[Senate Hearing 110-516]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-516
 
                       CLIMATE CHANGE LEGISLATION

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

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                                   TO

  RECEIVE TESTIMONY ON ENERGY AND RELATED ECONOMIC EFFECTS OF GLOBAL 
                       CLIMATE CHANGE LEGISLATION

                               __________

                              MAY 20, 2008


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

                     U.S. GOVERNMENT PRINTING OFFICE
44-664 PDF                 WASHINGTON DC:  2008
---------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092104 Mail: Stop IDCC, Washington, DC 20402ï¿½090001

               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  JEFF BINGAMAN, New Mexico, Chairman

DANIEL K. AKAKA, Hawaii              PETE V. DOMENICI, New Mexico
BYRON L. DORGAN, North Dakota        LARRY E. CRAIG, Idaho
RON WYDEN, Oregon                    LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota            RICHARD BURR, North Carolina
MARY L. LANDRIEU, Louisiana          JIM DeMINT, South Carolina
MARIA CANTWELL, Washington           BOB CORKER, Tennessee
KEN SALAZAR, Colorado                JOHN BARRASSO, Wyoming
ROBERT MENENDEZ, New Jersey          JEFF SESSIONS, Alabama
BLANCHE L. LINCOLN, Arkansas         GORDON H. SMITH, Oregon
BERNARD SANDERS, Vermont             JIM BUNNING, Kentucky
JON TESTER, Montana                  MEL MARTINEZ, Florida

                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
              Frank Macchiarola, Republican Staff Director
             Judith K. Pensabene, Republican Chief Counsel

                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Bingaman, Hon. Jeff, U.S. Senator From New Mexico................     1
Corker, Hon. Bob, U.S. Senator From Tennessee....................     7
Domenici, Hon. Pete V., U.S. Senator From New Mexico.............     4
Gruenspecht, Howard, Deputy Administrator, Energy Information 
  Administration.................................................    15
Hannegan, Bryan, Vice President, Environment and Generation, the 
  Electric Power Research Institute..............................    64
Martinez, Hon. Mel, U.S. Senator From Florida....................     7
McLean, Brian J., Director, Office of Atmospheric Programs, 
  Office of Air and Radiation, Environmental Protection Agency...    20
Orszag, Peter R., Director, Congressional Budget Office..........    26
Parker, Larry, Congressional Research Service....................    12
Yacobucci, Brent, Congressional Research Service.................     8

                                APPENDIX

Responses to additional questions................................    67


                       CLIMATE CHANGE LEGISLATION

                              ----------                              


                         TUESDAY, MAY 20, 2008

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10 a.m. in room 
SD-366, Dirksen Senate Office Building, Hon. Jeff Bingaman, 
chairman, presiding.

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

    The Chairman. Why don't we go ahead and get started. Today 
we'll hear testimony on analyses of global warming legislation 
to learn about the economic and energy impacts of climate 
policy and how to understand what the capabilities and 
restrictions of economic models are. Over the past several 
years the committee has had a number of hearings and workshops 
and briefings to understand the economic, environmental impacts 
of climate legislation, specifically on its impacts to the 
energy sector.
    Last year the Energy Information Administration and others 
testified before our committee on draft legislation that would 
become the Bingaman-Specter Climate bill. Since that time many 
other climate bills have been introduced. Many of them have 
been modeled and not only by EIA but also by EPA and also by 
various stakeholders and interest groups.
    Debates on climate legislation and energy policy in general 
have often focused heavily on modeling analyses and 
predictions. They go from one extreme to another. There are 
some models that have been used to show that legislation will 
cause massive disruptions in our economy. There are other 
models that have been used to show that this legislative 
proposals can be accomplished with little or no cost.
    Given this wide disparity of findings it can be difficult 
to navigate the space in-between and to understand what the 
true impacts of legislation will be. We're faced with the 
question how could reasonable people and institutions analyze 
the same policy and come to completely different conclusions.
    A broader question that the committee needs to focus on is 
how energy models can be helpful to us in creating a road map 
to transform our economy toward a low carbon economy. Although 
EIA and EPA and others have done modeling of various climate 
change proposals in the last year, the most recent modeling has 
been of the Lieberman-Warner Climate Security Act which was 
reported by the Environment Committee in December.
    It is my understanding that a substitute for that bill is 
being developed and that the substitute will be what is 
considered on the Senate floor in the next several weeks. 
Obviously, that substitute has not been the subject of modeling 
as yet. Nevertheless, I believe it's valuable for us to 
understand first, the extent to which modeling can reliably 
inform our judgment about what to do.
    Second, the assumptions built into the various models about 
the availability of resources and the need and the speed of 
technology development in deployment.
    Third, the factors that most significantly affect the 
outcomes from these models.
    I very much thank the witnesses for being here to help us 
understand these complex issues. Let me defer to Senator 
Domenici before I introduce the witnesses.
    [The prepared statements of Senators Salazar and Murkowski 
follow:]

   Prepared Statement of Hon. Ken Salazar, U.S. Senator From Colorado

    Thank you Chairman Bingaman and Ranking Member Domenici for holding 
today's hearing on the energy and related economic impacts of global 
climate change legislation. This Congress has made climate change 
legislation a priority, and, under your leadership, this Committee has 
devoted considerable effort to developing a cap-and-trade system to 
control greenhouse gas emissions. We are all anticipating the upcoming 
floor debate of the Lieberman-Warner climate change bill.
    Many have called the lack of a price on carbon the greatest market 
failure in history. Placing a price on carbon will likely touch many 
sectors of the economy. Our design choices can have far-reaching 
consequences, and we must take care to motivate and reward consumers, 
farmers, and industrialists to ``do the right thing'' with regards to 
embracing a low-carbon footprint.
    Above all, a carbon cap-and-trade system has the potential to 
turbo-charge the nascent clean energy revolution that has already begun 
in our country. Clean, low-carbon energy can be an economic engine for 
our nation, and I am hopeful that a cap-and-trade system and the right 
tax policies will stoke our transformation into the undisputed world-
leader in cost-effective solutions to the climate challenge.
    Our nation's competitiveness in the global marketplace and the high 
standard of living we enjoy today are intimately related to our 
longstanding dedication to promoting and capitalizing on technological 
innovation. Long the envy of the world, our innovation infrastructure 
holds the key to solving the climate crisis. A cap-and-trade program 
has the potential to fully unleash our economy's innovation capacity 
and fuel incredible economic growth. I am particularly interested to 
hear from our panelists whether the existing analyses of the Lieberman-
Warner bill have captured and incorporated these undeniable forces in 
our economic system.
    In Colorado I have witnessed firsthand the economic muscle of clean 
energy, where our citizens' commitment to a renewable electricity 
standard has attracted thousands of new jobs to the state. In the 
Denver metro region alone, the number of renewable-energy sector jobs 
tripled between 2004 and 2007.
    Our nation holds the technological potential to meet the climate 
challenge and the economic potential to capitalize on it. Time and 
again throughout our history American ingenuity has developed the 
technologies to meet our greatest challenges. Achieving homegrown 
solutions to the carbon problem will undoubtedly present incredible new 
economic opportunities to export these technologies to the rest of the 
world, particularly China and India. Last year Morgan Stanley declared 
that clean energy industries could reasonably achieve $1 trillion in 
annual global revenues by 2030. Clean, low-carbon energy will be an 
economic driver for the 21st century. I look forward to discussing this 
transformation with this distinguished panel.
    Thank you, Mr. Chairman.
                                 ______
                                 
  Prepared Statement of Hon. Lisa Murkowski, U.S. Senator From Alaska

    Mr. Chairman, I must admit this is a particularly complex hearing. 
As the CRS report makes clear, so many of the computer models that 
purport to look at the effects of Lieberman-Warner and of the 
alternative Bingaman-Specter cap and trade bills for that matter, 
seemingly use different assumptions and generate vastly different 
results. And many of the models themselves produce vastly different 
results between their reference cases and their ``high-tech'' 
alternatives.
    While there is some uniformity of opinion that the Lieberman-Warner 
bill will reduce our gross domestic product, there is a big difference 
in estimates as to how much. The EPA predicts a drop of between--0.7% 
to -2.5% by 2020 and from -0.9% to -3.8% by 2030. EIA predicts a drop 
of from -0.3% to -0.9% by 2020 and from -0.3% to -0.8% by 2030. The 
Clean Air Task Force model predicts a low of -0.7% by 2030 while the 
National Association of Manufacturer's ACCF model predict up to a -2.7% 
reduction by 2030--resulting in a cumulative difference of nearly $4 
trillion among the models.
    That difference is not unimportant. If you look at all the computer 
models, the EIA models pegs the cost to the average household at 
somewhere between $76 and $723 in 2030, quite a spread. But the NAM/
ACCF model puts that spread at between $4,000 and $6,750 per household 
in 2030. The EPA model puts it at between $446 and $608 in 2020, less 
than half of the $1,340 that the Charles River Associates International 
model predicts in that same year.
    Look at specific utility prices, electricity rates are predicted to 
rise by a low of 10% in 2030 in the Clean Air Task Force Model, to by 
30% in the Nicholas Institute model, to 34% in the Charles River 
Associates International model, by 44% in the EPA model, to 57% in the 
MIT model, by between 11 and 64% in the EIA model, and to 101 to 129% 
in the NAM/ACCF model.
    There is not much more uniformity of opinion about the price 
impacts on coal, natural gas or oil/gasoline costs. Or for that matter 
how much alternative and renewable energy we are likely to gain by 
passing the bill. The EIA in its 2008 energy outlook predicted about 
4.5 gigawatts of alternatives would be built to 2030 in a business as 
usual case. MIT predicts in its model about 16 gigawatts will result 
from the bill. EIA is harder to pin down but I thought the report 
suggested around 16 gigawatts, which is a 146% increase over their 
business as usual case. EPA estimates 61 gigawatts, NAM between 108 and 
180 gigawatts, the Clean Air Task Force around 100 gigawatts and 
Charles River Associates 176 gigawatts.
    How can we in Congress be on the verge of voting on a measure where 
there is such a large difference in the forecasts about what the bill 
will mean to our constituents with little hope of clarifying the 
estimates before floor action?
    From a provincial Alaska perspective, the NAM/ACCF model predicts 
it will cost the average Alaskan household between $4,548 and $8,294 a 
year in higher energy costs and will cut jobs in Alaska between 6,410 
and 8,530 in 2030. The Heritage Foundation model puts Alaska's job loss 
at 1,800 by 2025. Meanwhile an analysis by the University of Alaska's 
Institute of Social and Economic Research implies the cost will be far 
less, especially in terms of jobs, a recent report indicating the bill 
might actually hike employment in the State by leading to construction 
of a natural gas pipeline.
    Seldom has Congress been asked to start voting on a bill that will 
have such a massive impact on our economy and our future with such a 
large divergence of opinion about what it will mean for the nation and 
our state's constituents.
    Obviously as the CRS report shows, and as other analysis has shown, 
there are real differences in the assumptions that drive the models and 
real differences of opinion about what assumptions make the most sense.
    Nuclear power may be a rational way to replace carbon emitting 
power with clean energy. The models, however, have vast differences as 
to how much nuclear power will be built--that affecting greatly the 
various cost estimates for how climate legislation will impact people.
    As the CRS report notes from 1963 until 1985--22 years--this 
country built 78 gigawatts of nuclear power in total. But the computer 
models predict that over the next 22 years we will build somewhere 
between 117 in the view of the Clean Air Task Force model, which helps 
to limit the cost of the Lieberman-Warner bill, between 88 and 286 
gigawatts in the differing forecasts of EIA, to 62 gigawatts in the EPA 
model, 40 in the view of Charles River (CRAI), 25 in the view of NAM 
and just 3.5 gigawatts in the view of the MIT report.
    You get almost the same vast spread in predicted outcomes in the 
amount of carbon capture and storage capable coal-fired plants that 
will be built. And those differences are vital in how the models 
determine the predicted cost to Americans of the legislation.
    And as the CRS report makes clear there are similar uncertainties 
in a host of other areas. Look at carbon prices for allowances, a key 
in determining gasoline, coal, natural gas, and electricity prices that 
Americans will pay under the measure because of their impacts on carbon 
emission allowance costs. The estimates are that carbon in 2030 may 
cost a low of $38 a ton in the report by the Nicholas Institute, which 
helped design the architecture of the Lieberman-Warner bill. The Clean 
Air Task Force places it at $50 a ton. Charles River at $76 a ton, EPA 
between $61 and $83 a ton, MIT at $86, EIA at between $61 and $156 a 
ton, depending on which of their forecast scenarios you pick, and NAM 
at between $227 and $271 a ton.
    That variance alone helps to explain why CRAI says that Lieberman-
Warner may cost the nation $7.4 trillion in 2007 dollars to 2050, while 
the Bingaman-Specter alternative cap and trade bill that I am a co-
sponsor of is expected to cost just $1.7 trillion till 2050.
    And what will Americans get for that cost. As the CRS report makes 
clear, it depends solely upon whether foreign nations follow America's 
suit and adopt similar types of carbon emission reductions. If they 
don't, the world will see a drop in atmospheric levels of carbon of 
about 23 to 25 parts per million less than would otherwise be seen.
    I point out these differences not because I believe nothing should 
be done to limit carbon emissions. Coming from Alaska, the state 
already impacted by climate change during the past three decades, and 
predicted to be the most impacted in America by climate change, I 
certainly want to do things that work quickly to reduce carbon 
emissions, if nothing more than an insurance policy against future 
atmospheric change.'
    But I certainly want to make sure that the costs of legislation are 
the lowest possible on Americans, while maximizing the benefits they 
will see from any measure that we pass.
    I await the testimony and my chance to try to make sense out of the 
models and the estimates of the impacts of the Lieberman-Warner bill 
that we are about to hear. Thank you Mr. Chairman.

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

    Senator Domenici. First, thank you, Mr. Chairman for 
calling this hearing. I think the more of these kinds of 
hearings we can hold, gathering expertise from the people like 
today's witnesses, the better off we are and the better off our 
country will be. I thank you for coming and lending us your 
time and your intelligence.
    Good morning, everyone. We have five cap and trade bills in 
the Senate. At least 11 attempts have been made to analyze 
them. Every single one--11 out of 11--has concluded that these 
bills will result in higher energy prices, lower economic 
growth and minimal environmental benefit. That's what every one 
of the studies says.
    There are seven sets of analysis on the Lieberman-Warner 
Bill alone. They don't agree on much. One study projects 264 
gigawatts of new nuclear power plants, while another projects 
no more than four. But all of them anticipate a negative impact 
on our Gross Domestic Product. Even those estimated impacts 
vary, from $444 billion to a high of $4.8 trillion.
    Addressing global climate change is one of the great 
challenges of our time. I have the greatest respect for the 
goals and efforts of each bill's authors. I also appreciate the 
hard work that has gone into these studies. But a range of 
nearly $4.5 trillion is as massive as it is inconclusive. I 
remain concerned about the dire consequences that the 
Lieberman-Warner bill could have for our Nation.
    We must also remember that projections are just that, 
projections. The best estimates by our most capable minds often 
prove inaccurate. Take for instance, EIA's projected oil price 
for 2010 as it appeared in the Annual Energy Outlook for 2005. 
I certainly hope that oil prices decline to $25 a barrel over 
the next 18 months, but right now, we're paying five times that 
amount. On a projection just 5 years into the future, what a 
difference the past 3 years have made.
    Even the projected environmental impacts of climate change 
have varied significantly. In 2001 the IPCC predicted that sea 
levels would rise by 3 feet by the year 2100. In their latest 
assessment, that number was lowered to between 7 and 23 inches 
on a projection that sought to look a full century forward, 
what a difference the past 7 years have made.
    Compounding this uncertainty is what appears to be the 
worst kept secret on Capitol Hill--that what was reported from 
EPW last December will be replaced by a manager's amendment. 
Senator Bingaman has alluded to that. Very few will have been 
able to provide input on this amendment, and even fewer will 
have had a chance to properly evaluate it.
    We're all working on the bill, as it was reported by EPW. 
But the bill will be irrelevant when it is substituted for by a 
manager's amendment, which I am certain will have substantial 
changes at every level and every part. Today, this leaves us to 
learn about legislation that will never be taken up on the 
Senate floor.
    Given what we lack in future projections, it is critical to 
look at what other countries have tried to do, including the 
signatories to what was supposed to have been a binding treaty. 
It caught my attention last December when President Clinton 
appeared on the Charlie Rose show, Mr. Chairman, and latented 
the fate of the Kyoto Protocol. He said 170 countries signed 
this treaty, only 6 out of the 170 have reduced their 
greenhouse gases to the 1990 level. He said that only 6 will do 
so by 2012 deadline.
    One hundred sixty-four out of 170 is a staggering rate of 
failure, and we should give that precedent the attention it 
deserves. If the Wright Brothers had been among 170 seeking to 
be the first to fly, I'm certain they would have wanted to know 
why all but a handful of their fellow aviators came crashing 
down to earth.
    I'm not endorsing the status quo, but our Nation has done 
reasonably well compared to those who have implemented cap and 
trade programs. The European Union began operating its system 
in 2005. According to the Wall Street Journal, their carbon 
dioxide emissions have continued to rise by about 1 percent a 
year. During that same period, America's carbon dioxide 
emissions actually declined by 1 percent.
    Any reasonable amount of time spent looking at cap and 
trade proposals leads to more questions than answers. While 
that may be acceptable for scientific endeavors it is not a 
very sound footing from which to embark upon policymaking. One 
of these questions is particularly troubling. Assume for a 
moment that Congress passes, and the President signs, the 
Lieberman-Warner legislation. What then will we have 
accomplished for the environment?
    As it turns out, the answer is next to nothing. This is a 
global problem. But without further international action, the 
Lieberman-Warner bill would reduce atmospheric concentrations 
of greenhouse gases by a mere 1 percent by 2050. To achieve 
that reduction we may subject our economic prosperity and 
global competitiveness to irreparable harm.
    My concerns are no different than those shared by the full 
U.S. Senate in 1997, when on a vote of 95 to 0, we passed a 
resolution indicating that we did not support Kyoto. Our 
economy grew by 5 percent in the quarter before that vote. In 
the midst of robust growth the Senate overwhelmingly rejected 
the idea of a treaty that did not include developing nations or 
``could result in serious harm to the United States economy.''
    With the many factors now limiting our economy, which 
expanded by just 0.6 of a percent last quarter, today should be 
no different. Our determination to involve developing nations 
in these efforts should be stronger than ever, since we now 
know that China has surpassed us in greenhouse gas emissions 
decades before they were supposed to. There is a fine line 
between success and failure in the global economy. We must not 
let a disproportionate sense of urgency tip the balance away 
from our economic strength and competitiveness with emerging 
economies.
    Addressing climate change is a great challenge, but it is 
not the only challenge that we face. Between 1990 and 2006, 
American's reliance on foreign oil increased from 42 percent to 
60. As a result, nearly half a trillion dollars will be sent 
overseas this year for energy that we are capable of producing 
at home.
    Our trade deficit ballooned from $81 billion to $700 
billion last year, and our Nation's national debt tripled to 
over $9 trillion during that same period. These are bipartisan 
shortcomings that have played out over the course of decades.
    During these same years, we did make progress on one front, 
and it is a front that is central to this debate. Between 1990 
and 2007, the greenhouse gas intensity of our economy dropped 
by nearly 27 percent, even as many other problems became much 
more serious. We may see an increase in emissions in some 
years. But over the past 2 decades, our ability to reduce 
greenhouse gas emissions relative to GDP has been very 
instructive.
    We are already experiencing record prices for gasoline, oil 
and other commodities. To me, it's more than a little ironic 
that the free market, which so many of my colleagues have 
criticized as responsible for those high prices, is the very 
same mechanism that they ask us to trust for containing the 
costs associated with a cap and trade regime.
    We, as a Congress and as a Nation, must realize that cap 
and trade is neither our only option nor our best option for 
addressing climate global climate change. Rather than choosing 
among cap and trade proposals, we could look at alternate 
measures promoting nuclear power, advancing clean energy tax 
incentives, and accelerating the development of clean 
technologies.
    The Energy bills we passed in 2005 and 2007 are the 
functional equivalent of a clean energy Manhattan Project. 
There is no question that fully funding these measures, and the 
additional progress made possible by my Clean Energy Investment 
Bank that might come into being, will lower emissions even 
further.
    In closing I remind my colleagues of the importance of 
choosing the right path for our Nation on climate change and 
the enormity of the consequences if we fail to fully and wisely 
choose. I look forward to hearing from the witnesses. Many of 
them I do not know, but I know enough about them to say that 
they are more than adequate to help us understand what we are 
about to enter upon.
    Thank you, Mr. Chairman.
    The Chairman. Thank you. Let me suggest this way of 
proceeding. I know there are members here who would like to 
give opening statements as well.
    I think in fairness to our witnesses, I would like to go 
ahead and hear from the witnesses, and maybe give each member 7 
minutes of time for comments or statements and questions on the 
first round. Any member that has not had a opening statement 
like I did and like Senator Domenici did, so that we don't get 
into a major debate here about whether climate change should be 
addressed through cap and trade or not. Because I do think that 
these witnesses are really here to talk about the modeling 
which is the focus of our hearing.
    Let me just introduce Senator Corker.

          STATEMENT OF HON. BOB CORKER, U.S. SENATOR 
                         FROM TENNESSEE

    Senator Corker. Yes, I'll refrain from giving an opening 
comment. I have to go to a banking meeting at 10:30 that has a 
mark up and a thin number as it relates to actually having a 
quorum. I apologize. I do want to thank you for having this 
hearing.
    There are numbers of things that I'd like to say which I 
guess I will not say at this time out of respect for the 
chairman, but I thank you for having this hearing. I'll 
probably enter those into the record. Thank you.
    The Chairman. I would like to give you time to say them, 
but Senator Domenici has a hearing he has to be at at 11 
o'clock. We'll still be giving opening statements by 11 o'clock 
if we don't go ahead, I'm afraid.

         STATEMENT OF HON. MEL MARTINEZ, U.S. SENATOR 
                          FROM FLORIDA

    Senator Martinez. Mr. Chairman, could I also say that I 
would have to be going to this banking hearing and mark up as 
well very shortly, but I'm very interested in this topic. Thank 
you for calling the hearing.
    The Chairman. Thank you all very much. Our first witness is 
Brent Yacobucci who is with the Congressional Research Service. 
I've asked that the CRS provide us with a brief description of 
how a cap and trade system would work, and he's intending to do 
that in his statement.
    Larry Parker is also with the CRS and will proceed to give 
us some of the conclusions in a new report that CRS has done 
seeking to compare the results of various climate change 
analyses.
    Howard Gruenspecht who's a familiar witness to us here is 
with the Energy Information Administration and Brian McLean who 
has also been here before with the Environmental Protection 
Agency. They will talk about the analyses that their respective 
agencies have done. Brian McLean is accompanied by Francisco de 
la Chesnaye, thank you for being here to provide technical 
support.
    Peter Orszag is well known to all of us as the Director of 
the Congressional Budget Office. He'll speak about some of the 
economic impacts of climate legislation. He recently testified 
before the Finance Committee on similar issues.
    Thank you all for being here. Why don't we start and just 
go across the table there. If you could take 5 or 6 minutes and 
make the main points that you think that we need to understand. 
Then we will have questions.

  STATEMENT OF BRENT YACOBUCCI, CONGRESSIONAL RESEARCH SERVICE

    Mr. Yacobucci. Alright. Good morning, Senators. My name is 
Brent Yacobucci and I'm joined by Larry Parker.
    On behalf of the Congressional Research Service we would 
like to thank the committee for this invitation to testify here 
today. I've been asked by the committee to present a short 
introduction to cap and trade policy including key concepts and 
terms and relate those to S. 2191, the Lieberman-Warner Climate 
Security Act of 2008. Attached to my opening statement is a 
brief glossary of key terms presented in this statement.
    A cap and trade system imposes an emissions ceiling or cap 
on the total annual emissions from entities covered by the 
system. The level of the cap is equal to the number of 
emissions permits or allowances allocated each year. At the end 
of the year covered entities must submit one allowance for each 
ton of carbon dioxide equivalent emitted.
    In general a cap and trade system achieves emission 
reductions by decreasing the number of allowances allocated in 
successive years, the steeper the annual reduction in 
allowances, the more stringent the program. Also for the same 
cap the wider the coverage, that is, the more economic sectors 
and entities within those sectors covered by the system, the 
more stringent the program. S. 2191 as already reported would 
establish a mandatory cap and trade system reducing overall 
emissions by 66 percent from 2005 levels by 2020 according to 
the bill's sponsors.
    Allowances may be used to comply with the cap, banked for 
future use or traded to someone else. This is the trade aspect 
of a cap and trade program. A key component of trading is the 
fact that some participants will have lower reduction cost than 
others.
    To the extent that two different firms have different cost 
it makes the most economic sense for the firm with higher 
reduction costs to pay the lower firm to further reduce their 
emissions. In a national program these sorts of trades could 
occur among entities, sectors and countries within certain 
limits. A key element in designing a cap and trade system is 
selecting the point at which emissions are regulated. That is, 
who should submit allowances under the program.
    Greenhouse gases can be controlled downstream at the point 
where they are emitted into the atmosphere or they could be 
controlled upstream requiring allowances from firms that 
produce or supply fuel and other products that will ultimately 
lead to greenhouse gas emissions. S. 2191 achieves broad 
coverage through upstream regulation of petroleum, natural gas 
and fluorinated gas producers and importers and downstream 
regulation of coal consumers such as electric generators. Now 
the point of regulation should not be confused with how and to 
whom allowances are allocated.
    Allowances may be given at no cost to cover entities. In 
contrast allowances could be given to anyone. For example, 
States who may sell them to covered entities and use the 
proceeds for various purposes. Also allowances may be auctioned 
by the government and the proceeds used for purposes related or 
unrelated to greenhouse gas reduction.
    S. 2191 uses a mix of all 3 options allocating roughly 35 
percent of allowances in 2012 to covered sectors, another 35 
percent to non-covered entities and auctioning the rest. In 
successive years the percentage of allowances given to covered 
entities reduces to zero while the share being auctioned 
increases.
    Within a cap and trade system three flexibility mechanisms 
are key to determining the ultimate cost of the program. The 
first is banking, which is the ability to retain allowances for 
future use or sale. A provision included in S. 2191. Banking 
allows smoother transitions and can promote earlier reductions.
    A second flexibility mechanism is the availability of 
domestic offsets which are emission reductions achieved by non-
covered entities. These non-covered entities can sell offsets 
to covered entities who may use them in lieu of an allowance. 
Under S. 2191 up to 15 percent of a covered entities 
requirement can be met using these domestic offsets.
    A third flexibility mechanism is the availability of 
international credits which are reductions achieved in eligible 
foreign systems that may be used by covered entities to comply 
with a U.S. program. Under S. 2191 up to 15 percent of a 
covered entities requirement can be met through the use of 
international credits.
    In addition to these flexibility mechanisms cap and trade 
approaches may contain techniques to limit costs. These include 
a safety valve like that in S. 1766 which allows a covered 
entity to choose to pay a fee in lieu of submitting an 
allowance. Another way to control costs is S. 2191's carbon 
market efficiency board with the authority to loosen limits on 
offsets, international credits and the borrowing of allowances 
from future years.
    To conclude the relative costs of a cap and trade program 
are largely driven by three factors, as we call them, the three 
T's: tonnage, time, and techniques or the level of the cap and 
its coverage, the rate of emissions reductions and the 
available flexibility and cost control mechanisms.
    Thank you for inviting us to appear. We'll be pleased to 
address any questions you may have.
    [The prepared statement of Mr. Yacobucci follows:]
 Prepared Statement of Brent Yacobucci, Congressional Research Service
    My name is Brent Yacobucci, and I am joined by Larry Parker. On 
behalf of the Congressional Research Service (CRS), we would like to 
thank the Committee for its invitation to testify here today. I have 
been asked by the Committee to present a short introduction of cap-and-
trade policy, including key concepts and terms, and relate those to S. 
2191, the Lieberman-Warner Climate Security Act of 2008. Attached to my 
opening statement is a brief glossary of key terms presented in this 
discussion.
    As suggested by its name, a cap-and-trade system imposes an 
emissions ceiling or cap on the total annual greenhouse gas emissions 
of entities covered by the system. The level of the cap is equal to the 
number of emissions permits or allowances distributed each year. The 
allowances are distributed to entities through an allocation scheme. At 
the end of the year, for each ton of carbon dioxide equivalent\1\ 
emitted by a covered entity, that entity must submit one allowance to 
the agency regulating the program.\2\ In general, a cap-and-trade 
system achieves emissions reductions by decreasing the number of 
allowances allocated in successive years. For the same cap, the wider 
the coverage, that is the more economic sectors (and entities within 
sectors) under the cap, the more stringent the program. Also, the 
steeper the annual reduction in allowances, the more stringent the 
program. S. 2191, as ordered reported by the Senate Committee on 
Environment and Public Works,\3\ would establish a mandatory cap-and-
trade system, reducing overall emissions by 66% from 2005 levels in 
2050, according to the bill's sponsors. S. 2191 would limit emissions 
from all petroleum refiners and importers, natural gas processors, 
entities that produce or import fluorinated gases and other greenhouse 
gases, and facilities that use more than 5,000 tons of coal per year. 
Sponsors estimate that S. 2191 would cover 87% of the country's 
greenhouse gas emissions.
---------------------------------------------------------------------------
    \1\ In general, greenhouse gas reduction bills address emissions of 
all six greenhouse gases recognized under the United Nations Framework 
Convention on Climate Change: carbon dioxide (CO2), methane 
(CH4), nitrous oxide (N2O), sulfur hexafluoride 
(SF6), hydrofluorocarbons (HFC), and perfluorocarbons (PFC).
    \2\ The U.S. Environmental Protection Agency in most proposals.
    \3\ Available on Senator Lieberman's website: http://
lieberman.senate.gov/documents/lwcsa.pdf.
---------------------------------------------------------------------------
    Allowances--each of which represents a limited authorization to 
emit one metric ton of carbon dioxide equivalent--may be used to comply 
with the cap, banked for use in a future year, or traded to someone 
else. This is the trade aspect of a cap-and-trade program. A key 
component of trading is the fact that some participants will have lower 
reduction costs than others. To the extent that two firms have 
different costs, it makes the most economic sense for the firm with 
higher reduction cost to pay the firm with lower costs to further 
reduce its emissions. An illustrative example of this concept is 
attached (Appendix).* In a national reduction program, these sorts of 
trades could occur among entities, sectors, and countries (within 
certain limitations).
---------------------------------------------------------------------------
    * Figures have been retained in committee files.
---------------------------------------------------------------------------
    A key element in designing a cap-and-trade system is the point at 
which emissions are regulated (point of regulation). That is, where are 
emissions measured, and thus, who must submit allowances to comply with 
the program. Greenhouse gases can be controlled downstream, at the 
point where they are emitted into the atmosphere, or they can be 
controlled upstream, requiring allowances from firms that produce or 
supply fuel and other products that will ultimately lead to emissions. 
A key advantage of downstream regulation is that the entity causing 
emissions has the responsibility for reductions. A key advantage of an 
upstream system is that it may simplify the regulatory process and help 
limit the number of covered entities.\4\ S. 2191 achieves its broad 
coverage through an upstream regulation mandate on petroleum, natural 
gas, and fluorinated gas producers and importers, and a downstream 
mandate on coal consumers, such as electric generators.
---------------------------------------------------------------------------
    \4\ A useful example is the automotive sector. While the purpose of 
the cap-and-trade program would be to have motor vehicle owners make 
reductions by driving less or purchasing more efficient vehicles, it 
would be a massive regulatory undertaking to install emissions monitors 
on the millions of cars and trucks on U.S. roads, and to demand that 
every driver submit emissions allowances at the end of the year.
---------------------------------------------------------------------------
    The point of regulation should not be confused with how, and to 
whom, allowances are allocated. Allowances may be given at no cost to 
the covered entities. For example, that is how the sulfur dioxide cap-
and-trade program of the Clean Air Act allocates allowances. In 
contrast, allowances could be given to anyone--for example, states--who 
may sell them to covered entities and use the proceeds for specified or 
unspecified purposes. Finally, allowances may be auctioned by the 
federal government and the proceeds used for various purposes related 
or unrelated to greenhouse gas reduction. For example, those funds 
could be used to lessen the economic burden of the program on affected 
workers, industries, and regions, to promote the development of new 
technology, or to adapt systems to a changing climate. Further, those 
revenues could be used for non-climate-related purposes such as deficit 
reduction or tax relief.
    S. 2191 uses a mix of all of these options, allocating roughly 35% 
of allowances in 2012 to covered sectors, roughly 35% to unregulated or 
non-covered entities, and auctioning the rest. In successive years, the 
percentage of allowances given to covered entities decreases to zero, 
while the share of auctioned allowances increases. With respect to 
revenues, S. 2191 allocates a large share of auction revenue to keep 
the bill revenue-neutral, to speed deployment of new technology, to 
provide assistance to energy consumers, and to promote adaptation 
efforts.
    Within a cap-and-trade system, three flexibility mechanisms are key 
to determining the ultimate cost of the program:

   The first is banking. Banking is the ability to retain 
        allowances either received or purchased for future use or sale. 
        (It is a provision included in S. 2191.) This allows smoother 
        transitions and can promote early reductions.
   The second flexibility mechanism is the availability of 
        domestic offsets. Offsets are emissions reductions achieved by 
        non-covered entities, such as the agricultural sector. These 
        non-covered entities can sell offsets to covered entities, who 
        may use them in lieu of an allowance, within certain limits. 
        Effectively, offsets increase the supply of available 
        allowances--under S. 2191, up to 15% of a covered entity's 
        allowance requirement can be met through submission of domestic 
        offsets.
   A third flexibility mechanism is the availability of 
        international credits. International credits are emissions 
        reductions achieved by other countries that may be used by 
        covered entities to comply with a U.S. cap-and-trade program. 
        Under S. 2191, up to 15% of a covered entity's allowance 
        requirement can be met through submission of international 
        allowances from eligible foreign cap-and-trade systems.

    In addition to flexibility mechanisms, cap-and-trade approaches may 
contain other techniques to limit costs. These include a safety valve 
like that in S. 1766 which allows a covered entity to choose to comply 
with a cap-and-trade program by paying a safety valve fee instead of 
submitting allowances. However, this would allow emissions to exceed 
the cap. Another way to control costs is S. 2191's Carbon Market 
Efficiency Board, with authority to increase (within certain bounds) 
the pool of available allowances without increasing overall emissions.
    To conclude, the relative costs of a cap-and-trade program are 
largely driven by three factors, as we call them, the ``Three T's'': 
tonnage, time, and techniques.

   Tonnage refers to the stringency of the cap, as well as the 
        breadth of coverage. The more stringent the cap (that is, the 
        fewer the tons allotted), the higher the cost.
   Time refers to the rate of decrease in allowances. The 
        faster the cap decreases, the more expensive the program will 
        be.
   Techniques refers to the flexibility and cost-control 
        mechanisms used. Banking is arguably the most important 
        mechanism to limit volatility in allowance markets. Other 
        techniques that will decrease costs include the availability of 
        domestic offsets and international credits--effectively 
        increasing the supply of allowances.

    Thank you for inviting us to appear. We will be pleased to address 
any questions you may have.
                       attachment.--common terms
    Allowance.--A limited authorization by the government to emit 1 
metric ton of carbon dioxide equivalent. Although used generically, an 
allowance is technically different from a credit. A credit represents a 
ton of pollutant that an entity has reduced in excess of its legal 
requirement. However, the terms tend to be used interchangeably, along 
with others, such as permits.
    Auctions.--Auctions can be used in market-based pollution control 
schemes to allocate some, or all of the allowances. Auctions may be 
used to: 1) ensure the liquidity of the credit trading program; and/or 
2) raise (potentially considerable) revenues for various related or 
unrelated purposes.
    Banking.--The limited ability to save allowances for the future and 
shift the reduction requirement across time.
    Cap-and-trade program.--An emissions reduction program with two key 
elements: 1) an absolute limit (``cap'') on the emissions allowed by 
covered entities; and 2) the ability to buy and sell (``trade'') those 
allowances among covered and non-covered entities.
    Coverage.--Coverage is the breadth of economic sectors covered by a 
particular greenhouse gas reduction program, as well as the breadth of 
entities within sectors.
    Emissions cap.--A mandated limit on how much pollutant (or 
greenhouse gases) an affected entity can release to the atmosphere. 
Caps can be either an absolute cap, where the amount is specified in 
terms of tons of emissions on an annual basis, or a rate-based cap, 
where the amount of emissions produced per unit of output (such as 
electricity) is specified but not the absolute amount released. Caps 
may be imposed on an entity, sector, or economy-wide basis.
    Greenhouse gases.--The six gases recognized under the United 
Nations Framework Convention on Climate Change are carbon dioxide 
(CO2), methane (CH4), nitrous oxide 
(N2O), sulfur hexafluoride (SF6) 
hydrofluorocarbons (HFC), and perfluorocarbons (PFC).
    Offsets.--Emission credits achieved by activities not directly 
related to the emissions of an affected source. Examples of offsets 
would include forestry and agricultural activities that absorb carbon 
dioxide, and reductions achieved by entities that are not regulated by 
a greenhouse gas control program.
    Revenue recycling.--How a program distributes revenues from 
auctions, penalties, and/or taxes. Revenue recycling can have a 
significant effect on the overall cost of the program to the economy.
    Point of Regulation.--Regulatory approaches to limiting emissions 
can choose different points and participants along the production 
process to assign compliance responsibility. Upstream allocation 
schemes establish emission caps at a production, importation, or 
distribution point of products that will eventually produce greenhouse 
emissions further down the production process. In contrast, downstream 
allocation schemes establish emission caps and assign allowances at the 
point in the process where the emissions are emitted.
    Sequestration.--Sequestration is the process of capturing carbon 
dioxide from emission streams or from the atmosphere and then storing 
it in such a way as to prevent its release to the atmosphere.

    The Chairman. Thank you very much. I think that was a good 
summary of the complex issue we're trying to deal with here.
    Dr. Parker, why don't you go right ahead?

