables, 2006.
* Note: Total consumption = Intermediate consumption + personal consumption.
Fortunately, a consensus is evolving on the need to address the
special needs of energy-intensive manufacturing in the context of a cap
and trade program. Policymakers are beginning to recognize: (1) that
energy-intensive manufacturing is critical to the economy because it
generates high-wage jobs, and (2) that it is vulnerable to an increase
in the cost of energy driven by a cap and trade system. They are
concerned that this vulnerability will force environment leakage, a
production shift from the United States, where carbon is regulated and
energy costs are high, to other geographic regions where carbon is not
regulated and energy costs are low. Such a shift would hurt the economy
without improving the environment.
As a result, many proposals to date include special provisions to
partially and temporarily compensate energy-intensive manufacturers for
the significant cost that they must absorb under a cap and trade
program. These proposals also include temporary border measures to
assess the cost of carbon on imports of energy-intensive products from
countries that do not have programs to effectively regulate carbon
emissions. Generally, the industries affected by these compensation and
border adjustment mechanisms include glass, ceramics, iron, steel,
pulp, paper, cement, rubber, chemicals, and aluminum and other
nonferrous metals.\4\
---------------------------------------------------------------------------
\4\ Lieberman-Warner (S. 2191), Boxer Substitute (S. 3036),
Investing in Climate Action and Protection Act (Markey H.R. 6186) and
Climate MATTERS (Dogget H.R. 6316) all contain provision for transition
assistance for energy-intensive manufacturing.
---------------------------------------------------------------------------
Some of our friends in the environmental community have expressed
support for these proposals. They are appropriately concerned about the
environmental leakage and job loss in energy-intensive manufacturing
that could occur under a cap and trade system. And, they have expressed
support for giving energy-intensive manufacturing facilities some
direct compensation in the form of ``free allowances'' and for border
adjustment measures provided that both are temporary, limited, and used
as a tool to encourage other countries to adopt ``comparable action''
to control greenhouse gas emissions.\5\
---------------------------------------------------------------------------
\5\ Testimony of David D. Doniger, Climate Center Policy Director,
Natural Resources Defense Council, February 28, 2008, before the
Committee on Energy and Commerce Subcommittee on Energy and Air
Quality, p. 11.
---------------------------------------------------------------------------
The international community also recognizes the special needs of
energy-intensive manufacturing. In its reform proposal, the European
Commission notes that, although auctions are the most efficient method
for allocating allowances, it remains concerned about carbon leakage.
In the event that a global agreement to control greenhouse gas
emissions cannot be reached, the Commission recommends that energy
intensive manufacturers subject to global competition receive up to 100
percent of allocations for free to avoid job loss and carbon
leakage.\6\
---------------------------------------------------------------------------
\6\ Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE
COUNCIL amending Directive 2003/87/EC so as to improve and extend the
greenhouse gas emission allowance trading system of the Community,
Brussels, 23.1.2008 COM(2008) 16 final, 2008/0013 (COD), p. 16.
---------------------------------------------------------------------------
III. Cost Impact of Energy-Intensive Manufacturing
To design a mechanism to avoid leakage and economic dislocation in
energy-intensive manufacturing, one must first understand how a cap and
trade program will likely impact the cost of manufacturing. For the
purposes of this discussion, I will assume that a cap and trade system
will be established that reduces greenhouse gas emissions by 60% to 80%
from 1990 levels by the year 2050.
Such a system will require firms that emit greenhouse gases, mostly
CO2, to redeem an allowance for every ``carbon equivalent
ton'' of emissions. The administrator of the program will issue these
allowances annually by declining volumes over time so as to force a
reduction in emissions slowly to the targeted level in 2050.
A portion of these allowances will be made available to some
facilities at no cost, but the free allowances will not be sufficient
to accommodate all of the needs of all facilities. There will be a
shortfall that must be accommodated by purchasing emission allowances
in an auction market. The market will set the price of carbon
emissions.
Achieving a 60% to 80% reduction below 1990 levels will have a
significant impact on energy-intensive manufacturers because it will
require that they absorb both direct and indirect costs associated with
the cap and trade program. Direct costs will arise from the purchase of
allowances to cover emissions that a manufacturer produces directly
from its own processes (e.g., in Corning's case burning natural gas to
melt silica). This is called the direct cost of carbon. Direct costs
will also arise from investment in new technology to increase fuel
efficiency. These direct costs can be easily identified.
The indirect costs that an energy-intensive manufacturer must
absorb under a cap and trade system are derived from the increased cost
of electricity and other energy sources that are driven by the cap and
trade system. These indirect costs will be driven by four factors:
the cost associated with allowances that energy suppliers
(i.e., electricity, natural gas, and fuel oil) will have to purchase in
the auction market (i.e., the indirect cost of carbon);
the cost associated with ``fuel switching'' by
electricity suppliers (i.e., the purchase of higher-cost, lower-carbon
fuels like natural gas);
the cost associated with investment by electricity
suppliers in new technology like carbon capture and sequestration and
renewable sources; and
the rising cost of natural gas driven from fuel switching
upstream that energy-intensive manufacturers must absorb to maintain
their own operations.
These indirect costs are more difficult to identify.
I share this detail for the purpose of demonstrating the myriad
ways in which energy-intensive manufacturers can be affected by a cap
and trade system. A mechanism that can effectively contain leakage and
prevent economic dislocation for energy-intensive manufacturers should
neutralize these direct and indirect costs. Most proposals that have
been introduced to date focus solely on the direct and indirect cost of
carbon, that is, the cost of allowances to cover CO2
emissions by the manufacturer and its energy suppliers. They do not
address all of the other indirect costs noted above.
IV. Design Principles
I do not have a specific proposal to share with the Committee on
how to address the leakage problem or the challenges that a cap and
trade system will likely create for energy-intensive manufacturers.
Rather, I would like to present some design principles that the
Committee might consider in developing a mechanism for incorporation
into a cap and trade system to address the leakage problem and the
challenges of energy-intensive manufacturers. I suggest that you
consider seven design principles.
First, the mechanism should clearly identify the types of
manufacturing facilities or product categories that will be eligible
for compensation under a cap and trade system. Specifying industry
sectors in the legislative language would certainly be desirable for
planning purposes. This has been done in many proposals to date.
Generally speaking, the proposals have identified glass, ceramics,
iron, steel, pulp, paper, cement, rubber, chemicals, and aluminum and
other nonferrous metals. The legislative language should also include a
set of criteria that the administrator could use to add new sectors and
product categories.
Second, the mechanism should neutralize the cost of carbon for
eligible energy-intensive manufacturing facilities. This can be done by
allocating enough free allowances to each eligible facility to cover
all of its direct emissions (i.e., the direct cost of carbon), plus
enough to cover the net allowance cost of their electricity supplier
(i.e., the indirect cost of carbon). The net allowance cost is the
difference between the allowances that the electricity supplier must
redeem to cover its direct emissions and the free allowances that it is
granted by the administrator of the program. If electricity suppliers
do not get enough free allowances, they will have to purchase them on
the auction market and pass the cost on to their manufacturing
customers. Calculating the cost of carbon is not difficult for well-
managed firms.
Most proposals to date use free allowances to partially compensate
energy-intensive manufacturers for the direct and indirect cost of
carbon. But this can also be done through a tax rebate or credit
mechanism. Under such a program, manufacturers would receive a tax
rebate or credit large enough to offset the cost of carbon that is
inherent in every unit of output. It can be designed to have about the
same impact as a system of free allowances, but may be easier to
administer and may generate more predictable results.
Third, the mechanism should neutralize the noncarbon indirect costs
for eligible energy-intensive manufacturing facilities. These costs
would involve the noncarbon costs that are passed on to the
manufacturer by its energy suppliers. These noncarbon costs include the
cost of fuel switching to natural gas by electricity suppliers, as
described above, and the cost of investment in new technology incurred
by the electricity suppliers to reduce their carbon footprint. This
would also include the increased cost of natural gas to the
manufacturer that arises from fuel switching. Admittedly, identifying
these costs will be difficult, but they could be significant and,
therefore, should be accommodated to the maximum extent possible in
order to fully address the leakage and competitiveness problems.
Fourth, such a mechanism should address the competitiveness issue
as it relates to both imports and exports. The debate so far has
focused almost exclusively on imports. But energy-intensive
manufacturers are significant exporters. In fact, energy-intensive
manufacturing accounts for 14% of all U.S. exports. It is unwise to put
these exports in jeopardy especially in light of the fact that the U.S.
economy is relying on exports to generate more than one-third of our
economic growth.\7\
---------------------------------------------------------------------------
\7\ See Economic Report of the President, Chapter 3, The Causes and
Consequences of Export Growth, February 2008, p. 79.
---------------------------------------------------------------------------
Every effort should be made to provide compensation to energy-
intensive manufacturers through free allowances or tax rebates to
neutralize the direct cost and indirect cost associated with the cap
and trade program. It is the most efficient way to address the leakage
and competitiveness problems in the context of a cap and trade system.
If compensation is adequate, it will prevent leakage and job loss in
energy-intensive manufacturing. Importantly, it addresses the problems
as they relate to both competition from imports and competition in
export markets. It should be noted, however, that competing demands for
free allowances have made it very difficult to fully compensate energy-
intensive manufacturers for the direct and indirect costs associated
with cap and trade system. If full compensation is not possible,
effective border adjustment measures will be necessary.
Sixth, if border adjustment measures are adopted, the mechanism
should minimize the risk of the WTO challenge, but the risk of
challenge should not block action. Experts have testified before
Congress that a WTO-compliance border adjustment measurement can be
developed.\8\ I will defer to the legal experts on this question. But
if there is any doubt, I suggest that the Committee direct U.S.
negotiators to negotiate arrangements now in the Doha Round to remove
such doubt.
---------------------------------------------------------------------------
\8\ See Testimony of Michael G. Morris, Chairman, President, and
Chief Executive Officer, American Electric Power Before the House
Energy and Commerce Subcommittee on Energy and Air Quality and attached
WTO opinion of Sidley Austin LLP, February 28, 2008.
---------------------------------------------------------------------------
Finally, the mechanism of compensation or border measures to
address the challenges facing energy-intensive manufacturers should not
be prematurely terminated. The mechanism will be temporary pending
adoption by our trading partners of comparable measures to regulate
greenhouse gases. But those measures should be adopted and implemented
before the mechanism is terminated. Premature termination could
generate high-wage job loss and promote leakage.
V. Conclusion
Energy-intensive manufacturers are particularly vulnerable to an
increase in energy costs that will no doubt arise from the
implementation of a cap and trade program. This is due to the fact that
energy accounts for a large portion of their cost of production, and
these manufacturers will encounter difficulty passing these increased
costs on to their customers because energy-intensive manufacturing
faces competition in both export and import markets.
A cap and trade program should address the special challenges it
creates for energy-intensive manufacturers for two reasons. First, they
are an important source of high-wage employment and economic growth.
Second, production adjustments that may result from a cap and trade
program could result in the loss of high-wage jobs and environmental
leakage. A production shift from the U.S. market, where carbon is
regulated and energy costs are high, to another region where carbon is
not regulated and energy costs are low, is neither in our economic
interest nor in our environmental interest. Indeed, it will hurt the
economy without improving the environment.
Fortunately, a consensus is evolving on the need to include
mechanisms in a cap and trade program to address the special needs of
energy-intensive manufacturing to avoid high-wage job loss and leakage.
These measures should neutralize the increased direct and indirect
costs imposed on energy-intensive manufacturers by a cap and trade
program. A compensation system of free allowances or tax rebates can
most efficiently offset these increased costs. If sufficient
compensation is not possible, border measures that minimize the risk of
a WTO challenge can be implemented. But these measures should not be
terminated until our trading partners implement comparable measures to
regulate greenhouse gases.
Mr. Chairman, thank you for the opportunity to appear before you.
APPENDIX
Table 1: Energy-Intensive Industries
----------------------------------------------------------------------------------------------------------------
NAICS
Industry Products Code
----------------------------------------------------------------------------------------------------------------
Glass Flat glass manufacturing 327211
Other pressed and blown glass and glassware 327212
manufacturing
Glass container manufacturing 327213
----------------------------------------------------------------------------------------------------------------
Aluminum Alumina refining 331311
Primary aluminum production 331312
Secondary smelting and alloying of aluminum 331314
----------------------------------------------------------------------------------------------------------------
Pulp, Paper, and Paperboard Pulp Mill Products 322110
Mills Paper Mills 322121
Paperboard Mill Products 322130
----------------------------------------------------------------------------------------------------------------
Iron,Steel,&FerroalloyMills Iron and steel mills and ferroalloy manufacturing 331111
----------------------------------------------------------------------------------------------------------------
Cement Cement manufacturing 327310
Ready-mix concrete manufacturing 327320
----------------------------------------------------------------------------------------------------------------
Industrial Ceramics Industrial Ceramics 327113
----------------------------------------------------------------------------------------------------------------
Chemicals Chemicals 325
----------------------------------------------------------------------------------------------------------------
Other Nonferrous Metals Copper and other nonferrous metal manufacturing 33141
----------------------------------------------------------------------------------------------------------------
Sources: Boxer Amendment S. 3036; U.S. Department of Commerce, U.S. Census Bureau, Annual Survey of
Manufactures, Statistics for Industry Groups and Industries, 2004-06.
Chairman RANGEL. The House soon will be taking votes, but
we will have the opportunity to listen to our last witness, and
then may have to take close to a half-hour break. I will just
advise you of that.
But Clyde Hufbauer--is it Clyde or Gary?
Mr. HUFBAUER. Gary.
Chairman RANGEL. Gary Hufbauer is going to share his views
with us. He is an expert in taxes and trade, and has done a lot
of work in this area, lectured and authored. We are so glad
that you are able to share those views with us. Thank you.
STATEMENT OF GARY CLYDE HUFBAUER, REGINALD JONES SENIOR FELLOW,
PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS
Mr. HUFBAUER. Thanks very much, Mr. Chairman, and Members
of the Committee. I am delighted that this Committee will be
asserting its jurisdiction, because it has as its core concern,
as you noted, the WTO and international trade rules, and I do
not think that's an area that should be consigned to the
States.
Second, the revenue implications are very large, as Peter
Orszag and many others have noted. I think permits are the same
as revenue, and they shouldn't just go out the door without the
surveillance of this Committee. So, I applaud the initiative.
My institute, the Peterson Institute for International
Economics, and the World Resources Institute are conducting
major research in this whole area, and we have published one
book, another one is coming along, and others will follow.
As you have noted, the proposals that are before the
Congress embody two main approaches: carbon taxes and cap and
trade. But there are also performance standards in the
discussion. All of these have their advantages and
disadvantages. But the bottom line is that any of these
approaches, if serious, will impose very heavy costs on U.S.
economy, and those costs will be highly concentrated on a few
industries, as Mr. Regan and Mr. Lighthizer have noted.
So, this has given rise to the competitiveness concerns
which have already been mentioned. These competitiveness
concerns have, really, two dimensions: one, immediate impact on
particular industries; and second, trying to do something to
give an incentive to countries like China and India to step up
to the plate. The bills before Congress have both concerns in
mind. The logic of some kind of international dimension to the
bills is, therefore, quite clear.
I have appended a table to my testimony which shows where
the carbon intensive manufacturers are coming from, on the
import side. Not to go into any detail, but you will note that
most of our carbon-intensive imports come from OECD countries
which, on average, as Mayor Bloomberg has noted, are cleaner,
according to various indices and scores, than the United
States.
So, we shouldn't think that carbon-intensive goods are all
coming from China or India, because they are not. The
statistics are clear.
The problem of doing things at the border and pressuring
other countries along the lines that Mr. Regan mentioned is
that anything we do to other countries they can do to us. We
could be big losers. Importantly, the world trading system,
which has been a major source of economic growth in this
country and the world since the second world war, would be at
risk.
I think it's appropriate to remember, in this week
particularly, that Wall Street crashed first in the Great
Depression, but Smoot-Hawley came second. A round of trade
restrictions in the name of climate change could be the Smoot-
Hawley of our times, or the potential Smoot-Hawley.
Now, turning to the WTO rules as they presently exist, I
would offer three head notes. One, they were written long ago.
They were written in a period when climate change was on
nobody's mind. Second, there have only been very few cases--and
we summarize them in our forthcoming book--only about six or
eight cases which have had anything to do with this issue. The
decisions leave a lot of room for questions to be decided. So,
the jurisprudence is very scarce.
With that in mind, our recommendation is for U.S.
legislation, or the legislation of other major countries, to
provide a pause before border measures are imposed, a pause for
a short period of time, 3 or 4 years, to try to negotiate a new
WTO code that outlines what is permissible, what is not.
Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Hufbauer follows:]
Prepared Statement of Gary Clyde Hufbauer, Reginald Jones Senior
Fellow, Peterson Institute for International Economics
Mr. Chairman and Members of the Committee, thank you for inviting
me to testify. My name is Gary Hufbauer and I am a Senior Fellow at the
Peterson Institute for International Economics. In May 2008, the
Peterson Institute and the World Resources Institute jointly published
a book titled ``Leveling the Carbon Playing Field.'' The book analyzes
the intersection between greenhouse gas (GHG) emissions,
competitiveness, and international trade.\1\ Currently, my colleagues
and I are writing a monograph titled ``Reconciling GHG Limits with the
Global Trading System,'' which focuses on U.S. climate policy options
and their consistency with the WTO.\2\ This testimony reflects findings
from both works.
---------------------------------------------------------------------------
\1\ Houser, Trevor, Rob Bradley, Britt Childs, Jacob Werksman, and
Robert Heilmayr. 2008. Leveling the Carbon Playing Field: International
Competition and U.S. Climate Policy Design. Washington: Peterson
Institute for International Economics and World Resources Institute.
\2\ Charnovitz, Steve, Gary Clyde Hufbauer and Jisun Kim. 2008
(forthcoming). Reconciling GHG Limits with the Global Trading System.
Washington: Peterson Institute for International Economics.
---------------------------------------------------------------------------
Major Concerns With U.S. Climate Change Legislation
Facing rising domestic and international pressures, several GHG
control bills have been introduced in the 110th Congress. The proposals
embody two main approaches, namely carbon taxes and cap and trade
systems. Performance standards are a secondary feature of some
proposals. Each system has its own mix of advantages and disadvantages.
However, whether the limits take the form of a carbon tax, a cap and
trade system, performance standards, or some other method, it must be
emphasized that serious GHG controls will impose heavy costs on the
U.S. economy, and the costs will be concentrated on a short list of
GHG-intensive industries and activities. The prospect of heavy costs
has raised concerns about the competitive position of U.S. producers
and the ``leakage'' of production and jobs to foreign firms. In the
absence of parallel international commitments, U.S. measures might
shift manufacturing activity to China and India, among other countries
that do not limit GHG emissions. In the end, U.S. controls might make
no difference to climate change if emissions activity simply migrates
abroad. To address these concerns, U.S. legislators have drafted
special provisions in their GHG control bills such as free allocation
of allowances, special exemptions, and border adjustments that would
affect both U.S. exports to and imports from countries which do not
have comparable climate policies.
Questionable Effectiveness of Trade Measures
Trade-related rules, such as an emissions allowance requirement
imposed on foreign producers at the U.S. border, have gained political
support, both because they address the competitiveness issue and
because they arguably create incentives for other countries to join in
combating global warming. The logic of this approach is clear. However,
it is questionable whether trade measures will achieve the goals
sought. Indeed, it is quite possible that trade measures, if imposed by
several major countries, will adversely affect the United States.
The United States imports carbon-intensive goods largely from
Canada and the European Union--countries that emit less CO2
than the United States. China and India, the primary targets of U.S.
trade measures, are not large suppliers of carbon-intensive exports to
the United States. In 2005, China accounted for less than 10 percent of
U.S. carbon-intensive imports except cement: 7 percent of steel
imports; 3 percent of aluminum imports; 4 percent of paper imports; and
14 percent of cement imports (Houser et al., 2008, pp. 44-45). Also,
while China accounted for 32 percent of global steel production, it
exported only 8 percent of steel produced in 2005, and less than 1
percent was sold to the U.S. market (Houser et al., 2008, p. 54).
These statistics imply two things. First, trade measures may not
provide intended economic relief to domestic industries affected
adversely by U.S. climate change policy because U.S. firms are
competing mostly with ``cleaner'' countries; and second, that U.S.
trade measures may not create substantial leverage to shape climate
change policies of other countries--particularly China and India.
In proposed U.S. legislation, trade measures are generally imposed
on imports unless the trading partner enacts domestic climate policy
``comparable'' to the U.S. policy. As the trade data mentioned above
shows, the largest foreign suppliers to the United States of carbon-
intensive goods are countries like Canada and the European Union, and
these countries emit considerably less carbon than the United States
either on a national basis or a per capita basis. Moreover, the
European Union has already enacted more stringent GHG measures than the
United States, and Canada may soon do the same. ``Comparability'' tests
imposed by the United States could be turned around by other
countries--starting with the European Union--to implement similar
measures against imports from the United States. This sort of
escalation would damage U.S. industries in the global market.
Moreover, a round of global trade restrictions, enacted in the name
of climate change, would interrupt the agenda of trade liberalization
which has proven enormously successful in boosting world economic
growth since the Second World War. The damage to the world economy
would be severe. Recall that trade barriers were a hallmark of the
Great Depression. Wall Street collapsed first; Smoot-Hawley was passed
second.
Trade Measures and the WTO
While the WTO allows member countries great flexibility in adopting
environmental standards within their territories, the same discretion
does not apply in their trading relations with other countries.
Accordingly, trade barriers have the potential to conflict with WTO
rules. In light of economic history, WTO rules that limit national
actions should be counted as a blessing.
To be specific, when GHG trade measures are mixed with mechanisms
designed to alleviate the burden of emission controls on domestic
firms, the possibility arises of a collision with WTO rules. The table
appended to my testimony provides a quick view as to which U.S. climate
policy options with respect to imports might be justified under
particular GATT articles. If the United States enacts its own unique
brand of import bans, border taxes, and comparability mechanisms--
hoping that measures which violate GATT Articles I, III and XI will be
saved by the exceptions of GATT Article XX--the probable consequence
will be a drawn-out period of trade skirmishes, possibly escalating to
trade wars.
One way to determine whether such trade measures in support of GHG
emission controls are compatible with WTO agreements is to let the
dispute settlement process run its course. In the end, a record of
decided cases will define the contours of WTO obligations. However,
given the complications and sensitivity of GHG controls, the Appellate
Body is unlikely to produce clear guidelines for several years.
Moreover, consigning these decisions to a panel of jurists would put
tremendous stress on the WTO system, which is already under siege.
Recommendation
A central issue in designing U.S. climate change policy is how to
level the playing field internationally. Given uncertainties in their
effectiveness and possible conflicts with WTO rules, trade measures may
not offer the best approach. Given the fact that large emitting
countries--notably China and India--are also under domestic and
international pressures, the United States might better address
competitiveness concerns by actively engaging in international
negotiations. Two forums for international engagement are relevant:
Copenhagen and WTO.
At upcoming negotiations in Copenhagen, to be concluded in December
2009, a post-Kyoto regime is meant to be agreed. Importantly, both the
United States and China--which are not only the largest sources of GHG
emissions, but the cause of great concern over the outcome of climate
negotiations--are expected to join the international regime. While the
post-Kyoto compact may not reach agreement on uniform international
standards, engagement of the United States and China will build
significant momentum which could draw stronger commitments from India
and other developing countries. In this way, the United States may
partly address its own competitiveness concerns.
While the post-Kyoto regime will probably announce new ambitious
targets for reducing GHG emissions, and commit both developing and
developed countries to take action, national governments will likely be
left to their own methods for meeting targets. Under this scenario,
conflicts due to difference in climate change policies are all but
certain. Consequently, many cases might be brought to the WTO. Rather
than consign the crucial decisions to the WTO judicial system, in my
judgment, key WTO members should attempt to write a new WTO Code of
Good Practice on GHG rules. The idea is to define more sharply the
policy space for climate control measures that are consistent with core
WTO principles, even if a technical violation of WTO law might occur.
To encourage WTO negotiating efforts along these lines, the United
States and other important emitting countries should adopt time-limited
``peace clauses'' into their own climate legislation. The ``peace
clause'' would suspend the application of border measures or other
extra-territorial controls for a defined period of time (say 3 years)
while WTO negotiations are underway.
Thank you, Mr. Chairman. I will be happy to answer questions.
[GRAPHIC] [TIFF OMITTED] T2201A.044
Chairman RANGEL. Those bells mean that the Members here
will have 15 minutes to vote on the previous question. Then,
after that, we will have a vote on the rule which will follow
in 5 minutes, which means that there would be a total of at
least 20 minutes that we will be absent.
But, since we do have some time--the Capitol, as you well
know, is 5 minutes walking--perhaps I will yield my time as
Chair to my distinguished Mayor to ask, how do you respond to
the question that moving in the direction that some of us think
is right, and you do, that it could be the destruction of our
manufacturing base and the end of our jobs and economy as we
know it?
Mr. BLOOMBERG. Mr. Chairman, I am just fascinated by the
focus on competitiveness based on price. I have always thought
that any industry or any company that its business model says
they're going to be the low-price producers is doomed to
failure. I think we have seen that repeatedly throughout the
world.
If you go to China, you will see the failed policy of being
the low-cost producer. In the eastern part of China they have
vacant factories, where all the business has moved west,
because people in western China will work for less than they do
in eastern China. Business is leaving China and going to
Bangladesh and Vietnam and Sri Lanka, because people there will
work for less.
You will always find somebody working for less. If
America's competitiveness is going to be based on being the
low-cost producer, because you have low-cost labor, or you have
low-cost energy, it's just a failed policy. This country has to
compete on technology, it has to compete on having the best and
the brightest. You will only get those people if we improve our
environment, if we adopt new technologies, if we train our
workforce.
One of the great things about reducing pollution through
cap and auction, or through a carbon tax, is you could use the
money to do exactly that, to retrain our workforce so that we
can be competitive down the road. I think, as one of the
gentlemen pointed out, a lot of the European countries are much
more energy efficient than we are, and they are able to compete
with us when it comes to cost.
The great strength of America is our workforce, and it is
the regulations we have that ensure quality. You are seeing
that, the big scandal in China, of this milk contamination. If
you haven't been reading about it, you should, because it's
devastating for the Chinese economy. They had the problems with
lead in toys coming here, and cat food. That destroys their
markets overseas.
We have to go and address this issue, and improve the
environment, and improve the quality of American products. If
we do that, I think it's good for business. I think there are
plenty of examples of that.
Nobody wants to go home and say to their constituents,
``You're going to have to pay more for something.'' But if you
explain to them that the value of that is that this country can
become more competitive, rather than less, that the air they
breathe is going to be better, then I think the public, the
American public, is willing to listen to that.
The time has come for this Committee, both sides of the
aisle, to pull together and to say, ``We cannot afford to sit
around and spend another 4 years trying to negotiate with other
countries overseas. What we have to do is do it by--lead by
example. Do it here first.'' It's tough enough a political lift
for us. If you're going to wait for the rest of the world, it's
just not going to get done. We are the big losers. Thank you
for giving me the opportunity.
Chairman RANGEL. Mr. Lighthizer, what do you have to say
about that?
Mr. LIGHTHIZER. Well, since we are a major presence in New
York City, I have to be very careful.
Mr. BLOOMBERG. That's all right.
Mr. LIGHTHIZER. Skadden Arps. I would say my argument is
not that we shouldn't do anything. But I think that it is wrong
to think that you're going to take the 3 or 4 or 5 or 6 or 7
million workers, some of whom are in steel mills, and you're
going to retrain them to design computer chips.
Right now, they are making the best--taking steel as an
example--they are making the best product in the world, they're
making the cheapest in the world. They are competing with the
entire world, and they're doing pretty well. But to come in
there and say, ``Look, we're going to add $70, $80, $90 a ton
to your cost, and not add it to your competitors,'' is, in my
opinion, a serious mistake, and bad for the economy, and unfair
to all of those people.
What I'm saying is, fine, if your judgement is that it's so
important that we do this, that we clean up the environment--
and it is important to do it--at least do it in a way that is
sane and it is fair to basic manufacturing. I think you can do
both, if you do it right. So, I'm not really disagreeing with
the Mayor.
All I am saying is it's nice to talk about it all being
information technology. It's nice to talk about it all being
financial services. It's great. But in the real world, there
are millions of people that are working very hard, doing a
great job, and they shouldn't be penalized because of this
other objective. You can do it in a way that doesn't penalize
those people.
Chairman RANGEL. Thank you. We are going to go to vote, and
then, when we come back in approximately 20 minutes, I will
yield to Mr. McCrery, and then the Members will have their
time.
I apologize for this interruption, but that's what we're
here for, to vote.
[Recess.]
Chairman RANGEL. The Committee will resume. But I just want
the panel to know that we have received nothing but accolades
as to the quality of the testimony and the timeliness of the
Congress making certain that we moved on this before we left.
So, collectively, I want to thank you and yield to my
friend, Jim McCrery.
Mr. MCCRERY. Thank you, Mr. Chairman. I certainly share
with those from whom you have heard giving accolades about the
panel. Your testimony was excellent, and we look forward to
continuing to work with you, as we go through this issue in the
days to come.
I was actually pleased that there was so much back and
forth discussion about some of the things I mentioned in my
opening statement, primarily the impact on the economy, the
impact on jobs in this country, and particularly on those
energy-intensive industries. I know that a couple of you--or
several of you--in your written testimony, actually outlined
some possible approaches to mitigating the adverse impacts on
those industries.
I just wonder if you might go over orally before the
Committee, some of those possibilities, and tell us what traps
there may be, if you will, in pursuing some of those
possibilities, whether it's WTO or tax policy, or whatever. Dr.
Orszag, will you start?
Mr. ORSZAG. Sure. My written testimony discusses two broad
approaches. There are others. The first involves transitional
assistance.
So, for example, if you had a cap and trade program,
handing out some of the permits to the affected sectors and
firms, and in particular, and the important part, is tying that
to what they do. So, saying, ``You get these for free, but you
must basically continue producing,'' because without that tie,
they're--just giving them a permit won't necessarily get what
you want.
The second broad approach involves border adjustments,
which we have already heard some about, which would involve
imposing some sort of requirement on imports that are coming in
in those sectors to obtain a permit. On that latter point,
there is a--there are issues involving our World Trade
Organization obligations.
Relevant to this Committee is that one line of defense
involves articles two and three under the WTO, which speaks
about a tax. So it would raise the issue of the degree to which
a cap and trade is the same as a tax, another of which is
applicable under article 20. I think--my understanding,
although there are lawyers here who can speak to it more
professionally than I--is that that appears to be a more
auspicious avenue for the border adjustment system that may be
part of any cap and trade system.
Mr. MCCRERY. Yes. Dr. Burtraw.
Mr. BURTRAW. I would just like to add to that that I guess
there is a third approach, which is some kind of performance
standard.
The problem with the border tax adjustment is that if we
were using a tax in the U.S., it would make some sense under
WTO. But if we're using cap and trade in the U.S., then you
have this problem of what is the adjustment that's being made,
how do you calibrate that? Is it to the value of emission
allowances last year, or yesterday? This is a--these volatile
prices in a market opens the door for litigation under the WTO.
The approach I favor is the first one Dr. Orszag mentioned,
which is free allocation of allowances. You heard me earlier
speak strongly against free allocation. This is a different
kind of free allocation that occurred under the SO2
program, where there was a one-time grandfathering of
allowances. Instead, as Dr. Orszag emphasized, it would be an
output-based allocation, and it would be updated on an annual
basis, tied to value added and economic activity.
So, if Corning continues to keep jobs on shore, then it
would continue to earn a free allocation, and the level of that
allocation would be benchmarked to best practice in the
industry. That way, Corning has an incentive to continue to try
to remove emissions in its production activities, but it would
not be placed in unfair competition in either its import or
export markets, because it wouldn't be having to pay for
emission allowances, at least up to that level that is best
practice in the industry.
But this would have to be revisited on an ongoing basis.
When that competition goes away, there should be a Federal
agency charged with developing criteria to measure the level of
foreign competition. When that competition goes away, this
subsidy should go away.
Mr. MCCRERY. Tim, what do you think about that approach?
Mr. REGAN. I have no problem with it at all. You don't want
to create some sort of a windfall for manufacturers. You want
to design something that's going to secure their
competitiveness in the United States. So, making some sort of a
condition on maintaining your operation in the United States
strikes me as quite legitimate.
I also think that that approach of using those kinds of
allowances would help on the export side, because we would be
able to maintain our competitiveness without having to worry
about some sort of an export subsidy to offset the cost of
carbon. Expert subsides give to real serious WTO issues.
So, you know, the idea of using allowances as we just
described strikes me as a good way to deal with the export
problem.
Mr. MCCRERY. Thank you. Mr. Chairman, my time has expired.
But thank you very much for your contributions. I would have
liked to have gotten Mr. Lighthizer's comments on the WTO
problems, but somebody else may get to that. Thank you.
Chairman RANGEL. The Chairman would like to recognize the
Chairman of the Subcommittee on Trade, whose expertise we're
going to rely on to see how this affects our ability to be
competitive.
Mr. LEVIN. Thank you so much, Mr. Chairman, and thank you,
all of you, for coming.
You know, as I listened to your testimony, it struck me
that there remains a basic issue that we have to resolve, and I
hope we do that in the coming months, and that is the basic
question of whether global warming presents a serious, severe
challenge, or does it not.
I am often surprised about how the lines fall on this, in
trying to understand. Those who have been in denial,
reluctantly perhaps now agreeing a bit, and those of us who
have felt for some time that it is, indeed, a deep challenge,
if it is, for those of us who have been working for alternative
fuel measures, we can't believe that it will provide enough of
an answer soon enough.
As to trade policy and the article 1, 2, 3, 11, 20, there
seem to be ways to put together a system that would meet the
requirements. If not, we're in negotiations. To simply say that
it will--to endanger liberalization, Mr. Hufbauer-- we know
each other well--I think assumes that global warming isn't
enough of a challenge that we cannot maintain trade
liberalization and address a serious problem.
If I might say so, I don't think it helps to bring up the
ghost of Smoot-Hawley. We are well beyond that. In terms of the
competitiveness, people who have been working on this are
sensitive to it. Many who are saying we've got to do something
about global warming, it's a severe challenge, have been
leading the effort to try to help make us competitive and to
maintain jobs in this country.
So, we've got to face up to the issue, is this global
warming issue a very serious, severe challenge, or is it not?
I think, Carol, you have talked a lot about this. I don't
know whom to ask, but one of you--all of you--just describe
briefly, what do we face?
Ms. BROWNER. Well, I think it is probably the greatest
environmental challenge of our time. The consequences of
inaction are, in many instances, things that cannot be
corrected.
For example, sea level rise. Once we start to experience
the consequences of sea level rise, the reality of sea level
rise, there is not an engineer in the world who can help us
drop the sea. I mean, this is a hard issue because we're asking
people to take significant action before we can actually see,
feel, and touch all of the consequences.
Mr. LEVIN. Some of it we have touched already.
Ms. BROWNER. Some of it we've touched already. The other
thing I think that's really important to note about the
scientists, the climate scientists, when they have predicted
what the consequences will be, and as we've started to realize
some of those consequences, all of their predictions have been
on the lower end than what the reality is.
So, we didn't understand, for example, that there would be
feedback loops, and so that with ice melting, it would be more
complicated than simply the icebergs melting.
So, you know, it's--I don't know that--none of us are
scientists here, and I don't want to say anything on behalf of
other people, but you know, you have never, ever, in the
history of the world, had agreement like we have among the
scientists on what the consequences are going to be, and how
severe they will be, and the need for action sooner, rather
than later.
Mr. LEVIN. Dr. Orszag, you were shaking----
Mr. ORSZAG. I would agree with that. I would just say in a
sense we are conducting a very significant experiment with the
globe without a backup plan, and without, you know, the ability
to rerun the experiment if things turn out poorly.
We are running a very significant, long-term risk, and the
question is how we buy insurance to reduce that risk.
Mr. LEVIN. Thank you.
Chairman RANGEL. Thank you. The Chair recognizes the
distinguished Member of the minority, Mr. Herger.
Mr. HERGER. Thank you, Mr. Chairman, and our witnesses.
Incredibly important issue that we're dealing with, working
with. I believe it's considered important by everyone.
I don't think it's a case that, for the first time in the
2\1/2\, 3 billion year history of the Earth, that we're seeing
climate change, because we continually see climate change. I
think what's important is that we're not unjustly hastening
that.
I think what is important is that there is a right way, and
a positive way to deal with this. I think there is a wrong way
and a negative way to be dealing with this. I think we have
heard some testimony on--having to do with that.
I would like to just add, from a report that I have here, a
study that was done. I believe Mr. Reagan mentioned the
unintended consequences that we can have of our actions. So
often, we learn the hard way of this. Smoot-Hawley was brought
up. Unintended consequences to our actions to solve something.
We need to be thinking very carefully what we do, that we--
those who don't learn from history are doomed to repeat it.
Hopefully, we won't do that because we will think it through.
One of these unintended consequences, a study that was done
by the American Council for Capital Formation, estimates just
in my State of California, in just 11 years, if the cap and
trade proposal of the Lieberman-Warner were to go in, an
estimated as many as 195,000 jobs lost, just in California in
the next 11 years. And 10 years beyond that, by 2030, as many
as 449,000, almost 450,000 jobs lost. Again, unintended
consequences.
So, what we do, we want to do in a positive way. I believe
there is many positive things we can do.
I would like to mention that--I mentioned in my--noted in
my opening statement about trade liberalization is an important
tool to reduce greenhouse gas emission, both here and in the
United States and abroad. For that reason, Mr. Brady and I have
introduced the Green Export Enhancement Act of 2008. This bill
provides the United States Trade Representative with the
authority to negotiate the elimination of tariffs on
environmentally friendly technology.
This is a positive way that we can engage our international
partners in an effort to reduce greenhouse gas emissions. The
removal of these trade barriers will support the export of
cutting edge technology, developed and manufactured by American
workers. It will also speed the adoption of technology that
developing countries would need if they're going to reduce
their greenhouse gas emissions.
This bill is a positive step in engaging our international
partners, addressing concerns about climate change, and does
not impose significant increases in energy prices on the
American family, particularly at a time when the American
family is hurting, when we're in an economic downturn.
I would like to hear from our witnesses today as to whether
or not they support trade liberalization and environmental
technology.
Why don't we start with you, Mr. Hufbauer, and just move
across?
Mr. HUFBAUER. Absolutely. This should be done. The reason
we haven't reached an agreement on this very constructive
approach in the WTO is that the U.S. has taken ethanol out of
the package. It's very simple. You don't put ethanol in, as the
U.S. environmental contribution, no package.
Now, I am not a big ethanol fan, in terms of saving
CO2, but I think we at least should include ethanol
in the talks.
Mr. HERGER. So, you support it. Mr. Regan.
Mr. REGAN. Sure. We actually do it. We manufacture
environmental control devices, and we export them. Matter of
fact, we have a plant in Blacksburg that makes the core of a
catalytic converter, and 70 percent of its output is exported.
We have a plant in Corning, New York, that manufactures
diesel particulate filters for diesel cars, 100 percent of its
output is exported to Europe. So, yes, we love to export. To
the extent that you can eliminate barriers to our exports, we
would appreciate it.
Mr. HERGER. Thank you.
Chairman RANGEL. Thank you so much. The Chairman has been
informed that Mr. Lighthizer and Administrator Browner will not
be able to stay; they have to leave earlier. But I hope that
both of you will receive questions from Members of the
Committee and respond in writing. Any Member that would want to
direct questions to them do so in writing.
At this time, I would like to yield 5 minutes to the
distinguished doctor on our Committee, Jim McDermott.
Dr. MCDERMOTT. Thank you, Mr. Chairman. Often in the United
States, we fail to learn from what the rest of the world is
doing. Europe has done this cap and trade business. I would
like to hear from you what they did right, what they did wrong,
what they did with the money.
There has been a suggestion we should perhaps use some of
the money for education, or for health care, or whatever. I
would like to hear what the European experience has been, so
that we don't have to recreate the wheel if it's already been
discovered and working so well somewhere else.
Ms. BROWNER. I think it is worth looking at what Europe has
done, and there are some important things to learn. Probably
the most important thing we can learn is why they ended up in a
situation where they created a windfall profit for the electric
utility sector.
