[Senate Hearing 110-992]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-992
 
               THE U.S. CLIMATE ACTION PARTNERSHIP REPORT 

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

                                HEARING

                               before the

                              COMMITTEE ON
                      ENVIRONMENT AND PUBLIC WORKS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 13, 2007

                               __________

  Printed for the use of the Committee on Environment and Public Works



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               COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS

                       ONE HUNDRED TENTH CONGRESS
                             FIRST SESSION

                  BARBARA BOXER, California, Chairman
MAX BAUCUS, Montana                  JAMES M. INHOFE, Oklahoma
JOSEPH I. LIEBERMAN, Connecticut     JOHN W. WARNER, Virginia
THOMAS R. CARPER, Delaware           GEORGE V. VOINOVICH, Ohio
HILLARY RODHAM CLINTON, New York     JOHNNY ISAKSON, Georgia
FRANK R. LAUTENBERG, New Jersey      DAVID VITTER, Louisiana
BENJAMIN L. CARDIN, Maryland         JOHN BARRASSO, Wyoming\1\
BERNARD SANDERS, Vermont             LARRY E. CRAIG, Idaho
AMY KLOBUCHAR, Minnesota             LAMAR ALEXANDER, Tennessee
SHELDON WHITEHOUSE, Rhode Island     CHRISTOPHER S. BOND, Missouri

       Bettina Poirier, Majority Staff Director and Chief Counsel
                Andrew Wheeler, Minority Staff Director

                  \1\Note:  During the 110th Congress, Senator 
                      Craig Thomas, of Wyoming, passed away on 
                      June 4, 2007. Senator John Barrasso, of 
                      Wyoming, joined the committee on July 10, 
                      2007.......................................








                            C O N T E N T S

                              ----------                              
                                                                   Page

                           FEBRUARY 13, 2007
                           OPENING STATEMENTS

Boxer, Hon. Barbara, U.S. Senator from the State of California...     1
Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma...     3

                               WITNESSES

Darbee, Peter A., Chairman, CEO and President, PG&E Corporation..     8
    Prepared statement...........................................    10
    Responses to additional questions from Senator Inhofe........    14
Holiday, Chad, Chairman and CEO, E.I. Dupont De Nemours and 
  Company, Inc...................................................    16
    Prepared statement...........................................    17
Lash, Jonathan, President, World Resources Institute.............    18
    Prepared statement...........................................    20
Elbert, Stephen A., Vice Chairman, BP America, Inc...............    23
    Prepared statement...........................................    25
Book, Kevin, Senior Vice President, Senior Analyst, Friedman, 
  Billings, Ramsey and Company, Inc..............................    26
    Prepared statement...........................................    28
    Responses to additional questions from Senator Inhofe........    33
Smith, Fred L. Jr., President, Competitive Enterprise Institute..    35
    Prepared statement...........................................    37
    Responses to additional questions from Senator Inhofe........    44
Hamm, Harold, Chairman of the Board, Chief Executive Office, 
  Continental Resources, Inc.....................................    46
    Prepared statement...........................................    47

                          ADDITIONAL MATERIAL

Statement of Senator Christopher S. Bond, U.S. Senator from the 
  State of Missouri..............................................    77
Article, The Washington Post; January 13, 2002, ``Enron Also 
  Courted Democrats; Chairman Pushed Firm's Agenda With Clinton 
  White House....................................................    78
Reports:
    The Green Lobby Report, By Angela Logomasini.................    81
    European Union, Delegation of the European Commission........   117


               THE U.S. CLIMATE ACTION PARTNERSHIP REPORT

                              ----------                              


                       TUESDAY, FEBRUARY 13, 2007

                                       U.S. Senate,
                 Committee on Environment and Public Works,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10 o'clock a.m. 
in room 406, Dirksen Senate Office Building, the Hon. Barbara 
Boxer (chairman of the committee) presiding.
    Present: Senators Boxer, Inhofe, Lautenberg, Carper, 
Klobuchar, Warner, Alexander, Bond, Sanders

         OPENING STATEMENT OF THE HON. BARBARA BOXER, 
           U.S. SENATOR FROM THE STATE OF CALIFORNIA

    Senator Boxer. The hearing will come to order.
    Today we will hear from a group of leading corporations and 
environmental groups who have agreed on a road map for next 
steps to address the global warming challenge. They have banded 
together to issue ``a call for action'' on global warming. They 
have concluded that ``we know enough to act'' on global warming 
and that ``Congress needs to enact legislation as quickly as 
possible.''
    I want to thank all parties for this report and let them 
know that I believe it makes an important contribution to 
helping solve the global warming problem. It is very important 
to note that this group includes some of the world's largest 
corporations, such as General Electric, DuPont, BP, 
Caterpillar, Alcoa, and includes key energy companies, such as 
Duke Power, Florida Power and Light, and PG&E from my home 
State of California. These companies produce products of all 
types. They use fuels of all types, including coal. And they 
are committed to being profitable for many years to come.
    As the chairman of Duke Power noted on release of the 
report, Duke Power is the third largest user of coal in the 
United States. Yet all these companies agree that we need to 
act now to enact a mandatory program to address global warming. 
What is more, they agree on the targets for reduction, both in 
the short term and the long term. They agree that we need to 
stabilize worldwide atmospheric concentrations of 
CO2 at 450 to 550 parts per million.
    Their targets for emissions include reductions of 10 to 30 
percent from today's levels within the next 15 years, and a 60 
to 80 percent reduction from today's levels by 2050. These 
targets are consistent with what the scientists are telling us. 
And they are consistent with the targets set forth in the 
Sanders-Boxer bill, as well as other bills introduced this 
Congress, which include cutbacks of 60 to 80 percent by 2050.
    The companies and groups before us today also made clear 
that by acting now we can help, not hurt, our economy. They say 
that, and I think we have this on a chart, I am not sure, but I 
think--yes, that is it--``Each year we delay action to control 
emissions increases the risks of unavoidable consequences that 
could necessitate even steeper reductions in the future, 
potentially greater economic costs and social disruption.''
    The U.S. CAP report also makes the point that we need to 
enact an economy-wide program. As I have often said, I am very 
proud of my home State of California which enacted AB 32, an 
economy-wide global warming bill. The California law sets a 
mandatory cap on carbon pollution, including a 25 percent 
reduction from projected levels by 2020. And the California 
Governor's executive order includes a target to reduce 
emissions 80 percent from 1990 levels by 2050. Here is 
bipartisan leadership at its best.
    California is leading the way in combatting global warming. 
And one of the companies here, as I said, Pacific Gas and 
Electric, has helped enormously by working hard to help 
increase California's energy efficiency, which is one of the 
highest in the Nation.
    I continue to believe we should approach this problem with 
hope, not fear. I want to repeat that: I continue to believe we 
should approach this problem with hope, not fear. I am an 
optimist, and I believe we can solve this problem, and that in 
doing so, we will be better for it in every single way. The 
members of the Climate Action Partnership who are here today 
agree with this approach. They say that ``In our view, the 
climate change challenge, like other challenges our country has 
confronted in the past, will create more economic opportunities 
than risks for the U.S. economy, and that addressing climate 
change will require innovation and products that drive 
increased energy efficiency, creating new markets, increased 
U.S. competitiveness, as well as reduced reliance on energy 
from foreign sources.''
    I so appreciate their comments, because I have watched for 
years those naysayers who said, when you act to protect the 
environment, you hurt the economy. The opposite has been 
proven. As business leaders that successfully compete in 
national and worldwide markets, these witnesses should know. We 
must face the challenge of global warming now. It is one of the 
greatest challenges facing our generation. With the help of 
these groups and businesses, like those in the Climate Action 
Partnership, with their help, this is a challenge we can and 
will meet.
    Again, I want to say to all of you, I believe when history 
is written, this will be a turning point, that you stepped 
forward and saw your responsibilities. And it means a great 
deal to the American people, I believe. So I really again want 
to thank you so much.
    With that, I will give Senator Inhofe such time as he would 
like to take.
    [The prepared statement of Senator Boxer follows:]
         Statement of Senator Barbara Boxer, U.S. Senator from 
                        the State of California
    Today we will hear from a group of leading corporations and 
environmental groups who have agreed on a roadmap for next steps to 
address the global warming challenge.
    They have banded together to issue ``A Call for Action'' on global 
warming. They have concluded that ``we know enough to act'' on global 
warming and that ``Congress needs to enact legislation as quickly as 
possible.''
    I want to thank these companies for their report and let them know 
that I believe it makes an important contribution to helping solve the 
global warming problem.
    This group includes some of the world's largest corporations, such 
as General Electric, Dupont, BP, Caterpillar, Alcoa, and includes key 
energy companies such as Duke Power, Florida Power and Light and PG&E, 
from my home State of California.
    These companies produce products of all types, use fuels of all 
types, including coal, and are committed to being profitable for many 
years to come. As the Chairman of Duke Power noted on release of the 
report, Duke Power is the third largest user of coal in the United 
States. Yet all these companies agree that we need to act now to enact 
a mandatory program to address global warming.
    What is more, they agree on the targets for reduction, both in the 
short term and the long term. They agree that we need to stabilize 
world wide atmospheric concentrations of CO2 at 450-550 
parts per million. Their targets for emissions include reductions of 
10-30 percent from today's levels within the next 15 years and a 60 
percent to 80 percent reduction from today's levels by 2050.
    These targets are consistent with what the scientists are telling 
us and they are consistent with the targets set forth in the Sanders 
bill, of which I am co-sponsor, as well as other bills introduced in 
this Congress.
    The companies and groups before us today also make clear that by 
acting now, we can help, not hurt our economy. They say that:
    ``Each year we delay action to control emissions increases the risk 
of unavoidable consequences that could necessitate even steeper 
reductions in the future, at potentially greater economic cost and 
social disruption.''
    The U.S. CAP report also makes the point that we need to enact an 
economy wide program.
    I am very proud of my home State of California, which enacted AB 
32, an economy-wide global warming bill. The California law sets a 
mandatory cap on carbon pollution, including a 25 percent reduction 
from projected levels by 2020 and the California Governor's Executive 
Order includes a target to reduce emissions 80 percent from 1990 levels 
by 2050.
    California is leading the way in combating global warming. And one 
of the companies here, Pacific Gas and Electric, has helped enormously 
by working hard to help increase California's energy efficiency, which 
is one of the highest in the Nation.
    I continue to believe we should approach this problem with hope and 
not fear. I am an optimist, and I believe we can solve this problem, 
and that in doing so, we will be better for it in every way.
    The members of the Climate Action Partnership who are here today 
agree with this approach. They say that ``In our view, the climate 
change challenge, like other challenges our country has confronted in 
the past, will create more economic opportunities than risks for the 
U.S. economy'' and that ``addressing climate change will require 
innovation and products that drive increased energy efficiency, 
creating new markets. . .  increased U.S. competitiveness, as well as 
reduced reliance on energy from foreign sources.''
    As business leaders that successfully compete in national and 
world-wide markets, they should know.
    We must face the challenge of global warming now. It is one of the 
great challenges of this generation. With the help groups and 
businesses like those in the Climate Action Partnership, this is a 
challenge we can and will meet.
    I look forward to hearing the witnesses' testimony.