           STATEMENT OF LARRY PARKER, CONGRESSIONAL 
                        RESEARCH SERVICE

    Mr. Parker. My name is Larry Parker. On behalf of the 
Congressional Research Service, Brent Yacobucci and I would 
like to thank the committee for the invitation to testify here 
today. S. 2191 would establish a cap and trade program to 
reduce U.S. greenhouse gas emissions through the year 2050. 
While CRS takes no position on the bill, CRS has just completed 
a review and synthesis of six studies that attempt to project 
the cost of S. 2191 to the year 2030 or 2050.
    It is difficult and some would consider it unwise to 
project cost up to the year 2030 much less beyond. The already 
tenuous assumption that current regulatory standards would 
remain constant becomes more unrealistic. Other unforeseen 
events loom as critical issues which cannot be modeled.
    Hence long term cost projections are at best speculative 
and should be viewed with a tint of skepticism. In the words of 
the late Dr. Lincoln Moses, the first Administrator of the 
Energy Information Administration, there are no facts about the 
future.'' Models cannot predict the future, but they can 
indicate the sensitivity of a program's provisions to varying 
economic, technological and behavioral assumptions that may 
assist policymakers in designing a greenhouse gas reduction 
strategy.
    The various cases CRS examined do provide some informative 
insights on the cost and benefits of S. 2191 and its many 
provisions. We have summarized these insights into seven 
points.
    First, if enacted the ultimate cost of S. 2191 would be 
determined by the response of the economy to the technological 
challenges presented by the bill. The bill provides numerous 
research and development, deployment, regulatory and price 
incentives for technology and evasion to reduce greenhouse gas 
emissions. The potential for new technology to reduce the cost 
of S. 2191 is not fully analyzed by any of the cases examined 
nor can it be.
    The process of technology development and dissemination is 
not sufficiently understood at the current time for models to 
replicate it with any long term confidence. In the same vein, 
it is difficult to determine whether the various incentives 
provided under S. 2191 are directed in the most optimum manner.
    Second, a considerable amount of low carbon, electric 
generating capacity would have to be built under S. 2191 in 
order to meet the reduction requirements. The cases presented 
here do not agree on the amount of new generating capacity 
necessary under S. 2191 or the mix of fuels and technologies 
that would be employed. The estimated amount of capacity 
constructed depends on the cases assumptions about the need for 
new capacity and the replacement or retirement of existing 
capacity under S. 2191 along with consumer demand response to 
the rising prices and incentives contained in the bill.
    Third, the cases suggest that the carbon capture and 
storage bonus allowance allocation provided under S. 2191 would 
be effective in encouraging deployment of carbon capture and 
storage technology accelerating development by 5 to 10 years. 
However, the cases disagree on whether or not the bonus amount 
provided by the bill is sufficient or needs to be extended 
additional years.
    Fourth, the cases generally indicate that domestic carbon 
offsets and international carbon credits could be valuable 
tools for entities covered under S. 2191. Not only to 
potentially reduce cost, but combined with the bill's 
provisions permitting the banking of allowances to provide 
companies more time to develop long term investment and 
strategic plans and to pursue new technologies. Cost could be 
lowered further by allowing greater availability to domestic 
offsets and international credits and with a broader definition 
of eligible international credits. A more direct path for 
permitting the use of international credits would also reduce 
one of the more important cost uncertainties revealed by the 
cases varying interpretations of S. 2191's international credit 
eligibility requirements and their projected price.
    Fifth, the proposed Carbon Market Efficiency Board could 
have an important effect on the cost of the program through its 
powers to increase the availability of domestic offsets and 
international credits. However, the board is primarily designed 
to deal with short term volatilities due to episodic events in 
the allowance market and has only short term powers. Whether it 
could coordinate a longer terms strategy, if necessary, with 
its proposed authority is not known.
    Sixth, the proposed low carbon fuel standard could 
greatly--could significantly raise fuel prices and limit 
supply. The effects would depend on what fuels are included in 
it, the level of emission reductions achieved by alternatives 
and the ability of suppliers to reduce those alternatives. If 
plug-in hybrid vehicles or large amounts of cellulosic biofuel 
are available early, or if certain fuels such as aviation fuel 
are excluded from the mandate the cost would be lower.
    Seventh, S. 2191's potential climate related and 
environmental benefit is best considered in a global context 
and the desire to engage the developing world in the reduction 
effort. It is in this context that the United States and other 
developed country agree both to reduce their own emissions to 
help stabilize atmospheric concentrations of greenhouse gases 
and to take the lead in reducing greenhouse gases when they 
ratify the 1992 framework convention on climate change.
    The global scope raises two issues for S. 2191. Whether the 
bill's greenhouse gas reduction program and other provisions to 
be considered sufficiently credible by developing countries so 
that schemes for including them in future international 
agreements becomes more likely and two, whether the bill's 
reductions meet U.S. commitments to stabilization under the 
framework convention and occur in a timely fashion so that 
global stabilization may occur at an acceptable level.
    I thank the chairman. We would be happy to answer any 
questions the committee may have.
    [The prepared statement of Mr. Parker follows:]
   Prepared Statement of Larry Parker, Congressional Research Service
    My name is Larry Parker. On behalf of the Congressional Research 
Service (CRS), Brent Yacobucci and I would like to thank the Committee 
for its invitation to testify here today. S. 2191 would establish a 
cap-and-trade program to reduce U.S. greenhouse gas emissions through 
the year 2050.\1\ While CRS takes no position on the bill, CRS has just 
completed a review and synthesis of six studies that attempt to project 
the costs of S. 2191 to the year 2030 or 2050. It is difficult (and 
some would consider it unwise) to project costs up to the year 2030, 
much less beyond. The already tenuous assumption that current 
regulatory standards will remain constant becomes more unrealistic, and 
other unforeseen events (such as technological breakthroughs) loom as 
critical issues which cannot be modeled. Hence, long-term cost 
projections are at best speculative, and should be viewed with 
attentive skepticism. In the words of the late Dr. Lincoln Moses, the 
first Administrator of the Energy Information Administration: ``There 
are no facts about the future.''\2\
---------------------------------------------------------------------------
    \1\ CRS Report RL34489, Climate Change: Costs and Benefits of S. 
2191, by Larry Parker and Brent Yacobucci. (Note: CRS report has been 
retained in committee files.)
    \2\ Lincoln E. Moses, Administrator, Energy Information 
Administration, Annual Report to Congress: 1977, Volume II (1978).
---------------------------------------------------------------------------
    Models cannot predict the future, but they can indicate the 
sensitivity of a program's provisions to varying economic, 
technological, and behavioral assumptions that may assist policymakers 
in designing a greenhouse gas reduction strategy. The various cases CRS 
examined do provide some important insights on the costs and benefits 
of S. 2191 and its many provisions. We have summarized these insights 
into seven points:

          First, if enacted, the ultimate cost of S. 2191 would be 
        determined by the response of the economy to the technological 
        challenges presented by the bill. The bill provides numerous 
        research and development, deployment, regulatory, and price 
        incentives for technology innovation to reduce greenhouse gas 
        emissions. The potential for new technology to reduce the costs 
        of S. 2191 is not fully analyzed by any of the cases examined, 
        nor can it be. The process of technology development and 
        dissemination is not sufficiently understood at the current 
        time for models to replicate it with any long-term confidence. 
        In the same vein, it is difficult to determine whether the 
        various incentives provided by S. 2191 are directed in the most 
        optimal manner.
          Second, a considerable amount of low-carbon electric 
        generating capacity would have to be built under S. 2191 in 
        order to meet the reduction requirement. The cases presented 
        here do not agree on the amount of new generating capacity 
        necessary under S. 2191 or the mix of fuels and technologies 
        that would be employed. The estimated amount of capacity 
        constructed depends on the cases' assumptions about the need 
        for new capacity, and replacement/retirement of existing 
        capacity under S. 2191, along with consumer demand response to 
        the rising prices and incentives contained in the bill.
          Third, the cases suggest that the carbon capture and storage 
        bonus allowance allocation provided under S. 2191 would be 
        effective in encouraging deployment of carbon capture and 
        storage technology, accelerating development by 5-10 years. 
        However, the cases disagree on whether the bonus amount 
        provided by S. 2191 is sufficient, or needs to be extended 
        additional years.
          Fourth, the cases generally indicate that domestic carbon 
        offsets and international carbon credits could be valuable 
        tools for entities covered by S. 2191 not only to potentially 
        reduce costs, but combined with the bill's provisions 
        permitting the banking of allowances, to provide companies more 
        time to develop long-term investment and strategic plans, and 
        to pursue new technologies. Cost could be lowered further by 
        allowing greater availability of domestic offsets and 
        international credits and with a broader definition of eligible 
        international credits. A more direct path for permitting use of 
        international credits would also reduce one of the more 
        important cost uncertainties revealed by the cases' varying 
        interpretations of S. 2191's international credit eligibility 
        requirements and their projected price.
          Fifth, the proposed Carbon Market Efficiency Board could have 
        an important effect on the cost of the program through its 
        power to increase the availability of domestic offsets and 
        international credits. The cases generally do not consider the 
        Board in their analyses but, one can infer from the results 
        that the most important power that the Board may have is the 
        ability to increase the availability of domestic offsets and 
        international credits (although the Board would not have the 
        authority to change the eligibility requirements for domestic 
        offsets or international credits). In this sense, the Board's 
        powers could mesh with the previous insight about the 
        importance of offsets and banking to the cost-effectiveness of 
        S. 2191. However, the Board is primarily designed to deal with 
        short-term volatility due to episodic events in the allowance 
        market and has only short-term powers. Whether it could 
        coordinate a longer term strategy, if necessary, with its 
        proposed authority is not known.
          Sixth, the proposed Low Carbon Fuel Standard could 
        significantly raise fuel prices and limit supply. The effects 
        would depend on what fuels are included in the LCFS, the level 
        of emissions reductions achieved by alternatives, and the 
        ability of suppliers to produce those alternatives. If plug-in 
        hybrid vehicles or large amounts of cellulosic biofuel are 
        available early, or if certain fuels such as aviation fuel are 
        excluded from the mandate, the costs could be lower.
          Seventh, S. 2191's potential climate-related environmental 
        benefit is best considered in a global context and the desire 
        to engage the developing world in the reduction effort. It is 
        in this context that the United States and other developed 
        countries agreed both to reduce their own emissions to help 
        stabilize atmospheric concentrations of greenhouse gases and to 
        take the lead in reducing greenhouse gases when they ratified 
        the 1992 United Nations Framework Convention on Climate Change 
        (UNFCCC). This global scope raises two issues for S. 2191: (1) 
        whether S. 2191's greenhouse gas reduction program and other 
        provisions would be considered sufficiently credible by 
        developing countries so that schemes for including them in 
        future international agreements become more likely, and (2) 
        whether S. 2191's reductions meet U.S. commitments to 
        stabilization under the UNFCCC and occur in a timely fashion so 
        that global stabilization may occur at an acceptable level.

    Thank you. We will be glad to answer any questions you may have.

    The Chairman. Thank you very much.
    Dr. Gruenspecht, go right ahead.

 STATEMENT OF HOWARD GRUENSPECHT, DEPUTY ADMINISTRATOR, ENERGY 
                   INFORMATION ADMINISTRATION

    Mr. Gruenspecht. Mr. Chairman and members of the committee, 
I appreciate the opportunity to appear before you today to 
discuss the energy and economic effects of global climate 
change legislation. EIA is the independent statistical and 
analytical agency in the Department of Energy. We do not 
promote, formulate or take positions on policy issues. Our 
views should not be construed as representing those of the 
Department or the Administration. Since you already have our 
written testimony and our recent analysis* that addresses both 
the reported Lieberman-Warner bill and an updated analysis of 
S. 1766, the Low Carbon Economy Act of 2007 introduced by you, 
Senator Specter and others, my remarks will focus on some key 
findings and insights.
---------------------------------------------------------------------------
    * Document has been retained in committee files.
---------------------------------------------------------------------------
    First, the projected impacts of the Lieberman-Warner 
proposal on energy prices, energy use and the economy are 
highly sensitive to assumptions about the cost and availability 
of no- and low-carbon technologies for power generation and 
international offsets. Our report on S. 2191 includes five 
alternative cases that reflect a variety of different 
assumptions regarding these factors, with the Core case on the 
one hand and the Limited Alternatives/No International Offsets 
Case on the other representing, respectively, the most 
favorable and least favorable situations for ease of compliance 
with the Lieberman-Warner targets.
    Allowance prices and economic impacts through 2030--EIA is 
not brave enough to go to 2050--are roughly three times larger 
using the least favorable assumptions than using the most 
favorable ones. As discussed in our report, both technical 
barriers and public acceptance barriers to key no- and low-
emissions technologies can be influenced by policy design 
choices.
    Second, energy and economic impacts are sensitive to 
whether the recent steep rise in the cost of major energy 
infrastructure projects reflects a temporary bubble or a 
permanent shift. Compliance with very stringent emission 
targets is expected to result in the need to replace all or the 
vast majority of the existing fleet of coal-fired power plants. 
With a large increase in capacity additions needed to replace 
those units and also meet rising demand, higher costs could 
result in increased energy and economic impacts.
    The baseline, including expectations for future energy 
prices as noted in Senator Domenici's opening statement, is a 
third key assumption for analysis. Policy design is another 
extremely important factor affecting price uncertainty. For 
example, the technology accelerator payment provision in S. 
1766 greatly reduces uncertainty in the cost and energy price 
impacts of global climate legislation, while adding to 
uncertainty regarding the amount of emissions reduction in any 
given year.
    Let me now turn briefly to the specific results of our 
analysis. Figure 1 in my written testimony shows that allowance 
prices vary widely under the cap and trade program, the 
Lieberman-Warner version, depending on assumptions regarding 
the availability and cost of the key electricity technologies 
and international offsets.
    As shown in the top-left-hand panel of figure 2 of my 
written testimony, the effect of the program on the cost of 
using coal is particularly significant, with delivered costs 
between four and eight times higher under the Lieberman-Warner 
bill than in the reference case. This reflects both the low 
baseline price of coal relative to other fossil fuels and its 
relatively high carbon content per unit of energy. The 
delivered price of natural gas, shown in the lower-left-hand 
panel of figure 2, is also significantly affected, increasing 
by between 34 and 107 percent above the reference case 
projection by 2030. The price of motor gasoline is affected to 
a lesser extent.
    As shown in figure 3 of the written testimony, national 
average electricity prices in 2030 are 11 percent to 64 percent 
higher. Electricity price impacts vary by region. Your 
invitation letter had asked about regional effects. In general, 
larger price impacts occur in those regions that are most 
reliant on coal and have competitive wholesale power markets.
    Turning next to energy system impacts as shown in figure 4, 
electricity-related reductions account for roughly 80 to 90 
percent of overall reductions in energy-related emissions. 
There are several reasons for this result. Over 90 percent of 
coal, the fuel whose price is most heavily impacted by 
allowance costs, is used in the electricity sector.
    Second, while coal-fired generation is a major source of 
current and projected reference-case emissions, there are 
several alternative, no- and low-emissions technologies already 
demonstrated--wind and nuclear, for example--and others being 
developed.
    Third, changes in electricity generation fuels don't 
require large changes in distribution infrastructure or 
electricity--using equipment. Thus, the chicken and egg issues 
that bedevil major fuel transformations and other areas do not 
arise.
    Finally, recent experience with very high motor fuel prices 
in other countries over an extended period suggest that major 
shifts in transportation energy use are not likely to be 
induced by the impact of the Lieberman-Warner bill on the price 
of petroleum fuels.
    I've already noted the impact on the need for new electric 
capacity additions--over 2007 to 2030, projected electricity 
generation additions, other than natural gas, range from 353 to 
484 gigawatts across the five Lieberman-Warner cases as 
compared to 168 gigawatts in the reference case. By comparison, 
generation capacity additions other than natural gas have 
totaled only 55 gigawatts since 1990. We haven't been adding a 
lot of base load recently. Frankly, we haven't needed it. We 
had a lot of coal, a lot of nuclear. We've raised the 
utilization rates of those units over the past 18 years. But 
we're running toward the end of that string.
    Finally, turning to economic impacts, the left-hand panels 
of figure 6 compare the reductions in GDP and consumption, 2009 
through 2030, across the cases. In the Core case, those 
accumulative discounted reductions are $444 billion and $558 
billion, respectively. They're roughly three times higher in 
the least optimistic Limited Alternatives/No International 
Offsets Case. Manufacturing impacts, which are not illustrated 
in the figure, are significantly higher than GDP impacts and 
these costs can be framed in many different ways.
    Mr. Chairman and members of the committee, that concludes 
my oral testimony. I'd be happy to answer any questions you 
might have.
    [The prepared statement of Mr. Gruenspecht follows:]

Prepared Statement of Howard Gruenspecht, Deputy Administrator, Energy 
                       Information Administration

    Mr. Chairman, and members of the Committee, I appreciate the 
opportunity to appear before you today to discuss the Energy 
Information Administration's (EIA) recent analysis of the energy and 
economic impacts of global climate change legislation.
    EIA is the independent statistical and analytical agency within the 
Department of Energy. We are charged with providing objective, timely, 
and relevant data, analyses, and projections for the use of the 
Congress, the Administration, and the public. Although we do not take 
positions on policy issues, we do produce data and analyses to help 
inform energy policy deliberations. Because we have an element of 
statutory independence with respect to this work, our views are 
strictly those of EIA and should not be construed as representing those 
of the Department of Energy, the Administration, or any other 
organization. My testimony focuses on EIA's recent analysis of the 
Lieberman-Warner Climate Security Act of 2007 (S. 2191), which also 
includes an updated analysis of the Bingaman-Specter Low Carbon Economy 
Act of 2007 (S. 1766).
    The choice of a baseline is one of the most influential assumptions 
for any analysis of global climate change legislation. Our analysis 
uses the reference case of the Annual Energy Outlook 2008 (AE02008) as 
its starting point. AE02008 is based on Federal and State laws and 
regulations in effect as of the end of 2007, including the Energy 
Independence and Security Act of 2007, which became law last December. 
It does not, however, include State-level greenhouse gas limitation 
initiatives that are in various stages of development in several 
regions of the country. The projections included in AE02008 and our 
analysis, which both extend through 2030, are not meant to be exact 
predictions of the future but represent plausible energy futures given 
technological and demographic trends, current laws and regulations, and 
consumer behavior as derived from available data. EIA recognizes that 
projections of energy markets over a nearly 25-year period are highly 
uncertain and subject to many events that cannot be foreseen, such as 
supply disruptions, policy changes, and technological breakthroughs. In 
addition to these phenomena, long-term trends in technology 
development, demographics, economic growth, and energy resources may 
evolve along a different path than expected in the projections. 
Generally, differences between cases, which are the focus of our 
report, are likely to be more robust than the specific projections for 
any one case.
    The Lieberman-Warner bill imposes limits on emissions of energy-
related carbon dioxide and other greenhouse gases with a cap-and-trade 
system that regulates suppliers of oil products and natural gas, owners 
of plants that burn coal, and suppliers of some industrial gases other 
than carbon dioxide. EIA's complete report, which includes a full 
description of the bill, our modeling approach, and our results, as 
well as a discussion of uncertainties and caveats, has been provided to 
the Committee and is publicly available on our web site 
(www.eia.doe.gov).
    The projected impacts on energy prices, energy use, and economic 
activity that are presented in the report and summarized briefly in my 
testimony suggest several key findings and additional insights. It is 
important to note that the estimated impacts of the Lieberman-Warner 
proposal on energy prices, energy use, and the economy are highly 
sensitive to assumptions about the cost and availability of no- and 
low-carbon technologies for power generation and international offsets. 
EIA's report includes five cases that reflect a variety of different 
assumptions regarding these factors, with the Core Case and Limited 
Alternatives/No International Offsets Case representing, respectively, 
the most favorable and least favorable situations for ease of 
compliance with the Lieberman-Warner targets. We find that allowance 
prices and economic impacts through 2030 are roughly three times larger 
using the least favorable assumptions than using the most favorable 
ones.
    It is well-known that key technologies for reducing emissions, such 
as nuclear power and coal with carbon capture and sequestration (CCS), 
face a variety of technical challenges and, in some cases, additional 
questions regarding public acceptance of their widespread deployment 
arising from concerns unrelated to global climate change. As noted in 
EIA's report, both technical and public acceptance barriers to key low- 
and no-emissions technologies can be directly influenced by policy 
design choices. For example, both the Lieberman-Warner and Bingaman-
Specter bills include incentives for early technology deployment. The 
``technology accelerator'' payment in the Bingaman-Specter bill, which 
implicitly relaxes emissions targets in the event that a predetermined 
compliance cost threshold is exceeded, can help to promote public 
acceptance of key technologies by stakeholders who view greenhouse gas 
emissions limitation as the highest priority, but might be inclined to 
block deployment of these technologies due to non-climate concerns in 
the absence of such a mechanism.
    Our results also suggest that energy and economic impacts are 
sensitive to whether the recent steep rise in the cost of major energy 
infrastructure projects reflects a temporary ``bubble'' or a permanent 
shift. EIA's analysis generally reflects only a portion of recent 
infrastructure project cost increases as a permanent shift, with a much 
larger permanent component assumed in the High Cost Case. Compliance 
with the Lieberman-Warner emissions targets is expected to result in 
the rapid retirement of the existing fleet of coal-fired power plants. 
With a large increase in capacity additions needed to replace these 
units and also meet rising demand under any of the technology cases, 
higher costs translate directly into increased energy and economic 
impacts.
    Your invitation letter, Mr. Chairman, asked about the main factors 
contributing to price uncertainty in analyses. In addition to 
uncertainty regarding the cost and availability of key no- and low-
carbon technologies and international offsets, future energy prices 
also play an important role in determining the cost and energy price 
impacts of meeting a fixed emissions target. Policy design is another 
important factor. For example, the technology accelerator payment 
provision in the Low Carbon Energy Act of 2007 greatly reduces 
uncertainty in the cost and energy price impacts of global climate 
legislation, while adding to uncertainty regarding the amount of 
emissions reduction achieved in any given year.
    Let me now turn briefly to the specific results of EIA's recent 
analysis.

                   ALLOWANCE AND ENERGY PRICE IMPACTS

    Figure 1* shows that allowance prices, which are the key driver of 
energy price impacts, vary widely under the Lieberman-Warner cap-and-
trade program, depending on assumptions regarding the availability and 
cost of electricity technologies such as nuclear and coal with CCS, as 
well as the availability of international offsets.
---------------------------------------------------------------------------
    * Figures 1-6 have been retained in committee files.
---------------------------------------------------------------------------
    As shown in the top left-hand panel of Figure 2, the effect of the 
program on the cost of using coal is particularly significant; by 2030, 
it is between 4 and 8 times higher under Lieberman-Warner than in the 
reference case. This reflects both the low baseline price of coal on an 
energy content basis relative to other fossil fuels and its relatively 
high carbon content per unit of energy. The delivered price of natural 
gas, shown on the lower left-hand panel of Figure 2, is also 
significantly affected, increasing by between 34 and 107 percent above 
the reference case projection by 2030. In cases where the demand for 
natural gas is increased as a result of the policy proposed in S. 2191, 
delivered and wellhead prices both move in the same upward direction. 
As shown in the top right-hand panel, the price of motor gasoline is 
also affected, but to a much lesser extent than coal or natural gas 
prices. In fact, the gasoline price changes anticipated to result from 
this program through 2030 are smaller than the changes experienced over 
the past several years.
    Electricity is generated using a mix of fuels. Currently, about 50 
percent of the Nation's electricity is generated using coal, and coal 
would be a highly competitive source of additional generation to meet 
demand growth absent any limits on carbon dioxide emissions. The impact 
of allowance prices on the cost of using fossil fuels to generate power 
is reflected in higher electricity prices, but the impact is cushioned 
by changes in the projected electric generation mix that occur in 
response to S.2191. As shown in Figure 3, national average electricity 
prices in 2030 are between 1.0 cents to 5.7 cents per kilowatt-hour (11 
percent to 64 percent) higher, relative to the reference case. 
Electricity price impacts vary by region. In general, larger price 
impacts occur in those regions that are most reliant on coal and have 
competitive wholesale power markets.

                         ENERGY SYSTEM IMPACTS

    As shown in Figure 4, between 82 percent and 91 percent of 
reductions in energy-related carbon dioxide emissions in 2030 are 
achieved through the electricity-related reductions, requiring a rapid 
expansion of low- and no-carbon generation. There are several reasons 
for this. First, over 90 percent of coal, the fuel whose price is most 
heavily impacted by allowance costs, is used in the electricity sector. 
Second. while coal-fired generation is a major source of current and 
projected reference case emissions, there are several alternative no- 
and low-emission technologies already demonstrated, and others are 
being developed. Third, changes in electricity generation fuels do not 
require large changes in distribution infrastructure or electricity-
using equipment. Thus, the ``chicken-and-egg'' issues that bedevil 
major fuel transformations in the transportation sector, where the 
absence of a robust fuel supply infrastructure--that is precluded by 
the lack of a sufficient number of dedicated alternative-fueled 
vehicles to be served--in turn discourages the sale of such vehicles, 
do not arise. Finally, recent U.S. experience and very high fuel prices 
over an extended period in Europe and other world regions show that 
major shifts in transportation energy use are not likely to be induced 
by the impact of the Lieberman-Warner cap-and-trade program on the 
price of petroleum fuels.
    In addition to changing the projected mix of electricity generation 
sources, as shown in Figure 5, the Lieberman-Warner program 
significantly increases the total amount of new electric capacity that 
must be added between now and 2030. The requirement for capacity 
additions, which poses significant challenges to siting both generation 
and transmission facilities, reflects the retirement of many existing 
coal-fired power plants that would be expected to continue operating 
beyond 2030 absent the limitations on greenhouse gas emissions required 
by the Lieberman-Warner bill. Over the 2007-to-2030 period, projected 
electricity generating capacity additions other than natural gas range 
from 353 to 484 gigawatts (GW) across the five Lieberman-Warner policy 
cases, as compared to 168 GW in the AE02008 reference case. By way of 
comparison, generating capacity additions other than natural gas have 
totaled only 55 GW since 1990.

                            ECONOMIC IMPACTS

    The left-hand panels of Figure 6 compare the cumulative reductions 
in gross domestic product (GDP) and consumption over the 2009-through-
2030 period across cases. In the Core Case, which has the most 
optimistic assumptions regarding technology cost and availability and 
international offsets, the cumulative discounted reductions in GDP and 
consumption were $444 billion and $558 billion, respectively. In the 
Limited Alternative/No International Offsets Case, cumulative 
discounted losses in GDP and consumption are substantially higher, 
$1.31 trillion and $1.42 trillion, respectively. The reduction in GDP 
from reference-case levels is between 0.3 percent and 0.9 percent in 
2020 and between 0.3 percent and 0.8 percent in 2030. The reduction in 
real consumption is between 0.4 percent and 1.2 percent in 2020 and 
between 0.5 percent and 1.1 percent in 2030. Manufacturing impacts, 
which are not illustrated in the figure, are significantly higher than 
GDP impacts. Total manufacturing output is 1.5 percent to 5.4 percent 
lower than in the reference case in 2020 and 3.0 percent to 9.5 percent 
lower in 2030.
    While the greenhouse gas issue is a problem of unprecedented scale 
in terms of its implications for our energy system, the scale of the 
economy itself is huge. Therefore, the same estimated economic impacts 
from any given analysis can be ``framed'' to sound either large or 
small. Figure 6, which in its right hand panels presents the same 
results discussed above in terms of the absolute levels of GDP and 
consumption in 2020 and 2030, shows how framing matters. At EIA, we 
strive to present our results as neutrally as possible and leave the 
framing to others.
    Mr. Chairman and members of the Committee, this concludes my 
testimony. I would he happy to answer any questions you may have.

    The Chairman. Thank you very much.
    Dr. McLean, thank you for being here.

 STATEMENT OF BRIAN J. MCLEAN, ENVIRONMENTAL PROTECTION AGENCY

    Mr. McLean. Thank you, Mr. Chairman and members of the 
committee. I appreciate the opportunity to testify today before 
you on the effects of recent climate change legislation. I am 
Brian McLean, Director of the Office of Atmospheric Programs 
within EPA's Office of Air and Radiation. With me today is 
Francisco de la Chesnaye, our chief climate economist to assist 
me in answering your questions.
    To date EPA has analyzed three bills for Congress. S. 280 
introduced by Senators Lieberman and McCain. S. 1766 introduced 
by Senators Bingaman and Specter and S. 2191, introduced by 
Senators Lieberman and Warner.
    In analyzing each bill EPA developed a set of scenarios in 
consultation with the Senate staff to evaluate the various 
provisions and to gauge the importance of key assumptions in 
climate mitigation technologies. The scenarios do not represent 
an EPA assessment of which scenarios are more likely to occur 
or any formal position of the EPA or the Administration. EPA's 
analyses covered all greenhouse gases and key economic sectors, 
both domestically and internationally and go out to 2050.
    To provide a complete picture of possible impacts EPA 
employed two economy wide models that take slightly different 
approaches to estimating technological development and macro 
economic effects as well as a detailed electricity sector model 
given the significance of the emission reductions from that 
sector. There is significant uncertainty about the future 
course of economic growth and technological advances as has 
been mentioned several times by people. Our analyses contain 
several sensitivity analyses, however, that help show the 
impacts that key assumptions have on future projections.
    All of our analyses use the same EIA 2006 reference case 
for easy comparison and do not reflect the new Energy 
Independence and Security Act or the most recent EIA Annual 
Energy Outlook. Both of which tend to lower the estimated costs 
of these bills. We analyzed an alternative reference scenario 
with lower referenced emissions as an approximation of the most 
recent projections.
    In my written testimony I respond to each of the eight 
questions posed in your invitation. This morning I will 
summarize our major observations.
    The overall economy will grow under all the bills. In EPA's 
alternative reference scenario the size of the U.S. economy is 
projected to increase an average of 80 percent from 2010 to 
2030. Under Lieberman-Warner, the most stringent of the three 
bills, the economy is estimated to be an average of 2 percent 
smaller than in the alternative reference scenario in 2030.
    We did not calculate the benefits of greenhouse gas 
reductions. But S. 2191 is expected to have the ancillary 
benefit of reducing sulfur dioxide and nitrogen oxides from 
electric generation below current requirements. This will 
facilitate the achievement of the fine particle and ozone air 
quality standards.
    All of our analyses point out the importance of technology, 
of offsets and of international action. They illustrate the 
value of a portfolio of technologies and confirm that there is 
no silver bullet.
    The absence of a single technology such as carbon capture 
and storage or new nuclear capacity results in some cost 
increases but the absence of many technologies would 
significantly increase cost. Most models including ours, do not 
try to forecast major advances in technology over what we are 
aware of today. Such advances are likely to reduce costs since 
market economies not only drive innovation, but generally adopt 
lower cost solutions over higher cost ones.
    The overall price signal plus specific incentives in the 
bills push deployment of technology earlier. Incentives for 
carbon capture and storage in particular, help maintain the use 
of coal as a major source of energy for the next several 
decades. The offset provisions can also be very important for 
cost containment.
    Although cost can be reduced significantly with larger 
offset programs, it will be important to ensure environmental 
integrity and consider implementation issues to ensure that 
offsets do not lessen the greenhouse gas reductions achieved 
through the caps. Though significant, legislative action by any 
country including the U.S. would not be able to reduce 
greenhouse gas concentrations in the atmosphere enough to fully 
address the climate challenge. Global participation is clearly 
needed.
    Our analysis shows that if all countries take action we 
could make significant progress in addressing climate change 
without risk of emissions leakage because U.S. industry is an 
effective global competitor. If on the other hand, additional 
actions are not taken by other countries, emissions leakage 
would lessen the impact of our actions by about 11 percent.
    In closing we believe that EPA has provided valuable 
technical input to the U.S. climate policy debate. We look 
forward to working with you as this process continues. Thank 
you, Mr. Chairman.
    [The prepared statement of Mr. McLean follows:]

Prepared Statement of Brian J. McLean, Director, Office of Atmospheric 
 Programs, Office of Air and Radiation, Environmental Protection Agency

    Mr. Chairman and Members of the Committee, I appreciate the 
opportunity to come before you today to testify on the energy and 
economic effects of global climate change legislation as analyzed by 
EPA. To date, EPA has analyzed the following three bills for this 
Congress: S. 280, the ``Climate Stewardship and Innovation Act'' 
introduced by Senators McCain and Lieberman; S. 1766, the ``Low Carbon 
Economy Act of 2007,'' introduced by Senators Bingaman and Specter; and 
S. 2191, the ``Lieberman-Warner Climate Security Act of 2007,'' 
introduced by Senators Lieberman and Warner. I note that for this last 
bill, the analysis was based on the bill reported out by the Senate 
Environment and Public Works Committee this past December; the first 
two bills were modeled as introduced.
    In all three bill analyses, EPA developed a set of scenarios in 
consultation with Senate staff to evaluate various provisions in the 
bills as well as gauge the importance of key enabling climate 
mitigation technologies. EPA's scenarios describe a wide range of 
possibilities but do not represent an EPA assessment of which scenarios 
are more likely to occur. The analyses do not attempt to estimate the 
benefits of reducing greenhouse gas emissions (GHGs) nor do they 
represent any formal position or opinion of the EPA or the 
Administration.
    EPA's analyses covered all GHGs and key economic sectors, both 
domestically and internationally, and go out to 2050. For the broader 
impacts on the U.S. economy, EPA employed two economy-wide models to 
estimate a range of economic impacts and GHG reductions. Combined, 
these two models provide a more complete picture of possible impacts 
than can be provided from any single model. These models take different 
approaches to estimating technological development and macroeconomic 
effects. Since the electricity sector plays a key role in GHG 
mitigation, and the near-term response in the electricity sector is of 
particular interest, EPA also used a detailed electricity sector model 
to shed further light on the near-term impact of the bills and 
complement the broader picture presented by the economy-wide models.
    It is worth noting that in projecting significant policies such as 
global climate change legislation, there is significant amount of 
uncertainty about what that future will look like (e.g. uncertainty 
with regards to economic growth and technological advances). Our 
analysis contains a number of sensitivity analyses that help show the 
impact that key assumptions have on future projections. This 
uncertainty increases the further into the future one is making 
projections. It is also worth noting that EPA did not separately assess 
or judge the ``workability'' of the legislation from an implementation 
standpoint. For example, the Agency did not assess whether various 
provisions would be able to be implemented or enforced.
    The following responses to the questions posed by the Committee in 
its letter of invitation to this hearing are based on EPA's analyses of 
the bills indicated above.

    Question 1. What do the analyses show about impacts of global 
climate legislation on GDP and the overall economy?
    Answer. The economic impacts of the bills EPA analyzed depended on 
the level of greenhouse gas reductions sought and percentage of U.S. 
GHG emissions that are from sources that are covered and would thus be 
required to hold allowances under the cap. The following estimates are 
from the main bill scenarios in EPA's analyses of the three bills that 
incorporate the assumptions agreed upon with Senate staff. All of these 
scenarios assume that there is a widely available portfolio of enabling 
mitigation technologies. However, it does not assume major 
breakthroughs in technology over the next 40 years. Additionally, the 
analyses assume that there are no significant regulatory or litigation 
obstacles to the infrastructure needed to support a massive scale-up of 
low carbon energy, such as new interstate transmission lines, new 
pipelines and liability concerns surrounding CCS, access to natural gas 
(domestic production or new LNG terminals), and adequate long term 
storage for spent nuclear fuel. In EPA's Reference Scenario, the size 
of the U.S. economy is projected to increase an average of 97% from 
2007 ($13.4 trillion) to 2030 ($26.3 trillion) and by an average 215% 
by 2050 ($42 trillion).

   For the Lieberman-McCain bill which would cover about 73% of 
        U.S. GHG emissions (based on the 2005 GHG inventory), GHG 
        emissions in 2030 were projected to be approximately 25% below 
        what they are projected to be in the reference scenario without 
        a climate policy in 2030. The estimated reduction in GDP is 
        between 0.6% and 1.6% (between $146 and $419 billion) in that 
        same year. GHG emissions in 2050 were projected to be 
        approximately 44% below what they are projected to be in the 
        reference scenario without a climate policy in 2050. The 
        estimated reduction in GDP is between 1.1% and 3.2% (between 
        $457 and $1,332 billion) in that same year.
   For the Bingaman-Specter bill which would cover about 83% of 
        U.S. GHG emissions, GHGs also were projected to be 
        approximately 23% below reference emissions in 2030. The 
        estimated reduction in GDP was slightly lower estimated at 
        between 0.5% and 1.4% (between $124 and $370 billion) in 2030. 
        GHG emissions in 2050 were projected to be approximately 40% 
        below what they are projected to be in the reference scenario 
        without a climate policy in 2050. The estimated reduction in 
        GDP is between 0.9% and 2.9% (between $401 and $1,199 billion) 
        in that same year. The small difference in GDP impacts between 
        the two bills was due to the broader coverage in the Bingaman-
        Specter bill and the slightly higher allowance prices under the 
        Lieberman-McCain bill.
   For the more recent Lieberman-Warner bill which would cover 
        about 87% of U.S. GHG emissions, GHGs were projected to be 
        approximately 40% below reference emissions in 2030 with an 
        estimated impact on GDP of between 0.9% and 3.8% (between $238 
        and $983 billion) in 2030. GHG emissions in 2050 were projected 
        to be approximately 56% below what they are projected to be in 
        the reference scenario without a climate policy in 2050. The 
        estimated reduction in GDP is between 2.4% and 6.9% (between 
        $1,012 and $2,856 billion) in that same year. The coverage of 
        GHGs is slightly more than the Bingaman-Specter bill, and the 
        level of GHG reductions is greater than the other two bills.

    Please see Figures 1 and 2* from our Lieberman-Warner analysis for 
a comparison of the bills projected GHG emission reductions.
---------------------------------------------------------------------------
    * Figures have been retained in committee files.
---------------------------------------------------------------------------
    Question 2. How does the impact on energy prices vary from region 
to region under these analyses?
    Answer. Our detailed power sector analysis provides insight into 
regional electricity price changes. Retail electricity price impacts 
vary by region, depending on a host of factors. The most important 
factors determining electricity price impacts are the types of existing 
power generating technologies and the electricity market structure for 
each region. Generally, the Central and Midwestern portions of the 
country, which are more dependent upon coal-fired generation for 
electricity production, will see higher price impacts than the Western 
and Northeastern portions of the country, which rely less on coal. In 
the South, prices increase somewhat less than in the Midwest even 
though the South is reliant on coal-fired generation. This is largely 
due to the fact that much of the South is a regulated market, and the 
value of allowances allocated directly to utilities at no cost must be 
passed along to customers, which will dampen price increases.
    Question 3. Why do the analyses contain such a broad range of 
projected economic impacts?
    Answer. The response to question #1 explains some of the key 
differences in the results of EPA's analyses. When considering the 
range of results from various analyses of a given bill, there are a 
number of factors that lead to such a broad range of estimated economic 
impacts.

   The projected reference case economic growth rate will 
        affect both the level of GDP and projected levels of U.S. GHG 
        emissions. In general, a higher projected level of reference 
        GHG emissions will make it more costly to meet GHG reduction 
        targets. This is highlighted in EPA's analysis using an 
        alternative reference scenario which is more consistent with 
        recent projections of GHGs related to lower projected economic 
        growth and also emission reductions attributed to the Energy 
        Independence and Security Act of 2007 (EISA). For example, in 
        the Lieberman-Warner bill the estimated reduction in GDP would 
        be smaller, estimated at between 0.6% and 3.6% in 2030 ($158 
        and $947 billion). Allowance prices also would be 15% lower on 
        average ($60/tCO2 vs. $72/tCO2).
   Assumptions about the development and deployment of key 
        enabling technologies such as nuclear power, advanced coal-
        fired power with carbon capture and storage, and more efficient 
        renewable power have a significant effect on projected economic 
        impacts. The greater the extent of the development and 
        deployment of key enabling technologies, the lower the costs of 
        achieving GHG emission reductions. (To the extent the 
        development and deployment of key enabling technologies do not 
        occur in the timeframe assumed by the analysis, the costs of 
        achieving GHG emissions reductions will undergo a corresponding 
        increase.)
   The use and amount of allowable offsets, that is, reductions 
        made outside of the covered sectors as specified in the bills, 
        will influence the estimated economic impacts. In general, 
        greater use of offsets, both domestic and international, can 
        reduce costs, while providing commensurate environmental 
        benefits. However, the costs and benefits need to be considered 
        in the context of issues related to the implementation of an 
        offset program. The models assumed that an offsets program 
        could be managed efficiently and generate additional reductions 
        in emissions and increases in carbon sequestration with no 
        discounting and minimal transaction costs. If offsets are not 
        truly additional they will lessen the expected reductions in 
        GHGs achieved through a cap. If international offsets are fully 
        utilized, the total payments for international credits are 
        approximately $12 billion in 2030 and $22 billion in 2050.
    Question 4. What are the 5 most influential assumptions made in 
these analyses?
    Answer. Five of the more influential assumptions in our analyses 
were:

   On modeling: In all the policy scenarios, we assume that 
        there is a well functioning market for the trading of emission 
        allowances, that once technologies are commercially available 
        they are deployed, and that the agents in the models know the 
        future prices of allowances hence there is no market 
        volatility.
   Nuclear Power: The main bill scenarios assume a substantial 
        growth in nuclear power reflecting possible future policies to 
        promote this technology in the bills and elsewhere. Our 
        assumption is that nuclear power generation increases by 150% 
        from 2005 to 2050. This would require the construction of 
        approximately 60 new or expanded nuclear plants by 2030 and 150 
        new or expanded nuclear plants by 2050. These assumptions are 
        based on a study conducted by the U.S. Climate Science Program 
        on long-term scenarios.
   CCS: The main bill scenarios assume advanced coal-fired 
        power with carbon capture and storage is deployable as soon as 
        it is projected to be commercially available. Where bonus 
        allowances for CCS are available, this helps advance the 
        deployment of this technology from 5 to 10 years in our 
        analysis. The assumption of widespread deployment of CCS is 
        critical to the continued use of coal in the U.S. for electric 
        power generation under any of the three bills analyzed. In our 
        analyses, we constrain the rate at which CCS technology can be 
        deployed considering historic capital turnover rates given the 
        existing capital investments and infrastructure of the 
        electricity sector. It is also worth noting, however, that in 
        absence of a carbon price, there are zero coal fired power 
        plants with CCS in operation today and that there are only a 
        handful of applications for commercial scale coal fired power 
        plants with CCS to be built in the next 10 years. In addition, 
        deployment of CCS will be contingent upon the ability to site 
        new pipelines as well as addressing the liability concerns 
        surrounding underground storage of CO2. Please see 
        Figure 3 from our Lieberman-Warner analysis.
   International action: In the main bill scenarios, we assume 
        the following: High-income countries in the Kyoto Protocol 
        fully comply with the treaty. After 2012, Kyoto countries, with 
        the exception of Russia, follow an emissions path that falls 
        gradually from simulated Kyoto levels in 2012 to 50% below 1990 
        levels in 2050. Low-income countries adopt a policy in 2025 
        that returns emissions and holds them at 2015 levels through 
        2034 and returns emissions to and maintains them at 2000 levels 
        from 2035 to 2050.
   Offsets: In the main bill scenarios we assume that both 
        domestic and international offsets are available up to the 
        amounts allowed in the bills and that there are systems in 
        place to ensure the environmental integrity of those offsets, 
        that do not result in the benefits being heavily discounted or 
        high transaction costs.