In essence, what they did is they were giving away the
credits, but they were allowing the utilities to pass on 100
percent of the cost. So, they were, you know, sort of paying
utilities to do what they needed to do, but of course, allowing
costs to be passed on to the consumer, and that created a
windfall. We certainly want to avoid that, I think, in any
program that we structure.
I am not aware about what they actually spent the money on.
Someone else may know that.
Mr. ORSZAG. Well, again, since they actually gave away most
of the permits, there wasn't actually money to be spent. As
they're moving into the next phase, and there will be more
auction, there will be a larger component that's auctioned,
there will be, sort of, questions about how that revenue would
be used then.
The other thing that I think is important to highlight, and
that I understand is an issue under the RGGI, the regional
initiative that's underway, is you have to be really careful
about how you set the initial targets. Because if you project
targets that are--or caps that are--very high, relative to what
the base line turns out to be, you wind up with very, very low
permit prices, and not much constraint coming from the cap,
itself.
That is more of a sort of technical forecasting question.
Dr. MCDERMOTT. Did their idea--excuse me, go ahead.
Mr. BURTRAW. Well, I just would like to add two other
things. You know, agreeing with what I have learned so far
about lessons learned from the EU, one is that the Europeans
themselves have learned this lesson.
After investigations in the UK, Germany, Netherlands, and
elsewhere, the European Commission has proposed--and it looks
like it's going to be adopted--that, beginning in 2013, there
will be 100 percent auction of allowances for the power sector,
and phasing in 100 percent auction for the rest of the affected
sources over the next decade.
The second thing that they learned sorely after the first
phase is they had no banking in between phase one and phase
two. So, even though, as Dr. Orszag just mentioned, there was
sort of what they call over-allocation, the cap was kind of
slack in the first phase, there still would have been an
incentive to reduce emissions if companies had had the ability
to bank allowances into the future, because then there would
have been reward for early auction. But instead, what happened
is that those allowances took--went right to zero, because
there were too many of them.
You have heard--there is a variety of arguments that we've
offered up today for why the ability to bank, giving you inter-
temporal flexibility, is really key to industry to help
industry plan for the future. It's really key for the economy,
because it smooths the impact of the program on the economy.
So, that's a critical element.
Dr. MCDERMOTT. Has there been any thought about companies
that have already done things somehow being able to benefit by
this plan in the future?
I mean, while we dither here in Congress, there are
businesses out there making decisions right now. Their--I mean,
I can at least see why they might say, ``Look, could you put
retroactively the date as of X date, if we did something after
January 1, 2006,'' or 2007, or something----
Ms. BROWNER. I think----
Mr. ORSZAG. Could I note that's only--oh, sorry, go--just--
that's only an issue if you're giving the permits away. If
firms have to buy the permits, then the reward to that past
action is they won't have to buy as many.
Dr. MCDERMOTT. Okay, excuse me. You have already----
Ms. BROWNER. Economists always say it better than former
regulators.
Dr. MCDERMOTT. Well, I have, then, this question of the use
of the money. Since we're going to auction--we all agree that
the Europeans made the mistake of giving it away, and now
they're going to auction it. So, they're going to be in the
same place we will start from, I presume.
There will be some money from this auction. Where should it
go? I mean, is health care a public good that we should think
about in this country, since we have a problem in trying to
finance a health care reform of some sort, or is there some
other place that you think makes more sense?
Some people have talked about retraining, and that may be
it, but----
Ms. BROWNER. You know, obviously, this is a--what you, as
Members of this Committee and Congress will get to do, is
decide where to spend the money. I would encourage you to think
about helping low-income families, less fortunate people, deal
with some of the costs. I think we all agree there will be
increased energy costs, for example. So, perhaps something
through the earned income tax credit, some vehicle for helping
to offset the increase in energy costs that would inevitably
hit certain parts of--you know, certain families in our country
harder.
Dr. MCDERMOTT. Yes, go ahead.
Mr. BURTRAW. I agree. This is why they pay you the big
bucks, to make this decision. So, I want to offer just a couple
of principles on how to think about it. I argued earlier for
simplicity and transparency about that.
I think it is necessary for the American public to see that
there is a link to what happens to this revenue. Now, whether--
if it goes to health care, there is an argument to be made for
that. If it goes to tax reform, there is an argument to be made
for that. If it goes to dividends right back to households,
that's another way that they would see immediately that the
costs that they're paying through higher energy bills, they're
seeing back through some kind of regular dividend from the
government.
Whatever you do on any of those choices, I think the public
needs to feel like they own this program, and they are
participating in this program. Because we don't know now for
sure, but it's possible over the next decade we're going to go
back to the American public and ask them to do more. There has
to be a sense that this is a national effort.
If there is just too many threads here, and the money gets
carved up in a lot of different ways, two bad things happen.
One is you lose that simplicity, and the public doesn't have a
sense of owning or participating in this together. Second, it
puts the United States behind the eight ball with respect to
Copenhagen in 2009. Because at the end of 2009, there is going
to be international conventions in Copenhagen. If the U.S.
could do something before then, it could move us out front on
the international stage.
If you can resolve what to do with all this money in a
complicated way before then, that would be kind of a surprise
to me, but a simple approach, maybe something could be done at
the beginning of the next Congress, I don't know.
Dr. MCDERMOTT. I have made the proposal for the stimulus
package for gasoline stamps. That is some way to mitigate the
additional cost that people are spending on gasoline. That is
also a way that I suppose you could help low-income families,
either through the oil heat that they would have to buy, or the
gasoline.
These ideas, do they make sense? Are they the kind of
transparency that you're talking about?
Mr. ORSZAG. I guess I will be a little bit of a contrarian.
I think one thing one needs to be careful about is you can
provide assistance to low-income households. But if you tie
that to their consumption of energy--so, for example, a gas
stamp--you're undermining part of the incentive to become more
energy efficient for those households, also, as opposed to
something like the earned income tax credit, or just a simple
cash injection that will still, at the margin, give them some
incentive, like other households, to be more energy efficient,
to the extent that they can.
Dr. MCDERMOTT. The idea being, if you give them a gas
stamp, they will buy gasoline and drive to work, rather than
take the bus, which would be a more efficient way.
Mr. ORSZAG. That may be one manifestation, right.
Dr. MCDERMOTT. Okay. Yes?
Mr. BURTRAW. There are other proposals out there that have
some logic. For example, free allocation to electricity
consumers through allocation to local distribution companies.
The virtue here is that it would soften the change in
electricity prices, which is politically attractive, but it has
the same downfall that Dr. Orszag mentions in the electricity
sector.
It lowers the cost of electricity consumption, and it makes
it so that you're going to have to get more emission reductions
from natural gas. Or, if you drive a car, in that case you
might be concerned about it. Or, if you heat your home you
might be concerned about it, you know, with natural gas. But if
you're an industrial facility and you're buying natural gas,
you might be concerned about the fact that natural gas prices
are going to go up, and that allowance prices are going to go
up.
Our modeling suggests that free allocation to the
electricity sector would raise allowance prices by about 15
percent. So, that's a cost that has shifted to other sectors of
the economy.
Earlier today we heard this idea--I think the Mayor was the
one who mentioned--the law of one price is what we really want
to strive for here, treating all sectors of the economy
equally.
Dr. MCDERMOTT. One of the things some of us in the
northwest worry about is we already have hydro, and we've got a
whole lot of wind. So we're wondering exactly how this is all
going to work for us. But I yield back the balance of my time.
Chairman RANGEL. The chair is pleased to recognize Mr. Camp
for 5 minutes.
Mr. CAMP. Well, thank you very much, Mr. Chairman. You
know, at its core, from what I have heard today, cap and trade
proposals are designed, really, to increase energy costs, which
will result in increased production costs for those who
generate energy.
Dr. Orszag, in your Senate testimony--and I quote--you
said, ``Price increases would be essential to the success of a
cap and trade program.''
Now, these increased costs are then passed along and placed
primarily on energy-intensive manufacturers. Obviously, being
from Michigan, most people think I am referring to automobiles,
but really new manufacturers--and I'm thinking of, in my
district, the crystal solar wafers that are manufactured for
the solar industry is now the single most energy-intensive user
in the State of Michigan. It's a very intensive energy user.
Yet, it would be penalized under this sort of proposal.
So, Dr. Orszag, on page 15 of your testimony today you
point out that energy-intensive manufacturing would experience
a decline in sales, employment, and profits, as a result of a
cap on carbon emissions.
Now--and I note the National Association of Manufacturers
has done a study, and they look at my home State of Michigan
and say that as many as 120,000 jobs would be lost by 2030.
Given what our State has been through, that's a significant
concern.
Also, by 2030 we could see disposable household income drop
as much as $7,000 per family. Prices of gasoline would increase
between 72 and 141 percent by that same date. Michigan
residents would pay between 112 and 160 percent more for
natural gas by 2030.
So, my question to you is, with dramatic increases in
energy inputs, combined with the world's highest effective
corporate tax rate in the United States, won't cap and trade
incentives--won't cap and trade incentivize more American
companies to leave the United States and set up operations
offshore? Has CBO done an analysis of the potential offshoring
effects of a cap and trade policy?
Mr. ORSZAG. First, let me just say, as I noted not only in
the Senate Finance testimony, but also just with respect to
this Committee in today's testimony, price increases are an
essential part of having a cap and trade program work. That
price signal is crucial.
I think some of the numbers that were cited with regard to
particular estimates for particular pieces of legislation may
be somewhat exaggerated. But there is a cost to reducing the
risk associated with global climate change.
We have not done an analysis of the degree to which U.S.
corporate activity would shift to other countries, but as--
especially with regard to these energy-intensive industries,
which are a small share of the total economy, but nonetheless
are a part of the economy, there would be some shifting, even
under the kinds of approaches that have been put forward for
border adjustments, and what have you.
The question is the magnitude. Most of the analysis that I
have seen suggests, especially from the macroeconomic
perspective, that would be somewhat limited, and certainly
somewhat smaller than the numbers you were suggesting, but
still part of what is going to have to happen here.
Mr. CAMP. All right. I have a question for anyone who would
like to answer, not just for Dr. Orszag.
Obviously, we are looking at policy options today, not
whether it be carbon taxes or cap and trade. Many of those
presume that the path--as you mentioned, in response to my
question--to reduce greenhouse gas emissions is to raise the
cost of energy. Are there any ways to reduce these emissions
without raising the cost of energy?
I would put this open to anyone who would like to answer.
Mr. ORSZAG. Can I?
Mr. CAMP. Yes.
Mr. ORSZAG. I will just very quickly say prices are part of
it. But I also think it's very important--I feel like we need
much more psychology 101 in public policy, and maybe a little
less economics 101. So, pricing those are important.
But, for example, evidence suggests that for consumers,
it's not just the price signal, but even things about--there is
this experiment that's been done with a little glowing thing
that glows red or green, depending on whether you're more
energy intensive or less energy intensive than your neighbors,
and that significantly affects behavior. There are lots of
interventions that are not direct price signals that can affect
what people do.
Mr. CAMP. All right.
Ms. BROWNER. You obviously could use a traditional command
and control regulatory scheme. You could set a standard, a
pollution standard, a greenhouse gas standard.
The downside of that is you will lose the efficiencies that
can come in a trading program. You know, I go back to the acid
rain example. Now, acid rain was one pollutant; it was not all
sectors of the economy. So, it's not a perfect example.
But the fact that the cost of compliance was so
dramatically lower than what even EPA had predicted--the
industry costs predictions were much higher than EPA's--I think
demonstrates that you will find some efficiencies in a trading
regime that you will not find in a traditional command and
control regulatory. You could certainly go down that path, but
I think it will end up being much more expensive.
Mr. CAMP. Okay. Thank you very much. Thank you, Mr.
Chairman.
Chairman RANGEL. The Chair will recognize Mr. Doggett.
Mr. DOGGETT. Thank you very much. I believe that each of
you made a contribution to our effort this morning. I
particularly took note of Dr. Orszag's comments that the
danger, the potential harm to our country that we're facing
here can be termed ``catastrophic.''
There are some people who continue to feel that they can
come up with every excuse in the book to avoid doing anything.
There are others that, like those on our panel, who have really
offered constructive suggestions for how we can improve the cap
and trade proposal before the Committee. My focus is on that.
I believe that the Climate Matters bill that we have
introduced addresses each of the four critical issues that
Mayor Bloomberg talked about. I am pleased to hear you testify
that this approach of pollute-free cards, or pollution stamps,
that that's a real mistake. That is, despite the significant
progress that was made in the Senate this year, the Lieberman-
Warner bill tended to favor, a little too heavily. I think we
need to tighten up the provisions in Climate Matters on that,
and recognize the great cost of using pollution-free permits.
Competitiveness. This is clearly something that we can
benefit from, additional input from Mr. Reagan and others, to
assure that we're competitive.
Indeed, every alternative idea that has been advanced by my
Republican colleagues is in the Climate Matters bill already.
It's just that the Climate Matters bill does more than that,
and recognizes that it can't be all benefit and no limitation,
and that unless you put in place some limit on greenhouse gas
pollution, it won't work, and it's never worked in the history
of the world, that--if it's all benefit and there is no
limitation in the marketplace.
It is true that there may be some additional cost. Now,
fortunately, on the one issue that Mr. McCrery offered at the
beginning, the concern that all of us have about the rising
price of gasoline, fortunately we have a definitive study on
what the effect of cap and trade will be on gasoline, and that
is from the Bush Administration. They put out an Administration
statement during the Lieberman-Warner debate, and they came up
with a precise figure.
They tell us that, over the next 20 years, consumers can
expect, as a result of a cap and trade system, to have to pay
$.03 a gallon more per year over the next 20 years. Well, of
course, under the policies of this Administration, many
Americans find themselves paying more than $.03 a gallon
overnight. I think that's a reasonable price to pay.
The study that was just referenced, from the National
Association of Manufacturers, unfortunately is so unrealistic
it--in some of its categories, it's almost 500 percent higher
than the Bush Administration on what the effect of cap and
trade will be.
So, there are people of good will that want to look at the
cost and the benefits. We need to understand that we're not
looking at what will be the cost under a cap and trade system
versus today. No, we have to weigh the cost of a cap and trade
system versus the cost of the do-nothing, catastrophic global
warming alternative. That's the proper comparison. That's not--
that is what organizations like NAM have not done, to weigh
what the alternative costs are.
I would ask Administrator Browner if you would comment on--
you currently refer to yourself from your regulatory days, but
I believe your current work is advising businesses about how to
deal with these issues. What I have noticed is, not only are
the States and the cities way ahead of the Congress, but the
business community is way ahead of--and they need the certainty
now, before they make investment, to know what the rules will
be on greenhouse gas emissions. They don't have that.
From your standpoint, as a--from your perspective, not only
as a former EPA administrator, but as a business consultant,
tell us about what--whether the costs do, in fact--of global
warming--pose more problems to business than--in our economy
than not--than having a cap and trade system, and tell us about
the need for certainty of businesses, and finally, that if we
don't act promptly, that each year we delay it becomes a self-
fulfilling prophecy, because all you can do then are Draconian
costly approaches, rather than having the flexibility if we
start immediately.
Ms. BROWNER. First of all, lots of businesses are doing----
Chairman RANGEL. I hate to interrupt, but we do have a
problem here. Soon we will have to leave for approximately 30
minutes or more to vote. I am not asking this panel to stay
until we come back for questioning.
We have two, four, six, seven Members here now. I am asking
unanimous consent that they restrict themselves to 2 minutes.
If the vote is delayed, we will come back again and pick up
whatever time that we do have. But in view of that, again, I
would ask the Members to really expect to get their answers in
writing.
At this time I would recognize, on the Republican side, Mr.
Weller for 2 minutes.
Mr. WELLER. Thank you, Mr. Chairman, and I will be to the
point.
I do want to note my good friend from Texas, my classmate,
noted that the price of gasoline in his State would go up about
$.03 a gallon based on the Lieberman-Warner bill. Actually, the
statement of Administration policy from the White House said it
would go up $.53. So, that----
Mr. DOGGETT. Over 20 years, though, Jerry.
Mr. WELLER. So--but you said $.03.
Mr. DOGGETT. It's $.03 per year over that period.
Mr. WELLER. So, Mr. Chairman, I just ask unanimous consent
that that statement of Administration policy be inserted into
the record at this point, if I could, please.
Chairman RANGEL. The Chair hears no objection.
[The information follows:]
Mr. WELLER. Mr. Chairman, time is limited, and this is an
important subject, but I would just note, you know, one of my
disappointments this year is, while this is an important
hearing, there has been a subject which is so very important in
this hemisphere which we have not had a hearing on, and that is
the U.S.-Colombia trade promotion agreement.
Of course, Colombia not only is considered the U.S.'s most
trusted ally and partner in Latin America----
Chairman RANGEL. We are so limited in time, are you going
to connect Colombia with this issue?
Mr. WELLER. Yes. And--but I have 2 minutes, Mr. Chairman,
and I do want to be brief.
I just have some copies, some editorials in support of the
trade agreement, urging that Congress vote on this trade
agreement. I just ask unanimous consent to enter them into the
record as well, Mr. Chairman.
Chairman RANGEL. Without objection.
[The information follows:]
Mr. WELLER. Thank you. I just want to comment, Mr.
Chairman, that, you know, since this trade agreement was signed
by President Uribe and President Bush, that over $1 billion in
tariffs have been levied on U.S. products.
Chairman RANGEL. I really don't see, if you know how
restricted the time is, how relevant----
Mr. WELLER. Mr. Chairman, out of due respect, I have 2
minutes, and I was just using it as I feel is appropriate.
Now, the economy grew 3.3 percent this last quarter, 90
percent of that growth was based on exports. As we are looking
at this coming week, and rushing a stimulus package to the
floor without hearings, without action in this Committee, it
appears that we are ignoring what has actually proven to grow
this economy in the last quarter, which is expanded trade.
That $1 billion in tariffs that was levied on U.S.
products, Illinois corn and Illinois soybeans, Illinois-
manufactured construction equipment, has cost jobs. This trade
agreement was in place, eliminating those tariffs. That's $1
billion worth of products that could have been bought----
Chairman RANGEL. The gentleman's time has expired.
Mr. WELLER. Thank you----
Chairman RANGEL. The Chair would like to recognize Mr.
Pomeroy for 2 minutes.
Mr. POMEROY. Mr. Chairman, I would--if trade is on the
table, I would certainly like to talk about the catastrophic
week we are having on Wall Street as a direct result of this
Administration's utter incompetent handling of the economy, but
that doesn't have to do with the topic at issue, so I won't
mention that. I will get to the issue at hand.
[Laughter.]
Mr. POMEROY. I want to thank you for this hearing, Mr.
Chairman, because I believe, as we looked at the environment,
and what we're doing relative to this issue, undoubtedly there
is one tax strategy discussed after another. This is the
jurisdiction of tax policy in this Congress. So, it's going to
be vitally important to essentially stake out our jurisdiction.
It's going to be central to this issue, and I look forward to
working on it.
A couple of speakers have talked about predictability,
flexibility, as kind of the central components to this
strategy. I would add a third: Viability.
I am anxious, representing 800 years of lignite coal at
present usage, that we leap into some regimen that either
excludes coal, and therefore doesn't fully contemplate the
astounding costs consumers would carry if we somehow diminish
the most abundant and affordable energy resource we have in the
country. Or, on the other hand, we impose on this fuel source
standards that they technologically cannot meet.
I am very interested, but happy to cosponsor the Carbon
Reduction Bridge Act, a fee that would be assessed and, on the
other hand, would fund research to get us to the point where
we're looking at carbon sequestration and other strategies to
deal with CO2 issues and the burning of coal.
The final point I would make is it isn't just about the 800
years of supply we have in North Dakota. The fuel sources of
China and India, and much of the developing world, are low-rank
coal. When we develop strategies to deal with CO2
emissions of low-rank coal for our country, we cause the
technological breakthrough that's going to allow friends in the
other parts of the world that are going to have to be with us
on this the very strategies they're going to need, as well.
Thank you, Mr. Chairman, I yield back.
Chairman RANGEL. The distinguished gentleman from Georgia,
Mr. Linder, is recognized for 2 minutes.
Mr. LINDER. Thank you, Mr. Chairman. Do any of the four of
you question any of the science behind the theory that humans
are causing global warming? Anyone want to take a shot at that?
[No response.]
Mr. LINDER. The science is sound? Mr. Orszag, Dr. Orszag,
maybe you can tell me. What is the optimum temperature the
planet should be at?
Mr. ORSZAG. I cannot give you the optimum temperature. I
will relay--and I am not a physical scientist or a
climatologist, I'm an economist, but I will relay the
professional opinion that the course that we are on involves
significant risks, i.e. that the temperature would be higher
than we would ideally want it to be--the mean temperature, and
that's not even the main concern.
Mr. LINDER. Do you know that the temperature for the last
10 years has been below the temperature average for the last
3,000 years? Are you aware of that?
Mr. ORSZAG. There are fluctuations that occur for a variety
of reasons.
Mr. LINDER. Have you seen the petition signed by 31,000
scientists, 9,000 who have Ph.D.'s in the science, 22,000 with
masters in science, that take issue with this theory? Have you
seen that?
Mr. ORSZAG. I haven't seen that. I would again say on this
issue, relative to others, I think there is a stronger and
broader consensus among professional scientists than on
anything else I have seen.
Mr. LINDER. Well, science is not a democracy.
Mr. ORSZAG. No, it's not.
Mr. LINDER. One of the great deniers of all time was
Galileo. So, you have to go by some observations. We can tell
you for a fact that the 22 climate models do not accurately
reflect observed temperatures. That's been proven.
So, the climate modelers say, ``Well, maybe your facts are
wrong.'' Climate modeling is a rather recent science. We're
talking about making a huge, huge increase in cost to
consumers, based on that theory that no one has ever--a theory.
I think we ought to take a look at the science first, and then
make our big decision. Thank you.
Chairman RANGEL. Mr. Kind is recognized for 2 minutes.
Mr. KIND. Thank you, Mr. Chairman, and I want to thank the
panels for your testimony. I know you have been patient, it's
been a long stay already.
But let me just highlight a point of fact that I discovered
over the August recess. I took the recess as an opportunity to
travel throughout western Wisconsin to visit all the companies
that are involved in some form of alternative and renewable
energy development, or high efficiency manufacturing products.
I stopped off at a train manufacturing company, which is
the largest employer in my district, high efficiency heating
and cooling units, asked them what the impact of a cap and
trade system in the United States would be, and they said sales
would fly off the shelf, and they would be adding jobs to the
company.
I visited solar, geothermal, wind companies in the
district, too, and asked them the impact of cap and trade on
their business. They said they're going to be able to expand,
and they're not going to be able to keep up with the orders
that would be coming in. So, the point I'm making, then, even
with the ongoing controversy with the science behind global
warming, a lot of this just makes good business sense for the
American economy.
I have read studies--and this is where I want to ask the
panel if you have seen studies, too--on the impact of job
creation if we moved to an energy-based system with more
investment and more reliance on alternative, renewable, clean
technology, clean energy sources, as opposed to staying
dependant on a carbon-based energy system that we have today.
One study that I showed, it's three to five times more
good-paying jobs in the renewable field as we would get in
carbon-based production in this country.
Does anyone else have any information? Mr. Orszag.
Mr. ORSZAG. There clearly are sectors that would benefit--
--
Chairman RANGEL. The response has to be limited to 20
seconds.
Mr. ORSZAG. Yes, it will be really short. Benefit--there
are sectors that would benefit. The overall impact, at least in
the short run, however, will be some costs. We have to figure
out whether we are willing to pay that cost.
Mr. KIND. Okay, thank you.
Chairman RANGEL. The Chair recognizes Mr. Ryan for 2
minutes.
Mr. RYAN. All right, 2 minutes. Did Gary leave, Hufbauer?
Did he--okay.
Dr. Orszag, I will stick with you, then. You came to the
Budget Committee and went through your report that you released
in February, titled, ``Policy Options for Reducing
CO2 Emissions,'' in which you stated that when
targeting long-term reductions and greenhouse gas emissions,
``A tax could be set at a rate that could meet that target, and
at a lower cost than a comparable cap.''
I--this was a very good report, by the way, I encourage
people to read this. Specifically, you reported that the net
benefits of a tax could be roughly five times greater than the
net benefits of an inflexible cap. Let's put aside the
arguments of the science for a second, and just think about
this from the purpose of economics.
Is it--given that cap and trade gives us a theoretical
certainty of reductions, never mind the fact that those might
not be achieved, isn't a tax far more economically efficient,
with respect to job displacement and competitiveness, given
that you can border adjust taxes, than a cap and trade regime?
Mr. ORSZAG. Yes. A simple cap and trade regime. You can
make cap and trade more similar, or increase its efficiency
through things like banking and borrowing, or price--a ceiling,
floor on prices.
Mr. RYAN. The more we complicate things, I would argue--and
I am watching my clock, Chairman--and I wanted to ask Gary,
but--we can invite all these WTO problems through the cap and
trade approach.
The fear that I have is--you know, I don't like the cap and
trade bill at all, but the fear I have is we're going to set up
a revenue spending machine up here. One point two trillion
dollars, I think, is your 10-year score of Warner-Lieberman,
which is the revenues that come here, and we're going to
reallocate that in Washington? Take that out of the economy?
It is best if we leave all of this back in the economy.
From an economics standpoint, if we're going to do this--which,
I caution against it--if we're going to do this, keeping it in
the economy through the tax system, we don't have the WTO
problems, we don't have the economic dislocation problem, and
yet we still send the kinds of price signals against carbon
that people want to send.
My time is up. Thank you, Chairman.
Chairman RANGEL. Mr. Pascrell.
Mr. PASCRELL. Thank you, Mr. Chairman. Mr. Chairman, I've
been a long critic of many of the trade agreements, and I'm
sorry Mr. Hufbauer had to leave. There are certain countries I
anticipate will attempt to bypass our greenhouse emission
regulations. The fact is that when countries who are also
guilty of contributing high quantities of greenhouse emissions
are allowed to skirt the rules, the impact is felt back here at
home.
How do we level the field, internationally? The large
emitting countries like China and India, they're also under
domestic and international pressures. The United States might
better address competitiveness concerns by actively engaging in
international negotiations.
Here is my question to anyone on the panel. Knowing that
China, India, and Brazil are not signatories and operate
without any regulation of greenhouse gas emissions for the most
part, what's your stance on the imposition of a safety valve on
the price per ton of carbon to ensure that American
manufacturing remains globally competitive?
Who would like to take a shot at that? Dr. Burtraw.
Mr. BURTRAW. The introduction of a safety valve which
serves as a price ceiling is probably one of the most important
mechanisms to manage potential cost and cost disruptions from
cap and trade programs.
But it has been also quite criticized, because the way it
has been suggested in previous legislation, it would be
immediately binding. It would, essentially, determine the
price. It provides a sort of a disincentive for investment in
new technologies.
So, a much preferable approach would be--as Dr. Orszag
mentioned earlier--would be a ceiling, as well as a floor; a
floor, simply taking the form of a reserve price in an auction.
That way, if prices were to fall, as occurred in the EU, for
example, and this is a part of the REGI auction that's
occurring, the regional greenhouse gas----
Mr. PASCRELL. How do you think----
Mr. BURTRAW. Those allowances are not put into the market.
That brings back up the price of allowances----
Mr. PASCRELL. Just quickly, how do you think this is going
to affect our trade negotiations with other countries, if
this--if we're trying to level the field at the same time?
Let's say we have a ceiling, let's say we have a floor. How
do we do that?
Mr. BURTRAW. No, you're right. The EU has been very
concerned about the possibility that the U.S. would introduce a
safety valve, because they do not have one in their program.
But instead, what they do is administratively adjust their
program on a--revisiting it in different phases. So, they have
a safety valve of their own, you just see it behind closed
doors.
Mr. PASCRELL. Thank you.
Chairman RANGEL. The Chair recognizes Mr. Nunes. He's not
here? Mr. Tiberi.
Mr. TIBERI. Thank you, Mr. Chairman. My congressional
district over the last 8 months has lost five manufacturers who
have announced that they are leaving central Ohio. Three are
moving to other States in the United States, and two are moving
to countries that have no emission requirements and don't plan
to.
The question to the three of you--and, Tim, I will start
with you--is isn't a better way of going about this to protect
our manufacturing? One analysis in our State of Ohio is that by
2030 we will lose 140,000 manufacturing jobs, we will have none
left. Isn't a better way of doing this creating incentives for
manufacturers, in terms of a playing field, to reduce
emissions?
Mr. REGAN. I think that's why I was leaning toward this
notion of some sort of an allowance system that would give
energy-intensive manufactures assistance to try to deal with
the problems associated with the costs we have to absorb, and
our inability to pass them on.
Mr. TIBERI. Thank you.
Mr. REGAN. So, that's where I am.
Mr. TIBERI. Go ahead.
Mr. BURTRAW. No, I agree. Exactly. That's correct. I think
it's a major concern, but I think----
Mr. LIGHTHIZER. Well, I agree it's a major concern also,
and I think it's one of the reasons why you have to look at the
competitiveness side of this so closely.
Because the fact is, we're going to exacerbate that trend
that's going on right now if we don't make sure that people in
China and other places that are bringing products to the United
States bear the same burden that we do on the cost of carbon.
Mr. TIBERI. Thank you. I yield back, Mr. Chairman.
Chairman RANGEL. The Chairman recognizes the gentleman from
Alabama, Mr. Davis.
Mr. DAVIS. Thank you, Mr. Chairman. Given the time
constraints, I am going to use my 2 minutes in making an
observation, and then invite a very quick response from perhaps
one of you all.
This is the concern that I have, was I want to make sure
that I underscore that the concerns about cap and trade are,
frankly, not divided along party lines. You know, someone
casually listening to this hearing might assume that
Republicans are in one place, and Democrats are in another.
While I don't endorse Mr. Lender's comments about the
science, I would endorse some of the comments that have been
made on the other side of the aisle about the impacts of cap
and trade. Let me briefly summarize them.
I have three sets of concerns. One concern is because we
know that particular industries are going to be disadvantaged--
steel, heavy duty manufacturing, pulp and paper, forestry--we
can predict that those kinds of industries will be
disproportionately disadvantaged, well, that means two things.
First of all, those industries, of course, are not spread
evenly across the country. They are disproportionately located
in the American South and the American Midwest.
Another thing that we know is that those particular
industries have all borne the brunt of a lot of changes we have
had in global markets in the last decade. We know that all
those industries are affected by anti-competitive conduct
abroad from the Chinese and others.
Third of all, we know that, frankly, those kinds of heavy
duty manufacturing industries have been the traditional
conveyor belt for people who may not be college educated, but
who want to earn a middle-class income.
I have another set of concerns within those. My State is a
classic example of one that has two economies. There is a part
of Alabama that is a modern information technology, financial
services, health care-driven economy that, frankly, doesn't
care a whole lot about this debate. But there is another part
of it that is conventional, heavy duty manufacturing,
automobiles, forestry, pulp and paper.
I am concerned that if we're not careful about the way we
do this, we will get more segmentation of the economy in States
like Alabama, more parts of the State faring poorly because of
these changes, other parts of the State unaffected.
Mr. Lighthizer, can you speak to this concern about, if we
do this wrong, our driving and creating more wage inequality in
this economy and more class inequality in this economy?
Mr. LIGHTHIZER. Yes, I would be happy to. I think the sense
of my testimony was that we really have to get this part of it
right. If we don't, there are enormous amounts of problems that
we're going to create. One of them is this problem that you
alluded to, which is that we are going in the direction of
having--we are getting rid of all the conveyor belts to middle-
class status for people, and we're going to find ourselves
losing the kind of good, middle-class jobs that we need in this
country.
I think it is possible to get it right. But, candidly, most
of the proposals out there need some change. But I think it's a
fundamental problem.
The first question really is what Mr. Levin asked, which
is, ``Do we have a problem?'' If you agree with that, then, in
my judgement at least, yours is the most important second
problem. Can we do this in a way that doesn't really alter our
economy and our society, ultimately, in a negative way?
Chairman RANGEL. Well, Mr. Davis, you certainly were
timely.
Let me tell this panel that we recognize that we have not
come anywhere close to resolving this problem. But I do hope
that when we do start next year, you will make yourselves
available in a more informal manner, where you're not
restricted to 5 minutes, but you will be able to share with us
and compete in your thinking, so that we can make the best
possible decision for our country, and indeed, the planet.
I want to thank you for your patience with us. We thank
this panel.
For the next panel, we will be on the floor for at least a
half-hour. We recognize you haven't had a chance to eat. So, if
we can reconvene at 2:15, I think that could fit in as to what
we would like to do here.
So, thank you so much for your patience with us, but we are
controlled by the votes on the floor. We stand in recess.
[Recess.]
Chairman RANGEL. Here again, let me say publicly what I
have said to you privately. The awkwardness of our
parliamentary system causes us to have to leave the hearing
rooms to vote, because that's what we're here for.
But I want to assure you that this problem is so complex,
that when the Committee--assuming we can convince the new
President to give us the priority which we on the Committee
believes this deserves--I was telling them earlier that this
room will be converted into a room with Members, Republican and
Democrat, sitting with you as we walk through this, so that at
the end of the day, you won't have to ask what's in the bill,
and to see whether you can support it.
We need your support, your expertise to be out there,
Republicans and Democrats, to say not what's good for our
party, but what's good for our country, and what's good for the
planet. So, we are going to take advantage of the expertise,
but also to give you the opportunity, not just to say what we
should be doing, but to be a part of putting it together.
I really believe that next year we can start brand new
initiatives, things expire, and we can really be proud and
lucky that we are participants in it.
So, Mr. Ackerman, thank you so much, and all of you, for
your patience. We will start with your testimony as the Members
come in. Thank you, I knew you would be here.
STATEMENT OF FRANK ACKERMAN, PH.D., GLOBAL DEVELOPMENT AND
ENVIRONMENTAL INSTITUTE AND STOCKHOLM ENVIRONMENT INSTITUTE--
U.S. CENTER, TUFTS UNIVERSITY, MEDFORD, MASSACHUSETTS
Mr. ACKERMAN. Thank you, Mr. Chairman, and Members of the
Committee, for inviting me here to testify on this important
topic.
The issue of climate change is particularly timely now,
because there has been a shift away from a debate about the
science. The world has, essentially, decided about the science
at this point. As the science debate is reaching closure, the
economics debate is still wide open.
Climate change is happening. It is threatening our future
well-being. But how much can we afford to do about it? The most
powerful argument for inaction today is that the cost of
reducing emissions would somehow be intolerable. The damage to
the economy, it is alleged, would be worse than the problem we
are trying to solve.
This argument, I believe, is wrong on two counts. It
exaggerates the cost of reducing emissions, and it understates
the harm that will occur if we continue to do little or nothing
about the problem. That second point is what I'm mainly going
to talk about.
But briefly, on the first point, on the cost of reducing
emissions, the two best studies I have seen, Nicholas Stern's
very detailed study for the British government, and the recent
studies by McKinsey and Company, the international consulting
firm that has been studying it, both estimate that what we need
to spend, total package worldwide, is about 1 percent of world
output for quite a few years, for some decades to come, in
order to reduce emissions to a safe level.
Without having researched it myself, I take that as a good
estimate. My research says that the cost of inaction for the
United States, where we have just a partial estimate, are going
to be much greater than that.
We estimated just four categories of the cost of inaction,
the cost of increased hurricane damages as hurricanes become
more intense as water and air get warmer, the cost of sea level
rise, as the seas rise and threaten more coastal properties,
the increased energy system costs, as increased air
conditioning costs rise rapidly throughout the country, only
partially offset by reduced heating costs in the northern
States. Finally, the huge costs of water supply, as hotter and
dryer conditions in the already dry States of the south and
southwest cause huge new costs to maintain water supply, likely
losses to irrigated agriculture, and so forth.
These four categories, this partial estimate of the cost of
inaction, is already above 1 percent of GDP at the beginning of
the century, rises to 1.5 percent of GDP by the end of the
century, and will keep on rising beyond that.
I would emphasize that it's a very partial account. There
are many other categories: health costs, agriculture costs,
losses of tourism and so forth, which are not included in that,
which would make the true numbers even larger.
I will briefly mention two other studies of the cost of
inaction we did. We did one looking at Florida, in specific,
one of the States that is most vulnerable, where all of these
costs loom much larger, the expected losses of tourism revenue
as the conditions that draw people to Florida now are
undermined really cuts a hole in the economy that the losses to
Florida could exceed 5 percent of that State's income by the
end of the century--again, for a very partial accounting of the
costs--and continue rising.
The data allowed us to map what would be the effects of 27
inches of sea level rise in Florida. The written testimony
describes that, shows a map, 9 percent of the State, 1.5
million people's homes under water at high tide by about 2060,
huge number of facilities and property lost.
Finally, we did a study of some of the Caribbean islands,
some of the parts of the world that are much more sensitive
even than the most sensitive States, like Florida. Huge losses,
some economies likely to be wiped out by hurricane damages,
losses of tourism, and so forth.
This is not only a humanitarian issue for us, this is a
likely source of a huge increased flood of refugees. If you are
driven out of your home in the Caribbean by increasingly stormy
and difficult conditions that have destroyed your local
economy, where are you going to move to that's a little colder
and a little richer? My guess is they are coming here.
So, the climate change, for all of those reasons, for the
flood of refugees it could create, for the costs, the ones I
have been able to enumerate, which are large enough, as well as
the many others that I have not enumerated, the costs of
inaction, even a partial accounting of the cost of inaction, is
much greater than the cost of action, and will continue to rise
into the future.
These costs are detailed in the testimony which contains
links to the original studies. We are not just talking about
numbers getting larger as the economy grows. These are
expressed as percentages of the economy. So, it is that the
economy will be growing throughout the century, the damages
from climate change will be growing even faster, they will be
growing to be a larger and larger percentage. If we do nothing
about it, they will continue to get worse, as time goes on.
As other witnesses have said, doing something about climate
change is expensive. Doing nothing about it is much more
expensive. It's not too hard to pick which one to choose.
[The prepared statement of Mr. Ackerman follows:]
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Chairman RANGEL. Thank you, Mr. Ackerman. We are pleased to
have Daniel Abbasi, who is the Senior Director with
MissionPoint Capital Partners, and also is--runs one of the
first and largest private equity funds exclusively focused on
financing the transition to a low-carbon economy.
We thank you, that you have taken time to share your views
with us today.
STATEMENT OF DANIEL R. ABBASI, DIRECTOR, MISSIONPOINT CAPITAL
PARTNERS, NORWALK, CONNECTICUT
Mr. ABBASI. Thank you, Chairman Rangel and Members of the
Committee. My name is Dan Abbasi, and I am a Senior Director
with MissionPoint Capital Partners. As the Chairman just said,
we are exclusively focused on financing the transition to a
low-carbon economy.
I appreciate the invitation to testify to the Committee
today, and would ask that my written testimony be submitted
into the record.
Chairman RANGEL. Without objection.
Mr. ABBASI. MissionPoint's portfolio includes solar, wind,
smart metering, geothermal, carbon finance, and other low-
carbon companies, as well as companies that cut emissions and
optimize traditional power plants.
Our main message to the Committee today is this. Our
country now has a profound opportunity before it: To lead the
most strategic economic transformation of the 21st century, a
massive retooling of the global system of energy production,
distribution, and use, one that will cut our exposure to fossil
fuel price volatility, and achieve long-term energy security,
one that will create a more efficient and globally competitive
industrial base, one that will generate hundreds of thousands
of jobs, just when we need them the most, and finally, and not
least, tackle the fundamental economic threat of unabated
climate change.
But we are truly at risk of squandering this opportunity.
We have the capital and the talent, but it's mobile. There is a
fierce global competition underway to attract them. Here, in
the U.S., we are still missing that one critical ingredient,
and that is a long-term, stable, comprehensive policy
framework.
So, we respectfully offer three recommendations to the
Committee, and related recommendations.
First, it is time for Congress to remedy a glaring market
failure, an externality, and put a price on carbon.
Second, a well designed cap and trade policy is our
preferred mechanism, not a carbon tax.
Third, 75 percent or more of the allowances in the cap and
trade policy ought to be auctioned, and a quarter or more of
the proceeds used to fund a supplementary package of policies
that will stimulate faster adoption of low-carbon solutions
than a carbon price alone would.