        OPENING STATEMENT OF THE HON. JAMES M. INHOFE, 
            U.S. SENATOR FROM THE STATE OF OKLAHOMA

    Senator Boxer. Thank you, Madam Chairman. I appreciate your 
having this hearing today. The issue of climate change has 
taken a larger significance lately, and the subject of the day, 
mandatory carbon cap and trade. More and more companies that 
wish to profit on the backs of consumers are coming out of the 
woodwork to endorse climate proposals in hopes of forcing 
customers to buy their products or to penalize their 
competitors.
    Some companies are coming together in an attempt to profit 
from Government intervention where they have failed in the 
marketplace. Economists call this rent-seeking. But I think the 
Wall Street Journal is right: they are climate profiteers. 
These companies will gain market share against their 
competitors, while the economy flattens and jobs are sent to 
China, which in an ironic twist of fate will soon become the 
biggest emitter of CO2, passing the United States by 
2009.
    Interestingly also about China is that people who are 
concerned about job flight, when you consider we haven't had a 
new coal-fired generating plant put online in 17 years, and 
they are cranking out one every 3 days, so there is more to 
come. Most of its victims are particularly small businesses 
that will no longer be able to compete, but the biggest losers 
won't be the businesses, but the American consumers.
    And you know, you guys, you all look so solemn right now. 
This is a happy committee hearing isn't it, Barbara?
    Senator Boxer. Well, for me it is. For you I don't think 
so.
    [Laughter.]
    Senator Inhofe. I really do believe, I spent 25 years in 
the real world as a CEO. I know something about how CEOs think. 
And I have wondered quite often, I really have, and I say this 
in a serious vein, would I, if I had the opportunity to make a 
bunch of money and answer to my stockholders, would I come 
forth and do something that I think is not in the best 
interests of America?
    The proposal that we are talking about and others like it 
may be written in the form of Government regulatory mandates. 
But for all practical purposes, it is really a regressive tax 
on the American economy, where select powerful companies 
profited at the expense of seniors, the working class and the 
poor. These groups already pay disproportionately more than 
their monthly budget for energy. And this situation will only 
worsen under proposals like I see today.
    Let me be real clear today, because we have to say what it 
is we are talking about, the largest tax increase in the 
history of America. I want to get some responses from Mr. Book 
and Mr. Smith on this, because in reality, that is what we are 
talking about, the very liberal group that, they came out and 
they were talking about what was the largest tax increase, it 
was the Omnibus Budget Reconciliation Act of 1993. I can go 
down and talk about the 10 things it did to increase taxes.
    The total amount of taxes increased and the effect on the 
economy was $32 billion a year. This would be over $300 billion 
a year. So it is a much larger tax increase on the American 
people. We need to say what it is and talk about who is going 
to be paying for it.
    I am told that the rush to do something about global 
warming has gained momentum. But the not so hidden secret is 
that more and more serious scientists and political leaders are 
voicing their discontent with both the hype and the symbolic 
approaches, that masquerade as solutions that are designed more 
to line the pockets of its promoters than accomplish anything.
    Now, when you stop and think about the scientists, and this 
is where you see the sense of panic that is coming from those 
individuals that all started with the United Nations, to make 
people believe that man-made gas is responsible for climate 
change, and you see the ones who are aligning, they are very 
aggressive leaders, Claude Allegre was one of the leaders in 
France, a very liberal socialist in France, he is a 
geophysicist, well, I am not sure what he was, but he is on 
both the French and the United States Academy of Sciences. 
Claude said, I don't have his quote here, but he said that 
warming may be due simply to natural variation and the debate 
appear to be about money.
    Then just last week, this Nir Shariv, he is one of the top 
astrophysicists in Israel, he is now, and he was on the other 
side of this debate back when it started, back when the United 
Nations started all this stuff 15 years ago, and he is now 
saying that there is no proof of man's contribution, rather 
than natural variation. Same thing is true with David Bellamy 
from the U.K., he was one of them marching in the streets 
waving the flags, the dirty old man is responsible for climate 
change. And now he has come around to realize that the science 
flat is not there.
    Then there are political leaders. Prime Minister Steven 
Harper once called the Kyoto Accord a socialist scheme designed 
to suck money out of rich countries. And just last week, and I 
really enjoyed this, because I know him personally, Czech 
President Vaklav Klaus, made clear his disdain for politics 
parading for science when he said ``Global warming is a false 
myth and every serious person and scientist says so. It is not 
fair to refer to the United Nations panel, the IPCC is not a 
scientific institution, it is a political body, a sort of non-
government organization of green flavor.''
    This is kind of interesting, because everyone is talking 
about what happened a week ago Friday when they came out with 
the fourth assessment. The fourth assessment isn't going to be 
out until next may. This was something for the policy. This was 
not the scientists, but the policymakers.
    So anyway, that is what is happening. I guess what I am 
saying is, the science is not settled. I think everybody knows 
that, and since more and more people are coming to the other 
side, there is a level of panic that is setting in.
    They don't have to agree with my position on the science to 
question the wisdom of a cap and trade approach. These 
proposals would do little and cost much. Moreover, as White 
House Spokesman Tony Snow stated last week, there is a carbon 
cap system in place in Europe and we are doing a better job of 
reducing our emissions here.
    This is kind of interesting. They all jumped in western 
Europe, 15 countries signed onto Kyoto. Only 2 of the 15 
countries, Sweden and Great Britain actually have met their 
targets. None of the rest of them have. So if you take all 15 
countries, we have reduced the CO2 emissions in this 
country far more, and we are not even a part of the Kyoto 
thing. Simple fact is that we can't continue to put pressure on 
demand for natural gas in this country while we curtail the 
efforts of producers who supply it.
    Now, as Mr. Hamm knows, my State of Oklahoma is an ag 
State. The thing that I hear when I go around, and I am in the 
State every weekend, out in the western part of the State and 
the southern part of the State and rural Oklahoma, the chief 
problem that they are having right now, my farmers in Oklahoma, 
is the cost of fertilizer. The main thing that has driven the 
cost up is the price of natural gas. We can't demand 
significant emission reductions while Senators oppose the 
construction of new nuclear facilities. In short, we can't 
demand reductions from our fossil fuel sector unless these 
demands can be met. The result can only be further increasing 
the volatility of natural gas prices, continued and even 
increased job flight to countries that don't participate.
    But the biggest cost will be to the consumers who will be 
forced to foot the bill for its climate problems. That is why 
we have decided to fight for consumers and plan to introduce 
the Ratepayers Protection Act, which is going to be something 
kind of interesting to a lot of utilities. Because I am going 
to ask them, and this Act provides that if this drives the cost 
up, you can't pass this on to your consumers.
    So finally, I would just say that we know, and I don't 
criticize people for being here today who are going to make 
profits by a cap and trade system, because you have your board 
of directors to answer to, and I understand that.
    Thank you, Madam Chairman.
    [The prepared statement of Senator Inhofe follows:]

        Statement of Senator James M. Inhofe, U.S. Senator from 
                         the State of Oklahoma
    Madame Chairman, I appreciate you having this hearing today. The 
issue of climate change has taken on a larger significance lately. And 
the subject of the day is mandatory carbon cap and trade. More and 
more, companies that wish to profit on the backs of consumers are 
coming out of the woodwork to endorse climate proposals in the hope of 
forcing customers to buy their unnecessary products or to penalize 
their competitors.
    Some companies are coming together in an attempt to profit from 
Government intervention where they have failed in the marketplace. 
Economists call this rent-seeking. But I think the Wall Street Journal 
was right. They are climate profiteers. These companies will gain 
market-share against their competitors while the economy flattens and 
jobs are sent to China--which in an ironic twist of fate will soon 
become the biggest emitter of carbon dioxide on the planet. Madame 
Chairman, not all companies have joined the climate profiteers. Most 
will be its victims, particularly small businesses that will no longer 
be able to compete. But the biggest losers won't be businesses, but 
American consumers.
    This proposal and others like it may be written in the form of 
Government regulatory mandates, but for all practical purposes, it is 
really a regressive tax on the American economy, where select powerful 
companies profit at the expense of seniors, the working class and the 
poor. These groups already pay disproportionately more of their monthly 
budget for energy, and this situation will only worsen under proposals 
like we see today. Let me be clear--this is the biggest tax hike in 
U.S. history.
    I am told that the rush to do something about global warming has 
gained momentum. But the not so hidden secret is that more and more 
serious scientists and political leaders are voicing their discontent 
with both the hype and the symbolic approaches that masquerade as 
solutions that are designed more to line the pockets of its promoters 
than to accomplish anything.
    Among scientists, of course, there is Claude Allegre--the French 
Socialist, geophysicist, and member of the French and American 
academies of science--who has said that warming may be due simply to 
natural variation and that this debate appears to be about money. There 
is also Nir Shariv, one of Israel's top young astrophysicists, who says 
there is no proof of man's contribution rather than natural variation.
    And then there are the political leaders. Prime Minister Stephen 
Harper reportedly once called the Kyoto accord a ``socialist scheme'' 
designed to suck money out of rich countries. And just last week, Czech 
President Vaclav Klaus made clear his disdain for politics parading for 
science when he said ``Global warming is a false myth and every serious 
person and scientist says so. It is not fair to refer to the U.N. 
panel. IPCC is not a scientific institution: it's a political body, a 
sort of non-government organization of green flavor.
    You don't have to agree with my position on the science to question 
the wisdom of the cap and trade approach. These proposals will do 
little and cost much. Moreover, as White House spokesman Tony Snow 
stated last week, ``there is a carbon cap system in place in Europe, we 
are doing a better job of reducing emissions here,'' Snow said.
    The simple fact is that we cannot continue to put pressure on 
demand for natural gas in this country while we curtail the efforts of 
producers to supply it. We cannot demand significant emission 
reductions while Senators oppose the construction of new nuclear 
facilities. In short, we cannot demand reductions from our fossil fuel 
sector unless these demands can be met.
    The result can only be further increases and volatility of natural 
gas prices, continued and even increased job flight to countries that 
don't participate. But the biggest cost will be to consumers, who will 
be forced to foot the bill for this climate chicanery. That is why I 
have decided to fight for consumers and plan to introduce the 
Ratepayer's Protection Act, which will protect consumers in regulated 
States from having their rates raised to pay any climate schemes.
    Thank you.