    Question 5. What are the most significant factors contributing to 
price uncertainty in the analyses?
    Answer. In our analyses, the two most significant factors affecting 
the projected allowance prices are the availability of enabling 
technologies and the use of offsets. For example, in our analysis of 
the Lieberman-Warner bill for the scenarios that limit the availability 
of enabling technologies, the projected allowance prices increase by 
over 80% (from $61/tCO2 to $112/tCO2 in 2030). We 
did not run scenarios that assumed significant advances over current 
technologies. In scenarios that do not allow use of domestic offsets 
and international credits, costs increase by over 90%.
    Question 6. What are the consequences if either new nuclear power 
plants or new coal-fired power plants that capture and sequester carbon 
dioxide, which are both assumed in many analyses, are not available at 
such significant levels?
    Answer. EPA evaluated additional scenarios for the impact on GDP 
given the availability of these two key enabling technologies. In our 
analysis of the Lieberman-Warner bill under the scenario where nuclear 
power and biomass power do not exceed reference case growth and carbon 
capture and sequestration technology does not become commercially 
available until 2030, the impact on GDP is slightly more than double 
the impact estimated under the main bill scenario ($603 versus $238 
billion). In sensitivity cases conducted as part of the analysis of the 
McCain-Lieberman bill where carbon capture and sequestration technology 
was not allowed and nuclear power growth was cut in half, there was a 
greater impact on GDP. The lower nuclear power case only slightly 
increased costs, as long as there is compensating increases in CCS 
generation to reduce the economic impact of the lower nuclear capacity. 
In the case where CCS is not available, this results in almost a 
doubling of the impacts on GDP versus the main bill scenario.
    Question 7. What conclusions are reached on American 
competitiveness in the global economy?
    Answer. EPA did evaluate the potential impact on the trade of U.S. 
energy-intensive manufactured goods in the recent analysis of the 
Lieberman-Warner bill. The general conclusion is that in the case where 
developing countries also take on mandatory reductions of GHGs, the 
terms of trade for the U. S. are better than in the case where those 
countries do not take action.
    In the main bill scenarios where the U.S. and all other countries 
are assumed to take action, imports of energy-intensive manufacturing 
goods from high-income countries to the U.S. fall as that group of 
countries also takes on emission targets.
    In the same scenario, there is an increase of U.S. exports of 
energy-intensive manufacturing goods to developing countries, 
particularly after 2030 as that group of countries is assumed to take 
on mandatory reductions in GHGs starting in 2025. This is due to the 
greater energy-efficiency in the production of U.S. manufactured goods 
relative to those goods being manufactured in lower income countries.
    In the case where developing countries do not adopt any additional 
policies or measures to reduce GHGs, the terms of trade for the U.S. 
are substantially worse. In 2030 there is a 6.3% decrease of U.S. 
exports of energy-intensive manufacturing goods to developing 
countries, and a 1.5% increase of U.S. imports of energy-intensive 
manufacturing goods from developing countries. However, the use of an 
International Reserve Allowance Requirement limits imports from those 
countries.
    Question 8. What impact does domestic climate change legislation 
have on global concentrations of greenhouse gases?
    Answer. In EPA's analysis of the Lieberman-Warner bill, there is a 
reference scenario for global CO2 concentrations that 
increases from today's levels of about 380 parts per million (ppm) to 
about 720 ppm by the end of the century. If the US adopts the 
Lieberman-Warner bill the concentration is reduced by between 7--10 ppm 
in 2050 and by 25--28 ppm in 2095. In the scenario where the U.S. 
adopts the Lieberman-Warner bill and the international community takes 
on mandatory GHGs reductions as described above, global CO2 
concentrations would be reduced by about 50 ppm in 2050 and 230 ppm in 
2095 with US action under Lieberman-Warner accounting for about 10 ppm 
in 2050 and 25 ppm in 2095, leading to global CO2 
concentrations of 458 ppm in 2050 and about 490 ppm at the end of the 
century. It is important to note that while CO2 
concentrations would be significantly reduced in this scenario with 
international action; they are not on a stabilization trajectory since 
this scenario assumes that emissions are held constant after 2050 which 
results in continued increases in CO2 concentrations.
    In summary, based on the analyses of the three bills, I would like 
to make the following points:

   The analyses illustrate the value of a portfolio of 
        technologies and confirm that there is no silver bullet. 
        Although the absence of certain technologies, or availability 
        of offsets would significantly increase cost.
   If we assume that CCS technology will be successfully 
        developed at the commercial scale, the overall price signal 
        plus specific incentives in the bills push deployment of 
        technology earlier, and incentives for CCS, in particular, help 
        maintain the use of coal as a source of energy for the next 
        several decades.
   The offset provisions are also very important for cost 
        containment. Although costs are reduced with larger offset 
        programs, it will be important to ensure that offsets do not 
        lessen the GHGs reductions achieved through the cap and that 
        the offsets program is efficient and the benefits are fully 
        recognized.
   There will be economic costs associated with the bills. 
        However, in all cases the U.S. economy grows over time. In 
        EPA's Reference Scenario, the size of the U.S. economy is 
        projected to increase approximately 97% from 2007 to 2030 and 
        215% higher by 2050. Under the Lieberman-Warner bill, that 
        growth is projected to decrease by between 0.9% and 3.8% in 
        2030 and 2.4% and 6.9% in 2050.
   The ability of models to forecast major changes in 
        technology or the invention of new responses to the climate 
        challenge which may significantly reduce costs is limited and 
        are therefore not a part of this analysis.
   Our analyses indicate that there will be ancillary benefits 
        under the Lieberman-Warner bill in the form of greater 
        SO2 and NOX emissions reductions from the 
        power sector under current regulations. This will facilitate 
        the achievement of the fine particle and ozone air quality 
        standards.

    The impact of any of these bills, as would action by any one 
country alone, on the concentration of GHGs in the atmosphere is not 
enough to address the global climate challenge, but this is not 
surprising. Clearly, global participation is needed.
    In closing, we believe that EPA has provided valuable technical 
input to the U.S. climate policy debate. We look forward to working 
closely with members of Congress as this process continues.
    Thank you, Mr. Chairman, and Members of the Committee for this 
opportunity. This concludes my prepared statement. I would be pleased 
to answer any questions that you may have.

    The Chairman. Thank you very much.
    Dr. Orszag, go right ahead.

 STATEMENT OF PETER R. ORSZAG, DIRECTOR, CONGRESSIONAL BUDGET 
                             OFFICE

    Mr. Orszag. Thank you very much, Chairman Bingaman, Senator 
Domenici, members of the committee. Let me make four basic 
points.
    First. Global climate change does pose a significant long 
term risk to the economy and to our Nation. Addressing that by 
reducing greenhouse gas emission, however, will involve short 
term economic costs. A cap and trade program reduces the 
economic costs involved by providing flexibility to firms to in 
terms of where and how they undertake the emission reductions 
as has already been referred to.
    But what I want to focus on today is the very important 
timing issue involved in a cap and trade program. In particular 
under an inflexible cap there is a level of emissions specified 
each year. The problem arises because costs for achieving that 
cap can vary substantially from year to year depending on the 
state of economic activity, environmental conditions, the 
weather, technology, etc.
    From an environmental prospective, however, it does not 
matter to a first approximation whether you reduce a ton of 
carbon emissions this year or next year. The costs, however, 
can vary substantially. An inflexible cap does not provide that 
kind of timing flexibility which can have a very substantial 
impact on costs.
    Let me try to illustrate that point with the following 
chart. What you see on the left hand part on the top is what 
happens in 2018 if costs are at or equal to what's projected 
currently. That's a simple cap in the light blue.
    The white area and then the dark blue area present 
different approaches in which there is either a price ceiling 
or a price floor. That's ways of trying to limit the 
fluctuation from year to year and provides a timing flexibility 
in when emission reductions occur. So if things turn out as you 
expect, those price ceilings and price floors don't matter. You 
hit what you expected to occur.
    But now let's consider a case in which costs are 
significantly higher than projected. In that case having a 
price ceiling or a safety valve in place will mean that there's 
not as much emission reductions occurring. You can see 
reflected in the white bar being lower than the light blue bar. 
But also that costs are significantly below what was projected 
because you're not undertaking as much emission reductions in 
that year. The existence of a price floor which is shown in the 
dark blue area doesn't matter when costs are higher than you 
projected.
    Now let's take a case in which costs are lower than were 
expected. In that case the price ceiling doesn't matter. But 
the existence of a price floor where you're not allowing the 
price of carbon permits to fall below some level means that 
you're actually undertaking more emission reductions in that 
low cost year than you would without either the price ceiling 
or the price floor.
    But costs are higher with the price floor in this case. You 
can see that by the fact that the dark blue bar is higher than 
the other two. Costs are also somewhat higher because you're 
undertaking more emission reductions in that year.
    Now the kicker is that if we go to the next slide combine a 
high cost and a low cost year. Then focus on, in particular, 
the first bar and the last bar. You can see that under an 
inflexible cap and under a combined price ceiling and price 
floor, you wind up with the same cumulative emission 
reductions.
    From an environmental perspective, that is the key. It 
doesn't matter when you undertake the emission reductions. It 
matters how much you undertake ultimately.
    From a cost perspective, however, there is a very 
significant difference. The combination of a price ceiling and 
a price floor means cumulative costs that are roughly 20 
percent lower than under an inflexible cap and trade system. 
Twenty percent is the significant amount of money given the 
cost involved in many of these efforts.
    So I think the key point that I wanted to make here is 
providing the timing flexibility to allow emission reductions 
when they're cheapest to do. That's what generating this 
difference here. You're getting more of the emission reductions 
in the cheap year rather than in the expensive year, can have a 
very significant effect on cost.
    Another very substantial influence on cost is shown in the 
next chart--what one does with the value created from the 
allowance permits where the value of the allowances created. 
There's a very substantial amount of money at stake here, often 
in the hundreds of billions of dollars a year.
    If you auction those allowance permits and then you provide 
an equal lump sum rebate to households--so you just give the 
money back to households on an equal basis for each household--
you wind up with a macro economic efficiency cost of about half 
a percent of GDP according to at least one estimate.
    We can sort of scale these. But they also produce a 
progressive net result. The reason is that the fact that each 
household is getting the same amount per dollar back from the 
government more than offsets the price increases on electricity 
and gasoline and other things for low income households.
    Alternatively you could auction the revenue and then use 
that to reduce corporate income taxes. That's the second bar. 
There you have a regressive of outcome because high income 
households will benefit more.
    Low income households wind up worse off. But you 
significantly reduce the macro economic efficiency costs, cut 
it basically in half. That's what you see on the top bar.
    If you give the permits away you wind up with the worst of 
both worlds. You wind up with the full macro economic cost and 
all the regressivity of the first set of results, or the second 
set of results. I'm sorry.
    Giving the permits away is effectively equivalent to 
auctioning the permits and then giving the money that you raise 
back to the producers. That foregoes both the opportunity to 
reduce the macro economic cost and the opportunity to offset 
the regressivity of the ultimate price increases.
    So just in summary, two key factors of a cap and trade 
system.
    One whether you provide timing flexibility which could be 
done through a combined price ceiling and price floor.
    Second, what you do with the revenue will have a very 
substantial effect on the economic cost involved.
    Thank you very much.
    [The prepared statement of Mr. Orszag follows:]

    Prepared Statement of Peter R. Orszag, Director, Congressional 
                             Budget Office

    Chairman Bingaman, Senator Domenici, and Members of the Committee, 
thank you for the invitation to discuss the implications of cap-and-
trade programs that are designed to reduce U.S. emissions of greenhouse 
gases, most prominently carbon dioxide (CO2). Under a cap-
and-trade program, policymakers would set a limit on emissions and 
allow entities to buy and sell permits (or allowances) to emit 
CO2 and other greenhouse gases.
    Global climate change is one of the nation's most significant long-
term policy challenges. Human activities are producing increasingly 
large quantities of greenhouse gases, particularly CO2. The 
accumulation of those gases in the atmosphere is expected to have 
potentially serious and costly effects on regional climates throughout 
the world. Although the magnitude of such damage remains highly 
uncertain, there is growing recognition of the risk that the damage 
could prove extensive and perhaps even catastrophic. The risk of 
potentially catastrophic damage associated with climate change can 
justify actions to reduce that possible harm in much the same way that 
the hazards we all face as individuals motivate us to buy insurance.
    Reducing greenhouse-gas emissions would provide benefits to society 
by helping to limit the damage associated with climate change, 
especially the risk of significant damage. However, decreasing those 
emissions would also impose costs on the economy--in the case of 
CO2, because much economic activity is based on fossil 
fuels, which release carbon when they are burned.
    Most analyses suggest that an appropriately designed program to 
begin lowering CO2 emissions would produce greater benefits 
than costs. Market-oriented approaches to reducing carbon emissions, 
such as a cap-and-trade program or a carbon tax, would reduce emissions 
more cheaply than would command-and-control approaches, such as 
regulations requiring across-the-board reductions by all firms. Those 
market-oriented approaches are relatively efficient because they create 
incentives and flexibility for emission reductions to occur where and 
how they are least expensive to accomplish.
    I will focus today on two key design elements of a cap-and-trade 
system that could help to improve its efficiency further in terms of 
reducing the cost of emission reductions: (1) structural features to 
allow the timing of reducing emissions to respond to year-to-year 
differences in conditions that affect the cost of doing so and (2) the 
use of the allowances' value created by a cap-and-trade system to 
reduce its cost.
    The Congress is currently considering a bill, S. 2191, which would 
reduce emissions by establishing a cap-and-trade program.\1\ S. 2191 
would also establish a Carbon Market Efficiency Board, which would be 
authorized to transfer emission allowances across years to help 
minimize the cost of meeting a long-term target for reducing emissions. 
Other approaches--such as imposing limits on the price of allowances--
could also be used to contain the costs that a cap might impose on the 
economy.
---------------------------------------------------------------------------
    \1\ The Congressional Budget Office (CBO) reviewed S. 2191 as the 
bill was ordered reported by the Senate Committee on Environment and 
Public Works on December 5, 2007. As discussed later, on April 10, 
2008, CBO provided a cost estimate for the bill as it was ordered 
reported and a cost estimate for it with a proposed amendment 
transmitted to the agency on April 9, 2008.
---------------------------------------------------------------------------
    My testimony makes the following key points:

   The cost of meeting an emission target with a cap-and-trade 
        program could be reduced, potentially quite substantially, by 
        providing firms flexibility in the timing of their efforts to 
        reduce emissions. In particular, the most cost-effective cap-
        andtrade design would encourage firms to make greater 
        reductions when the cost of doing so was low and would allow 
        them leeway to lessen their efforts when the cost was high. 
        Providing firms with such flexibility could also prevent large 
        fluctuations in the price of allowances that could be 
        disruptive to the economy. The reduction in economic burden 
        need not come at the cost of additional environmental risk: The 
        flexibility to shift emission reductions across years could be 
        designed to achieve any given cumulative reduction in emissions 
        over the medium or long term.
   One option for allowing firms flexibility in determining 
        when to reduce emissions while also achieving compliance with a 
        cumulative target would be through setting both a ceiling--
        typically referred to as a safety valve--and a floor on the 
        allowance prices each year. The price ceiling would allow firms 
        to exceed the annual target when the cost of cutting emissions 
        was high, while the price floor would induce firms to cut 
        emissions more than the annual target in low-cost years. The 
        price ceiling and floor could be adjusted periodically to 
        ensure that emission reductions were on track for achieving the 
        long-run target; such a dynamic price system could 
        substantially reduce the cost of a cumulative target for 
        emissions.
   Another option would be to authorize firms to ``borrow'' 
        future allowances for use in the current year or to ``bank'' 
        allowances for use in future years. Firms would have an 
        incentive to borrow allowances, though, only if they expected 
        the price in the future to be sufficiently lower than the 
        current price to make borrowing cost-effective. Similarly, 
        firms would have an incentive to bank allowances only if they 
        expected the price in the future to be sufficiently higher than 
        the current price. Most proposals for borrowing and banking 
        would impose limits on the degree to which they could be 
        undertaken, and partially as a result of those limits, this 
        approach is likely to be less effective at reducing cumulative 
        costs for any given cumulative target for reducing emissions 
        than a dynamic price system would be.
   Under the Carbon Market Efficiency Board described in S. 
        2191, which would be authorized to transfer emission allowances 
        across time periods, regulators would attempt to shift 
        allowances in a manner that led to more reductions when costs 
        were relatively low and less reductions when costs were high. 
        An alternative approach, which may be easier for regulators to 
        implement efficiently, would be to have the board set a ceiling 
        and floor for allowance prices and be responsible for adjusting 
        those price limits periodically as needed to achieve a long-
        term target for reducing emissions.
   Policymakers' choices about whether to distribute the 
        allowances without charge or to auction them--and if they are 
        auctioned, how to use the proceeds--could also have a 
        significant effect on the overall economic cost of capping 
        emissions. Evidence suggests that the cost to the economy of a 
        15 percent cut in U.S. emissions (not counting any benefits 
        from mitigating climate change) might be half as large if 
        policymakers sold the allowances and used the revenue to lower 
        current taxes on capital that discourage economic activity, 
        rather than giving the allowances away to energy suppliers and 
        energy-intensive firms or using the auction proceeds to reduce 
        the costs that the policy could impose on low-income 
        households. Using the allowances' value to lower the total 
        economic cost could, however, exacerbate the regressivity of 
        the cap-and-trade program.

      CONTAINING COSTS BY PROVIDING FLEXIBILITY IN THE TIMING OF 
                          EMISSION REDUCTIONS

    A cap-and-trade program, which creates financial incentives for 
firms and households to cut their greenhouse-gas emissions, is a lower-
cost approach to reducing emissions than more restrictive command-and-
control approaches, which mandate how much those entities can emit or 
what emission-reduction technologies they should use. The lower cost of 
a cap-and-trade program stems from the flexibility it provides as to 
where and how emission reductions are to be achieved.
    Under a cap-and-trade program for CO2, policymakers 
would set a limit on total emissions during some period and would 
require regulated entities to hold allowances for the emissions 
permitted under that cap. (Each allowance would entitle companies to 
emit one ton of CO2 or to have one ton of carbon in the fuel 
that they sold.) After the allowances for a given period were 
distributed, entities would be free to buy and sell them. The trading 
aspect of the program could lead to substantial cost savings relative 
to command-and-control approaches: Firms that were able to reduce 
emissions most cheaply could profit from selling allowances to firms 
that had relatively high abatement costs. The cost-effectiveness of a 
cap-and-trade program could be further improved by providing firms with 
flexibility in determining when to reduce their emissions.

   THE IMPORTANCE OF FLEXIBILITY IN THE TIMING OF EMISSION REDUCTIONS

    In its most inflexible form, a cap-and-trade program would require 
that a specified cap on emissions was met each year. That lack of 
flexibility would increase the cost of achieving any long-term goal 
because it would prevent firms from responding to year-to-year 
differences in conditions that affected costs for reducing emissions, 
such as fluctuations in economic activity, energy markets, and the 
weather (for example, an exceptionally cold winter would increase the 
demand for energy and make meeting a cap more expensive), and the 
technologies available for reducing emissions.
    In contrast, because of the long-term nature of climate change, the 
key issue from an environmental perspective involves emissions over the 
long term and concentration paths of greenhouse gases, not the year-to-
year fluctuations in emissions. In other words, limiting global climate 
change will entail substantially reducing the amount of greenhouse 
gases that accumulate in the atmosphere over the next several decades, 
but the benefits of doing so are largely independent of the annual 
pattern of those reductions.\2\ Consequently, a cap-and-trade program 
could achieve roughly the same level of benefits at a significantly 
lower cost if it provided firms with an incentive to make greater 
reductions in emissions at times when the cost of doing so was low and 
allowed them leeway to lessen their efforts when the cost was high.
---------------------------------------------------------------------------
    \2\ Although costs and benefits are difficult to measure, the long-
term cumulative nature of climate change implies that the benefit of 
emitting fewer less ton of CO2 in a given year--referred to 
as the marginal benefit--is roughly constant. In other words, the 
benefit in terms of averted climate damage from each additional ton of 
emissions reduced is roughly the same as the benefit from the previous 
ton of emissions reduced, and shifting the reductions from one year to 
another does not materially affect the ultimate impact on the climate. 
In contrast, the cost of emitting one fewer ton of CO2 in a 
given year--the marginal cost--tends to increase with successive 
emission reductions. The reason is that the least expensive reductions 
are made first and progressively more-expensive cuts would then have to 
be made to meet increasingly ambitious targets for emission reductions.
---------------------------------------------------------------------------
    Including features in a cap-and-trade program that enabled to firms 
to reduce emissions less when costs were high and more when costs were 
low could also reduce the volatility of allowance prices. Experience 
with cap-and-trade programs has shown that price volatility can be a 
major concern when a program's design does not include provisions to 
adjust for unexpectedly high costs and to prevent price spikes. For 
example, one researcher found that the price of sulfur dioxide 
allowances under the U.S. Acid Rain Program was significantly more 
volatile than stock prices between 1995 and 2006 (see Figure 1).* \3\
---------------------------------------------------------------------------
    * Figures 1-4 have been retained in committee files.
    \3\ See William D. Nordhaus, ``To Tax or Not to Tax: Alternative 
Approaches to Slowing Global Warming,'' Review of Environmental 
Economics and Policy, vol. 1, no. 1 (Winter 2007), pp. 37-39.
---------------------------------------------------------------------------
    Price volatility could be particularly problematic with 
CO2 allowances because fossil fuels play such an important 
role in the U.S. economy. In 2006, fossil fuels accounted for 85 
percent of the energy consumed in the United States. CO2 
allowance prices could affect energy prices, inflation rates, and the 
value of imports and exports. If those prices were volatile, they could 
have disruptive effects on markets for energy and energy-intensive 
goods and services and could make investment planning difficult.

    DESIGN FEATURES PROVIDING FLEXIBILITY IN THE TIMING OF EMISSION 
                               REDUCTIONS

    Recent proposals for cap-and-trade proposals include a variety of 
design features that would provide firms or regulators with flexibility 
in the timing of emission reductions, thereby reducing the economic 
costs of the effort to limit greenhouse gas emissions.

                   A PRICE CEILING AND A PRICE FLOOR

    The combination of a price ceiling and a price floor offers one 
method of allowing timing flexibility and thereby reducing the economic 
burden of achieving any desired cumulative target for reducing 
emissions:

   Setting a ceiling, or safety valve, for the price of 
        allowances could prevent the cost of reducing emissions from 
        exceeding either the best available estimate of the 
        environmental benefits or the cost that policymakers considered 
        acceptable. The government could maintain a price ceiling by 
        selling companies as many allowances as they would like to buy 
        at the safety-valve price.
   Similarly, policymakers could prevent the price of 
        allowances from falling too low by setting a price floor. If 
        the government chose to auction a significant share of the 
        allowances, it could specify a so-called reserve price and 
        withhold allowances from the auction as needed to maintain that 
        price. The efficiency advantage of a price floor would stem 
        from the fact that it could prevent the cost of emission 
        reductions from falling below the expected benefits or below 
        the level of effort that policymakers intended.

    A cap-and-trade program that included both a ceiling and a floor 
for allowance prices could achieve a long-term target for emissions 
while minimizing both the overall cost of achieving the target and 
price volatility. Under such a program, policymakers would specify 
annual emission targets as well as a ceiling and a floor for the price 
of allowances for each year. Regulators could adjust the levels of the 
price ceiling and floor periodically (for example, every five years) to 
ensure that emission reductions were on track for achieving the long-
term target. For example, the rate at which the price floor or ceiling 
rose over time could be increased if regulators determined that the 
reductions in the previous five-year period were significantly lower 
than the amount needed to achieve the long-term target. Alternatively, 
policymakers could include provisions in a cap-and-trade program that 
would automatically trigger adjustments in the price ceiling and floor. 
For example, the rate at which the price ceiling and floor rose could 
be based on the percentage gap between anticipated and actual emissions 
in the previous five-year period.
    Figures 2 and 3 illustrate the effects of price ceilings and 
floors. The figures present a simple example of an inflexible cap each 
year relative to a system involving price ceilings and floors. In 
Figure 2, the results illustrate what happens in 2018 if the costs of 
reducing emissions by roughly 15 percent are twice as high or 50 
percent lower than expected. Under an inflexible cap, the emission 
reductions are unaffected. Under a price ceiling, fewer emission 
reductions are undertaken when costs are high; the result is lower 
economic costs that year but also less of a reduction in emissions. 
Under a price floor, more emission reductions are undertaken when costs 
are low.
    Figure 3 shows the results after one high-cost year and one low-
cost year. Cumulative reductions of emissions are the same under the 
inflexible cap and the combined price ceiling-and-floor system, but 
costs are more than 20 percent lower under the latter approach. The 
reason, again, is that more of the emission reductions are undertaken 
in the low-cost year under that approach.

                    BORROWING AND BANKING ALLOWANCES

    An alternative but generally somewhat less effective approach to 
reducing economic costs involves allowing companies to borrow future 
allowances in high-cost years, thereby deferring emission reductions to 
later years. Borrowing allowances from future years would tend to 
reduce allowance prices in the current year but then raise prices in 
the future (because borrowing would allow smaller reductions now but 
require greater reductions later). Firms would want to borrow 
allowances only if they expected the price of allowances in the future 
to be sufficiently below the current price as to make deferring 
reductions profitable. Most proposals would impose limits on borrowing, 
furthermore, in part because of concerns about enforcement and 
questions about who would be liable if the firm that borrowed future 
allowances was unable to pay them back (if it declared bankruptcy, for 
example).
    Similarly, policymakers could help keep the price of allowances 
from falling too low by allowing companies to exceed their required 
emission reductions in low-cost years in order to bank allowances for 
use in future high-cost years. The additional emission reductions 
motivated by banking in low-cost years would put upward pressure on the 
price of allowances in those years.

             S. 2191 AND THE CARBON MARKET EFFICIENCY BOARD

    S. 2191 would address sustained high prices for allowances by 
allowing an administrative board, the Carbon Market Efficiency Board, 
to transfer future allowances to the current year. That action could be 
viewed as a form of forced borrowing--that is, it would require firms 
to trade lower reductions today for higher reductions in the future, 
even if they would not have found it profitable to do so voluntarily. 
Such transfers could ultimately raise or lower the overall cost of 
meeting a long-run target depending on how the price of allowances 
changed over time. For example, if a low-cost, low-carbon energy 
technology became available in the future, transferring future 
allowances to the current period would have successfully shifted 
emission reductions to a time when the cost of achieving them was 
lower. Alternatively, if policymakers borrowed future allowances with 
the expectation that such a technology would become available, but it 
did not, then the transfer could cause even more reductions to be made 
at a relatively high-cost time. (An alternative approach to the one 
embodied in S. 2191, which may be easier for regulators to implement 
efficiently, would be to have the board be the entity responsible for 
setting a ceiling and a floor for allowance prices and for adjusting 
those price limits periodically as needed to achieve a long-term target 
for reducing emissions.)

         USING THE VALUE OF ALLOWANCES TO REDUCE ECONOMIC COSTS

    In establishing a cap-and-trade program, policymakers would create 
a new commodity: the right to emit CO2. The emission 
allowances would have substantial value. For example, on April 10, 
2008, CBO estimated that the value of the allowances created under S. 
2191 (as order reported) would be roughly $145 billion (in 2006 
dollars) once the proposed program took effect in 2012; in subsequent 
years, the aggregate value of the allowances would be even greater. 
(See Box 1 for a short description of CBO's cost estimate for S. 2191.)

                BOX 1.--CBO'S COST ESTIMATE FOR S. 2191

    On April 10, 2008, the Congressional Budget Office (CBO) issued a 
cost estimate for S. 2191, the America's Climate Security Act of 2007, 
as ordered reported by the Senate Committee on Environment and Public 
Works in December 2007. CBO also issued a cost estimate for a slightly 
amended version of the legislation that was transmitted by the 
committee on April 9.
    The legislation would create a cap-and-trade system for carbon 
dioxide and other greenhouse gases. (The bill actually calls for two 
separate cap-and-trade programs--a bigger one covering most types of 
greenhouse gases and a smaller one covering hydrofluorocarbons.) Some 
of the emission allowances would be auctioned--through a new entity, 
the Climate Change Credit Corporation; the remaining allowances would 
be distributed at no charge to states and other recipients. Over the 
roughly 40 years that the proposed capand-trade programs would be in 
effect, the number of allowances--and thus the emissions of relevant 
gases--would be reduced each year.
    On the basis of an analysis of the results of several economic 
models, CBO estimates that if the legislation was enacted, the auction 
price of emission allowances for those gases would rise from about $23 
per metric ton of carbon-dioxide-equivalent (mt CO2e) 
emissions in 2009 to about $44 per mt CO2e in 2018.\1\ (In 
2006 dollars, the auction price per metric ton of CO2e would 
rise from about $21 in 2009 to $35 in 2018.) Measured relative to base-
case emissions (that is, those that would occur under current law), 
emissions of the main greenhouse gases covered by the programs would 
decline by 7 percent in 2012 and by 17 percent in 2018; over the 2012-
2050 period, emissions would decline by a total of 42 percent relative 
to the base case.
---------------------------------------------------------------------------
    \1\ A carbon dioxide equivalent is defined for each greenhouse gas 
as the quantity of that gas that makes the same contribution to global 
warming as one metric ton of carbon dioxide, as determined by the 
Environmental Protection Agency.
---------------------------------------------------------------------------
    Enacting S. 2191 as it was ordered reported would increase revenues 
by about $1.19 trillion over the 2009-2018 period, CBO estimates. 
Direct spending from distributing those proceeds would total about 
$1.21 trillion over the period. The net effect of the original 
legislation (as ordered reported) would be to increase the deficit 
(excluding any effects on future discretionary spending) by an 
estimated $15 billion over the next 10 years. The effect of the amended 
version, in contrast, would be to reduce the deficit (again excluding 
any effects on future discretionary spending) by roughly $80 billion 
over the same period. In addition, if policymakers appropriated the 
amounts necessary to implement S. 2191, discretionary spending would 
increase over the 2009-2018 period, CBO estimates, by about $4 billion 
under the original legislation and by about $80 billion under the 
amended version.
    The cost estimates for the two versions of the bill differ because 
the amendment would increase the proportion of allowances that were 
auctioned, deposit some of the auction proceeds in a Climate Change 
Deficit Reduction Fund, and make spending from that fund subject to 
appropriation.

              OPTIONS FOR DISTRIBUTING EMISSION ALLOWANCES

    Policymakers would need to decide how to allocate the allowances 
that corresponded to each year's CO2 cap. One option would 
be to have the government capture their value by selling the 
allowances, as it does with licenses to use the electromagnetic 
spectrum. Another possibility would be to give the allowances to energy 
producers or some energy users at no charge. The European Union has 
used that second approach in its two-year-old cap-and-trade program for 
CO2 emissions, and in the United States, the federal 
government has distributed nearly all of the allowances issued under 
the 13-year-old U.S. cap-and-trade program for sulfur dioxide emissions 
(which contribute to acid rain) that way.
    Selling the allowances would provide lawmakers with an opportunity 
to reduce the overall economic impact of a CO2 cap. For 
instance, the government could use the revenue from auctioning 
allowances to reduce existing taxes that tend to dampen economic 
activity--primarily, taxes on labor, capital, or personal income. As 
research indicates, a CO2 cap would exacerbate the economic 
effects of such taxes: The higher prices caused by the cap would lower 
real (inflation-adjusted) wages and real returns on capital, which 
would be equivalent to raising marginal tax rates on those sources of 
income. Using the value of the allowances to reduce such taxes could 
help mitigate that adverse effect of the cap. Alternatively, 
policymakers could choose to use the revenue from auctioning allowances 
to reduce the federal deficit. If doing so lessened the need for future 
tax increases, the end result could be similar to dedicating the 
revenue to cuts in existing taxes.
    The decision about whether or not to sell the allowances and how to 
use the proceeds could have a significant impact on the overall cost. 
For example, researchers have estimated that the efficiency cost of a 
15 percent cut in emissions could be reduced by more than half if the 
government sold allowances and used the revenue to lower corporate 
income taxes, rather than devoting the revenue to providing lump-sum 
rebates to households or giving the allowances away (see the top panel 
of Figure 4).\4\
---------------------------------------------------------------------------
    \4\ The efficiency cost of a policy reflects the economic losses 
that occur because prices are distorted so that they do not reflect the 
nonenvironmental resources used in their production. That cost includes 
decreases in the productive use of labor and capital as well as costs 
(both monetary and nonmonetary) associated with reducing emissions. To 
provide perspective on the magnitude of such efficiency costs, they are 
depicted as a share of gross domestic product.
---------------------------------------------------------------------------
        THE DISTRIBUTIONAL CONSEQUENCES OF DIFFERENT APPROACHES

    The ways in which lawmakers allocated the revenue from selling 
emission allowances would affect not only the total economic cost of a 
cap-and-trade policy but also its distributional consequences. The 
ultimate distributional impact of a cap-and-trade program would be the 
net effect of two distinct components: the distribution of the costs of 
the program (including the cost of paying for the allowances) and the 
distribution of the allowances' value. (Because someone would pay for 
them, someone would benefit from their value.) Market forces would 
determine who bore the costs of a cap-and-trade program, but 
policymakers would determine who received the value of the allowances. 
The ultimate effect could be either progressive or regressive, imposing 
disproportionately large burdens on high-income or low-income 
households, respectively.

       MARKET FORCES WOULD DETERMINE WHO BORE THE COSTS OF A CAP

    Obtaining allowances--or taking steps to cut emissions to avoid the 
need for such allowances--would become a cost of doing business for 
firms that were subject to the CO2 cap. However, those firms 
would not ultimately bear most of the cost of the allowances. Instead, 
they would pass the cost along to their customers (and their customers' 
customers) in the form of higher prices. 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. (In regulated electricity industries, 
distributing the permits at no cost might mitigate or prevent price 
increases in those markets but only at the cost of requiring even 
larger price increases in other markets. Ultimately, consumers will, in 
one way or another, bear costs roughly equal to the value of the 
permits.)
    The rise in prices for energy and energy-intensive goods and 
services would impose a larger burden, relative to income, on low-
income households than on high-income households. For example, without 
incorporating any benefits to households from lessening climate change, 
CBO estimated that the price increases resulting from a 15 percent cut 
in CO2 emissions would cost the average household in the 
lowest one-fifth (quintile) of all households arrayed by income 
slightly more than 3 percent of its income; such increases would cost 
the average household in the top quintile just under 2 percent of its 
income (see Table 1).* \5\
---------------------------------------------------------------------------
    * Table 1 has been retained in committee files.
    \5\ Those numbers are based on an analysis that CBO conducted using 
1998 data; see Congressional Budget Office, Who Gains and Who Pays 
Under Carbon -Allowance Trading? The Distributional Effects of 
Alternative Policy Designs (June 2000). CBO is in the process of 
updating those figures, using recent data on households' expenditures 
and income.
---------------------------------------------------------------------------
    The higher prices that resulted from a cap on CO2 
emissions would reduce demand for energy and energy-intensive goods and 
services and thus create losses for some current investors and workers 
in the sectors of the economy supplying such products. Investors might 
see the value of their stock decline, and workers could face the risk 
of unemployment as jobs in those sectors were cut. Stock losses would 
tend to be widely dispersed among investors, because shareholders 
typically diversify their portfolios. In contrast, the costs borne by 
workers would probably be concentrated among relatively few households 
and, by extension, communities.

 POLICYMAKERS WOULD DETERMINE WHO RECEIVED THE VALUE OF THE ALLOWANCES

    Although the price increases triggered by a cap-and-trade program 
for CO2 emissions would be regressive, the program's 
ultimate distributional effects would depend on policy-makers' 
decisions about how to allocate the allowances. As noted above, those 
allowances would be worth tens or hundreds of billions of dollars per 
year. Who received that value would depend on how the allowances were 
distributed.
    Lawmakers could more than offset the price increases experienced by 
low-income households or the costs imposed on workers in particular 
industrial sectors by providing for the sale of some or all of the 
allowances and using the revenue to pay compensation. For example, when 
CBO examined the ultimate distributional effects of a capand-trade 
program that would reduce CO2 emissions in the United States 
by 15 percent, it concluded that lower-income households could be 
better off (even without any benefits from reducing climate change 
considered) as a result of the policy if the government chose to sell 
the allowances and use the revenue to pay an equal lump-sum rebate to 
every 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 and energy-intensive goods.\6\ Such a 
strategy would, on net, increase average income for households in the 
lowest income quintile by about 2 percent (see the bottom panel of 
Figure 4). At the same time, the net average income for households in 
the top quintile would fall by less than 1 percent, CBO estimated.
---------------------------------------------------------------------------
    \6\ One researcher has suggested that an environmental tax credit 
based on earnings could offer another means of reducing the regressive 
effects of the price increases that would result from a tax or cap on 
CO2 emissions. See Gilbert E. Metcalf, A Proposal for a U.S. 
Carbon Tax Swap (Washington, D.C.: Brookings Institution, October 
2007).
---------------------------------------------------------------------------
    In contrast, if lawmakers chose to use the allowances to decrease 
corporate income taxes, the overall cost to the economy would fall but 
the distributional effects would be significantly more regressive than 
the initial price increases. Because low-income households pay 
relatively little in corporate taxes, the cut in corporate tax rates 
would not offset their increased spending on energy and energy-
intensive goods. Households in the top income quintile, however, would 
experience an increase in after-tax income as a result of the policy. 
Should policymakers decide to use the revenue from selling allowances 
to decrease payroll taxes, the effects (not shown in the figure) would 
be regressive as well, although less so than for a cut in corporate 
taxes.\7\
---------------------------------------------------------------------------
    \7\ For those results, see Congressional Budget Office, Trade-Offs 
in Allocating Allowances for CO2 Emissions (April 25, 2007).
---------------------------------------------------------------------------
    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.
    For example, in 2000, CBO estimated that if emissions were reduced 
by 15 percent, as in the scenario discussed above, and all of the 
allowances were distributed free of charge to producers in the oil, 
natural gas, and coal sectors, the value of the allowances would be 10 
times as large as the producers' combined profits in 1998. Profits for 
those industries have climbed substantially since then, yet the value 
of the allowances associated with the policy that CBO analyzed would 
still be large relative to those producers' profits.\8\ Because the 
additional profits from the allowances' value would not depend on how 
much a company produced, such profits would be unlikely to prevent the 
declines in production and resulting job losses that the price 
increases (and resulting drop in demand) would engender.
---------------------------------------------------------------------------
    \8\ Specifically, CBO estimated that the value in 1998 of the 
allowances stemming from the 15 percent reduction in U.S. emissions 
would total $155 billion (in 2006 dollars). By comparison, profits for 
U.S. producers of oil, natural gas, and coal totaled $13.5 billion in 
1998 (in 2006 dollars). Those companies' total profits have grown 
substantially--for example, in 2006, they totaled $174 billion.
---------------------------------------------------------------------------
    In addition, those profits would accrue to shareholders, who 
typically are from higher-income households, and would more than offset 
those households' increased spending on energy and energy-intensive 
goods and services. Low-income households, by contrast, would benefit 
little if allowances were given to energy producers for free, and they 
would still bear a disproportionate burden from the price increases 
that would nonetheless occur. Thus, giving away allowances would be 
significantly regressive, making higher-income households better off as 
a result of the cap-and-trade policy while making lower-income 
households worse off. Further, giving away the allowances would 
preclude the government from dedicating the value of the allowances to 
reducing the overall economic impact of the policy.