As we have heard today, some contend that a carbon price
will harm our economy. We have heard a lot of discussions of
the cost of inaction. Mr. Ackerman mentioned the Stern report,
but didn't--I didn't hear the number 5 to 20 times, which is
the multiple by which Nicholas Stern, in his authoritative
study, estimated the cost of inaction would exceed the cost of
action. As Mr. Ackerman and others have pointed out, these are
real economic costs to real industries.
So, you know, I just ask, are we really going to risk our
future and miss this profound opportunity, based on fictitious
accounting?
We have also discussed the risk to international
competitiveness. From our vantage point in the market, the real
competitiveness threat is that if we don't price carbon we will
lose the opportunity to develop this sector here, in the United
States, and be an export leader. Instead, we will end up buying
these solutions abroad.
Take Germany. Not a real sunny place. To Mayor Bloomberg's
point, not known for its low-cost labor. Their stable feed-in
tariff policy has produced the largest installed base of solar
power generation in the world, five times more than we have in
the United States. They are manufacturing much of their solar
cells at home. They have 20 percent market share, and 42,000
jobs to show for it, and are now even enticing away the next
generation producers, U.S. companies, thin film solar power
companies, to set up their facilities there, in Germany.
We have a meager 7 percent share today, and we should
incentivize those companies to stay here, at home, and keep
those high-tech jobs here, at home.
But I want to underscore that the new clean energy jobs
won't only be for the cutting-edge companies and the genius
innovators. With the right policy spurring adoption, each clean
energy innovation creates a ripple effect, creates--job-
intensive supply chains sprout up, new installations companies,
parts companies, service companies.
We love--MissionPoint loves--our own tech innovators in our
portfolio, companies like Aminex. But some of our fastest-
growing companies, like SunEdison, Hannon Armstrong, UpWind,
are service innovators. They figure out ways and new business
models to make it easier for customers to finance and adopt
these low-carbon solutions, and to get the most energy
productivity out of them.
So, why do we favor a cap and trade over carbon tax? Three
basic reasons: it's the only way to predictably hit our
emissions target; it lets us trade around the emission
reduction burden to the least cost source; and third, it will
do the most, we are convinced, to unleash American
entrepreneurship and inventiveness.
Some object that the administrative costs of the cap and
trade will be too high. We simply don't agree. The private
sector does know how to do this, we can do this. Many
companies, including our own APX, are already competing to
provide the tools, the registry infrastructure, the offset
protocols, and others to support a cap and trade and keep costs
low.
As with the carbon tax, if you auction most of the
allowances, you will have a lot of revenue available for other
purposes, to reduce distortionary taxes, consumer impacts, and
fund other supportive policies.
In the written testimony we lay out over a dozen of these,
each intended to supplement the carbon price by reinforcing
carbon weighting in our national policy framework. I will
quickly mention just a couple.
We would encourage you to extend the R&D tax credit, but
some of the carbon auction revenue should be used to provide a
higher rate for low carbon, or R&D.
Second, create a new tax credit to accelerate smart meter
roll-out that will motivate and empower consumers to do
efficiency upgrades. One of our companies, Trillian Networks,
makes and deploys these meters, and aims to unlock our
country's vast reserve of untapped efficiency.
Finally, create new tax credits for rail and intermobile
infrastructure, so that we can move freight from highways to
rail, where they emit, literally, one-seventh per ton mile of
the emissions.
So, Congress does need to act to supply this framework now.
We can get it done together with you. Otherwise, we are going
to lose the momentum that we have built in the market.
Thank you very much.
[The prepared statement of Mr. Abbasi follows:]
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Chairman RANGEL. Thank you for your contribution. Now we
will hear from Jerome Ringo, who is a clean air and clean
energy advocate, and environmentalist for many years, and has
contributed to the United Nations.
You came all the way from California to be with us, didn't
you?
Mr. RINGO. Actually, Louisiana.
Chairman RANGEL. Louisiana?
Mr. RINGO. My office is in San Francisco, but I live in
Louisiana.
Chairman RANGEL. Well, thank you so much for sharing your
views with us, Mr. Ringo.
STATEMENT OF JEROME RINGO, PRESIDENT, APOLLO ALLIANCE, SAN
FRANCISCO, CALIFORNIA
Mr. RINGO. Thank you very much, Mr. Chairman and Members of
the Committee, for the invitation.
This is a time of daunting challenges and yet boundless
opportunity. We, at the Apollo Alliance, recognize the
challenges, challenges like foreign oil dependency. It puts our
national security and economic future at risk.
We recognize the price of energy, as it skyrockets, as
American families struggle, poor people in particular, who have
to make a decision between a gallon of gas or a gallon of milk.
We recognize the growing threats of global warming in this
economy, and the environmental and human costs, in particular
the hurricanes of the Gulf region. As I mentioned, I'm from
Louisiana. I just returned back from evacuating from Hurricane
Ike, 2 weeks ago evacuating from Hurricane Gustav, evacuating
from Hurricane Katrina, evacuating from Hurricane Rita, all the
result of intensive storms because of the warm waters of the
Gulf of Mexico, which is like adding steroids to those storms:
a result of global warming.
If we don't do anything, we don't create any opportunities
just as described, and we remain stuck in the status quo.
The opportunities that are recognized by the Apollo
Alliance is that we have developed a new Apollo program, and
it's a comprehensive, 10-year, $500 billion investment strategy
to move America to climate stability, energy security, and
economic prosperity.
The new Apollo program invests in energy efficiency,
conservation, clean fuels, rapid transit, next generation
vehicles, and advance manufacturing, smart growth, and millions
of made-in-America jobs, 5 million jobs, to be exact.
We believe that Congress should support a major public
investment in clean energy economy. One way to do that is a cap
and invest, a policy that auctions off permits like legislation
sponsored by Representative Markey and Representative Doggett.
An emissions permit auction is estimated to raise between
$50 billion and $300 billion per year to invest in a new clean
energy economy. This money should be used to aid new
technologies and enter the mass market and develop green-collar
jobs, a strong demand. It should be used to insure that these
technologies are manufactured domestically. This money should
be invested in the domestic workforce, so that we have the
skills needed in manufacturing, design, installation,
maintenance, and science.
It should be invested in such projects such as a 21st
century power grid, a world class transit system, fixing
America's transportation infrastructure, rebuilding and
retooling America's manufacturers in research and development,
all of which will create jobs.
The investment should be made with an eye toward aiding
workers and industry in a transition, and helping communities
that have been disproportionately affected by the old energy
economy, to lift them out of poverty. For example, the
provisions of the workforce assistance at 4 percent in
Congressman Doggett's Climate Matters Act is a good start.
A cap and trade investment with an auction of permits can
be a win-win-win, and it can help curb global warming. It can
provide energy security, and stimulate the economy while
leveling the playing field for those that have been victims of
that disproportionate impact.
As cap and invest policy is sweet, it can be bitter, too.
If emission trading permits are given to companies instead of
auctioning them off, then we make rich companies richer. Exxon
Mobile made $40.6 billion in 2007, which is three times the
profit of Microsoft, four times the profit of Wal-Mart, while
people in America still lost their jobs.
We are more likely to build a new energy future with good
jobs for working Americans if we ensure any new energy policy
is an investment strategy, as well as a regulatory strategy.
Thank you very much.
[The prepared statement of Mr. Ringo follows:]
Prepared Statement of Jerome Ringo, President,
Apollo Alliance, San Francisco, California
Chairman Rangel and Members of the Committee, thank you for
inviting me here today to talk about an issue of crucial importance to
our Nation's future.
For Americans this is a time of daunting challenges and boundless
opportunities. We have become more and more dependent on foreign oil,
putting our national security and economic future at risk. We have seen
the price of energy skyrocket as American families struggle to make
ends meet--choosing between a gallon of gas and a gallon of milk. And
we have seen the growing threat of climate instability and all its
economic, environmental and human costs.
The food lines and emerging FEMA failures of Hurricane Ike remind
us of the threat that became a reality as Hurricane Katrina pounded our
shores. She provided a stark reminder that America faces not only a
climate crisis, but a crisis of economic inequality as well.
But fortunately our energy, climate and economic crises also
present tremendous opportunity. The Apollo Alliance offers a unique
perspective on the issue before this Committee, ``cap and trade,'' or
as we like to call it ``cap and invest.'' As a coalition of labor
unions, businesses, environmentalists, and community advocates, we
believe our Nation can and must achieve a triple bottom line: Energy
security, climate stability and broadly shared economic prosperity. My
goal today is to illustrate how a strong ``cap and invest'' program can
help us achieve these goals.
The Apollo Alliance's new policy agenda, The New Apollo Program,
recognizes that great challenges bring with them great opportunity. We
say no to business as usual and yes to a new path that will build a
clean energy economy that creates millions of jobs--high-quality jobs
that actually pay decent wages and support families. We say yes to a
climate stability agenda that also strengthens national security. The
economic potential, we believe, will be directly proportionate at a
factor of almost 5 to the level of public investment. The Apollo
Alliance estimates that an ambitious $500 billion in Federal spending
over 10 years would create over 5 million jobs. This includes a broad
range of activities such as building efficiency, renewable energy
investments, smart growth, advanced grid technology, research and
development initiatives and a ``cap and invest'' program.
Before I illustrate how a ``cap and invest'' program can be a
stimulus toward a new clean energy economy, I'd like to first explain
what we mean by the green-collar economy, how we got here and where we
go from here.
What are green-collar jobs? Green-collar jobs are well-paid, career
track jobs that contribute directly to preserving or enhancing
environmental quality. They run the gamut from low-skill, entry-level
positions to high-skill, higher-paid jobs, and include opportunities
for advancement in both skills and wages.
Green-collar jobs tend to be local. Building retrofits, solar panel
repairs, transit line construction--these jobs can't be outsourced.
Most of these jobs are in industries that already exist, but that are
just now getting involved in the green economy because of policy
changes and public commitments to energy efficiency, renewable energy,
and transportation.
Green-collar jobs are here and growing and exist in many of the
States of this Committee's Members.
The Renewable Energy Trust reports that the clean energy sector in
Congressman Neal's State of Massachusetts provides over 14,000 jobs and
will soon be the 10th largest sector in the State. And a new report by
the Political Economy Research Institute at the University of
Massachusetts, Amherst says that investment in energy efficiency
retrofits, a smart electrical transmission grid, rapid transit and
renewable energy will yield 42,530 jobs.
Most of us know, as do the Congressmen Doggett, Johnson and Brady,
that wind energy is going to be bigger in Texas than anywhere else, but
did you also know that the University of Texas predicts an additional
123,000 new high-wage jobs by 2020 if Texas moves aggressively toward
solar power?
Environment California predicts that by meeting California's
Renewable Portfolio Standard goal of 20% by 2010--119,000 person-years
of employment will be created at an average salary of $40,000. And
there are two measures on November's ballot that would raise the
Portfolio Standard.
The clean energy economy is present in Pennsylvania, Michigan,
Tennessee, Oregon, Florida and nearly every State in the union. As
mentioned above, a $50 billion a year investment over 10 years will
lead to the creation of 5 million jobs--jobs like the one held by Eric
Chamberlain, a fifth generation native of Rock Port, Missouri. Rock
Port was the first town in the Nation to meet all of its energy needs
from wind. Chamberlain manages the wind farm operations for the town-
owned utility. When he started working part-time at Loess Hills Wind
Farm in 2006, he was one of four employees, now there are 30. That
might not seem like a big number, but in Rock Port--a town of 1,300,
it's significant.
The potential of the clean energy economy is evident. What's not
evident is whether we have the human capital or the political will to
make it happen. In 2005, a National Association of Manufacturers study
found that 90 percent of survey respondents expect a moderate to severe
shortage of qualified, skilled employees like machinists and
technicians. And the National Renewable Energy Lab concurs that a
shortage of skilled labor is a large obstacle to an economy with strong
renewable energy and energy efficiency industries. Even more important
are the policies that create the demand for these products that in turn
create the demand for workers. If we don't pass the Production Tax
Credit and Investment Tax Credit, over 116,000 U.S. workers will lose
their jobs within a year, and we'll lose nearly $19 billion in
investment, according to a February 2008 study by Navigant Consulting
for the American Wind Energy Association and the Solar Energy
Industries Association.
Congress can foster the growth of the clean energy sector by
focusing on specific measures needed to create green-collar jobs. Only
by ensuring that all Americans come out winners will we build enough
public support to do what must be done on the scale necessary to boost
the economy, stabilize the climate and achieve energy independence.
We need a major public investment in the clean energy economy. One
way to gather the funds we need for that investment is for the U.S. to
enact a ``cap and invest'' policy that auctions off permits, in the
same way they are auctioned in legislation sponsored by Representatives
Markey (D-MA) and Doggett (D-TX). At Apollo, we think a ``cap and
invest'' policy should accomplish two major goals.
First, it has to set clear limits on carbon emissions, so that we
can dramatically lower our national carbon footprint. This will send a
powerful market stimulus and begin to shift our entire energy economy
toward low-carbon technologies. Second, it needs to raise significant
levels of public funding to reinvest in the new energy future, while
ensuring these funds are not siphoned off for wasteful pork barrel
projects.
A cap on carbon emissions would establish certainty in the rate of
emission reductions necessary for climate stabilization. Emissions
reductions would be achieved by reducing the number of carbon permits
sold or allocated to the market each year. Trading these permits would
allow the market to achieve carbon reductions at the lowest cost.
Emissions permits should be auctioned off to energy-intensive
industries and power producers to generate substantial public funding--
estimated by the Congressional Budget Office to be between $50 billion
to $300 billion per year--to invest in the new clean energy economy.
The money would be managed by a new Clean Energy Investment
Corporation.
Administering such a fund should achieve three objectives. First,
it should continuously bring new technologies to the mass market.
Green-collar jobs will develop amidst strong demand. Second, it should
ensure that these technologies are manufactured domestically. Third, it
should invest in the domestic workforce so
that we have the skills needed in manufacturing, design, installation,
maintenance and science. The money should be invested in such projects
such as a 21st century power grid, a world-class transit system, fixing
America's transportation infrastructure, rebuilding and re-tooling
American manufacturers and research and development. The investments
should be made with an eye towards aiding workers and industries in
transition and helping communities that have been disproportionately
affected by the old energy economy to lift them out of poverty.
Congressman Doggett's Climate MATTERS Act includes such provisions and
I support its goals. For example, I support the provision for workers
assistance at 4%. I think that is a good start, but I would like to see
more money allocated to workers and low-income communities.
If done as just described, a ``cap and invest'' with an auction of
permits can be a win, win, win--it can help stabilize the climate,
provide energy security and stimulate the economy while leveling the
playing field for those that have been disproportionately left out of
the process.
As a ``cap and invest'' policy is sweet, it can be bitter, too. If
emissions trading permits are given to companies instead of auctioning
them off, then we make rich companies richer. Exxon Mobil made $40.6
billion in 2007, which was three times the profit of Microsoft and four
times the profit of Wal-Mart. In the meantime people lost jobs. This is
the wrong way and a lost opportunity, not only to foster the market for
clean energy and revolutionize our economy (and lose the potential
described above,) but also to assist workers and families caught in the
transition and to lift those that have been disproportionately affected
by a petroleum-based energy economy.
Also, the European Union implemented a ``cap and trade'' program
that gave away permits. Not only have emissions not been reduced, but
the E.U. didn't raise funds to reinvest in R&D, infrastructure or its
people.
Other solutions that have been proposed are based upon a carbon
tax. While we applaud the efforts of Representative Stark (D-CA) and
Larson (D-CT) for taking action, we prefer a cap on emissions. A cap
sends a strong signal to the market that there is a limit on emissions
that will stay the same even as demand grows. The limit on emissions
will be a factor in the business decisions of those deciding whether to
invest in a new power plant or a new wind farm. It might make them
think twice if they have to pay more and more for carbon each year that
goes by. Taxes don't do that and they can be passed on to consumers.
If I leave you with one message today, it is this: We're more
likely to build a new energy future with good, green-collar jobs for
working Americans if we ensure any new energy policy is an investment
strategy as well as a regulatory strategy.
We have called on the ``can do'' spirit of the original Apollo
program in our Alliance's name because we believe the American people
are once again ready for a great challenge. Energy will be the
transformative issue of our generation.
The challenge for congressional leaders today will be to ensure
that we all get there together: working men and women alongside
industry, environmentalists, and our national security community.
We're confident this great Nation can get the job done; we're
confident we can get there with your leadership.
Thank you.
Chairman RANGEL. Thank you. Peter Barnes, author, a former
journalist, and a former expert in this area, we welcome your
presence.
STATEMENT OF PETER BARNES, SENIOR FELLOW, TOMALES BAY
INSTITUTE, POINT REYES STATION, CALIFORNIA
Mr. BARNES. Thank you very much, Mr. Chairman, Members of
the Committee.
I want to recommend to you today a form of carbon capping
called cap and dividend. It was briefly mentioned this morning,
and I want to speak a little bit more about it now.
If you're going to do a carbon cap, as opposed to a tax, I
think cap and dividend is the simplest, fairest, and most
effective way to design that cap and trade system. It lets us
reduce carbon emissions to the levels that scientists are
calling for, without reducing the purchasing power of American
families or expanding the size of government.
Cap and dividend has three steps: First, cap the carbon
supply, economy-wide; second, auction 100 percent of the
permits; and third, return 100 percent of the auction proceeds
to the American people in the form of taxable monthly
dividends. Let me briefly explain a bit more about these steps.
The cap, ideally, is an upstream cap, that is, a cap on
carbon suppliers, rather than carbon emitters. The reason for
that is that it's much simpler to administer, and you catch all
the carbon in the economy. You can administer the cap by
requiring the first sellers of oil, coal, and natural gas--
which are the same companies that you would apply a carbon tax
to, if you were doing a carbon tax--to buy permits equal to the
carbon content of your fuels.
Once a year, these companies would true up and pay a
penalty if they don't own enough permits, and that's it. No
other businesses would need permits, no smoke stacks would need
to be monitored, no bureaucracy would be needed to check up on
everybody. So, that's the cap.
Second, of course, as everybody, I think, has said here,
you would auction the permits, not give them away.
Third, the bigger question here is what to do with the
auction revenue. This proposal says wire that money directly
into people's bank accounts--or debit card accounts, if they
don't have bank accounts--every month, just like Social
Security. A precedent for this is the Alaska Permanent Fund,
which takes the revenue from State oil leases in Alaska and
pays equal dividends to every resident up there. So, this is
kind of like a revenue neutral carbon tax. It's just structured
a little differently.
Now, I know there are Members of this Committee who would
like to spend the auction revenue on a variety of good things.
So, let me say why I think it's better to give the money back
to the people.
The number one reason for giving the money back is that the
money actually comes from people's pockets in a regressive way.
Even though it's the fossil fuel companies that are buying
these permits, they pass the costs on to consumers. As the CBO
has shown, these higher costs will hit low-income and middle-
class families quite hard. So, giving the money back protects
these families, and protects consumer buying power, which is 70
percent of our economy. As we're in a recession, it's pretty
important to protect that.
The number two reason for giving the money back, I would
say, is political. As I don't need to remind you, rising energy
prices are an explosive political issue. A carbon cap will
raise energy prices further, not just once, but for decades.
So, the potential for political backlash is enormous.
Unless you build pocketbook protection into the design of a
carbon cap from the get-go, A, it probably won't pass Congress
in the first place, but more importantly, it certainly won't
survive long enough to do the job that we need it to do.
There are a few other advantages that I would mention. One
is that cap and dividend is simple enough that you can explain
it to your constituents.
The last point I would make is that--which was mentioned
earlier today--is the virtue of simplicity. The Lieberman-
Warner bill, which recently died in the Senate, tried to do too
many things in one package. It was both a carbon cap and a
massive spending bill, as you know, that allocated trillions of
dollars over 40 years.
A better approach, I think, is to focus on getting a good
carbon cap, a cap that is simple, effective, and popular,
something that could get bipartisan support, and conceivably
even pass next year, with a new President.
Once you have a cap like that, I think lots of other things
will follow. More things do need to be done. But the point I am
making is separate the cap from a lot of the other things that
need to be done, and make the cap politically appealing and
durable. Thank you.
[The prepared statement of Mr. Barnes follows:]
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Chairman RANGEL. Very interesting view. Now, the President
of the American Public Transportation Association, Bill Millar,
will express his views on transportation being such a large
part of the problem. Share with us your suggestions toward a
solution.
STATEMENT OF WILLIAM W. MILLAR, PRESIDENT, AMERICAN PUBLIC
TRANSPORTATION ASSOCIATION
Mr. MILLAR. Thank you, Mr. Chairman, Mr. McCrery, Members
of the Committee. I do appreciate the opportunity to appear
before you on behalf of the 1,500 members of the American
Public Transportation Association.
As Congress considers legislation to reduce greenhouse gas
emissions, a climate bill must work to reduce transportation-
related emissions. The transportation sector produces
approximately one-third of all the CO2 emissions in
the U.S., and the transportation sector is the fastest-growing
source of greenhouse gas emissions.
Now, there is three widely held options for how to do this.
The first is to make our cars and trucks more fuel efficient.
The second is to use alternative energy sources that release
less CO2. The third is to provide more travel
options that allow Americans to leave their cars behind. All
three are important, but I will focus on the third one,
providing Americans travel options and, more specifically, the
importance of public transportation in reducing greenhouse gas
emissions.
Now, you may have seen the figures recently from the
Federal Highway Administration, that highway travel has
declined in recent months. But with 100 million more Americans
expected over the next 40 years, it's believed that the future
growth in vehicle miles of travel will erase the emissions
savings that the recent increase in cafe standards and new low-
carbon fuels will provide.
We cannot wait on future vehicle improvements and unproven
clean fuel sources alone to address transportation emissions.
The sooner we address the problem of climate change, our
chances for success are so much better.
Now, public transportation investment, land use policies,
and tax incentives that promote energy efficient compact
development and better transportation choices such as public
transportation, encouragement of walking and bicycling, are
proven ways to reduce emissions.
For example, the more than 10 billion trips that Americans
took on public transportation last year already reduced
CO2 emissions by more than 37 million metric tons in
the United States. They did this directly, and through reducing
highway congestion and supporting more energy efficient land
use.
I want to compliment several Members of this Committee for
their early efforts to promote these kinds of solutions,
particularly Representative Doggett and Representative
Blumenauer, and other cosponsors of the Climate Matters Act are
to be commended for their proposal, which would use auction
revenue from a cap and trade system to increase public
transportation investment, so that we could reduce
transportation-related emissions.
Now, let me put the emissions savings from public transit
into some perspective. Consider a typical household, two adults
work outside the home. In America, it's more likely that each
of them will drive their own car their own way. Commuting each
day, let's say a total round trip of about 20 miles a day. If
just one of those two people changes his or her habit to using
public transportation, the annual CO2 emissions from
that household will fall by about 2 metric tons, equal to about
10 percent.
So, the simple act of one of them starting to commute by
transit--take the bus, take the train--will reduce it by about
10 percent. Now, this is greater savings than if that same
household were to: install compact fluorescent lights,
certainly a good thing to do; weatherize their home, another
good thing to do; replace that old refrigerator with an Energy
Star appliance. If they do all three of those things, they
haven't yet equaled the energy savings from simply one person
commuting by public transit.
Now, let's suppose that person finds out public transit
works pretty good for them, and they decide maybe they can sell
that second car and don't need that so much, take public
transit, walk more, ride a bike when they can. At this point,
the household saves 30 percent of their household carbon
footprint.
Thirty percent of their household carbon footprint is more
than if the house could do without electricity--and I don't
know very many Americans that would be willing to do without
electricity. My point is, public transportation can make a big,
big difference in this effort.
Now, besides the greenhouse savings, you get enormous fuel
savings from these same actions. Transit riders are already
saving over 4.2 billion gallons of gasoline each year. This is
three times the amount of petroleum we import from a country
like Kuwait, for example.
Investing in public transportation strengthens our economy.
The Federal Government tells us for every billion dollars
invested in transportation infrastructure, about 35,000 jobs
are created. Since the Congress has long ago established the
policy of ``Buy America,'' when we purchase buses or rail cars
with Federal aid, this is investment that goes in American
jobs. The assemblies are done in America with components
produced largely in America.
In recent years, transit systems have begun buying large
numbers of hybrid-powered buses, natural gas-powered buses. The
sales from these buses have put thousands of American workers
into new green-collar jobs, jobs that cannot be sent overseas.
Better public transit service is one of the quickest ways
that Americans can avoid that high cost of fuel. So, I would
encourage more investment in this area.
I thank the Committee for the work you did to save the
high-
way trust fund recently. Chairman Rangel sponsored that bill,
and we thank you, sir. That bought us a little bit of time to
consider the bigger issues of how we finance transportation
beyond the usual sources. We are certainly going to need to
look to cap and trade.
I know my time has expired, there is much more I could say,
and I will look forward to answering your questions. Thank you
very much, Mr. Chairman.
[The prepared statement of Mr. Millar follows:]
Prepared Statement of William W. Millar,
President, American Public Transportation Association
Chairman Rangel, Ranking Member McCrery and distinguished Members
of the Committee, on behalf of the American Public Transportation
Association (APTA) I thank you for the opportunity to testify today. As
the Congress considers strategies to reduce the emission of greenhouse
gases, it must address the challenge of reducing transportation-related
emissions.
Our Nation's transportation sector produces one-third of all carbon
dioxide (CO2) emissions in the U.S., and unfortunately
transportation is the fastest-growing source of domestic greenhouse gas
emissions.
[GRAPHIC] [TIFF OMITTED] T2201A.109
Source: Energy Information Administration (EIA), Emissions of
Greenhouse Gases in the United States, http://www.eia.doe.gov/oiaf/
1605/ggrpt/flowchart.html.
Approximately 85 percent of transportation sector emissions are
related to the surface transportation system. To reduce these emissions
there are three widely accepted options: First, we can make our cars
and trucks more fuel efficient; second, we can use alternative sources
of energy that release fewer greenhouse gases when consumed or
produced; and third, we can provide more travel options that allow
Americans to leave their cars behind. While we need to undertake all of
these options, for the purpose of this hearing I will focus principally
on the importance of the last option.
To prevent potentially catastrophic increases in average global
temperatures, the scientific community has determined that the
emissions of all greenhouse gases must be reduced by as much as 85
percent below 2000 levels by 2050.\1\ Achieving emissions reductions on
this scale in the transportation sector will not be easy. Current
research indicates that future growth in private motorized vehicle
travel in the next 30 years could negate the emission savings from the
recent changes in Corporate Average Fuel Economy (CAFE) standards and
the low-carbon fuel requirements contained in the Energy Independence
and Security Act of 2007 (P.L. 110-140).\2\ Stated simply, this means
that for the United States to achieve reductions in transportation
emissions on the scale required to limit the potentially disastrous
effects of global warming, we must offer Americans more travel choices.
We cannot rely alone on future vehicle improvements and unproven clean
fuel sources to address transportation emissions. The sooner we begin
to address the problem of climate change, our chances for success are
better. Americans need more travel choices that allow them to preserve
the mobility they have come to expect and reduce their individual
carbon footprint. Public transportation can help reduce greenhouse gas
emissions. It can do it now, and it can do it by expanding mobility
choices.
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\1\ Intergovernmental Panel on Climate Change (United Nations and
World Meteorological Organization), ``Summary for Policymakers, Climate
Change 2007: The Physical Science Basis. Contribution of Working Group
I to the Fourth Assessment Report of the IPCC,'' February 2007.
\2\ Urban Land Institute, ``Growing Cooler: The Evidence on Urban
Development and Climate Change,'' Don Chen, Reid Ewing and Steve
Winkelman, January 2008.
[GRAPHIC] [TIFF OMITTED] T2201A.110
VMT = Vehicle Miles Traveled;
Source: Urban Land Institute, ``Growing Cooler: The Evidence on
Urban Development and Climate Change.''
The Role of Public Transportation, Energy Efficient Land Use, and
Improved Transportation Choices in Reducing Emissions
Public transportation investment, energy efficient land-use
policies and other strategies that promote transportation choices are
proven ways to reduce emissions from the transportation sector. Public
transportation use currently reduces CO2 emission by more
than 37 million metric tonnes every year in the United States by
reducing travel and congestion on roadways and supporting more
efficient land use patterns.\3\ Those who choose to ride public
transportation reduce their carbon footprint and conserve energy by
eliminating travel that would have otherwise been made in a private
vehicle, and even the length of vehicle trips is considerably shorter
for households that live near transit. In fact, households within close
proximity of public transportation drive an average of 4,400 fewer
miles annually than those with no access to public transportation.
Unfortunately, only 54 percent of American households have access to
any public transportation services according to U.S. Census data, and
Americans can't use what they don't have.
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\3\ ICF International, ``The Broader Connection between Public
Transportation, Energy Conservation and Greenhouse Gas Reductions,''
February 2008.
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How do we unleash the power of public transportation to reduce
greenhouse gas emissions? To begin, the Federal Government must do its
part to expand transit availability and promote energy efficient land-
use patterns and transit-oriented development. Efficient land use,
combined with good transit service, particularly fixed guideway
service--subway, light rail, commuter rail, streetcar and bus rapid
transit--produces results far beyond the immediate benefit of increased
use of public transportation. Efficient land use has the potential to
significantly change the way we live and travel, reducing our
individual carbon footprints while preserving and enhancing our
mobility. Higher densities allow for closer proximity of housing,
employment and retail, reducing driving distances and enabling
communities to plan for and support alternative travel options. In many
central business districts, trips taken for shopping, dining or other
noncommuting purposes are often made on foot--even by those who drive
to work.
Allow me to put the emissions savings from transit into
perspective. Consider a typical two-adult, two-car household where both
adults commute separately by car. If just one person in the household
switches a 20-mile total round trip commute to existing public
transportation, his or her annual CO2 emissions will fall by
4,800 pounds per year, equal to a 10 percent reduction in all
greenhouse gases produced by members of the household. If the entire
household chooses to eliminate one of its cars and take public
transportation, walk or ride a bicycle instead of driving for most of
its trips, a savings of up to 30 percent of carbon dioxide emissions
can be realized. This is more CO2 savings than if that
household went without electricity.
[GRAPHIC] [TIFF OMITTED] T2201A.111
Source: Science Applications International Corporation (SAIC),
``Public Transportation's Contribution to U.S. Greenhouse Gas
Reduction,'' September 2007.
The Many Benefits of Public Transportation Investment
While my testimony today has focused on the emissions reductions
benefits associated with public transportation use, it is important to
point out that public transportation provides enormous benefits beyond
it contribution to improving the environment. In particular, public
transportation investment by the Federal Government offers unique
benefits that cannot be measured solely in terms of emissions
reductions. Among its many benefits:
Public transportation helps Americans escape the high cost of
gasoline, and it promotes energy independence.
Providing Americans more access to public transportation not only
reduces greenhouse gas emissions, it also frees individuals and
families from the heavy burden of high gasoline prices. On average, a
transit user saves more than $9,500 per year by taking public
transportation instead of driving based on today's gas prices. These
savings are important not only for individuals and families, they are
important when we consider the urgent need for the United States to
attain energy independence. Transit use already saves the U.S. 4.2
billion gallons of gasoline each year, the equivalent of more than 11
million gallons per day. That amount of savings is equivalent to oil
refined from 102 supertanker loads, or more than three times the amount
of oil we import from Kuwait each year.\4\
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\4\ ICF, 2008.
Public transportation contributes to the growth of a strong
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economy.
For every $1 billion in Federal investment in transportation
infrastructure, the U.S. Department of Transportation estimates that
approximately 35,000 jobs are created. Federal investment in public
transportation also greatly supports American manufacturing jobs. Every
transit bus or rail car that is purchased with Federal assistance is
assembled domestically and comprised of components that are produced
primarily in the United States, in accordance with ``Buy America''
policies established by Congress. In recent years, transit systems have
increased their procurement of clean and alternative fueled buses,
including diesel-electric hybrid buses and compressed and liquid
natural gas (CNG and LNG) buses. The rapid growth in sales of these
vehicles has put thousands of workers into new ``green-collar'' jobs
that cannot be sent overseas.
According to researchers at Cambridge Systematics, it is estimated
that every $10 million in capital investment in public transportation
yields $30 million in increased business sales, and that every $10
million in operating investment in public transportation yields $32
million in increased business sales. Further, every $1 taxpayers invest
in public transportation generates $6 in economic returns.\5\
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\5\ Cambridge Systematics, ``Public Transportation and the Nation's
Economy,'' October 1999.
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Public transportation reduces traffic congestion.
Traffic congestion results in lost time and wasted fuel. According
to the Texas Transportation Institute report, congestion cost America
$78 billion in lost time and productivity in 2005. Public
transportation saved 541 million hours in travel time and 340 million
gallons of fuel. Without public transportation, congestion costs faced
by American motorists that year would have been $10.2 billion
higher.\6\
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\6\ Texas Transportation Institute, 2007 Annual Urban Mobility
Report, September 2007.
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These are simply a few of the many benefits that public
transportation investment and use provide. Many more benefits could be
detailed: Transit also provides important public health benefits--its
service produces 95 percent less carbon monoxide and 90 percent less in
volatile organic compounds than private vehicles; transit improves
safety--fatality rates for travel on public transportation vehicles are
about 1/25th that of private passenger vehicles; and transit offers
vital mobility to older Americans and persons with disabilities. Each
of these benefits are important, and deserves attention, but possibly a
more pressing issue is that U.S. transit providers cannot meet the
current demand for their services.
Current Investment Fails to Meet Demand for Transit Services
The greatest challenge facing public transportation today is
meeting the record-breaking demand for transit services. We have
witnessed sweeping changes in American travel patterns in 2008 in
response to rising fuel prices, and public transportation is playing a
key role in helping individuals escape the heavy burden of $4 a gallon
gasoline while preserving the mobility we have all come to expect. In
the second quarter of 2008 as the price of gasoline rose steadily,
Americans took more than 2.8 billion trips on public transportation
vehicles. This is almost 140 million more trips than last year for the
same time period or 1.5 million more each day. As ridership has
increased, transit services across the country are operating at
capacity during peak travel times. Transit providers are struggling to
maintain the quality of their physical infrastructure and the
reliability of their service. Eighty-five percent of public transit
systems report capacity problems, and 39 percent report turning
passengers away because of capacity issues, according to a new
nationwide survey of 115 transit systems of all sizes across the Nation
recently conducted by APTA.\7\
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\7\ APTA, ``Rising Fuel Costs: Impacts on Transit Ridership and
Agency Operations--Survey Results,'' September 2008.
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It should be noted that transit ridership has been growing robustly
in recent years. Last year, 10.3 billion trips were taken on U.S.
public transportation--the highest number of trips taken in 50 years.
Public transportation use rose 32 percent between 1995 and 2007, a
figure that is more than double the growth rate of the population (13
percent) and up substantially over the growth rate for the vehicle
miles traveled (VMT) on our Nation's highways (24 percent) for that
same period. In fact, in recent months growth in transit ridership has
accelerated while use of our highways has fallen. Transit ridership
grew by more than 5.2 percent in the second quarter of 2008, while the
Federal Highway Administration (FHWA) has reported that the vehicle
miles traveled on our Nation's roads declined by 3.3 percent.
Despite the growth of the Federal transit program, Federal funding
has not kept up with the growing needs or inflation. U.S. transit
systems need nearly $60 billion a year in capital investment to improve
and maintain transit infrastructure at a rate that would allow
ridership to double in 20 years. The Federal Government traditionally
provided approximately 50 percent of the capital investment in transit,
but that share has shrunk. In 2006, the most recent year reported, the
Federal Government provided 43.6 percent. As we move ahead, the Federal
Government needs to invest upwards of $30 billion a year to support
vibrant transit service across the Nation, significantly more than the
$10 billion a year that it currently provides.
[GRAPHIC] [TIFF OMITTED] T2201A.112
Source: Cambridge Systematics, ``State and National Public
Transportation Needs Analysis,'' 2008.
As this Committee knows, the resources of the Federal Highway Trust
Fund are being exhausted rapidly. APTA strongly supported the trust
fund ``fix'' that Chairman Rangel sponsored and President Bush signed
into law this week. That legislation remedies the short-term crisis
facing the Federal Highway Trust Fund without damaging the Mass Transit
Account of the Trust Fund, but it does not address the larger issue of
underinvestment in our Nation's surface transportation system,
particularly underinvestment in public transportation. Congress now has
more time, but not much time, to address the long term funding need as
the current Federal-aid highway and public transportation programs
expire in 1 year on September 30, 2009.
When Congress develops a new surface transportation authorization
bill, we urge this Committee to finance an aggressive program that
provides no less than $123 billion in Federal public transportation
investment over 6 years and restores the purchasing power of the
Federal motor fuel tax. There has been no increase in the motor fuel
tax since 1993, and inflation has steadily eroded the purchasing power
of the revenues that go into the highway trust fund. The effects of
inflation have been compounded in recent years by steep increases in
the cost of construction materials. According to the Associated General
Contractors of America (AGC), the cost of supplies for transportation
infrastructure construction have increased 77 percent in the past 5
years, a much faster rate of growth than the consumer price index (CPI)
which increased 19 percent.
For the Federal Government to begin to invest upwards of $30
billion a year in public transportation, the Congress will need to look
to new sources of revenue, and given the contributions of public
transportation to reducing emissions, climate change legislation should
be one potential source.
APTA Recommendations for Federal Climate Change Legislation
Use revenues from Federal climate change legislation to
expand public transportation service across the Nation.
As Congress develops climate change legislation, it must move to
protect, preserve, and most importantly expand public transportation
service across the Nation. To achieve the increases in transit
ridership that will significantly reduce greenhouse gas emissions from
the transportation sector, climate change legislation must begin to
address the $45.9 billion annual capital funding shortfall for public
transportation. Revenues from the auction or sale of emissions
allowances under a ``cap and trade'' program or forms of revenue from
an emission reduction program should be used to supplement--not
substitute--funding provided through the Federal highway and public
transportation authorization legislation.
Increase the availability of fixed guideway transit--subway,
light rail, commuter rail, streetcar and bus rapid transit--which is
essential to creating energy efficient land-use patterns that reduce
greenhouse gas emissions.
Fixed guideway transit investments are essential to creating energy
efficient land use patterns which produce greenhouse gas emission
savings far beyond the immediate benefit of increased public
transportation use. These investments have the potential to
significantly improve the way we live and travel, reducing our
individual carbon footprints while preserving and enhancing our
mobility. Experience has shown that once fixed guideway transit
investments are committed and station locations set, the private sector
will build transit-oriented developments which produce dramatic
reductions in vehicle travel and transportation-related emissions.
Promote energy efficient technology in public transportation
systems to increase the already substantial CO2 savings from
transit.
Climate change legislation should encourage new investment in
energy efficient technology that can increase the annual CO2
savings from current public transportation services. Federal support
for such investment would speed the deployment of advanced
technologies, increasing CO2 savings and simultaneously
reducing the cost of transit operations, thereby freeing up resources
to support expanded service. These investments would also put more
Americans to work in new ``green-collar'' jobs because all transit
vehicles purchased with Federal resources are manufactured
domestically.
Support local, regional and State efforts to increase
mobility while reducing emissions from the transportation sector.
As part of a comprehensive strategy to reduce greenhouse gas
emissions, APTA supports the creation of a new source of funding for
local, regional and State governments to advance mobility in ways that
reduce the need for motorized vehicle travel. New funding could be
linked to new performance-based goals and planning efforts that will
capture maximum emission savings through the energy efficient land-use
patterns, expanded transit availability and transit-oriented
development. A new pool of funds at the regional and local level, when
combined with a significant new investment in dedicated funding for
public transportation infrastructure and operations, would offer
communities the full complement of tools they need to fight congestion
and expand mobility while simultaneously reducing greenhouse gas
emissions from the transportation sector.
Equalize and expand tax benefits for public transportation
riders.