    Senator Boxer. Thanks very much.
    I think it is very clear that the Ranking Member and I 
disagree on whether the science is settled. So just for the 
record, I believe the science is settled. There are always 
people, when there is a breakthrough in science, who continue 
to say, not true. There are still people who say that HIV 
doesn't cause AIDS. There are still people who say that there 
is no tie between smoking and cancer.
    So we know that there will always be some naysayers. But 
what I find really interesting and important to note here is 
that the first argument against doing anything about global 
warming is how bad it is going to be for the economy. Now it 
is, it may be really good for some of our companies.
    Senator Inhofe. I think I made that real clear, let's don't 
leave it on that note.
    Senator Boxer. I didn't interrupt. I will be glad to give 
you some time if you want.
    Senator Inhofe. Sure.
    Senator Boxer. So you can't have it both ways and say it is 
going to destroy American business when you have American 
business here taking the lead on this. I also think it is quite 
unfair to cast aspersion on people who actually might have come 
to the decision that there is a need for corporate 
responsibility here. So I think that we should hear from the 
witnesses whether or not they are being motivated because they 
want to make money from this, or they are being motivated by 
the science and the fact that they want to be around, they want 
their corporations to be around in a world that is a 
predictable world. I think that is the basic question here. As 
we all come together, if we believe that there are going to be 
adverse impacts that are going to be very costly and dangerous 
for the world, then clearly we may be motivated to make sure 
that we take the steps necessary now so that we can have our 
companies thrive in the future. So I think there are many ways 
to look at this.
    Senator Inhofe, if you would like some time.
    Senator Inhofe. Yes, I think I made it very clear in my 
opening statement that there are some who will make money in 
doing this and I don't criticize them. I have been trying to 
make it clear that I wish there were more people in the U.S. 
Senate who had a 25 or 30 year experience in the real world, 
and they would understand a little bit more about some of the 
things that are going on up here.
    But there are a lot of people who are going to be paying 
this huge, huge tax. It is going to cost a lot of money. We 
have some witnesses who I think can address that, Madam 
Chairman.
    On the science thing, the only reason I keep bringing it 
up, the science, is those individuals who are on the other side 
are coming over in droves as they look at the new science. That 
is it.
    Senator Boxer. OK. We could go on, but we won't.
    Let's start with Mr. Darbee and we will work our way 
through. Mr. Darbee, we are very proud to have you here. Why 
don't you begin? And everyone will get 6 minutes.

STATEMENT OF PETER A. DARBEE, CHAIRMAN, CEO AND PRESIDENT, PG&E 
                          CORPORATION

    Mr. Darbee. On behalf of the PG&E Corporation and the U.S. 
Climate Action Partnership, or U.S. CAP, I would like to thank 
you for the opportunity to be here today.
    PG&E is California's largest energy provider. Our company 
is also one of the Nation's cleanest utilities and we are an 
acknowledged leader in energy efficiency. U.S. CAP is a unique 
alliance of leading companies from diverse sectors of the 
economy and major environmental organizations. Our organization 
is here because we share a view that climate change is the most 
pressing environmental issue of our time and also because we 
agree that as the world's largest source of global warming 
emissions, our country has an obligation to lead.
    No other country matches the U.S. in terms of our capital 
resources and its capacity for innovation. Our economy is the 
world's locomotive and U.S. CAP believes it is critical to get 
that engine pulling in the right direction on climate change. 
Toward that end, we have outlined an aggressive but entirely 
achievable set of public policy principles in a legislative 
framework. This morning I will talk about three areas in 
particular: improving energy efficiency; developing a smart 
grid for electricity; and making smart decisions about the 
diversity of the fuels that we use to generate electricity.
    Keep in mind the backdrop is our recommendation favoring a 
program that creates a long-term price signal for carbon by 
creating a mandatory cap on greenhouse gas emissions, combined 
with a trading program that uses the market to establish that 
long-term price signal and lets companies figure out how best 
to meet the goals.
    Let's start with energy efficiency. We haven't even 
scratched the surface of what the Nation can achieve here. A 
recent McKinsey study reported that through energy efficiency 
we can reduce the growth rate of worldwide energy consumption 
by more than 50 percent over the next 154 years, and we can do 
it using today's technology. A major step forward would be 
Federal action making it easier for the country's utilities to 
actively promote energy efficiency. PG&E has been doing this 
for 30 years. We have already prevented 125 million tons of 
greenhouse gas emissions and helped California escape the need 
to build 24 additional large power plants.
    During the last 30 years, we and others have seen 
California per capita energy utilization remain flat while in 
the rest of the United States, per capita energy use has risen 
by 50 percent. The key has been a policy called decoupling. It 
is a simple idea. It works by setting utility revenues at a 
fixed level sufficient to run the business and provide a fair 
return to investors.
    But it has profound implications, because it means our 
financial health doesn't depend on selling more energy. We 
don't see it as a bad thing when customers use less of our 
product, and that is a good thing for the environment. U.S. CAP 
recommends that Congress incorporate this policy into Federal 
law or strongly encourage more States to do so. We would also 
like to see stronger national energy efficiency codes for 
buildings, equipment and appliances. By setting tough but 
achievable standards, Congress can help spur much-needed 
investment in new energy efficiency technologies.
    An example of the nexus between energy efficiency and 
technology advancement is our work with the high-tech industry. 
PG&E worked with Sun Microsystems to develop an incentive 
program for energy efficient servers, garnering attention from 
a growing number of other major computing equipment 
manufacturers. We announced the first ever utility financial 
incentive program to support virtualization projects in data 
centers, which enables customers to consolidate their data 
centers. One major software firm, for example, was able to 
consolidate workloads from 230 servers onto just 13, 
representing an energy cost savings of more than 100,000 per 
year. Rather than burden this company, energy efficiency has 
created a competitive advantage for it. This same company is 
now creating a new product based on this approach.
    A second area for action is creating the infrastructure for 
smart energy grid. We can turn the energy grid into an 
interactive network which in turn would exponentially multiply 
the options for creating efficiencies and using energy more 
intelligently. We have the technologies to do this now.
    For example, PG&E has the largest program in the country to 
install so-called smart meters, that provide for two-way 
communication between the energy supplier and the customer. 
This opens the door for opportunities like time of use metering 
that allows for informed consumer decisionmaking to efficiently 
utilize electric power or for maximizing the potential benefits 
of plug-in hybrid vehicles. U.S. CAP would like to see Congress 
develop tax incentives and reform measures that could help 
advance technology development and capital investment in these 
areas.
    Finally, I will say a few words about how we can ensure an 
affordable, reliable and diverse supply of electricity from low 
greenhouse gas emitting sources, including renewable resources, 
natural gas, nuclear and advanced coal technologies. This is 
critical to ensuring that we meet our climate change objectives 
in a way that maintains economic growth. One major positive 
step would be extending Federal production and investment 
incentives for renewable energy sources for more than 1 year at 
a time. This would provide certainty for investors, reduce the 
costs of technology development and encourage fuller deployment 
of these clean sources of energy.
    Another major step would be Federal help with developing 
cleaner conventional power sources, particularly coal. Coal is 
our most abundant domestic resource and we need to support its 
continued use in the context of our greenhouse gas reduction 
goals. We need to accelerate efforts to cost effectively 
capture and store carbon dioxide. Right now, the technology is 
expensive and questions remain. The Federal Government can help 
speed up progress and help drive down the cost. Congress should 
fund at least three large-scale development and demonstration 
programs. The U.S. should also set rules for capturing, 
transporting and storing carbon dioxide in order to provide 
clarity for investors.
    I am an optimist. I personally believe we are going to meet 
the challenges we are talking about today. But as I have said, 
I am also a realist, and I recognize that doing so will be 
tough. We are going to need your continued support and 
leadership.
    On behalf of PG&E and U.S. CAP, thank you for the 
opportunity to be part of a serious discussion on this very 
serious issue. We look forward to working with you going 
forward.
    Senator Boxer. Thank you so much, Mr. Darbee. I am very 
proud of your testimony.
    I would ask Senator Carper to introduce our next speaker.
    Senator Carper. With pleasure. I want to welcome each of 
our witnesses. I think I have had a chance to welcome you all 
personally.
    It is a special privilege today for me to welcome Chad 
Holliday to the committee. In our church, we like to say that I 
would rather see a sermon than hear a sermon. When it comes to 
the DuPont Company, we see the sermon with respect to the 
commitment to the environment, and to husbanding and preserving 
our natural resources. They have been providing great 
leadership from within the chemical industry, now they are 
providing great leadership throughout the business community on 
a whole range of fronts.
    I want to thank Chad for stepping up, I think big time, in 
helping to form this partnership and to provide a bit of 
leadership for it. I just want to say thank you, welcome. I 
believe we have reached a tipping point with the release of the 
call for action. We have reached a tipping point and I just 
want to commend each of you that are part of that for standing 
up and speaking out and providing common sense, pragmatic 
leadership at a time when we really need it.
    Chad, welcome, we are delighted that you are here.
    [The prepared statement of Peter A. Darbee follows:]