    The Chairman. Thank you very much. I'll start and just ask 
5 minutes of questions and then defer to Senator Domenici. 
Then, as I said earlier, members that have not had a chance to 
make an opening statement will each have 7 minutes so they can 
make whatever statement they want, if they would prefer rather 
than ask some questions.
    Let me start with a question to you, Dr. Gruenspecht. I 
looked at this CRS report. They did an analysis of the various 
studies.
    The ACCF NAM study, National Association of Manufacturers 
Study, high cost scenario stands out. It has, it proposes or 
contemplates allowance prices roughly 75 percent higher than 
the highest cost scenario that you have come up with at EIA. 
But the Gross Domestic Product impact in 2030 is three times 
higher than what you estimate in 2030.
    Could you explain that? Just how that would be the case or 
what your understanding of that is? I just wasn't able to 
understand why the 75 percent increase in allowance prices 
would translate into a three time increase in impact on the 
Gross Domestic Product.
    Mr. Gruenspecht. Thank you, Mr. Chairman. It's always 
difficult to talk about somebody else's work, but I think I can 
try a little bit here. Amen corner. Now I'm on my own, I guess.
    First of all, the allowance price differences reflected 
some of the assumptions, like the absence of banking in their 
analysis which they were very clear about. There are some 
similarities in that when we make similar technology cost and 
availability assumptions as they do, we get fairly close in 
allowance prices for that high case.
    However, based on our own previous work we were surprised, 
as I guess you are, by the size of the macro-economic losses 
reported in the study done for NAM, we had concerns about their 
consistency with the identified energy market impacts.
    In order to better understand their work we asked to look 
at some of their modeling results and met with their 
contractor, and we did identify an issue we think contributes 
to the size of the economic impacts in the study performed for 
NAM and the ACCF. They apparently arose from problems in 
implementing the modification of the Annual Energy Outlook 2007 
baseline to pick up the Energy Independence and Security Act 
and the lower baseline economic growth.
    For example, they used EIA's high price oil scenario in 
their policy case. But then they compared the results to a 
baseline with much lower oil prices. So really the macro 
impacts that are shown in their report reflect both the S. 2191 
policy and the effects of higher oil prices, not just the 
effects of the S. 2191 policy.
    So, we think that there are some abnormal results in the 
report. We've shared our concern and other comments with both 
the contractor and the report sponsors, and look forward to 
their resolution.
    We certainly recognize and welcome the use of our modeling 
tools by diverse users for climate policy studies. There was 
also one by the Clean Air Task Force that used NAM. So again, I 
think there may be a mix of--maybe what is attributed to the 
cap and trade bill may also be picking up the high oil price 
scenario that they used.
    The Chairman. I guess I understand that you're saying 
basically there's some type of double counting going on in the 
model. Is that what I'm understanding?
    Mr. Gruenspecht. I don't know if it's double counting. I 
think it's more mixing the impact of two things, the effect of 
S. 2191 and moving from lower oil prices to higher oil prices 
that is not because of S. 2191. Senator Domenici had talked 
about the difficulty in projecting or looking at scenarios of 
oil prices.
    We have a high oil price case that's much higher than the 
reference case. They use the high oil price case, which is 
actually closer to current prices, for looking at the S. 2191 
policy. Then our understanding is they compared that to a 
scenario with the reference oil prices in the baseline. So it 
was mixing the effects of S. 2191 and a less favorable oil 
price situation which is not good, obviously, for the U.S. 
economy either.
    The Chairman. Let me ask, Dr. Orszag. As I understand one 
of the points you made, is that you think the best result of 
getting emission reductions at minimal cost is accomplished by 
a structure that would have both a price ceiling and also a 
price floor on allowances. Did I understand that correctly?
    Mr. Orszag. That is correct. I don't want to use the word, 
best. But if you wanted to create an efficient system that from 
the perspective of achieving the emission reductions at the 
lowest possible economic cost, providing timing flexibility 
which could be done by both a price ceiling and a price floor 
where both of those prices could be adjusted over time to hit 
any cumulative emission reductions target you wanted is an 
effective way of achieving that objective.
    The Chairman. Thank you very much. My time is up.
    Senator Barrasso.
    Senator Barrasso. Thank you very much, Mr. Chairman. I very 
much appreciate you holding these hearings. This is very 
important for all of us to get a clear understanding. I do have 
real concerns as do all the members. I have a lengthy 
statement. With your permission I'd like to have that inserted 
into the record?
    [The prepared statement of Senator Barrasso follows:]
  Prepared Statement of Hon. John Barrasso, U.S. Senator From Wyoming
    In dealing with climate change, there are certain principles that I 
apply in assessing any approach to this issue.
    One, is that fossil fuels, such as coal, maybe ironically to many 
in the Senate, is vital to achieving our goals of having a cleaner 
energy future.
    We can not get there without them.
    Two, a strong American economy--that creates jobs and new 
technologies--is critical to developing the tools we need that capture 
and sequester carbon.
    China and India will not act to address carbon emissions until such 
technologies are developed.
    And third, we cannot afford to hurt the very regions, industries, 
and workers, who will provide that technology through hard work and 
innovation.
    In terms of economic impact, I have serious concerns with the 
Lieberman-Warner approach as currently written.
    According to a recent study done by the National Association of 
Manufacturers, the impact to my home State of Wyoming is dire.
    I will note these numbers could change because we do not know what 
the final bill that will be on the floor will look like.
    The study projects Wyoming would lose roughly 2,000 to 3,000 jobs 
by 2020, and 6,000 to 8,000 jobs by 2030.
    Gasoline prices and energy prices for Wyoming families would 
double.
    How would that impact Wyoming families?
    Wyoming family budgets are predicted to lose 900 to 3,000 dollars a 
year in income by 2020, and 4,000 to 7,000 dollars a year by 2030.
    Sadly, the impacts of the bill results in class warfare, hitting 
lower income families the hardest. Low income families in Wyoming would 
have to dedicate 1 dollar out of 5 from their family budget for energy 
costs under the Lieberman-Warner bill.
    The statistics go on and on.
    Higher costs for Wyoming schools, universities, and hospitals.
    According to the study, Wyoming coal would face a serve decline.
    That would result in lost jobs, broken family budgets, and 
displacement.
    As I have said, fossil fuels, including coal, are vital to our 
energy security. We need to make them cleaner so that they can be a 
basis for America's energy mix.
    But clean coal technology is a work in progress. It will take time 
to perfect.
    The men and women of Wyoming, who are the backbone of the coal 
industry, are essential to providing clean coal technology to America.
    The capital and infrastructure that make coal happen in Wyoming are 
also essential to providing clean coal technology to America.
    America can simply not tolerate the lost jobs and high energy 
prices that will come from dramatic decreases in coal production under 
Lieberman-Warner.
    As I stated in the beginning, we need to have a strong economy, we 
need an economy that creates jobs and fosters innovation to provide the 
clean energy technologies we need.
    We can ill afford to hurt the very regions, industries, and 
workers, who will provide that technology through hard work and 
innovation.
    On both points, at least according to this report, the Lieberman-
Warner bill appears to fail.
    It doesn't have to be this way. I truly believe we can address 
climate change. There are betters ways, more economically friendly 
approaches, that can make a real difference.
    I do not simply offer platitudes on this issue.
    Earlier this year, I introduced legislation to address climate 
change.
    I believe overlooked in the debate are green house gasses, 
currently in the atmosphere. Those are the gasses contributing to the 
warming of the planet.
    The best science tells us it is a factor.
    To what extent, we are not sure.
    It would seem to me a worthy approach, to find a way to remove 
existing green houses gases from the atmosphere and permanently 
sequester them. This is the other end of the problem.
    To accomplish this, we certainly are going to need to invest the 
money to develop the technology.
    The approach my legislation takes to address this is through a 
series of financial prizes where we set technological goals, and 
outcomes.
    The first to meet each criteria would receive federal funds and 
international acclaim.
    The prizes would be determined by a federal commission under the 
Department of Energy.
    The commission would be comprised of climate scientists, 
physicists, chemists, engineers, business managers and economists.
    They would be appointed by the President, with the advice and 
consent of the Senate.
    The awards would go to those, both public or private, who would 
achieve milestones in developing and applying technology.
    Technology that could significantly help to slow or reverse the 
accumulation of greenhouse gases in the atmosphere.
    The greenhouse gasses would have to be permanently sequestered. 
Sequestered in a manner that would be without significant harmful 
effects.
    I believe this approach is just one example of how we can tackle 
the problem of climate change in an economically friendly way without 
sacrificing real progress.
    I would hope, as we begin debate on this issue, that more members 
of this body embrace approaches that address climate change while 
protecting jobs, family budgets, and the industries we must count on.