Finally, while understanding that the focus of this hearing is on
global warming legislation, I would be remiss if I did not mention two
legislative proposals under this Committee's jurisdiction that would
increase transit ridership. H.R. 1475, the ``Commuter Benefits Equity
Act,'' introduced by Representative James McGovern, would increase the
transit benefit offered under section 132(f) of the Tax Code to $215/
month, the same level as parking. A Transit Cooperative Research
Program study found that employee transit and vanpool ridership
generally increases by 10-50 percent at worksites after the commute
benefit program is introduced. Similarly, H.R. 6030, the ``Commuter Act
of 2008,'' introduced by Representative Mark Kirk, would establish a
small tax credit for those employers who subsidize their employees
commutes on public transportation. These two legislative proposals are
cost effective remedies to increasing transit ridership and reducing
greenhouse gas emissions, and I would urge this Committee to take
action on these proposals as soon as possible.
Conclusion
Mr. Chairman, APTA applauds the attention of this Committee to the
pressing issue of climate change, and we thank you for considering the
contribution of public transportation toward reducing greenhouse gas
emissions from the transportation sector. We look forward to working
with the Committee as it explores these issues further in the months
ahead.
Chairman RANGEL. We will be looking forward to working with
you, because we need your ideas, especially in transportation,
public transportation.
Now we will hear from Dr. Kreutzer of The Heritage
Foundation. We look forward to your testimony.
STATEMENT OF DAVID W. KREUTZER, PH.D., SENIOR POLICY ANALYST,
THE HERITAGE FOUNDATION
Mr. KREUTZER. Mr. Chairman, I want to thank you and the
other Members for this opportunity to address you on the topic
of climate change. My name is David Kreutzer, I am the Senior
Policy Analyst in Energy Economics and Climate Change at The
Heritage Foundation. The views I express in this testimony are
my own, and should not be construed as representing any
official position of The Heritage Foundation.
What is the problem with carbon dioxide, or CO2?
Carbon dioxide is not a toxin, it is not directly harmful to
human health, and it is not projected to become so, even
without legislative or regulatory action. CO2 is
fundamental to all known forms of life. Indeed, studies show
that increased CO2 levels are beneficial for crop
production.
However, higher CO2 levels are expected to have
negative effects, due to temperature increases that some
predict will be brought on by these higher levels. If the
negative effects of CO2 increases outweigh the
positive, the question becomes, what are the benefits of
limiting CO2 emissions, and how do these benefits
compare to the costs?
Some have made estimates of all the damage that global
warming will do, and preset them as the benefit of reducing
CO2 emissions by some amount. Often called ``The
cost of doing nothing,'' this approach has two fatal flaws.
First, the estimate costs, such as the property damage from
higher sea levels or crop loss from drought, are based on a
world that is richer, in large part, because of the energy use
that supposedly causes the projected sea level rise or drought.
The sea level rise affects more expensive buildings, and
the drought reduces crops that are worth more because the world
is richer. That is, the cost of doing nothing is an impossible
cost to avoid, since the magnitude of the damage depends on the
much richer world that energy use will create.
Using similar logic, I could consider my $6 per day Metro
commuting expense the cost of work, and then estimate I would
be $120 per month richer if I didn't go to work. Of course,
that would be a silly exercise.
The second fatal flaw occurs when the total estimated cost
of global warming is compared to the cost of reducing a small,
often insignificant portion of that warming. Sticking with the
previous analogy, it would be comparing the $120 per month
commuting cost to the salary lost by staying home 1 day per
month. The lost day's salary needs to be compared to the $6
saved from not commuting 1 day, not to the whole month's
commuting cost.
So it is with proposals for carbon tax or a cap and trade
scheme. We need to look at the cost of these proposals, in
light of what difference the proposals make.
None of the proposed cap and trade schemes or carbon taxes,
or any program that I have seen will entirely eliminate
predicted climate change, regardless of the assumptions, the
models, computers, or theories used. There are still going to
be some emissions of CO2. We will not cut it all.
As documented in our report, which is attached, we find
that a cap and trade program like Senate Bill 2191, the
Lieberman-Warner bill, will, in just the first 19 years--which
is as far as our analytical models could go--in the first 19
years, reduce overall employment--overall employment--by up to
900,000 jobs in some of those years, reduce manufacturing
employment by nearly 3 million jobs.
Again, in just 19 years, reduce gross domestic product by
nearly $5 trillion, after adjusting for inflation. Of course,
as has been mentioned, energy prices will go up. For example,
gasoline will go up $1 a gallon above what it otherwise would
have been.
These losses occur after consumers, workers, and businesses
have adjusted as well as they can to the higher energy costs.
Household energy prices rise, even though consumers will have
switched to smaller cars, live in more energy-efficient houses,
and make greater use of public transit. Job and income losses
occur, even though firms will have adopted more energy-
efficient technologies and processes.
In addition, cap and trade proposals include well-
intentioned provisions to protect domestic industries.
Unfortunately, these provisions promised to create unwieldy
bureaucracies, trade tensions, and the possibility of damaging
trade wars.
How much difference will all this make to world
temperatures? Depressingly little.
The environmental gain for all the costs is unlikely to
exceed a fraction of a degree by the end of this century. The
Environmental Protection Agency analyzed the impact of a 60
percent cut in CO2 emissions, and found that it
would reduce concentrations of CO2 by about 25 parts
per million. This would lead to a temperature drop of about .1
to .2 degrees centigrade.
The EPA did outline a scenario that would cut temperatures
by a more significant 1 to 2 degrees, but this scenario
required the developing world, including India and China, to
reduce emissions to a level that would be equivalent to a 90 to
95 percent cut for us. We cannot expect these countries to
condemn themselves to such income-killing reductions. So, we
are back to the .1 or .2 degrees saved.
In sum, the cap and trade proposals impose significant
costs for very little change in global warming. I am done.
[The prepared statement of Mr. Kreutzer follows:]
Prepared Statement of David W. Kreutzer, Ph.D.,
Senior Policy Analyst, The Heritage Foundation
My name is David Kreutzer. I am the Senior Policy Analyst in Energy
Economics and Climate Change at The Heritage Foundation. The views I
express in this testimony are my own, and should not be construed as
representing any official position of The Heritage Foundation.
Mr. Chairman, I want to thank you and the other Members for this
opportunity to address you on the topic of climate change.
What Is the Problem With Carbon Dioxide (CO2)?
Carbon dioxide is not a toxin, is not directly harmful to human
health, and is not projected to become so--even without legislative or
regulatory action. CO2 is fundamental to all known forms of
life. Indeed, studies show that increased CO2 levels are
beneficial for crop production.
However, higher CO2 levels are expected to have negative
effects due to temperature increases that some predict will be brought
on by these higher levels. If the negative effects of CO2
increases outweigh the positive, the question becomes: What are the
benefits of limiting CO2 emissions and how do these benefits
compare to the costs?
Costs and Benefits
Some have made estimates of all the damage that global warming will
do and present them as the benefit of reducing CO2
emissions. Often called ``the cost of doing nothing,'' this approach
has two fatal flaws.\1\ First, the estimated costs (such as the
property damage from higher sea levels or crop loss from drought) are
based on a world that is richer, in large part, because of the energy
use that supposedly causes the projected sea-level rise or drought. The
sea-level rise affects more expensive buildings, and the drought
reduces crops that are worth more per bushel because the world is
richer.
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\1\ For instance see: Frank Ackerman, et al., ``The Cost of Climate
Change: What We'll Pay if Global Warming Continues Unchecked,'' 2008,
Natural Resources Defense Council. Accessed on September 7, 2008 at:
http://www.nrdc.org/globalwarming/cost/cost.pdf.
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That is, the ``cost of doing nothing'' is an impossible cost to
avoid since the magnitude of the damage depends on the much richer
world that energy use will create. Using similar logic I could consider
my 6-dollars-per-day Metro commuting expense ``the cost of work'' and
estimate I would be $120 per month richer if I didn't go to work. It is
a silly exercise.
The second fatal flaw occurs when the total estimated cost of
global warming is compared to the cost of reducing a small, often
insignificant, portion of that warming. Sticking with the previous
analogy, it would be comparing the $120 per month commuting cost to the
salary lost by staying home 1 day per month. The lost day's salary
needs to be compared to the 6 dollars saved, not to the whole month's
commuting cost.
So it is with proposals for a carbon tax or a cap and trade scheme.
We need to look at the cost of these proposals in light of what
difference these proposals make. None of the proposals will entirely
eliminate predicted climate change regardless of the assumptions,
models, computers or theories used.
The Costs
The typical cap and trade proposal seeks to reduce CO2
emissions by 60 percent to 80 percent by 2050 where the comparison year
is usually 2005. The Center for Data Analysis at The Heritage
Foundation did an analysis of the costs of meeting the goals of the
Lieberman-Warner bill, S. 2191, this past spring. The report on this
analysis is attached.\2\
---------------------------------------------------------------------------
\2\ William W. Beach, et al., ``The Economic Cost of the Lieberman-
Warner Climate Change Legislation,'' Center for Data Analysis Report
#08-02. http://www.heritage.org/Research/Energy andEnvironment/upload/
cda_0802.pdf.
---------------------------------------------------------------------------
Our analytical models are not suited to making projections beyond
2030. Nevertheless, the costs of S. 2191 just in the first 19 years
were eye-opening. The estimated aggregate losses to Gross Domestic
Product (GDP), adjusted for inflation, are $4.8 trillion. By 2029, the
job losses in the manufacturing sector will be nearly 3 million. This
is over and above the significant manufacturing job losses that most
economists predict will occur even in the absence of global warming
legislation.
Some of the workers forced out of manufacturing will find
employment in the service sector but overall the economy loses jobs. In
some years this overall job loss exceeds 900,000.
Eighty-five percent of our energy use today is based on
CO2 emitting fossil fuels. The ability to switch to non-
CO2-emitting energy sources over the next 20 years is
limited and expensive. Therefore, significant cuts in CO2
emissions require significant cuts in energy use.
The cap and trade schemes, as well as carbon taxes, limit emissions
by making energy more expensive. In addition to having a direct impact
on consumers' budgets for gasoline, heating oil and natural gas, these
higher energy costs force cutbacks on the production side of the
economy and lead to lower output and income.
These losses occur after consumers, workers and businesses have
adjusted as well as they can to the higher energy costs. Household
energy prices rise 29 percent above the business as usual prices, even
though consumers will have switched to smaller cars, live in more
energy efficient houses and make greater use of public transit.
Production drops even though firms will have adopted more energy
efficient technologies and processes. To reiterate, the trillions of
dollars of lost GDP and the hundreds of thousands of lost jobs occur
even after homes and businesses have made the switch to greener ways of
doing things. The hoped-for green-job gain is a mirage.
Cap and trade programs frequently include provisions to protect
domestic industries from competition with firms in countries that
haven't adopted similarly costly mechanisms for reducing
CO2. While the intent is certainly understandable, the
provisions create the possibility of a protectionist wolf in global
warming clothes.
While the theory of this trade-protection makes sense, putting it
into operation is a bureaucratic nightmare. Every product from every
country will need to be judged for how much of an advantage it may have
due to different carbon-cutting regimes. Since different countries can
have different approaches and since different manufacturers can use
different technologies and processes, assigning an offsetting
CO2 tariff will necessarily involve arbitrary decisions. The
potential for a trade war is very real.
Note: Current law already has many provisions for curtailing
CO2 emissions. They range from local renewable-fuel mandates
to increased nationwide Corporate Average Fuel Economy (CAFE) standards
to subsidies for ethanol production. While the reductions in
CO2 emissions are included, the considerable cost of these
programs is not included in our analysis. This is because the costs are
attributable to existing legislation and will occur even without
additional laws or regulations. Of course, if they were included, job
and GDP loss totals would be even higher.
The Gain
Analysis by the Environmental Protection Agency (EPA) shows that a
60 percent reduction in CO2 emissions by 2050 will reduce
CO2 concentrations by only 25 ppm in 2095. This reduction
would affect world temperatures by 0.1 to 0.2 degrees C. In other
words, it makes virtually no difference.
Some argue that if the United States adopted a sufficiently severe
cap on CO2 emissions that would induce the rest of the world
to do the same. The same EPA analysis runs through just such a scenario
and finds with the ``leadership'' effect the drop in CO2
concentrations are larger--perhaps enough to reduce world temperature
by 1-2 degrees C.
However, the assumptions made to achieve even this reduction are
entirely unrealistic. It is assumed that our leadership causes the
developed world to reduce their emissions by 50 percent by 2050 and
that the developing world would cut its emissions to the 2000 level by
2035.
Seeing what that means for just two countries, India and China,
illustrates how unlikely it will be to meet that goal.
In 2000, China's CO2 emissions per capita were about 2
tons per year. In India the 2000 per capita emissions were barely above
1 ton per year. Currently the U.S. emits about 20 tons. With no
population growth, a 70 percent cut would bring us down to about 6 tons
per capita per year. Expecting China and India to cut back to levels
that are \1/3\ or \1/6\ of ours is unrealistic. Even holding them to
our limit of 6 tons per capita would cause their emissions to grow more
than enough to offset our 70 percent cut. The rest of the developing
world would be no more inclined to abide by similarly stringent limits.
The Tax
Implementing a cap and trade program to cut emissions by 70 percent
creates a transfer within the United States that is equivalent to taxes
on the order of $250 billion to $300 billion per year, just for the
years 2012 to 2030. This takes the purchasing power from the households
and turns it over to the Federal Government or to whomever it assigns
the rights to permits for emissions (allowances). This would be one of
the largest taxes in the economy--almost twice as large as the highway
use taxes.
Conclusion
The legislation analyzed seeks to cut CO2 emissions by
70 percent. This cut will have little impact on global temperatures but
even the 30 percent cut that we analyzed will reduce incomes, raise
taxes and destroy jobs. The true comparison is trillions of dollars in
lost income and hundreds of thousands of lost jobs vs. a fraction of a
degree change in average world temperature 85 years from now.
__________
The Heritage Foundation is a public policy, research, and
educational organization operating under Section 501(C)(3). It is
privately supported, and receives no funds from any government at any
level, nor does it perform any government or other contract work.
The Heritage Foundation is the most broadly supported think tank in
the United States. During 2007, it had nearly 330,000 individual,
foundation, and corporate supporters representing every State in the
U.S. Its 2007 income came from the following sources:
Individuals
46%
Foundations
22%
Corporations
3%
Investment Income
28%
Publication Sales and Other
0%
The top five corporate givers provided The Heritage Foundation with
1.8% of its 2007 income. The Heritage Foundation's books are audited
annually by the national accounting firm of McGladrey & Pullen. A list
of major donors is available from The Heritage Foundation upon request.
Members of The Heritage Foundation staff testify as individuals
discussing their own independent research. The views expressed are
their own, and do not reflect an institutional position for The
Heritage Foundation or its board of trustees.
Chairman RANGEL. Thank you. Before I ask Mr. McCrery to
kick off the questions for the Committee here, we are very
anxious to make certain that we have prepared a way to give
this some type of priority for the next Administration.
We have an unusual situation, where both of our candidates
are supporting cap and trade. But in listening to most of the
testimony today, I find that I may be facing next year, if
McCain is not the President, some type of a split along party
lines--for sincere beliefs, not because of polarization--but
because of differences in thought as to the damage that would
happen to our country and the planet if we don't do anything,
and seemingly, from the questions I heard from the minority, a
concern about moving forward could possibly wreck our economy
and the manufacturing industry.
My question is, in a very generic way, as you go out
selling your position, is there a tendency that one party or
the other is more solid in support of your position? I hesitate
to ask Heritage Foundation, because I am afraid I would know
the answer there, just because of who is doing the research.
But I will start with you. Do you find many Democrats
supporting your position, as you speak and write and discuss
this?
Mr. KREUTZER. We have not been invited by many Democrats to
brief them.
Chairman RANGEL. I see.
Mr. KREUTZER. So, I don't know what they support.
Chairman RANGEL. Well, that takes--well, it's probably the
reputation of the Foundation, rather than the scientists out
there.
Generally speaking, has anyone felt that the concern is
bipartisan? Can I get a--yes?
Mr. BARNES. Yes. I would say, with regard to a revenue-
neutral cap and dividend, that it has support on both sides of
the aisle. It appeals to liberals, because it protects low-
income families, and middle-class families, and it also has
appealed to conservatives, because it's revenue-neutral and
it's market-based.
So, in the Senate, for example, when Lieberman-Warner was
being debated, Senator Corker introduced an amendment, which
was essentially to give all the money back to the people, on a
per capita basis.
I would also mention that in Alaska, Governor Palin
recently increased the taxes on the oil companies, and
distributed that revenue in the form of a $1,200 dividend to
all Alaskans. This is an addition to the regular dividend that
they get from the permanent fund, in order to offset the higher
energy prices there.
So, I think this approach does have that appeal that cuts
across----
Chairman RANGEL. Your approach?
Mr. BARNES. Yes.
Chairman RANGEL. Yes.
Mr. BARNES [continuing]. Cuts across party lines.
Chairman RANGEL. Others have any comment to make?
Mr. ABBASI. We would be pleased to provide you with polling
that I have seen over the last few years that has shown that
there is a partisan gap, a significant partisan gap, on this
issue. Unfortunately, a higher proportion of Democrats have
been concerned about it, and urging government action, than
Republicans.
Our firm, MissionPoint, is bipartisan. And, we're prepared
and anxious to work with Members from both sides of the aisle
to fashion a solution that will work. We need champions on both
sides. We would be able to supply you with some polling data
that we have seen that supports what you are saying about a
partisan gap.
Chairman RANGEL. Well, these meetings--not to say it's
unfortunately--but many people are just not educated on looking
at this on both sides. But we do know that it's a serious
problem, and that we may both have to make compromises.
But I am pleased to see that, the way the testimony is
coming, the questions are coming from the Committee, and we may
not have the problem that I guessed we might.
Let me yield to Mr. McCrery.
Mr. MCCRERY. Thank you, Mr. Chairman. Were all of you here
earlier today for the first panel? You heard their testimony
and our questions?
I was actually--I was telling the Chairman, I was actually
pleased that there seemed to be somewhat of a consensus among
the panel that there were, indeed, some pitfalls, if you will,
of a cap and trade approach to global climate change. They
seemed interested, and anxious, even, to come up with ways to
address those pitfalls, particularly, I guess, with respect to
energy-intensive industries here, in the United States.
I was just wondering if you all share the--what I believe
was the conclusion of the first panel, that yes, we do need to
take some measures within the cap and trade structure to
address the potential loss of jobs and energy intensive
industries here, in the United States. You can just go down the
line, if you would like.
Mr. ACKERMAN. I think that we certainly need to look at
what the real job effects will be. I think that there have been
wildly differing estimates. We have heard so many times in the
past that one environmental proposal or another will cause
humongous job losses, we need to look very closely at what's
the basis for that being projected, once again.
There are groups, like coal miners, who certainly will be
affected by any effective carbon policy. We need to look at the
compensation of them, whether that's through the cap and trade
program, or not.
I also wouldn't say that the cap and trade program is the
only thing we need to do. The point of my testimony is that
it's urgent to get going on carbon reduction, whether through
this method or through some other.
Mr. MCCRERY. Thank you.
Mr. ABBASI. My understanding is that the average energy
cost, the proportion of the average manufacturing company's
overall cost structure that is energy is about 2 percent. But
it is higher for a handful of industries, and that for those
industries, in some of the pending legislation like the
Lieberman-Warner bill, there is a proposed adjustment: A
requirement that an importer would surrender an allowance for
imported goods, on a one-to-one basis for carbon content. This
would be intended to level the playing field if we have a cap,
and we are importing from an uncapped country.
There is also a provision in that bill that says that the
adjustment would have to account for the different
developmental levels of the country from which we're importing.
In prior testimony I gave to the Select Committee on Energy
Independence and Global Warming in April, we proposed a way to
think about a formula like that, which would be an adjusted
kind of index that would account for emissions per capita, as
well as emissions per unit of GDP.
Our emissions per capita, of course, are much higher than,
for example, China's, but their emissions per unit of GDP, as I
think was pointed out earlier, is significantly higher, I think
four to five times. So, some sort of index that would basically
allow the surrender of less than a one-for-one allowance for an
import from that country, based on allowing developing
countries additional head room to grow is a model that we
believe would be fair. It would reflect the fact that, at this
point of the cumulative emissions in the atmosphere, the United
States accounts for about 30 percent.
So, I think it's fair and equitable to say that we in the
U.S. need to take the first step. It is also important to
recognize the competitiveness impacts you're talking about. But
if we're going to have a requirement like that at the border,
let's adjust it in a fair way to allow some of that development
head room.
Mr. MCCRERY. Good. Thank you.
Mr. RINGO. Representative Artur Davis this morning, of
Alabama, brought up a very interesting point and an interesting
concern about an industry in particular in his State that might
fall vulnerable to a cap and trade system.
At the Apollo Alliance, we believe that if the overall
moneys that are going to be generated from such a system are
properly reinvested in training, in making sure that the
playing field is level for those people that have been
disproportionately impacted, the impact would be a lot less,
with respect to the loss of jobs.
If we invest in training people for this new green economy,
if we invest in training people for these new green jobs, those
that lose their jobs will gain new jobs, new training. That's
why Apollo Alliance is a huge alliance, and we are engaged very
much with the labor community, with the conservation community,
because we believe that this whole 10-year, $500 billion
investment strategy that we are promoting is a win-win-win-win
for all Americans.
Now, I am sure that there will be some casualties along the
way. But I believe that, with proper management of the program,
that those numbers would be minimized.
Mr. MCCRERY. Mr. Chairman, my time is expired. I didn't get
to hear from everybody on the panel, but I think--I don't hear
any dissonance there, particularly, so I am pleased that we are
all at least looking to try to create a system that does not
unduly harm the economy, and destroy jobs.
Mr. DOGGETT [Presiding]. Thank you, Mr. McCrery. I ask for
your advice in trying to perfect the Climate Matters bill
before turning to Mr. Herger for his questions to you.
Let me begin with you, Mr. Abbasi, because I am pleased
about your response to Mr. McCrery about the bipartisan nature
of this. You know, we talk about the Lieberman-Warner bill.
Certainly Senator Warner, a distinguished conservative
Republican whose career has been built around national
security, recognizing the security implications of this, I
want, as I said at the outset in introducing my bill, to have
strong bipartisan participation in it. But at the same time,
much like the science, we can't wait until we get 100 percent
of the scientists, including those who may work for industries
who have a stake in doing nothing, to come aboard, because the
needs are so great to move now.
Let me ask you if, based on your experience, you believe we
are already beginning to lose competitiveness and lose some
jobs as a result of not moving forward on climate change. An
aspect of that that Ms. Browner did not have a chance to
respond on, whether the uncertainty that business has about
what might or might not happen, how comprehensive a cap and
trade bill will be, if that is affecting investment, and where
people choose to invest now.
Mr. ABBASI. Thank you, Mr. Doggett, and thank you for your
leadership in introducing that very important bill. We look
forward to working with you on it.
Yes. Our belief, from our experience in the market, is
that, in fact, the other countries--I am going to talk about
Europe for a moment--have provided a much more conducive
environment for clean energy companies.
We founded our firm with a strong U.S. focus, but we are
going to be opening an office in London, and we are doing due
diligence right now on transactions in Europe. There is a
strategic understanding of how big this opportunity is in
Europe. Obviously, they have launched the European trading
system for carbon, and they also have very, very supportive
regimes to directly stimulate renewable energy in a number of
countries.
I mentioned Germany earlier. Let me say that what's so
difficult to watch, what's painful to watch, is that a number
of the most innovative companies are originally from the United
States. So, I mentioned that Europe--Germany has a large
installed base of solar power using the traditional
crystallline and silicon flat plate technology. But thin film
is the next generation, thin film technologies.
So, companies like First Solar, which are U.S. companies,
are now out, installing their manufacturing facilities--again,
high-tech manufacturing--in other countries. First Solar plans
to build 1,100 megawatts worth of production capacity by 2009.
That's a lot of solar. It accounts for about $864 million in
investment. And 87 percent of that is going to be in Germany
and in Malaysia.
So, we see an instance where, again, companies with
original U.S. technology, next generation technology, are
moving their production facilities abroad. We should be
bringing those jobs here, home.
Mr. DOGGETT. Thank you. Mr. Barnes, the cap and divided
approach that you suggest certainly does have the advantage of
simplicity. As you know, in the legislation that I introduced,
I envision some income transfer, especially to those Americans
at the bottom of the economic scale who will face the greatest
burden here, as they will face the greatest burden if we don't
resolve climate change.
That's not the only thing that I do with the auction
revenues, and one of the areas that I focus on is health care.
Is health care a way of providing a direct benefit of the type
that you envision, even though it's not necessarily putting a
check in the mail?
Mr. BARNES. Yes, I think health care meets the test, if you
will, that the auction revenues be used for a public benefit
that is basically universal, and that particularly benefits
low- and middle-income families.
So, I would say I would be very sympathetic to some of it
being used for health care. But I would caution not to take
that too far. The moment you start doing this, that, and the
other thing, I think you then run into the whole Lieberman-
Warner sort of sandpit.
Mr. DOGGETT. Thank you. Mr. Ringo, we have already heard in
testimony from others about the danger of seeing jobs go
overseas. The type of jobs that would be created under a cap
and trade system, which put a premium on clean energy and
energy efficiency, how likely is it that those kind of jobs
will ever be exported abroad?
Mr. RINGO. Well, I think that if we invest in America,
invest within our communities, we have programs, we have
legislation being passed in our State legislatures around the
country, 27 States have passed renewable portfolio standards
that are requiring that a certain amount of energy in those
States be produced, be alternative energy.
For example, in the State of Pennsylvania, where Gamesa
came in from Spain, brought those jobs into Pennsylvania
because of that portfolio standard, and created 1,000 jobs.
Those are homegrown jobs. Many of those people were people that
were laid off from the steel industry.
I met a gentleman at the Democratic Convention recently who
was a laid off steel worker who was rehired by Gamesa when
Gamesa moved into Pennsylvania. Those are jobs that are going
to be homegrown. With proper investment and subsidizing some of
these companies, to encourage them to invest in alternative
energy, it can really stimulate the economies at home, and
guarantee that those jobs remain within our communities.
Mr. DOGGETT. Dr. Ackerman, your study, the written study
you had, tends to focus on the cost of inaction that will
result from weather changes, primarily. Are there not also--and
you refer to some of these in your oral testimony--a long list
of changes and costs that will occur, such as on health care,
that would be in addition to the cost that you outline in your
written testimony.
Mr. ACKERMAN. That is right. I emphasized in writing,
particularly, that this is a partial accounting of the cost of
inaction. There will be increased health care costs, as weather
extremes are obviously bad for health--there are a number of
studies of that.
There will be worse effects on agriculture. More and more
research has undermined what people believed 10 or 15 years
ago, that warmer weather would be good for crop yields. It's
increasingly not supported by recent research. Stormier and
hotter conditions, and drier conditions in a lot of places
would be bad for agriculture.
The tourism effects which we were able to estimate for
Florida, but not for the country as a whole, certainly outdoor
activities that are dependent on the weather, like tourism,
will be devastated by some of the changes that are being looked
at.
The list goes on and on. How do you value the changes to
parks, to wilderness areas, natural ecosystems? There are many,
many costs which are not included in the kind of estimates I
produced.
Mr. DOGGETT. Finally, you opened your testimony by saying
that there was broad consensus on the science that we have.
Mr. ACKERMAN. Yes.
Mr. DOGGETT. We know it's not universal, from the questions
that Mr. Linder asked earlier, and that we are never going to
get 100 percent agreement on science. Maybe even people still
debating about tobacco and its effect on health.
But tell me, as it relates to the economics, do you
perceive that there is, if not a total consensus, a growing
view among economists that the cost of a properly designed
response to climate change is less than the cost of inaction on
climate change?
Mr. ACKERMAN. I don't think we have reached the level of
consensus that scientists have, where--what I've said about the
climate debate is that science is I think it's something like
3,000 to 5 now. We are not at that level, but there is a steady
movement in economics, there are more and more people who have
moved that way.
The Stern review, Sir Nicholas Stern, who is one of the
most prominent members of the British government in these
areas, and formerly Chief Economist at the World Trade
Organization, that study was really path-breaking, in
suggesting that conventional economic calculations showed that
the worldwide costs of inaction, are very large, much greater
than my U.S. estimates: Worldwide, 5 to 20 times the cost of
action. That has certainly moved the debate quite a ways.
Mr. DOGGETT. Mr. Millar, thank you for your comments about
the bill. I think Mr. Blumenauer will have a few more questions
about infrastructure. Mr. Herger.
Mr. HERGER. Thank you very much. I am enjoying our
panelists, I appreciate each of you.
Again, I would like to bring back the perspective that it
was just 30--let's see, 38 years ago, in 1975, the headline of
Newsweek Magazine was global cooling. Just a year before that,
the headline on Time was, in 1974, global cooling. We know we
have gone through several ice ages, we know that we are--you
know, it's not like we don't ever change here. We do. So, I
think it's very important we have everything in perspective.
Now, the fact that we have all of what we're doing,
obviously, we have to have an effect on the environment. I
think whatever we do, we need to do where we don't overact and
bankrupt our society at the same time. I think that, hopefully,
that is the balance, Mr. Chairman, that we are going to have
with this very important hearing that we are having today.
So, again, getting around to the cost of this, knowing that
we are now being surpassed, and not just by a little bit, but
overwhelmingly surpassed here in the years to come by China and
the greenhouse gases they're going to be emitting, and India
and others, that we not cut off our nose to spite our face,
that we be involved.
But, you know, I get the feeling, just listening, that boy,
we have to somehow think we can do it all here, shoulder all
the expenses, for what might end up being, as the doctor over
here indicated, might be just a half a percent of climate
change, perhaps.
So, again, I don't want to throw a damp towel on this, but
I certainly hope and pray we have this in perspective. Just
getting around to the cost, the cost that, at a time when our
economy is down, when we're looking at doing what we can do,
and knowing, particularly this Committee, Ways and Means, that
we have entitlement cost problems ahead of us--Social Security,
Medicare--I mean, these costs are something we need to be
considering in putting them in the perspective, and whether or
not we should be doing it in a way where we use a carrot and
not a big, huge stick.
I so much am hearing this big, huge stick that's being
promoted by so many, and that, quite frankly, more than a
little bit concerns me, and I think concerns many, and should
concern many.
With that in mind, I would like to ask a question of our
panelists, that reducing these greenhouse gas emissions by the
amount that is required in House bills H.R. 6186 and 6316 is
going to be very expensive.
In June of this year, the United Nations International
Energy Agency estimated that allowance prices need to be at
least $180 per ton. This was their estimate, which is more than
four times the prices in the EU today, more than four times
what they are paying. An IEA Executive Director stated that,
``Costs are going to be very steep.''
Just how high do energy prices have to get to reduce
greenhouse gas emissions by the amount in these House bills? I
would be interested to hear estimates from our panelists. Dr.
Ackerman.
Mr. ACKERMAN. I would like to respond to a couple of
things.
Mr. HERGER. Please.
Mr. ACKERMAN. I don't have a number in my pocket for that
last question. The question about the global cooling estimates
from the 1970s, there used to be a lot more pollution in the
air, and some of that pollution actually blocked some of the
sunlight, so that it--this is not just a change in whims, this
is a change in the science. We used to put a lot of crud that
came out of the coal plants into the air, and that somewhat
cooled the atmosphere down.
It also made people sick and killed forests and killed fish
much more quickly than climate change does, so it was a big
step forward for human and environmental health, to adopt the
Clean Air Act, and take that stuff out of the air. The
consequence of taking it out of the air is that it took away
this perverse way in which we were slowing down global warming,
so that that--you know, it's actually progress in dealing with
acid rain that has led to that shift that you mentioned.
In terms of how much will it cost, I would--I noticed I was
mentioned in Mr. Kreutzer's testimony--I would take exception
to the way he used my numbers there, and particularly to this
estimate that we would get only this tiny percentage reduction
in the temperatures. That's if only the U.S. reduces emission,
and nobody else does.
This is a global problem. The U.S., China, and Europe, each
in round numbers, account for one-fifth of it, and the rest of
the world for the other two-fifths. There is no possibility of
a solution without cooperation, and it makes no sense at all to
quote these numbers, based on the U.S. acting alone.
I will tell you, having spoken a little bit about this
internationally, there is going to be no world solution without
the U.S. taking a lead. It has been embarrassing to talk about
this issue in Europe lately, because no matter what research
you come there with, they only have one question for Americans,
which is, ``What are you thinking of, not doing anything about
this? Why isn't the Bush Administration doing something about
it?'' There is only so many times you can say, ``Well, I don't
speak for the Bush Administration,'' without feeling a little
embarrassed for your country, and not taking action.
Mr. KREUTZER. Yes, I would like to talk about the costs.
First of all, we are sometimes portrayed as being to the right
and having extreme numbers. There is a table on page 14 of our
report that shows where our estimates of the allowance costs
come in, compared to other people who have done similar sorts
of estimates.
In 2030, our high end is $88 per ton of carbon dioxide.
MIT, hardly a bastion of conservative thought, came in at $101.
These are good ways to gauge where we fit in the mainstream of
estimates of the cost of carbon dioxide restrictions. The EPA,
their estimates were $83. Charles River Associates, a
consulting firm, is $112. The much maligned and undeservedly
maligned National Association of Manufacturers reports $85 to
$227. The $227, which is the number you keep hearing, was with
no offsets. That was a technicality. The Energy Information
Administration had a range of $61 to $156 per ton. So, we are
not in some extreme exaggerated position in estimating what the
costs will be to the economy.
As far as the damage--the help done to CO2
levels, how much temperature change there will be, yes, we
could talk about bringing it around 2 degrees, if you get India
to cut back to one ton per capita and no population growth by
2035. They simply won't do that. We will be having six. China
will have to cut back to two. That was what the EPA estimated.
So, this is--and if you're going to talk about the cost of
the whole world cutting back, we need to look at the cost to
their economies, as well. You can't say, ``Well, here is what
it costs the U.S. to cut back 70 percent, and here is the
benefit we get, it's only a tenth of a degree,'' and you say,
``Well, the rest of the world has to cut back, too.'' Well,
let's look at how much they're going to have to spend.
Mr. DOGGETT. Thank you. Mr. Larson.
Mr. LARSON. Thank you, Chairman Rangel, again, for putting
this together. I thank the panelists for their forbearance,
especially Mr. Abbasi, whom I know from my home State of
Connecticut, and the great work that you have done, and the
book that was prefaced by the ``fierce urgency of now,''
quoting Dr. Martin Luther King, and how important that is.
The significance of this hearing, in as much as I think
it's relatively clear--and certainly I respect people who
dispute the science. We have people that don't believe in
evolution. We have differences of opinion that exist in the
U.S. Congress, and you have to allow for that respect and
tolerance within the Committee process, as we do all across the
United States.
But to--really, it comes down to a category of doing
nothing, or doing something. I applaud my colleagues on this
Committee, Lloyd Doggett and others, who have put forward
legislation that deals with this issue. I also have put forward
a proposal, along with Peter Stark and George Miller and Jim
McDermott of this Committee. I serve with Mr. Blumenauer on a
Speaker's Select Committee on Climate Change, Global Warming,
and Energy Independence.
Mr. Sensenbrenner, in that Committee, says, ``Look, whether
you call it cap and trade, or whether you call it a carbon tax,
we're going to call it a tax. We are opposed to taxes, period,
end of tape, end of discussion. That's how we're going to frame
this issue.''
So, we ought to be clear that, from the outset, that's how
this issue is going to be framed if you don't favor doing
something about it now. If you don't believe that there is the
fierce urgency of now, and you don't believe in the science,
then the opposition will be, ``This is a tax, and we're against
taxes.''
So, once we get that issue decided, then you have to look
at, well, you have a difference of opinion upon how we best
solve this problem. I believe--and we just came from hearings
today, meetings with regard to everything that's happening in
the economy today. What the American public wants is us to
level with them. None of them like taxes. I thought Mr.
Bloomberg this morning was eloquent. Nobody likes to be taxed.
But what are the problems that we face, and then level with us
forthrightly about what we have to do.
So, to indicate to them--and, Mr. Barnes, I thought your
proposal was interesting, as well--about taxing polluters
upstream, so that there is a downstream benefit directly to the
people, as in ``We, the people,'' is the only way, if you put
the science aside for a moment, that you can basically come to
bipartisan agreement, in terms of this issue of taxation and
money flowing back to the people who, surely, everyone agrees,
will be impacted.
With regard to tariffs, and intensified industry, I thought
those were excellent points, and again, commend the Chairman,
because this is how you flesh out concepts and ideas of this
nature.
I am a firm believer that what we have to do is level with
the people and be unafraid about--and talk to them directly
about--what it costs, and what we're going to have to do to
achieve these goals, and what it means to them, their
grandchildren, and our children, and the consequences of that,
and then lay it out in a manner as succinctly and as clearly as
we can, so that they understand those ramifications.
Now, what we give back to them, I believe, has to be direct
relief for the consumer. Other ideas you can entertain. My
concern with cap and trade is how we explain about these
auctions that take place, and what happens at an auction, and
how is it set up, and what will that bureaucracy do.
When you have a system that's already set up to deliver
money directly back to the people, how can we--why isn't it--as
Paul Volcker, as Alan Greenspan, as Al Gore, as Bill Bradley,
and you can go down the list of economists and others have
said--``Send the money directly back to the people, by way of
payroll deduction.'' Join people in an effort that will
preserve the environment that has a direct efficient way of
getting the cost back.
Your response, from the panel?
Mr. RINGO. When you talk about getting it back to the
people, as I mentioned earlier, I live and am from Louisiana,
close to the State of Alabama. Louisiana is a State where oil
and gas is king. One-third of the domestic oil supply comes off
of our coast of Louisiana.
After Katrina hit in 2005 and Rita hit in 2005, and the two
storms that have recently hit, people before that time were not
talking about climate change. Many didn't believe that climate
change was real, because oil and gas was king, and that was
just not an issue to discuss. I was in a shelter last week,
evacuated from Hurricane Ike. The conversation in the shelter
was--and these are people who are industry workers, and
families of industry workers--were saying, ``We've got a real
problem out there with this global warming, because every storm
that hits the Gulf of Mexico is a four or five.''
Now, it is costing us in a big way, because of a lack of
action. We have gone through several decades of missed
opportunity in dealing with issues of global warming, and what
have you.
Some people, as I oftentimes say, in Louisiana we suffer
from category five storms and there are folks up here in D.C.
and around the country who have been suffering from category
five denial about global warming. But now people along the
coast are waking up because they see the impacts. Now they are
saying, ``Do something, and do something now.''
We have gone through these decades of missed opportunity.
Now we're in a decade of last opportunity, because we've got to
fix it. People now, along Louisiana, in Texas, are not thinking
about the bail-out of AIG right now. We're in the middle of
hurricane season. We're just halfway. They're just concerned
about the next storm, and the fact that, if it hits the Gulf,
it will probably be a four or five, and the impact will unfold
as you have seen.
So, there is a sense of urgency down there, for sure, on do
something about it, and do something about it now. At the same
time, the majority of the people that are crying out, many of
which are poor people who have already suffered the
disproportionate impact by being the folks that live closest to
the fence line of those industries----
Mr. LARSON. So, would they prefer a direct tax back to them
from the revenues that are generated?
Mr. RINGO. If it is reinvested in their community to be a
pathway out of poverty----
Mr. LARSON. I am talking about them personally, lowering
their payroll taxes.
Mr. RINGO. I am sorry, sir. I didn't hear that.
Mr. LARSON. Lowering their payroll taxes directly to them.
Mr. DOGGETT. The Chairman is back, and I think Mr.
Blumenauer is next.
Mr. LARSON. Thank you.
Mr. BLUMENAUER. Thank you. I appreciate your patience with
this. I have found this to be extraordinarily interesting.
I have enjoyed working with Mr. Doggett on his proposal,
although frankly, I have cosponsored Mr. Larson's. I am
agnostic, in terms of how we deal with a price for carbon
pollution, and being able to have some resources to redirect
for the economic revitalization that you talked about. But
Lloyd is right, I have some modest interest in this larger
question of infrastructure.
We think about, in the short term, what is going to happen
for water, in terms of supply, water development, protection,
water treatment: extraordinarily expensive for systems that are
already inadequate in much of America--72,000 miles of water
main and sewer pipe over 80 years of age right now.
Problems of electric transmission, grid reliability, being
able to get some of this alternative energy out from some of
the remote areas of wind turbines, for instance, to the grid,
being able to use some of the technology that I know we're
developing to help people do a more efficient job, just in
their own household.