    Statement of Peter A. Darbee, Chairman, CEO and President, PG&E 
                              Corporation
    Chairman Boxer, Ranking Member Inhofe, and members of the 
committee, I am pleased and honored to appear before you this morning 
representing both my company, PG&E Corporation, and the U.S. Climate 
Action Partnership (U.S. CAP).
    PG&E Corporation is an energy holding company headquartered in San 
Francisco, California and is the parent company of Pacific Gas and 
Electric Company. Pacific Gas and Electric Company is California's 
largest utility, providing electric and natural gas service to more 
than 15 million people throughout northern and central California. PG&E 
is a recognized leader in energy efficiency and has among the cleanest 
electric delivery mix of any utility in the country.
    The U.S. Climate Action Partnership, also known as U.S. CAP, is a 
coalition of leading businesses and environmental non-governmental 
organizations (NGOs), including Alcoa, BP America, Inc., Caterpillar 
Inc., Duke Energy, DuPont, Environmental Defense, EFL Group, General 
Electric, Lehman Brothers, Natural Resources Defense Council, Pew 
Center on Global Climate Change, PG&E Corporation, PNM Resources, and 
World Resources Institute. U.S. CAP has come together based on a shared 
understanding that climate change is an urgent issue, and that the 
United States both has a responsibility and opportunity to act now, act 
aggressively, and enact policies to stabilize and reduce greenhouse gas 
emissions, enhance energy security, and create economic opportunity by 
developing and deploying new technologies.
    U.S. CAP has recommended a set of public policy principles and a 
legislative framework for Congress and the Administration, which will 
accomplish these goals. We developed this framework and these 
recommendations by putting the tough issues on the table, We challenged 
each other with hard questions. We debated. And we came together to 
move forward in those areas of common ground, This is difficult to do. 
It takes tenacity. And most of all, it takes mutual respect, humility, 
patience, compromise and a willingness to take the long-term view.
    The members of U.S. CAP are committed to working with Congress and 
the Administration to do the same. On behalf of PG&E, I want to thank 
Chairman Boxer and the other members of this committee for hearing from 
the business and environmental communities and other stakeholders on 
this important issue. I believe that this dialogue will help to forge 
the kind of understanding needed to tackle this challenging issue.
                             the challenge
    As the head of a major energy company--and also as an American and 
a great believer in our Nation's unique place in the world-I believe 
the United States has a responsibility to be at the forefront of 
addressing global climate change.
    If you look at U.S. greenhouse gas emissions compared with other 
nations, the level of emissions from sources in the U.S. is vastly 
disproportionate to our population. Our emissions are higher than those 
of China and India combined, where the population is more than 2.5 
billion people.
    If you look at our wealth and prosperity relative to other Nations, 
it's clear that we can afford to make a difference, and, if you look at 
our tremendous capacity for innovation, it's clear that we have the 
human capital to develop the solutions. By signaling to the market that 
we're serious about making progress on clean energy, we can stimulate 
investment and engage our best and brightest minds in this effort.
    The longer we wait, the costlier the solutions will likely become. 
On the other hand, by acting now, we preserve valuable response 
options. We narrow the uncertainties. And we avoid the economic and 
social dislocation of drastic changes later.
                         developing a response
    So, in the face of this challenge, where do we start? U.S. CAP has 
provided a roadmap for developing the kind of comprehensive approach 
that will be necessary to address global warming. At the core of the 
recommendations is a national, mandatory, market-based approach to 
reducing greenhouse gas emissions--a so-called `cap and trade' 
program--that establishes clear short-, medium-, and long term goals 
and unleashes the power of the market to get the job done. In addition, 
U.S. CAP identifies action that should be pursued aggressively in 
advance of the implementation of a national cap-and-trade program, 
including a full court press on energy efficiency.
    Taking this approach will create clarity for business; create 
consistency, by avoiding a State-by-State patchwork of emissions 
trading markets; create focus for a comprehensive national energy 
strategy; and allow us to begin to change the U.S. emissions trajectory 
today.
                  overview of u.s. cap recommendations
    U.S. CAP provides recommendations on all the major components of 
legislation that could be developed to address this challenge, and many 
of these recommendations are focused on making the U.S. economy more 
energy efficient than it is today. In brief, these recommendations 
include the following:

     Policies and measures to facilitate the development and 
deployment of advanced transportation, power generation, and energy 
efficient technologies;
     Cost control measures, including the use of greenhouse gas 
emissions offsets, banking, borrowing, a strategic allowance reserve, 
and preferred allowance allocations;
     Inventory and registry so that we can identify both the most 
energy-intensive parts
    of our economy and where the most cost-effective reductions can be 
achieved;
     Credit for early action, to both recognize actions already taken 
and encourage
    others to step up today; and
     Sector-specific policies and measures that complement an 
economically sound cap-and-trade system and create additional 
incentives to invest in low-GHG approaches in key sectors, including 
energy efficiency. These measures will be particularly necessary where 
near-term price signals are insufficient to deploy existing energy-
efficient technologies or other market and regulatory barriers exist 
that impede their introduction or utilization.

    In addition to outlining these major recommendations from U.S. CAP, 
I would also like to spend a little time addressing three key elements 
that provide the foundation for many of the recommendations--the 
importance of improving energy efficiency, the need to develop a 
``smart grid'' for delivery of electric power to consumers, and the 
important role that decisions on electric power generation and fuel 
diversity play in the climate change equation.
                           energy efficiency
    A recent McKinsey study said that, through energy-efficiency, we 
could reduce the growth rate of worldwide energy consumption by more 
than 50 percent over the next 15 years. And McKinsey said we can do 
this using the technology we have available today.
    A major step toward unleashing this opportunity in the U.S. would 
be Federal action making it easier for utilities to actively advocate 
energy efficiency. PG&E has been doing
    this for three decades. Our energy efficiency programs, both 
electric and natural gas, have already prevented 125 million tons of 
greenhouse gas emissions. These programs also helped California escape 
the need to build 24 additional large power plants, and they've saved 
customers more than $9 billion.
    And we are doing even more. Between 2006 and the end of 2008, we 
will invest an additional $1 billion in energy efficiency, avoid the 
need for another 600 megawatts (MW) of electric power, and save 
customers another S 1 billion. In fact, in 2006, we exceeded our 
targets and saved more than 160 MW of power and 10 million therms of 
natural gas.
    The reason we can do this is that, under State law, our revenues 
are set at a fixed level by regulators. We collect what we need to run 
the business and provide a fair return to investors. Any overruns go 
back to customers. Any shortfalls are recovered Oater. This is known as 
``decoupling,'' and it means our financial health doesn't depend on 
selling more energy. It eliminates the financial disincentives that 
otherwise stand in the way of encouraging customers to use less of our 
products. Experience shows that this empowers utilities to become some 
of the most effective advocates for energy efficiency. This is 
especially true when you package this policy with incentives for 
utilities. Utilities should be provided an opportunity to earn a return 
on investments that save energy, just as they do when they invest in a 
new power plant, and that earnings opportunity should be tied directly 
to how well utilities help customers reduce their bills.
    A number of states are already moving in this direction. U.S. CAP 
recommends that Congress bring all 50 states on board by either 
incorporating this policy into Federal law or taking steps to strongly 
encourage states to do so. We also need stronger energy efficiency 
codes for whole buildings, equipment and appliances. PG&E has worked 
for decades to help both State and Federal authorities set better 
energy efficiency standards. Progress at the Federal level has lagged 
recently, however, and we urgently need to reinvigorate it. And 
finally, it may be necessary to provide incentives for entities to go 
even further to seek energy savings.
    Aggressive standards and incentive programs are a big reason that 
per capita energy usage in California has remained flat over the past 
30 years, while the rest of the Nation has increased its per capita 
usage by 50 percent. During this time, California's economy has 
continued to grow at a rate that is equal to or has outpaced the U.S., 
and was the epicenter of the hi-tech and bio-tech revolutions-with many 
of the market leaders being energy efficiency pioneers themselves. 
Raising the bar at the national level will lead to new investment in 
next-generation energy efficient technologies and spark growth 
opportunities in other sectors
    For example, recognizing the intense and persistent energy use of 
computing equipment, airflow management, and power conditioning systems 
in data centers, PG&E worked with Sun Microsystems to develop an 
incentive program for energy-efficient servers, garnering attention 
from a growing number of other major computing equipment manufacturers, 
who are also qualifying their premium performance equipment for 
incentive programs.
    PG&E also announced the first-ever utility financial incentive 
program to support virtualization projects in data centers. 
Virtualization technology enables customers to consolidate their data 
centers and thereby significantly reduce their energy use. One major 
software firm, for example, was able to consolidate workloads from 230 
servers onto just 13, representing an energy cost savings of more than 
$100,000 per year. This same company is now creating a new product 
based on this approach.
    Many regions across the U.S. are experiencing new demands for 
electric infrastructure as data center operators construct new 
facilities. Data centers can use up to 100 times the energy per square 
foot of typical office space, so efficiency opportunities are 
significant. We are now working to expand the gains we've made, by 
leading a coalition of U.S. utilities to capture energy efficiency in 
data centers. Participants include the Northwest Energy Efficiency 
Alliance, TXU Energy, the New York State Energy Research and 
Development Authority, and NSTAR.
    Our efforts do not stop in the U.S. We recognize that climate 
change is a global problem requiring a global solution. And, while we 
do not believe that U.S. action should be contingent upon global 
action, we do recognize that in order to make progress, all major 
emitting economies will need to contribute equitably. That is why PG&E 
is working cooperatively with the Natural Resources Defense Council, 
the State of California, and others as part of the U.S.-China Energy 
Efficiency Alliance. The Alliance works to exchange information and 
facilitate technology deployment, ultimately helping China reduce the 
energy intensity of its economy and providing economic opportunity and 
advantage to those that supply these energy efficient technologies and 
facilitate best-practice programs. A climate program therefore must 
build off of efforts like this and the Asia-Pacific Partnership in the 
near term, and create additional international linkages going forward.
    And, finally, we are supporting the development and deployment of 
new energy efficient technologies and call on Congress to do the same. 
We implemented several emerging technologies projects in 2006, 
including integrated day lighting in schools and automated demand 
response controls. These projects set the stage for significant energy 
savings in the future and for creating economic opportunities for 
manufacturers and vendors.
    In our State and for our company, energy efficiency is the ``first 
energy resource.'' That is, before we look to add generation, we see 
what we can do to reduce demand. I believe the U.S. should make energy 
efficiency the Nation's first resource as well, and U.S. CAP's 
recommendations will go a long way toward achieving that.
                               smart grid
    Maximizing the potential for energy efficiency, as well as 
distributed generation and some advanced transportation technologies, 
will require a ``smarter energy grid, one that provides for two-way 
communication between energy consumers and energy providers. PG&E is 
installing 10 million Smart MetersTM-- throughout our 
service area to provide the
    infrastructure that will eventually support these technologies and 
offer new capabilities. Tax incentives and reform measures will be 
needed to advance these efforts nationally.
    One example of a technology which would benefit from a ``smarter 
grid is plug-in hybrid vehicles (PHEVs). Vehicle-to-grid technologies 
have the benefit of reducing oil use, enhancing the power grid, and 
reducing greenhouse gas emissions. For example, when the cars are not 
in use, energy from the batteries could be uploaded back to the system, 
reducing the need for peak power generation. This is important, because 
peak power often comes from the least efficient and least clean 
resources on the grid. And, PHEVs facilitate more efficient use of the 
electric grid, as these vehicles will mainly charge at night, when 
demand is otherwise low. And, in our State, this is also when some of 
our lowest emitting resources are powering the electric system.
                  power generation and fuel diversity
    In addition to using energy more efficiently, reducing demand, and 
implementing ``smart grid.'' strategies, a significant emphasis and 
focus of any greenhouse gas reduction program must be on ensuring an 
affordable, reliable, and diverse supply of electricity from low-
greenhouse gas (GHG) emitting sources. As with energy efficiency, the 
latest research suggests we can be doing a lot more with what we have 
available today.
    For example, currently, the U.S. is getting about 9 percent of its 
electricity from renewable sources. Excluding hydroelectricity, that 
figure is a little more than 2 percent. A number of states have set 
targets for increasing the supply of renewable energy.
    In California, our target is to deliver 20 percent of our energy 
from renewable sources by the year 2010, excluding large hydroelectric 
sources. PG&E is on track to meet this goal.
    But the Federal Government can make a tremendous contribution here. 
I believe one major positive step would be the extension of production 
and investment tax incentives for renewable energy sources for more 
than one year at a time. This would provide much-needed certainty for 
investors, reduce the cost of technology development, and encourage 
fuller deployment.
    Washington can also play a leading role in researching and 
developing next-generation renewable power sources. I'm particularly 
intrigued by solar thermal technology. PG&E is also exploring the 
possibility of tidal and wave power off the coast of California. And, 
the sooner we can develop a good understanding of their viability, and 
their relative costs and benefits, the sooner we will be in a position 
to move forward.
    It's also critical that we implement policies and initiatives to 
facilitate the development and deployment of lower GHG-emitting 
conventional power sources. A strong place to start would be increasing 
the efficiency of natural gas fired turbines. And, I personally believe 
we need to facilitate development of both new supplies and new 
infrastructure. For example, biogas from methane digesters is an 
opportunity we are pursuing to supplement natural gas supplies for our 
customers. Again, Federal investment and policies that support efforts 
in these areas would be very positive.
    We are also hearing the beginnings of a national conversation about 
the future of nuclear power in our country. The advantages of nuclear 
power in a carbon-constrained world are considerable and must be 
acknowledged. But nuclear power also faces considerable challenges that 
must be addressed. It is an option that should be on the table.
    Finally, we must address the issues surrounding the use of coal. 
About 40 states rely heavily on coal for their electric power and, 
nationally, the electricity mix is currently more than 50 percent coal. 
So, it is critical that we accelerate efforts to deploy advanced coal 
technologies that have the capability to cost-effectively capture and 
store carbon dioxide. Right now, carbon capture and storage technology 
is expensive, and questions remain. I am cautiously optimistic that the 
challenges facing this important fuel source can be addressed. And the 
Federal Government can help us get the answers we need more quickly and 
help drive down cost. Policy makers should fund at least three large-
scale development and demonstration programs, to account for a 
diversity of locations, coal types, and storage formations. The U.S. 
should also establish the rules as soon as possible for how carbon 
dioxide must be captured, transported and stored. Without these rules, 
it will be difficult for investments to be made on the scale necessary 
to achieve our GHG reduction targets.
                            the time is now
    Our country has a historic opportunity to change the way we produce 
and use energy in ways that will lower the threat of climate change and 
improve our environment. The optimist in Inc is certain that we're 
going to achieve this goal over the course of the next generation. But 
the realist in me knows that we can't take this outcome for granted. 
Achieving it will be a very substantial challenge. And that is why we 
have to come together as pragmatic, responsible participants in this 
effort.
    On behalf of PG&E and U.S CAP, I want to thank you for the 
opportunity provided today. I appreciate the commitment of this 
committee to addressing this critical issue and I pledge my cooperation 
and support as this committee and Congress moves forward.
    Thank you.
                                 ______
                                 