    The Chairman. We'll be glad to include anyone's statement 
in the record.
    Senator Barrasso. Dr. Gruenspecht, if I may. You state in 
your testimony both written and oral that the larger price 
impacts occur in those regions that are most reliant on coal 
and being from Wyoming, the No. 1 coal producer in the United 
States, that is clearly a concern. So I know we're in the 
category.
    But you say different regions of the country will be 
affected. What specific regions are you talking about?
    Mr. Gruenspecht. We looked at electricity prices. We looked 
at 13 regions of the country. They each use different amounts 
of coal for power generation. They each have different 
regulatory structures. We generally find, I'm just doing this 
by memory, but we find places like the Pacific Northwest, which 
have a lot of hydropower and don't have competitive markets, 
places like California, are less affected. Places that are more 
heavily reliant on coal and are competitive have larger 
impacts. In the testimony we tried to illustrate the effect on 
the 13 regions.
    Senator Barrasso. So it looks like we're talking about 
having significant impact on the Midwest, the Rocky Mountains, 
the South. They're going to suffer the most. When I look at 
these studies it looks like in the State of Wyoming and many of 
those other Rocky Mountain States that about one dollar out of 
five dollars in the income of an average family in my State 
will have to be spent on energy costs under Lieberman-Warner.
    Does it appear to you that the impacts of the bills are 
really hitting the lower income families the hardest? Would you 
agree with that assessment?
    Mr. Gruenspecht. We have not really looked at income 
distribution, and we haven't really looked at the individual 
State levels. All we did regionally, in response to the 
chairman, is look at the electricity price impacts on a broad 
regional basis.
    Senator Barrasso. You stated that the price of motor fuel 
gasoline would be affected maybe to a lesser extent than coal 
or natural gases. There's a study that's reported in today's 
copy of The Hill: Warner-Lieberman bill could raise gas prices.
    They talked about some large numbers there. This would be 
on top of the gas prices that people are already enduring 
across the country. How do you explain this increase in the 
cost of gasoline prices under Lieberman-Warner?
    Mr. Gruenspecht. We do not see the Lieberman-Warner 
proposal significantly affecting the world oil price. But we do 
see the cost of the allowances that are needed under the cap 
and trade program as being reflected in the price of motor 
fuels. So the real question is how high those allowance prices 
are.
    In our analysis, that really depends on how successfully 
the electric power sector can reduce its carbon emissions. The 
electric power sector accounts for 40 percent, roughly, of 
energy-related emissions and energy-related emissions account 
for a little bit more than 80 percent of total emissions. So 
energy-related emissions are very important.
    The range we get for gasoline price impacts is about 40 
cents a gallon to about a dollar a gallon. That almost 
completely reflects the value of these allowances under a cap 
and trade program.
    Senator Barrasso. Which is significant in terms of the 
amount of prices already that people are enduring at the pump--
another 40 cents to a dollar.
    Mr. Gruenspecht. I don't think anyone likes the first 
number that they're seeing when they drive up to the pump. I 
guess this analysis would affect either the second digit or 
potentially in the case where it's a dollar, you know it would 
be a dollar. But again, that's what we find.
    Senator Barrasso. As Congress is being asked to address 
some of these pieces of legislation I want to make sure the 
American people realize what the impacts are going to be on 
their own pocketbook as we try to address an issue and as this 
comes to the floor next month.
    Dr. Yacobucci and Dr. Parker, you talk a bit about the 
uncertainty of the estimates in terms of the costs to the 
economy, the cost to American jobs. The uncertainty as I read 
this, really reflects the magnitude rather than the direction 
in terms of it seems is it a question of how many jobs will be 
lost. How big the drag will be on the economy. You know, how 
much we will shackle our economy. I think Dr. Parker, you used 
the word, challenges to the economy.
    Would including a so called safety valve help things if in 
part of the legislation?
    Mr. Parker. Yes, I always forget that. A safety valve which 
for people who don't know, that's basically putting an upper 
limit on a price so that if the volatility and the allowance 
market exceeds a certain level, you can pay a fee as opposed to 
having to submit an allowance. It is basically a very effective 
method of controlling the upper level prices that you would 
entail.
    A question of course, is where do you set that price. So 
the, yes, it would be very effective at doing so. In fact it 
would guarantee the price of the program could not exceed that 
level because any rational entity would decide to pay the fee 
rather than pay more for an allowance.
    Senator Barrasso. It does seem, well, that no matter how 
you do this there's going to be impacts on higher heating 
bills, higher electrical cost for cooling, higher prices at the 
pump, lower wages and lower returns for people in their long 
term retirement plans. No matter what you do. No matter which 
way you go, all of those things are going to be impacted by all 
of the assessments.
    Mr. Parker. Prices will go up. Whether or not individual 
bills go up depend on how people respond to the prices. A 
couple of the models attempted to look at what the various 
incentives that the bill has it in for conservation and other 
abilities.
    They concluded that while, yes, electric for example, 
electric prices or natural gas prices might go--the prices 
would go up. The monthly bills might go down if people 
sufficiently conserved. So in the end it's how the economy and 
ourselves respond to what's occurring as to how much it 
ultimately hits our pocketbook. But yes, no one is predicting 
that prices were going down.
    Senator Barrasso. Dr. Gruenspecht, if I could ask about the 
issue of nuclear energy. I think there's been some criticism 
regarding some of the assumptions in the model in terms of 
construction of 264 gigawatts of electricity from nuclear power 
by the year 2030. Could you explain what that means in terms of 
the number of plants, the construction timelines, locations, to 
see if this is actually a realistic assessment of where this 
Nation can be with nuclear power in 23 years?
    Mr. Gruenspecht. My view would be that it is very unlikely 
that much nuclear would actually be built. But this is a Core 
case result. It results from running the reference case 
distribution version of the EIA model which does not reflect 
constraints that would likely hold the maximum number of 
nuclear builds to a lower level.
    The implications of more modest nuclear builds are 
reflected in our High Cost and Limited Alternatives cases which 
are also included in the report. I'd like to give you some 
context. Until recently the primary issues surrounding nuclear 
power, as members of this committee know, was whether any 
nuclear plants would be built. EIA was often excoriated by 
coming up here and suggesting that our long term outlooks 
projected that no nuclear would be built through 2030. In this 
setting, modeling attention really focused on the issue of what 
it would take to build any and not on a concern that too many 
might be built. As a result there was not much focus on 
characterizing constraints that would limit builds.
    Without such constraints, nuclear's status is as a 
demonstrated base load technology with no carbon dioxide 
emissions that's already close to being economically 
attractive, even without a carbon constraint. That leaves the 
model to choose large amounts of nuclear when a strict carbon 
cap applies. That's a little bit of the history.
    Indeed, the reason this study was built the way it was, and 
this came up in the questions asked by the chairman, was to 
show what matters. These technology assumptions really matter a 
lot. There's no implied or intended preference for the Core 
case as representing the most likely or preferred view.
    As I said, technology is important. Public acceptance is 
also really important. Nuclear is an example of a technology 
that exists today in large part, but there are issues 
surrounding public acceptance. So I think it's important we 
frame this issue. We not only discuss it in terms of if we did 
R and D, which is very important, but we also have to worry 
about whether the market will take it.
    I'd also point out that 250 gigawatts of nuclear power or 
something very close to the level we talked about in that Core 
case was actually ordered in the 1960s at various points in 
time. One hundred and fifty gigawatts of it ended up being 
canceled. One hundred ended up being built.
    That was a time when U.S. electricity demand was growing at 
a very rapid rate. This was not just planned plants, it was 
actually ordering the steam supply systems for 250 gigawatts of 
nuclear power. So we were able to order literally 250 gigawatts 
of nuclear in the 1960s. Clearly we're not ordering much if any 
yet. But it's a very important question.
    Senator Barrasso. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Sanders.
    Senator Sanders. Thank you, Mr. Chairman for holding this 
important hearing. I thank our guests for all the work that 
they have done. I just want to say a few words.
    I didn't hear much discussion this morning. Maybe that 
wasn't your assignment. About what happens in fact if the 
United States and the world do not act aggressively to address 
the crisis of global warming.
    There are studies out there which suggest that in terms of 
the growth of drought, of flooding, wars, disease, severe 
environmental disturbances and weather patterns that if we do 
not act sufficiently we're going to end up in an economic 
situation worse than the Great Depression with massive job loss 
and economic dislocation. So I want in a moment, I would to ask 
some of you to address that issue.
    The other issue that concerns me very much, Mr. Chairman, 
is I think we're into old think here. I do not think that we 
are looking at the extraordinary potential of energy efficiency 
to substantially reduce greenhouse gas emissions at a 
reasonable cost. I think there is not significant attention 
paid to the tremendous potential in sustainable energy on top 
of energy efficiency.
    I find it hard to be talking about the cost of moving away 
from greenhouse gas emissions without looking at the reality 
that we're driving cars today that get 15 miles per gallon. 
That we have homes and appliances which are grossly 
inefficient. That we have a transportation system in terms of 
rail which lags far behind Europe and Japan and in some cases 
even China. That we have not explored the potential of electric 
cars. That photovoltaics are just beginning to take off.
    So I would say, Mr. Chairman, that there is huge potential 
out there. We have seen it in California. We have seen it in 
the State of Vermont in terms of energy efficiency. The day 
will come and certainly should come that our people will be 
driving cars that get 50, 75 miles per gallon. There will be 
millions of electric cars out there.
    Just one example in terms of concentrating solar power, as 
some of you may know there is a plant that is going to be built 
by Pacific Gas and Electric in the Mohave Desert which should 
be online within a couple of years. Over 500 megawatts of 
electricity at a competitive price. There are those people who 
think that we can build dozens of those plants in the Southwest 
of the United States that could provide a very substantial 
amount of the electricity that we consume as a people at a 
competitive price. No greenhouse gas emissions.
    What I fear very much is that our old friends in the coal 
industry, in the fossil fuel industry, in the automobile 
industry, simply continue to want us to go the old way and are 
not looking at a bold, new future. I think if we look at a 
bold, new future what we can be talking about is the creation 
of significant numbers of good paying jobs as we transform our 
economy away from fossil fuels and dependence on foreign oil. 
Alright.
    So my first question and anyone can jump right up there. 
What happens if you don't act? How much is it going to cost us, 
the American people, the people around the world in increased 
costs and in human suffering? Who wants to tell us that?
    Mr. Orszag. I guess I'll step up. As I tried to indicate I 
think global climate change is among the Nation and the world's 
most serious long term risk. It is clear that we are running 
some risk of potentially catastrophic changes to the climate 
which would have substantial effects on society and on the 
economy.
    The difficulty really is in terms of timing. Moving away 
and we can come back to your second point. But moving away from 
the current fossil fuel based economy, will involve some up 
front costs, even if the technologies are already available.
    Senator Sanders. Yes, of course.
    Mr. Orszag. So it's really a question of paying up front an 
insurance premium, almost, for reduced long term costs. That's 
one question. The second question is the global dimension of 
the problem.
    Senator Sanders. You didn't give me an example. There are 
some of my friends say, look, it's going to be very expensive 
to move forward. Fair question. A good point. What happens if 
we don't move forward? How much is it going to cost?
    What we're paying in the supplemental bill, if my memory is 
correct, some $10 billion more for Katrina, $10 billion more. 
How much will flooding cost? What will drought cost? What will 
water cost us as we fight for limited resources?
    Who wants to tell us how many trillions of dollars we will 
be spending on that? What will it mean to the people in Wyoming 
or the people in Vermont if we don't act? I mean because that's 
really what we're debating. Somebody will say, well, look it's 
expensive. We can't go forward.
    But what I'm suggesting is disaster if we don't go forward. 
Second of all, I believe you are underestimating the potential 
of energy efficiency and the new sustainable energy that we can 
put online right now. If they are breaking ground almost now 
for a solar thermal plant in the Mohave Desert for $2 billion 
to provide 400,000 homes with electricity. The people tell me 
we can build dozens of those plants.
    I'm afraid that I don't see such a great cause. Of course 
there's going to be economic dislocation. Am I underestimating 
the problem or is there more potential in terms of energy 
efficiency and sustainable energy than you guys are suggesting. 
Dr. McLean?
    Mr. McLean. On your first question on the impacts, I think 
this is an area that concerns us greatly. We have several 
people on my staff who are working on this area. But as you 
know it's been a very hard area to quantify.
    Senator Sanders. Sure.
    Mr. McLean. To monetize. It's an area that we need to make 
progress on and I agree with you. Because you have to compare 
what the alternative is. We're working on that as we speak.
    On your second questions dealing with energy efficiency and 
renewables and actions we can take. There is a lot we can say 
about that. First of all, in these analyses we show a huge 
increase in reliance on renewables for energy production. 
That's a recognition of the kinds of points you're making that 
the technologies are evolving. As the cost, the relative cost 
for fossil rises, renewable costs decline. They come in.
    Senator Sanders. Dr. McLean, I'm sorry to interrupt. But 
let me ask you this. I'm reading from a document which says the 
building just 80 gigawatts of concentrating solar power, these 
solar plants, a target that is achievable in 2030 with 
sufficient public policies what which I believe is true, would 
produce enough electricity to power approximately 25 million 
homes and reduce carbon dioxide emissions by 6.6 percent 
compared to 2000 levels.
    Does that seem like off the wall or does that seem--with 
strong public policy? We're saying that's what we're going to 
do. Can we do that? Are you looking at that type of magnitude?
    Mr. McLean. Yes. I can't give you an answer to that. I 
don't know the numbers without looking through that. I can say 
that we are showing a greater reliance, an increase in 
renewables. It has to do with policies as well as cost shifts 
in those technologies.
    Senator Sanders. Mr. Chairman, the problem that I'm having 
is if we look at global warming as a really, really serious 
problem that I believe it is. If we say we are going to commit 
resources to transform our economy and energy systems. I think 
we can make real progress.
    I think somehow our friends may be underestimating the 
potential that exists if we really focus on a Manhattan type 
project. That would be my point. I thank the panelists very 
much.
    The Chairman. Thank you very much.
    Senator Corker.
    Senator Corker. Mr. Chairman, thank you. I just want to say 
that I love the passion that my friend, Bernie Sanders has. I 
traveled with him to Greenland where we had a chance to meet 
with scientists from Denmark and other places. It was most 
educational.
    I certainly appreciate the leadership you've shown. A year 
ago you and I were in Europe meeting with the carbon traders, 
meeting with members of the European Commission, utility 
providers and others. This panel, and I hate that I didn't hear 
every panelists, but I have a general idea of what each of you 
has said.
    I think what they're doing is shedding light on some of the 
pragmatic issues that we need to address. The fact is that my 
hope is that somehow we can take the passion, if you will, that 
so many have around the issue of the environment and global 
warming and link that simultaneously with our desire as a 
country in the short term to have energy security. I think that 
is possible. That's what over the last year I've been working 
with others to try to do.
    Now we have a bill that's coming to the floor on June 2, 
possibly. It's a bill that I think is different than the bill 
we actually came in the room to discuss. My understanding 
there's a number of amendments and changes that came out at 10 
o'clock this morning. So in some ways we're discussing a bill 
that's not the bill, if you will or not the vehicle.
    But I do think that getting down and taking, if you will, 
that passion and linking it though in a pragmatic way so that 
we pass a bill that works and moves us in that Manhattan 
Project way toward energy efficiency, toward conservation. I 
think that to me, is the beauty of what we might be able to 
accomplish with cap and trade. That's why our office and so 
many other people have spent so much time on it.
    I think on the other hand there are real decisions that we 
have to make that really affect people every day. I mean the 
fact is the bill, as it came out, is not simply a cap and trade 
bill. I mean, I'm actually a purist. I think in many ways, 
Bernie, excuse me, Senator Sanders, you and I have some similar 
views about the purity, if you will, of a bill.
    This bill is not just a cap and trade bill though. It's a 
huge spending bill. I mean at the end of the day, I know it's 
going to be revised, revisited, revised right now, but right 
now it spends every penny that comes in in a non-discretionary 
way. I mean that's an unusual bill. We don't pass bills like 
that around here.
    So we need to talk about that. I think the whole issue of 
allowances, and I understand Dr. Orszag, may have addressed in 
his testimony. That's a big deal because we're passing out what 
is like public shares in a public company.
    I mean these things are marketable. How those get laid out 
is a big deal. I mean it affects so many things. I hope that 
what we'll do--I know the romance of this is interesting. 
That's what drives so many people to want to look at cap and 
trade legislation.
    I'm interested in it for that reason. But the fact is that 
there's a lot underneath this that truly is going to affect us. 
We need to line up priorities in an appropriate way.
    One of the--I'm just going to mention. I'm going to get 
down in the weeds now. Ok. We got these allocations of 
allocating out, transferring wealth, trillions of dollars of 
wealth out to people.
    I think people should understand that $7.2 trillion between 
now and 2050. If carbon is at $13 a ton initially which is what 
the modeling projects.
    Today in London carbon is selling from $38, $40 a ton, so 
we're talking maybe $20, $23 trillion, preset. Again, I just 
think that's a pretty important thing to talk about as to how 
that's allocated. Now I don't understand why in the world we 
would be allocating credits out to middlemen, to people that 
have absolutely nothing to do with the creation of energy.
    This bill allocates out credits or allowances to States. 
Why would we do that? I mean, States have nothing what so ever 
to do with producing energy. What would a State do with public 
shares in IBM if we just transferred it out?
    What would a State do with allowances that we're allocating 
out that are worth a lot of money? I'd like for one of you all 
to--and by the way there's numbers of middlemen. I don't mean 
to pick on States, but why would we do that? I'd like for one 
of you, any of you to share with me why in the world we do 
that? What public policy end would we meet in doing that?
    Mr. Orszag. You'd be helping the State governments.
    Senator Corker. The State governments are actually.
    Mr. Orszag. The recipients of a permit, I think the best 
way of viewing of when you give a permit away it is like you 
sold the permit for some amount of money. Then you just hand 
the money to the recipient of the permit. So the only objective 
that you're generally fulfilling is if you wanted to transfer 
money to those recipients. This accomplishes that objective.
    Senator Corker. So in essence this bill which is to focus 
on capping carbon emissions transfers out hundreds of billions 
of dollars to States for no reason.
    Mr. Orszag. There also are requirements. I mean, the bill 
is a little bit more complicated because there also are 
requirements on sort of what happens. But I think focusing on 
the fact that this is a huge amount of money and handing out 
the permits is a windfall to many of the recipients is a key 
insight.
    Senator Corker. Ok. I just have to tell you that I don't 
understand why, I have no idea what thinking could be behind 
that. By the way there are numbers of other people that have 
nothing what so ever to do with reducing carbon that are given 
these allowances. It makes absolutely no sense. I hope it is 
something we will address.
    The other issue that I bring up today, I have many others 
I'd like to talk about, but it's the international allowances. 
I listened to my friend again, Senator Sanders, who I like as 
much as anybody here in the Senate. I love his passion. He's 
talking about capping emissions here in our country.
    Yet this bill provides for us to buy international credits. 
That does nothing what so ever to lower emissions in our 
country. All it does is allow people who are emitting to lower 
their costs.
    What it does do is transfer out. I want to say in a time we 
have a trade deficit, ok. We're losing jobs here in our 
country. Again it transfers out hundreds of billions of dollars 
to other companies.
    I will just say and Senator Bingaman and I have witnessed 
this in Europe, to projects that actually in many cases are 
fraught with fraud. I'd like for someone to please share with 
me on what public policy motive, if you will, we would allow 
our money here in this country to be transferred out to 
international credits to many countries that are not capping 
emissions. I'd love for somebody to support that notion.
    I just want the record to show that----
    The Chairman. You've got--we'll give another 10 seconds for 
an answer. Then we'll----
    [Laughter.]
    Senator Corker. Ok.
    The Chairman [continuing]. Move on to Senator Salazar.
    Senator Corker. Ok.
    The Chairman. Yes, Dr. McLean.
    Mr. McLean.Yes. Can I take on your first question?
    Senator Corker. Sure.
    Mr. McLean.What would States do with money? I'm not 
defending the amount of money or even whether this is a good 
policy decision, but just to answer your question about some 
uses that it might be put to. Then you can decide whether those 
are worthy.
    First of all, a lot of efficiency programs are run at the 
State level by energy offices and other offices within States, 
so some of that funding would go toward assistance in running 
those programs. There's assistance to low income----
    Senator Corker. Could be. The bill says could be.
    Mr. McLean. Right. So I'm not saying, you know, you can 
decide whether that's worded correctly or it accomplishes its 
purpose. But just to say there are purposes I think that people 
have in mind. A third area would be adaptation. I mean there's 
a whole issue of what do we do in response to the inevitable 
things in terms of infrastructure and responses there.
    So there would be expenses and costs and some people 
believe that this would be a way of covering that. Now you can 
raise the question is this the right thing to do? Is this the 
right amount of money? There are certainly questions there. But 
it's not that there would be no purpose to it. But I understand 
your point.
    Senator Corker. Mr. Chairman, my time is up. I realize. I 
just would make one more comment. That is, I mean this with 
total sincerity, I think we have a chance in our country to 
quit the squabbling, to focus on our environment in a 
responsible way and to tie the concern for our environment 
responsibly to some pragmatic things to cause our country to be 
energy secure.
    I think we can do so in a way that does away with all this 
picking of winners and losers and the subsidizing for 3 years 
and then not subsidizing. I think it's really incoherent what 
we do as a country. But I hope we will do as a Senate is to 
truly look at what this bill says. Then work together.
    I mean this totally sincerely, work together toward a 
pragmatic end. I hope that what we do on June 2 is a dry run. I 
don't think enough people in the Senate actually understand 
what this bill really does.
    I hope that we together can do something. I mean it to 
harness the passion for our environment with the absolute need 
for this country to have an energy policy that causes us to be 
more secure. I thank you so much for this hearing.
    The Chairman. Thank you very much.
    Senator Salazar.
    Senator Salazar. Thank you very much, Mr. Chairman. I would 
be happy to be a co-sponsor of the Corker-Sanders Climate 
Change bill.
    [Laughter.]
    Senator Salazar. When they get it together given the 
passion that they bring to the issue. If they can get it 
together I think they might actually get a number of co-
sponsors with the same practical approach that both Senator 
Corker and Senator Sanders were talking about.
    Let me first say, Mr. Chairman, I think it is incredibly 
important that this committee exercise its jurisdiction over 
this issue because when you look at what's been happening in 
the last three and a half years that I've served on this 
committee. We have been trying to define a clean energy future 
for America. It is inextricably tied in to what happens with 
global climate change and what we do with the cap and trade 
systems.
    So I think your holding this hearing is very important 
because at the end of the day what we're doing is defining the 
new energy future for America. I think in fact that I would 
suggest, Mr. Chairman, I don't know that we have time between 
now and June 2. But hopefully it will be something that will be 
a continuing feature of what we do here in this committee. I 
know we've already had hearings, but I think also this is an 
area where, as Senator Corker pointed out, there's a lot of 
information, a lot of learning yet to be held.
    I'm going to ask a question that I wanted to Dr. Orszag and 
Dr. Gruenspecht to respond. That is on the allocation on the 
auction revenues that are set forth in Lieberman-Warner. There 
are nine categories that are set forth there.
    My question to you, as you think about that, is whether or 
not those allocations are correct. Whether changing those 
allocations, given the sensitivity of the models in terms of 
technology investment, might make a major difference in terms 
of our GDP as well as in terms of the effects on consumers. Let 
me give you, as your thinking about that question, just a 
comment.
    You know for me when I look at the practical reality of 
what we've done out of this committee in my State of Colorado. 
In 2005 we were producing no power at all from wind energy. As 
a result of what this committee has done, today we're over 
1,000 megawatts of energy from my State, almost 1,500 megawatts 
equivalent of what 5 mid-size coal-fired power plants.
    We had no biofuel industry to speak of 3 years ago. As a 
result of what we've done here with renewable fuel standards 
and other incentives we now have 5 ethanol plants producing 
several hundred million gallons of ethanol a year. As a result 
of what we've done in this committee as well as the Finance 
Committee and the Agriculture Committee, we're creating great 
incentives for cellulosic ethanol that hopefully the President 
will sign into law with the Farm bill that will override soon. 
We're looking at a whole host of other things. Geothermal and 
solar, biomasses and all the rest of what we include within the 
renewable energy portfolio.
    As we've worked on these issues over the last three and a 
half years so closely with Senator Bingaman and Senator 
Domenici and their leadership. I've always viewed the energy 
future for us as a tied into first of all, efficiency. That's a 
low hanging fruit. Many in the business community very much 
support what we're trying to do to create incentives to be much 
more efficient than how we use our energy.
    Second, opening up this new door of opportunity to 
renewable and alternative fuels, which we're working together 
with the Administration on and many of the legislation that we 
passed.
    Third, the new technology. When we talk about hybrid plug-
ins or we talk about IGCC, that all is incredibly important in 
terms of getting us to where we want to be on energy 
independence.
    Fourth, we're going to continue to use some of our 
conventional fuels whether that would be coal or that would be 
oil or natural gas out of the Gulf, domestic production we're 
going to continue to do that as we make this transition.
    My question is at the end of the day whatever global 
climate legislation we pass there's going to be created a pot 
of money. It could be a very large pot of money. I think in the 
Finance Committee Dr. Orszag testified it was several hundred 
billion dollars a year that might be created from this cap and 
trade system.
    Ultimately the question I think we're going to face here is 
what is the best way of investing those proceeds. Because last 
year when Secretary Bodman, wonderful leader, who said that we 
were not going to move forward with FutureGen because we 
couldn't find the money to move forward with carbon capture and 
sequestration with new coal technology. We didn't have the 
money to do it.
    So at the end of the day it seems to me what Lieberman-
Warner is trying to do in allocation of the nine categories is 
try to figure out a way how we fund these new technologies. So 
we can develop this new energy future that will be good for the 
economy, good for the climate. Get it done so we're not at a 
point where we just don't have the money to do it.
    So my question to both of you, if you can spend a couple of 
minutes on it, is is this the right allocation?
    Mr. Orszag. I'm not going to talk to right or wrong. But in 
terms of achieving--it depends really what your objective is. 
They're different objectives. You can try to cushion the blow 
for low income households. You can try to reduce the macro 
economic costs. You can try to accelerate over time the 
adoption and deployment of technology.
    Depending on what your objective is this may or may not be 
the right thing to do. So, for example, on macro economic 
costs, at least with regard to the short run, a more effective 
approach would be to auction the permits. Then use that auction 
revenue to reduce other distortionary taxes, like payroll taxes 
or corporate income taxes. That was one of the points I made in 
one of the slides. You can have a significant effect on 
economic efficiency through that kind of approach. If instead 
you wanted to more cushion the blow for low income households 
you'd go in that direction.
    I don't know because I wasn't present in the drafting 
whether----
    Senator Salazar. Let me ask you, Dr. Orszag. A lot of 
people, a lot of my colleagues on both sides of the aisle have 
talked about a Manhattan Project. We heard Senator Corker 
talking about it. I heard Senator Sanders. A lot of people.
    They're talking about the kinds of resources that embark on 
Manhattan style type of project. Would it be better to invest 
that money in the new technology pot as opposed to softening 
the blow on low income consumers that might be affected? How 
can we essentially launch a Manhattan style project that 
ultimately would be effective?
    Mr. Orszag. Two things quickly. One is, I mean there is 
only--it's big. But there is only a given size of the pot. So 
you can't do all things for all people at all times. It is 
significant that, you know, a trillion dollars or more over the 
10-year window.
    Second we do need to remember in terms of the deployment 
and adoption of new technologies there will be something that 
happens just through the price signal that would occur through 
pricing carbon emissions.
    Then finally if you wanted to go beyond that, one could, 
yes, either auction the revenue and explicitly fund new R and D 
or one alternatively could allocate the permits to the entities 
that are undertaking R and D. In general that's less--that's 
more opaque and may not lead to as a good policy outcome.
    Senator Salazar. Mr. Chairman, could I have Dr. 
Gruenspecht----
    The Chairman. Yes, Dr., why don't you go ahead? Respond. 
Then I'll call on Senator Domenici.
    Mr. Gruenspecht. I would actually associate myself with a 
lot of Peter's remarks. I would say they're really issues on 
the economic side. There's issues of economic efficiency and 
concerns related to what I would call fairness, whether its the 
impact on low income consumers or other such things. The weight 
you put on those would matter.
    On the energy side there's energy efficiency and then 
there's energy technology and the weight you put on those would 
matter. But really that is a policy call. I don't think EIA is 
really well placed to say what the right ways are, so other 
than framing the question I would defer.
    Senator Salazar. If I may, Mr. Chairman, just 15 seconds on 
this. I think that at the end of the day that's one of the huge 
issues obviously, that we'll be debating. If we create this pot 
of money where are you going to make the investment?
    You know, I've had conversations with you and Senator 
Domenici over the years that we have these great thoughts and 
these great programs and at the end of the day the question is 
well, where is the money? We can talk about plug-in hybrids and 
clean coal technology, but if you don't have the money to move 
forward with that then we really have an empty policy. So I 
think this is an opportunity for us to marry up our work with 
what we're trying to do on global climate change to make our 
vision a reality.
    The Chairman. Thank you very much.
    Senator Domenici.
    Senator Domenici. Let me say to my friend from Colorado and 
to the rest of my Senate colleagues, as well as those people at 
the table, I haven't been here because I had to go to a budget 
meeting, and for once in my life I didn't have to do any work 
there. They wanted to give me a present--they gave me a big 
gavel.
    Senator Craig. Was it money?
    Senator Domenici. No, it was not money. That's the point 
I'm going to get to--they gave me a gavel. I assured them that 
while I cleaned up my office and put things in boxes that I 
wouldn't throw this one away. It was too nice. I thought I'd 
keep it.
    But let me just say I've been looking at the so-called 
Manhattan Project approach, which came from ideas out of the 
brain of Senator Bingaman and some thoughts out of mine. I 
really don't think we need to have a cap-and-trade regime, and 
rely upon the money it raises to create a Manhattan Project. 
What's evolving from the Manhattan Project idea is the notion 
that we don't need one. We need a bunch of mini-Manhattan 
Projects instead.
    You need to pick about 8 or 10 issues that you must solve. 
You can take them and put them into a Manhattan Project 
context. You certainly can do that within the current wealth of 
our Nation without producing a new engine of wealth, which is 
what the rights to pollute which we're talking about here 
really are.
    I wanted to say to you, Mr. Orszag, that at a various point 
in time in this place, the CBO Director called something we 
were doing differently than everybody else had been calling it, 
and became a very big hero. Your predecessor, third removed, 
whose name slips my mind, made a decision in the middle of the 
discussions of health care by the Clinton Administration.
    Mr. Orszag. Mr. Reischauer.
    Senator Domenici. Reischauer. Regarding the Clinton 
Administration's plan for health care, he ruled all on his own 
over there and it became binding that that health care plan was 
a tax. You might remember that, and that, in my opinion, was a 
realistic analysis of the plan. It denied the plan's 
effectiveness because it was going to be too big a tax.
    You have come along and I don't know if you're first and 
alone. But you're talking realistically about this program as 
if it were another gigantic Federal reserve system or another 
gigantic banking system that what would be created. These 
credits would be worth billions, if not trillions of dollars 
that are going to be floating around this economy. We don't 
know who's going to end up owning them and who's going to end 
up losing them.
    But you have made it eminently clear as an expert that we 
need in our government to understand what cap and trade is. I 
understand that much better because of the way you've addressed 
it. I thank you for that. I think more people are going to 
understand it and be very quizzical about what in the world we 
are doing when we attempt to do this.
    I'm going to ask you a question. If it doesn't make sense 
then don't answer it. But I believe----
    Mr. Orszag. What a luxury.
    Senator Domenici. Ok. I believe that what we really need to 
do is develop new technology at the most rapid pace possible to 
reduce greenhouse gas emissions. How does that strike you and 
your understanding of what we're doing here? What if we said 
we're going to spend $30 or $40 billion and get these new 
technology requirements achieved? Tell me. Answer that for me.
    Mr. Orszag. Sure. With respect. I do think that pricing 
carbon will be a spur to the adoption and diffusion of lower 
carbon technologies. So the thought that the technologies will 
just develop and then be, especially, be deployed aggressively 
in the absence of a price on carbon is unlikely to be as 
realistic as in a context in which carbon emissions have some 
price associated with them.
    If you look at current energy efficient technologies that 
they often don't diffuse as widely as some experts believe both 
because of the price signal. I also think we have to pay and 
this is a broader point, I think we have to be paying a lot 
more attention in public policy, not just the financial 
incentives and those matter.
    But also to, basically to behavioral psychology, the way 
people actually behave. The way things would get adopted. The 
way things are framed for example and what's presented first, 
whether the energy efficient refrigerator or something else can 
have a very substantial effect on outcomes. We haven't really 
gone very far along that road in hearing both financial 
incentives and things like defaults and how things are 
presented in changing behavior.
    Senator Domenici. Ok. To change the subject a little bit. 
Before the Senate Finance Committee on April 24, you asserted 
that research has suggested a tax on greenhouse gas emissions 
could achieve a long-term target at roughly one-fifth the cost 
of an inflexible cap and trade regime. Could you characterize 
S. 2191 in terms of its flexibility or inflexibility?
    Mr. Orszag. There's some degree and this point is the same 
one that I was trying to make through a price ceiling and a 
price floor within a cap and trade system. The key is timing 
flexibility. A tax actually provides you timing flexibility to 
undertake the emission reductions when they're cheapest.
    The Lieberman-Warner legislation has some limited timing 
flexibility through the banking and borrowing provisions and 
through the related Carbon Market Efficiency Board. But it is 
not as much as would be achieved through the kind of dynamic 
price system that we discussed earlier or through a tax.
    Senator Domenici. This commodity, which is a right to emit, 
will presumably have a value in the global market. What is the 
impact on American economic competitiveness, of imposing a cost 
in the U.S. that is not imposed in emerging economies, if in 
fact we are creating ``creating a commodity'' as you asserted 
the Lieberman-Warner bill would do in your testimony before the 
Finance Committee.
    Mr. Orszag. There are really two issues here. One is an 
environmental question and the so called leakage question about 
whether production and other activities and therefore emissions 
move to other countries. The second is the sectors in the 
United States and sort of what is happening to their 
production.
    The concern is most salient with regard to, on that later 
point, with regard to a very limited number of sectors, 
aluminum, uranium processing. There a bunch of sectors that are 
very energy intensive. The legislation has a component in it to 
try to cushion the blow on those sectors.
    But it is the case that the, those, and it's a limited 
number, but those energy intensive sectors will likely 
experience some shifting in their production patterns relative 
to other countries.
    Senator Domenici. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Sessions.
    Senator Sessions. Thank you. There will be, likely some 
shifting patterns. What you mean is, I was talking to a 
chemical company person whose plants in maybe 50 countries in 
the world who told me that natural gas prices are high in the 
United States relative to a number of other places. Those 
plants exist. With increased cost of natural gas energy in the 
United States if their company decides to expand production it 
will not be in the United States.
    In fact they hadn't expanded at that plant in years. 
Senator Voinovich says that the chemical industry has been 
devastated in Ohio as a result of this. This is not academic.
    You drive up the cost here whereas our competitors in China 
and other places which already have wage advantages also have 
now energy advantages. It really begins to put our people, our 
jobs at stake. I want to mention that.
    Mr. Chairman, thank you so much for having this hearing. I 
find it almost breathtaking that our EPW colleagues who voted 
out this cap and trade bill did not have a serious hearing on 
the cost that it would incur on the American people and our 
economy. I thank you also, several years ago, couple of years 
ago for having a hearing on cap and trade.
    We had Europeans testify and other experts. I went into 
that hearing more positive about cap and trade. When I came out 
of it I was more uneasy.
    My unease has increased having read a, I think, a fabulous 
article in Scientific American who went into great detail 
saying first, if you're going to do this, a simple tax is 
better. But if you do a cap and trade these are the 
difficulties you have to work through and the lawsuits and the 
fraud and all the problems that go with it. When I got through 
reading it I realized I concluded it wasn't a very good idea. 
Second they noted at the conclusion it's still better to have a 
simple tax than the cap and trade, although they favor a 
massive reductions and are concerned about global warming.
    Senator Corker and I agree. I think most of us in this 
Congress have come to a conclusion that we need to do something 
that works. I have made that decision.
    It's going to cost money. It's going to cause us to change 
what we're doing. But a seven to $23 billion cost to John Q. 
Citizen is what we are, trillion, $7 to $23 trillion cost is 
what we're talking about imposing on our constituents. That's 
the average working American. So we have to be careful about 
that. We really got to be careful.
    I think it's an intoxicating concept that we can empower 
what would be masters of the universe to sort of control this 
economy. That's a seductive concept. A lot of people just can't 
wait to be empowered to start regulating all of these things 
and passing out credits and picking winners and losers and that 
kind of thing. I think it's very, very dangerous. It worries 
me.
    I would note this. Before I would say that. I want to agree 
with Senator Domenici.
    My basic concept is kind of let's do the things that work. 
Let's get busy doing them now. Let's find out what is impeding 
those things that work from occurring now. Let's figure out how 
to eliminate those road blocks. Let's do it and sooner rather 
than later.
    But I want to point out for a perspective that between 2000 
and 2010, according to the University of California study that 
just the growth in China's greenhouse gas emissions will be 
approximately six times greater than all the commitments to 
reduce carbon made by all the developed countries signatories 
to Kyoto in the same time period. Any of you familiar with that 
or want to dispute that? That's a significant thing.
    Also I would point out to my colleagues that according to 
the International Panel on Climate Change, as I understand the 
numbers, they project that if we and the world signs on the 
Kyoto and we go forward with these very strict controls by 2060 
it will reduce the growth of temperature onto the climate 
models by less than one tenth of one degree centigrade, really 
.07 percent of a degree centigrade, which is almost 
unmeasurable. So we've got to be humbled here before we start 
thinking about imposing great burdens on the American people. I 
just want to make that point.
    You, Mr. Gruenspecht, talked about the nuclear component. 
You indicate it's unlikely we would achieve the projections 
that some have considered. The EPA analysis of the America's 
Climate Security Act assumes substantial growth, Dr. McLean, in 
nuclear generation, approximately 150 percent from the 782 
billable kilowatt hours in 2005 to 1,982 billable kilowatt 
hours in 2050. This is about 200 new nuclear plants.
    Today there are 104 power plants in America. I think 
Senator Domenici and I agree that one of the things we need to 
be doing, perhaps on a higher priority than cap and trade is to 
figure out how to make that happen. Do you see, is it going to 
take legislation and other actions in Congress to move to that 
kind of growth in nuclear power? Is it important to have this 
kind of nuclear power growth to meet our global greenhouse gas 
emission goals?
    Mr. Gruenspecht. I think we'll try to split that.
    Senator Sessions. Good.
    Mr. Gruenspecht. Like an ice cream sundae. Nuclear power 
exists. It's carbon free. I think there are real challenges to 
public acceptance.
    I think one of the issues is that, you know, issues and 
problems need to be prioritized. I know there are some concerns 
that some people have with nuclear power, but the sense is if 
global climate change is prioritized as a very high challenge, 
the thought is that you already have nuclear power technology.
    In one sense looking for technologies is very important 
because one technology is not going to do it. I think everyone 
agrees with that. On the other hand, with nuclear power you 
have a technology that, again, is very attractive in terms of 
greenhouse gas emissions.
    So the real issue is that choices have to be made, as you, 
as a Senator, are involved in every day and know very well. I 
guess it's really a policy design question that I danced around 
a little bit in my testimony. But that technology is very 
important. Public acceptance is also very important and 
designing programs in a way----
    Senator Sessions. Let me just suggest, I don't think that 
as a professional politician I'm not as worried about public 
acceptance. Some are. I think it's a question of how we can get 
there.
    Mr. Gruenspecht. Ok.
    Senator Sessions. Feasibility, economically, 
technologically.
    Mr. Gruenspecht. I think it's fairly attractive with a 
significant carbon price, nuclear power is attractive.
    The Chairman. Dr. McLean, did you want to add something?
    Mr. McLean. Yes, just a little bit. I basically agree with 
the points that Howard was making. But in our analysis we 
project a little bit lower nuclear than he does.
    But one of our constraints we added was just how much have 
we ever produced in the past. So we sort of looked at the last 
30, 40 years when we were building in nuclear. We sort of said 
that's how much we can do in a 10-year timeframe. So it reduced 
it a little bit.
    But the basic element is that both of our models look at 
this as an economic issue. These are economic models. 
Economically this becomes more attractive as an alternative 
than it is today. The issues are not the economics of building 
these facilities.
    The issues are as you know proliferation, waste and safety 
which he's referring to as public, sort of, acceptance. How you 
address those and how you overcome those will determine the 
extent to which it's used. Not the economics or the ability to 
construct it.
    Senator Sessions. Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator Murkowski.
    Senator Murkowski. Thank you, Mr. Chairman for calling this 
hearing. I would agree with all of my colleagues. This 
information that we're getting this morning is exceptionally 
important for us as we consider whether it's Senators Warner 
and Lieberman's legislation that we'll be taking up or whether 
it's your legislation, Mr. Chairman that I have signed on to.
    But we need to understand what it is that we are doing as 
we embark on policies that are enormous in terms of a departure 
from where we currently are. Analyzing and understanding the 
costs behind our policy decision are something that we just 
can't hope that we get it right. I think some of us are looking 
at the decisions that we have made when it comes to ethanol and 
our reliance on corn based ethanol that is having an impact on 
the price of food. We're kind of walking this land of 
unintended consequences.
    I want to make sure that when or to the fullest extent 
possible that as we move forward into this new world of cap and 
trade, new to this country, that we're not waking up and 
saying, oh, my gosh, what have we wrought. I, in preparing for 
this hearing this morning, talking to my staff who spent a fair 
amount of time yesterday reviewing the 74 page report from CRS. 
He described it as mind numbing. I think that that was probably 
a polite way to put it.
    [Laughter.]
    Senator Murkowski. But I will tell you I came away from the 
exchange that we had yesterday and recognizing the various 
reports that are out there with an understanding that you've 
got a whole multitude of different reports. Modeling based on 
different assumptions generating vastly different results. I 
think we would agree that there's some uniformity of opinion 
that Warner-Lieberman will reduce our Gross Domestic Product, 
but by how much.
    I will attribute this to my staff, but when he was looking 
at the EPA model, the Clean Air Task Force, NAMs, EIAs, he 
comes back and he tells me there's a cumulative difference 
between all of these reports of nearly four trillion dollars 
between these models. So you kind of say, well, so what does 
this mean? Who's right? Who's using the assumptions that are 
most likely?
    When you look at what it means to our constituents. That's 
where we've got an obligation to try to do better than just, 
kind of, second guess. When you look at the computer models 
that the EIA uses, they peg the cost to the average household 
somewhere between $76 and $723 in 2030. This is quite a spread.
    But the NAM model puts that spread at between $4,000 and 
$6,750 per household in 2003. The EPA model puts it at between 
$446 and $608 into 2020. But this is less than half of what 
Charles Rivers Associates predicts.
    So I said well, what does it mean. This is again, mind 
boggling. Mind numbing. What does it mean for my constituents 
in Alaska?
    So we're looking into some of the specific studies and NAM 
predicts it will cost the average Alaskan household between 
about $4,500 and $8,200 a year in higher energy costs. It will 
cut jobs in the State between 6,400 and 8,500 in 2030. Then you 
go to the Heritage Foundations model and they put Alaska's job 
loss at 1,800 by 2025. Meanwhile the University of Alaska with 
their economic modeling, they imply that the cost will be far 
less, especially in terms of jobs.
    So I'm looking at this and I'm saying, who's right? My 
constituents are saying to me, well Lisa, if we're going to 
embark on this kind of a policy, what does it mean to me and my 
household because right now we're getting socked when it comes 
to the cost of energy. That's not only in Alaska, that's all 
over the country.
    So we've got an obligation to be fair and honest with them 
when we move forward with policies like this. Because if they 
say, you know what, the cost really is worth it. If they agree 
with Representative Sanders that the price of doing nothing is 
not something we're willing to take on. We still need to give 
them some assurance of what we're looking at.
    I'm not convinced that we know. As Senator Corker said, 
we're going to go to the floor after the Memorial Day break 
with legislation that you all haven't really modeled yet. Now I 
don't know how long it takes to do these models but I don't 
think you're going to be able to do it over the Memorial Day 
break.
    So, Dr. Parker, Mr. Yacobucci, is it even fair to ask the 
question of you of all the models that are out there and yeah, 
there's a new one out today. The NERA Economic Consulting that 
was done at the request of the National Petroleum and Refiners 
Associations. So the reports are coming out all the time.
    Is it fair to ask you which model you think is perhaps 
best? Can you rank them? Does it really all depend on the level 
of assumptions? I know you're going to create friends and 
enemies here. But we need a little better sense as to where we 
really look. Can you help me out?
    Mr. Parker. Is it fair? Probably, no.
    [Laughter.]
    Mr. Parker. I think it depends on what you're asking out of 
the models. How reliable or predictable they are. If you're 
looking for one of the models to give you the answer that this 
is what the world will look like in 20 years and this is what 
it will cost. None of the models will give you that answer. Not 
reliably.
    You know, it would be if they could, perhaps we could make 
them our stockbrokers and make lots of money because they could 
predict the future. What the models can do is to tell you have 
we designed this bill so that under different circumstances we 
have kept the price down as low as possible. What element in 
this bill helped hold the price down? What elements in this 
bill tend to increase price and how could they be modified so 
that we are bringing these reductions in at the most cost 
effective level. That is what the models can do for you.
    So for the analyses that have done the most sensitivity 
analysis on these different technological, economic and 
behavioral assumptions are the ones that are going to be the 
most useful. So do that----
    Senator Murkowski. But the most useful but for whose end? 
If I'm opposed to cap and trade legislation I'm probably going 
to look at the NAM model because that predicts that the costs 
are going to be higher. If I'm a supporter, I might be looking 
at somebody else's modeling and the assumptions that are there.
    So I think we also need to recognize that we can use these 
models, use these projections just as, you know, we use 
statistics to support our particular situations. So you're 
saying that really nobody's right, nobody's wrong. It just 
depends on the level of assumptions that are going into it. Is 
that correct? Dr. Gruenspecht?
    Mr. Gruenspecht. I guess Larry still has all his friends.
    [Laughter.]
    Senator Murkowski. He's a politician there.
    Mr. Gruenspecht. I'm going to lose some. I think you have 
to realize the different studies, you know, in part they start 
from different baselines. As EPA said, if they looked at the 
Annual Energy Outlook 2008 which includes the bill that 
Congress passed that was enacted last year, the Energy 
Independence and Security Act, they may come out someplace 
different.
    They start from different baselines. They analyze different 
provisions. You mentioned the Charles River Associates 
analysis. They get a fairly big impact early from the low 
carbon fuel standard. I don't think any of the other analyses 
looked at the low carbon fuel standard. In our case we felt it 
wasn't specified in the bill enough as to what it was. So we 
just didn't want to make assumptions about it.
    I already had a fairly long discussion with the chairman 
regarding the NAM and the issue that they may have wrapped up 
the effect of S. 2191 with the effect of a different oil price 
scenario. So, you know, there is going to be a range, I think, 
so you could try to standardize some of those things and 
probably narrow the set a little bit.
    But again, it's technology and technology acceptance by the 
public in some cases. A lot of times people want to make 
assumptions that may lower the cost. Then you might suspect 
that some of those same people would be the people who would 
oppose those technologies after the bill was enacted.
    So it's hard for me to give you advice. But if one designs 
one's policy so that the incentives after enactment are 
consistent with the assumptions made about technologies and 
costs and market penetration while the bill is being debated, 
that's probably your best chance to avoid this kind of 
concern--that an assumption is made and then you find 
opposition to that assumption once the proposal is enacted.
    Senator Murkowski. Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Senator Craig.
    Senator Craig. Mr. Chairman, thank you. Let me pick up 
where Senator Murkowski left off. I think we're all frustrated 
about where we are or where we might be. I don't know whether 
I'm willing to risk Idahoans on the environmental models of 
climate change or the economic models of climate change. 
Neither of them are accurate.
    This committee under the leadership of Senator Domenici and 
Senator Bingaman a few years ago passed a sweeping energy 
policy act in 2005. We had spent years shaping it. We knew what 
it would do. It's in large part doing it.
    Here we are now looking at models and legislation that none 
of you had a chance to really examine. As you can see you're 
all over the field, as is the country. In probably an effort 
that Congress has never undertaken before in micromanaging the 
economy of this country to this magnitude.
    I'm not quite sure I can remember. Our staff has done a 
little research. Have we ever as a Congress tried to 
micromanage the marketplace in a way with the magnitude that 
these bills are offering? I think the answer is no, Mr. 
Chairman. That's never happened before.
    So when Senator Murkowski asked the question that is asked 
of her constituent. She better be right if she votes for this 
and so had I and everybody else. Because I'm not quite sure 
that we'll build the switches accurately enough so that we can 
turn them quickly enough.
    Once we've told the world to go invest in this direction. 
We find out that it's inaccurate or it's dislocating in a way 
that we can't live with. So we say, no, we'll turn the switch a 
little more in this direction. We'll shift trillions of dollars 
of investment in another way. But that's kind of the game that 
wants to get played here.
    Models are models. Let's look at this model. This is 
Heritage's model based on all the accuracy. It says that 
somewhere out there there's a three million job loss.
    Most of it comes in the manufacturing sector. That's the 
dislocation that Senator Sessions is talking about. About a 
million of it comes in the household sector.
    I'm not one of those who certainly says we get it. If we're 
going to do this we better get it right instead of play the 
politics of a Presidential year. I wish the chairman was here, 
that our leader now wants to do because somehow this has 
magnitude in it of political value. I serve on two committees 
the EPW Committee, so I've marked up Lieberman-Warner as have 
several on this committee. We probably have a better grasp of 
that then others of this committee do.
    We were pushing the chairman to get allocation figures. 
She's now come out with them: $911 billion to consumers to help 
energy costs, $566 billion to States to deal with greenhouse 
gas cuts, $307 billion to fossil fuel electric utilities, $254 
billion to States that rely on manufacturing of coal, $253 
billion to States and tribal adaptations and 237 billion to 
wildlife conservation and $213 billion to carbon intensive 
manufacturing of iron, steel, paper, etc, etc. Phenomenal 
redistribution of wealth, I think that word has been used here 
before.
    So whether it is old think or new think or green think. The 
reality is we're not thinking at this moment because we don't 
have the model. We don't have the legislation, Mr. Chairman 
that will ultimately go to the floor in a way that this 
committee has to be able to examine it in great detail and 
listen to these gentlemen and their staffs after they've had a 
chance to look at it and model it and work on it extensively.
    We get this one wrong, we're in deep trouble. If we're 
talking about trillions of dollars that we're going to flow out 
there in a way that many have spoken to this, here's another 
little irony. I tried to get a forestry sequestration amendment 
in the Warner-Lieberman bill on EPW. Not allowed, not allowed.
    Yet I now find the chairman of that committee's going to 
offer an amendment on the floor that will allow 10 percent of 
the bill's compliance requirements to fund international 
reforestation. Now somebody used to chair the Forestry 
Committee. I can't find a dime to reforest U.S. forests. But 
we're going to ask ratepayers and industry to gain the system 
at 10 percent to reforest somebody else's forests.
    That's green speak folks. That has nothing to do with 
economics. That's purely environmental politics across the top. 
You can't model that one. Don't try.
    I'm not going to ask the question because you've all worked 
hard. I've looked at it. I'm reading your material. It's as 
valid as the day it was written and tomorrow it will be invalid 
because we're going to write it differently. Then we're going 
to ask you to come back and turn the dials on your models a 
little to see if you can readjust.
    But I believe, Mr. Chairman, there are a few simple 
conclusions to be made. This committee, no other committee of 
the U.S. Congress has ever tried to micromanage the U.S. 
economy in the way we're attempting to do it today. The long-
term impact, if we get it wrong, is devastating.
    So let me conclude with this idea. It's a different way of 
measuring. If climate change is creating radical factors in the 
climates of our world, and it may. I'm not going to say it 
isn't.
    Right now we're averaging about 1.9 hurricanes a year in 
the United States. Now that's at an average of $5 billion. Ok.
    Do you know what the impact of this if all of the modeling 
is reasonably accurate is on the economy of our country and our 
peoples? It's between 300 to 900 hurricanes from now to 2030. 
You don't have hurricanes in Alaska. Nor do I in Idaho. But you 
will now.
    Because we've spread the hurricane hit nationwide. All of 
these States of the Nation. It isn't just Florida, the Gulf 
Coast and possibly some of the Southern East Coast. It's all of 
the U.S. economy now gets hurricanes between 200 to 900 
additional hurricanes between now and 2030 from an economic 
point of view, instead of the five billion a year spread 
somewhere along the Gulf Coast and up the East Coast.
    Mr. Chairman, we've got a lot more struggling to do with 
this issue before we get it anywhere near a way that we can 
take to the American people to say this is the right thing to 
do. I would hope that you as chairman and this ranking member 
fight to allow that to happen, instead of the politics that is 
getting played with this at the moment for the sake of 
politics. Old speak, new speak, or green speak, I'm not sure 
where we are. But right now I suspect no speak is the safest 
for our citizens and our constituents as we attempt to figure 
out which way to go.
    Thank you. Thank you all very much for being here.
    The Chairman. Thank you. We've all had a chance to ask some 
questions. Let me do a short second round if we can. Let me ask 
a couple of questions.
    Dr. Parker, you and Mr. Yacobucci, in your report which I 
complement you on. I think it's very useful. You have this 
statement which I thought was good about how long-term cost 
projections are at best speculative and should be viewed with 
an attentive skepticism.
    I think that's a good phrase. Attentive skepticism. That's 
what you develop around this place. Attentive skepticism.
    Senator Domenici. Attentive.
    The Chairman. Right. It strikes me that projections of job 
loss or job creation are also extremely speculative. It's much 
easier to project job loss than it is to project job creation 
when you are seeing a transition of an economy from a high 
carbon based economy to a low carbon based economy, which is 
sort of what we're looking at for the next couple decades.
    I'd be interested in your reaction to that, Dr. Parker, if 
you agree with that or disagree, and if any of the rest of you 
that wanted to comment.
    Mr. Parker. First, let me state that yes, once you move 
from primary economic impacts to secondary economic impacts you 
have added another layer of uncertainty in your analysis. I'm 
saying this is a cost to translating that into an employment 
impact means you're already making assumptions, what you 
believe. Not only the impact of what the bill is. But what you 
believe future productivity is going to be. What future life 
going to be. What it's going to be in terms of future leisure 
opportunities. You're making a whole host of assumptions about 
future quality of life that a generation will be making that 
currently doesn't even work.
    So therefore, you have added an entire new layer of 
uncertainty on top of your analysis. So the attentive 
skepticism becomes even more attentive because you have numbers 
that are even farther away from the economic analysis in the 
first ones were. So my general concerns about these analyses 
would be increased when you were talking about employment 
numbers.
    The Chairman. Dr. Orszag, did you have any thoughts on the 
ability to use these kinds of models of potential cap and trade 
systems to project impact on employment?
    Mr. Orszag. There is, I would just reinforce. There's a 
significant amount of uncertainty surrounding any of these 
point estimates. Most of the effect, if you're talking about 
jobs, most of the effect will be on the type of job, at least 
over the medium to long term and not the number thereof.
    That's a general phenomena in the economy does, even with a 
reduction in GDP will adjust the types of jobs. They may be a 
different set of jobs. But the typically analysis that's done 
that studies the number of jobs is often excludes the dynamic 
adjustment of the economy over time to new conditions.
    The Chairman. I assume that that's the case with the 
various models that we've looked at here or that have been done 
on this. There's no effort to incorporate any kind of dynamic 
adjustment.
    Mr. Orszag. I tend not to focus very much on the jobs 
numbers that come out of these sorts of analyses.
    The Chairman. Ok. Alright. Dr. Parker, did you want to add 
anything.
    Mr. Parker. I would just completely agree with that last 
comment by the CBO that we don't tend to focus on those numbers 
either. We consider them very, very uncertain. Therefore we are 
very skeptical of them.
    The Chairman. Why don't we go ahead and see if Senator 
Corker has additional questions?
    Senator Corker. I'm going to make some additional comments. 
Again, I think this hearing has been outstanding, our 
testimony. Many of you have been in our offices for some of 
these numbing presentations and we appreciate the tremendous 
amount of time that you spent with us both here and there.
    Senator Salazar did ask about technology. I just want to 
say that the way that this bill now talks about technology is 
52 percent of the auction proceeds which again we need to be 
deciding how much is auctioned and how much is not. But 52 
percent of the auction proceeds actually go into technology 
development.
    The way this is set up a five person board, not the 
Congress which maybe that's a great thing based on what I've 
seen in 16 months. But a 5-person board decides how this money 
is spent. So just to give it, you know, at $13 a ton as a 
beginning assumption, which I think is the basis for this 
modeling in the first place.
    Again I'd like to add that in Europe today, that carbon is 
selling for $38 to $40 a ton. So we could be talking about 
vastly different numbers. Through the life of this bill, $2.3 
trillion would be spent on technology development. It would be 
decided by a 5-person board, generally speaking, as to how that 
money was spent.
    Again, some of these factoids I think are things that 
people in the Senate and the House and certainly this country 
should care a great deal about.
    Senator Domenici. How much money was that?
    Senator Corker. It's $2.3 trillion at a $13 ton beginning 
price. I mean if you look it could be $6 trillion, $7 trillion 
and again a 5-person board deciding where these moneys go.
    Let me move to another point. We talked about upstream 
verses downstream. With a board with this distinguished, mind 
numbing panel, agree that if you in essence have upstream 
allowances that's in essence pretty much a direct tax. A 
downstream allowances an indirect tax. Would you all like to--
in other words if you're taxing petroleum out of the refinery 
based on the number of gallons because we know, you know, how 
much carbon content it has. In essence that's a pretty direct 
tax. Is it not, if that's how we're doing the allocations, 
upstream?
    Mr. Orszag. I guess in economics, direct and indirect taxes 
have these sort of technical meanings. But ultimately 
regardless of whether you applied it upstream or downstream 
consumer prices are going to go up. Consumers will bear most, 
if not all, of the burden involved.
    The upstream verses downstream question should really be 
one in terms of administrative efficiency and what's the 
simplest to administer.
    Senator Corker. Ok. I understand that refining it is easier 
to do upstream. Utilities you can do it downstream because of 
some of the monitoring systems we have in place.
    I guess what I'm leading up to is that in essence this is a 
tax. By the way, I think we all understand that. We're still 
focused on this piece of legislation. It is in fact a carbon 
tax.
    What's happened though in the process of this bill, 
interest groups have gathered around the table which I don't 
blame them when we're talking about trillions of dollars and 
have made a, what could have been very simple with a carbon 
tax, something very complicated and many people are going to 
benefit. I mean, we see them walking up and down the hallways 
non stop. I mean this is a transference of wealth of 
monumental--it's monumental what's occurring if this bill were 
to pass.
    I'd like for each of you to quickly address the efficacy of 
just having a carbon tax. I mean at the end of the day what 
we're about, I think, is trying to change behavior. Ok. A 
carbon tax that, you know, that's what this bill is intending 
to do anyway.
    A carbon tax that's started at a certain amount, but 
increased in amount so that over time it became increasingly 
painful, ok, to be emitting carbon emissions. I'd love for each 
of you to sort of reflect upon that verses, if you will, this 
comprehensive bill, if you will, that has many subtleties that 
most people, I think in the Senate today don't understand.
    Mr. Orszag. I guess I'll start. Economic analysis generally 
suggests that a tax is more efficient than a simple cap and 
trade system. You can make the cap and trade system approach 
the efficiency of a tax through auctioning the permits and 
through providing significant flexibility in terms of when the 
emission reductions occur.
    Senator Corker. That's if you auction all of them.
    Mr. Orszag. That's correct.
    Senator Corker. Right now we're giving away about 70 
percent of them on the front end. Is that correct?
    Mr. Orszag. That, actually at the very front end a little 
bit more than that. That does impair the efficiency of what 
you're trying to do.
    Senator Corker. Ok.
    Mr. Yacobucci. I think one key thing to keep in mind with 
all of this is regardless of whether you're talking a carbon 
tax or a cap and trade system, especially if you're auctioning 
or running a tax. You're either giving these allowances out for 
free or you are selling the right in one form or other to emit, 
whether it's a tax or an allowance. Regardless you are talking 
huge sums of money being controlled by the government.
    If you went to a tax you would still deal with many of the 
same questions of allocation of revenue. In this case it would 
be tax revenue. The government would still need to decide, 
Congress would still need to decide where that money goes. So 
you don't necessarily put these questions of allocation that 
you've raised aside if you move to a tax.
    Senator Corker. Mr. Chairman, I know my time is up. Again, 
you do an outstanding job. Both you and the ranking member 
making sure that this committee truly looks at issues in a real 
way.
    We're going to be offering an amendment to this bill that 
actually returns all of the revenues back to the citizens who 
are paying them, ok. All of the revenues. Congress can decide 
over time whether it can certainly with that amendment whether 
to pass or not.
    But let me just say. I think it's so ironic that on June 2 
we're going to be debating on the floor of the U.S. Senate a 
tax. Everybody at this panel and everybody up here at the Dias 
knows that this is a tax.
    We have two Presidential candidates who've actually asked 
for a gas tax holiday. Ok. This summer with gas prices 
approaching $4 a gallon, we're going to be debating a tax on 
citizens through the year 2050.
    I just think that all of us need to be very transparent 
about that as we discuss it. So again, I think this is, I 
understand altering behavior. I just think citizens around 
America need to know that in trying to alter that behavior when 
in essence, directly not indirectly, directly driving up the 
cost of petroleum which may be very necessary.
    I'm not debating against that. I just hope we'll be very 
transparent. I thank you, Mr. Chairman.
    The Chairman. Thank you very much. Let me ask if either 
Senator Domenici or Senator Murkowski has additional questions.
    Senator Domenici. No. I just wanted to say, Senator, before 
you leave, that I have spoken to you before as your ranking 
member about the need for your involvement in this bill. After 
today's hearing, I want to reiterate that point.
    You say you haven't been here very long, but we're very 
fortunate on our side that you are here. I do believe it's 
urgent that you remain involved because the things you have 
said, Senators must know. It's going to be hard to get the word 
out on what you have described and the way you've described the 
tax and the implications of this bill. So I commend you and I 
ask that you stay involved as much as you can.
    I don't have a question, but before she proceeds, could I 
just make one observation. I wanted to say to you, Senator, 
that the people from Alaska certainly know that you're 
concerned about the impact this bill will have on them.
    We certainly talked enough about a tax and the burden it 
comes with today. I'm not sure we spent enough time on how much 
benefit there would be after we've done all this. Because that 
too is a very important issue, and it's the benefit in terms of 
the global consequence which is what we're talking about. Not 
our consequence, but the global consequence. The American 
contribution, if the rest of the world isn't contributing, is 
very, very small after we've gone through all of this 
manipulation that worries you. One final question. Why do you 
think there's so much support for cap and trade and so little 
for carbon tax, which seems just in discussing things here, to 
be a far more direct way to do this? Do you have any thoughts, 
Mr. CBO?
    Mr. Orszag. I guess I would only say that it is a general 
phenomenon that the consensus among economists is often not the 
consensus among policymakers. That seems to be the case here 
too.
    Senator Domenici. Thank you.
    The Chairman. Senator Murkowski.
    Senator Murkowski. Thank you, Mr. Chairman. Senator 
Domenici, I appreciate the observation about the benefits. I am 
one who very firmly believes that we will resolve our issues as 
they relate to emissions. We will have good policies when we 
have the technology that allows us to do what you're all 
speculating and prognosticating that we need to do.
    As I look at the various bills that are out there the 
concern that I have is we've got this schedule. We've got this 
timeline that requires all this to be in place. Our reality is 
that we're going to be paying for the technology after the 
auction proceeds come in. But I'm wondering whether or not, by 
front loading the technology whether it's capture and 
sequestration of carbon or the various technologies out there 
that will allow us to meet the reduction in emissions by the 
time that we want.
    Senator Craig has pointed out the job loss. We've been 
focusing a lot about the actual costs. But there are other 
issues out there that if we can get the technology in place 
first, perhaps we won't see the loss in manufacturing jobs. 
Perhaps we won't see the regional impact in those States that 
are more coal producing.
    Given your analysis of all that is out there is it fair to 
say that if we allow the technology to somehow or other be 
front loaded. I haven't figured out how we do that, whether 
we--what it is that we have to do from the governmental 
prospective to get that technology in place first. Does that 
perhaps reduce some of the cost to the economy whether it's 
actual cost or job loss? Is it an approach we should be looking 
at a little more carefully or do we just revise our timelines 
or do we just hunker down and make it happen regardless of the 
cost?
    Mr. Orszag.
    Mr. Orszag. I will take a crack at that. I think it's hard. 
You know, the key question of how you accelerate that is the 
elephant in the room and that pricing carbon will create a 
strong incentive for more technologies to be developed and for 
them to be diffused in a, sort of in a broader way. The thought 
that we can just sort of create it out of nothing and then have 
it diffused rapidly doesn't seem consistent with all of the 
experience that we've had to date.
    Senator Murkowski. So you think the policy message out 
there is enough to incent the companies to make the investment 
and make the technology happen?
    Mr. Orszag. No, putting a price on carbon would create a 
significant incentive. It could be supplemented with government 
efforts but if you priced something that firms want to avoid, 
they will invest in trying to avoid it, including in this case 
carbon emissions.
    Senator Murkowski. Again the impact in some areas may be 
more difficult and problematic than others.
    Dr. Orszag.
    Mr. Orszag. Admittedly, yes.
    Senator Murkowski. Yes.
    Mr. McLean. I wanted to second that and maybe more answer 
your question. I think there are two pieces to this. One is the 
research and development aspect, which we are investing in at 
very high levels and maybe people think we should be doing 
more.
    The second one is the price signal that Peter mentioned. So 
I think you have to have both of them there. If you have only 
one, you're going to have a problem. You raised the concern. 
What if we mandate this, but there's no technology. That's a 
problem.
    So, I think we need to do both. The timing is very 
important in these policies. You can say I want you to do it 
today or you can say I'm telling you today that I want you to 
do it in 10 years. That's a very different signal and it gives 
people the time between when they know it's a policy and when 
they have to respond to the policies. So that would be the 
third aspect.
    Senator Murkowski. Thanks, Mr. Chairman. They've been very 
kind with their time. I appreciate yours as well.
    The Chairman. Thank you all very much. I think it's been 
very useful testimony. I appreciate it. That will conclude our 
hearing.
    [Whereupon, at 12:27 p.m. the hearing was adjourned.]

    [The following statement was received for the record.]
     Statement of Bryan Hannegan, Vice President, Environment and 
           Generation, the Electric Power Research Institute
    On behalf of the Electric Power Research Institute (EPRI) I submit 
this written testimony to the full Committee oversight hearing on May 
20, 2008 to receive testimony on energy and related economic effects of 
global climate change legislation.
    On May 8, 2008, EPRI convened a workshop in Washington, DC to 
develop further understanding of the wide range of cost estimates 
(Figure 1)* that have been made public over the last 6 months. Below is 
a summary of the workshop.
---------------------------------------------------------------------------
    * Figures 1-3 have been retained in committee files.
---------------------------------------------------------------------------
    EPRI appreciates the opportunity to provide this testimony to the 
Committee.
       epri workshop explores cost estimates of lieberman-warner 
                          climate legislation
    EPRI convened a May 8 workshop in Washington, DC to develop further 
understanding of the wide range of cost estimates (Figure 1) that have 
been made public over the last 6 months. The meeting was attended by 
Congressional staff, government officials, energy-economy modelers, and 
electricity company staff.
    Workshop presenters included modeling teams from the Energy 
Information Administration (EIA); the American Council on Capital 
Formation (ACCF); the Clean Air Task Force (CATF); the Environmental 
Protection Agency (EPA), Massachusetts Institute of Technology (MIT) 
and CRA International (CRAI).
    While there are important differences in the modeling approaches 
and models used, much of the variation in the cost estimates appears 
driven by a handful of key assumptions, several of which are 
highlighted here:
    Reference case. Most modeling efforts rely on the Energy 
Information Administration's Annual Energy Outlook (AEO) to develop 
their reference case. In general, models that use an earlier projection 
of the baseline (AEO 2006 or AEO2007) have to find more emission 
reductions to achieve the Lieberman-Warner targets and have higher 
costs--everything else equal--than those using the recent AEO2008 
projection (Figure 2).
    Technology cost and deployment. In general, scenarios that limit 
the use of advanced, low and non-emitting electricity generation 
technologies result in higher costs; those that let them enter freely 
result in lower costs. Model results presented at this workshop show 
dramatic variations in renewable, coal with CCS and nuclear capacity 
additions (Figure 3).

   Emission offsets. In general, scenarios that allow for 
        compliance using offsets (emission reductions that are made 
        outside of an emissions cap) show a much lower cost than those 
        scenarios without offsets. Most groups do not model offsets in 
        detail, but rather make relatively crude assumptions about 
        their cost and quantity. Several teams did not include any 
        international offsets in their analyses based upon their 
        interpretation of the bill.
   Time horizon. The EIA's NEMS model runs (used by several 
        groups) extend through 2030, but most of the other models run 
        through 2050. Different time horizons can affect compliance 
        behavior (e.g. banking of extra credits), choice of technology 
        deployments, and other aspects of model economics.
   Discount rates. The models use discount rates (which define 
        the time preference for money) ranging from 4 to 7%. This 
        affects the time period in which emissions reductions are 
        viewed to be most attractive from an economic point of view, 
        and leads to differences in total economic cost.

    Workshop participants agreed that presentation of their modeling 
assumptions and results in a common format could provide important 
insights for decisionmakers and reduce confusion on how to interpret 
different estimates of costs. Links to the meeting agenda, 
presentations (and underlying analyses) are provided below.