Disaster--and I appreciate Mr. Ringo's reference to that--
what we pay for the recovery from disaster, from prevention.
This--it's gone up sixfold in the last three decades, and the
loss from disaster is skyrocketing. All the indications are
that it's going to get worse.
Last, but not least, transportation, what we're going to do
to retrofit, to expand, to have a new fleet, to have new
choices, new options, is not a cheap proposition. But it has
embedded in it economic opportunities that are very
substantial.
This comes at a time when our Chairman is going to have
lots of people knocking at his door next term. We have the
Highway Trust Fund that is going into deficit for the first
time in history.
There are more people with their mouth open and their hand
out for all sorts of schemes that are going to have to be paid
for, as well as these notions of renewing and rebuilding.
I wonder if Mr. Millar, Mr. Abbasi, Mr. Ringo, if you could
comment briefly--and this will be my last question, and I will
be quiet--just about the merits and the opportunities of making
some strategic investment in being able to not just meet our
climate challenges, but just kind of hold the country together
with the challenges that Dr. Ackerman is talking about, in
terms of the stresses we're going to be facing with extreme
weather events, change in temperature, rise in sea level.
Mr. MILLAR. The opportunities are certainly great, and I
tried, in my testimony, to give a sample, across the board.
While this hearing is specifically about greenhouse gas
emissions and climate change, how we choose to solve that
problem will have impact in so many other areas.
So, for example, in transportation policy, thinking about
expanding the opportunity for choice to more Americans. The
Census Bureau tells us that only about half the households in
America have any choice at all, in terms of public
transportation available. If we give people the choice, recent
history has shown us if it's a good choice they will use it. We
are seeing record growth in the use of public transit.
The interesting thing to me is it's not just in the big
cities. In fact, two of the top three growth areas we're seeing
are in communities of less than 100,000 and 100,000 to 500,000.
Generally those are communities with not well developed public
transit. It shows Americans are hungry for choice, and choice
requires investment.
Mr. ABBASI. I want to commend you, Congressman Blumenauer,
on your smart growth initiative. You know, you reference the
importance of infrastructure. We will need less infrastructure,
in terms of roads, if we're smarter in how we locate our homes.
One idea we promote in the testimony--it's similar to
something you proposed is a location efficient mortgage, which
provides a bonus for mortgages on homes that are located in a
high density area that will cut down on our transportation
need.
I want to mention one other example of infrastructure:
smart meters. I don't know if anyone here has ever actually
tried to decipher their electricity bill, but it's very hard to
understand the impact of the choices you make in your home on
your energy bill, let alone to read and understand what's in
that bill. Smart meters offer us an opportunity to, once and
for all, understand that, to have an in-home display, where we
can see the electricity usage of our various appliances.
Mr. BLUMENAUER. In real time?
Mr. ABBASI. In real time. There is good evidence that, when
you do this, people make better, more informed choices--they
will upgrade, they will invest in efficiency.
So, when we think about using some of those auction
revenues, let's incentivize things like that, because that will
allow you to actually see the new carbon price signal when we
have one and respond to it.
Mr. BLUMENAUER. Thank you very much.
Mr. ABBASI. I will just give one other statistic. The
average electricity bill in America was about the same in 2005
as it was in 1990, even though electricity prices were up about
24 percent. What that indicates is that we do get more
efficient, and people do respond over time. So, prices and
bills are different.
Mr. DOGGETT. Thank you. Mr. Pascrell.
Mr. PASCRELL. Thank you, Mr. Chairman.
Mr. Millar, most of us are advocates for public investment
in transportation, public transportation. In my--in New Jersey,
high gas prices are turning commuters to New Jersey Transit
Commuter Rail Service.
As you point out in your written testimony, public
transportation use reduces carbon dioxide emissions by more
than 37 million metric tons every year in the United States. Am
I quoting you accurately?
Mr. MILLAR. Yes, sir, you are.
Mr. PASCRELL. Well, then before I ask you this series of
questions, let me ask Mr. Kreutzer this question.
Mr. KREUTZER. Okay.
Mr. PASCRELL. What do you think, since only 54 percent of
American households use public--mass transportation--do you
think that this is a wise thing to do, in reducing the amount
of emissions? Very briefly, do you think this is wise, or is
this cost foolish?
Mr. KREUTZER. It depends a whole lot on where you do it. I
live in Arlington, I take transportation, the Metro. It makes a
whole lot of sense there. I would be willing to pay more if
they could have some more cars so I could sit down on occasion.
But I also lived in Dayton, Virginia, an old order
Mennonite hub. We had horse and buggies. You could have put a
subway at every one of their houses, they wouldn't have taken
it.
Mr. PASCRELL. But you wouldn't object, therefore, to public
investment into the kinds of things that you could accept?
Mr. KREUTZER. As with any public investment, I think I
would want to look at the cost, versus the benefit.
Mr. PASCRELL. Well, we all would.
Mr. KREUTZER. Right.
Mr. PASCRELL. I don't think anybody on this panel or
anybody on this side of the table would simply, you know,
spend, regardless of what the outcomes would be. We want to
make sure it's effective and efficient.
Mr. Millar, what policy options do you suggest for fully
incorporating public transit into the United States climate
change strategy?
Mr. MILLAR. We recommend several things. First, we think it
is reasonable to take some of the revenue that would be
generated by cap and trade and invest back in public
transportation.
We believe that there ought to be national goals set, and
each sector ought to have a responsibility for its piece of
that, and public transit would have its piece, as to what we
could do.
We believe that certain policies--for example, tax policies
under the jurisdiction of this Committee--which today favor
energy-inefficient public transportation, at least ought to be
equalized so that an employer, for example, that wants to
encourage his or her employees to use public transit can at
least get the same help from the government as if they provide
parking to the employees. So, we think there is a series of
things there.
We think giving incentives to communities, so that
communities and States will invest more in public transit and
will have an interest in how they control their land use to get
more energy-efficient transit-useful land use, such as
Arlington, Virginia chose to do some 25 years ago, and now
receives enormous benefit for the decisions made then. Those
are examples, sir.
Mr. PASCRELL. Just very briefly, the expansion of the
compressed natural gas buses nationwide, what else can we do to
promote this technology?
Mr. MILLAR. I think there are several things there, first
to realize that already about 25 percent of our bus fleet is
alternately powered with clean fuel. That compares with, what,
1, 2, 3 percent of the automobile fleet.
We could certainly provide additional funds and incentives
to transit systems to replace their aging fleets more quickly,
for example, change the amount of local match that's required.
There is a whole series of things that could be done there. All
would turn over our fleet much more quickly.
Mr. PASCRELL. All of these are going to necessitate some
public investment.
Mr. MILLAR. Yes, sir. I believe so.
Mr. PASCRELL. We have to find the money someplace.
Mr. MILLAR. Yes, sir.
Mr. PASCRELL. Thank you, Mr. Chairman.
Mr. DOGGETT. Thank you. Mr. Davis.
Mr. DAVIS. Mr. Chairman, thank you. I have time for,
really, just three observations. The first one, I don't buy the
Republican arguments on the science. You could take all the
science that the Bush Administration has rejected, and make
from it a whole new ecosystem and a whole new globe, and fill
it up with new species. So, I am not too enthusiastic about
their scientific interpretations.
Point number two, I do think this side of the aisle, which
I see as the more progressive side of the American political
debate, has to be cautious about one premise. A lot of the
arguments that we have made in the context of cap and trade
policy sounds something like this. They say, ``Well, there will
be short-term costs, disproportionate costs to some parts of
the population, but there are significant gains, and those
gains will be for the common good.''
We certainly don't like that argument on this side of the
aisle when it comes to tax policy. You could make a point that
President Bush's 2001 and 2003 tax cuts were very good for
people whose income rests primarily on dividends and capital
gains, but we don't like the thrust of those policies, because
it's left us more unequal as a society, and made the Tax Code
more regressive.
Most of us on this side of the aisle don't like an
unfettered trade policy with no labor and environmental
standards, even though some could say unfettered trade benefits
certain multi-national corporations, and it's probably for the
common good. So, just as we resist those kinds of arguments in
the context of trade, as we resist them in the context of tax
policy, I think we have to be appropriately dubious in the
context of environmental policy.
My third point, I have no doubt that we can fashion short-
term, wealth-transferred policies to cushion the impact of cap
and trade legislation. I don't doubt that. But this is what I
do wonder about.
If we do this in the wrong way, and the consequence of
doing it in the wrong way is that communities that are very
dependent on heavy duty manufacturing fall even further behind,
and the employees of those industries find their skills
outmoded for the work that's available, a short-term wealth
transfer or reduction on your FICA taxes means nothing if you
don't have a job, or if you're not employable.
So, I think we have to be unusually attentive to the fact
that the very industries and sectors of the country who are
most likely to be displaced are the ones that have already
borne the brunt of 10 years of unfettered globalization, and a
wide variety of other policies.
Dr. Ackerman, are you trying to jump in?
Mr. ACKERMAN. Yes. Precisely on that point, I certainly
think that those communities need to be protected. But I think
there is something missing in the whole discussion of
competitiveness here. We are talking about it as if cost
increases are the only things that affect competitiveness, and
a little more cost increase is unbearable for our economy.
Now, you could make a case that the most competitive
economies in the world today have some of the highest costs.
Germany is often the world's leading exporter in many recent
years. Ten percent of all world exports come from Germany, a
country with higher wages than we have, higher energy costs,
and stricter environmental regulations.
They are doing something there that is making people buy
their products that isn't about cutting their costs.
Mr. DAVIS. Here is the only cautionary note I would sound
about that. Take coal and steel as two examples.
Mr. ACKERMAN. Yes.
Mr. DAVIS. If you push up the cost of coal and steel
production too much, they don't just engage in an economic
recalibration of what they do, they sometimes close their
plants.
Mr. ACKERMAN. Yes. But Germany and Japan, which has costs
similar to ours, labor costs similar to ours, energy costs
higher than ours, they have both made the transition to selling
manufactured goods to the world.
People are not buying Toyotas because they're made with
low-cost wages. People are not buying German machine goods
because they're made with low-cost wages. So, instead of
looking over our shoulders at a competition with China to cut
wages, which we will never win, we should look over the other
shoulder at the competition with Germany and Japan to sell the
high-tech manufacturers of the future.
As several people have mentioned, we are in danger of
losing solar power, the new energy technology industries, to
Germany as well, not to somebody who has lower costs. We're in
danger of losing those industries to a country that has higher
energy and labor costs than----
Mr. DAVIS. Well, let me just stop you with my final 30
seconds----
Mr. ACKERMAN. Sure.
Mr. DAVIS [continuing]. And say this. As this Committee
tries to figure out how to fashion policy that can actually be
sold in real time to the voters, ergo our constituents, I think
we have to make sure that we are offering them not some long-
term gain----
Mr. ACKERMAN. Yes.
Mr. DAVIS [continuing]. Not some intermediate-term gain,
but some short-term, immediate-term insulation. Otherwise, they
won't be supportive of what we do.
Mr. ACKERMAN. Right.
Mr. DAVIS. We will see a divide between the elites and the
people we represent, and that won't be helpful, either.
Mr. ACKERMAN. No, I think we need to figure out some--I
don't know how they do it. I think we need to figure out what's
the secret of high-cost competitiveness.
Mr. DAVIS. Thank you, Mr. Chairman.
Chairman RANGEL. On behalf of the full Committee,
Republicans and Democrats, I want to thank this panel for the
high quality of testimony that you have given to us. I am going
to accept your testimony merely as appetizers, because the main
event comes next year. I do hope that you would be made
available, no matter which side--which approach that you're
taking, so that we can meet together.
As I was talking with Mr. Doggett, this is a matter that
we're going to have to go to the Chief Executive Offices,
because it's not an issue for lobbyists to be--we're talking
about the country and the world, and so we need those people
who have a concern for it.
So, I want to thank you so much for your testimony. We will
be in touch, and I'm so sorry for the lateness in the hour, but
it certainly was worth it for us to hear your expert testimony.
[Whereupon, at 4:29 p.m., the hearing was adjourned.]
[Submissions for the Record follow:]
Statement of Accor Services USA
Accor Services USA is the leading provider of tax-free commuter
benefit solutions in the U.S., and we have made it our mission to make
tax-free commuter benefits a staple in employee benefits packages
throughout the American workplace to encourage the use of public
transportation and therefore contribute to help protect the
environment.
Public transportation is one way Americans can reduce their carbon
footprint. It is our understanding the primary focus of this hearing,
is on legislation which would develop a ``cap and trade'' program. This
type of program certainly has merit, but we urge Congress to also
examine ways to reduce emissions from the transportation sector. Mobile
source emissions make up roughly \1/3\ of all emissions. Global Warming
legislation needs to recognize this point and should take steps to
promote alternate modes of transportation; including public
transportation, and there are actions that this Committee can and
should take to this end.
Accor Services USA promotes the use of public transportation to
prevent climate change and promote global sustainability through our
employer group, third-party administrator and transportation authority
programs. Accor facilitates the transit use of over 300,000 people in
the U.S. saving them and their employers over $129 million in payroll
and commuting costs in addition to over $340 million in gasoline per
year and over 8,730,000 pounds of carbon every single day. That adds up
to 2,095,200,000 pounds of carbon this year, the equivalent of over
327,000 tons of waste recycled instead of landfill or over 24 million
tree seedlings grown for 10 years.
We maintain statistics for our clients nationwide showing the
current status as a baseline and also showing the improvements and
impacts of new legislation. These statistics are impressive, but there
is room for growth within our employer base. We urge Congress to
include the following provisions in a Climate Change package in order
to ensure that more Americans utilize public transportation as a way to
reduce their carbon footprint.
Establish a Pilot Program Where Companies Can Earn Credit for
the Amount of Carbon They Conserve Through Employee Transit Benefit
Programs
Accor urges Congress to provide an incentive for private sector
companies to subsidize their employees' transit trips through the
transportation fringe benefit. This incentive can come in the form of
credits that can be applied to other aspects of the company's business
activities or can be sold to companies who exceed their targeted carbon
emissions. By including such a provision Congress will be providing the
private sector with an incentive to initiate transit benefit programs,
which will ultimately result in less congestion in U.S. cities, better
air quality, and a reduction in mobile emissions.
Accor works with its clients to track and monitor how many pounds
of carbon are being conserved using precise modeling and tracking
software. Recently, we were approached by a client company with over
130,000 U.S. employees who were commuting to work every day. This
company already has a commuter benefits program in place, and through
that program over 2,300 employees utilized public transportation. By
utilizing EPA and U.S. Census Bureau statistics around average commutes
we were able to help this employer quantify the savings that those
employees represented in terms of emissions and saved gasoline. Through
its commuters, this company was saving the equivalent of:
Over 3,000 gallons of gasoline each day.
Over 828,000 gallons of gas each year.
Over 66,000 pounds of carbon each day.
Over 16 million pounds of carbon each year
16 million pounds of carbon is the equivalent of saving:
Carbon emissions from over 16,900 barrels of oil being
consumed.
Carbon emissions from the electricity use of over 900
homes for a year.
Carbon sequestered by 186,824 tree seedlings grown for
10 years.
Carbon sequestered annually by 50.8 acres of forest
prevented from deforestation.
Based on the results of our calculations, this company has now
decided to move forward with an aggressive program to increase employee
participation in its commuter benefit, so that employees are better
able to access the tax savings in this time of rising fuel costs; and
so that the company may better support its environmental initiatives.
With this technology, we are able to monitor and track exactly how
much carbon is being reduced. This information can be verified by EPA
and other entities so that the accuracy of data satisfies the need for
accurate and dependable substantiation. We are confident that if a cap
and trade program were to include a provision that would help them earn
credit for their employee trip reduction, more companies would get
engaged.
Establish Parity Between the Parking and Transit Portions of
the Transportation Fringe Benefit
Section 132(f) of the Internal Revenue Code provides employees and
employers with a transportation fringe benefit. Currently the monthly
cap for the benefit is $220/month for parking and $115/month for
transit. The disparity between the two benefit levels creates a
financial incentive for Americans to drive to work. Many times, those
Americans with transit commutes which cost over $115/month are those
who travel the furthest distance and emit the most carbon. Accor urges
Congress to establish parity between parking and transit. Congressman
McGovern (D-MA), has introduced legislation to this effect, (H.R.
1475), additionally, we understand that one legislative proposal calls
for parity to be established at $200/month, creating a revenue positive
proposal. Accor urges Congress to include this proposal in the Global
Warming legislation, or at its earliest convenience.
Set-Aside Proceeds From ``Cap and Trade'' for Transit
With one-third of all carbon emissions stemming from the
transportation sector, it would be prudent for Congress to set-aside a
portion of the proceeds generated from a cap and trade program for the
expansion of mass transportation. Additionally, a portion of these
funds should be dedicated to the marketing and promotion of mass
transportation. The capital needs of transit systems are overwhelming,
and should be addressed, but we would urge Congress to recognize that
these funds should not only go toward expanding transit into areas that
are not currently served by mass transit, but funds should also be
spent to better market and provide outreach where transit is already
available.
Accor is grateful for the opportunity to submit written testimony
and looks forward to working with this Committee as the process moves
forward.
Statement of Environmental Defense Fund
I am pleased to submit the attached statement from Environmental
Defense Fund to be entered into the record for the September 18 hearing
on climate change. We encourage the Ways and Means Committee to
continue to delve into this critically important issue and urge you to
make a cap on greenhouse gas emissions a high priority for 2009.
There is no time for delay. The U.S. needs to move quickly and
aggressively to spur economic and job growth, increase our energy
independence, and stabilize our climate. A strong emissions cap with
aggressive near- and long-term reduction targets would provide
investors, innovators, and businesses with the reliable, long-term
demand for low-carbon solutions they'll need to make that
transformation a reality. Two climate bills that have been referred to
your Committee--the Climate MATTERs Act (H.R. 6316) and Investing in
Climate Action and Protection Act (H.R. 6186)--reflect the needed level
of reductions.
Importantly, the U.S. can achieve these reductions while
maintaining robust economic growth in the U.S. As the attached
statement details, several independent studies conducted by highly
respected groups in government and academia share a key finding: That
the overall impact of climate policy on the U.S. economy will be small.
We thank you for holding the hearing and look forward to working
with you to develop an environmentally and economically sound solution
early in the 111th Congress.
Sincerely,
Nathaniel Keohane
Director of Economic Policy and Analysis
Environmental Defense Fund
__________
What Will it Cost to Protect Ourselves From Global Warming? The Impacts
On the U.S. Economy of a Cap and Trade Policy for Greenhouse Gas
Emissions
[GRAPHIC] [TIFF OMITTED] T2201A.113
Nathaniel Keohane, Ph.D.
Peter Goldmark
Executive Summary
Important parts of the world are acting to reduce the greenhouse
gases that cause global warming, and the United States is now debating
whether to join that process. This paper examines the potential impact
of a cap on greenhouse gases on the U.S. economy as a whole and on
American families.
What will it cost to protect ourselves against the potentially
catastrophic consequences of global warming? Advocates of action
anticipate minimal costs. Those who want to do nothing sometimes assert
that carbon cuts will ``bankrupt the economy.'' Who is right?
This paper conducts the broadest assessment to date of the impacts
on the U.S. economy of capping greenhouse gases. This report
synthesizes the findings of several state-of-the-art economic models,
and arrives at a strong conclusion:
The United States can enjoy robust economic growth over the next
several decades while making ambitious reductions in greenhouse gas
emissions. If we put a cap and trade policy in place soon, we can
achieve substantial cuts in greenhouse gas emissions without
significant adverse consequences to the economy. And in the long run,
the coming low-carbon economy can provide the foundation for sustained
American economic growth and prosperity.
But for such a policy to be truly affordable, we must act now.
Delay will greatly increase the economic cost of making the necessary
emissions reductions, and will risk locking in irreversible climate
change. And delay will put the United States further behind the rest of
the world in the race to invent and produce the next generation of
energy technologies.
What Makes Our Analysis Different_Relying On a Range of Forecasts
We surveyed eight policy scenarios analyzed by five highly
respected, transparent, and peer-reviewed economic modeling groups in
government and academia: The Energy Information Agency (EIA), Research
Triangle Institute (RTI), Harvard (the IGEM model), the Massachusetts
Institute of Technology (MIT), and Pacific Northwest National
Laboratories (PNNL). None of these models is perfect, as no economic
model can be. A particular challenge for models is predicting the
course and pace of technological innovation--a key economic driver in
the transition to a low-carbon economy.
Advocates have cherry-picked the largest or smallest numbers from
one or another of these models to support their positions. But sweeping
conclusions based on a single model cannot be trusted. Judiciously
using a range of current models, however, can inform the policy debate
in useful ways.
Ambitious Climate Policy Is Affordable
While these models take different approaches to representing the
U.S. economy, they share one basic conclusion: The overall impact of
climate policy on the U.S. economy will be small.
The U.S. economy has averaged nearly 3% growth per year
in the postwar period, and is projected to continue at nearly that
pace. The projected median impact on that annual growth of capping
greenhouse gases is three-hundredths of a percentage point (0.03%).
The U.S. economy is projected to nearly double in size
between now and the year 2030. In that year, the median forecasted cost
to the U.S. economy of capping greenhouse gas emissions is only 0.58%.
The projected impact on GDP can be thought of this way:
Under business as usual, the total output of the U.S. economy is
projected to reach $26 trillion in January 2030. With a cap on
greenhouse gases, the economy will get there by April.
In present-value terms, the median projected impact of
climate policy on U.S. GDP is less than one-half of 1 percent for the
period 2010-2030, and under three-quarters of 1 percent through the
middle of the century.
The range of differences among models about the future
size of the economy overwhelms the impact that any of them projects
from a cap on carbon; in
other words, even under varying assumptions, the impact of climate
policy is small. The models vary by as much as 10% in their estimates
of what economic output will be in 2030--17 times the estimated 0.58%
cost of capping greenhouse gases.
[GRAPHIC] [TIFF OMITTED] T2201A.114
Importantly, none of these models takes into account the damages
from allowing global warming to build up unchecked and the value of
avoiding them. That is, they look at only one side of the ledger: the
costs of acting, not the benefits. These ``costs'' of reducing
emissions actually represent an investment that will pay enormous
dividends--by creating a low-carbon economy filled with new
opportunity, and by ensuring a livable planet for generations to come.
A Cap On Greenhouse Gases Will Not Adversely Affect Employment In the
American Economy
The overall impact of climate policy on employment,
according to government projections, will be very small--a cumulative
reduction of less than one-twentieth of 1 percent (0.05%) over the next
two decades, relative to business as usual. That forecast, moreover,
considers only current sectors of the economy; by its nature, economic
modeling cannot anticipate the emergence of entirely new sectors--and
the associated jobs--that will arise in the low-carbon economy.
The manufacturing sector has a high level of job
turnover--over 10% of all manufacturing jobs are either created or
destroyed every 3 months. By comparison, the impact of capping
greenhouse gases on manufacturing employment will be tiny--a cumulative
effect of only a few percentage points over more than two decades. And
this is the sector expected to be affected most by a cap on greenhouse
gases.
[GRAPHIC] [TIFF OMITTED] T2201A.115
Of course, no one whose job is lost is comforted by the
fact that he or she is one of relatively few affected. The broader
trend of job erosion in the manufacturing sector can neither be
reversed nor eased significantly by climate policy--precisely because
the effects of such policy are so small. Dealing with volatility in
this sector will remain the province of other aspects of American
economic and social policy.
For the average American family, the cost of capping
greenhouse gases will amount to less than 1% of household budgets over
the next two decades.
Stated as a fraction of household income, capping
greenhouse gases will cost families less than a penny on the dollar.
This is much less than what Americans already spend in their household
budgets to protect themselves and their families. By comparison, more
than 3 cents of every dollar already goes to insurance; nearly 4 cents
goes to national defense; and 10 cents goes to Social Security.
The Effects of Capping Greenhouse Gases On Household Energy Bills Will
Be Modest, and Are Much Smaller Than the Fluctuations That
American Families Already Live With
Household impacts will be most pronounced in the area of energy
prices because of our dependence on fossil fuels. Importantly, energy
prices are accounted for in the overall impacts described above. But
even taken in isolation, the projected effects of climate policy on
household energy spending are modest.
Home energy bills are projected to rise by only a few
dollars a month over the next two decades, relative to business as
usual, taking into account effects on prices and corresponding shifts
in household consumption. And the fact that the overall costs of
capping greenhouse gases will be so modest means that we can easily
afford programs to offset the burden of these increased costs on low-
income households.
Price fluctuations due to supply bottlenecks and Mideast
politics are recurring consequences of relying heavily on imported
hydrocarbon fuels. Recent run-ups in the price of gasoline at the pump
and in the price of home heating oil and natural gas are several times
larger than the predicted effects of capping greenhouse gases.
By the same token, the uncertainty about what gasoline
prices (or other energy prices) will be two decades from now dwarfs the
estimated impact from climate policy. For example, one study projects
that a cap on greenhouse gases would add about 15% (35 cents a gallon)
to the price of gasoline in 2030 relative to business as usual. This is
much smaller than the uncertainty surrounding any estimate of gasoline
prices that far in the future. This conclusion is in line with other
assessments: The median forecast for the studies discussed here is an
increase of 13% by the year 2030.
[GRAPHIC] [TIFF OMITTED] T2201A.116
If We Act Now, a Cap and Trade Policy Can Provide the Basis for
Continued U.S. Economic Leadership
In the longer term, the transition to a low-carbon economy may
offer the United States a comparative advantage in a highly competitive
world. A look back at the history of the U.S. economy since World War
II teaches a number of lessons:
American ingenuity and innovation have achieved
challenges of much greater magnitude before. The mobilization for World
War II involved a complete transformation of the U.S. economy in just 2
years. If we do not waste our scarcest resource--time--we can make the
transition to a low-carbon economy without adverse macroeconomic
impacts.
Technological change is the engine of progress in the
American economy. We emerged as the world's economic superpower in the
last century by leading every economic revolution--from mass production
to aviation to semiconductors and the Internet. Our continued
prosperity in the new millennium depends on leading the next
transformation: The emergence of a low-carbon economy.
But innovation does not just happen: It responds to the
basic economic drivers of demand and price. A hard, long-term cap on
carbon emissions will provide the market signals necessary to spark
innovation and unleash the kinds of powerful market forces that
propelled our economy in the postwar period. A failure to stimulate
innovation through a carbon cap will cede leadership in the low-carbon
economy to others.
__________
Environmental Defense Fund is dedicated to protecting the
environmental rights of all people, including the right to clean air,
clean water, healthy food and flourishing ecosystems. Guided by
science, we work to create practical solutions that win lasting
political, economic and social support because they are nonpartisan,
cost-effective, and fair.
This report is available at www.edf.org/climatecosts.
2008 Environmental Defense Fund; Cover photo: istockphoto.
Statement of Humane Society of the United States and the
Humane Society International
The Humane Society of the United States (HSUS), the Nation's
largest animal protection organization representing 10.5 million
supporters, and Humane Society International (HSI), the international
arm of HSUS, submit the following comments to the House of
Representatives Committee on Ways and Means.
HSUS and HSI are encouraged that the Committee on Ways and Means
recognizes the need for policy mitigation strategies that will reduce
and stabilize greenhouse gas (GHG) emissions from industry,
agriculture, and transportation in the United States. However, we are
troubled by many of the existing proposals--including H.R. 2069 (The
Save Our Climate Act of 2007), H.R. 6316 (The Climate MATTERS Act of
2008), H.R. 3416 (America's Energy Security Trust Fund Act of 2007),
and H.R. 6186 (The Investing in Climate Action and Protection Act of
2008)--as very few, if any, take into account farm animal production,
despite its contribution to GHGs.
The United Nations Food and Agriculture Organization (FAO) has
found that the farm animal sector contributes 18% of total GHGs, which
is more than the entire transportation sector, including cars, trucks,
airplanes, and ships.\1\ Every step of meat, egg, and milk production--
including the land use changes for feed crop production and grazing
land, the manufacture of fertilizers and pesticides for feed crops, the
transportation of live animals and animal products, and the management
of farm animal manure--contributes to GHG emissions. Fertilizer
production for soy and corn crops for farm animal feed alone
contributes some 41 million tonnes of carbon dioxide annually.\2\
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\1\ Steinfeld H, Gerber P, Wassenaar T, Castel V, Rosales M, and de
Haan C. 2006. Livestock's long shadow: Environmental issues and
options. Food and Agriculture Organization of the United Nations, p.
xxi.
\2\ Ibid, p. 86.
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Conversely, more sustainable and higher welfare animal production
practices, including pasture-raised systems, can help mitigate the
effects of climate change by helping to sequester carbon in the soil,
reducing deforestation for soy and other feed crop production, and
eliminating the need for artificial sources of fertilizer.
Furthermore, the manufacture of biofuels from both animal waste and
animal fat has the potential to encourage unsustainable animal
agriculture practices. On farms raising both plants and animals, manure
is typically a very efficient and available source of nutrients for
crops, often eliminating the need for any artificial fertilizers. On
factory farms, however, the huge quantity of waste produced makes it
nearly impossible for the manure to be utilized as fertilizer on nearby
cropland, a problem made worse by beef, chicken, egg, and dairy
operations increasingly being sited far from where crops are grown.
Storage of manure in lagoons can also contribute to water pollution and
harmful air emissions, according to a Government Accountability Office
(GAO) report released in September 2008.\3\
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\3\ U.S. Government Accountability Office (GAO). 2008. Concentrated
animal feeding operations. EPA needs more information and a clearly
defined strategy to protect air and water quality from pollutants of
concern. September 2008. GAO-008-944.
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As a result, Smithfield, Tyson Foods, and many other animal
agribusinesses are looking for ways to profit from the 500 million tons
of manure generated annually by industrial farm animal production
operations.\4\ The cost of installing digesters and biogas recovery
equipment can be extremely expensive, and many of these systems are
supported by government subsidies and tend to only be profitable at
large-scale industrial facilities.\5\
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\4\ U.S. Environmental Protection Agency. 2003. National Pollutant
Discharge Elimination System permit regulation and effluent limitation
guidelines and standards for concentrated animal feeding operations
(CAFOs); final rule. February 12. Federal Register 68(29):7176, 7180.
\5\ U.S. Environmental Protection Agency. 2007. EPA helps farmers
turn livestock waste into wealth. January 18. http://yosemite.epa.gov/
opa/admpress.nsf/756fc9115d0af011852572a000655 93e/
c9f1eb2189c4600d852572670065a77d!OpenDocument. Accessed April 23, 2008.
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Installing anaerobic digesters can require significant investment
depending on the type of system used. As a result, some States have
grant and subsidy programs that offset the cost of installation.
However, digesters work best on large factory farms that have ``stable,
year-round manure production,'' not smaller scale farms that lack the
necessary infrastructure to collect at least half of that manure every
day.\6\
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\6\ U.S. Environmental Protection Agency. Managing manure with
biogas recovery systems, improved performance at competitive costs. The
Agstar Program, p. 5.
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Additionally, the funding of anaerobic digesters through the EPA
AgStar program for industrialized animal production operations in the
United States and the use of the Clean Development Mechanism (CDM) of
the Kyoto Protocol to fund installation of anaerobic digesters in
developing countries may actually encourage the growth of factory farms
internationally, which will further exacerbate environmental challenges
and animal welfare assaults.
There is also concern that the use of market-based carbon offsets
or carbon trading mechanisms could do more harm than good. Many
environmental organizations are wary of supporting projects in the
developing world, such as planting trees to offset the carbon emissions
from air travel and other activities. Unless there are strict
regulations and compliance mechanisms in place, such programs could
support fast-growing tree plantations for the timber industry, for
example, that do very little to sequester carbon or mitigate climate
change. A better approach is to steer carbon trading toward projects
that actually keep wild forests intact and support conservation of
species, including gorillas and other endangered animals indigenous to
forest ecosystems, such as those supported by the United Nations
Environment Programme Great Ape Survival Project (GRASP).\7\
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\7\ United Nations Environment Programme (UNEP). Great Ape Survival
Project (GRASP) http://www.unep.org/GRASP/. Accessed September 2008.
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In addition, ethanol production may actually contribute more GHGs
than fossil fuel-based energy.\8\ The ethanol industry is also selling
ethanol co-products, including distiller's grains (DGs), a waste or co-
product of dry mill ethanol production, in an attempt to create a
symbiotic relationship between industrial animal agriculture and the
biofuel industry.\9,\ \10\
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\8\ Searchinger T, Heimlich R, Houghton R, Dong F, Elobeid A,
Fabiosa J, Tokgoz S, Hayes D, and Yu T. 2008. Use of U.S. Croplands for
Biofuels Increases Greenhouse Gases Through Emissions from Land Use
Change. Science, 319. 5867: 1238-40.
\9\ Biofuels can help the livestock sector. 2008. Farmers Guardian.
March 13, 2008. http://www.farmersguardian.com/
story.asp?sectioncode=1&storycode=17019. Accessed March 20, 2008.
\10\ Lardy G. 2008. Biodiesel benefits for cattle producers:
Feeding byproducts of biodiesel production. Executive Summary. p. 1.
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Recycling ethanol co-products, however, is not always healthy for
animals or humans. Research from the University of Kansas in 2007
suggests that cattle who are fed DGs have a higher likelihood of
harboring E. coli O157 in their hindgut, or colon.\11\ While the
pathogen doesn't harm cattle, it remains the leading cause of kidney
failure among previously healthy children and kills dozens of Americans
a year.\12\
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\11\ M.E. Jacob, J.T. Fox, J.S. Drouillard, D.G. Renter, T.G.
Nagaraja. 2008. Effects of dried distillers' grain on fecal prevalence
and growth of Escherichia coli O157 in batch culture fermentations from
cattle. Applied and Environmental Microbiology, 74. 1:38-43.
\12\ National Institutes of Health. 2005. Foodborne diseases.
National Institute of Allergy and Infectious Disease fact sheet.
February. www3.niaid.nih.gov/healthscience/healthtopics/ecoli/
Complications.htm. Accessed September 26, 2008.
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Given the importance of animal agriculture both in contributing to
and mitigating climate change, it is crucial that any climate change
policy or laws enacted by the United States take farm animal production
practices into account. While there may be concern regarding the
expense of encouraging farmers to transition away from industrial, low-
welfare \13\ animal agriculture practices, including rearing animals in
fossil fuel-intensive confined animal feeding operations (CAFOs), the
long-term social, environmental, economic, and public health benefits
of more sustainable, higher-welfare systems outweigh any short-term
financial input.\14\ As well, public opinion polls consistently show
that U.S. consumers are concerned not only about food safety and
environmental integrity, but also the welfare of animals raised for
meat, eggs, and milk, and have expressed a willingness to pay premium
prices for higher welfare and organic products.\15,\ \16\
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\13\ See The Humane Society of the United States. An HSUS Report:
the welfare of intensively confined animals in battery cages, gestation
crates, and veal crates. http://www.hsus.org/web-files/PDF/farm/hsus-
the-welfare-of-intensively-confined-animals.pdf.
\14\ National Commission on Industrial Farm Animal Production.
2008. Putting meat on the table: Industrial farm animal production in
America. A report of the Pew Commission on industrial farm animal
production. Executive summary, p. 51-5. http://www.ncifap.org/_images/
PCIFAPSmry.pdf. Accessed September 24, 2008.
\15\
Technomic survey. 2007. Cited in MeatingPlace. Q and A Animal kingdom. M
ay 2007. p. 23.
\16\ Harris Interactive. 2007. Large majorities see organic food as
safer, better for the environment and healthier--but also more
expensive. Harris Poll #97, October 8, 2007. http://
www.harrisinteractive.com/harris_poll/index.asp?PID=813.
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Communities also benefit from less ground and surface water
pollution when factory farms are not located nearby.\17\ Public health
is also jeopardized--asthma, diarrhea, headaches, and sore throats are
all more common among neighbors who live close to factory farms.\18\ As
a result, the American Public Health Association has recommended a
moratorium on construction of new CAFOs.\19\ Furthermore, the
prestigious Pew Commission on Industrial Farm Animal Production has
recommended, in addition to phasing out intensive animal confinement
practices such as battery cages, sow gestation crates, and veal crates,
phasing out the use of antibiotics in animal agriculture because of
concern about antibiotic resistance.\20\
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\17\ U.S. Environmental Protection Agency. 2003. National Pollutant
Discharge Elimination System permit regulation and effluent limitation
guidelines and standards for concentrated animal feeding operations
(CAFOs); final rule. February 12. Federal Register 68(29):7176, 7237.
\18\ U.S. Environmental Protection Agency, Office of Water. 2001.
Environmental assessment of proposed revisions to the National
Pollutant Discharge Elimination System regulation and the effluent
guidelines for concentrated animal feeding operations. www.epa.gov/
waterscience/guide/cafo/pdf/EnvAssessPt1of2.pdf. Accessed September 24,
2008.
\19\ American Public Health Association. 2003. Precautionary
moratorium on new concentrated animal feeding operations (CAFOs).
September 24, 2008. http://www.apha.org/advocacy/policy/policysearch/
default.htm?id=1243. Accessed September 24, 2008.
\20\ National Commission on Industrial Farm Animal Production.
2008. Putting meat on the table: Industrial farm animal production in
America. A report of the Pew Commission on industrial farm animal
production. Executive summary, p. 21-22. http://www.ncifap.org/_images/
PCIFAPSmry.pdf. Accessed September 24, 2008.
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In consideration of the competition concerns raised, HSUS and HSI
strongly believe that the United States must participate in an
international agreement, where all major emitting countries commit to
following the same rules. This lessens the potential for the United
States to have higher costs or for U.S. products to be uncompetitive
with products from another country, as all signatories to the agreement
will be obliged to follow a similar climate change mitigation scheme.
Statement of Industrial Energy Consumers of America
The Industrial Energy Consumers of America (IECA) is a trade
association whose membership are exclusively large energy intensive
consuming companies with representation from every sector, has firmly
concluded that because they compete globally on both exports and
imports; and if the U.S. regulates ghg emissions using a cap and trade
policy approach, it will be critically important that energy intensive
consuming industries be provided free emission allowances to cover the
resulting increase in both direct and indirect costs. If not, their
competitiveness will be at risk and will unfortunately result in their
movement to countries that have lower energy and compliance costs. It
is a matter of economic survival.
There are several policy options beside cap and trade to regulate
ghg emissions that vary greatly in effectiveness and cost. Regardless
of the choice, it is essential that the `border adjustment' issue avoid
throwing the energy intensive manufacturing companies into a legal
morass with the WTO. This is not only expensive and time consuming but
adds tremendous uncertainties that will negatively impact companies and
entire industrial sectors.
Climate change and the policies necessary to avoid and reduce
greenhouse gas emissions is a top priority for IECA. We welcome the
opportunity to work with you and the Committee to fashion a regulatory
system that is cost effective in reducing ghg emissions. We know
something about reducing ghg emissions. The industrial sector's ghg
emissions are at 1990 levels while the residential, commercial,
transportation and power sectors emission have all increased by over 30
percent.
__________
The Industrial Energy Consumers of America is an association of
leading manufacturing companies with $500 billion in annual sales and
with more than 850,000 employees nationwide. It is an organization
created to promote the interests of manufacturing companies for which
the availability, use and cost of energy, power or feedstock play a
significant role in their ability to compete in domestic and world
markets. IECA membership represents a diverse set of industries
including: plastics, cement, paper, food processing, brick, chemicals,
fertilizer, insulation, steel, glass, industrial gases, pharmaceutical,
aluminum and brewing.
Statement of James Culliton
Thank you for the opportunity to provide a statement regarding the
issue before you. My name is James Culliton; I am affiliated with no
group and have no financial interest in the matter at hand.
Having read the written testimony as submitted on September 18,
2008, it is apparent that my comments lack the pedigree and meticulous
investment in research and citations evidenced by most of that
testimony. Yet, I believe my comments are salient to the issue.
If some variant of cap and trade is passed, I have several
concerns.
First, how would Federal carbon permits be integrated into existing
State, regional and post-2012 carbon trading schemes? Arbitrage is not
a mere possibility, it is a certainty, unless structurally mitigated
through thoughtful design. If the overuse of derivatives has rendered
it difficult to valuate a company, imagine how emissions trading of
pollution credits in multiple markets will render actual reduction
difficult to gauge.