   Responses by Peter A. Darbee to Additional Questions from Senator 
                                 Inhofe
    Question 1. I am aware of at least two reports by financial 
analysts (Bernstein and Citigroup) that identify some utilities that 
would be winners and losers under climate legislation. Both reports 
reached similar conclusions. In particular, they concluded that 
companies with non-emitting generation, like nuclear and renewables, 
would get a financial windfall. According to Wall Street analysts, the 
windfall for some utilities would be in the billions of dollars. Would 
cap-and-trade legislation of the nature endorsed by USCAP benefit your 
company in terns of enhanced revenues or reduced costs?
    PG&E Corporation is the parent company of Pacific Gas and Electric 
Company, which provides gas and electric service to more than 15 
million people throughout northern and central California. Within 
California's policy framework, PG&E operates as a regulated utility, 
and does not complete directly with other energy providers. We do 
compete on a very limited basis with some municipal utilities within 
the State.
    And, in the event that our company did receive an allowance of 
emissions allocations under a cap-and-trade program, the economic 
benefit of those allowances would go to our customers, who have already 
made significant investments in low carbon energy sources, energy 
efficiency and advanced energy solutions. Allowance allocations for the 
benefits of our customers will help to ensure they do not ``pay twice'' 
for carbon reductions.
    As a regulated utility, the prices we charge, the services we 
provide, and the profits we earn are all largely determined by 
California State regulators. They ensure that our utility customers 
receive cost-effective, reliable, and responsible service, while 
providing the opportunity for our shareholders to earn a fair return, 
and no more.
    PG&E's commitment to supporting cleaner advanced energy solutions 
is a value we share with our customers and is a fundamental reason why 
we have been an active voice on the issue of climate change for many 
years.
    Through extensive research and debate on the issue of climate 
change, we have concluded at PG&E that the science is compelling, the 
risks immense, and the time for action is now.
    We will continue to support policies that are consistent with these 
values and protect the interests of our customers and our State in the 
process.

    Question 2. I understand that ``early action'' carbon credits 
awarded to your company under a cap-and-trade system would likely have 
a significant market value--is that correct?
    Response. Consistent with our answer above, PG&E operates as a 
regulated utility, and does not complete directly with other energy 
providers. We do compete on a very limited basis with some municipal 
utilities within the State. In the event that our company did receive 
an allowance of credits for ``early actions'' taken to reduce emissions 
as part of a cap-and-trade program, the economics benefits of these 
allowances would go to our customers, who have already made significant 
investments in low carbon energy sources, energy efficiency and 
advanced energy solutions.
    As a regulated utility, the prices we charge, the services we 
provide, and the profits we earn are all largely determined by 
California State regulations. They ensure that utility customers 
receive cost effective, reliable, and responsible service, while 
providing the opportunity for our shareholders to earn a fair return, 
and no more.

    Question 3. Have you done any analysis of the financial impact on 
your company of greenhouse gas reduction scenarios? If so, what were 
the results of that analysis?
    Response. PG&E has benchmarked its emissions, both for generating 
sources it owns and operates, as well as for the total mix of delivered 
electricity (i.e., owned and purchased), against others in our 
industry. That comparison is available in a document laying our PG&E's 
position on climate change as well as the steps we are taking to 
mitigate our greenhouse gas emissions. This document can be found on 
our website www.pgecorp.com. We update this comparison annually and 
publish that information in our Corporate Responsibility Report, also 
available on our website.
    We believe that given our current emissions, profile and the 
investments we are making on behalf of our customers in low or zero 
emitting energy generation, energy efficiency, renewable generation and 
the ``smart grid'' technology will allow us to continue to provide 
responsive, reliable and cost-effective service to our customers under 
various greenhouse gas reduction scenarios, while at the same time 
ensuring a fair return to our shareholders.

    Question 4. What is your estimate of the percentage of baseload 
generation that can be supplied by solar and wind energy without any 
threat of disrupting reliability if the grid?
    Response. The amount of baseload generation that can be displaced 
by renewable resources depends on the other generating resources 
connected to the electric power grid. As an example, Denmark generates 
more than 20 percent of its electric power from intermitting resources 
on its system. Many studies have been done across the United States and 
globally to assess similar integration issues. The Utility Wind 
Integration Group, for example, published a report on the subject last 
year, summarizing the results of many of those studies. The link to the 
study is included here and a copy is attached to the submitted 
response:

    http://www.uwig.org/ewec06gridpresentation.pdf;
    http://www.uwig.org/ewec06gridpaper.pdf

    Studies on integrating intermitting renewable energy resources are 
also underway in California. For example, a project sponsored by the 
California Energy Commission just released its report. A link to the 
study is included here and a copy is attached to the submitted 
response:
    http://www.energy.ca.gov/pier/final--project--report/CEC-500-2007-
081.html.

    The California Independent System Operator is also conducting an 
integration study, the results of which are expected to be released 
later in 2007.

 STATEMENT OF CHAD HOLLIDAY, CHAIRMAN AND CEO, E.I. DUPONT DE 
                   NEMOURS AND COMPANY, INC.

    Mr. Holliday. Thank you, Senator Carper, thank you, 
Chairman Boxer, Senator Inhofe for convening this hearing on a 
very important topic.
    I am pleased to be here today representing DuPont, a 205 
year old Science company. I am also here as a member of a 
unique partnership of companies and NGO's who have reached a 
consensus on action our country should take around the 
challenge of global climate change. We call this the U.S. 
Climate Action Partnership.
    DuPont's environmental approach was shaped when atmospheric 
research on ozone depletion led to phaseout of 
chlorofluorocarbons, or CFCs, through the Montreal Protocol. It 
was during this period DuPont became more aware of the 
potential business and environmental implications of climate 
change.
    Since 1991, we have reduced our greenhouse gas emissions by 
72 percent globally, and avoided $3 billion of energy costs. We 
made these changes because they earned solid returns for our 
shareholders and they help the environment. I am here today 
because I am absolutely convinced that Americans and American 
business can do our part to beat this global issue. We must 
know the rules of the road you want us to follow to reduce 
greenhouse gases. When you lay down the law, our universities, 
our companies, our national laboratories and individual 
citizens will lead the world in finding solutions.
    As a catalyst for your process, U.S. CAP has developed five 
principal themes I will briefly cover. First, clear and strong 
near-term and mid-term goals are important to prepare for the 
long-term reductions that will be needed. Second, action across 
the entire U.S. economy will be required. However, one size 
does not fit all. Different approaches and timeframes will be 
required for different sectors of the economy.
    Third, any solution must be economically sound and harness 
the power of the market. A Federal program should include 
market mechanisms such as cap and trade and additional policies 
and measures such as energy efficiency standards. Fourth, we 
must drive innovation and open up new markets by fighting 
aggressive technology through R&D. This recommendation is in 
complete harmony with the work the National Academies did for 
the Senate last year called Rising Above the Gathering Storm.
    Five, we need to encourage early action and be fair. By 
recognizing voluntary actions taken to reduce emissions and 
addressing disproportionate economic impacts that may occur to 
economic sectors, regions of the country or income groups is 
very important. U.S. CAP has offered detailed recommendations 
in some areas. In other areas, we have offered a range of 
possibilities without trying to specify exact details. My 
colleague with me today will give you more details and 
recommendations.
    In closing, we do not have all the answers. I am sure you 
can improve on our recommendations. However, I am equally sure 
when we pull together we can deal with global warming and 
continue to have the world's leading economy. Thank you very 
much.
    Senator Boxer. Thank you so much, Mr. Holliday, for that 
very succinct presentation.
    Just for the benefit of members, we are going to go through 
the panel and then in order of arrival, I will go back and 
forth, I will give each member 10 minutes, so you can work in 
your opening statements. Senator Inhofe and I did have our 
opportunity to do that. So that is what we are going to do.
    We are going to continue now hearing from Jonathan Lash, 
President of the World Resources Institute. Welcome.
    [The prepared statement of Chad Holiliday follows:]