                                APPENDIX

                   Responses to Additional Questions

                              ----------                              

   Responses of Howard Gruenspecht to Questions From Senator Bingaman
                   gdp impacts of the accf/nam study
    Question 1. Can you please provide more detail about what you said 
at the hearing? Please explain in more detail why GDP impacts are 
disproportionately so much higher in the ACCF/NAM study than in the EIA 
study compared to the difference in allowance prices?
    Answer. Our review of the ACCF/NAM analysis performed by SAIC 
identified problems in the methodology used in the macroeconomic 
modeling. These problems arose from how modifications were made to the 
baseline used in their analysis (using the Annual Energy Outlook 2007 
reference case) to reflect the effects of the Energy Independence and 
Security Act of 2007 and the lower macroeconomic growth in the 
subsequent AE02008 reference case. These problems magnified the size of 
the economic impacts identified in the ACCF/NAM study.
    The analysis attempted to adjust their baseline to reflect higher 
world oil prices by using the EIA high oil price scenario as part of 
their Lieberman-Warner policy scenario. Unfortunately, they compared 
the results to a baseline with much lower oil prices. This led to 
larger reported energy price and macroeconomic impacts than would be 
associated with the S. 2191 policy alone, since it also included the 
effects of the higher world oil prices in the policy case. In the SAIC 
analysis, these impacts are solely attributed to the effect of the 
greenhouse gas cap-andtrade policy. We shared this concern with both 
the contractor and the report sponsors.
                         state-by-state results
    Question 2. The ACCF/NAM study also provides state-by-state results 
for a whole range of possible impacts, such as impacts on gross state 
product, energy prices, and jobs. These state-level results were 
presumably derived from the NEMS modeling analysis done by ACCF and 
NAM. Does NEMS provide state-level results? Do you know how these 
results were derived from the NEMS model for the ACCF/NAM analysis?
    Answer. The National Energy Modeling System (NEMS) does not produce 
state-level results. The regional-level results it produces vary by 
module (energy sector). All of the energy demand modules (including the 
macroeconomic module) provide regional results for each of the nine 
census divisions. The energy supply modules produce regional results 
for differently defined regions, depending on the markets that they are 
trying to represent. Appendix F of the Annual Energy Outlook 2007, 
which can be found on the EIA website, illustrates the regions used in 
the NEMS.
    According to page 19 of ACCF/NAM analysis, it used the census 
division results and applied historical trends based on Census state 
population projections and historical relationships between states and 
Census regions to obtain population and gross-state-product-weighted 
results for income, jobs, industrial production and state-level prices. 
These results were not based on a detailed state model.
   Responses of Howard Gruenspecht to Questions From Senator Domenici

           KYOTO PROTOCOL MISSES EMISSIONS REDUCTION TARGETS

    Question 1. What are the major factors causing signatories to the 
Kyoto Protocol to miss their greenhouse gas emission reduction targets 
and are those shortcomings similarly foreseeable for the United States 
under a cap and trade regime?
    Answer. The first commitment period for the Kyoto Protocol 
signatories began this year and runs through 2012. Greenhouse gas 
emissions in the European Union (EU) have risen slightly in recent 
years, reducing the likelihood of meeting the Kyoto targets. In a 
recent report on the emissions cap and trade system set up in the EU 
for a 2005 to 2007 ``trial'' period, ``The European Union's Emissions 
Trading System in Perspective,'' the authors from MIT argue (page iii) 
that the challenges faced in implementing the Emissions Trading System 
(ETS) were not unexpected. They go on to state that

          The development of the EU ETS and the experience with the 
        trial period provides a number of useful lessons for the U.S. 
        and other countries.

   Suppliers quickly factor the price of emissions allowances 
        into their pricing and output behavior.
   Liquid bilateral markets and public allowance exchanges 
        emerge rapidly and the ``law of one price'' for allowances with 
        the same attributes prevails.
   The development of efficient allowance markets is 
        facilitated by the frequent dissemination of information about 
        emissions and allowance utilization.
   Allowance price volatility can be dampened by including 
        allowance banking and borrowing and by allocating allowances 
        for longer trading periods.
   The redistributive aspects of the allocation process can be 
        handled without distorting abatement efficiency or competition 
        despite the significant political maneuvering over allowance 
        allocations. However, allocations that are tied to future 
        emissions through investment and closure decisions can distort 
        behavior.
   The interaction between allowance allocation, allowance 
        markets, and the unsettled state of electricity sector 
        liberalization and regulation must be confronted as part of 
        program design to avoid mistakes and unintended consequences. 
        This will be especially important in the U.S. where 50 percent 
        of the electricity is generated with coal.(pages iii-iv)

                  EPA SULFUR DIOXIDE PROGRAM CONTRAST

    Question 2. I hear supporters of a cap and trade approach to global 
climate change mitigation consistently refer to the sulfur dioxide 
program at the Environmental Protection Agency and compare it to the 
potential implementation of this legislation. Please compare the size 
and scope, including the ways in which regulated entities complied with 
sulfur dioxide limits and can be expected to comply with limits on 
carbon dioxide, of the two programs so that we may have a better sense 
of perspective on this comparison.
    Answer. Compared to the greenhouse gas cap and trade program called 
for in S. 2191, the sulfur dioxide (SO2) cap and trade 
program created in the Clean Air Act Amendthents of 1990 affected a 
relatively small group of large power plants and industrial facilities. 
With approximately 9.5 million allowances issued every year and a 
current SO2 allowance price trending towards $400 per ton, 
the total market value of the SO2 allowances issued each 
year is approximately $3.8 billion dollars. In contrast, in EIA's 
analysis of S. 2191, the market value of the allowances issued in 2030 
ranged from $235 billion to $603 billion, roughly 2 orders of magnitude 
larger. We defer to EPA regarding the behavior of regulated utilities 
under the two programs.

                 NUCLEAR PLANT CONSTRUCTION LIMITATIONS

    Question 3. The NRC anticipates 29 applications for new nuclear 
reactor units by the end of this year. Those applications represent 
approximately 40 gigawatts of new capacity and are likely to be the 
majority of new reactor license applications that the NRC will receive 
by the end of 2010. Even under the very ambitious schedules, only the 
very first of these plants will be coming on line in the 2015 to 2020 
time-frame.
    How do you justify the assumption made in your model that 264 
gigawatts--over 6 times the 40 gigawatt estimate--of new nuclear 
generating capacity will become available by 2030?
    Answer. EIA agrees that many factors may constrain the amount of 
new nuclear capacity that can be added between now and 2030. These 
include material costs, manufacturing limits, labor shortages, 
potential permitting bottlenecks, and public acceptance problems. As a 
result, our analysis of S. 2191 analysis includes alternative cases 
that assume higher costs and limited availability for new nuclear 
facilities. The amount of new nuclear added across the S. 2191 cases 
ranges from 17 gigawatts to 286 gigawatts.
    While we agree that it is very unlikely that anything approaching 
the higher end of this range would occur, the existence of an allowance 
cost on fossil fuel use will make new nuclear plants very attractive 
and will likely stimulate increased investments in all segments of the 
industry. In addition, the existing fleet of approximately 100 
gigawatts of nuclear capacity was nearly all added over a 20-year 
period, during which another 150 gigawatts of planned nuclear capacity 
was cancelled.

                     NUCLEAR COMPONENT FABRICATION

    Question 4. We currently have no domestic capacity for the 
fabrication of large nuclear components such as pressure vessels, and 
we are told that our existing workforce can support the construction of 
no more than three reactors at a time.
    Have you analyzed how many reactors we are physically capable of 
building by 2030?
    Answer. EIA has not prepared an analysis of how many reactors could 
physically be built in the U.S. by 2030. Moreover, as noted in the 
answer to the previous question, EIA agrees that many factors may 
constrain the amount of new nuclear capacity that can be added between 
now and 2030. These factors are what led us to include alternative 
cases about the potential cost and availability of new nuclear plants 
in our analysis of S. 2191. However, a greenhouse gas cap and trade 
program, by increasing the costs of continuing to rely on fossil fuels 
for electricity generation, should provide substantial incentive for 
increased investment in all sectors of the nuclear industry. Only a few 
years ago there were no new nuclear license applications at the Nuclear 
Regulatory Commission, but they now report having received combined 
license applications for 15 new nuclear generating units (as of April 
18, 2008) and the Nuclear Energy Institute has compiled a list of 14 
additional units that are expected to file applications shortly. 
Colleges are also beginning to report growing enrollment in nuclear 
engineering programs. For example, the University of California at 
Berkeley reported that between 1996 and 2006 the number of nuclear 
engineering majors nearly tripled, while the number of freshman 
applications for the major doubled over five years (Mass High Tech, May 
12, 2006). Similarly, a recent study of the 31 U.S. universities with 
nuclear engineering programs reported that 346 bachelor's degrees were 
awarded in 2006, the highest number reported in ten years and a 30 
percent increase from 2005 (Oak Ridge Institute of Science and 
Education, June 20, 2007).

   HOW DO HIGHER NATURAL GAS PRICES AFFECT PROPOSED LIEBERMAN-WARNER 
                      LEGISLATION COMPLIANCE COSTS

    Question 5. The Annual Energy Outlook for 2008 forecasts that in 
2015, natural gas prices will be $5.21 per million BTU. The current 
price is much higher than that, and NYMEX futures contracts for May 
2015 are at around $9.00 per million BTU right now. Many of the models 
in these studies rely upon your baseline prices to determine the cost 
of compliance with a cap and trade regime.
    Given that, how significant would the impact of higher-than-
projected natural gas prices be on the costs of compliance with the 
Lieberman-Warner legislation?
    Answer. Generally, higher natural gas prices would make natural gas 
less attractive as a greenhouse gas (GHG) compliance fuel, and would 
make switching to natural gas for GHG compliance more expensive than 
would otherwise be the case under lower natural gas prices. However, in 
our Lieberman-Warner analysis cases that allow for the rapid adoption 
of nuclear, coal with carbon capture and sequestration, and renewables, 
such as the ``core'' case, natural gas consumption is lower than in the 
reference case because considerable energy production shifts to nuclear 
and renewables. Therefore, higher natural gas prices would generally 
not increase GHG compliance costs. In cases where nuclear and 
renewables are constrained, such as in the ``limited alternatives'' 
cases in our analysis, natural gas consumption is higher with the 
legislation, GHG compliance costs are higher than the ``core'' case 
results, and the GHG compliance cost risk is more directly related to 
the price of natural gas. 



                 LONG-TERM NATURAL GAS SUPPLY PROSPECTS

    Question 6. I am very concerned about the long-term supply 
prospects for natural gas. Rumors of a natural gas cartel continue to 
make the news and U.S. production of natural gas is trending toward a 
steep decline in the coming years.
    Has EIA changed its import projections in recent years to account 
for these and other developments? If a natural gas cartel is formed and 
U.S. natural gas production declines steeply, are you capable of 
modeling its potential impact on supply and prices for natural gas?
    Answer. EIA does not expect an effective natural gas cartel to form 
in the future, nor do we expect steep declines in U.S. natural gas 
production in the coming years. In fact, our reference case projections 
of future natural gas imports have declined in recent years as higher 
natural gas prices are expected to limit demand growth, especially in 
the power sector, and stimulate increased domestic natural gas 
production. We are capable of modeling the effects of reduced global 
gas supply (the expected effect of a gas cartel) and reductions in U.S. 
natural gas production. The soon to be released Annual Energy Outlook 
2008 will include a ``Limited Natural Gas Supply'' side case that 
presents the supply and price effects of such a scenario.
    The natural gas market is becoming increasingly globalized, but the 
formation of an effective cartel seems unlikely, for a number of 
reasons. The primary reason is that natural gas demand is more elastic 
than oil demand, since natural gas must compete with coal, nuclear, and 
renewables in the power sector. The existence of these viable 
alternatives greatly reduces the market power of a potential cartel. In 
addition, natural gas reserves are more widely dispersed than oil 
reserves.
    We do not see evidence that U.S. natural gas production is trending 
toward a steep decline. Production for December 2007 was 1700 billion 
cubic feet, the highest since 1980. While we are seeing clear sustained 
declines in a number of areas where conventional production sources 
dominate, other areas such as in the deep waters of the Gulf of Mexico 
and unconventional plays, such as gas shales, are showing strong gains. 
The growth in these areas is the result of both higher natural gas 
prices and significant technological advances.

                          COMPLIANCE MECHANISM

    Question 7. These anayses tend to list natural gas, nuclear clean 
coal, renewables and other forms of electrical generation as ways n 
which the caps in S.2191 cab be adhered to. As a result, we get some 
odd results that are likely impossible to achieve.
    Do any of the models you have looked at allow for economic slow-
down as a compliance mechanism?
    Answer. All of the greenhouse gas mitigation proposals that have 
recently been analyzed by EIA rely on mechanisms to reduce greenhouse 
gas emissions or promote low or no carbon technologies that pass the 
cost of compliance along to consumers through energy prices. The 
economy is only affected through the impact these proposals have on 
energy suppliers and consumers. There are, no doubt, other command and 
control mechanisms that, if implemented, would more directly impact the 
economy, but they have not been examined by EIA.

                           ALLOWANCE PERMITS

    Question 8. As we discuss issues that relate to the share of 
allowances that will be be auctioned or given away, what would be the 
consequences of these permits being bought up by people who don't 
intend to emit greenhouse gases?
    What would that do to the cost to emitters and their ability to 
comply with S. 2191?
    Answer. In an efficient carbon allowance market, the price of 
allowances would depend on the quantity supplied and demanded. If the 
owners of allowances intend to limit the supply, then, all else being 
equal, the price would increase. The economic burden imposed on a 
particular firm in a carbon reduction program depends on its ability to 
pass through costs, the price elasticity of consumer demand, and 
emission reduction opportunities. Some available research indicates 
that consumers and businesses at the end of the energy supply chain may 
bear the largest share of costs. Also, certain firms or industrial 
sectors may face difficulty in passing through increased costs and 
would pay an increased share of the burden, such as those firms that 
compete with foreign suppliers that do not face similar emission 
constraints. For an effective carbon reduction program, all energy 
producers and users should face the same incentive to reduce emissions.

                     BASELOAD GENERATION EXPANSION

    Question 9. Our country hasn't had to increase its baseline 
generation for nearly two decades, but that trend will soon come to an 
end. What impact does this impending shift have on your economic 
analysis, particularly in light of local opposition to infrastructure 
construction?
    Answer. Since 1990, nearly 320 gigawatts of new generating capacity 
has been added and integrated into the U.S. electricity grid. While 
nearly 83 percent of this capacity reported natural gas as their 
primary fuel, it still represents a fairly large investment in 
infrastructure. Over the same time period, there has been a significant 
increase in both coal and nuclear generation, but it has come from the 
increased use of existing plants rather than the addition of new 
plants. In fact, between 1990 and 2006, the combined increase in 
generation from coal and nuclear plants, 605 billion kilowatthours, 
exceeded the 435 billion kilowatthour increase in generation from 
natural gas plants.
    In EIA's Annual Energy Outlook 2008, we do see the need for renewed 
investment in large baseload facilities such as new coal and nuclear 
plants, but the bulk of these facilities are expected to be needed in 
2015 and beyond. If local opposition were to preclude these additions, 
the industry likely would continue to invest in new natural gas 
capacity and consumers would face higher electricity prices. In our 
analysis of S. 2191, we included cases limiting the addition of new 
baseload capacity like nuclear and coal power plants with carbon 
capture and sequestration. In the most limiting scenario, the Limited 
Alternatives / No International Offsets case, the allowance price 
reached $156 per metric ton carbon dioxide equivalent, much higher than 
the $61 per metric ton carbon dioxide equivalent reached in the most 
optimistic case. Similarly, electricity prices in the most limiting 
case were 64 percent above the reference case level in 2030, again much 
higher than the 11 percent increase seen in the most optimistic case. 
Natural gas generation in this limiting case was over 2.4 times the 
level seen in the reference case in 2030.
   Responses of Howard Gruenspecht to Questions From Senator Menendez

                   IMPACT UNDER HIGHER ENERGY PRICES

    Question 1a. Current oil prices are nearly double those assumed in 
EIA's and EPA's analysis of climate policy. We can already see that 
high gasoline prices are inducing changes in consumer driving and 
vehicle purchasing behavior. Goldman Sachs recently estimated that oil 
prices might climb to $150-$200 per barrel within the near future. How 
might the projected costs of Lieberman-Warner and other climate 
policies change if the models were run with the higher (and more 
realistic) energy prices that we are already seeing today?
    Answer. There are two opposing effects of higher energy prices on 
compliance costs that cloud the issue: a cost-reducing effect arising 
because the emissions reduction to meet a given cap is less under high 
prices, and a cost-increasing effect that can occur if increased use of 
natural gas occurs in the effort to comply with the capand-trade 
policy. Under the first effect, projected costs of emission cap and 
trade policies would tend to be lower under higher energy price 
scenarios, because higher energy prices would tend to suppress the 
projected growth in fossil fuel use and carbon dioxide emissions in the 
absence of a cap. Therefore, the reduction in emissions required to 
meet a given emissions cap would also tend to be lower under higher 
energy prices, and the allowance prices, a key indicator of compliance 
costs, would be driven lower. For example, relative to the EIA's Annual 
Energy Outlook 2008 (AE02008) reference case, meeting the S. 2191 
emission cap requires a cumulative reduction in emissions from 2012 to 
2030 of 37.7 billion metric tons in carbon dioxide equivalence. 
Relative to emissions in the forthcoming AE02008 high price case, which 
assumes higher oil and natural gas prices than in the reference case, 
the required emissions reduction over the same period is 35.1 billion 
metric tons (6 percent lower than in the reference case).
    An opposing effect would arise if compliance with a cap-and-trade 
policy led to an increased use of natural gas, as might occur if 
alternatives such as nuclear, biomass, or offsets were not available or 
more costly. Under higher energy prices, the cost of any incremental 
use of natural gas would be higher, leading to higher compliance 
expenditures.
    Question 1b. Does this mean that allowance prices and the total 
cost to the economy of the cap will be lower than current models 
suggest? Can the EPA or EIA rerun the models with estimates that 
reflect a future with sustained high prices for petroleum and other 
fossil fuels?
    Answer. Allowance prices and the effect on the economy could tend 
to be somewhat lower under a higher energy price scenario because the 
emissions reduction to meet the cap would be lower. However, in cases 
where compliance resulted in increased use of natural gas, an opposing 
effect on compliance costs would influence the results, as explained in 
the response to the first part of the question. Given the time 
necessary to conduct, review, and present additional modeling cases, 
EIA could not publish any further modeling cases of S. 2191 prior to 
planned floor debates in early June. As illustrated by the range of 
results in the five cases presented in EIA's analysis, the economic 
impacts of the bill can vary widely based on assumptions about 
technology availability and costs, as well as offset assumptions. While 
the cost results would be shifted somewhat under higher energy price 
assumptions, the overall conclusions drawn by the report would not be 
changed materially.
   Responses of Howard Gruenspecht to Questions From Senator Sanders

                       ASSUMPTIONS ABOUT OFFSETS

    Question 1a. The use of offsets is being defined in the models as a 
cost avoidance mechanism, but there is more to offsets than cost 
avoidance. Now, I understand the theory that paying someone to do 
something can be easier than changing your own behavior, but if we 
don't actually ensure emissions reductions, it doesn't really matter.
    What are the assumptions regarding the actual emissions reductions 
from offsets? Do the models assume a 1 to 1 relationship or do the 
models include some calculation for the fact that offsets can be 
difficult to quantify, or even difficult to verify?
    Answer. EIA assumes that the domestic offsets from certified 
greenhouse gas mitigation projects represent actual emission 
reductions, in the sense that emissions projections assume that any 
offsets supplied represent actual reductions from the baseline or 
reference case emission levels. However, in defining the market 
potential of offsets, EIA discounts the potential supply to account for 
such factors as additionality, which is a test that demonstrates that 
the emission reductions from a project or action are additional to what 
would have happened in the absence of the project or action, and 
permanence, and further reduces the economic potential to reflect a 
gradual market penetration of offsets over time.
    EIA's model focuses on energy and reductions in energy-related 
carbon dioxide emissions. For projections of non-CO2 
greenhouse gases, EIA relies in part on information from the 
Environmental Protection Agency (EPA). EPA provided EIA with economic 
relationships that characterize the economics of offset projects in 
terms of ``marginal abatement cost'' curves. The curves were developed 
in a series of engineering-economic studies EPA conducted in recent 20 
years. The curves indicate the emission reductions that would be cost-
effective to develop at various allowance prices. In evaluating the 
information, EIA assumed that the quantity of domestic offsets actually 
supplied at a given allowance price would be reduced 25 percent from 
the cost-effective level given by the abatement curves, based on market 
factors and the transaction costs of certification and verification. In 
addition, EIA assumed that market penetration of offsets would not 
occur immediately, but be introduced gradually into the market over 
time.

                                OFFSETS

    Question 1b. Does the usage of offsets create opportunity costs for 
the adaptation of renewable technologies, such as wind and solar, that 
reduce our overall emissions? Said another way: does the use of offsets 
have the potential to, in any way, delay a transition to renewables, 
since polluters could just pay someone to plant a tree instead of 
actually moving to sustainable energy?
    Answer. Since offsets provide an alternative means of complying 
with allowance obligations, offsets may compete, in a sense, with 
renewable energy. If offsets were not permitted, and the overall 
emissions cap was not relaxed accordingly, then the price of allowances 
would be driven higher. At higher allowance prices, additional sources 
of renewable energy would become economical. For example, in EIA's S. 
2191 No International Offsets case, projected consumption of renewable 
energy in 2030 is 18.2 quadrillion British thermal units (Btu), 
compared to 16.7 quadrillion Btu in the S. 2191 Core case which assumes 
that up to 15 percent international offsets are allowed and generally 
competitive.

                               PERMANENCE

    Question 1c. Also, what are the assumptions in the models that 
determine the permanence of offsets? Is there a discount factor for 
offsets that fail because of natural or manmade reasons?
    Answer. In developing assumptions for offsets, EIA has discounted 
the economical potential for offsets to account for certification and 
other transaction costs, as well as other market penetration issues. S. 
2191 requires that the EPA administrator issue regulations to certify 
offset allowances to ``ensure that those offsets represent real, 
verifiable, additional, permanent, and enforceable reductions in 
greenhouse gas emissions or increases in sequestration.'' The bill also 
describes accounting standards for offsets that would be developed for 
agriculture and forestry sequestration projects and specifies 
discounting factors to reflect uncertainty. EIA assumed that these 
regulations and procedures would be reflected in the offset market and 
affect the supply available. Therefore, EIA applied a 25 percent 
discount factor to abatement cost curves provided by EPA.

                             ADDITIONALITY

    Question 1d. How is additionality worked into the models?
    Answer. This answer has been provided in the response to questions 
A1(a) and A1(c).
       failure to assess the benefits of action on global warming
    To date, all of the analyses of Lieberman-Warner and other bills 
assess only the costs of acting--they do not assess the benefits of 
acting and avoiding or mitigating global warming. Agencies typically 
analyze the costs AND benefits of their regulations. However, in the 
case of climate change, economists have a long way to go in monetizing 
benefits, assuming many of the benefits like preventing catastrophic 
events such as hurricanes, droughts, and other extreme weather events, 
along with the spread of diseases, wars over resources, and the 
extinction of specie's--can even be monetized. The analyses of 
Lieberman-Warner by EIA and EPA do not attempt to quantify the 
benefits. They thus run the risk of focusing attention on the costs of 
climate legislation without balancing that information with the 
benefits of reducing climate change.
    Question 2a. Do your analyses assess the benefits of avoiding or 
mitigating climate change? Aren't there important benefits that have 
not been considered at all? Examples that come to mind include the 
avoidance of risks from increased or more severe droughts, floods, 
hurricanes and wildfires: increases air pollution; catastrophic events 
such as melting ice sheets; unrest overseas affecting U.S. national 
security and changing disease patterns.
    Answer. The Energy Information Administration (EIA) analyses focus 
on the energy market impacts of the proposed rules, regulations or 
legislation that we are asked to review. EIA does not have expertise in 
climate system analysis that would be required to assess the potential 
benefits of avoiding or mitigating climate change.
    Question 2b. A related, but different, question is: do the 
``Business as Usual'' scenarios included in your models (or the models 
you have seen, in the case of CRS) assume increased costs from the 
types of events I just mentioned, given that we are told that the 
events will become increasingly common unless we reduce global warming.
    Answer. EIA does attempt to capture the impacts of changing climate 
trends on energy supply and demand. However, the types of models that 
address the impact of greenhouse gas emissions on climate conditions 
are usually referred to as Integrated Assessment Models. These models 
are very complex because they attempt to capture all of the 
interactions of the climate system. As a result, they do not focus on 
energy markets and can not address the types of questions from the 
energy committees of the Congress and others to which the energy models 
typically respond.
    Question 2c. What efforts is your agency making to assess the value 
of the benefits of climate change mitigation?
    Answer. Consistent with our legislative mandate, EIA analyses focus 
on the energy market and economic impacts of the proposed rules, 
regulations or legislation that we are asked to review. EIA does not 
have expertise in climate system analysis that would be required to 
assess the potential benefits of avoiding or mitigating climate change.

        UNTAPPED POTENTIAL FOR RENEWABLES AND ENERGY EFFICIENCY

    Electricity from coal, nuclear power, and other traditional energy 
sources appear prominently in the modeling of Lieberman-Warner. Several 
renewable technologies, however, are available today that can generate 
inexpensive electricity without emitting carbon.
    Concentrating Solar Power uses the sun to provide heat that drives 
a steam power plant. This one resource could provide up to 17% of our 
nation's electricity. A typical CSP plant being built today produces 
250 Megawatts of power, emits very little CO2, and costs 1-2 
billion dollars (about the same as a traditional coal plant and 
significantly less than a new nuclear plant, which can run between 4-12 
billion). Over its operating life, today's CSP plants deliver power at 
$0.13 per kilowatt-hour, but the Department of Energy estimates that 
the costs for CSP will drop below $0.08 per kilowatt-hour once 
economies of scale are achieved. There are close to 400 Megawatts of 
CSP already operating in the southwest, and at least 3,000 Megawatts 
are in various stages of development.
    Wind is another major opportunity. Just last week the Department of 
Energy's National Renewable Energy Laboratory released a report showing 
that wind could provide up to 20% of our nation's electricity needs by 
2030. This resource will only cost $0.05 per kilowatt-hour, which is 
competitive with what we are paying for coal today.
    Geothermal is another great opportunity. A report for the U.S. 
Department of Energy by the Massachusetts Institute of Technology 
suggests that geothermal energy could provide 100,000 Megawatts of new 
carbon-free electricity at less than $0.10 per kilowatt-hour, 
comparable to cost projections for coal with carbon capture and 
storage. This single renewable resource could account for almost 10% of 
our nation's electricity needs in the future.
    There are many other the possibilities, for biomass, photovoltaics, 
hydropower, and other renewable technologies, for example. But, once 
you add it all up, the United States could meet 2/3 of its electricity 
needs from sustainable energy.
    Now, add on what we could be doing with energy efficiency, and it 
gets really exciting. According to the McKinsey Report, released last 
year, we have the technologies needed to reduce greenhouse gases at our 
disposal today.
    Question 3. Do your analyses take into account the strategies 
identified in the McKinsey Report for reducing greenhouse gases, 
including improving the economy's energy efficiency?
    Answer. With regard to your discussion of renewable generation 
technologies, we agree that theses sources have considerable potential 
to make an increased contribution to electricity generation, 
particularly if actions are taken to limit energy-related carbon 
dioxide emissions. The mix of renewable and non-renewable low- and no-
carbon technologies that will ultimately be deployed will depend on the 
relative costs of different technologies, technology characteristics 
such as intermittency and dispatch ability, and public acceptance 
issues surrounding both renewable and non-renewable technologies.
    Decisions regarding additions of new generation capacity, both 
renewable and non-renewable, reflect competition among different 
technologies that might be added as well as competition between those 
technologies and existing capacity. Displacement of existing capacity, 
whose fixed costs are already invested, can present significant 
economic challenges even for renewable technologies that are well-
placed to compete with other new capacity sources. For example, over 
300,000 megawatts of existing conventional coal-fired generation 
currently provides about one-half of the nation's total electric 
generation. At average delivered prices of coal well under $2.00 per 
million Btu, the forward-looking costs of operating existing coal 
plants is roughly $0.02 per kilowatt hour. In the absence of actions to 
limit greenhouse gas emissions, EIA would expect the vast majority of 
the existing coal-powered fleet to remain in use through 2030, with 
many units continuing to operate after that date. Replacing existing 
coal-fired capacity with alternative renewable or non-renewable 
sources, which many believe are among the most cost-effective actions 
to reduce greenhouse gas emissions, is likely to engender significant 
costs, even under optimistic assumptions about the costs of low-and no-
carbon technologies for new generation capacity.
    Turning to the strategies identified in the recent McKinsey report, 
our view is that while it identifies a large technical potential for 
improving energy efficiency and investing in renewable technologies, it 
is silent on the policies that might be needed to take advantage of 
these options. In fact, a letter included in the report from the 
Conference Board, co-publishers of the report, states:

          The McKinsey team looked primarily at the technical 
        feasibility and cost of those options. How quickly consumers 
        modify behavior and adopt different options will have a major 
        effect on the ultimate economic benefits of those options.--
        Preface letter

    The report goes on to say:

          Unlocking the negative cost options would require overcoming 
        persistent barriers to market efficiency, such as mismatches 
        between who pays the cost of an option and who gains the 
        benefit...--page xii

    In EIA's analysis of S. 2191, large improvements in energy 
efficiency and increased investment in renewables are stimulated by the 
higher costs of continuing to use fossil fuels under a greenhouse gas 
cap-and-trade program. For example, the average annual growth in 
electricity demand between 2006 and 2030 falls from 1.1 percent in the 
reference case to between 0.9 percent and 0.6 percent in the S. 2191 
cases. These rates of growth are all less than half the 2.4 percent 
annual growth that occurred in the 1990s. With respect to renewables, 
between 112 gigawatts and 357 gigawatts of new renewable generation 
capacity are added in the S. 2191 cases; much more than the 47 
gigawatts that are added in the reference case without S. 2191.
    Responses of Howard Gruenspecht to Questions From Senator Akaka

           HAWAII ELECTRIC PRODUCTION TRANSITION TO BIOFUELS

    Question 1. Hawaiian Electric Company is uniquely a liquid fuel 
utility, with over 75% of its electricity produced from imported oil. 
We understand Hawaiian Electric Company is moving toward biofuel 
substitution for fossil fuel in their existing generating units. How 
can we assure that whatever program is put in place at the national 
level will create incentives for this Hawaii utility to proceed 
expeditiously with biofuel substitution? Equally important, how can we 
be assured that a broad national program will not produce barriers to 
this fuel transition?
    Answer. The allowance costs associated with the national greenhouse 
gas cap-and-trade program called for in S. 2191 will increase the costs 
of continuing to use fossil fuel in power generation, and should make 
increasing the use of biofuels as a substitute for oil more attractive. 
In EIA's analysis, average distillate fuel oil prices--including the 
costs of holding allowances--are 21 percent to 52 percent higher than 
in the reference case in the S. 2191 cases.

                   PREMIUM FOR LOCAL OFFSET PROJECTS

    Question 2. Do you see any categorical problem with states such as 
Hawaii considering a premium local payment for locally developed and 
implemented offset projects, with the objective of retaining funds 
within the state economy?
    Answer. It does not appear that categorical funding restrictions 
under S. 2191 would restrict the use of proceeds from States' allowance 
allocation for subsidizing local offset projects. Under S. 2191, States 
will be allocated 4.5 percent of allowances based on the state shares 
of population, LIHEAP program expenditures, and carbon dioxide embodied 
in coal mined, natural gas processed, and oil refined in the State. 
State proceeds from the sales of those allowances could be considered 
categorical funds because the bill specifies that 95 percent of the 
allowance proceeds be used for any of a list of 15 distinct purposes, 
which include the following:

   to encourage advances in energy technology that reduce or 
        sequester greenhouse gases,
   to address local or regional impacts of climate change 
        policy, including providing assistance to displaced workers, 
        and
   to fund any other purpose the States determine to be 
        necessary to mitigate any negative impacts as a result of 
        global warming or new regulatory requirements resulting from 
        the Climate Security Act.

    Therefore, using allowance proceeds to subsidize local offset 
projects would appear to be a legitimate use of funds.
    Provisions of S. 2191 suggest that State governments could purchase 
specific offset allowances associated with projects developed in their 
States, or enter into agreements with developers to finance offset 
projects through premium payments or other means. Under Sec. 2402, a 
unique serial number would be assigned to offset allowances, and the 
project developer would own the offset allowance initially, unless 
otherwise specified in a legally-binding contract or agreement. The 
offset allowances may then be sold, traded, or transferred, which would 
allow State governments to purchase offsets from projects originating 
in the State.

                            PLUG-IN HYBRIDS

    Question 3. Plug-in hybrid electric vehicles will effectively 
transfer greenhouse gas emissions from the transportation sector to the 
electric utility sector, although on a reduced basis. How will this 
beneficial potential be taken into account in the allocation of credits 
under a cap and trade program? Can market mechanisms be structured to 
promote rather than impede the development and commercialization of 
plug-in hybrid electric vehicles?
    Answer. Under S. 2191, the allowance allocation provisions do not 
appear to have any negative material impact on economic incentives for 
plug-in hybrid electric vehicles. Under S. 2191, the primary market 
incentive that could affect the economics of plug-in hybrids is the 
allowance requirement for carbon dioxide emitted by fossil fuels, 
directly increasing the price of petroleum fuels and indirectly raising 
the cost of electricity. The differential cost impacts on electricity 
and petroleum would influence the relative economics of plug-in hybrids 
versus other vehicles.
                                 ______
                                 
    Responses of Larry Parker and Brent Yacobucci to Questions From 
                            Senator Bingaman

    Question 1. [For Larry Parker]. Your testimony and report ask us to 
take a skeptical stance toward modeling, because of the larger number 
of assumptions that need to be made in order to arrive at any 
particular economic conclusion. In this regard, it seems that one 
should approach regional (state-level) projections and projections 
about jobs with even greater skepticism because of the greater number 
of assumptions that need to be invoked in these cases. To follow-up on 
our discussion at the hearing, what is your sense of the reliability of 
regional estimates, sectoral estimates and estimates of job creation 
and loss in such models compared to the reliability of aggregate 
estimates?
    Answer. As noted on page 15 of the CRS report, ``the uncertainty 
about the future direction of the basic drivers of greenhouse gas 
emissions and the economy's responsiveness (economically, 
technologically, and behaviorally) illustrate the inability of models 
to predict the ultimate macroeconomic costs of reducing greenhouse 
gases.'' If one cannot project the fundamental drivers of a dynamic, 
additional complexity in the form of aggregation or disaggregation 
(depending on the architecture of the specific model) may not increase 
accuracy and, indeed, may further mask the underlying uncertainties. 
For models that use a modular construction with separate sector-level 
models, CRS noted on page 70: ``baseline forecasts are even less 
accurate at a sector level than they are at an aggregate national 
level. As noted by Winebrake and Sakva, sector level baseline forecasts 
have significantly higher errors compared with aggregate estimates, nor 
have sector estimates improved over the past two decades:

          We find that low errors for total energy consumption are 
        concealing much larger sectoral errors that cancel each other 
        out when aggregated. For example, 5-year forecasts made between 
        1982 and 1998 demonstrate a mean percentage error for total 
        energy consumption of 0.1%. Yet, this hides the fact that the 
        industrial sector was overestimated by an average of 5.9%, and 
        the transportation sector was underestimated by an average of 
        4.5% We also find no evidence that forecasts within each sector 
        have improved over the two decades studied here.\1\
---------------------------------------------------------------------------
    \1\ James J. Winebrake and Denys Sakva, ``An Evaluation of Errors 
in US Energy Forecasts: 1982-2003,'' Energy Policy 34 (2006), p. 3475.

    Interestingly, the largest forecasting errors have occurred for the 
areas of the industrial sector (over-estimated energy use) and for 
transportation (under-estimated energy)--two key sectors frequently 
targeted for controlling greenhouse gas emissions. This is not to say 
that disaggregation is inherently misleading; there are regional 
differences in energy supply that, all else being equal, would result 
in potentially higher costs for some regions under S. 2191. However, to 
move beyond recognition of regional differences in energy supply to 
then make precise state-by state projections of impacts (frequently to 
two or more ``significant'' digits) 20 years after enactment of 
legislation propels the analysis from ``worthy of some skepticism'' 
toward a ``fallacy of misplaced concreteness.''\2\
---------------------------------------------------------------------------
    \2\ ``Fallacy of misplaced concreteness'' is a term used by the 
philosopher Alfred North Whitehead to describe a situation where 
someone mistakes an abstract belief, opinion or concept about the way 
things are for a physical (i.e., ``concrete'') reality. See: Alfred 
North Whitehead, An Enquiry concerning the Principles of Natural 
Knowledge (1925).
---------------------------------------------------------------------------
    This situation is compounded further when attempting to estimate 
secondary cost impacts, such as jobs. At this level of analysis, an 
additional layer of assumptions must be added to the calculus, 
including: worker productivity trends, wage rates (usually national 
averages), and workweek trends (usually national averages). Projecting 
these trends out to 2030 or 2050 is more an act of faith than analysis. 
Add to this effects on industry of S. 2191 that are likely very site-
specific (p. 70), and one sees projections that are based more on 
philosophy than analysis.
    Question 1. [For Brent Yacobucci]. Your results suggest that the 
Low Carbon Fuel Standard could raise energy prices dramatically. Could 
you explain how this standard interacts with the underlying cap-and-
trade system and why prices rise so significantly in the presence of 
such a standard if the overall emissions cap remains unchanged?
    Answer. One of the key reasons that the Low Carbon Fuel Standard 
(LCFS) could raise energy prices is that the standard, as proposed in 
S. 2191, would have no interaction with the capand-trade system. As 
noted in the report (p. 56):

          The assumptions for the amount of low-carbon fuel available, 
        the expected emission reductions for that fuel, and the total 
        amount of fuel subject to the requirements would significantly 
        affect the costs and feasibility of the LCFS program. The way 
        the provisions are written in S. 2191, the LCFS program is 
        separate from the cap-and-trade program, and there is no way to 
        purchase credits or offsets from other sectors. If the 
        necessary amount of low-carbon fuel is not available, then 
        under the program fuel providers must reduce the amount of fuel 
        they sell, or pay civil penalties. In its analysis of S. 2191, 
        NMA/CRA states that in 2015 the LCFS ``can only be met by a 
        decrease in gasoline consumption to allow the limited supplies 
        of low carbon biofuel to meet the averaging requirements of the 
        standard.''\3\ Further, the model estimates that because of the 
        decrease in supply, motor fuel prices increase 140% in 2015 
        over the baseline case.\4\ The NMA/CRA analysis suggests that 
        if the LCFS is construed to include all ground transportation 
        fuels without exception, then it may be difficult to achieve it 
        without reducing fuel demand.
---------------------------------------------------------------------------
    \3\ CRA International, Economic Analysis of the Lieberman-Warner 
Climate Security Act of 2007 Using CRA's MRN-NEEM Model (April 8, 
2008). p. 29.
    \4\ Ibid. p. 22.

    The magnitude of price increases projected by CRA may or may not be 
valid, but CRA's analysis does point out the lack of flexibility in S. 
2191's LCFS provision. Also, recent experience suggests that fuel 
demand is very price inelastic (i.e., it takes a very large increase in 
price before demand decreases significantly).

    Responses of Larry Parker and Brent Yacobucci to Questions From 
                            Senator Domenici

    Question 1. What are the major factors causing signatories to the 
Kyoto Protocol to miss their greenhouse gas emission reduction targets 
and are those shortcomings similarly foreseeable for the United States 
under a cap and trade regime?
    Answer. While the domestic emissions of some parties to the Kyoto 
Protocol may exceed their emissions targets, many of these countries 
maintain that they will meet their obligations through the use of 
credits from other countries, as allowed under the Protocol. As noted 
in CRS Report RL33826, Climate Change: The Kyoto Protocol, Bali 
``Action Plan,'' and International Actions, by Susan R. Fletcher and 
Larry Parker (p. 13):

          The EU [European Union] has consistently stated that it will 
        meet its commitments under the Kyoto Protocol and is currently 
        developing targets for the post-2012 period. In 2006, the 
        European Environmental Agency (EEA) projected the 15 EU Members 
        that had jointly agreed to reduce GHGs by 8% below 1990 levels 
        during the Kyoto compliance period would meet their obligation 
        as a whole, although seven of those countries would not meet 
        their individual obligations.