Second, in the retail electricity context, should utility
shareholders or ratepayers benefit from emissions reductions? These
reductions will trace back to effective demand-side management,
increasing use of renewable generation, as well as pollution control
device installation. If there is profit realized from the sale of
emissions credits, it should be distributed to the ratepayers, who
would have reduced their consumption and paid for the construction/
operation of renewable generation and pollution control devices. The
utility shareholders are already able to earn a return of their capital
investment plus a return on the latter two; they should not realize a
double return in the form of any emissions credit trading profits.
Third, although a 100% auction with a floor and a ceiling should be
used, if allocation is the chosen means to distribute credits (or a
hybrid auction-allocation as in the current Boxer bill), allocations
should not be given away. The regressive impact of this granting of a
property right would be disastrous. Kyoto punted on the initial
valuation question: The price to pollute was set at zero. In broad
terms, an emission credit allocation masks the true cost of a
particular enterprise. If the true costs of doing business are not
reflected in an enterprise's end-product, the market is shielded from
price signals that might otherwise operate to reward an enterprise that
pollutes less. In other words, allocating credits prevents a market
from rewarding efficient production. If there is no reward for reducing
emissions, there is little chance an enterprise would put itself at a
competitive disadvantage. Assuming pollution efficiencies are otherwise
desired (perhaps to boost a marketing campaign), the price of each
credit would fall proportionately, even in a trading market where the
supply of credits is limited. The SO2 system anticipated
this and devalued future credits incrementally; apparently, Kyoto did
not. This general point is compounded when, as in Kyoto, the initial
allocation of credits exceeds the absolute number of credits needed.
Certainly, the collapse of many former Soviet-bloc industries is
partially to blame, as it created a glut of credits. Our national
push--evidenced in Renewable Portfolio Standards at the State level--
toward renewable generation and increased demand-side management could
create a similar glut. The banking of credits (particularly when their
carried-over value is undepreciated) and imprecise initial calculation
of actual numbers to allocate is even more troubling on a going-forward
basis.
Respectfully, I believe the best available option would be an
upstream carbon tax, distributed across sectors evenly, with the
proceeds to be distributed on a pro-rata basis to taxpayers (after
monitoring/enforcement monies are removed). To combat any resulting
import and export competitive disadvantages, an import tax or export
credit could be handled at the Customs office in question. If this
structure creates a problem with international trade group compliance,
fix the trade group rules to recognize a carbon exception. The issue is
really not insurmountable. The only real problem with a tax structure
is that it reduces the emitters ability to choose when to reduce
emissions. The other side of the when coin is that it fosters
innovation and technological advance more quickly--thereby addressing
the underlying problem of excess carbon dioxide in the atmosphere
faster. A tax also has the advantage that it could be ratcheted up or
down on a yearly basis to address any unintended effects. A cap and
trade does not have such flexibility, especially if banking is
permitted. Finally, assuming the U.S. participates in the next phase of
a global cap and trade, if a tax is established, the emitters who
reduce would be well-positioned to capitalize in the global emissions
market. Since the baseline for emissions would be set at pre-2008
levels, the U.S. emitter who reduces would in essence receive a double
reward for designing and implementing efficiencies: Through lowering
its domestic tax liability (thereby either raising net profits or
gaining competitive market-share advantages) and gaining more credits
faster on the global emissions market.
Statement of Julian Keniry
Thank you, Chairman Rangel and Ranking Member McCrery, for hosting
this important hearing on policy options to address climate change.
Since 1936, the National Wildlife Federation has advocated for wildlife
habitat and protection, environmental education, and conservation of
our public lands. The Federation has over 4 million members and
supporters and 48 affiliate organizations across the country. We have a
robust climate change policy solutions campaign, and I am here today to
talk with you about one important aspect of our multi-faceted program,
climate change education. I direct the Federation's Campus Ecology
Program, which supports student and faculty efforts to help reduce the
carbon footprint on college campuses and to promote sustainability
curricula at universities.
We commend you for holding this important hearing and for
considering legislation to support strong reductions in greenhouse gas
emissions to put America on the path to a clean energy future. We can
work together to create a new energy economy that protects wildlife,
creates new green jobs, provides strong green education programs, and
ensures a thriving economy. As you consider policy options to curb
climate change, we urge you to support policies that will help wildlife
adapt to global warming and support comprehensive global warming
education to prepare citizens for the opportunities of the new energy
economy. We strongly believe that auction proceeds from a cap and trade
climate security act should remain dedicated to climate change
solutions.
We also recognize the efforts of Congressmen Markey and Honda who
have introduced legislation to advance climate change education. While
the language included in Congressman Doggett's H.R. 6316 is a step in
the right direction, we must do more and we must act quickly to ensure
the public moves beyond mere awareness of global warming as a problem
to a strong understanding of the causes of global warming and what they
can do to find solutions.
The Federation's research shows that a dramatic investment in
climate change education is needed to ensure sufficient emissions
reductions to stop global warming and to prepare the next generation
for our new clean energy economy. The recent spotlight has focused on
how our new economy will create millions of ``green''-collar jobs, but
much less attention has been paid to what is needed to prepare our
Nation's young people for these rewarding new careers. In August 2008,
we released, Campus Environment 2008: A National Report Card on
Sustainablity in Higher Education. This report contains some surprises.
It shows that many positive changes are occurring on U.S. campuses,
especially in the greening of campus operations. There are no surprises
there. But unexpectedly, the amount of sustainability-related education
offered on campuses did not increase since our 2001 study and may have
even declined. In short, the curriculum is not keeping pace with the
greening of campus operations and faculty are lagging behind their
staff and administrator peers in fostering sustainability education.
This is cause for deep concern.
The National Wildlife Federation's report reflects the Nation's
largest survey created to gauge campus leadership for sustainability--
with more than 1,060 participating schools--and demonstrates how our
learning hubs integrate green programs into day-to-day operations such
as transportation, landscaping, energy conservation, and waste
reduction. But schools fall behind when it comes to providing students
with the academic preparation needed to face environmental challenges
and seize the opportunities of the future. Our results show that, in
the past 8 years, sustainability-related education offerings and
recruitment programs have declined, as have faculty conducting
environmental and sustainability research.
Our 2001 to 2008 comparison of the curricular and academic
dimensions of sustainability shows little infusion of sustainability
concepts across disciplines, very few campuses requiring sustainability
courses for all students, and low levels of support for faculty
development on climate change and other sustainability topics. Students
studying subjects such as engineering, business, health sciences and
teacher education--disciplines crucial to our Nation's ability to
create a sustainable economy--receive relatively little exposure to
sustainability concepts and courses. Just over half of colleges and
universities now either offer an undergraduate minor or major in
environmental and sustainability studies, down from two-thirds in 2001.
In 7 years, no significant gains in educating students on
sustainability have been made despite the growing depth of the global
warming challenge and what it means to future professions and their
related disciplines.
Yet, America and the world are in the midst of revolutionary
change. In just the past few years, the threat of global warming has
shifted in the United States from a distant worry to a present and
intense national public conversation. Business leaders and policymakers
are responding with new proposals every day amidst shifting markets.
These shifts are challenging the American education system, especially
higher education, to keep pace and ultimately lead in the realm of
environment and sustainability.
Two things are certain. First and foremost, we have never before
had an environmental challenge on such an immense scale as to force
modern society to remake itself. America will require a new energy
economy and needs an educated workforce to get started on that right
away. Second, addressing this problem and shaping a more sustainable,
low-carbon society will require new thinking supported by new
technology, design, businesses, financing, consumer behaviors and
career paths. That is where education comes in. It plays important
roles by both being part of a changing world and also actively shaping
the future direction of that world.
American higher education has risen to past challenges--and has the
people and the resources already in place to meet today's challenges
head-on. It produces 30 percent of the world's scientists and a
remarkably large percentage of the world's business, diplomatic and
government leaders. Higher education leaders have always been clear
that successful development of human talent and globally-competitive
skills provide the United States with the many critical opportunities
and advantages.
The men and women, who in 20 or fewer years, will lead our
businesses, educational institutions and government agencies are in
school now. We need to offer them the kind of academic and professional
preparation that will ready them to envision and create a different
kind of world. It will be a world which has new and cleaner forms of
energy production, transportation, agriculture, natural resource
management, health care, scientific research, micro and macro
businesses, and other essential technological advances. To achieve this
at the speed required will call for serious new support including a
reevaluation of how we educate every degree candidate from architecture
and engineering to accounting and even teaching itself.
Elevating education for sustainability will require new levels of
incentives for higher education and, in particular, support for
faculty. College and universities need to have the means to provide
faculty with time to network with other faculty and to redesign their
course work. They also need the proper incentives to establish and
track objectives for sustainability education across all disciplines
and to foster interdisciplinary research and teamwork among faculty,
students and staff within and among campuses and with their larger
communities. With the passage of the Higher Education Sustainability
Act provisions in August 2008, which was championed by Congressman
Blumenauer, we have taken a step in the right direction on
sustainability education. We must, however, act quickly to appropriate
significant funding to support climate change education at all levels.
We need to prepare students entering college as well. In addition
to higher education, we need to support comprehensive global warming
education in our elementary and secondary academic development,
vocational and school-to-work programs, professional training and re-
training, and broad consumer education.
As a Nation, the United States has a rich tradition of excellence
in education, especially higher education. But we are witnessing
national and global changes that pose new challenges and opportunities
for higher education leadership. This Report Card tells us there is a
widening gap between where American higher education actually is on
teaching and learning for sustainability and where it should be. Our
national assessment findings serve as a warning. If we are unable to
bridge the gap in student education for sustainability, we miss vast
needs and opportunities. Our findings also point to the need to
incorporate global warming education throughout our public education
programs from elementary and secondary schools, to vocational schools,
to professional training, and general consumer education. With a
greater focus on making the transition and given adequate human and
financial resources, we can bring our public education systems to speed
and help shape a brighter and more sustainable future.
We therefore urge the Committee to include strong allocations for a
comprehensive global warming education policy platform in its climate
security legislation. We applaud your work in holding this important
hearing. Thank you for your time and consideration.
Dear Chairman Rangel and Members of the Committee,
I'm writing in support of Congressman Doggett's Climate MATTERS Act
and to urge the Committee to pass this legislation and give it an
opportunity for debate by the full House. While several worthy bills
have been filed in the House and Senate addressing the critical and
immediate challenge of climate change, H.R. 6316 contains certain
elements that are unique and which merit careful consideration. In this
respect, I would like to highlight the following elements of the
Climate MATTERS Act:
Allocation and Distribution of Emission Allowances--Of the
several greenhouse gas (GHG) cap and trade bills filed in the House and
Senate, the approach to allowance allocation/distribution taken in H.R.
6316 does the best job of allowing unfettered market forces to drive
GHG emission reductions. The success of any cap and trade GHG regime
depends primarily on providing clear and undistorted price signals to
the marketplace, internalizing the true costs of GHG emissions and
providing economic incentive for investment in clean energy
alternatives. In contrast to other legislative approaches that would
hand out the bulk of GHG emission allowances under a free allocation
system and take decades to transition to an auctioning system, H.R.
6316 begins in 2012 with 85% of allowances being distributed through
auctions and phases to full auctioning in a relatively short 5 years.
Clearly, this is the approach that puts the fullest faith in free
market forces, the greatest trust in the innovative capacity of
American business and the highest level of confidence in the wisdom of
the consumer. Likewise, auctioning helps eliminate the manipulation and
jockeying for windfall profits that we have already seen regulated
entities engage in as free allocation systems have been developed and
proposed.
Cost Relief Measures--H.R. 6316 recognizes the potential
for unacceptable short-term risk to the U.S. economy that could be
realized if the price for emission allowances rises too high too
quickly. To this end, Sec. 9933 allows for cost relief measures that
still maintain the integrity of the overall program. Certain other
legislative approaches merely cap the price of emission allowances or
allow for the unrestricted release of additional allowances when
trading prices reach a certain point. This, of course, distorts price
signals, undermines the market forces upon which a cap and trade regime
depends, reduces the corresponding incentive for investment in clean
energy alternatives and threatens our ability to achieve the intended
reductions in GHG emissions. H.R. 6316 instead allows for an increase
to limits on foreign allowances and offset credits--thus ensuring that
a temporary dampening of price signals is accompanied by a
theoretically equal reduction or sequestration of GHG emissions.
Global Cooperation--H.R. 6316 creatively and even-handedly
resolves ongoing concerns about Federal regulation of GHG emissions
potentially placing U.S. businesses at a competitive disadvantage vis-
a-vis producers from countries that do not have comparable GHG regimes
in place. The bill does so through its international reserve allowance
provisions and, through Sec. 111(a)(7), appropriately accommodates the
intent of our WTO agreements and obligations by allocating proceeds to
climate change mitigation programs serving disadvantaged communities in
WTO participant nations.
Early Action Account--Another somewhat unique element of
the Climate MATTERS Act is its recognition of early action taken by
regulated entities to voluntarily reduce greenhouse gas emissions prior
to the implementation of a regulatory mandate to do so. The city of
Austin, and in particular its municipally owned and operated electric
utility, Austin Energy, are widely acknowledged as national leaders on
energy efficiency, demand side management, development of renewable
energy resources and deployment of advanced clean energy technologies.
Likewise, we are now implementing a voluntary carbon cap and reduction
plan at Austin Energy which will, in part, involve the voluntary
purchase and retirement of carbon offset credits. We have implemented
the above strategies because our citizens believe we should play a role
and pay our fair share in the cost of protecting the environment and
natural resources on which we all depend. And we are not alone in this.
Scores of cities and regulated entities have implemented similar
measures in part due to a shared sense of social and environmental
responsibility. Under most of the climate change legislation that has
been filed, however, regulated entities are not given credit for these
actions--even though the climate protection benefits of the actions are
measurable and verifiable, and even though the actions have resulted in
reductions of GHG emissions that would otherwise be trapped
atmospherically and would be contributing to the mounting problem which
we all now face. In Sec. 9512 and Sec. 331, the Climate MATTERS Act
takes an important step toward fairness in distributing the burden of
paying for climate protection by crediting regulated entities for
voluntary GHG emission reduction activities taken between 1994 and
2012.
As mentioned, the city of Austin has taken extraordinary steps to
voluntarily reduce GHG emissions coming from our municipal and utility
operations. We have also begun to implement municipal code changes that
will help reduce GHG emissions throughout the community. Highlights of
those measures include:
Adoption of the Austin Climate Protection Plan, which is
intended to make all municipal fleets, facilities and operations carbon
neutral by 2020.
In less than 2 years, conversion of more than half of our
4,000+ municipal fleet of vehicles and heavy equipment to biofuels and
hybrid technology.
Approximately 700 megawatts of efficiency savings at
Austin Energy in the past 25 years, and a plan to achieve an additional
700 megawatts of savings by 2020.
A doubling of our renewable energy generation from 6
percent 2 years ago to almost 12 percent today. A recent contract for
the largest renewable biomass power plant in the Nation that will bring
our renewable portfolio to 18 percent by 2012. And a plan to produce 30
percent of our electricity from renewable sources by 2020.
Nationally leading building codes that will make all new
single-family homes in Austin zero energy capable by 2015.
Implementation of land-use policies to encourage dense,
mixed-use, walkable and transit-friendly development that will help
reduce vehicle miles traveled.
As the Mayor of Austin, I'm privileged to act as Chairman of the
Board for Austin Energy. Likewise, I serve as Chair of the Energy
Committee for the U.S. Conference of Mayors. In these roles, I've had
the opportunity to study and learn a great deal about energy policy,
and I've had the challenge of implementing climate protection policy at
the local level.
In Austin, we've made great progress, and--at the risk of
immodesty--I believe we serve as a national model and an indispensable
city in this regard. Indeed, in the face of Federal inaction on this
issue, it has been left to local governments to lead the way. The fact
of the matter, however, is that our local efforts will always fall
short of the GHG reductions the united global scientific community
tells us we need to make.
In Austin, for example, more than half of our community carbon
footprint comes from vehicle emissions. Yet, we have neither the
ability nor the authority to regulate transportation fuels and vehicle
emission standards. We can eliminate GHG emissions from our municipal
operations, and we can meet our electric load growth through efficiency
and renewables--as we're doing. But in the fastest growing big city in
the fastest growing State in the Nation, we will always lose ground due
to increased vehicle emissions.
This is just one example of the need we have locally for strong
Federal leadership to reverse course and avoid the worst of the impacts
of global climate change. We can not do it alone. As I write, Austin is
hosting thousands of evacuees from Hurricane Ike--just as we did for
Hurricanes Katrina and Rita. It is a stark and heartbreaking reminder
of the realities we'll continue to face if the United States does not
step up and take its rightful role as a world leader on this issue.
With that in mind, I would ask you to listen to the scientists who
uniformly tell us of the targets we need to reach, listen to the
economists who advise us on the most efficient and equitable tools for
meeting those marks, and give thoughtful consideration to your
respected colleagues, such as Congressman Doggett, who propose vehicles
that embody the best of those ideas.
Sincerely,
Will Wynn
Mayor
Dear Congressman Doggett,
I have read the materials about your proposed Climate Matters Act,
and while I am not an expert on the topic of emissions auctions and
some of the other elements of the very ambitious legislation, I do know
something about the clean energy alternatives we will have to
transition to, in order to meet your goals. We all miss the days of
gasoline under a dollar a gallon, but the good news is that if we make
a commitment to reduce CO2, as well as other emissions,
Americans can find a way to make a business out of it. Although some
people are frightened by the prospects of the changes ahead, I think it
will be like what happens in the forest when an old tree finally falls:
Many new saplings have a chance at their spot in the sun, and an
explosion of growth takes place.
Your program appears to allow emission sources three options:
First, they can reduce their own emissions, using a wide
variety of clean energy or environmental technologies and strategies,
only limited by our creativity;
Second, they can purchase emissions allowances, and your
bill reinvests a portion to support clean energy and environmental
programs, and training;
Third, they can purchase credits or allowances from others
with opportunities to reduce emissions themselves, or help others
reduce their emissions.
Each of these options allow innovation to take place within a
market environment, where the most cost-effective solutions can rise to
the surface. This is an important element of the plan, if I understand
your strategy correctly, because we need to be sure we don't get in the
way of some of the options which seem ready to replace the status quo.
We have a mind-boggling array of technology emerging to make us more
efficient at everything we do. We have only begun to tap the potential
of renewable resources. And, there are still some tricks up our sleeves
to make the old fossil fuels less troubling.
Naturally the first thing to do when you find yourself in a hole is
stop digging. And, the most cost-effective strategy we can all turn to
in order to reduce emissions is efficiency, in a variety of forms. The
city of Austin just adopted a process for rating the energy efficiency
of every home at the time of sale, and we have been working with Texas
A&M's Energy System's Lab on producing a web-based energy scoring
system that will be adopted for a voluntary labeling program statewide.
We are working with the Texas Workforce Commission and the Texas
Foundation for Innovative Communities to develop curriculum to meet the
training needs for energy auditors and building science educated
technicians, which we expect to explode. Austin is the birthplace of
the green builder movement, and you probably know our old friend Clark
Wilson, once a large tract-home builder, has reentered the business as
GreenBuildersInc.com, building some of the most energy efficient homes
anywhere. I could go on. It is an exciting time.
Smart energy technology is the widely-used term for simply bringing
our utilities, and our use of utilities, into the digital age, but it
too holds out the promise of capturing huge efficiencies. All the Texas
utilities are undertaking a systematic mass deployment of digital
electric meters and we are piloting two-way communicating thermostats
in the urban areas, and e-Radio energy broadcasts directly to new
thermostats with FM receivers. We predict that demand response will
replace the last 5 percent of peak generation by 2015. One of our
clients have developed the intelligence through long research that
allows them, using available market data and a simple communicating
thermostat, to determine the thermal performance of a building,
identify homes that need energy improvements, or help the occupants
modify their behavior to significantly lower their bills. The same
intelligence alone allows this firm to improve the energy reduction
associated with a demand response program by 10 to 15%.
Austin is moving toward an integrated system of advanced meters,
but you might be surprised to know that Bluebonnet Cooperative may have
the most complete system in the State at the moment. I was visiting
with the General Manager today, Mark Rose, who has every customer on a
communicating meter, and the system is integrated so that the customer
services call center can talk to a customer while reading his/her meter
on the spot. The next move will be toward time-of-use pricing signals
and enabling greater control over their energy use for his customers,
but notice it comes with increased customer service!
Here at Good Company Associates we are working with a coalition of
utilities and technology companies to accelerate the adoption of
standardized home area network equipment and controls. We have just
made patent filings for a service platform that would allow premise
owners to access their home or business controls remotely, or authorize
a third party provider to do so on their behalf. I plan to live long
enough to see this come to pass.
By the way automated reading of gas and water meters is also
following on the coattails of the electric systems, but additional
technologies are emerging to identify leaks in gas and water systems
that will save huge amounts of energy.
We are also working with a newly patented system for thermal
storage, applicable to smaller buildings including single family homes,
which is being developed here in Texas. And, just down the road this
side of San Antonio, a client of ours is developing electric drive
systems for electric cars and electric/gas hybrids, and onboard idle
reduction equipment for large transport vehicles.
Many people will point out that we can't ``save our way out of the
energy crisis,'' and that is certainly true, but it will make it a lot
easier for us to maintain higher lifestyles with the renewable energy
resources we have. I'm proud to have helped develop our first Texas
commercial wind farm in 1995, and to know that the State has now
surpassed every other State in wind capacity installed. Our new $5
billion commitment to building transmission to the windy areas of West
Texas will make way for at least a doubling of the capacity here, and
also open the way for development of solar systems in those desert
areas that can share the transmission lines, because the wind seems to
blow least when the sun shines the brightest there. These developments
are driving a tremendous wealth to West Texas landowners. Texas was
just chosen for one of two sites for national wind turbine component
testing, and we are working to help assure a cluster of related
businesses grow up around this important new center. In addition, we
are currently undertaking a significant multi-client study of large-
scale energy storage, and how it might complement this explosion of
resource projects in Texas. With so many salt dome storage sites
holding natural gas or chemicals in the State today, we have the know-
how and technology to develop compressed air energy storage as well.
I'm surprised by how few people know that only about 9,000 feet
under most of East Texas the Earth reaches temperatures over 250
degrees Fahrenheit. And, the entire Texas-Louisiana coastline is a geo-
pressurized zone that has pockets of substantial reserves of
pressurized steam, often found in conjunction with natural gas. We have
drilled so many holes in the ground down here that it is the most
studied and best understood geology in the country. In past years, the
U.S. Department of Energy spent about $140 million to explore this, but
found (in 1990) that the cost of production would not support
competitive pricing--which at the time was about $1.20 per Mcf for gas
and 2 cents per kWh for electricity at wholesale! Today things look
quite differently. In the U.S. alone over 100 new geothermal power
projects are on the drawing boards or under construction. Texas has yet
to announce its first project (about 80% of the U.S. capacity is in
California), but the UT Bureau of Economic Geology estimated years ago
that we could provide almost 30% of the State's current power from this
resource, and I think that was conservative. We know how to develop
underground resources better than anyone in the world and there are at
least two companies in Houston that can build the above ground plant
for this resource. We predict geothermal is the next big renewable
resource.
One of our clients just inked a deal with Austin Energy for a 20
year contract to provide 100 MW of wood fired biomass energy to the
city, and let me tell you the county judge of Nacogdoches came to town
just to testify for the contract's acceptance. A lot of paper mills
have shut down in that part of East Texas and this project is going to
put a lot of woodland owners and loggers in the black again, with long-
term supply contracts. We know of two more projects under development
already.
I know I'm leaving a lot of good folks out of my rambling coverage
of the exciting new saplings struggling for the light, but before I
stop I want to point out that there are some pretty creative people
trying to figure out how to use the high quality fossil resources we
have, while limiting the impact. The folks at Skyonics, here in Austin,
have developed a chemistry process that was being tested at the Fayette
coal plants. I'm not a chemist, but they basically bubble the coal
emissions through their chemical plant and separate out all the
emissions. The process removes most of the carbon dioxide, turning it
into sodium bicarbonate (baking soda), and even results in a net
production of hydrogen. I talked to the then President of what is now
Luminant, and asked him if the fact that it could consume about 25% of
the power plant energy to accomplish this feat was exorbitant, and he
said that this is about what all the various options seem to require,
whether on the front end or the back. So it isn't that we can't get
there, even with coal, it's just a question of what is the most cost
effective.
The biggest challenge ahead of us is that we are in the process of
doubling the number of people that work in the energy business. It
might not always look like the energy business, like the home area
network Geek Squad, but it will all be related to helping us save or
generate more, cleaner energy. Efficiency replaces the consumption of
fuel with labor and capital equipment. Smart energy technologies
replace energy consumption with intelligence. Renewables replace the
consumption of stocks of high qualify fossil fuels with labor and more
distributed but sustainable resource flows.
Beating climate change could be the stimulus for a tremendous
technology and economic development response, and I can see the
outlines of it already. Let the future come. Thank you for your
leadership.
Best regards,
Robert J. King, P.E.
President
Good Company Associates
Statement of Shawnee Hoover
Mr. Chairman and Members of the Committee, thank you for your
efforts to explore policy options to address and regulate global
warming pollution. Friends of the Earth was founded nearly 40 years ago
and is a national environmental organization with more than 2 million
members and supporters worldwide. Friends of the Earth U.S. is a
founding member of Friends of the Earth International--a network of
member organizations in 70 countries. It is the mission of Friends of
the Earth to create a more healthy and just world. In serving its
mission to protect people and the environment, it is notable to mention
that Friends of the Earth has been working on tax, trade and finance
policy since the early 1980s.
Role for Ways and Means Committee
It is highly appropriate that the House Ways and Means Committee
take a serious interest in the regulation of carbon pollution.
Irrespective of which committee holds primary jurisdiction over climate
legislation, the House Ways and Means Committee, by way of its unique
jurisdiction areas, will play a critical role in helping our Nation
achieve aggressive greenhouse gas (GHG) reduction targets.\1\ In
consideration of a Federal climate policy, we submit several policy
suggestions for the Committee to consider that include the Tax Code,
protecting American families and uses of complementary policies. We
also highlight potential pitfalls to be considered in a cap and trade
program and encourage the Committee to support positive international
engagement toward a global climate agreement.
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\1\ The term greenhouse gases (GHG) or GHG pollution is used
interchangeably with global warming pollution, and carbon pollution.
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Decarbonizing the Tax Code
With the impeding climate and energy crisis, we need to move
rapidly to reform the old purposes of energy tax preferences that
primarily benefit fossil fuels. The Tax Code will be an essential tool
to help guide our economy in a carbon-constrained world. With oil
prices hovering around $100 a barrel and companies like ExxonMobil
posting the highest profits in history, there is no reason to continue
subsidizing oil and gas companies. Several bills have already been
introduced that would begin the process of purging oil and gas tax
breaks from the Tax Code.
Minimizing the global warming impact of the Tax Code will be an
essential component to any climate legislation. This is done primarily
by eliminating subsidies for the production and use of carbon intensive
technologies and fuels (also referred to ``decarbonizing the Tax
Code''), while expanding incentives that encourage scaling up renewable
forms of energy, conservation, and energy efficiency.
The first step in decarbonizing the Tax Code involves assessing the
actual impacts of the Tax Code on global warming pollution. The House
Ways and Means Committee is already taking steps to determine the
footprint of the Tax Code. We thank the Committee for its ongoing
advocacy for a Carbon Audit of the Tax Code.\2\ If signed into law and
funded, this audit could importantly inform the Committee's efforts in
designing future global warming policy.
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\2\ The Carbon Audit of the Tax Code was included in sec. 14001 of
H.R. 3221, the Renewable Energy and Energy Conservation Tax Act of
2007, and authorized the National Academy of Sciences to undertake the
audit.
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While we await the completion of this audit, there are a number of
explicit energy tax preferences, breaks, and credits in the Tax Code
that encourage the use of fossil fuels that can be immediately
addressed. By Friends of the Earth's last count in July 2008, there are
dozens of incentives in the Federal Tax Code (some relatively known,
others hidden) that directly reward fossil fuel use and energy waste
costing at least $32.9 billion through 2013.\3\ For instance, the
report took a quick look at the Joint Committee of Taxation's annual
revenue expenditure report and found 12 tax preferences given to the
oil and gas industry worth approximately $23.2 billion over 5 years.
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\3\ ``Big Oil, Bigger Giveaways: An analysis of $32.9 billion in
tax breaks, subsidies and other handouts the oil and gas industry will
receive by 2013.'' Friends of the Earth. July 2008. http://www.foe.org/
pdf/FoE_Oil_Giveaway_Analysis_2008.pdf.
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Other, more subtle, preferences in the Tax Code that encourage
wasteful energy use can also be found. In the housing market, the
Federal mortgage interest deduction for first homes allows home buyers
to deduct interest from the first $1 million of the cost of their home.
With median house prices at approximately $203,000 the deduction
subsidizes the purchases of oversized homes with oversized energy
needs.\4\ There is also a Federal mortgage deduction allowed for the
purchase of a second home.
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\4\ ``Existing-Home Sales Slide on Tight Mortgage Availability.''
National Association of Realtors. September 24, 2008. http://
www.realtor.org/press_room/news_releases/2008/ehs_tight
_mortgage_slide.
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There has been some effort by the Committee to use the Tax Code in
the automobile sector toward reducing our Nation's use of oil. The Tax
Code includes a 1970's era tax on ``gas guzzling'' automakers that
produce inefficient passenger vehicles. Yet, there exists a glaring
loophole in the ``gas guzzler'' tax that exempts sports utility
vehicles (SUVs) and other light trucks from the tax. This loophole
should be closed as it, in part, undermines the penalty in the Tax Code
and causes more SUVs to be bought and sold.
Ideally, the carbon audit of the Tax Code will find all the carbon
leaks, or areas where high carbon use is rewarded rather than
discouraged. The mortgage interest deduction and the ``gas guzzler''
loophole are just two examples of tax preferences that at first blush
do not appear related to energy but which, in reality, have enormous
impacts on our energy use--and certainly there are more.
As we take care of the carbon leaks by decarbonizing the Tax Code,
Congress has the opportunity to reinforce and increase many of the tax
credits meant to make our economy energy efficient and shift our energy
consumption away from fossil fuels. This should include finally
adopting a long-term renewal of the Section 45 renewable energy tax
credit. It is our hope that this credit will no longer be needed after
roughly 10 years. But until that time, wind energy development needs
help through the Tax Code to level the regulatory and financial playing
field that heavily favors traditional sources of energy. Additional
incentives, such as for hybrid vehicles that push the envelope of fuel
economy and incentives for technologies that increase energy
efficiency, could and should also be adopted by way of the Tax Code.
Finally, there seems to be wide agreement that perhaps the greatest
step the United States could take to reduce our carbon emissions and
increase our efficient use of energy is to place a price on carbon. In
that vein, it is time that Congress, the American public and energy and
environmental advocates seriously consider the various uses and
benefits of a carbon tax or fee on all carbon intensive fuels, or on
specific carbon intensive uses like gasoline. Members of the Ways and
Means Committee have already introduced H.R. 2069, the Save Our Climate
Act of 2007 sponsored by Reps. Stark and McDermott and H.R. 3416,
America's Energy Security Trust Fund Act of 2007 sponsored by Rep.
Larson. These bills both utilize the Tax Code to create a tax on
carbon.
Protecting America's Families
In assessing the best policy options to address global warming it
is critical that our Nation's most vulnerable populations be held
harmless from both the impacts of climate change and the impacts of
higher prices for energy and basic goods and services. For reasons
Members of Congress know well, we must take special care not to allow
the transition to a clean energy economy to cause severe hardship to
hard-working Americans. The mechanisms used to protect the purchasing
power of lower-income households and our investments made to pull these
communities out of poverty will make all the difference.
In its analysis of the distributional impacts of carbon policy
designs, the Congressional Budget Office (CBO) noted that lower-income
households spend a higher percentage of their income on energy costs
than the rest of the population and suffer disproportionately from a
rise in the costs of energy and basic necessities.\5\ In a recent
analysis, the CBO illustrated this point by estimating that a 15
percent cut in global warming pollution would increase the costs of
households in the lowest quintile by 3.3 percent of their average
income, and only 1.7 percent for households in the highest quintile.\6\
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\5\ ``Who Gains and Who Pays Under Carbon-Allowance Trading? The
Distributional Effects of Alternative Policy Designs,'' Congressional
Budget Office, June 2000. http://www.cbo.gov/doc.cfm?index=2104.
\6\ ``Trade-Offs in Allocating Allowances for CO2
Emissions,'' Congressional Budget Office, April 25, 2007. http://
www.cbo.gov/ftpdocs/80xx/doc8027/04-25-Cap_Trade.pdf.
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Fortunately, many in Congress recognize the need to address global
warming without increasing poverty and hardship on vulnerable
households through effective policy tools, as evidenced by both the
Climate MATTERS Act (H.R. 6316) and iCAP (H.R. 6186). It is paramount
in any climate bill design that (1) a sufficient amount of resources is
designated specifically for low- and moderate-income households, (2)
rebates or similar income recycling is delivered fairly and through
effective delivery mechanisms, and (3) additional investments focus on
revitalizing lower-income communities toward decreasing carbon
dependence and increasing job opportunities.
Devote Sufficient Resources to Low- and Moderate-Income Households
It is important that any climate policy is not just efficient, but
fair as well. There are both moral and political reasons for this.
Fairness has always been a cornerstone principle of the American
polity. Fairness in a climate policy also has clear political merits.
As the authors of a policy paper for the Pew Center on Global Climate
Change rightly stated, ``Even the most cost-effective program design
may be unacceptable if its costs are distributed in such a way that is
perceived to be unfair.'' \7\ Such insight could apply both to
auctioning all the permits in a cap and trade program as well as to
providing a safety net for low- and moderate-income families. A climate
policy can and should be designed in a way that does not increase
poverty levels and that is not regressive--that is, in a way that does
not disproportionately burden lower-income households. The aim is not
just to protect those who are already living near or below the Federal
poverty line (typically the bottom income quintile)--but to provide a
safety net also for the 40 percent of all households that make up the
moderate-income and lower-income scale of middle class families. They
too will face decreases in their purchasing power. Congressman Markey's
iCAP bill is a good example of the resources needed to provide a
sufficient safety net for vulnerable households.
---------------------------------------------------------------------------
\7\ Nordhaus, Robert and Kyle Danish, ``Designing a mandatory
greenhouse gas reduction program for the U.S.,'' Pew Center on Global
Climate Change, May 2003.
---------------------------------------------------------------------------
Lastly, while it is important to offset increases in home energy
costs, that alone will not suffice as home energy costs are just a part
of the total consumer costs of a cap on carbon pollution. According to
the Center for Budget and Policy Priorities (CBPP), a majority of such
costs will come from transportation, and energy-sensitive goods and
services. CBPP calculates that home energy costs will account for less
than half (45 percent) of the impacts on the budgets of the lowest
income households (Figure 1).
Figure 1: Impacts of a Carbon Cap on the Budgets of Low-
Income Households
[GRAPHIC] [TIFF OMITTED] T2201A.117
Utilize Effective Delivery Mechanisms to Offset Costs
The delivery mechanisms used to offset the impacts on low- and
moderate-income households will in large part determine the
effectiveness of any climate policy. The aim should be to use a range
of delivery mechanisms that will compensate the highest portion
possible of the target population. Uses of the Tax Code, such as
assisting low wage workers through the Earned Income Tax Credit (EITC)
are essential. The Tax Code alone will not reach the majority of
those in need who may be unemployed, underemployed, disabled, or
retired and do not file taxes. Other efficient delivery mechanisms
include: electronic benefit transfer (EBT) systems used by State
assistance agencies to provide food stamps and Medicare benefits; the
Low Income Home Energy Assistance Program (LIHEAP); and the
Weatherization Assistance Program.
A climate policy must also recognize that low- and moderate-income
households will require immediate income protections as well as longer-
term cost mitigation strategies. The delivery mechanisms described
above can efficiently and effectively return lost purchasing power to
households. Longer-term cost mitigation strategies include making
lower-income households more energy efficient, either through
efficiency programs overseen by the State or provided by the
Weatherization Assistance Program.
Avoid Cash Grants to Investor-Owned Local Distribution Companies
Some Members tend to favor the concept of giving Federal grants
directly to Local Distribution Companies (LDCs), or utilities, to
distribute to low-income families through efficiency programs. Friends
of the Earth finds this approach riddled with problems. Many advocates
for lower-income energy consumers oppose direct Federal grants or
funding of local utilities in order to establish or increase low-income
energy efficiency programs.
While some LDC demand-reduction strategies may be able to provide
efficiency services through longer-term weatherization programs, such
an approach is not a substitute for immediate relief provided by
Federal rebates delivered through proven and effective mechanisms.
Weatherization programs take time and are an uncertain mechanism for
ensuring that lower-income households are cushioned from increased
energy-related costs. They would likely fail to account for price
impacts that fall outside utility costs alone. According to the CBPP,
LDCs may also miss large numbers of target households, including ``the
significant share of low-income households who do not pay utility bills
directly because the bills are paid by their landlords (and reflected
in their rents). Many other low-income households will fall through the
cracks since most utility companies cannot easily identify which of
their consumers have low incomes (other than households facing shut-
offs).'' \8\ Overall, a direct consumer rebate delivered through
effective mechanisms, such as the EITC and EBT, and that takes into
account additional factors, such as rural/urban location and region of
residence, is a much more fair way to provide immediate relief to
lower-income households.\9\
---------------------------------------------------------------------------
\8\ ``Low-income provisions of the Boxer substitute to Lieberman-
Warner,'' Center for Budget and Policy Priorities, May 30, 2008.
\9\ For more on varying cost impacts, see: Eisenberg, Joel F.,
``The Impact of Carbon Control on Electricity and Gasoline Expenditures
of Low-Income Households,'' Oak Ridge National Laboratory, April 2008.
http://weatherization.ornl.gov/pdf/CON-504.pdf.
---------------------------------------------------------------------------
It should also be noted that direct Federal grants to investor-
owned LDCs would be unprecedented. The established U.S. framework for
funding LDC efficiency programs, under the oversight of State
regulators and agencies, has been achieved without any publicly funded
grants directly to LDCs.\10\ In 2007, more than 300 major investor-
owned local utilities, both gas and electric, spent nearly $361 million
on low- and moderate-income efficiency programs in 43 States.\11\ The
funding was collected from ratepayers according to rate schedules
established by State regulatory commissions or, in a few States such as
California, Wisconsin, and Nebraska, funded by utility fees mandated by
their State legislatures.\12\
---------------------------------------------------------------------------
\10\ Personal communication with Meg Power, Senior Policy Advisor,
National Community Action Foundation, September 2008.
\11\ Two sets of State reports provide annual data. The State
supplement report of the HHS Office of Energy Assistance catalogs the
value of non-Federal contributions to low-income energy programs
coordinated with State LIHEAP and weatherization programs and offers
some details on LDC initiatives. http://liheap.ncat.org/Supplements/
2007/supplement07.htm. The National Association for State Community
Services Programs also collects annual reports of non-Federal funding
that supplements the States' weatherization program. http://
www.waptac.org/sp.asp?id=9014.
\12\ Personal communication with Meg Power, Senior Policy Advisor,
National Community Action Foundation, September 2008.
---------------------------------------------------------------------------
The wide range of program designs approved by regulators and
legislators over the past 25 years have together produced usage and
cost reductions without direct grants. Low-income programs are subject
to cost effectiveness tests and most are managed so that they are a
benefit to the utility, its ratepayers and the public in numerous ways.
Those include peak load reduction, slowing the demand for building new
generating capacity, decreasing bad debt write-offs, and customer
service costs. When emission reductions can be quantified, those
benefits will also accrue to the utility.\13\ There is a wide variation
among the initiatives and their cost-effectiveness. Evaluations of LDC
initiatives have demonstrated that those that are delivered in
coordination with and by the State weatherization program delivery
system have the best outcomes. The established financing and oversight
framework for these investments can provide ample guidance for future
State initiatives.\14\
---------------------------------------------------------------------------
\13\ Ibid.
\14\ Kushler, Martin (Ph.D.), Dan York, Ph.D. and Patti White.