Statement of Chad Holliday, Chairman and CEO E.I. DuPont de Nemours and 
                              Company, Inc
    Thank you, Chairman Boxer and Senator Inhofe for convening a 
hearing today on this important topic. I am pleased to be here 
representing DuPont. I am also here as a member of the U.S. Climate 
Action Partnership (U.S. CAP), a group of companies and NGOs who have 
come together to forge a consensus view regarding U.S. action on the 
challenging issue of climate change.
    At DuPont our goal is sustainable growth, which we define as the 
creation of shareholder and societal value while reducing our 
environmental footprint along the value chains in which we operate. Our 
sustainable approach to climate change is informed, in part, by our 
experience with chlorofluorocarbons in the 1980s. When atmospheric 
research on ozone depletion led to the Montreal Protocol and an 
international agreement to phase out the use of CFCs, DuPont led in 
that effort, and used our science to develop better replacement 
materials.
    In the course of that work DuPont became more aware of the 
potential business and environmental implications of climate change. We 
believe that the science is sufficient to compel prudent action. Since 
1991 we have reduced our own greenhouse gas emissions by 72 percent 
globally, and avoided $3 billion in energy costs. By 2015, we will 
further reduce our greenhouse gas emissions by 15 percent from a base 
year of 2004.
    DuPont will continue to do its part, using our science to bring new 
products to market that help others reduce their emissions. These 
sustainable solutions include alternative energy sources such as 
photovoltaic solar cells and next generation biofuels, value-adding 
materials produced from agricultural feedstocks rather than petroleum 
like our DuPontTM Sorona' polymer fiber and 
biofuels, and energy efficiency aids such as next generation 
refrigerants and DuPontTM Tyvek' 
HomeWrap'. In addition, DuPont made a corporate commitment 
to acquire at least 10 percent of our power from renewable energy 
sources by 2010, and we are already more than halfway there.
    While members of U.S. CAP have a range of reasons for joining the 
coalition, from a sense of the strength of the science to a desire for 
greater business certainty, we all believe that there is a leadership 
role for the U.S. to play in addressing this serious global issue. 
Prompt action by Congress is needed to enact a market-based program to 
reduce greenhouse gas emissions that is environmentally effective and 
economically sustainable.
    Many of our members have already taken extensive voluntary actions 
to address their own greenhouse gas emissions. But voluntary efforts 
alone will not solve the problem--we need sound policy that takes 
broad, coordinated action across the entire economy. To achieve this, 
climate protection policy must be coupled with U.S. energy policies 
that result in diverse and adequate low-carbon energy supplies.
    The U.S. CAP principles are built around the following central 
themes.

    1. Clear and strong near- and mid-term goals are important to 
prepare us for the long term reductions that will be needed.
    2. Action across the entire U.S. economy will be required. However, 
one size does not fit all, and different approaches and timeframes may 
be required for different sectors of the economy.
    3. Any solution must be economically sound, and harness the power 
of the market. A Federal program should include market mechanisms such 
as cap and trade, and additional policies and measures such as energy 
efficiency standards.
    4. We must drive innovation and open up new markets by funding 
aggressive technology R&D, demonstration and deployment programs.
    5. We need to encourage early action, and be fair, by recognizing 
voluntary actions taken to reduce emissions, and addressing 
disproportionate economic impacts that may occur to economic sectors, 
regions of the country, or income groups in the early years of a 
program.

    U.S. CAP has offered detailed recommendations in areas where we 
have been able to reach consensus. In some areas we have identified a 
range of potential policies without attempting to specify the ideal 
approach. My colleagues with me today will address these 
recommendations in greater detail.
    In closing, DuPont has taken these actions and policy positions 
because they are the right things to do, both for business and the 
environment. We will continue to work hard to bring new products and 
technologies to market that will help address the global climate 
challenge. But business cannot solve the problem alone. Federal 
legislation will help create the marketplace that will drive 
innovation, economic growth, and environmental progress. DuPont is 
proud to be part of a growing group of businesses who believe that it 
is time for the U.S. to take action on climate change. We appreciate 
this opportunity to exchange views with you, and look forward to 
working with you to enact effective legislation.

    STATEMENT OF JONATHAN LASH, PRESIDENT, WORLD RESOURCES 
                           INSTITUTE

    Mr. Lash. Madam Chair, thank you very much. Distinguished 
members of the committee, thank you for the opportunity to 
speak to you this morning about an issue of compelling national 
and global significance.
    I will follow Mr. Holliday by trying to summarize some of 
the key U.S. Climate Action Partnership recommendations. Our 
starting point is a goal in terms of emissions levels and a 
goal in terms of global concentrations of greenhouse gases. We 
set a range, 450 to 500 parts per million, because there is 
growing evidence that concentrations above those levels would 
create large-scale adverse impact to human populations, the 
natural environment and increase the risk of unpredictable and 
abrupt climate change.
    In light of that goal, we recommend a pathway with targets 
to slow, stop and then reverse the growth of U.S. emissions, 
achieving emissions levels between 100 percent and 105 percent 
of today's levels within 5 years of enactment, between 90 
percent and 100 percent of today's levels within 10 and between 
70 and 90 percent of today's levels within 15 years of 
enactment. Just to be clear, that is a 10 to 30 percent 
reduction from today's levels by 2022.
    We suggest a long-term goal of reducing emissions by 60 to 
80 percent by 2050. There are four reasons to outline this 
pathway of steadily declining emissions. First, it is what is 
necessary to address the problem of global warming. Second, it 
provides a clear road map of future market conditions for 
companies making choices regarding new technologies and 
products. Third, it will encourage investors to support 
innovative low-carbon technologies. And fourth, it will enhance 
U.S. credibility in seeking international agreement, which is 
crucial.
    Deep cuts in emissions will require fundamental changes in 
our energy systems over a period of decades, and legislation 
should focus on step-wise, cost-effective actions. Since 
markets play an important role in shaping behavior, we believe 
there needs to be a price for greenhouse gas emissions for all 
sectors of the economy. Our environmental goal and economic 
objectives can best be accomplished through an economy-wide 
market-driven system that includes a cap and trade program with 
specific limits on greenhouse gas emissions.
    Cap and trade programs in the past, like the SO2 
program that Congress enacted in the Clean Air Act amendments 
in 1990, have demonstrated a track record of creating 
environmental value at an acceptable cost. That program was 
being debated in the Congress. There were many who thought the 
costs of controlling acid rain would ruin U.S. competitiveness. 
It did not, and the CO2 cap and trade program will 
not.
    According to the venture capitalist John Doerr, who 
endorses cap and trade as a solution to global warming, ``The 
choice is clear. Are we going to innovative and prosper or 
stagnate and suffocate?''
    Cap and trade provides both certainty and flexibility. 
Sources can choose whether to make reductions to buy credits. 
Innovators can invest in technology to produce and sell excess 
credits. Cap and trade creates a market that chooses the best 
solutions.
    Just as a robust market can reduce the costs of reductions, 
there are several other program design features that can also 
help to reduce cots. One is the establishment of an offsets 
program, verified emissions reductions that are made by 
companies or farmers or other sources of emissions that are not 
within the cap but can be sold to regulated sources. 
Massachusetts, Oregon and Washington already require that power 
plant operators purchase offsets for a portion of their 
CO2 emissions. The regional greenhouse gas 
initiative cap and trade program in the northeast will include 
such an offsets program.
    If other control measures are used in climate policy, the 
U.S. Climate Action Partnership believes that they should be 
designed to first of all enable a long-term price signal that 
is stable and high enough to ensure investment in low and zero 
emitting technologies; second, that ensures the integrity of 
the emissions cap; third, to preserve the market's 
effectiveness in driving reductions.
    Possible additional cost control measures might include a 
safety valve, borrowing, a strategic allowance reserve program 
and preferential allocations, or dedicated funding, technology 
incentives and transition assistance. The emissions allowance 
allocation system in a cap and trade program can be used to 
help mitigate economic transitions costs. Allocations can help 
regions or groups that are relatively more adversely affected 
by greenhouse gas emission limits and recognize those who have 
made investments in higher cost, low GHG technologies.
    We suggest that a significant portion of allowances could 
be initially distributed free to capped entities and to 
economic sectors, particularly disadvantaged by a cap, 
including the possibility of funding transition assistance to 
adversely affected workers and communities. Free allocations to 
the private sector should be phased out over a reasonable 
period of time.
    A word on coal. Coal supplies over 50 percent of our 
current electricity generation. It will continue to play an 
important role in the future. Policies are needed to speed the 
transition to low and zero emission stationary sources that can 
cost effectively capture CO2 emissions for 
geological sequestration. I should note that the U.S. CAP 
didn't take a position s a group on any particular project, 
although individual members do have such positions. U.S. CAP 
also recommends moving forward with a fast track of activities 
and reductions that need not wait for a cap and trade program 
to begin. For example, companies like DuPont that reduce their 
emissions should get early credit for doing so.
    Delay--I have about one paragraph. Delay will increase the 
costs of reductions, but it is important, reductions are 
important also as a stimulus for technologies that will make 
the U.S. competitive on tomorrow's markets.
    Thank you very much, Madam Chair.
    Senator Boxer. Thank you.
    Next is Steve Elbert, Vice Chair of BP America. Welcome, 
Mr. Elbert.
    [The prepared statement of Jonathan Lash follows:]

    Statement of Jonathan Lash, President, World Resources Institute
    Chairman Boxer, distinguished members of the committee, good 
morning and thank you for inviting me to testify about a matter of 
compelling national and global significance. I am Jonathan Lash, 
President of the World Resources Institute. I appear today both in my 
capacity as President of WRI and as a partner in the U.S. Climate 
Action Partnership.
    The World Resources Institute provides analysis and builds 
practical solutions to the world's most urgent environment and 
development challenges. We work in partnership with scientists, 
businesses, Governments, and non-governmental organizations in more 
than seventy countries to provide information, tools and analysis to 
address problems like climate change, and the degradation of ecosystems 
and their capacity to provide for human well-being.
    The United States Climate Action Partnership started from the 
premise, as Mr. Holliday has noted, that we know enough now to know 
that we need to act on climate change, and that delay will only 
increase the costs of the action. Since the release of U.S. CAP's joint 
``Call to Action'' the IPCC has reported its findings based on a review 
of all of the climate science of the last 5 years. As an individual who 
has worked on these issues for several decades, I have to say that 
report, in its dry scientific language, offers as stark a picture of 
the scale and immediacy of the environmental challenge we face as I 
have ever seen.
    The 10 companies and four non-profit organizations that make up the 
U.S. CAP partnership reached rapid agreement on the need for an 
immediate and sustained effort to reduce U.S. GHG emissions and change 
our energy infrastructure. We worked hard to develop an interconnected 
set of recommendations for the general structure and key elements of a 
policy that would implement the six principles described by Mr. 
Holliday.
    U.S. CAP recommends that legislation be designed consistent with 
limiting global atmospheric concentrations of greenhouse gasses to a 
level of 450-550 parts per million. There is growing evidence, 
scientists indicate, that concentrations above those levels would 
create large scale adverse impacts to human populations and the natural 
environment, and increase the risk of unpredictable and abrupt global 
changes.
    In light of that goal, we recommend a pathway with targets that 
slow, stop and reverse the growth of U.S. emissions. Specifically, in 
``A Call for Action'' we recommend a mandatory emissions reduction 
pathway of:

    -Between 100-105 percent of today's levels within 5 years of rapid 
enactment
    -Between 90-100 percent of today's levels within 10 years
    -Between 70-90 percent of today's levels within 15 years
    So, by 2023, we would have achieved reductions of 10-30 percent. We 
also recognize that to achieve our long-term goal, we will need to cut 
emissions by 60-80 percent by 2050.
    There are four reasons why laying out the pathway of steadily 
declining emissions is important:

     It is what is required to control global warming;
     It will provide a clear road map of future market conditions for 
companies making choices regarding new technologies and products;
     It will encourage investors to support innovative low carbon 
technologies;
     It will greatly enhance U.S. credibility in seeking international 
agreement on reductions.
    Figure 1 depicts the U.S. CAP recommended targets and timetables.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    

    In Figure 2, WRI overlays U.S. CAP targets with legislative 
proposals under discussion by Congress. U.S. CAP has not reviewed, and 
does not endorse any specific legislative proposal. Figure 2 represents 
WRI's analysis alone, and I offer it simply as a useful way to 
understand the importance of long-term goals, and the range of outcomes 
resulting from different proposals.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Clearly, the emissions reductions that we recommend will require 
fundamental changes in our energy systems over a period of decades. 
Legislation should focus on a step-wise, cost-effective approach--U.S. 
CAP efforts focused on targets to help set us on a course over the next 
20-30 years to bring new technologies forward and reduce emissions. 
Harnessing the innovation and entrepreneurial nature of the private 
sector requires that there be a roadmap and markets open to new 
technologies.
    Since markets play an important role in shaping behavior, we 
believe there needs to be a price for GHG emissions for all sectors of 
the economy.
    Our environmental goal and economic objectives can best be 
accomplished through an economy-wide, market driven approach that 
includes a cap and trade program with specific limits on greenhouse gas 
emissions. To offer the most reduction opportunities, we recommend that 
the program should cover as much of the economy as possible through 
either an upstream or hybrid program with stationery sources regulated 
downstream.
    Cap and trade programs like the SO2 program in the Clean 
Air Act have a demonstrated track record of creating environmental 
value at acceptable economic cost. As the program was being debated in 
Congress, there were many who thought the costs of controlling acid 
rain would ruin U.S. competitiveness. It did not, and CO2 
trading will not. According to venture capitalist John Doerr, who 
endorses cap and trade, ``The choice is clear: Are we going to innovate 
and prosper, or stagnate and suffocate?''
    An economy-wide cap and trade program will allow companies to 
review their options to control greenhouse gas pollution by making 
process changes, changing fuel, or purchasing allowances from other 
entities that can more cost-effectively cut emissions. This flexibility 
lowers the cost to the economy, and with a declining cap on overall 
pollution levels, it effectively achieves its environmental goals. For 
those sectors that are insensitive to price signals or that face market 
barriers, we recommend sector specific policies--my U.S. CAP colleagues 
will speak more to some of these recommendations in a moment.
    Cap-and-trade provides both certainty and flexibility. Sources can 
choose whether to make reductions or buy credits. Innovators can invest 
in technology to produce and sell excess credits. Cap-and-trade creates 
a market that chooses the best solutions.
    Just as a robust market can reduce costs, there are several other 
program design features that can help do that as well--one is the 
establishment of an offsets program. These are verified emissions 
reductions that are made by companies, farmers or other sources of 
emissions not regulated under the cap. The offsets must be real 
reductions that are verifiable, permanent and enforceable.
    Massachusetts, Oregon and Washington already require power plant 
operators to purchase offsets for a portion of their CO2 
emissions and the Regional Greenhouse Gas Initiative cap and trade 
program in the Northeast will include an offsets program. Several years 
ago, WRI offset our emissions by helping a school in Oregon invest in a 
new high efficiency boiler. They had no funds for this upgrade which 
could offer significant emissions reductions. The new boiler reduced 
their energy costs, and we got ``credit'' for the environmental 
improvement. This type of program can be very cost-effective.
    If other cost control measures are used in climate policy, U.S. CAP 
believes they would need to be designed to:

    -Enable a long-term price signal that is stable and high enough to 
ensure that the investments in low and zero emitting technologies are 
not undercut.
    -Ensure that the integrity of the emissions cap
    -Preserve the market's effectiveness in driving reductions, 
investment and innovation.
    Possible additional cost control measures include, but are not 
limited to, a safety valve, borrowing, strategic allowance reserve 
program, preferential allocations, dedicated funding, technology 
incentives and transition assistance.
    An emission allowance allocation system in a cap and trade program 
can help mitigate economic transition costs. Allocations can help the 
regions or groups relatively more adversely affected by GHG emission 
limits and recognize those who have made investments in higher cost, 
low-GHG technologies.
    A significant portion of allowances should be initially distributed 
free to capped entities and to economic sectors particularly 
disadvantaged by a cap, including the possibility of funding transition 
assistance to adversely affected workers and communities. Free 
allocations to the private sector should be phased out over a 
reasonable period of time.
    U.S. CAP also recommends moving forward with a fast track of 
activities and reductions that need not wait for the cap and trade 
program to begin. For example, companies that can reduce their 
emissions now should get credit for doing so, and those that have been 
leaders to date should receive credit for early action.
    We recommend legislation should establish a national registry no 
later than the end of 2008. In addition, the fast track policy program 
should establish a program that offers credit for early action, support 
aggressive technology research and development, and include policies 
that discourage new investments in high-emitting facilities and 
accelerate deployment of zero and low-emitting technologies and energy 
efficiency. We recommend these fast track actions begin within one year 
of enactment.
    We must act now if we are to preserve all our options for cost-
effective greenhouse gas reductions and engage the international 
community. We in the U.S. must take the first step by reducing our own 
emissions. And we hope Congress will urge the Administration to re-
engage the international community at it discusses post-2012 policies. 
International cooperation is necessary, and can also help to improve 
cost-effectiveness, but U.S. action is imperative from both an 
environmental and political perspective.
    Thank you for the opportunity to join you today to share my 
thoughts and some highlights of the U.S. CAP recommendations.

STATEMENT OF STEPHEN A. ELBERT, VICE CHAIRMAN, BP AMERICA, INC.

    Mr. Elbert. Thank you very much, Madam Chairman, members of 
the committee. Thank you very much for inviting me to 
participate in this hearing on the U.S. Climate Action 
Partnership report.
    I am Steve Elbert, Vice Chairman of BP America. I am 
pleased to be here today to express BP's support for the 
adoption of a mandatory and national climate change control 
program. I am going to focus my remarks on the important role 
of technology and policy design and the necessity to 
incorporate mechanisms that fairly address the various 
components of the transport sector.
    In 1997, BP was the first oil and gas company to urge 
precautionary action on climate change. Since then, we have 
been active in addressing climate change through both open 
discussions on policy alternatives as well as through concrete 
business action. In 1998, the company set voluntary targets to 
reduce its own emissions. By 2001, our greenhouse gas emissions 
were dropped by 10 percent below our 1990 levels, and we have 
since continued to improve our emissions performance through 
energy efficiency projects.
    Our investment in energy efficiency will total 
approximately $450 million by 2010. That investment has already 
returned approximately $1.6 billion through the end of 2005 
through reduced energy costs. We expect to see continued energy 
and cost savings in coming years. Our experience demonstrates 
that energy efficiency is a cost-effective way of reducing 
greenhouse gas emissions.
    In addition to focusing on our own emissions we are 
focusing on developing low carbon power. That includes natural 
gas, hydrogen, biofuels, solar and wind technologies. That is 
why BP is so pleased to be a member of this first of a kind 
partnership of major industrials, environmental organizations 
and Wall Street to call for a mandatory climate change program. 
U.S. CAP's report, A Call for Action, is an important milestone 
because of the diversity of its members who were able to reach 
a very quick consensus opinion recognizing the urgent need to 
adopt comprehensive climate policy.
    All of us are committed to working with the President, 
Congress and other stakeholders to enact well designed national 
legislation to slow, stop and reverse the growth of greenhouse 
gas emissions. You have already heard from some of my U.S. CAP 
colleagues about many of the areas we have reached consensus on 
policy principles and recommended actions and frameworks for 
mandatory national policy. One of those design principles 
concerns the critical role that technology must play to reach 
the goal of stabilizing atmospheric concentrations of carbon 
dioxide at the 450 to 550 part per million by 2050.
    In order to slow carbon emissions in the near term, we must 
deploy the most cost-effective technologies that are available 
today to improve energy efficiency and reduce emissions. We 
must also develop new technologies for the longer term to stop 
and reverse the growth of these emissions. For that to happen, 
we need design policies that stimulate private investment into 
research, development and deployment. We believe this is best 
accomplished through the establishment of a market value for 
greenhouse gas emissions.
    The U.S. CAP members agree that in addition to developing 
the long-term price signals associated with a carbon price, the 
parallel and complementary policies will be required in the 
early years to stimulate capital investment. A combination of 
these policies will provide the framework necessary for both 
short-term action using existing technologies and the future 
research and development to achieve the so-called game changing 
technological breakthroughs.
    As the largest oil and gas producer in the United States 
and one of the largest retailers of transportation fuels, BP 
believes that all emitting sectors of the economy, including 
the transportation sector, both fuels and vehicles, must be 
included in nay national climate change policy. The U.S. CAP 
has identified a number of areas for consideration and we 
continue to work on policy options to address this very complex 
sector. We believe that parallel policies that address fuel 
specifications, vehicle design and customer behavior are 
necessary to achieve the reductions in emissions in the 
transport sector. BP and the U.S. CAP will continue to work 
with those who are committed to identifying cost-effective 
environmentally and economically sound solutions.
    We believe that addressing the risks of global climate 
change is good for our customers and good for our shareholders. 
And we are convinced it is possible to develop legislation that 
will enable us to stabilize the climate and meet the energy 
needs of the country. But we need technological innovation to 
break the link between energy consumption and carbon emissions 
and still maintain strong economic growth. That is why BP is 
investing $8 billion over the next 10 years in BP Alternative 
Energy. We are investing in new solar technologies, wind power, 
hydrogen power and carbon capture with sequestration and state-
of-the-art gas turbine technology.
    Through these investments, we expect to reduce 
CO2 emissions by 24 million tons by 2015. That is 
roughly the equivalent of making the city of Chicago carbon 
free. In addition, we have recently announced a $500 million 
research program to be housed at the University of California 
Berkeley and the University of Illinois. This energy 
biosciences institute will perform ground-breaking research 
aimed at applying biotechnology to production of new and 
cleaner energy, initially focusing on renewable fuels. This 
research will focus on every aspect of biofuels value chain 
from feedstocks and enzymes to conversion processes and onto 
new fuels. It will inform the actions of our own biofuels 
business segment and supplement the partnership we announced 
last year with DuPont, to introduce a new fuel, biobutanol.
    We believe that strong support from the Government is 
necessary to spur innovation and that will in turn increase 
U.S. energy security and create new opportunities to boost U.S. 
competitiveness in the world. We look forward to working with 
the committee and others to help develop the legislation that 
will make this happen.
    Thank you very much, Madam Chairman. I look forward to 
answering any questions the committee may have.
    Senator Boxer. Thank you very much, Mr. Elbert.
    And now on the other side of this, the next three 
witnesses, I want to welcome Kevin Book, Senior Analyst, Vice 
President, Friedman, Billings, Ramsey and Company.
    [The prepared statement of Stephen A. Elbert follows:]