    Meeting the EU target on a regional basis is allowed by the 
Protocol. As shown in Figure 1 (p. 15) of the same report, emissions 
above Kyoto targets by Canada, the EU-15, and Japan could be more than 
offset through emissions credits from Eastern Europe, Russia, and 
Ukraine. This experience outlines the valuable role that international 
offsets and credits can play in a cap-and-trade system. To the extent 
that a U.S. program allows international offsets, costs faced by 
covered entities would be lower than without offsets, at least in the 
short-term.
    Specific reasons for the difficulties some countries are 
experiencing in achieving Kyoto targets differ. For example, the rising 
level of greenhouse gas emissions from 1999-2004 in the EU-15 countries 
was the result of increased electricity and heat generation from coal-
fired facilities and increased energy use in the transport sector. 
However, these trends reversed between 2004 and 2005 as the EU-15 
countries reduced their reliance on coal-fired generation, overall 
transportation CO2 emissions declined, and Europe 
experienced a milder winter than previous years.\5\ These sorts of 
uncertainty are reflected in the wide range of baseline estimates of 
U.S. greenhouse gas emissions provided in the report. Under S. 2191, 
the higher the baseline emissions, the greater the reductions necessary 
to meet the proposed emissions cap, and the more difficult it would be 
to comply with the cap.
---------------------------------------------------------------------------
    \5\ European Environment Agency, Greenhouse Gas Emission Trends and 
Projections in Europe 2007 (Copenhagen, 2007), pp. 25-26.
---------------------------------------------------------------------------
    Question 2. I hear supporters of a cap and trade approach to global 
climate change mitigation consistently refer to the sulfur dioxide 
program at the Environmental Protection Agency and compare it to the 
potential implementation of this legislation.
    Please compare the size and scope, including the ways in which 
regulated entities complied with sulfur dioxide limits and can be 
expected to comply with limits on carbon dioxide, of the two programs 
so that we may have a better sense of perspective on this comparison.
    Answer. On pages 17 and 18, CRS makes some comparisons of the size 
and scope of the SO2 program and a program to limit 
greenhouse gases:

          Compared with the complexity of implementing a greenhouse gas 
        cap-and trade scheme, the SO2 program was trivial. 
        Conceptually, a CO2 tradeable permit program could 
        work similarly to the SO2 program. However, 
        significant differences exist between acid rain and possible 
        global warming that affect current abilities to model 
        responses. For example, the acid rain program involves up to 
        3,000 new and existing electric generating units that 
        contribute two-thirds of the country's SO2. This 
        concentration of sources makes the logistics of allowance 
        trading administratively manageable and enforceable. The 
        imposition of the allowance requirement is straightforward. The 
        acid rain program is a ``downstream'' program focused on the 
        electric utility industry. The allowance requirement is imposed 
        at the point of SO2 emissions so the participant has 
        a clear price signal to respond to. The basic dynamic of the 
        program is simple, although not necessarily predictable.
          A comprehensive greenhouse gas cap-and-trade program would 
        not be as straightforward to implement. Greenhouse gas 
        emissions sources are not concentrated. Although over 80% of 
        the greenhouse gases generated comes from fossil fuel 
        combustion, only about 33% comes from electricity generation. 
        Transportation accounts for about 26%, direct residential and 
        commercial use about 8%, agriculture about 6%, and direct 
        industrial use about 16%.\6\ Thus, small dispersed sources in 
        transportation, residential/commercial, agriculture, and the 
        industrial sectors are far more important in controlling 
        greenhouse gas emissions than they are in controlling 
        SO2 emissions. This greatly increases the economic 
        sectors and individual entities that may be required to reduce 
        emissions.
---------------------------------------------------------------------------
    \6\ U.S. Environmental Protection Agency, U.S. Inventory of 
Greenhouse Gas Emissions and Sinks: 1990-2006 (April 2008), p. ES-8.

    Further, the report notes that ``the diversity of sources creates 
significant administrative and enforcement problems for a tradeable 
permit program if it is meant to be comprehensive (p. 17).''
    However, the report also comments that (p. 18):

          The flexibility envisioned by most cap-and-trade programs 
        exceeds that of the SO2 program. Acid rain is a 
        regional problem that resulted in independent responses by the 
        United States and Canada. The United States chose a cap-and-
        trade program that included important flexibility mechanisms 
        like banking; Canada chose a variety of approaches and the 
        entire process was later codified by treaty. Offsets (emission 
        reductions made by entities not directly covered by the 
        program) are not a major component of the SO2 
        program. Uncovered industrial entities that want to participate 
        in the program must become covered entities with their own 
        baselines and monitoring equipment. The bill also sets up a 
        small reserve of allowances to reward reductions through 
        conservation and renewable energy efforts. With the sulfur 
        dioxide cap-andtrade system being limited to the United States, 
        there is no international trading in the acid rain program.
          In contrast, most GHG cap-and-trade proposals expand the 
        supply of available allowances by permitting offsets from a 
        wide variety of sources, including agricultural practices, 
        forestry projects, sequestration activities, and alternative 
        energy projects. These diverse sources multiply as the trading 
        extends globally and as other non-CO2 greenhouse 
        gases are included in the supply mix. Finally, the interaction 
        of these various supply sources and the demand of other 
        countries also reducing emissions (or who may decide to reduce 
        in the future) provide for an almost infinite number of 
        possible scenarios. Crucially, the availability of offsets may 
        have a significant impact on compliance costs, particularly in 
        the short-term.

    It should also be noted that there were several options available 
in 1990 for reducing SO2 emissions (e.g., scrubbers, low-
sulfur coal). With greenhouse gases, widespread technical solutions may 
not be as readily available. However, it should be noted that before 
the SO2 program was enacted, many thought that it would not 
be feasible to use low-sulfur western coal in boilers originally 
designed to use higher-sulfur eastern coal. As events unfolded, the 
development of the ability to use such coal in these boilers has been 
an important factor in keeping down the cost of the SO2 
program. This experience highlights the difficult nature of predicting 
the use, availability, and cost-effectiveness of future technology in 
the absence of a market currently for that technology.
    Question 3. According to the Congressional Budget Office's cost 
estimate for S. 2191, its cap and trade regime will generate roughly 
$1.2 trillion between 2009 and 2018.
    How much would Congress have to raise the federal gas tax, which is 
currently at 18.4 cents per gallon, to generate the same amount of 
revenue between 2009 and 2018?
    Answer. The Energy Information Administration projects that the 
United States will consume roughly 1.5 trillion gallons of motor 
gasoline between 2009 and 2018.\7\ To generate an additional $1.2 
trillion through increased gasoline tax revenue, the tax rate would 
need to increase by roughly 80 cents per gallon, assuming all gasoline 
is used for taxable purposes, and assuming no discount rate. Please 
note that this calculation assumes no reduction in gasoline demand 
resulting from the price increase and is based on gasoline use only; 
diesel fuel is not included.
---------------------------------------------------------------------------
    \7\ Energy Information Administration, Annual Energy Outlook 2008 
with Projections to 2030 (Revised Early Release) (March 2008), 
Reference Case Table 11.
---------------------------------------------------------------------------
    Question 4. These analyses tend to list natural gas, nuclear, clean 
coal, renewables, and other forms of electrical generation as ways in 
which the caps in S. 2191 can be adhered to. As a result, we get some 
odd results that are likely impossible to achieve.
    Do any of the models you have looked at allow for economic slow-
down as a compliance mechanism?
    Answer. All of the models allow for economic slowdown resulting 
from compliance with a greenhouse gas reduction program; however, 
economic contraction is not employed as a compliance mechanism, per se. 
The models also project slower GDP growth under S. 2191 than under 
their baseline (``business-as-usual'') cases. For most of the cases, 
the effect on GDP per capita in 2030 was a 0.3%-2.7% reduction from 
their respective ``business as usual'' baselines. Instead of growing by 
between 62% to 85% from 2010 to 2030 in the baseline projections, GDP 
is projected to grow 61% to 84% under S. 2191.\8\ In no case (including 
various sensitivity analyses) does the economy contract. As noted in 
the CRS report, the United States has a massive economy that can absorb 
substantial shocks with limited longterm effect (page 25).
---------------------------------------------------------------------------
    \8\ The cases with the largest reductions in GDP growth rest in the 
middle of the baseline cases. For example, EPA's IGEM model showed GDP 
growth from 2010 to 2030 dropping from 78% to 73% under S. 2191.
---------------------------------------------------------------------------
    Question 5. As we discuss issues related to the share of allowances 
that will be auctioned or given away, what would be the consequences of 
these permits being bought up by people who don't intend to emit 
greenhouse gases?
    What would that do to the cost to emitters and their ability to 
comply with S. 2191?
    Answer. There are two potential issues raised by your question. The 
first is the role of non-covered entities (e.g., states) that receive 
allowance allocations at no cost. The second is the role of non-covered 
entities in the secondary allowance market.
    In the first case, most proposed legislation--including S. 2191--
that gives allowances to non-covered entities, requires those entities 
to generate ``fair market value'' within some time frame, usually 
within one year of receipt. These non-covered entities may not bank or 
retire allowances. Likewise, since they must generate fair market 
value, they may not sell allowances at a reduced rate (or give them 
away) to preferred industries or firms.
    The second case is the role of traders (who may or may not be 
covered entities). Under current law, carbon allowances would be 
regulated as an exempt commodity--any person or firm could buy and sell 
them like any other commodity. To the extent that market participants 
hold on to allowances for the future, reducing the available supply, 
prices are likely to increase. The potential for investor fraud, 
insider trading, and market manipulation in such a market is discussed 
in a separate CRS report.\9\
---------------------------------------------------------------------------
    \9\ For a further discussion of this subject, see CRS Report 34488, 
Regulating a Carbon Market: Issues Raised By the European Carbon and 
U.S. Sulfur Dioxide Allowance Markets by Mark Jickling and Larry 
Parker.
---------------------------------------------------------------------------
    Question 6. The proposed Lieberman-Warner legislation seeks to 
reduce domestic greenhouse gas emissions by 66 percent by 2050. In the 
absence of international action, where other countries also take steps 
to reduce their emissions at similar rates, what effect would this 
domestic decrease have on projected global greenhouse gas emissions in 
2050?
    Answer. CRS attempts to put S. 2191 into a global context on pages 
67-69. As climate change is a global problem, the potential effects on 
greenhouse gas concentrations from U.S. action must be considered in a 
global context. As noted by the Massachusetts Institute of Technology 
(MIT):

          ...it is not possible to connect specific U.S. policy targets 
        with a particular global concentration or temperature target, 
        and therefore the avoided damages, because any climate gains 
        depend on efforts in the rest of the world.... If a cooperative 
        solution is at all possible, therefore, a major strategic 
        consideration in setting U.S. policy targets should be their 
        value in leading other major countries to take on similar 
        efforts.\10\
---------------------------------------------------------------------------
    \10\ 1Sergey Paltsev, et al., Assessment of U.S. Cap-and-Trade 
Proposals, MIT Joint Program on the Science and Policy of Global 
Change, Report No. 146 (April 2007). p. 55.

    Based on the MIT analysis discussed on pages 67-69, the estimated 
effect of S. 2191 in conjunction with similar action by all other 
developed countries (Annex 1 countries) who are signatories to the 
Kyoto Protocol would be to reduce by 0.5 degrees C the projected 3.5 to 
4.5 degree C increase in global mean temperatures suggested by the 
simulations (p. 67). Illustrating the need for global participation in 
---------------------------------------------------------------------------
responding to climate change, the report's conclusion notes (page 75):

          S. 2191's climate-related environmental benefit is best 
        considered in a global context and the desire to engage the 
        developing world in the reduction effort. It is in this context 
        that the United States and other developed countries agreed 
        both to reduce their own emissions to help stabilize 
        atmospheric concentrations of greenhouse gases and to take the 
        lead in reducing greenhouse gases when they ratified the 1992 
        United Nations Framework Convention on Climate Change (UNFCCC). 
        This global scope raises two issues for S. 2191: (1) whether S. 
        2191's greenhouse gas reduction program and other provisions 
        would be considered sufficiently credible by developing 
        countries so that schemes for including them in future 
        international agreements become more likely, and (2) whether S. 
        2191's reductions meet U.S. commitments to stabilization under 
        the UNFCCC and occur in a timely fashion so that global 
        stabilization may occur at an acceptable level. [Emphasis in 
        original]

    Question 7. I am greatly concerned about the securitization of 
carbon dioxide emissions credits, which could eventually lead to a 
situation similar to the recent housing crisis. What steps could be 
taken to prevent this from happening?
    Answer. CRS has a separate report on regulating carbon markets 
entitled Regulating a Carbon Market: Issues Raised By the European 
Carbon and U.S. Sulfur Dioxide Allowance Market.\11\ Noting the 
potential regulatory fragmentation of the carbon market, CRS draws an 
analogy to the stock market crash of 1987. That event revealed 
differences of opinion among the CFTC, the SEC, and the Federal 
Reserve. In response, ``President Reagan created the President's 
Working Group on Financial Markets, which remains active, conducting 
studies and making recommendations on intermarket issues, as well as 
providing a forum for regulatory coordination. A similar umbrella group 
might help to prevent regulatory gaps or conflicts in the emissions 
market.''\12\
---------------------------------------------------------------------------
    \11\ CRS Report RL34488 by Mark Jickling and Larry Parker.
    \12\ ibid., p. 37-38.
---------------------------------------------------------------------------
    Question 8. Should the Carbon Market Efficiency Board have 
authority to provide bail-outs for covered entities, similar to the 
Federal Reserve's decision to open up its lending window for Bear 
Stearns earlier this year?
    Answer. Under S. 2191, the Carbon Market Efficiency Board can only 
take actions that apply to all covered entities, for example allowing 
greater use of offsets or reducing the interest rate on borrowed 
allowances. CRS does not make recommendations on legislative proposals 
but could analyze the advantages and disadvantages of any future 
proposal to change the scope of the authority of the Board. Whether the 
Board should have authority to address individual entities' concerns 
would depend on one's view of the proper role of Board.

    Responses of Larry Parker and Brent Yacobucci to Questions From 
                            Senator Menendez

    Question 1. Your report touches on the difficulty in monetizing the 
benefits of GHG reduction. Your illustrative example mentions the 
results of The Stern Report, and the conclusion that the net present 
value (NPV) of S. 2191 's estimated reductions would range from $4.2 
trillion to $5.5 trillion. I note that this is very close to the costs 
estimated in the NMA/CRA analysis. As you know, the complexity inherent 
in interacting economic, social and political systems makes it very 
difficult to predict the costs and impacts of this legislation. Why is 
it any more difficult to predict the benefits of avoided warming?
    All of the studies you considered exclude averted GW costs and 
other environmental benefits, the primary reason for climate change 
legislation. How small or large might these be compared to the 
regulatory costs projected by the models? Do you consider your 
illustrative example to be realistic?
    As suggested on page 62, both long-term cost and benefit estimates 
are fraught with uncertainty. Many of the uncertainty issues are the 
same between long-term cost and benefit analyses (e.g., baseline 
uncertainty, unknown future events). As discussed on pages 25-29, the 
perspective of the modelers has a strong influence on both their view 
of projected costs and perceived benefits of addressing climate change. 
As illustrated on these pages, cost estimates reflect the 
technological, economic, and ecological perspective behind the 
assumptions used. As stated again later with respect to benefits, CRS 
quotes the Stern Review: ``It is very important ... to stress that such 
estimates reflect a large number of underlying assumptions, many of 
which are very tentative or specific to the ethical perspectives 
adopted (page 67).'' Benefit analysis may appear harder because the 
analyst is attempting to put impacts that currently have no markets or 
prices into an evaluative context of markets and prices. For example, 
as noted in the discussion of the impact of analysts' perspective on 
results (pages 25-29), some view issues such as intergenerational 
equity in ethical terms that should not be considered as commodities to 
be bought, sold, or discounted. Also, benefit analysis may appear 
harder because fewer resources have been devoted to it. As CRS notes on 
page 62: ``more research and resources devoted to benefits analysis are 
necessary before more comprehensive reports will be available.''
    CRS's illustrative example is based on the assumptions of the Stern 
Review and the analytical methodology employed by the UK Government. If 
the analysis were conducted with the much lower social cost of carbon 
estimate used by the National Highway Traffic Safety Administration 
(NHTSA), then the benefit estimate would be much lower (page 66). As 
noted on pages 28-29, meta-analysis suggests that inclusion of climate-
related benefits analysis can have a significant effect on lowering the 
overall costs of a greenhouse gas reduction program and that ``as none 
of the models reviewed in this report quantify any environmental 
benefits in their analyses, all models' results can be considered 
`worst-case' scenarios.'' (p. 29) The possibility that including all 
environmental benefits of a climate change program could result in a 
positive cost-benefit ratio is illustrated by Figure 1 on page 24. All 
the data points above the zero line indicate a positive cost-benefit 
result.
    Question 2. Nobody wants to see massive global warming. The 
questions, then, are what to do and when to act. I would like to focus 
now on the latter. How much more expensive will it be to wait to begin 
reducing GHG emissions than to act now? Our country faces an urgent 
need to invest in its infrastructure, including the transportation and 
electrical systems. If we begin to invest without a plan to address 
global warming, what potential do you see for inefficient investment?
    One of the arguments in favor of doing nothing is the idea that 
``technological advances'' will occur which will make emissions 
reduction cheaper in the future. What lessons does the SO2 
cap and trade regime offer in that regard? Could the innovations which 
made that program cheaper than expected have materialized without 
legislative action?
    Answer. In CRS report RL33799, Climate Change: Design Approaches 
for a Greenhouse Gas Reduction Program, we offer observations on the 
timing issue with respect to reducing greenhouse gas emissions (p. 12):

          This situation leads to disputes over how time should be 
        managed under a GHG reduction program. One argument is that 
        modest cuts (or slowing of the increase) early, followed by 
        steeper cuts later, is the most cost-effective. Generally, 
        three cost-related arguments are made in favor of this 
        approach. First, over the long-term, sustained GHG reductions 
        involve a turnover in existing durable capital stock--a costly 
        process. If the time frame of the reduction is long enough to 
        permit that capital stock to be replaced as it wears out, the 
        transitional costs are reduced. Second, increased time to 
        comply would permit the development and deployment of new, less 
        carbon-intensive technologies that are more cost-effective than 
        existing technology. Third, assuming a positive rate of return 
        on current investment, less money needs to be set aside today 
        to meet those future compliance costs.\13\
---------------------------------------------------------------------------
    \13\ Robert Repetto and Duncan Austin, The Costs of Climate 
Protection: A Guide for the Perplexed (World Resources Institute, 
1997), p. 21.

    A counter-argument to the above focuses on the risks of delay, both 
in terms of scientific uncertainty and technology development. First, 
in terms of scientific uncertainty, there is no consensus on what 
concentration of greenhouse gases should not be exceeded if undesirable 
climate change is to be avoided. If the stabilization level needed is 
relatively low, any delay in beginning reductions could be costly, both 
economically and environmentally.\14\ Second, given the sometimes long 
lead times for technology development, both a long-term price signal 
and research and development funding may need to be initiated quickly 
to encourage technology development and deployment in time to hold GHG 
concentrations to a level that limits unacceptable damages. In the same 
vein, an early signal with respect to climate change policy is likely 
necessary to discourage investment in durable long-lived (50-60 years) 
carbon-intensive technologies.\15\ As stated by Jaccard and Montgomery:
---------------------------------------------------------------------------
    \14\ Cambridge Energy Research Associates (CERA) Advisory Service, 
Design Issues for Market-based Greenhouse Gas Reduction Strategies: 
Special Report (February 2006), pp. 54-55.
    \15\ CERA Advisory Service, Design Issues for Market-based 
Greenhouse Gas Reduction Strategies: Special Report (February 2006), 
pp. 54-55; Robert Repetto and Duncan Austin, The Costs of Climate 
Protection: A Guide for the Perplexed (World Resources Institute, 1997) 
p. 22.

          The window of opportunity for reducing cost implies a need 
        for immediate and continuing action to develop new low-carbon 
        technologies and to begin shifting long-lived investment 
        decisions toward alternatives that lower carbon emissions. 
        Absent these actions, the rapid future emissions reductions 
        included in the delayed emissions scenario may be more costly 
        than more evenly paced, and earlier reductions.\16\
---------------------------------------------------------------------------
    \16\ M. Jaccard and W.D. Montgomery, ``Costs of Reducing Greenhouse 
Gas Emissions in the USA and Canada,'' Energy Policy, Volume 24, Issues 
10-11 (1996), pp. 889-898.

    With respect to lessons from the acid rain program, CRS discusses 
the acid rain program on pages 10-12 of RL34489. As noted on page 11, 
lower than projected costs were the result of several factors, 
including lower transportation costs, productivity increases in coal 
production, costs for scrubbers that were cheaper than expected, and 
new boiler adaptations to allow use of different types of coals. With 
the exception of increasing boiler flexibility, none of these would be 
considered ``technological advances'' or innovations. The increased 
boiler flexibility probably would not have occurred in the absence of 
legislation as there would have been no need for it. With respect to 
the scrubber cost savings, the commercial availability of two dozen 
scrubber systems and a competitive market with European and Japanese 
manufacturers competing with U.S. manufacturers helped ensure market 
prices to utilities and sufficient capacity.\17\
---------------------------------------------------------------------------
    \17\ See Larry Parker, ``Scrubbers: A Proven Technology,'' Forum 
for Applied Research and Public Policy (Spring 1989), pp. 35-39.
---------------------------------------------------------------------------
    Question 3. As was the case with the estimates of the cost of 
SO2 regulation, none of the LW [Lieberman-Warner] cost 
studies assume that new legislation will occur that will advance 
investments in energy efficiency and alternatives, resulting in 
lowering the costs of LW. Can you discuss what some of the associated 
policies might be and how likely they are?
    Answer. Projecting the likelihood of--and provisions of--future 
legislative initiatives over the long-term time frame of S. 2191, be it 
energy efficiency or other alternatives, would be an uncertain 
enterprise. There are currently over 350 energy efficiency and 
renewable energy bills introduced in the 110th Congress. These bills 
cover a wide range of policy and issue areas that include 
appropriations, authorizations, budget, research and development (R&D), 
grants, loans, financing, regulation (including a renewable fuel 
standard), tax incentives, goals, plans, impacts, and the environment/
climate change. Most of these bills have focused on grants and tax 
incentives. The bills also cover a range of sectors and topics that 
include buildings, transportation, defense, education, federal lands 
and energy management, farms, American Indians, and international 
activities. Thus far, the sector of international activities has 
generated the greatest number of bills. For more information, see CRS 
Report RL33831, Energy Efficiency and Renewable Energy Legislation in 
the 110th Congress, by Fred Sissine, Lynn J. Cunningham, and Mark 
Gurevitz.

    Responses of Larry Parker and Brent Yacobucci to Questions From 
                            Senator Sanders

                       ASSUMPTIONS ABOUT OFFSETS

    The use of offsets is being defined in the models as a cost 
avoidance mechanism, but there is more to offsets than cost avoidance. 
Now, I understand the theory that paying someone to do something can be 
easier than changing your own behavior, but if we don't actually ensure 
emission reductions, it doesn't really matter.
    Question 1. What are the assumptions regarding the actual emissions 
reductions from offsets? Do the models assume a 1 to 1 relationship or 
do the models include some calculation for the fact that offsets can be 
difficult to quantify, or even difficult to verify?
    Does the usage of offsets create opportunity costs for the 
adaptation of renewable technologies, such as wind and solar, that 
reduce our overall emissions? Said another way: does the use of offsets 
have the potential to, in any way, delay a transition to renewables, 
since polluters could just pay someone to plant a tree instead of 
actually moving to sustainable energy?
    Also, what are the assumptions in the models that determine the 
permanence of offsets? Is there a discount factor for offsets that fail 
because of natural or manmade reasons?
    How is additionality worked into the models?
    Answer. Based on the documentation provided by the various cases, 
there appears to be a one-to-one relationship assumed between offsets 
used and reduction achieved.
    As noted in our testimony: ``the cases generally indicate that 
domestic carbon offsets and international carbon credits could be 
valuable tools for entities covered by S. 2191 not only to potentially 
reduce costs, but combined with the bill's provisions permitting the 
banking of allowances, to provide companies more time to develop long-
term investment and strategic plans, and to pursue new technologies.'' 
To the extent that offsets bring down allowance prices, there may be 
less incentive for developing new technology or employing renewable 
resources.\18\
---------------------------------------------------------------------------
    \18\ See CRS Report RL34436, The Role of Offsets in a Greenhouse 
Gas Emissions Cap-and-Trade Program: Potential Benefits and Concerns, 
by Jonathan L. Ramseur, p. 22.
---------------------------------------------------------------------------
    Based on the documentation provided by the various cases, it 
appears that the cases assume the offsets are permanent. Likewise, 
there is no apparent discount factor for the possibility of offset 
failure.
    CRS cannot determine from the documentation provided how, or if, 
the issue of additionality is addressed by the cases it examined.

       FAILURE TO ASSESS THE BENEFITS OF ACTION ON GLOBAL WARMING

    To date, all of the analyses of Lieberman-Warner and other bills 
assess only the costs of acting--they do not assess the benefits of 
acting and avoiding or mitigating global warming. Agencies typically 
analyze the costs AND benefits of their regulations. However, in the 
case of climate change, economists have a long way to go in monetizing 
benefits, assuming many of the benefits--like preventing catastrophic 
events such as hurricanes, droughts, and other extreme weather events, 
along with the spread of diseases, wars over resources, and the 
extinction of species--can even be monetized. The analyses of 
Lieberman-Warner by EIA and EPA do not attempt to quantify the 
benefits. They thus run the risk of focusing attention on the costs of 
climate legislation without balancing that information with the 
benefits of reducing climate change.
    Question 2. Do your analyses assess the benefits of avoiding or 
mitigating climate change? Aren't there important benefits that have 
not been considered at all? Examples that come to mind include the 
avoidance of risks from increased or more severe droughts, floods, 
hurricanes and wildfires; increased air pollution; catastrophic events 
such as melting ice sheets; unrest overseas affecting U.S. national 
security; and changing disease patterns.
    A related, but different, question is: do the ``Business as Usual'' 
scenarios included in your models (or the models you have seen, in the 
case of CRS) assume increased costs from the types of events I just 
mentioned, given that we are told that the events will become 
increasingly common unless we reduce global warming.
    What efforts are others making in the public and private sectors?
    Answer. The CRS report addresses benefits on pages 62-70. 
Specifically, the report provides some illustrations of efforts to 
monetize benefits from reducing greenhouse gases, and attempts to put 
the reductions proposed by S. 2191 into a global context. With respect 
to climate risks, table 15 (page 64) provides a matrix of climate risks 
that illustrates the broad range of potential consequences of climate 
change and the difficulty in monetizing those potential effects. As 
stated in the report: (page 63)

          However, most current attempts to monetize environmental 
        benefits are incomplete. The matrix presented in Table 15 
        illustrates the problem. Most studies that attempt to monetize 
        benefits focus on the market impact of predictable, average 
        changes in climate (the ``easiest to measure'' box of Table 
        15). Only a few attempt to value non-market impacts or extreme 
        events and fewer still consider catastrophes or socially 
        contingent impacts.\19\ In reviewing 28 studies the UK 
        Government had analyzed in re-examining its estimate of an 
        appropriate Social Cost of Carbon, Ackerman and Stanton 
        observed:
---------------------------------------------------------------------------
    \19\ Frank Ackerman and Elizabeth Stanton, Climate Change--the 
Costs of Inaction, Report to Friends of the Earth England, Wales and 
Northern Ireland (October 11, 2006), p. 26.

                  That is, all of the studies that estimate the social 
                cost of carbon base their numbers on an incomplete 
                picture of climate risks--often encompassing only the 
                simplest and most predictable corner of the vast, 
                troubling canvas that has been painted by climate 
                science. There is, of course, no way to assign monetary 
                values to the global response to the possibility of 
                widespread droughts across large parts of Asia, or an 
                increase in the probability of a sudden change in ocean 
                currents that would make the UK as cold as Canada, but 
                in the understandable absence of such impossible 
                monetary values, it is important to remember the 
                disclaimer from the DEFRA [Department for Environment, 
                Food & Rural Affairs] review: all estimates of the SCC 
                [Social Cost of Carbon] omit some of the most important 
                unpriced risks of climate change. The same disclaimer 
                applies to virtually any quantitative economic estimate 
                of climate impacts.\20\
---------------------------------------------------------------------------
    \20\ ibid., p. 26.

    None of the cases CRS examined included any increased costs or 
suppressed economic growth from the events listed in your question.
    With respect to efforts by others to analyze benefits, CRS notes on 
page 62: ``more research and resources devoted to benefits analysis are 
necessary before more comprehensive reports will be available.'' An 
example of recent work in this area is provided in a separate CRS 
report entitled Climate Change: Current Issues and Policy Tools which 
also discusses the challenges of benefit analysis, the potential global 
costs of climate change, and the potential costs of climate change to 
the U.S. economy.\21\ (pages 13-17)
---------------------------------------------------------------------------
    \21\ CRS Report RL34513, Climate Change: Current Issues and Policy 
Tools, by Jane A. Leggett.
---------------------------------------------------------------------------
        UNTAPPED POTENTIAL FOR RENEWABLES AND ENERGY EFFICIENCY

    Electricity from coal, nuclear power, and other traditional energy 
sources appear prominently in the modeling of Lieberman-Warner. Several 
renewable technologies, however, are available today that can generate 
inexpensive electricity without emitting carbon.
    Concentrating Solar Power uses the sun to provide heat that drives 
a steam power plant. This one resource could provide up to 17% of our 
nation's electricity. A typical CSP plant being built today produces 
250 Megawatts of power, emits very little CO2, and costs 1-2 
billion dollars (about the same as a traditional coal plant and 
significantly less than a new nuclear plant, which can run between 4-12 
billion). Over its operating life, today's CSP plants deliver power at 
$0.13 per kilowatt-hour, but the Department of Energy estimates that 
the costs for CSP will drop below $0.08 per kilowatt-hour once 
economies of scale are achieved. There are close to 400 Megawatts of 
CSP already operating in the southwest, and at least 3, 000 Megawatts 
are in various stages of development.
    Wind is another major opportunity. Just last week the Department of 
Energy's National Renewable Energy Laboratory released a report showing 
that wind could provide up to 20% of our nation's electricity needs by 
2030. This resource will only cost $0.05 per kilowatt-hour, which is 
competitive with what we are paying for coal today.
    Geothermal is another great opportunity. A report for the U.S. 
Department of Energy by the Massachusetts Institute of Technology 
suggests that geothermal energy could provide 100,000 Megawatts of new 
carbon-free electricity at less than $0.10 per kilowatt-hour, 
comparable to cost projections for coal with carbon capture and 
storage. This single renewable resource could account for almost 10% of 
our nation's electricity needs in the future.
    There are many other possibilities, for biomass, photovoltaics, 
hydropower, and other renewable technologies, for example. But, once 
you add it all up, the United States could meet 2/3 of its electricity 
needs from sustainable energy.
    Now, add on what we could be doing with energy efficiency, and it 
gets really exciting. According to the McKinsey Report, released last 
year, we have the technologies needed to reduce greenhouse gases at our 
disposal today.
    Question 3. Do your analyses take into account the strategies 
identified in the McKinsey Report for reducing greenhouse gases, 
including improving the economy's energy efficiency?
    Answer. CRS did not conduct an independent analysis of the 
technologies necessary to meet S. 2191's goals, but reviewed the 
results of six studies. The amount of renewables each model assumed 
would be built under S. 2191 is provided in Table 11 (p. 46). CRS notes 
on page 47 that the cases it examined result in a 10-30% reduction in 
electricity demand from basecase levels. However, CRS does not know if 
the models incorporated the specific technologies mentioned above. As 
noted in the report (page 53-54), two of the cases CRS examined used 
proxies to at least partially model the effects of the various 
incentives contained in S. 2191:

          Specifically, CATF/NEMS simulated the incentives for low and 
        no carbon power technologies by using a production tax credit 
        for CCS and extending the wind production tax credit to 2030. 
        CATF/NEMS also used EIA's ``Best Available Technology'' case as 
        a proxy for the appliance and building standards included in 
        the bill. The results are some of the lowest overall cost 
        estimates of any of the cases, along with substantial 
        development of coal-fired CCS, nuclear power and renewables.
          Other innovative approaches were taken by EIA/NEMS, to 
        attempt to mimic the impact of energy efficiency incentives by 
        reducing the incremental cost of the most energy-efficient 
        residential appliances by half--simulating a rebate for buying 
        more efficient appliances. Likewise EIA/NEMS mimicked the 
        incentives for stronger building codes by tightening the 
        residential codes in the model by 30% in 2015 and 50% in 2025 
        compared with basecase levels. These proxies come in addition 
        to the EISA [Energy Independence and Security Act of 2007] 
        provisions that are contained in the preliminary AEO 2008 
        basecase used by EIA/NEMS. The proxies contribute to some of 
        the lowest cost estimates of any of the cases.
          The only other model to incorporate these initiatives was 
        NMA/CRA, which incorporated the preliminary AEO 2008 baseline 
        that includes the EISA provisions. However, the NMA/CRA results 
        do not separate out the efficiency standards from the new 
        Corporate Average Fuel Economy (CAFE) or renewable fuel 
        standard (RFS) requirements.
                                 ______
                                 