``American Council for an Energy-Efficient Economy. Meeting Essential
Needs: The Results of a National Search for Exemplary Utility-Funded
Low-Income Energy Efficiency Programs,'' September 2005. The report
summarizes common characteristics which include close coordination with
weatherization assistance and other State low-income programs and
vigilant monitoring and results measurement. Program features offer
guidance on best practices. For a list of such studies see: http://
www.opportunitystudies.org/repository/File/energy _ affordability/
Energy _ Program _ Evaluation _List.pdf.
---------------------------------------------------------------------------
Focus on Revitalizing and Retrofitting Lower-Income Communities
Low- and moderate-income households have a greater risk of being
permanently harmed by climate change-related impacts, such as fierce
storms, floods, droughts and fires, than higher-income households. The
reason for this is twofold. First, they are typically located in
economically depressed areas that lack the resources to invest in
adequate disaster preparedness or to provide sufficient disaster
relief. Second, because they have lower incomes and occupy older homes
in communities with aging commercial and public buildings and
equipment, they and their communities lack the capital to upgrade
(Figure 2). These populations also suffer disproportionately from
cancer, asthma and other respiratory ailments likely due to their close
proximity to power plants, toxic waste dump sites and other results of
our current pollution-based economy.\15\
---------------------------------------------------------------------------
\15\ Hoerner, Andrew and Nia Robinson. ``Climate of Change, African
Americans, Climate Change, and a Just Climate Policy for the U.S.,''
Environmental Justice and Climate Change Initiative, July 2008. http://
www.ejcc.org/climateofchange/index.html.
---------------------------------------------------------------------------
Figure 2: Changes in Bottom Quintile Incomes Compared to Energy Costs
[GRAPHIC] [TIFF OMITTED] T2201A.118
Policies can and should be designed to offset the impacts of
capping carbon on vulnerable households using effective policy tools
and strategies. The incomes of the bottom quintile, like those of
moderate-income households, have not increased as fast as the prices of
energy. These households, which include families of low-wage workers,
have seen a steady decline in their purchasing power and have severe
trouble meeting their basic needs.
In general, low-income households use less energy and cause fewer
GHG emissions. Yet, the intensity of energy use and carbon emissions is
greatest in these homes and communities. Therefore, these communities
offer the most opportunity for lower intensity of emissions and change.
It is critical that a strategy to protect lower-income households
and communities include separate, additional funds and strategies to
help both lift them out of poverty and a high dependence on fossil
fuels. To help build the resilience of these communities to the impacts
of climate change and to help transition our Nation to a clean energy
economy, they need and deserve a focused access to ``green-collar''
jobs and skills training. Because they often receive government
assistance, lower-income communities are prime candidates for
weatherization and renewable energy retrofits, carbon-reducing green
building incentives and standards, new and better access to public
transportation and carpooling programs, and new job opportunities and
training. Most importantly, a focus on revitalizing and retrofitting
lower-income communities can help increase skills and wages that will
serve to provide a pathway from poverty to economic self-sufficiency
and strengthen the middle class.
Cap and Trade Program: Importance of Auctions and Complementary
Policies
While there may be a role for a cap and trade program in a Federal
approach to reducing U.S. global warming pollution, the design of such
a program must be approached with fairness, prudence and caution. In
considering the design of such a program, one of the most critical
considerations is how the pollution permits (sometimes referred to as
allowances) will be distributed. Additionally, proper attention should
be paid to which emissions may be better captured outside a carbon
trading program, and the ability to provide proper oversight over the
various parts of a cap and trade program. Many proposals coming before
Congress treat a cap and trade (or carbon trading program) as the only
or most important tool to reduce GHG emissions. Such an approach is not
the only possibility however. For example, the design of California's
global warming law, AB32, is likely to rely on carbon trading for only
one-fourth of its overall emissions reductions.\16\ The majority of
California's emissions reductions are expected to come from
complementary policies, performance standards and other strategies
outside the carbon trading.
---------------------------------------------------------------------------
\16\ Under AB32, carbon trading is supposed to reduce GHG emissions
by 35 million megatons of CO2e (mmtco2e). Other
recommended strategies are aimed to reduce emissions by 112
mmtco2e. See: Climate Change Draft Scoping Plan, June 2008.
Discussion Draft pursuant to AB32, pages 17-18, http://www.arb.ca.gov/
cc/scopingplan/document/draftscopingplan.pdf.
---------------------------------------------------------------------------
Importance of 100 Percent Auctioning of Pollution Permits
A tremendous debate is occurring in Congress around the potential
method of distribution of pollution permits in a Federal cap and trade
program. There are two options for how the government distributes
pollution permits created by a cap and trade program--it can either
give them away to polluters for free, also known as ``grandfathering,''
or it can auction them.
The results of this debate will ultimately define the success or
failure of efforts to regulate global warming emissions under a cap and
trade program. Auctioning pollution permits would help ensure that the
implementation of global warming legislation is done in an equitable
way consistent with the ``polluter pays principle.'' Failing to auction
permits would hinder the government's ability to collect revenue to
protect low- and moderate-income households and to ensure that the
United States maintains its commitments to fund international
adaptation and clean energy transfers to developing countries.
Auctioning permits would also be better for the economy. The CBO
cites studies that find that auctioning permits would be 2-3 times less
costly to the economy and could provide a net gain to the economy if
the revenue was used to reduce individual income taxes.\17\
---------------------------------------------------------------------------
\17\ ``Trade-Offs in Allocating Allowances for CO2
Emissions,'' Congressional Budget Office,
April 25, 2007. http://www.cbo.gov/ftpdocs/80xx/doc8027/04-25-
Cap_Trade.pdf.
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Climate Equity
Efforts to create a cap and trade program will create winners and
losers in the marketplace and amongst energy consumers. Any policies
aimed at reducing global warming pollution will inevitably have an
upward effect on energy prices. This will occur whether pollution
permits are auctioned or not. Under a cap and trade program, according
to the CBO, ``If the government wanted to provide the same level of
services without increasing the budget deficit, it would have to either
raise taxes or use part of the value of the allowances to cover the
changes in Federal outlays and revenues.'' \18\
---------------------------------------------------------------------------
\18\ Ibid.
---------------------------------------------------------------------------
In the interest of fairness and equity, taxpayers would not be
getting a fair deal if pollution permits were given freely to
polluters. Robert N. Stavins of The Brookings Institute put it this
way: ``In a competitive market the benefits of free allowances
generally accrue only to their recipients, increasing their
profitability or wealth, and generally do not benefit the consumers,
suppliers, or employees of those recipients. Hence, although the cost
of allowance requirements can be expected to ripple through the
economy, the benefits of free allocations will not.'' \19\
---------------------------------------------------------------------------
\19\ Stavins, Robert N. ``A U.S. Cap and Trade System to Address
Global Climate Change.'' The Brookings Institute, October 2007. http://
www.brookings.edu/ /media/Files/rc/papers/2007/10 climate_stavins/
10_climate_stavins.pdf.
---------------------------------------------------------------------------
When permits are auctioned the government collects revenue and can
redirect those funds back to energy consumers to lessen the burden of
increased costs. Additionally, revenue could be directed toward
investments in renewable energy research to help the energy transition
away from fossil fuels, and to assist developing countries to battle
the global climate crisis and reduce their own emissions. If permits
are given for free, energy prices will rise but the government does not
collect any funds to aid our Nation's transition to a clean energy
economy.
A common misconception is that companies that receive free
pollution permits will not pass the cost onto consumers in the form of
higher prices. Such thinking is false. According to economist Jim
Barrett, President of Redefining Progress, a public policy economic
think tank, ``While it is a common understanding that auctioned permits
will result in higher energy and other product prices much the same way
that an equivalent fee on carbon emissions would, it is often
erroneously assumed that free permit allocations will not. . . . This
reasoning is incorrect. Cap and trade systems increase energy and
product prices because of the scarcity they introduce. That scarcity is
what drives the price increases, not the method of permit
distribution.'' \20\
---------------------------------------------------------------------------
\20\ Barrett, James, Ph.D. ``True Cost of Free Pollution Permits: A
Redefining Progress Issue Brief.'' Redefining Progress, February 2008.
http://www.rprogress.org/publications/2008/True%20
Cost%20Issue%20Brief%2002-08.pdf.
---------------------------------------------------------------------------
The CBO added this explaination, ``Although producers would not
bear out-of-pocket costs for allowances they were given, using those
allowances would create an `opportunity cost' because it would mean
foregoing the income that they could earn by selling the allowances.
Producers would pass that opportunity cost on to their customers in the
same way they would pass along actual expenses.'' \21\
---------------------------------------------------------------------------
\21\ ``Trade-Offs in Allocating Allowances for CO2
Emissions,'' Congressional Budget Office,
April 25, 2007. http://www.cbo.gov/ftpdocs/80xx/doc8027/04-25-
Cap_Trade.pdf.
---------------------------------------------------------------------------
Such impacts were witnessed first hand during the first phase of
the European Trading System (ETS) where the majority of pollution
permits were given to polluters for free. Instead of using the value of
the permits to lower prices, the companies continued to pass the costs
on to energy consumers and in the process gained windfall profits.\22\
---------------------------------------------------------------------------
\22\ ``EU ETS Phase II--The potential and scale of windfall profits
in the power sector.'' Point Carbon Advisory Services, March 2008.
---------------------------------------------------------------------------
Polluter Pays Principle
The principle of making polluters pay for their pollution is a long
held principle in environmental protection and regulation. This has the
economic impacts of forcing polluters to ``internalize'' their
pollution costs, which incentivizes them to adopt new processes and
technologies to eliminate these additional costs. The concept is
simple, air is a public resource that polluters should not be allowed
to use and compromise free of charge or without consequence.
Grandfathering polluters with free permits actually rewards them for
their previous harmful activities with windfall profits.
Economists strongly warn against the impacts of giving permits away
for free. According to economist Jim Barrett, ``Even under mild
assumptions, free permit distributions would represent the largest
windfall distribution of wealth in this country's history. Households,
businesses and industrial energy consumers will transfer their wealth
to the owners of energy producing companies, already among the richest
corporations in the world.'' \23\
---------------------------------------------------------------------------
\23\ Barrett, James, Ph.D. ``True Cost of Free Pollution Permits: A
Redefining Progress Issue Brief.'' Redefining Progress, February 2008.
http://www.rprogress.org/publications/2008/True%20
Cost%20Issue%20Brief%2002-08.pdf.
---------------------------------------------------------------------------
The CBO concurs, ``Giving away allowances could yield windfall
profits for the producers that received them by effectively
transferring income from consumers to firms' owners and shareholders.''
\24\ In congressional testimony to the Select Committee on Energy
Independence and Global Warming, Robert Greenstein, President of the
Center on Budget and Policy Priorities, stated, ``If companies receive
allowances for free, they will still be able to charge the higher
price--they will be able to charge what the market will bear--and will
reap what CBO has termed ``windfall profits.'' \25\
---------------------------------------------------------------------------
\24\ ``Trade-Offs in Allocating Allowances for CO2
Emissions,'' Congressional Budget Office,
April 25, 2007. http://www.cbo.gov/ftpdocs/80xx/doc8027/04-25-
Cap_Trade.pdf.
\25\ Greenstein, Robert. Testimony for Hearing on ``Cap, Auction,
and Trade: Auctions and Revenue Recycling under Carbon Cap and Trade.''
January 23, 2008. http://globalwarming. house.gov/tools/assets/files/
0321.pdf.
---------------------------------------------------------------------------
Lastly, auctioning 100 percent of pollution permits created under a
cap and trade program allows the market, and not the government, to
determine winners and losers. If Congress gives pollution permits away
for free it opens the door to a political slippery slope of intense
lobbying that plays to the strengths of the polluting industry over the
public benefit.
Complementary Policies: Transportation and International Forests
The transportation sector is a prime example within our economy
where, as described below, a complementary policy would be more
effective than carbon trading at reducing emissions.
Reducing emissions in the U.S. transportation sector is integral to
climate policy. Currently, nearly one-third of total U.S. GHG emissions
originate from the transportation sector, making it the Nation's
largest end-use source (Figure 3).\26\ Transportation is also the
Nation's fastest growing source of U.S. GHG emissions, accounting for
47 percent of the net increase in total U.S. emissions between 1990 and
2003.\27\ In order to meet and preferably exceed the targets that the
Intergovernmental Panel on Climate Change (IPCC) has identified as
necessary to avoid the worst impacts of global warming, it is
imperative to achieve significant GHG reductions in the transportation
sector. Failing to make substantial emissions reductions from
transportation means that additional reductions will have to be made up
by other sectors of the economy if we are to meet overall emissions
reduction targets. This will increase costs on other economic sectors
such as electricity producers or industry. Moreover, failing to address
transportation sector emissions will drive up the cost of making these
reductions in the future.\28\
---------------------------------------------------------------------------
\26\ U.S. EPA Inventory of U.S. Greenhouse Gas Emissions and Sinks:
1990-2005.
\27\ U.S. EPA, accessed at http://www.epa.gov/omswww/climate/
index.htm on 9/3/08.
\28\ Gallagher, et. al. Policy Options for Reducing Oil Consumption
and Greenhouse-Gas Emissions from the U.S. Transportation Sector. John
F. Kennedy School of Government, Harvard University, 2007.
[GRAPHIC] [TIFF OMITTED] T2201A.119
As Congress debates the implementation of a cap and trade program
for reducing GHG emissions across the economy, it is important to
evaluate how best to achieve GHG reductions in the transportation
sector. Cap and trade can provide a powerful tool for achieving GHG
reductions in some areas of the economy. However, a growing number of
transportation and climate change experts are concluding that we should
not expect a cap and trade policy to bring about efficient GHG
emissions reductions in the transportation sector.\29\ As such,
complementary policies are needed to accomplish this goal, especially
in the long run.\30\ It is therefore important for the Committee to
evaluate the inclusion of a set of complementary transportation
policies in addition to carbon trading.
---------------------------------------------------------------------------
\29\ Greene, David L., Ph.D. Oak Ridge National Laboratory.
Testimony to the Senate Environment and Public Works Committee, June
2008.
\30\ Ibid.
---------------------------------------------------------------------------
Congress has already pursued several important complementary
policies in the transportation sector in an effort to reduce oil
consumption, GHG emissions, and air pollution, as well as saving
consumers money on gasoline. These include raising vehicle efficiency
standards through Corporate Average Fuel Economy (CAFE) regulations and
low-carbon fuel standards (LCFS).
The policies for developing our surface transportation
infrastructure in the U.S. are not designed to take into account GHG
emissions. Transportation spending is largely focused on roads and
highways, and the majority of travel in the U.S. is by personal
vehicle, which is among the least efficient passenger and freight
transportation modes. As a result, 81 percent of transportation GHG
emissions (equaling nearly a quarter of total U.S. GHG emissions) are
due to gasoline consumption--62 percent from personal vehicles, and 19
percent from freight trucks.\31\ Current trends dictate that these
numbers will rise in coming decades and double by the year 2030.\32\
---------------------------------------------------------------------------
\31\ U.S. EPA Inventory of U.S. Greenhouse Gas Emissions and Sinks:
1990-2003.
\32\ U.S. Department of Energy/Energy Information Agency (USDOE/
EIA): Annual Energy Outlook, 2007. The trend between 1977 and 2001 has
been an increase in driving rates--measured in vehicle-miles traveled
(VMT). While the U.S. population increased by 30 percent, driving rates
grew by 151 percent. In this same period, trips per capita, average
trip lengths, and the proportion of drivers travelling alone all
increased to varying degrees. See Polzin, Steven, ``The Case for
Moderate Growth in Vehicle Miles of Travel,'' 2006.
---------------------------------------------------------------------------
This projected increase will have a significant increase on
transportation sector GHG emissions. Additional emissions resulting
from the projected increase in driving rates will overwhelm the
emissions reductions expected from new vehicle efficiency standards
requiring the U.S. auto fleet to average 35 miles per gallon by the
year 2020 and the required 10 percent reduction in the carbon content
of vehicle fuels mandated by the 2007 Energy Independence and Security
Act (H.R. 6). In other words, projected increases in driving rates will
result in a net increase of total GHG emissions from the transportation
sector despite projected emissions reductions from both CAFE and the
LCFS. Ignoring increasing driving rates will push overall
transportation sector GHG emissions 26 percent greater than 1990 levels
in 2030 (Figure 4).\33\
---------------------------------------------------------------------------
\33\ Winkelman, Steve. Center for Clean Air Policy.
---------------------------------------------------------------------------
Figure 4: Transportation Sector CO2 Emissions Forecast
2005-2030
[GRAPHIC] [TIFF OMITTED] T2201A.120
In this graph, the dark blue line represents transportation sector
GHG emissions, the light blue line represents emissions in 1990, and
the orange line shows the approximate path of reductions needed to
achieve IPCC recommendations. The purple line shows a 10% reduction in
fuel carbon content, the green line shows an increase to a 35 mpg CAFE
standard and the red line shows projected VMT. Each of these three
lines influence the dark blue GHG trend. The graph shows that the GHG
reductions achieved from CAFE and low-carbon fuels will be negated by
rising VMT.
The problem underscoring the trend in America's increased oil use
in the transportation sector is largely due to a lack of alternative
transportation options, inefficient land use and development patterns,
and inadequate traffic management.\34\ This has led transportation and
climate policy experts to conclude that we should not expect the small
increase in gasoline prices from a Federal cap and trade program
( $0.037 annually or $1.40 cumulatively through 2050) to bring about an
efficient reduction in driving rates and transportation sector GHG
emissions.\35,\ \36\ Complementary transportation infrastructure and
land-use policies are needed to accomplish this goal, especially in the
long run.\37\ A recent survey of decade's worth of data confirms that
such complementary policies can have a significant impact on travel
behavior in the U.S. in a way that reduces transportation sector
emissions. Given the right incentives and legitimate alternatives,
Americans will choose to drive less.\38\
---------------------------------------------------------------------------
\34\ Ewing, Reid, Pendall, Rolf, and Chen, Don. Measuring Sprawl
and It's Impact. 2002.
\35\ EPA Analysis of the Lieberman-Warner Climate Security Act of
2008 (S. 2191) in 110th Congress. 2008.
\36\ Greene, David L., Ph.D. Oak Ridge National Laboratory.
Testimony to the Senate Environment and Public Works Committee, June
2008.
\37\ Ibid.
\38\ Ewing, Reid, et al. Growing Cooler: The Evidence on Urban
Development and Climate Change. 2007.
---------------------------------------------------------------------------
Public transportation and other mass transportation modes, such as
passenger rail, are shown to make significant contributions toward GHG
emissions reductions. According to the Science Applications
International Corporation (SAIC), in 2005, public transportation
reduced carbon emissions by 6.9 million metric tons.\39\ This includes
both emissions reductions from reduced driving rates and reduced
traffic congestion. There is great potential for further emission
reductions; according to the same SAIC report. A single commuter can
reduce their CO2 emissions by an average of 20 pounds per
day, or more than 4,800 pounds annually, by commuting on public
transportation instead of driving.\40\ At the local level, this means
developing transit systems such as light rail, commuter rail, and rapid
bus service. For longer-distance intercity travel, especially for trips
between 50 and 500 miles, passenger rail, such as the service provided
by Amtrak and several State departments of transportation, is an
energy-efficient option that can help reduce the GHG emissions of long-
distance travel.
---------------------------------------------------------------------------
\39\ Davis, Todd and Monica Hale. ``Public Transportation's
Contribution to U.S. Greenhouse Gas Reduction.'' SAIC. September 2007.
\40\ Ibid.
---------------------------------------------------------------------------
A U.S. climate policy that includes a complementary policy that
sets forth increased alternative transportation options, efficient land
use and development patterns, and better traffic and road management
could yield a profound reduction in transportation sector emissions
when aggregated nationwide. Such a policy will reduce the burden on
other sectors to make up for the emissions increases in the
transportation sector and ultimately make it more likely that we meet
our Nation's economy-wide reduction targets.
International Forest Protection Through Policy Coherence
Deforestation and forest degradation is a major source of
greenhouse gas emissions, accounting for nearly 20 percent of emissions
globally. The growing rate of forest loss also threatens the world's
biodiversity and imperils the 1.6 billion people who are dependent on
forests for their livelihoods. A new global interest in addressing
climate change, and a particular interest in reducing emissions from
deforestation and degradation, provides an important opportunity to
address the real need for improved forest governance structures, while
simultaneously conserving biodiversity and safeguarding the rights of
the indigenous peoples' and other forest dependent communities.
At the Bali 2007 Conference of the Parties to the UN Framework
Convention on Climate Change (UNFCCC), reducing emissions from
deforestation was a major topic of discussion. Developing policy
options to reduce emissions from deforestation and degradation was also
included as a key component of the Bali Action Plan, which consists of
multiple decisions necessary to secure emissions reductions in global
climate negotiations. Assistance from the United States for this sort
of initiative will be critical in moving towards a global agreement.
While some are demanding the dubious use of international forest offset
projects to qualify for domestic emissions reductions, others are
arguing that an international fund under the UNFCCC, in support of
global agreement on climate change, would be a more secure and
equitable way to achieve reductions.
To be true, effective and just, any mechanism to reduce emissions
from deforestation and degradation must. To best get at the
deforestation problem through funding is to (1) prioritize the
development of coherent national policy frameworks and law enforcement
(2) must address the underlying drivers of deforestation; and achieve
policy coherence in consuming countries and (3) safeguard and enhance
the land tenure and other of local communities; as well as ensure that
indigenous and traditional forest-dwelling peoples play a central role
in forest management.
To promote effective governance, funds should support national,
regional and local governments in recipient countries in enacting and
enforcing comprehensive national forest policies. Further, the central
role of indigenous and traditional forest dwelling peoples, including
land tenure rights, should be clearly recognized. Large areas of
forested land are under management of indigenous peoples who do not yet
have legal title to their ancestral lands, and securing clear land
tenure rights is vital in ensuring responsible management of these
forests. Because indigenous peoples who hold secure land tenure for
their lands effectively manage their forests sustainably, securing land
tenure has proven a highly cost-effective tool in achieving emissions
reduction. Systematic monitoring programs and verification programs,
not enabling carbon offsets schemes, will also be critical for forest-
rich countries to effectively engage in international climate
agreements.
Illegal logging and associated trade are both indicators of and
perpetuators of poor forest governance. In particular, the U.S. Forest
Service is well suited to assist in the implementation of the recently
passed Lacey Act, which by prohibiting the import and trade of
illegally sourced timber and wood products, uses the U.S. market and
legal leverage to support better enforcement, governance and supply
chain reform in global wood markets.
International Forest Offsets As Part of a Cap and Trade Program Not An
Option
Global deforestation accounts for 20 percent of global GHG
emissions, and therefore many are looking to the preservation or
restoration of forests as a prime area of achieving the U.S.'s emission
reduction targets. Yet, using international forest offsets as a way to
meet domestic reductions targets may be a red herring as they remain a
dubious mechanism to achieve verifiable and permanent reductions. While
international offsets would provide an out for reducing emissions here
at home, avoiding emissions reductions at home is likely to avoid the
fundamental changes necessary to deliver emissions reductions to keep
us from facing climate catastrophe.
International forest offset projects suffer from similarly
problematic structural design concerns in meeting their criteria, such
as ensuring reductions are additional, real, and permanent, as do non-
forest project based offsets. Significant technical issues plague the
forest offset market, including the capacity to adequately assess and
monitor actual emissions reductions from deforestation, even using
remote sensing techniques, as well as concerns over whether emissions
reductions activities in forest areas can in reality be permanent.
The inclusion of international forest carbon offsets as a U.S.
climate mitigation strategy will potentially exploit the cheapest
emissions reductions projects available to developing countries in
their very own country. According to recent studies, 500 million tons
of carbon dioxide emissions could be offset in tropical rainforests at
roughly $2 per ton--well under the projected prices for carbon credits
in a cap and trade system.\41\ If industrialized countries buy all of
these cheap credits to count as their own domestic emissions
reductions, it leaves very little opportunity for those developing
countries to meet the international pressures for them to implement
climate mitigation policies of their own in a cost-effective manner.
Indeed, it will leave those developing countries with only the most
expensive mitigation options. The sovereignty of host nations is also
under question due to the liability constraints of potential future
emissions.
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\41\ Rainforest conservation could offset 500m tons of
CO2 emissions at $2/ton. Mongabay, July 24, 2008. http://
www.climateark.org/shared/reader/
welcome.aspx?linkid=103671&keybold=forest
%20carbon%20avoided%20deforestation.
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Additionally, unrelated to emissions reductions, many offset
projects have created or exacerbated existing social and environmental
problems. For example, plantation projects have created water
pollution, and projects to capture methane gas from landfills have not
addressed the toxic pollutants generated by the landfill.
The Plantar Project in Minais Gerais, Brazil, demonstrates how
projects may generate social and environmental problems unrelated to
carbon reductions. As described by the Institute for Policy Studies
Sustainable Energy and Economy Network:
In 2002 Plantar, an iron foundry company with operations in Brazil,
threatened to switch from burning charcoal to coal in order to increase
capacity at its pig iron operations. This would have significantly
increased their greenhouse emissions, so the World Bank rushed in with
carbon financing to help Plantar expand the eucalyptus plantations that
provide the company's charcoal.
The impact of the expanding eucalyptus farms has been devastating
to the nearby village of Sao Jose do Buriti. Concerned residents were
joined by Brazilian NGOs, churches, social movements and unions to halt
World Bank finance of the project in 2002 and 2003. Today residents
have witnessed the water table dropping, the disappearance of
biodiversity and medicinal plants, and the application of herbicides
and pesticides to timber plantations that have killed local farmers'
subsistence crops and poisoned streams. Perhaps more seriously, groups
allege that Plantar pressured local residents to sign letters of
support for the project or forfeit employment at the plantations.\42\
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\42\ Redman, Janet. ``World Bank: Climate Profiteer,'' Institute
for Policy Studies. April 2008.
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Over-Reliance on a Cap and Trade Program: Lessons From the Credit
Crisis
To effectively address climate change, the United States needs
robust domestic emissions reductions targets and policies that send the
correct signals to change industry behavior and produce real emissions
reductions. The implementation of a cap and trade program is viewed by
many as a way to use the market to achieve these reductions, but over-
reliance on a cap and trade program to solve climate change raises a
number of concerns, particularly in terms of the monitoring,
evaluation, and verification of carbon credits in a global market.
Our Nation is currently facing an historic financial crisis that
can provide us with a cautionary tale about a cap and trade program.
The subprime mortgage crisis, which underpins the current banking and
investment crisis, emerged from a failure of market checks and
balances.
Banks bundled together high-risk and lower-risk mortgages into
packages that were then bought, re-bundled and re-sold many times over.
This created bundles of promised revenues that were increasingly
difficult to track. When it became clear that a significant portion of
the loans were bad, the whole system began to unravel, affecting
everyone in the banking and investment system connected to these
bundled mortgages, including average Americans with savings accounts
and retirement savings, and turning a subprime mortgage problem into a
systemwide credit crisis.
Unfortunately, the Federal cap and trade proposals put forth so far
would create a system that poses almost identical challenges as those
in the breakdown of the mortgage-lending industry:
Could emissions reductions lead to subprime carbon assets?
The subprime mortgage crisis was generated by questionable loans. A
cap and trade program could face similar questions in terms of
emissions reductions associated with carbon offset credits, which are
likely to be tradable on open carbon markets. For offset projects to
work, they need to result in a decrease in the amount of carbon
pollution emitted. For example, retrofitting an industrial plant to be
more energy efficient, or replacing an aging coal-fired power plant
with wind power, creates GHG reductions that can be measured with
relative accuracy and verified, thus resulting in legitimate credits.
But not all offset projects clearly lead to emission reductions.
Some of the most visible carbon offset scandals to date have
centered around international offset credits, including forest-related
carbon reduction schemes, where trees have been planted to store
carbon, only to die a few years later; the construction of large,
environmentally destructive dams, where builders who were going to
construct the dams anyway claimed ``new'' emissions reductions; and HFC
(a chemical byproduct of refrigerant production) destruction projects,
where factories purposely created these very potent greenhouse gas
chemicals just so they could destroy them and make money off of the
credits.
In particular, proving the ``additionality'' of offset projects,
arguing that project would be impossible to do without the additional
revenues provided by carbon credits, is very difficult. (Offset
projects must prove that they are additional in order to be issued
credits by the Kyoto Protocol's Clean Development Mechanism.) But
according to a recent study of international offsets by leading
researchers at Stanford University, ``offset schemes are unable to
determine reliably whether credits are issued for activities that would
have happened anyway.'' \43\
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\43\ Wara, Michael W. and Victor, David G. ``A Realistic Policy on
International Carbon Offsets.'' Program on Energy and Sustainable
Development, Working Paper #74: April 2008. http://iis-b. stanford.edu/
pubs/22157/WP74_final_final.pdf.
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As carbon traders develop derivatives products, which are based on
promises to deliver carbon credits at a future date for a specified
price, a real risk of ``subprime carbon'' (carbon assets that fail to
deliver, called ``junk carbon'' by traders) emerges. Given the
potentially huge size of the carbon trading market, and the increasing
complexity of carbon derivatives, the risk of subprime carbon contagion
is a real possibility, particularly if the current credit crisis fails
to spur fundamental regulation of the financial market.
Could an onset of unscrupulous intermediaries be avoided?
The subprime crisis was exacerbated by the proliferation of
mortgage brokers and other middlemen who provided questionable, if not
unscrupulous, services. In the past decade, the seemingly limitless
appetite for mortgage lending and mortgage-backed securities fueled a
dangerous deterioration in lending standards. Since carbon is predicted
to ``be the world's biggest commodity market, and it could be the
world's biggest market overall,'' \44\ a speculative carbon bubble
could similarly spur the development of subprime carbon assets.
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\44\ Kanter, James, ``Carbon trading: Where greed is green,''
International Herald Tribune, 20 June 2007.
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Like mortgage brokers approving ``ninja loans'' (loans to borrowers
with no income, job, or assets), unscrupulous intermediaries may
overpromise on offset projects by selling future credits based on
projects that do not yet exist, are not additional, or which simply do
not deliver the promised GHG reductions. If the Wall Street financiers
continue employing the ``originate and distribute'' strategy (in which
banks offload their risks to investors in the secondary markets), banks
and intermediaries will still pursue lucrative fee-based business with
little regard to the risks they are passing onto investors.
Can asset valuation be properly determined?
``Innovative'' financial engineering characterized the credit
crisis, where complex financial instruments were created that made it
very difficult to determine the actual value of assets. Credit rating
agencies, which were supposed to be providing rigorous assessments of
mortgage-backed securities, could not analyze thousands of individual
mortgages, and thus relied on financial models, which were ultimately
flawed.
As secondary carbon markets grow, spawning the creation of new
derivatives and structured products, rating agencies and analysts will
face similar asset valuation challenges. Analyzing the quality of
underlying carbon offset projects will be as, if not more, difficult
than analyzing mortgages, and may be even less suited to modeling.
Will conflicts of interest be prevented?
After the Enron accounting scandal of 2001 some new regulations
were issued to reduce conflicts of interest. For example, today
accounting firms have separated their auditing and consulting
functions, and in June 2008 the Securities and Exchange Commission
issued new rules to reduce conflicts of interest among credit ratings
agencies. However, conflicts of interest still exist, both in the
broader financial sector and in the carbon finance market.
For example, similar to how credit rating agencies helped design
complex structured finance products and rated them, consulting firms
which offer advice on developing carbon offset projects may also earn
fees for verifying emissions reductions from projects. Banks which own
equity stakes in carbon offset projects may also be carbon brokers or
sector analysts, creating a temptation to bid up carbon prices to
increase the value of their own carbon assets. Such conflicts of
interest compromise the integrity of the carbon markets, from both a
financial and environmental perspective.
The Need for U.S. Leadership in Negotiating an International Climate
Deal
The policies pursued by the United States will be critical to
solving the greatest challenge facing the world today--global climate
change. Global warming is an issue that will have serious impacts not
only on the environment, but also on global economies, poverty and the
pursuit of sustainable development as laid out in the U.N. Millennium
Development Goals (MDGs).\45\ The costs of establishing a program to
reduce and reverse global warming pollution now will pale in comparison
to the cost of not aggressively addressing the problem.
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\45\ For more on MDGs, see: http://www.un.org/millenniumgoals/.
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A global effort to address climate change will require a
fundamental transformation of our economies and with jurisdiction over
U.S. trade policies and international commerce, the House Ways and
Means Committee will be an integral player to the development of
policies that will either promote or hamper proactive international
engagement on global warming. With greater responsibility for global
warming and greater capacity to address the problem, the United States
can show great leadership by offering assistance to developing
countries to both deal with climate change impacts and reverse the
causes of global warming.
Around the world, climate change is already impacting the daily
lives of the world's most vulnerable people. Facing more intense
storms, drought, disruption of water and food supplies, and increased
rates of disease, impoverished communities bear a disproportionate
burden of these impacts, despite the fact that they are the least
responsible for creating them and the least able to cope with the
effects. Global warming is likely to exacerbate international
competition and conflict over water and other natural resources, and
result in displaced peoples, mass migrations and increased poverty--
particularly in the Global South. Moreover, with the potential for the
conflict generated by climate impacts, it is in the national interest
of the United States to assist developing countries with the climate
crisis.
For an effective global deal to be reached, the United States will
need to offer assistance to developing countries to adapt to climate
change and cut their GHG emissions. To avoid catastrophic climate
impacts, developing countries will need to utilize clean technologies,
including leapfrogging to cleaner energy sources and ensure the
protection of standing forests. But developing countries, which are
less historically responsible for climate change and which often have
smaller budgets and larger populations than developed countries, cannot
afford by themselves the costs of transforming to clean energy
economies without compromising the provision of basic services, such as
water, sanitation, and basic education.
Developing countries are already taking many steps on their own to
both address climate impacts and to shift to cleaner energy. The United
States can support these efforts and secure a global deal by being
proactive in aggressively reducing its GHG emissions and by offering
financing and technology transfer opportunities to developing countries
for adaptation needs, clean energy, and forest protection.
The Principle of Common But Differentiated Responsibilities
Signed and ratified by 192 countries, the Convention on Climate
Change set an overall framework for intergovernmental efforts to tackle
the challenge posed by climate change. According to the Convention,
enacted in 1994, party governments ``gather and share information on
greenhouse gas emissions, national policies and best practices, launch
national strategies for addressing greenhouse gas emissions and
adapting to expected impacts, including the provision of financial and
technological support to developing countries, and cooperate in
preparing for adaptation to the impacts of climate change.'' \46\
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\46\ http://unfccc.int/essential_background/convention/items/
2627.php.
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The principle of common but differentiated responsibilities and
respective capacities is a fundamental principle underpinning the
UNFCCC, to which the United States is a party. It is also an underlying
principle that underpins the international negotiations on a global
climate deal already underway with an agreement expected to be reached
in December 2009. This principle acknowledges differences in historic
emissions, economic capacity to act, and the right to sustainable
development. As a party to the UNFCCC, under the principle of common
but differentiated responsibilities, the United States is obligated to
reduce its GHG emissions, and provide financial support to developing
countries to adapt to climate change impacts, receive transfers of
clean technology, and to reduce their GHG emissions.\47\
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\47\ Article 4 Commitments of the UNFCCC. http://unfccc.int/
essential_background/convention/background/items/1362.php.
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The United States and other industrialized countries are
historically responsible for global warming at greater levels than
other countries. For example, G8 countries, which represent 13.5
percent of the global population, are historically responsible for over
62 percent of the greenhouse gases currently in the atmosphere. These
countries, which include the United States, continue to emit some 39
percent of today's global warming pollution.\48\ Per capita emissions
in specific countries also demonstrate varying levels of
responsibility. For example, in 2000, each person in the United States
emitted 15.2 times as much carbon as each person in India and 34.7
times as each person in Malawi.\49\
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\48\ WWF International, Position Paper, ``G8 Summit 2008 in
Japan,'' June 2008.
\49\ Figures for greenhouse gas emissions come from the World
Resources Institute's Climate Analysis Indicators Tool, http://
cait.wri.org/.
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Different countries likewise have differing abilities of economic
capacity to respond to global warming. In 2004, the gross domestic
product (GDP) per capita in the U.S. was $36,451; in India, $2,851; and
in Malawi, $591.\50\ Based on this measurement, the average person in
the U.S. has 12.7 times as much economic output as a person in India
and 61.6 times that of a person in Malawi. In aggregate, the U.S. has a
much greater capacity to respond to global warming than most other
countries in the world.
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\50\ Ibid.
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This combination of responsibility and capacity means that the
United States has more of an obligation and is more able to help
developing countries both adapt to climate change and reduce emissions.
This is an understood piece of the international negotiations under the
UNFCCC. The United States could promote a global deal by offering
financing and technology transfer for adaptation and mitigation efforts
in developing countries by using ``carrots'' rather than ``sticks.''
Mitigation Actions in Exchange for Technology Transfer and Financing
Currently under the UNFCCC negotiations, nationally appropriate
mitigation actions on the part of non-Annex I (developing) countries
are contingent on the provision of financial resources, technology
transfer, and capacity by Annex I (industrialized) countries. For
obvious reasons, the first priority of developing, non-Annex I
countries is sustainable development. In this spirit, the United States
is expected to offer financing in the key areas of adaptation (the
ability of a country to respond to and build resilience to the impacts
of global warming), the transfer of renewable energy technologies that
build the capacity in-country to develop in a low-carbon fashion, and
funding for forest protection as part of the U.S. commitment in
exchange for nationally appropriate developing country climate
mitigation efforts.
Funding from the U.S. for international climate activities should
be made through multilateral mechanisms under the UNFCCC for
adaptation, clean technology, and forests. Making contributions to
these mechanisms would be a show of good faith on the part of the U.S.
and would facilitate international cooperation. Contribution to these
funds will also strengthen international negotiations. Qualification of
countries for financing and clean technology transfer should follow
decisions made under the UNFCCC.
Transfer of Clean Technology to Developing Countries
It is in the interest of all countries to have developing countries
leapfrog dirty energy sources on their path to development and move
directly toward clean energy economies that allow for both economic
growth and increased energy access. Developing countries need
assistance in transitioning to clean energy pathways so that
governments will not have to choose between low-carbon renewable energy
and poverty alleviation. For a global deal to be reached, the United
States will need to make commitments both within U.S. policy and under
the UN climate convention to finance transfers of clean technologies to
developing countries.
The World Bank estimates that the incremental costs to deploy clean
energy technologies in just the power sectors of developing countries
would require $30 billion annually.\51\
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\51\ ``A World of Difference in Energy Access,'' World Bank Group,
May 9, 2007. http://web. worldbank.org / WBSITE / EXTERNAL / NEWS /
0,,contentMDK : 21328449 menuPK : 34457 pagePK:
34370 piPK:34424 theSitePK:4607,00.html.
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The G77 and China (representing 130 developing countries) have
explicitly supported a multilateral technology financing mechanism
under the authority of the UNFCCC. The establishment of a financing
mechanism for technology under the UNFCCC--both for mitigation and
adaptation--was a major focus at UN climate change talks in Bonn,
Germany in early June 2008, with a number of governments putting
forward proposals. Under Article 4.3 of the UNFCCC, developed countries
are obliged to provide finance and technology to developing countries
to meet their full incremental costs of taking action to address
climate change. Article 4.7 says that developing countries' actions
depend on the extent to which developed countries meet their technology
and finance commitments. The G77 and China reiterated in Bonn that any
funds by developed countries outside the UNFCCC cannot be counted as
meeting their commitments. This, in turn, means the United States and
other industrialized countries cannot hold developing countries to
their qualified obligations to reduce GHG emissions. It also means that
should U.S. funds be directed to mechanisms outside the UNFCCC, the
U.S. would then have to make additional, parallel contributions to the
UNFCCC to meet its own obligations.
Developing countries, including China and India, were unambiguous
in Bonn that they do not see the World Bank's Climate Investment Funds
as a good faith effort or as a show of international good will. Many in
the Global South see the establishment of the World Bank's Climate
Investment Funds as a donor-driven process that lacks meaningful
consultation and undermines the UN process.