    Responses of Brian J. McLean to Questions From Senator Bingaman

    Question 1. In his testimony, Larry Parker from CRS aptly quoted a 
former director of EIA, Dr. Lincoln Moses, who said: ``There are no 
facts about the future''. I think we can all appreciate the relevance 
of this statement to the debate in front of us. Since EPA was heavily 
involved in the previous sulfur dioxide trading regime, I am wondering 
if you would care to comment on the factors that caused early estimates 
of SO2 allowance prices to be lower than originally 
projected and on the relevance of those factors to the question of 
CO2 allowance prices.
    Answer. Two significant assumptions in our analysis of both 
SO2 and NOX programs led us to overestimate 
allowance prices. First, end-of-pipe pollution control solutions were 
more effective than expected. In the case of SO2, incentives 
were put in the bill to encourage state-of-the-art scrubbers that 
achieved 90% efficiency, but as the bill was being finalized, scrubbers 
with 98% efficiency became available. Today new scrubbers routinely 
attain 98% emission removal efficiency. Similarly, in the case of NOx, 
we assumed selective catalytic reduction (SCR) could achieve 70% to 80% 
emission reductions and that the lowest rates that could be achieved 
were around 0.06 lbs of NOximmBtu. SCRs have performed better than that 
(upwards of 90%) and we have seen rates on many units below 0.06 lbs/
mmbtu.
    Second, we did not anticipate the full suite of low cost options 
that have been deployed. In the case of SO2, competition 
among railroads shipping low-sulfur coal led to substantial reductions 
in transport costs, a major component of coal cost. As low-sulfur coal 
became more readily available, it competed with scrubber design and 
equipment advances, reducing the cost of abatement. All of this 
contributed to medium-sulfur coal becoming marketable in the absence of 
a coal sulfur content limit which had existed under the traditional 
regulatory program. In the case of NOx, improved combustion controls 
reduced costs.
    Depending on the precise terms of the legislation approved, EPA 
could expect to see similar performance as companies respond to the 
CO2 price signal by developing and deploying technologies 
and innovative compliance strategies in ways that differ from the 
assumptions in our models.
    Question 2. Both EIA and EPA project that the amount of CCS 
deployed under the Lieberman-Warner bill would be less than the amount 
deployed under the Bingaman-Specter bill, even though the implied bonus 
to CCS (on a per ton basis) is greater under the Lieberman-Warner bill. 
Could you comment on the factors driving these differences in CCS 
deployment? How do the costs of CCS compare the cost of nuclear in 
these models?
    Answer. While it is correct to say that the bonus ratio for CCS (on 
a per ton basis) is greater under the Lieberman-Warner bill, the total 
number of bonus allowances available for CCS projects is lower. In 
Section 3601 of S. 2191, the bill instructs the Administrator to create 
a Bonus Allowance Account for carbon capture and storage deployment and 
to allocate 4 percent of the emission allowances to the account for 
each calendar year from 2012 through 2030. The Bingaman-Specter bill 
does not contain any such limitation on the number of bonus allowances 
available for CCS projects. This limit on the total number of bonus 
allowances is the main factor driving the differences in EPA's modeled 
results of CCS deployment under the two bills.
    Nuclear power is one of the lower-cost low-carbon generating 
options in our model when a carbon constraint is imposed, and the model 
builds as much as possible within the resource constraints. Advanced 
coal generation with CCS is a more expensive low-carbon electricity 
generation option that generally gets built after new nuclear 
generation capacity reaches the model constraint. During the 2015-2020 
time period, our model finds that CCS is cost-effective only if the 
bonus allowances are available. Without the bonus allowance provisions, 
the model would not build CCS capacity until CO2 allowance 
prices are high enough to make it attractive relative to other 
generation alternatives. The allowance prices reach this point by 2025 
under EPA modeling and assumptions.
    Question 3. All of the model analyses of Lieberman-Warner show that 
offsets are an important part of the compliance strategy in early 
years. If offsets are assumed not to be available as widely as the 
provisions allow, then the early targets become much more difficult to 
achieve at low cost. Since EPA generates the offset supply curves that 
other modeling groups employ, could you describe in some detail the 
steps that were taken to determine whether sufficient number of offsets 
would be available to meet the Lieberman-Warner targets and to 
calculate the cost and implied carbon price of such projects?
    Answer. EPA drew on experience gained through its government-
industry greenhouse gas partnership programs to develop mitigation cost 
data for the non-CO2 greenhouse gases in the energy, waste 
and industrial sectors, as well as for the forestry and agriculture 
sectors. These analyses were peer reviewed and published in EPA reports 
on Global Mitigation of Non-CO2 Greenhouse Gases (EPA 430-R-
06-005, 2006) and Greenhouse Gas Mitigation Potential in U.S. Forestry 
and Agriculture (EPA 430-R-05-006, 2005). Domestic and international 
offset supply curves were initially developed for EPA's analysis of the 
Lieberman-McCain bill (S. 280) and described in EPA's March 26, 2007 
memo to EIA. These offset supply curves were subsequently adapted for 
use in EPA's analyses of the Bingaman-Specter bill (S. 1766), and the 
Lieberman-Warner bill (S. 2191). In developing these offset supply 
curves EPA evaluated each individual domestic and international 
mitigation option to determine potential eligibility and feasibility 
over time for a future mitigation program. The offset supply curves 
therefore represent the costs associated with the ``eligible'' 
mitigation options. This detailed vetting of individual options, based 
on EPA's substantial emissions inventory and mitigation program 
expertise, substitutes and improves upon previous post-processing 
adjustments to the offset supply curves. The previous post-processing 
adjustments involved an across the board 50% reduction of the offset 
supply curves at every price. The detailed vetting of individual 
options results in a reduction of the offset supply curves that is 
similar in size to the previous post-processing adjustment.
    The EPA reports, our memo to EIA, additional detailed explanations, 
and the data used for development of the offset supply curves which are 
all available on our web site: http://www.epa.gov/climatechange/
economics/economicanalyses.html.
    Responses of Brian J. McLean to Questions From Senator Domenici
    Question 4. What are the major factors causing signatories to the 
Kyoto Protocol to miss their greenhouse gas emission reduction targets 
and are those shortcomings similarly foreseeable for the United States 
under a cap and trade regime?
    Answer. Signatories to the Kyoto Protocol (KP) are required to meet 
their emission limitation and reduction commitment under the Protocol 
for the five-year period from 2008 to 2012. Parties are not expected to 
report emissions data for 2008 until 2010. Because these commitments 
can be met by domestic action, through emissions trading or by 
acquiring reductions from either the Clean Development Mechanism or 
through Joint Implementation activities, national inventories for one 
year do not necessarily indicate whether a country will be in 
compliance at the end of the commitment period. Compliance will be 
determined after 2012 on the basis of whether or not a Party has 
sufficient Kyoto allowances to cover its emissions over the entire 
five-year period.
    Although the U.S. can learn from steps being taken under the Kyoto 
Protocol as well as lessons learned from current U.S. cap and trade 
programs, we are not bound to any shortcomings that might ultimately be 
found in the Kyoto Protocol system.
    Question 5. I hear supporters of a cap and trade approach to global 
climate change mitigation consistently refer to the sulfur dioxide 
program at the Environmental Protection Agency and compare it to the 
potential implementation of this legislation.
    Please compare the size and scope, including the ways in which 
regulated entities complied with sulfur dioxide limits and can be 
expected to comply with limits on carbon dioxide, of the two programs 
so that we may have a better sense of perspective on this comparison.
    Answer. The U.S. experience with cap and trade since the passage of 
the 1990 Clean Air Act Amendments has been very successful and forms 
the basis on which other countries have modeled cap and trade programs, 
and are modeling their greenhouse gas (GHG) reduction programs.
    The sulfur dioxide cap and trade program, known as the Acid Rain 
Program, began in 1995, targeting 110 coal-fired power plants (263 
individual sources) in 21 eastern and Midwestern states. In 2000, Phase 
2 of the program affecting virtually all electric power generators 
created the robust and dynamic market that has resulted in reducing 
emissions by nearly 50% and achieving the cap levels ahead of schedule. 
Currently, over 3,500 individual sources participate in the Acid Rain 
Program (2007 data). The flexibilities inherent in the program allowed 
for cost-effective decision making on a case-by-case basis by the owner 
or operator of a facility, without government interference, as to how a 
source chose to comply with the program requirements. If a source chose 
to change its method of compliance, it was free to do so without 
government review or approval. This resulted in huge economies of scale 
previously unimagined in traditional regulation (sometimes referred to 
as command-and-control). What made this possible were basic and 
straightforward requirements in the cap and trade program design that 
were easily understood by everyone: each ton of SO2 
emissions had to be offset by an allowance; if you wished to reduce 
below your allocation, you were free to sell your extra allowances or 
bank them for future use; if you emitted beyond your allocation, you 
needed to and were able to buy allowances from the market; at the end 
of the year, your emissions had to be equal to or less than the 
allowances you held in your account. A firm cap ensured the 
environmental goal was met and stringent continuous monitoring and 
reporting assured the integrity of every allowance, while providing the 
accountability that makes flexibility possible. All program data is 
made publicly available. Market and data transparency instilled public 
confidence in the process. Compliance is over 99%; the few instances of 
excess emissions have had compensating allowances automatically 
subtracted from accounts and stiff penalties automatically applied. EPA 
has issued a progress report every year on the status of the program. 
(For more detailed information, please see http://www.epa.gov/
airmarkets/progress/progress-reports.html.)
    The scope of the SO2 program and a potential U.S. GHG 
mitigation program would be different. Currently, there are roughly 
1,200 facilities covered by the existing Acid Rain Program (or roughly 
3,500 individual sources of emissions). EPA estimates that 2,0003,000 
facilities would be covered by S. 2191. The primary difference is that 
the source category for the Acid Rain Program focuses on electricity 
generators; while for the Lieberman-Warner proposal, source categories 
contributing to GHG emissions that cover the breadth of the economy 
have been discussed. The scale of the needed emission reductions under 
a future CO2 program, as specified in bills EPA has 
analyzed, is both larger and more complex than under the SO2 
program. The electricity generation sector made up over 70% of the 
SO2 contribution of total nationwide emissions, and 
restricting those emissions greatly reduced the acid rain problem and 
transport of SO2. CO2 emissions from electricity 
generation comprise about 30% of the total U.S. CO2 
emissions and other sectors, such as industry and transportation, 
contribute a significant portion of the total emissions.
    Even though the scale of the problem is different, much of the 
experience that has been gained from the existing EPA cap and trade 
programs can be applied to GHG cap and trade programs, including the 
establishment of a robust market, a strong institutional 
infrastructure, and cooperative relationships with States and industry 
that focus on results and assisting with compliance.
    It might also be useful to consider how a GHG cap and trade program 
would compare to the NOx cap and trade program used to reduce ozone 
transport in the Eastern U.S. In that case electricity generators and 
other industrial sources included in the program represented about 30% 
of the NOx emissions. The NOx Budget Trading Program successfully 
reduced those emissions by more than 70%. Because NOx contributes to 
the formation of ground level ozone, such reductions significantly 
contributed to a reduction in ozone transport. Coupled with significant 
reductions from mobile sources, 80% of the ozone nonattainment areas in 
the East were brought into attainment.
    Question 6. I am concerned that the effect Lieberman-Warner would 
have on global greenhouse gas concentrations, as opposed to emissions, 
has been consistently overlooked. In the absence of meaningful 
reductions by other countries, I am told that your agency's analysis of 
S. 2191 finds that global concentrations would be reduced by about 1 
percent by 2050.
    What is the probable impact of a 1 percent reduction in global 
greenhouse gas concentrations? What potential consequences of global 
climate change would such a reduction prevent?
    Answer. Legislative action by any one country--including the U.S.--
would not be able to reduce GHG concentrations in the atmosphere enough 
to have much impact on the climate challenge. Global participation--
especially by major economies--is needed. Our analysis of the 
Lieberman-Warner bill presents both the impact of the US acting alone, 
which would result in a 1.3% reduction in global CO2 
concentrations by 2050 taking into account the emissions leakage; and 
one possible assumption, based on a recent MIT report, where the Annex 
I Kyoto countries (except Russia) gradually reduce emission levels to 
50% below 1990 levels and the rest of the world gradually reaches 2000 
levels by 2050, which would result in a 9.7% reduction in global 
CO2 concentrations. However, it is noteworthy that only the 
European Union and Norway have made pledges to meet or exceed the 50% 
target by 2050 and very few countries have policies in place to set 
them on a trajectory to meet such targets.
    The current analytic capabilities of EPA, and of the climate change 
research community in general, do not allow us to quantify with 
confidence what the specific change in endpoint impacts (e.g., on human 
health, agricultural production, water resource availability) would be 
due to an incremental change in concentrations. The climate change 
research community has traditionally not examined the differences in 
potential future impacts between two incrementally different scenarios, 
but has instead focused on the impacts associated with different 
scenarios that diverge more significantly over time.
    Nevertheless, because we know, from the scientific literature 
assessed by the Intergovernmental Panel on Climate Change, that risk to 
human health, society and the environment increases as the rate and 
magnitude of climate change increases, near term mitigation actions 
reduce long-term risks (including risk of exceeding critical 
thresholds), and increase our chances of eventually reaching lower 
stabilization targets.
    Question 7. We currently have no domestic capacity for the 
fabrication of large nuclear components such as pressure vessels, and 
we are told that our existing workforce can support the construction of 
no more than three reactors at a time.
    Have you analyzed how many reactors we are physically capable of 
building by 2030?
    Answer. We have not performed a comprehensive analysis of the 
number of new reactors that could be built in the U.S. by 2030; 
however, a 2005 study performed for the Department of Energy concluded 
that the necessary infrastructure is available or can be readily 
available to support the construction of 8 units in the 2010 to 2017 
time period. In developing our projections for nuclear power, we drew 
on analyses performed for the Climate Change Science Program as well as 
the Electric Power Research Institute. Currently there are a number of 
factors constraining the ability to build reactors. For example, there 
is only one manufacturer (located in Japan) currently capable of 
manufacturing nuclear-grade, ultra-heavy (>350 tons) forgings needed to 
build a nuclear reactor and since there has been limited activity in 
the nuclear field since the early 1990s there is only a small trained 
US workforce in this area. However, Japan Steel Works has indicated 
that it is going to increase capacity and a number of other 
manufacturers have indicated their intention to develop capabilities 
needed for increased nuclear construction. In addition, the nuclear 
industry, recognizing the potential shortage of skilled workers and 
professionals, is actively recruiting and implementing training 
programs to ensure workforce adequacy for new construction.
    Question 8. These analyses tend to list natural gas, nuclear, clean 
coal, renewables, and other forms of electrical generation as ways in 
which the caps in S. 2191 can be adhered to. As a result, we get some 
odd results that are likely impossible to achieve.
    Do any of the models you have looked at allow for economic slow-
down as a compliance mechanism?
    Answer. EPA's models do not use an economic slow-down as a 
compliance mechanism. In EPA's analysis, the first step is to develop a 
reference case for projected economic growth, technology deployment, 
and GHG emissions. EPA's reference case is traditionally benchmarked to 
the reference case in EIA's Annual Energy Outlook. The next step in the 
analysis is to estimate the effect of changes in technology investments 
that result from the climate mitigation policy on reductions in GHG 
emissions, economic growth, and energy and other commodity prices.
    Question 9. As we discuss issues related to the share of allowances 
that will be auctioned or given away, what would be the consequences of 
these permits being bought up by people who don't intend to emit 
greenhouse gases?
    What would that do to the cost to emitters and their ability to 
comply with S. 2191?
    Answer. It is possible that individuals or institutions may 
purchase allowances with no intention of submitting them as compliance 
for the targeted emission levels of greenhouse gases. Such purchases 
may be made for several reasons. The purchase of an allowance could be 
used as a financial asset in the hope that this investment may result 
in higher returns than may be available elsewhere.
    Individuals or groups may also decide to purchase allowances simply 
to retire them, thus effectively lowering the cap. This has occurred to 
a very limited extent in the Acid Rain program, but has not been enough 
to significantly affect the cap or allowance prices. Given the size of 
the market created by a bill like S .2191, EPA does not believe that 
such purchases would significantly affect the cap level or costs.
    Responses of Brian J. McLean to Questions From Senator Menendez
    Question 10. Current oil prices are nearly double those assumed in 
EIA's and EPA's analysis of climate policy. We can already see that 
high gasoline prices are inducing changes in consumer driving and 
vehicle purchasing behavior. Goldman Sachs recently estimated that oil 
prices might climb to $150-$200 per barrel within the near future. How 
might the projected costs of Lieberman-Warner and other climate 
policies change if the models were run with the higher (and more 
realistic) energy prices that we are already seeing today?
    Does this mean that allowance prices and the total cost to the 
economy of the cap will be lower than current models suggest? Can the 
EPA or EIA rerun the models with estimates that reflect a future with 
sustained high prices for petroleum and other fossil fuels?
    Answer. EPA's economy-wide models are designed to compare responses 
across policy and reference scenarios, not to forecast energy prices. 
To compare policy responses, we benchmark the EPA models to reference 
scenarios from EIA's Annual Energy Outlook. If we were to benchmark the 
models to the EIA High Energy Price Case, GDP would be slightly lower 
and total GHG emissions would also be lower compared to our standard 
reference case that had lower energy prices. If we modeled the 
Lieberman-Warner bill off of the High Price case, allowance prices 
would likely be lower than in our standard case, although it is 
difficult to estimate the precise impact. In a scenario that also 
limits the availability of nuclear and carbon capture and storage 
technologies, where we expect to see an increase in natural gas usage 
in the electricity sector, the increased cost of natural gas usage 
would likely offset some of the potential decrease in allowance prices.
    Yes, EPA can run scenarios with sustained high prices for petroleum 
and other fossil fuels.

     Responses of Brian J. McLean to Questions From Senator Sanders

                       ASSUMPTIONS ABOUT OFFSETS

    Question 11a. The use of offsets is being defined in the models as 
a cost avoidance mechanism, but there is more to offsets than cost 
avoidance. Now, I understand the theory that paying someone to do 
something can be easier than changing your own behavior, but if we 
don't actually ensure emission reductions, it doesn't really matter.
    What are the assumptions regarding the actual emissions reductions 
from offsets? Do the models assume a 1 to 1 relationship or do the 
models include some calculation for the fact that offsets can be 
difficult to quantify, or even difficult to verify?
    Answer. The data and approach developed for EPA's assessment of 
offset potential is described in the answer to Senator Bingaman's third 
question. When applying the offset supply curves, EPA evaluates a 
variety of issues related to each mitigation option and adjusts the 
curve accordingly. The adjustments account for challenges in measuring, 
monitoring, and verifying offset reductions, as well as the lack of a 
clear market signal that the allowance price in the model run assumes.
    To illustrate the approach, for international energy-related 
CO2 emissions, the full abatement potential is included in 
the offset supply curve when a region has a market based greenhouse gas 
policy in place. When a region does not have a market-based emissions 
policy in place, the abatement potential is reduced by 90 or 75 
percent, depending on the year. The approach used to estimate both 
domestic offsets and international credits is described in detail in 
EPA's March 26, 2007 memo to EIA which is on our web site: http://
www.epa.goviclimatechange/economics/economicanalyses.html.
    Question 11b. Does the usage of offsets create opportunity costs 
for the adoption of renewable technologies, such as wind and solar, 
that reduce our overall emissions? Said another way: does the use of 
offsets have the potential to, in any way, delay a transition to 
renewables, since polluters could just pay someone to plant a tree 
instead of actually moving to sustainable energy?
    Answer. To the extent offsets reduce the costs of achieving an 
emissions cap and the allowance price, they can delay the adoption of 
higher cost technologies. At the same time, the ability of offsets to 
reduce costs can provide the private sector more time to develop new 
advanced technologies, including renewables. Determining which higher-
cost mitigation options might be delayed and by how much is dependent 
on the specific policy proposal as well as the assumptions made about 
the cost and performance of various technologies.
    If one believed that offsets were delaying deployment of available 
technologies one could set a lower cap, set it sooner, or restrict the 
amount of offsets. Cap levels and timing and the availability of 
offsets should all be considered together.
    Question 11c. Also, what are the assumptions in the models that 
determine the permanence of offsets? Is there a discount factor for 
offsets that fail because of natural or manmade reasons?
    Answer. Our analysis takes a comprehensive accounting of GHG 
emissions, both crediting emission reductions and debiting emission 
increases. Therefore, we do not use a discount factor for offsets 
related to the possibility of failure.
    Our analysis does include adjustments to the total amount of 
potential offsets. The adjustments made to mitigation potential for 
each offset category are designed to account for difficulties in 
measuring, monitoring, and verifying offset reductions in countries 
without a market-based greenhouse gas emissions policy. These 
adjustments include verifying that the offset emission reductions are 
achieved.
    Question 11d. How is additionality worked into the models?
    Answer. Since mitigation in our modeling is a function of a GHG 
allowance price, all mitigation undertaken is by definition additional 
to the reference case, that is, it would not have taken place in the 
absence of a GHG allowance price.

       FAILURE TO ASSESS THE BENEFITS OF ACTION ON GLOBAL WARMING

    Question 12a. To date, all of the analyses of Lieberman-Warner and 
other bills assess only the costs of acting--they do not assess the 
benefits of acting and avoiding or mitigating global warming. Agencies 
typically analyze the costs AND benefits of their regulations. However, 
in the case of climate change, economists have a long way to go in 
monetizing benefits, assuming many of the benefits--like preventing 
catastrophic events such as hurricanes, droughts, and other extreme 
weather events, along with the spread of diseases, wars over resources, 
and the extinction of species--can even be monetized. The analyses of 
Lieberman-Warner by EIA and EPA do not attempt to quantify the 
benefits. They thus run the risk of focusing attention on the costs of 
climate legislation without balancing that information with the 
benefits of reducing climate change.
    Do your analyses assess the benefits of avoiding or mitigating 
climate change? Aren't there important benefits that have not been 
considered at all? Examples that come to mind include the avoidance of 
risks from increased or more severe droughts, floods, hurricanes and 
wildfires; increased air pollution; catastrophic events such as melting 
ice sheets; unrest overseas affecting U.S. national security; and 
changing disease patterns.
    Answer. Current analyses do not include the benefits of avoided 
climate change. At this time, these analyses only estimate the cost of 
achieving the levels of greenhouse gas emission reductions specified in 
the proposed legislation.
    Although we cannot yet provide a cost-benefit analysis of proposed 
legislation, EPA is assessing the benefits of climate change 
mitigation. EPA has developed preliminary ranges of estimates for the 
marginal benefit of carbon dioxide reductions (Social Cost of Carbon). 
These estimates include many of the climate impacts listed in your 
question. We recognize, however, that the IPCC concluded that current 
estimates are still ``very likely'' to be underestimated because they 
do not include significant impacts that have yet to be monetized. 
Current estimates do not capture many of the main reasons for concern 
about climate change, i.e., non-market damages, the effects of climate 
variability, risks of potential extreme weather (e.g., droughts, heavy 
rains and wind), socially contingent effects (such as violent 
conflict), and potential long-term catastrophic events. We are thus 
reviewing available literature on a range of climate impacts to develop 
more robust and complete estimates of the benefits of greenhouse gas 
mitigation.
    Question 12b. A related, but different, question is: do the 
``Business as Usual'' scenarios included in your models (or the models 
you have seen, in the case of CRS) assume increased costs from the 
types of events I just mentioned, given that we are told that the 
events will become increasingly common unless we reduce global warming.
    Answer. No, most modeling of legislative proposals do not address 
the costs of climate change impacts under Business as Usual scenarios.
    Question 12c. What efforts is your agency making to assess the 
value of the benefits of climate change mitigation?
    Answer. See answer to the first part of Question 2.

        UNTAPPED POTENTIAL FOR RENEWABLES AND ENERGY EFFICIENCY

    Question 13. Electricity from coal, nuclear power, and other 
traditional energy sources appear prominently in the modeling of 
Lieberman-Warner. Several renewable technologies, however, are 
available today that can generate inexpensive electricity without 
emitting carbon.
    Concentrating Solar Power uses the sun to provide heat that drives 
a steam power plant. This one resource could provide up to 17% of our 
nation's electricity. A typical CSP plant being built today produces 
250 Megawatts of power, emits very little CO2, and costs 1-2 
billion dollars (about the same as a traditional coal plant and 
significantly less than a new nuclear plant, which can run between 4-12 
billion). Over its operating life, today's CSP plants deliver power at 
$0.13 per kilowatt-hour, but the Department of Energy estimates that 
the costs for CSP will drop below $0.08 per kilowatt-hour once 
economies of scale are achieved. There are close to 400 Megawatts of 
CSP already operating in the southwest, and at least 3,000 Megawatts 
are in various stages of development.
    Wind is another major opportunity. Just last week the Department of 
Energy's National Renewable Energy Laboratory released a report showing 
that wind could provide up to 20% of our nation's electricity needs by 
2030. This resource will only cost $0.05 per kilowatt-hour, which is 
competitive with what we are paying for coal today.
    Geothermal is another great opportunity. A report for the U.S. 
Department of Energy by the Massachusetts Institute of Technology 
suggests that geothermal energy could provide 100,000 Megawatts of new 
carbon-free electricity at less than $0.10 per kilowatt-hour, 
comparable to cost projections for coal with carbon capture and 
storage. This single renewable 11 resource could account for almost 10% 
of our nation's electricity needs in the future.
    There are many other the possibilities, for biomass, photovoltaics, 
hydropower, and other renewable technologies, for example. But, once 
you add it all up, the United States could meet 2/3 of its electricity 
needs from sustainable energy.
    Now, add on what we could be doing with energy efficiency, and it 
gets really exciting. According to the McKinsey Report, released last 
year, we have the technologies needed to reduce greenhouse gases at our 
disposal today.
    Do your analyses take into account the strategies identified in the 
McKinsey Report for reducing greenhouse gases, including improving the 
economy's energy efficiency?
    Answer. EPA modeling takes into account many of the strategies 
identified in the McKinsey Report. Our model results show more than 55 
GW of additional new renewable energy capacity relative to the 
reference case by 2025, and much of the new capacity is from wind 
power. For energy efficiency, the models include the consumer response 
to higher electricity prices and capture some energy efficiency 
investments. EPA recognizes that energy efficiency is an important, 
readily available resource that can, under the right circumstances, be 
implemented at relatively low cost, and we are drawing on the expertise 
gained through these programs to improve the representation of energy 
efficiency opportunities in our models. Our review of the McKinsey 
analysis indicates that we have consistent estimates of mitigation 
available in 2030 for comparable costs. We also recognize that 
technologies continuously evolve and improve and thus we have an 
ongoing commitment to incorporate new information on cost and 
performance into our models.
    The modeling approaches used by EPA and for the McKinsey analysis 
are different, however. The McKinsey analysis identifies a number of 
specific technologies and strategies to reduce emissions at a cost of 
less than $50 per ton of CO2e. Our models do not explicitly 
represent individual end-use technologies, but rather represent changes 
in end-use demand for energy in aggregate. In addition, our models 
represent capital markets and can show the effect on the economy of 
increased investment in the energy sector, as well as mitigation 
tradeoffs across sectors. Despite these differences, the McKinsey 
analysis and our models have fairly consistent estimates of mitigation 
available in 2030 for similar CO2 prices.
                                 ______
                                 
    Responses of Peter R. Orszag to Questions From Senator Domenici

    Question 1. What are the major factors causing signatories to the 
Kyoto Protocol to miss their greenhouse gas emission reduction targets 
and are those shortcomings similarly foreseeable for the United States 
under a cap-and-trade regime?
    Answer. While many of these countries actually increased emissions 
between 1997 and 2008, their commitments to reduce emissions are not 
binding until 2008 to 2012.
    One reason why emissions did not fall during the initial pilot 
period was that some signatories allocated too many allowances, so 
there was no real need to reduce emissions. Furthermore, high natural 
gas prices during the period encouraged an increase in the use of coal 
to generate electricity. This pilot period was useful for the European 
countries in that it provided a great deal of data on emissions, 
enabling them to correctly allocate allowances for the 2008-2012 period 
in order to meet their commitments.
    Provided that the United States implemented the cap ``upstream'' on 
producers and importers of fossil fuels or ``downstream'' only for 
large electricity generators, a U.S. program should be able to avoid 
this problem, because the country already has a great deal of detailed 
information on energy production and fossil-fuel imports. Furthermore, 
large electricity generators are already required to continuously 
monitor emissions of several pollutants, including carbon dioxide 
(CO2).
    The choice of 1990 as a base year for the Kyoto Protocol is another 
factor that has caused some countries' emission trends to exceed their 
Kyoto targets. The choice of 1990 made it difficult for signatory 
countries that have experienced high rates of economic growth since 
then (for example, Spain and Ireland) to meet their targets.
    Question 2. I hear supporters of a cap-and-trade approach to global 
climate change mitigation consistently refer to the sulfur dioxide 
program at the Environmental Protection Agency and compare it to the 
potential implementation of this legislation.
    Please compare the size and scope, including the ways in which 
regulated entities complied with sulfur dioxide limits and can be 
expected to comply with limits on carbon dioxide, of the two programs 
so that we may have a better sense of perspective on this comparison.
    Answer. The size and scope of a market for carbon dioxide emissions 
will be a function of policy design. The number of covered entities may 
or may not be more or less similar to the number in the current sulfur 
dioxide (SO2) program depending on the design of the 
CO2 program, but the value of the emission allowances in the 
programs currently being considered by the Congress is considerably 
larger for CO2 than for SO2.
    Should policymakers choose to place the cap upstream on producers 
or importers of fossil fuels or adopt a hybrid system that would 
directly cap large electricity generators but would place an upstream 
cap on other sources, then the number of regulated entities would be 
roughly comparable to the number in the current SO2 program, 
which covers about 3,000 generating units. As was the case with 
SO2, S. 2191 would allow nonregulated firms to participate 
in the allowance market--entities that are not required to submit 
allowances for their emissions (such as brokers) would be allowed to 
buy and sell allowances.
    In contrast to the number of regulated entities, the magnitude of 
the CO2 market, as measured by the value of the allowances 
traded, is likely to be much larger than the roughly $3 billion 
SO2 market. In November 2007, the Congressional Budget 
Office (CBO) estimated that the bills under consideration by the 
Congress at that time would result in an allowance market that totaled 
between $50 billion and $300 billion (in 2006 dollars) in 2020. On the 
basis of CBO's estimate of the cost of S. 2191, the value of the 
allowances in 2018 would be about $200 billion.
    The SO2 program is implemented largely by the U.S. 
Environmental Protection Agency (EPA) and is national in scope. The 
agency runs electronic allowance and emission registries and is 
responsible for verification of emission data. Regulated firms are 
allowed to comply either by reducing their emissions or by retiring an 
allowance for each ton of SO2 that they emit. Firms are 
allowed to bank an unlimited amount of current allowances for use in 
future years. Banking provides an incentive for firms to undertake more 
emission reductions than are required to meet the cap in low-cost years 
and, thus, helps smooth allowance prices over time. In spite of this, 
researchers have found that prices for SO2 allowances have 
been far more volatile than stock prices.
    How similar or different firms' compliance options are under a 
CO2 cap-and-trade program and the existing SO2 
program would depend on policymakers' decisions in designing the 
policy. Under S. 2191, firms would be able to comply by retiring an 
allowance or by purchasing a qualifying ``offset,'' which could be 
obtained from entities that sequestered carbon emissions or from 
entities that reduced greenhouse gas emissions but were not subject to 
the cap. Should policymakers choose to include a ``safety valve'' in a 
cap-and-trade program (not included in S. 2191), regulated entities 
would have an additional compliance option: They could comply by 
purchasing an allowance from the government at the safety-valve price.
    Question 3. According to your cost estimate of S. 2191, its cap-
and-trade regime will generate roughly $1.2 trillion between 2009 and 
2018.
    How much would Congress have to raise the federal gas tax, which is 
currently at 18.4 cents per gallon, to generate the same amount of 
revenue between 2009 and 2018?
    Answer. The Joint Committee on Taxation (JCT) has estimated that 
raising federal excise taxes on gasoline and diesel fuel by 50 cents 
per gallon, to 68.4 cents for gasoline and 74.4 cents for diesel fuel, 
would increase federal revenues by $49.3 billion in 2008 and by a total 
of $685.3 billion over the 10 years from 2008 through 2017 (CBO is 
required by law to use JCT's estimates for revenue proposals). Because 
excise taxes reduce the tax base of income and payroll taxes, higher 
excise taxes would lead to reductions in income and payroll tax 
revenues. The estimates reflect those reductions.
    CBO is not aware of any published estimates by JCT of the effects 
of an increase beyond 50 cents per gallon. Estimates of the additional 
increase in excise taxes needed to generate $1.2 trillion over 10 years 
would depend on assumptions about the response of consumers to higher 
tax rates and the effects of higher rates on compliance.
    Question 4. Your cost estimate looks at revenues and outlays 
through 2018, within the budget window. I am concerned about the costs 
of this legislation over a longer period of time.
    Answer. CBO estimates that enacting S. 2191, as ordered reported by 
the Senate Committee on Environment and Public Works with an amendment, 
would increase revenues by about $1.21 trillion over the 2009-2018, net 
of income and payroll tax offsets. Over that period, we estimate that 
direct spending from distributing those proceeds would total about 
$1.13 trillion. The additional revenues would exceed the new direct 
spending by an estimated $78 billion, thus decreasing deficits (or 
increasing surpluses) by that amount over the next 10 years.
    Assuming that the same pattern of revenue collection and spending 
would occur over the life of the program (2009-2050), the federal 
government would continue to collect revenue from the auctions and 
would spend some of those funds on a variety of programs as specified 
in the legislation. Because S. 2191 would require a portion of the 
auction proceeds to be deposited into a Climate Change Deficit 
Reduction Fund, and because that fund would be available for spending 
only as provided in future appropriations bill, CBO estimates that over 
the 2009-2050 period, net revenues also would exceed new direct 
spending.
    Question 5. These analyses tend to list natural gas, nuclear, clean 
coal, renewables, and other forms of electrical generation as ways in 
which the caps in S. 2191 can be adhered to. As a result, we get some 
odd results that are likely impossible to achieve.
    Do any of the models you have looked at allow for economic slow-
down as a compliance mechanism?
    Answer. Nearly all efforts to model the economic impacts of cap-
and-trade programs include a feedback by which restrictions on 
emissions raise energy prices, reduce incomes and slow the 
macroeconomy, and thus modestly reduce energy demand and energy-related 
emissions.
    Question 6. As we discuss issues related to the share of allowances 
that will be auctioned or given away, what would be the consequences of 
these allowances being bought up by people who don't intend to emit 
greenhouse gases?
    What would that do to the cost to emitters and their ability to 
comply with S. 2191?
    Answer. Factors that would affect allowance prices include the 
stringency of the cap, weather, conditions in energy markets, economic 
activity, available technologies for producing low- or zero-carbon 
energy and for sequestering carbon, and expectations about those 
factors. Permitting allowances to be bought and sold by entities that 
are not required to submit allowances for their emissions, but intend 
to resell them, would widen the market, creating a larger and 
potentially more diverse view of those key factors that influence 
current and future prices. Such broadening of the market would increase 
liquidity and could reduce volatility, provided that additional 
investors were well informed about the market.
    Individual participants or groups of participants (for example, 
sovereign wealth funds or investment funds formed by energy-producing 
cartels) could influence the price of allowances only if they were able 
to obtain a sufficiently large share of the market. Given the size of 
the allowance market, it would take a large amount of wealth to 
influence the price of allowances.
    In order to reduce the risk of market manipulation, current 
regulation to prevent manipulation of commodity markets could also be 
applied to CO2 allowance trading. In addition, policymakers 
could choose to set an upper limit on the price of allowances by 
allowing firms to purchase them from the government at a safety-valve 
price.
    Allowing nonemitters to purchase allowances would also create the 
possibility that entities could choose to buy allowances in order to 
retire them, thus making the cap more stringent. To the extent that 
that occurred, it would tend to increase the price of allowances.
    Question 7. Before the Senate Finance Committee on April 24, 2008, 
you stated that, ``Under a cap-and-trade program, firms would not 
ultimately bear most of the costs of the allowances but instead would 
pass them along to customers in the form of higher prices.''
    Would anyone be disproportionately impacted by these higher energy 
prices? And how would the revenues raised by S. 2191 be distributed--
who, in effect, would be choosing which technologies are advanced, and 
which programs receive funding?
    Answer. A cap-and-trade program would increase the prices of energy 
and energy-intensive goods and services. Those higher prices would 
impose a larger financial burden on low-income households than on high-
income households for two reasons. First, energy-related expenditures 
make up a larger share of the purchases of low-income households than 
of high-income households. Second, low-income households typically 
spend a larger fraction of their income.
    S. 2191 would require that auction proceeds be deposited into seven 
funds established by the Department of the Treasury:

   The Energy Assistance Fund ($64 billion) would support 
        various energy assistance programs for low-income persons and 
        other initiatives;
   The Climate Change Worker Training Fund ($12 billion) would 
        primarily support training programs for workers;
   The Adaptation Fund ($31 billion) would primarily support 
        research and education activities by the Department of the 
        Interior to assist fish and wildlife in adapting to the impacts 
        of climate change;
   The Climate Change and National Security Fund ($16 billion) 
        would finance steps to implement recommendations stemming from 
        the International Climate Change Adaptation and National 
        Security Program established under this legislation;
   The Bureau of Land Management Emergency Firefighting Fund 
        ($2 billion) would support fire suppression activities on 
        federal wildlands;
   The Forest Service Emergency Firefighting Fund ($6 billion) 
        would support fire suppression activities on federal wildlands; 
        and
   The Energy Independence Acceleration Fund ($6 billion) would 
        support research activities by the Department of Energy.

    In addition, the legislation would establish the Climate Change 
Credit Corporation, which would be responsible for auctioning the 
allowances and using the proceeds to finance various initiatives 
through the Energy Technology Deployment Program. By CBO's estimates, 
spending for that program would total about $123 billion over the next 
10 years. In total, direct spending from those funds (including the 
Energy Deployment Program) would total about $30 billion over the 2009-
2013 period and about $260 billion over the 2009-2018 period, CBO 
estimates. In addition, some proceeds would be deposited into the 
Climate Security Act Management Fund; however, spending from that fund 
could not occur without further appropriation action.
    Question 8. Commodities like gold, copper, natural gas, oil, corn, 
grain, and steel are experiencing unprecedented demand, and sharp price 
spikes as a result. Some point to supply-demand fundamentals altered by 
increased consumption in developing countries; others point to a 
speculative bubble as being responsible.
    How does S. 2191 prevent this from happening to the commodity you 
refer to as the ``right to emit carbon''?
    Answer. As described above, numerous factors would influence the 
price of allowances. S. 2191 includes two provisions to help prevent 
price spikes (or prolonged high prices). S. 2191 would allow firms to 
``borrow'' a limited number of future allowances for use in the current 
period as a method of addressing short-term price spikes. In addition, 
S. 2191 would establish a Carbon Market Efficiency Board, which would 
be allowed to take a variety of actions to lower prices, including 
transferring future allowances into the current period. Both of those 
provisions could help reduce the likelihood that prices would reach 
higher levels than policymakers had intended but would be a less 
reliable method of doing so than establishing a ceiling, or safety 
valve, for allowance prices. Moreover, giving the Carbon Market 
Efficiency Board overly broad discretionary powers to control prices or 
allowance quantities could undermine the integrity of the allowance 
market.
    Question 9. This commodity--a right to emit--will presumably have a 
value in the global market. What is the impact on American economic 
competitiveness of imposing a cost in the U.S. that is not imposed in 
emerging economies if, in fact, we are creating a commodity?
    Answer. A cap-and-trade program would increase prices for energy 
and energy-intensive goods and services and could, in some cases, cause 
a decrease in the demand for U.S. goods. Sectors that could potentially 
lose market share to foreign producers as a result of a carbon 
reduction policy are those with relatively high energy use and that 
have relatively high trade flows (that is, potentially a ``covered 
good,'' as discussed in S. 2191). The Energy Information Administration 
lists the following manufacturing sectors as energy-intensive: food 
products, paper and pulp products, chemicals, glass products, cement 
products, iron and steel products, and aluminum products. Energy use 
from those seven sectors constitutes approximately 14 percent of total 
U.S. energy consumption and results in approximately 10 percent of 
total U.S. carbon emissions. Those sectors contribute approximately 9.5 
percent of gross domestic product, 7.4 percent of U.S. imports, and 9.4 
percent of U.S. exports. Of those sectors, the iron and steel sector 
has a relatively large amount of exports to and imports from China.
    S. 2191 contains a provision that addresses cross-border 
adjustments for carbon-intensive goods. According to the bill, 
beginning in 2020, in order to import a ``covered good'' from a 
``covered country'' (as defined in S. 2191), the importer shall verify 
that the good has an accompanying number of allowances purchased from 
the international reserve of allowances at a price set not to exceed 
the market price for domestic allowances. To calculate the number of 
allowances required per unit of covered good, the total emissions 
(above an established baseline) from the country's sector is divided by 
the total goods produced in that country. ``Covered goods'' are those 
goods that are primary products, manufactured items for consumption, or 
products that create greenhouse-gas emissions during their production 
and that are close substitutes for energy-intensive goods produced in 
the United States that will be affected by the Act (for example, iron, 
steel, aluminum, bulk glass, nonmetal minerals, and paper). If that 
country has implemented ``comparable actions'' to reduce greenhouse-gas 
emissions, then the country is not a ``covered country.'' Similarly, if 
the country is either a ``least developed country'' or is a de minimis 
emitter of greenhouse gases, then the country is not a ``covered 
country.''
    Question 10. I am greatly concerned about the securitization of 
carbon dioxide emissions credits, which could eventually lead to a 
situation similar to the recent housing crisis. What steps could be 
taken to prevent this from happening?
    Answer. The securitization of allowances would be unlikely to 
create the same issues encountered in mortgage markets because, unlike 
mortgages, carbon allowances would be homogenous and, hence, would not 
require the endorsements or guarantees of performance that securitized 
mortgage pools require. The original holders of allowances should be 
able to sell them without complex financial intermediation (such as the 
insurance, guarantees, and highly leveraged distribution vehicles that 
were used to shift mortgages off banks' balance sheets).
    Some users of allowances might wish to trade options or futures 
contracts on allowances in order to secure access to allowances at a 
predetermined price at some future date instead of buying and holding 
them today. While such contracts are usually associated with minimizing 
risk, hedge funds and other speculative investors seeking to earn 
investment income on mispriced contracts will often take significant 
risks in these markets. Such risk-taking should not pose a threat to 
the integrity of the allowance trading program provided the trading 
rules ensured minimal risks to counterparties, as is the case in 
markets for commodity derivatives. For example, commodity derivative 
exchanges impose margin and capital requirements on participants, 
require daily settlement of open positions, and enforce the transfer of 
an insolvent participant's open positions to a solvent party.
    Question 11. Should the Carbon Market Efficiency Board have 
authority to provide bailouts for covered entities, similar to the 
Federal Reserve's decision to open up its lending window for Bear 
Stearns earlier this year?
    Answer. Providing bailouts could undermine a cap and the integrity 
of the cap-and-trade program. An alternative method of preventing the 
cost of complying with the cap from exceeding an acceptable level would 
be to establish a ceiling, or safety valve, on the price of allowances. 
If policymakers included both a price ceiling and a price floor in a 
cap-and-trade program, as well as provisions to modify the ceiling and 
floor over time, they could limit both price volatility and the overall 
cost of meeting a long-term target for emissions.
     Response of Peter R. Orszag to Question From Senator Menendez
    Question 1. Your analysis of S. 2191 accounts for decreases in 
federal revenues and the expenses associated with a cap-and-trade 
regime. But how do you account for the impacts of global warming in 
your baseline (business as usual) projections? For example, rising sea 
levels will bring a vast number of new costs to the federal government. 
So too will increases in tropical diseases, heat waves, water 
shortages, and violent storms. Last, but not least, we could face 
increased national security expenses due to political instability tied 
to climate change.
    We have seen the devastation of Hurricane Katrina and the Myanmar 
cyclone, as well as unprecedented battles for water in the Southeast. 
Obviously, it is problematic to causally link these individual events 
to climate change. But we do know that we will see more of them as the 
planet warms.
    What expense might the federal government incur if sea levels rise 
by 10's of feet? What impact would that have on the Federal Flood 
Insurance program?
    Can the CBO undertake an analysis of S. 2191 which accounts for 
some of these events? Would the assumption that a large reduction in 
U.S. GHG [greenhouse-gas] emissions averts global warming dramatically 
change the scoring of S. 2191?
    Answer. Human activities around the world--primarily fossil-fuel 
use, forestry, and agriculture--are producing growing emissions of 
greenhouse gases, most importantly carbon dioxide. The accumulation of 
those gases in the atmosphere and oceans is expected to have extensive, 
potentially serious, and costly but highly uncertain impacts on 
regional climate and ocean conditions throughout the world. Future 
developments are sufficiently uncertain that over the next century and 
beyond, climate-related changes could be relatively modest or very 
extensive. The uncertain links between carbon emissions, specific 
disasters or consequences of climate change, and the federal response 
to such events makes it extremely difficult to model or estimate 
changes in federal spending from reduced carbon emissions.
    Moreover, the timing of costs and benefits of reducing emissions 
are very different. Reducing emissions would require firms and 
households to make changes in their behavior (for example, driving or 
flying less) and their investments (for example, investing in more 
energy-efficient equipment, relying on renewable energy sources, or 
investing in carbon capture and sequestration). Those actions would 
impose near-term costs.
    The benefits of reducing emissions, in contrast, would be realized 
decades or even centuries after the reductions were made. The reason is 
that each ton of CO2 generates a rise in the average global 
temperature that peaks 40 years after the CO2 is emitted and 
then dissipates slowly, with a half-life of about 60 years. As a 
result, any reduction in federal spending that might be brought about 
by the benefits (such as potential decreases in hurricanes) resulting 
from S. 2191 would be well outside the 10-year window that CBO uses 
when it estimates the impact of legislation on the federal budget.
       Response of Peter R. Orszag to Question From Senator Akaka
    Question 1. A carbon tax seems like a more straightforward way of 
implementing greenhouse-gas regulation. During the hearing, you 
responded that a tax is more efficient; however, by using auctioning, 
and allowing significant flexibility in timing of efforts to reduce 
emissions (by using a floor and ceiling), cap-and-trade can be brought 
closer in line with a tax policy. Are there additional challenges that 
island states and U.S. territories face (in using a cap-and-trade 
instead of a tax credit), given their unique characteristics (e.g., 
being geographically separate from the continental U.S., relying 
exclusively on airlift and shipping for transporting goods, as well as 
being a ``closed'' energy system)?
    Answer. Either a tax or a cap-and-trade program would reduce carbon 
dioxide emissions by increasing the price of fossil fuels, with the 
price increases reflecting the CO2 released when the fuels 
were combusted. As a result, either approach would create an incentive 
for households and firms to reduce their use of such fuels. If the 
price of an allowance under a cap-and-trade program was equal to the 
level of a tax, either approach would be likely to impose roughly the 
same costs (with any distribution of the auction proceeds or tax 
revenues not considered). The price increases resulting from a cap-and-
trade program, however, would be more uncertain. The price of 
allowances would need to climb high enough to reduce emissions to the 
level required by the cap. That price would fluctuate over time 
depending on economic activity, weather, technological developments, 
conditions in fossil-fuel markets, and other factors.
    Since either a tax or a cap-and-trade program would induce 
reductions in emissions by driving up prices for energy and energy-
intensive goods and services, it does not seem likely that either one 
would provide a relative advantage or challenge to island states or 
U.S. territories.