Further, a strong definition of clean, renewable energy is
essential to ensure that it is both renewable and effective in reducing
GHG emissions. The World Bank does not define what it means by clean
energy. Friends of the Earth supports a definition of international
clean technology that includes renewable energy, such as wind, solar
photovoltaic, solar thermal, sustainably-sourced biomass, up to 10 MW
hydropower, wave, tidal and geothermal. Clean and renewable energy
technologies do not include those perpetuate GHG emissions, such as
coal (including the unproven techniques of carbon capture and
sequestration of coal plants), oil, natural gas, and unconventional
fossil fuels such as tar sands, oil shale, and coal-to-liquids;
hydropower over 10 MW; and those that produce fissile materials, such
as plutonium-239 or uranium-233, in the course of their operation.
Scarce, public clean energy funding should be used to drive down
the price of renewable energy to make it cost-competitive with
artificially cheap coal and further, to provide clean energy to the 1.6
billion impoverished people in the world who still lack access to
electricity. Modern coal technologies do not need public assistance--
they are already fundable through private investment, with improved
energy efficiencies paying for themselves in short time periods.
There is also a serious opportunity cost presented by investing
scarce climate funding toward technologies that have not been proven to
work or will not come on line in the near future, such as carbon
capture and storage (CCS). Using funds for CCS-readiness (as the World
Bank CTF document describes) would be counterproductive, as it would
lock in high emission coal plants in the hope of future mitigation that
may never be achieved, or may be achieved after catastrophic climate
change has already occurred.
To re-engage with the international community, generate good will,
and be effective in combating climate change, Congress should
proactively support an International Clean Technology Fund under the
authority of the UNFCCC. This presents the United States with an
important opportunity--after long delay--to show real leadership in the
global effort to address climate change and help break the impasse of
mistrust and finger pointing at international climate negotiations.
International Adaptation to Global Warming Impacts
As the IPCC has made clear, the world's poorest people--those least
responsible for the climate crisis--will be hurt the most by the
immediate and long-term impacts of global warming. For example, the
IPCC finds that up to 250 million people in Africa are projected to be
exposed to an increase in water stress due to climate change, and in
some countries, yields from rain-fed agriculture could be reduced by up
to 50 percent by 2020. As the IPCC notes, ``this would further
adversely affect food security and exacerbate malnutrition.'' As a
result of these and other climate impacts, climate change will be one
of the central drivers of global poverty in the 21st century.
The UN Development Program (UNDP) estimates that $86 billion a year
by 2015 will be necessary globally to meet adaptation needs.\52\ The
United States and other wealthy countries have the ability to help
developing countries finance adaptation, which would allow them to
continue to combat poverty while at the same time addressing climate
change. The United States is responsible for nearly a quarter of the
pollution that causes global warming, with 23 percent of cumulative
global emissions from the consumption of fossil fuels for the period of
1990 to 2005. These metrics alone suggest that the United States could
be responsible for between 20 and 40 percent of the global funding
necessary to address international adaptation, or between 23 and 40
percent of the $86 billion UNDP says is needed.
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\52\ United Nations Human Development Report, 2007/2008, http://
hdr.undp.org/en/reports/ global/hdr2007-2008/.
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Several international funds have been created under the United
Nations Framework Convention on Climate Change (UNFCCC) to address
adaptation needs:
The Least Developed Countries Fund (LDCF) and the Special Climate
Change Fund (SCCF) are already administering funding for adaptation-
related projects, although they are significantly under-funded. LDCF
funds have been used to support the development and implementation of
national adaptation programs of action (NAPAs), which have been
completed by 32 countries and are underway in a number of others. The
NAPAs, which are designed to build upon existing coping strategies at
the grassroots level and emphasize community-level input, provide a
framework for least developed countries to identify, prioritize, and
address adaptation needs.\53\
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\53\ http://unfccc.int/adaptation/napas/items/2679.php.
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The Adaptation Fund, which was operationalized at the UNFCCC
negotiations in late 2007, is likely to be the primary fund for
adaptation moving forward. The governance and structure of the fund are
improved over previous funds. For example, the Adaptation Fund Board
includes majority representation from recipient governments. The
Adaptation Fund will receive 2 percent of proceeds from international
trading of carbon emissions under the clean development mechanism,
although the Fund will also require additional sources of funding to be
effective.\54\
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\54\ http://unfccc.int/cooperation_and_support/financial_mechanism/
items/3659.php.
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Any domestic or international delivery mechanisms of climate
assistance must ensure transparency, accountability, and community
participation to effectively deliver adaptation funds and be seen as
credibly contributing to a global climate negotiation. To do this, such
funds should be transmitted via a UNFCCC-established fund.
International Trade
In putting a price on carbon, concerns have arisen in the United
States about the potential impact of increased cost on U.S.
manufacturing sectors. Imposing a carbon tariff, or border tax
adjustment, on GHG-intensive goods was first proposed by Europe as a
means to entice the United States to join an international agreement.
It has now gained currency in the United States primarily as a
mechanism to address concerns about China's growing emissions. Imposing
special measures on imports from countries has been pitched as an
appropriate means to level the playing field for U.S. industries
competing with countries that are not participating in an international
climate agreement or not undertaking adequate climate change mitigation
measures.
The use of border tax adjustments (BTAs) must be evaluated based on
their overall effectiveness, their role in reducing emissions
internationally, as well as their ability to protect U.S. consumers and
businesses. However, there are questions raised around the three main
objectives that BTAs are to satisfy: (1) prevent a potential decline in
output from U.S. manufacturers facing higher cost from new domestic
climate mitigation policies; (2) prevent the displacement of U.S.
manufacturing to new locales where GHG intensity of production is
allowed to be higher, resulting in increased emissions; and (3)
incentivize participation in a multilateral climate mitigation
agreement for those countries hoping to gain or maintain market share
in the United States.
The largest share of carbon-intensive imports into the United
States originates in Canada, followed by Europe. In comparison, China's
share is comparatively small. Because Canada and Europe, as well as
many developing countries, are on average cleaner than U.S. production,
then implementing BTAs could likely put U.S. manufacturing at a
competitive disadvantage, and thus fail to meet their primary
objective.
Advocates for imposing a carbon tariff on carbon intensive goods at
the border claim that it will force developing countries to the
bargaining table. It must be re-stated however that China, the source
of much of the concern in the U.S. climate policy debate, is
productively engaged in multilateral negotiations under the UNFCCC to
achieve a global deal on climate. China is also already taking
aggressive action to curb emissions, including a renewable energy
standard and a reduction in national energy intensity. Such progress in
China should damper arguments that U.S. industry will move there to
avoid carbon regulation. Further, because Chinese exports to the U.S.
make up such a small fraction of Chinese production, BTAs are unlikely
to function as useful leverage in compelling China to take on binding
emissions targets.
Given the clear international momentum building up toward the
UNFCCC Conference of the Parties (COP)15 in Copenhagen, scheduled for
December 2009, all efforts should be focused on reaching an ambitious
global agreement that tackles the climate crisis in both an effective
and fair manner to both U.S. consumers and the international community.
International cooperation is the best route for progressively
eliminating environmental and climate dumping and a ``race to the
bottom'' in environmental standards and regulations. Bold leadership by
the United States is welcomed and encouraged by the international
community and may be the single best ``carrot'' to entice other
countries to join a robust and effective multilateral agreement under
the UNFCCC.
RECOMMENDATIONS
Decarbonize the Tax Code--Remove and redirect subsidies that
encourage wasteful energy use and the use and production of fossil
fuels. Friends of the Earth finds that at least $32.2 billion could be
freed up through a decarbonization of the Tax Code that could be
applied to activities that encourage the efficient use and production
of clean energy.
Protect American Families--Adopt policy options that provide (1) a
sufficient amount of resources is designated specifically for low- and
moderate-income households, (2) rebates or similar income recycling is
delivered fairly and through effective delivery mechanisms, and (3)
additional investments focus on revitalizing lower-income communities
toward decreasing carbon dependence and increasing job opportunities.
This should be accomplished while avoiding cash grants to investor-
owned Local Distribution Companies (LDCs).
Consideration of a Cap and Trade Program--Economists agree that any
consideration of a Federal cap and trade program should start with an
adherence to auctioning all the pollution permits rather than give them
away for free. A cap and trade program need not be the only approach
used to reduce GHG emissions. Complementary policies outside a carbon
trading program can be better mechanisms to capture emissions from some
sources, such as transportation or international deforestation.
International offset projects present special problems under a cap and
trade program, particularly with forests, and should be avoided.
Approach Cap and Trade Program with Caution and Prudence--The
current credit crisis in the United States provides a cautionary tale
to heavy reliance on a carbon trading system. The design of
California's global warming law, AB32, may provide a model of sorts, as
California is likely to rely on carbon trading for only one-forth of
its overall emissions reductions.
Support Bold U.S. Leadership to Reach An Effective Global Climate
Deal--The United States needs to offer substantial financial and
technical assistance to developing countries in the areas of
international adaptation and clean technology transfer before
developing countries are forced to commit to reducing their GHG
emissions.
Statement of Stephen A. Smith
My name is Stephen Smith. I am the Executive Director of the
Southern Alliance for Clean Energy (SACE). Since 1985, SACE has been
working on behalf of citizens in the Southeast to promote responsible
energy choices that create global warming solutions and ensure clean,
safe and healthy communities throughout the Southeast.
SACE applauds the work you have done to promote effective climate
change legislation and pledges to work with you and your staff to
ensure the bill ultimately adopted by Congress embraces the most
effective and responsible approach to reducing greenhouse gas
emissions.
In this testimony, I would like to focus on one particular and
critical aspect of a well-designed cap and trade program for carbon
emissions--the need to auction 100 percent of the credits immediately.
As this testimony will demonstrate, auctioning all the credits is a
critical predicate to ensuring the environmental, economic and
political success of a carbon cap and trade program.
Unprecedented Resources at Stake
The science of pollution mitigation has advanced significantly
since Congress enacted the first cap and trade program to address the
problem of acid rain back in 1990.
In the 18 years that followed, study after economic study lends
critical support to the idea that a properly constructed cap and trade
program must auction 100 percent of the carbon credits. Anything less
than 100 percent auctions would needlessly increase the cost of the
program to the economy and consumers, while potentially resulting in
windfall profits for shareholders and executives of electric utility
companies and other industries.
Under a cap and trade program, a carbon credit authorizes the
holder to emit one metric ton of carbon dioxide, or its equivalent, per
year. These credits will be extremely valuable--eventually generating
hundreds of billions of dollars in revenue each year--and they
represent an important resource in our Nation's efforts to address
global warming.
As CBO Director Orszag testified in April 2008 before the Senate
Finance Committee:
On the basis of a review of the existing literature and the range
of CO2 policies now being debated, CBO estimated that by
2020, the value of those allowances could total between $50 billion and
$300 billion annually (in 2006 dollars). The actual value would depend
on various factors, including the stringency of the cap (which would
need to grow tighter over the years to keep CO2 from
continuing to accumulate), the possibility of offsetting CO2
emissions though carbon sequestration or international allowance
trading, and other features of the specific policy that was selected.
On April 10, 2008, CBO estimated that the value of the allowances
created under S. 2191 (America's Climate Security Act) would be roughly
$145 billion once the proposed program took effect in 2012; in
subsequent years, the aggregate value of the allowances would be even
greater.
The cumulative value of these credits over the life of the program
is simply unprecedented and any decision on the allocation of these
resources should be made only after extensive examination of their
potential utility. Properly structured, these revenues could be used to
help families with their energy bills and to speed the development of
important renewable energy and energy efficiency technologies.
Many of the leading climate change bills before Congress, however,
would give a majority of the carbon credits away. For example, the
legislation the Senate considered earlier this summer--America's
Climate Security Act--would auction just 26.5 percent of the credits at
the start of the program. Many of the remaining 73.5 percent of the
credits would be allocated for free to industries with a history of
emitting greenhouse gases. Later in the program's lifetime, this
legislation would still allocate more than a quarter of the credits for
free. Other major climate change bills in Congress allocate credits in
a similar fashion.
We caution the Committee from adopting this approach. It will
needlessly increase the economic cost of reducing our greenhouse gas
emissions and undermine the ability of future Congresses to assist low-
income families and other vulnerable communities.
No Windfalls for Polluting Industries
Utilities and other greenhouse gas emitting industries argue that
Congress should allocate some or all of the credits to them for free to
minimize the energy costs they pass on to their ratepayers. For
example, in testimony before the Senate Environment and Public Works
Committee on June 28, 2007, Jim Rogers, the Chairman of Duke Energy,\1\
stated:
---------------------------------------------------------------------------
\1\ Warned makes it sound like what he's saying needs to be heeded;
far from it.
Consumers should not be penalized for fuel choices that were
made 40-plus years ago. Areas of the country facing the largest
increases in electricity rates due to climate change policy
also represent the Nation's industrial heartland. How
allowances are allocated will directly impact the cost of
---------------------------------------------------------------------------
electricity and the prices these consumers pay.
This argument is simply inaccurate. Gifting billions of dollars in
pollution credits to utilities will not lower energy bills for
ratepayers because the marginal cost of abating a unit of greenhouse
gas is the same regardless of whether a firm buys the permits or is
allocated the permit for free. As the Congressional Budget Office
observed in their testimony before the Senate Energy and Natural
Resources Committee in May:
By attaching a cost to CO2 emissions, a cap and
trade program would thus lead to price increases for energy and
energy-intensive goods and services. Such price increases would
stem from the restriction on emissions and would occur
regardless of whether the government sold emission allowances
or gave them away. Indeed, the price increases would be
essential to the success of a cap and trade program because
they would be the most important mechanism through which
businesses and households were encouraged to make investments
and change their behavior to reduce CO2 emissions.
Further, the CBO notes:
Giving all or most of the allowances to energy producers to
offset the potential losses of investors in those industries--
as was done in the cap and trade program for sulfur dioxide
emissions--would also exacerbate the regressivity of the price
increases. On average, the value of the CO2
allowances that producers received would more than compensate
them for any decline in profits caused by a drop in demand for
energy and energy-intensive goods and services. As a result,
the companies that received allowances could experience
windfall profits.
Harvard Economist Greg Mankiw accurately points out that freely
allocating carbon credits to polluting industries is nothing more than
corporate welfare.
To understand why this is the case, consider a utility that is
given credits equal to its historic level of carbon emissions, as many
utilities have suggested should happen. How will that allocation affect
the utility's behavior? Very little, as it turns out.
If the utility has a history of emitting 100 tons of carbon dioxide
or equivalent per year and is given 100 credits that can be used to
emit one ton of carbon each, the utility considers options for reducing
its carbon emissions and determines that the cost of reducing its
emissions from 100 to 99 tons is $10. If each credit is worth $15
dollars, then the utility will spend the $10 to reduce its carbon
emissions by one ton, sell the credit, making its shareholders $5 in
the transaction. The utility will continue to reduce its emissions and
sell its credits until the cost of reducing another ton of carbon
emissions is equal to the market value of the credit. If the cost of
reducing emissions from 60 to 59 tons is equal to $15, then the utility
will stop there. In the end, it uses 60 credits and sells 40.
Now consider the case where the utility is given zero credits, and
has to buy them in order to continue operations. Once again, the
utility will have to balance the cost of credits verses the cost of
reducing its carbon emissions. In this case, the utility will buy
credits until the $15 cost of buying a credit is equal to the cost of
reducing the next ton of carbon emissions. Here, the utility buys 60
credits, and invests in mitigation technologies to reduce the other 40
tons of carbon.
The important point here is that the firm's behavior is the same
regardless of whether it is given the credits or it has to buy them
like everybody else. In both cases, the utility produces the same
amount of electricity as well as carbon. And ratepayers will face
similar costs.
What About Costs to Industry?
In recent years, considerable research has gone into assessing what
level of credit allocation is necessary to ``compensate'' the owners of
utilities and other industries for losses associated with a carbon cap
and trade program. One study found that allocating between 9 and 21
percent of the credits under the Kyoto Protocol would be sufficient to
offset the agreement's costs to energy and electricity producers.
Other studies, however, found the regulatory regime of a cap and
trade program without auctions could increase the opportunity for
profits by affected industries. As Resources for the Future noted in a
2002 study:
By compelling fossil fuel suppliers to restrict their
outputs, the government effectively causes firms to behave like
a cartel, leading to higher prices and the potential for excess
profit. To the extent that the environmental policy enables
firms to retain these rents--such is the case under
CO2 policy involving freely offered tradable
permits--the firms can make considerably higher profit under
regulation than in its absence.
Wall Street apparently agrees. The Wall Street investment firm of
Bernstein Research reported earlier this year its analysis of the
potential impact of a cap and trade program on utility industry
financials. The title of the report--``U.S. Utilities: Unregulated
Generators' Profits Could Surge Under Senate Bills to Cap
CO2 Emissions''--reflects its findings that implementing a
cap and trade program could increase profits for some utilities. As the
report notes:
If the U.S., in implementing its own cap and trade regime for
GHG emissions, also allocates allowances for free, we can
expect unregulated power generators in this country to behave
similarly, passing through the value of allowances consumed to
wholesale power prices. And as these generators will bear no
offsetting cost, their earnings can be expected to increase
materially.
Whatever the costs or benefits to industry, the more pertinent
question to ask is simply this: If a cap and trade program affects
everyone--energy consumers and producers alike--why should polluting
industries alone get compensated?
Global warming affects everyone. No industry should be given
special status and protected from the responsibilities that the rest of
us will face.
Economic Efficiency and Low-Income Families
Effectively addressing climate change will impose a certain level
of costs on the economy. The question before Congress is how to best
structure a cap and trade program to minimize the impact to the economy
while helping low-income families and other energy consumers most
vulnerable to changes in energy prices. The answer to this question,
again, is to auction the credits and use the revenues raised to reduce
the program's overall cost to the economy.
The CBO estimated that giving away credits under a cap and trade
program would cost nearly twice as much than if the credits were
auctioned and the revenues used to cut taxes. Who would bear the
additional costs of giving away credits to polluting industries?
Of the four allowance-allocation and revenue recycling scenarios
that CBO analyzed, the share of policy costs borne by households in the
lowest-income quintile would be largest if the government gave
allowances away and used the revenue received . . . to reduce corporate
taxes.
Further, the CBO noted in their June 17th letter to Senate Energy
and Natural Resources Committee Chairman Bingaman that lawmakers have
several options for assisting those most effected by increased energy
costs, including collecting the resources from the auction of carbon
credits and issuing rebate checks to households across the United
States. The CBO noted that:
Lawmakers could choose to offset the price increases
experienced by low- and moderate-income households by providing
for the sale of some or all of the CO2 emission
allowances and using a portion of the revenues to compensate
such households. For example, the Congressional Budget Office
(CBO) found that lower-income households could be financially
better off as a result of a cap and trade program (compared
with no program--and without consideration of any benefit in
terms of reduced risk of damage from climate change) if the
government chose to sell the allowances and used the revenues
to pay an equal lump-sum rebate to each household in the United
States. In that case, the size of the rebate would be larger
than the average increase in low-income households' spending on
energy-intensive goods.
Different studies may suggest different optimal options, but they
are universal in finding that the free allocation of credits to
industry produces the worst outcome, both for the economy as a whole
and for at-risk populations. Freely allocating credits needlessly
surrenders resources that could be used to ensure the best outcome for
the economy and low-income families.
Auction, Not Allocation
Congress should auction all credits under a cap and trade program
and use those resources to assist ratepayers with their energy costs
while investing in the development of critical technologies necessary
to speed the future reduction of greenhouse gas emissions.
Such an approach represents the surest means of meeting emission
targets in the most equitable and economically efficient manner.
Anything less is simply corporate welfare to those industries that have
contributed the most to climate change.
I thank the Committee for holding this hearing and for advocating
solutions to global warming. SACE looks forward to working with the
Committee to produce the most effective climate change legislation
possible. Southern Alliance for Clean Energy (SACE) is a nonprofit,
nonpartisan organization that promotes responsible energy choices that
create global warming solutions and ensure clean, safe and healthy
communities throughout the Southeast.
Since 1985 SACE has been working on behalf of citizens in the
Southeast to provide independent analysis of the energy supply system
in the region, help State utility commissions evaluate proposed energy
projects, work with State and local governments to develop new programs
to improve the energy efficiency of government facilities and vehicles,
and support the siting and development of clean, renewable energy
sources in our region.
SACE has been a leading voice for energy reform protecting our
communities and our region's natural resources for more than 20 years
with offices and staff throughout the Southeast.
Dear Congressman Doggett,
On behalf of our organizations, we write to applaud your efforts to
build support for strong congressional action to address global
warming.
Your commitment to science-based emissions reduction targets,
auctioning allowances, addressing global warming's impacts on natural
resources, and advancing an international global climate deal by
funding international adaptation for at-risk countries is essential. We
look forward to working with you to ensure that a climate bill will
serve as the economic engine to repower America by investing in clean
energy research and development and energy efficiency, creating green-
collar jobs, and saving millions of dollars for American families.
We appreciate the leadership and debate you are inspiring with the
introduction of the Climate MATTERS Act. Interest in the bill
encouraged the House Ways and Means Committee to hold a well-attended,
robust hearing this month and as such deepened the Committee's
investigation into policy options to solve global warming. Our groups
recognize that the House Ways and Means Committee, with its unique
areas of jurisdiction, will play an important role in helping our
Nation to achieve strong, science-based reduction targets through the
Tax Code and other means, while also ensuring that American families
and workers are adequately protected from undue hardship.
Thanks to your efforts to educate your colleagues, nearly 100
Members have already shown that they fundamentally agree that our
Nation needs long-term solutions to our energy problem and that those
solutions go hand in hand with solving global warming.
Sincerely,
Andrew Fahlund,
Vice President for Conservation, American Rivers
Sarah Saylor,
Legislative Representative, Earthjustice
Emily Figdor,
Federal Global Warming Program Director, Environment America
Shawnee Hoover,
Legislative Director, Friends of the Earth
Kate Smolski,
Sr. Legislative Coordinator, Global Warming Campaign Greenpeace
Justin Tatham,
Assistant Director of Government Relations, National Audubon
Society
Bob Gruenig,
Senior Policy Analyst, National Tribal Environmental Council
David Waskow,
Climate Change Program Director, Oxfam America
Will Callaway,
Legislative Director, Physicians for Social Responsibility
Dave Hamilton,
Director of the Climate and Energy Program, Sierra Club
Jennifer S. Rennicks,
Federal Policy Director, Southern Alliance for Clean Energy
David Moulton,
Federal Global Warming Program Director, The Wilderness Society
Lexi Shultz,
Deputy Director, Climate Program, Union of Concerned Scientists
Statement of Thomas J. Gibson
On behalf of the members of the American Iron and Steel Institute,
it is my pleasure to submit to you our written testimony in response to
the hearing the Committee recently held entitled ``Policy Options to
Prevent Climate Change.''
We believe the most important principle for successfully addressing
climate change is this: It is a global problem that can only be
addressed effectively on a global basis. If your Committee is guided by
this principle, we are confident any resulting legislation will have
two desirable outcomes: It will actually lower CO2 emissions
globally and it will do so without lessening the competitiveness of
U.S. manufacturers in the global marketplace.
The steel industry in the U.S. has the lowest energy consumption
per ton of production and the lowest CO2 emissions per ton
of production in the world. Production of steel in the U.S. versus
other parts of the world is therefore good for the environment.
The enactment of any CO2 reduction legislation in the
United States that does not incorporate or provide for similar measures
being taken by other major steel producing nations such as China, on a
contemporary timeline, will alter our competitiveness verses global
steelmakers. We must hold foreign manufacturers to comparable
standards, or else we will risk our own manufacturing jobs and economic
health, while at the same time making our planet's atmosphere worse,
not better.
There are many activities proceeding in parallel with your
deliberations that all address in some way a ``global solution to a
global problem.'' We offer the following two points for your
consideration.
The steel industry worldwide is working on a Global Steel
Sectoral Approach to climate change under the auspices of the
International Iron and Steel Institute. It is an agreement that will
obligate major steel producers, including those in Brazil, Russia,
India and China, to reduce CO2 emissions. It is the type of
agreement that has the potential to lower global CO2
emissions without creating market distortions. It is being presented to
UNFCCC negotiators in Poland in December 2009 as a model for post-Kyoto
policy. We believe governments should look to the Global Steel Sectoral
Approach to inform their own public policy initiatives.
In the absence of a successful Global Steel Sectoral
Approach that avoids distortions in the marketplace, legislators must
be prepared to address competitiveness impacts as an essential
component of domestic climate change policies. For example, prior
legislative efforts have included various ``competitiveness
provisions.'' We believe that any competitiveness provision should
impose the same cost obligations on imports that are imposed on
domestic producers, for example by border adjustment measures; by
requiring foreign and domestic firms to begin buying allowances in the
same timeframe; by subjecting imports to the same requirement to obtain
and submit allowances for greenhouse gas emissions; and by eliminating
the Administration's discretion to waive the requirements on foreign
manufacturers.
Our overarching point remains: Climate change is a global problem
that can only be addressed effectively on a global basis. We urge
Congress to ensure any climate legislation involves our major trading
partners so that it will lower CO2 emissions globally
without lessening the competitiveness of U.S. manufacturers in the
global marketplace.
Background--Steel Industry Leadership
The American steel industry is part of the solution in this debate,
not the problem. We are the most energy efficient steel industry in the
world and we have the data to prove it. We not only beat the Kyoto
targets 11 years early, we are already accomplishing on our own what
the various cap and trade proposals seek to do for the entire economy.
The domestic industry, largely through recycling and investments in new
technology, has reduced energy use per ton of steel shipped by over 40%
over the past 25 years. Specifically, reductions in energy intensity
per ton of
steel shipped between 1990 and 2006 exceeded 29% (a detailed chart appea
rs below).
[GRAPHIC] [TIFF OMITTED] T2201A.121
Because of our advances over the last two decades, the state-of-
the-art processes and technologies we operate today are highly
optimized. This means that in order to continue to make reductions in
energy use, new technologies and new processes are required. We are
currently researching, in collaboration with the rest of the global
steel industry, the next generation of iron and steelmaking
technologies that will drastically reduce or eliminate CO2
emissions. Such new ``breakthrough technologies'' will be developed and
deployed over the next 15-20 years and any legislated CO2
reduction timeline should recognize when these technologies will be
commercially available.
The steel industry has and is developing new types of steel
products that lead the way in reducing the greenhouse gas emissions of
our customers, for example, through the design of automobiles using
advanced high strength steels which permit much lower vehicle weights
and require much less fuel, all while maintaining vehicle safety. Use
of certain steel products results in more efficient buildings and
infrastructure and is integral in pressure vessels for electrical power
generation and energy transportation. Fighting global warming will
require significant amounts of new steel products.
Background--Energy Supply
The cost of energy is sure to rise, not just for steel, but for the
entire economy. Unfortunately, lack of a coherent energy policy has not
been addressed in any of the current pending climate legislation. We
need increased energy supply and greener energy, both of which have
immediate benefits in reducing the CO2 footprint of all
manufacturers. Obviously, if U.S. energy costs continue upwards
unabated, this will only increase the likelihood that foreign
manufacturers, who have access to affordable energy, will capture U.S.
jobs and domestic market share, and consequently increase greenhouse
gas emissions.
Background--Cap and Trade
We still have grave doubts generally about how well cap and trade
can address climate change. Cap and trade worked reasonably well on the
acid rain problem. The climate change issue is quite different. With
climate change we have major technological gaps, the need for global
reach, the presence of foreign competitors and no guaranteed ability
for regulatory cost pass-through.
Congress has under consideration a number of proposals to address
climate change through a cap and trade regime. While the
competitiveness provisions contained within these bills are well
intentioned, much work remains in order to craft proposals that
actually will result in addressing the global issue of climate change
and meet WTO muster. Adopting a competitiveness provision that proves
to be ineffective or WTO-illegal, will fail to create a level playing
field and result in a significant loss of high-paying and highly valued
jobs.
Thank you for your time and consideration. We recognize the
enormous challenge that faces the Committee as it seeks to develop
responsible climate change legislation. Please be assured as the
Committee moves forward it will have the full cooperation of our
industry as a technical resource to be called on at any time. We look
forward to working with you on this critical issue.
Statement of VPSI
Climate Change Legislation_``A three legged stool''
Much of the debate and discussion regarding climate change
legislation has focused on how to develop a `cap and trade' system
which would create caps on the amount of carbon that can be emitted in
the air, while establishing a market for industry to buy and sell the
right to emit carbon. While potentially effective, a `cap and trade'
system would only have a direct impact on stationary source emissions.
Mobile source emissions, primarily emissions from personal and freight
transport, would widely be unaffected by a cap and trade system.
Transportation sources accounted for approximately 29 percent of
total U.S. greenhouse gas emissions in 2006. Transportation is also the
fastest-growing source of U.S. GHGs, accounting for 47 percent of the
net increase in total U.S. emissions since 1990 and is also the largest
end-use source of CO2, which is the most prevalent
greenhouse gas.\1\
---------------------------------------------------------------------------
\1\ Greenhouse Gas Emissions from the U.S. Transportation Sector
1990-2003; U.S. EPA, 2006.
---------------------------------------------------------------------------
Climate change legislation designed to only manage stationary
source emissions through a cap and trade system would be incomplete. In
order to deal with the issue of climate change, VPSI urges Congress to
pass comprehensive global warming legislation which attacks the problem
by reducing both mobile and stationary source emissions.
Specifically, a comprehensive global warming legislative package
should include:
A Cap and Trade scheme;
Clean fuels legislation; and
Cost effective polices and programs to promote a
reduction in vehicle miles traveled (VMT).
While understanding that this Committee does not deal with every
aspect of the legislation, for the purpose of this hearing, VPSI will
highlight some of the items that this Committee can include in a global
warming package.
Furthermore, VMT reduction will not only help reduce carbon
emissions, but it also reduces congestion, and helps conserve fuel. So
as this Committee acts on other important pieces of legislation, VPSI
would kindly remind the Committee that many of these initiatives can,
and should, be passed as soon as possible. We'd like to begin by
briefly introducing VPSI and vanpooling.
Vanpooling and VPSI--Background
VPSI is the Nation's largest vanpool service provider with nearly
5,000 vanpools serving commuters in more than sixty (60) metropolitan
areas and three (3) statewide programs (Hawaii, Michigan and Vermont).
VPSI vanpools remove 1.8 million tons of carbon each day \2\ from the
atmosphere, leading to a reduction of 457 million tons of carbon each
year \3\ (see calculations below). Nationally, there are 12,000
vanpools removing 1.1 billion tons of carbon each year.\4\
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\2\ Calculation: (50K cars 50 miles/day 22 mpg
19.4 tons CO2) - (5K vanpools 50 mi/day
13 mpg 19.4 tons CO2) = 1.8 million tons
CO2 reduced.
\3\ Calculation: 1.8 million tons CO2 reduced
250 workdays per year = 457 million tons CO2 reduced.
\4\ Calculation: (120K cars 50 mi/day 22 mpg
19.4 tons CO2 250 workdays/yr) - (12K vanpools
50 mi/day 13 mpg 19.4 tons CO2
250 workdays/yr) = 1.1 billion tons CO2 reduced.
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What is a vanpool? In short, a vanpool is simply a large carpool.
Generally speaking, a vanpool is created when 6-15 people who typically
work at the same company or common location will decide to commute
together. This group will pick one person to be the volunteer driver
and one-to-three alternate drivers. This group will then contract for
the use of a nine to fifteen passenger vehicle on a ``30-day, pay-as-
you-go'' basis through a vanpool service provider.
VPSI and other vanpool providers work with large employers,
transportation management associations, metropolitan planning
organizations, and other public entities to market and organize
vanpools.
Figure 1--Vanpooling Is the Most Cost Effective Mode of Public
Transportation
[GRAPHIC] [TIFF OMITTED] T2201A.122
Vanpooling is not exclusive to large metropolitan areas, in fact,
much of the growth vanpooling has experienced over the past several
years has occurred in small metropolitan areas and in rural markets
where commuters often travel more than 50 miles each day to get to and
from their work location.
As Congress works to put together climate change legislation, VPSI
urges Congress to include provisions which would lead to a reduction in
vehicle miles traveled.
VPSI calls upon Congress to take the following actions as a part of
comprehensive climate change legislation:
Reinstate the Vanpool Investment Tax Credit.
Include the tax provisions included in the Transportation
and Housing Choices for Gas Price Relief Act of 2008 (H.R. 6495).
Set-aside cap and trade proceeds for transit, vanpooling,
and other VMT reducing strategies.
Include legislative provisions creating equity between
the parking and transit benefits associated with section 132(f) (H.R.
1475), and establish a tax credit for employers who subsidize their
employees alternative commutes (H.R. 6030).
These legislative remedies are not a silver bullet, but should be
one part of the overall solution. Additionally, it should be noted that
beyond a reduction in carbon emissions, VMT reductions also help
conserve energy and reduce congestion. As such, VPSI would urge
Congress to pass these provisions if another appropriate opportunity
presents itself.
Reinstate the Vanpool Investment Tax Credit
Under the Federal Energy Tax Act of 1978, a 10 percent investment
tax credit was approved for employers who established vanpools. To
qualify for the credit, the van was required to have a seating capacity
of at least eight, excluding the driver, have a 3-year useful life, be
used 80 percent of the time for vanpooling, and be put into service by
January 1, 1986.
From 1975 to 1985 over 24,000 commuter vanpools were placed into
service. Large employers, e.g. 3M, Conoco, Texaco, Pennzoil, Arco,
Hartford Insurance, Schering Plough, Boeing, Aramco, Arizona Public
Service, TVA, Chrysler, Cargill, Northrop, Shell, Ford, and McDonnell
Douglas, acquired fleets of vans to transport their employees to and
from work.
The vanpool investment tax credit expired in 1986 and was not
extended. VPSI urges Congress to reinstate the 10% ITC, but also
include private vanpool service companies in eligibility. (They didn't
exist from 1978 to 1985, except in 5 or 6 urban areas. Now these
private vanpool service companies serve commuters in more than 60 U.S.
cities).
Based upon historical trends and increasing demand, VPSI projects
that if such legislative policy was enacted, vanpool use could double
over the next four (4) years. Such growth would lead to new emission
reductions of 1.1 billion tons of carbon per year at an estimated
total cost of $36 million over the 4-year period, or $122/ton of
carbon. (See Table 1).
Additionally, a reinstated 10% vanpool investment tax credit would
be three times more effective at reducing CO2 emissions,
would reduce peak hour VMT in commute traffic by a factor of 10, and
would have less than half the impact to the Treasury than the current
tax credit for the purchase of hybrid vehicles. (See Figure 2).
Table 1--Cost to U.S. Budget of Investment Tax Credit FY '10-FY '13
------------------------------------------------------------------------
------------------------------------------------------------------------
Target = 24,000 vanpools Typical large commuter van = $30,000
Current fleet = 12,000 Value of 10% ITC = $3,000
Growth = 12,000 vanpools Impact on Treasury = $36,000,000
($3,000 12,000)
------------------------------------------------------------------------
Figure 2--Cost to U.S. Treasury Hybrid vs. Vanpool ITC
[GRAPHIC] [TIFF OMITTED] T2201A.123
Figure 3--Impact of ITC Reinstatement on Domestic Automakers
[GRAPHIC] [TIFF OMITTED] T2201A.124
Finally, an investment tax credit is also good for domestic
automakers. Vanpools typically use nine (9) to fifteen (15) passenger
vehicles. Currently, only domestic automakers produce these larger
passenger vehicles. The proposed policy change would mean an additional
$440 million in sales for domestic automakers over the next 4 years.
(See Table 4).
Include the tax provisions included in the Transportation and Housing
Choices for Gas Price Relief Act of 2008 (H.R. 6495)
The Transportation and Housing Choices for Gas Price Relief Act of
2008 (H.R. 6495), as introduced by Congressman Blumenauer (D-OR) is a
comprehensive piece of legislation aimed at providing commuters with
options from the high price of gas. While the direct focus of this
legislation is relief from the pain at the pump, a secondary focus is
to reduce the amount of greenhouse gases that are emitted into the air.
VPSI urges the Ways and Means Committee to act on the relevant sections
of this legislation that affect the Tax Code and are under this
Committee's jurisdictions. Specifically:
Section 7 `Credit for Teleworking'--which would provide a
tax credit of up to $400 a year for qualified teleworking expenses.
Section 8 `Transportation Fringe Benefit to Bicycle
Commuters'--which would expand the transportation fringe benefit under
section 132(f) of the Code to those who commute to work via bicycle.
The provision sets a cap of $50/month.
Section 9 `Increased Uniform Dollar Limitation for All
Types of Fringe Benefits'--which would create parity between the
parking and transit portions of the transportation fringe benefit.
Section 11 `Eligibility of Self-Employed Individuals to
Receive Certain Transit Benefits'--which would allow the self employed
to take advantage of the transit benefit under section 132(f) of the
Tax Code.
Section 12 `Parking Cash-Out Programs'--which would
require any employer who subsidizes or offers pre-tax parking benefits
to also offer parking cash-out programs. Parking cash-out is a term
used when employers offer employees cash in lieu of parking to
encourage employees to use transit or other forms of transportation.
Section 13 `Vanpool Credit'--which would reinstitute a
tax credit as described earlier in our testimony.
These legislative proposals are cost effective measures that will
encourage more Americans to utilize alternative forms of
transportation, thus driving less and emitting less carbon into the
atmosphere.
Set-aside cap and trade proceeds for transit, vanpooling, and other VMT
reducing strategies
According to the Environmental Protection Agency nearly one-third
of all greenhouse gas emissions come from the transportation sector. As
Congress puts together a cap and trade system, VPSI strongly recommends
that no less then 10% of the funds generated from the cap and trade
system be dedicated to mass transit and VMT reducing strategies. VPSI
recommends that when putting together the details of such a program
that it recognizes all the stakeholders who play a role in
transportation and can play a role in reducing VMT including employers,
local and regional planning bodies, transportation management
associations, and private providers of public transportation. Funneling
resources to existing Federal Highway and Federal Transit formulas
alone may not inspire the type of change that is required to meet the
goals of this legislation. VPSI recommends that the funding be
apportioned in a way that guarantees it is used in an efficient way to
reduce VMT and carbon emissions.
Additionally, provided that a cap and trade program would not
produce proceeds for several years, VPSI recommends that the
legislation include provisions that would allow public and private
transportation agencies to bond against the promise of cap and trade
proceeds in order to begin early action programs.
Include legislative provisions creating equity between the parking and
transit benefits associated with section 132(f) (H.R. 1475), and
establish a tax credit for employers who subsidize their employees
alternative commutes (H.R. 6030)
Finally, comprehensive climate change legislation should include
provisions that increases transit ridership nationwide. There are two
ways that this can be accomplished. First, the Ways and Means Committee
should include legislation offered by Congressman McGovern (D-MA) which
would establish parity between the parking and transit portions of the
transportation fringe benefit. This would end the current financial
incentive to drive to work that exists in the Tax Code. Additionally,
including this provision would mean that those Americans with the
longest commutes, and thus are driving the most and emitting the most
carbon during their daily commute would now be covered by the transit
benefit and would have an incentive to stop driving to work. One
version of the legislation offered by Congressman McGovern would
increase the cap on the transit benefit from $115/month to $200/month
while slightly reducing the parking portion from $220/month to $200/
month. In this version, the legislation is revenue positive by $143
million over 10 years.\5\
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\5\ According to a Joint Committee on Taxation letter to
Congressman McGovern, June 19th, 2007.
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Secondly, this Committee should include legislation offered by
Congressman Kirk (R-IL), H.R. 6030, which would create a tax credit for
employers who subsidize their employees' commutes. Multiple studies
have shown that when an employer pays for their employees' commute as a
part of their benefit package, transit ridership and use of alternative
transportation modes increases dramatically. More and more American
businesses recognize the role they can play in the fight against global
warming. As a part of that fight, employers are ready and willing to
become more involved in their employees commutes. As such, the Federal
Government can help inspire more companies to become engaged by
offering a small tax credit. The cost of such credit would be minimal
compared to the outcomes.
Conclusion
The recommendations outlined here today are only a few of the many
legislative remedies that can help reduce carbon emissions, and fight
global warming. VPSI recommends this Committee and the whole of
Congress study all of these remedies and include anything and
everything that can have a positive benefit.
If you have any questions, please contact Jon Martz, Vice President
of Government Affairs at (248) 597-3519 or Jason Pavluchuk at (202)
285-6414. We look forward to working with this Committee as the process
unfolds.