    Statement of Stephen A. Elbert, Vice Chairman, BP America, Inc.
    Madam Chairman, members of the committee, thank you for inviting me 
to participate in this hearing on the U.S. Climate Action Partnership 
report. I am Steve Elbert, Vice Chairman of BP America Inc. I am 
pleased to be here today to express BP's support for the adoption of a 
mandatory and national climate change control program. I will focus my 
remarks on the important role of technology in policy design and the 
necessity to incorporate mechanisms to fairly address the various 
components of the transport sector.
    In 1997, BP was the first oil and gas company to urge precautionary 
action on climate change. Since then, we have been active in addressing 
climate change through open discussions on policy alternatives and 
through business action. In 1998, the company set voluntary targets to 
reduce its own emissions. By 2001, our GHG emissions were 10 percent 
below 1990 levels and we have since continued to improve our own GHG 
emissions performance through energy efficiency projects.
    BP's investment in energy efficiency will total approximately $450 
million by 2010. That investment has already returned approximately 
$1.6 billion through the end of 2005 through reduced energy costs. We 
expect to see continued energy and cost savings in the coming years. As 
our experience demonstrates, energy efficiency is a cost-effective way 
of reducing greenhouse gas emissions.
    In addition to curbing our own emissions, we are focusing on 
developing low carbon power, including natural gas, hydrogen, biofuels, 
solar and wind technologies.
    That is why BP is so pleased to be a member of this first of a kind 
partnership of major industrials, environmental organizations, and Wall 
Street to call for a mandatory climate change program. U.S. CAP's 
report, ``A Call for Action,'' is an important milestone because of the 
diversity of its members who were able to reach a consensus opinion 
recognizing the urgent need to adopt comprehensive climate policy.
    All of us are committed to working with the President, Congress, 
and all other stakeholders to enact well designed national legislation 
to slow, stop and reverse the growth of greenhouse gas emissions.
    You have already heard from some of my U.S. CAP colleagues about 
many of the areas where we have reached consensus on policy principles 
and recommended actions and frameworks for a mandatory national policy.
    One of those design principles concerns the critical role that 
technology must play to reach the goal of stabilizing atmospheric 
concentrations of CO2 at 450-500 parts per million by 2050.
    In order to slow carbon emissions in the near term, we must deploy 
the most cost-effective technologies that are available today to 
improve energy efficiency and reduce greenhouse gas emissions, while 
developing new technologies for the longer term to stop and reverse 
greenhouse gas emissions.
    For that to happen, we need to design policies that stimulate 
private investment into research, development and deployment. We 
believe this is best achieved through the establishment of a market 
value for GHG emissions. The U.S. CAP members agree that in addition to 
developing the long term price signals associated with a carbon price, 
parallel and complementary policies will be required in the early years 
to stimulate capital investment.
    A combination of these policies will provide the framework 
necessary for both short term action using existing technologies and 
future research and development to achieve game-changing technological 
breakthroughs.
    As the largest oil and gas producer in the United States, and one 
of the largest retailers of transportation fuels, BP believes that all 
major emitting sectors of the economy, including the transportation 
sector--both fuels and vehicles--must be included in any national 
climate change policy. The U.S. CAP has identified a number of areas 
for consideration, and we continue to work on policy options to address 
this complex sector.
    We believe that parallel policies that address fuel specifications, 
vehicle design, and consumer behavior are necessary to achieve 
reductions of GHG emissions in the transport sector.
    BP and the U.S. CAP will continue to work with those who are 
committed to identifying cost-effective, environmentally and 
economically sound solutions.
    BP believes that addressing the risks of global climate change is 
good for our customers and our shareholders, and we are convinced it is 
possible to design legislation that will enable us to stabilize the 
climate and meet the energy needs of the country. But we need 
technological innovations to break the link between energy consumption 
and carbon emissions and still maintain strong economic growth.
    That is why BP is investing $8 billion over the next ten years in 
BP Alternative Energy Company. We are investing in new solar 
technologies, wind power, hydrogen power with carbon capture and 
sequestration and state of the art gas turbine technology.
    Through these investments, BP expects to reduce CO2 
emissions by 24 million tons per year by 2015. This is equivalent to 
making the City of Chicago carbon free.
    In addition, we have recently announced a $500 million research 
program to be housed at the University of California Berkeley and the 
University of Illinois.
    The Energy Biosciences Institute will perform ground-breaking 
research aimed at applying bio-technology to production of new and 
cleaner energy, initially focusing on renewable biofuels. This research 
will focus on every aspect of the biofuels value chain from feedstocks 
and enzymes to conversion processes and on through to new fuels. It 
will inform the actions of BP's biofuels business segment and 
supplement the partnership we announced last year with DuPont to 
introduce a new biofuel--biobutanol.
    These investments on our part and the investments of our U.S. CAP 
colleagues are just a start.
    And we believe that strong support from the Government is necessary 
to spur innovation that will in turn increase U.S. energy security and 
create new opportunities to boost U.S. competitiveness around the 
world.
    We look forward to working with the committee and others to help 
develop legislation that will result in real emission reductions at the 
lowest achievable cost.
    Thank you again Madam Chairman and I look forward to answering any 
questions the committee might have.

        STATEMENT OF KEVIN BOOK, SENIOR VICE PRESIDENT, 
  SENIOR ANALYST, FRIEDMAN, BILLINGS, RAMSEY AND COMPANY, INC.

    Mr. Book. Madam Chairman, Ranking Member Inhofe and 
distinguished members of the committee, thank you for the 
privilege of contributing to the important discussion here 
today. The testimony I will provide is my own and does not 
represent the view of Friedman, Billings, Ramsey and Company. I 
should also point out, as an energy policy analyst for Wall 
Street clients, I don't take sides so much as I try to help 
them try and figure out what is going to happen next. So I 
appreciate the opportunity to be here participating in what is 
happening next.
    This had led, by the way, to a number of intellectually 
honest discussions about climate change with policymakers, 
financial investors and corporate managers. In short, the 
nature of energy investments may present several challenges for 
policymakers crafting climate change mitigation strategies. As 
an initial act of conservation, I have cut my written testimony 
down to three and a half pages. So I will be happy to respond 
to any parts of the written record as well.
    Senator Boxer. Mr. Book, we will put your full testimony in 
the record, as well as everybody else's.
    Mr. Book. Thank you.
    Energy investments require significant capital outlays over 
long periods of time, pushing financial returns far into the 
future. The prospect of regulatory change can introduce 
uncertainty that diminishes investors' perceptions of value. 
Forcing corporations to offer either higher guaranteed returns 
on debt or larger portions of equity ownership in order to 
secure financing. High capital costs can stall investment or 
crowd out discretionary R&D spending.
    Second, the energy industry is characterized by large 
numbers that can magnify the impact of policy changes. In 2004, 
the EPA reported that U.S. fossil fuel combustion yielded more 
than 5,600 terragrams of carbon dioxide equivalent. More than 
1,850 terragrams came from transportation; nearly 2,300 
terragrams came from power generation. Keeping in mind that a 
terragram is one million metric tons, a fee of even $1 per 
metric ton across the economy would raise gasoline costs by 
approximately $1.25 billion per year and coal-fired power costs 
by approximately $2 billion per year.
    Third, greenhouse gas emissions and economic output are 
closely linked. The sole annual decrease in U.S. greenhouse gas 
emissions during the past 15 years arrived as a result of the 
September 11th tragedies. Emissions fell 1.3 percent as the 
growth rate of GDP fell from 3.7 percent to 0.8 percent. When 
President Vladmir Putin ratified the Kyoto Protocol in November 
2004, Russia's greenhouse gas emissions levels had decreased 32 
percent since 1990, with the collapse of its industrial base. 
At $10 per metric ton, that meant about $10 billion per year in 
credit sales, an attractive option for a $613 billion economy.
    But this wealth transfer ultimately rewards economic 
contraction, not the choice to reduce conventional energy 
production and increase green energy capacity.
    Fourth, a tax on the end user consumption of greenhouse gas 
emitting fuels would provide the most economically efficient 
means of limiting emissions. But consumption taxes tend to be 
regressive and may negative impact GDP growth. As a result, 
many policymakers and stakeholders to this debate support 
market based cap and trade programs that offer corporations the 
flexibility to choose between making new capital investments, 
purchasing emissions credits of shutting down.
    This strategy does have some shortcomings. Regulating 
corporations may mitigate some regressive income effects. But 
firms are still likely to pass through some portion of higher 
costs to all consumers. This approach could also weaken the 
price signals that motivate individuals to alter their 
consumption behaviors.
    Fifth, unless regulated entities can engage in economic 
technologically viable green behaviors to earn credits for 
future use or sale, the cap in cap and trade becomes a tax on 
production that court hurt producers with thin margins or small 
cash reserves. Carbon dioxide from fossil fuel combustion makes 
up more than 80 percent of U.S. greenhouse gas emissions, far 
exceeding potential offsets available to regulated entities 
from projects that stem emissions of other gases.
    Science may soon make great strides toward secure 
underground carbon dioxide sequestration. But this option is 
not available to U.S. emitters today.
    Sixth, safety valves to protect economic growth could 
undermine emissions market dynamics. Because a safety valve 
price would need to be by definition lower than the projected 
market price for credits under conditions of scarcity. When 
prices spike, emitters would just pay the safety valve price 
and continue business as usual, unless this price is set so 
high that it forces the consideration of new capital investment 
in green technologies that offer sustainable production cost 
advantages.
    Seventh, durability could be a concern. In December 2005, 
when Hurricane Katrina drove gas prices above $14 per million 
British thermal units, Massachusetts and Rhode Island stepped 
back from the regional greenhouse gas initiative. In 2012, 
Canada may face a choice of either paying that 1.3 percent of 
GDP to purchase credits or disable 30 percent of its GDP to 
meet its Kyoto targets. Investors are likely to be cautious 
about the possibility that high prices could motivate sovereign 
defection from or delayed implementation of proposed 
regulations.
    To conclude, enacting an economy-wide cap and trade system 
too far ahead of the commercialization of cost competitive 
green alternatives may not be the most stable or efficient way 
to modify energy use behaviors to address global climate 
change. There may be greater value in providing incentives to 
the U.S. venture capital, private equity and capital markets to 
deliver cost competitive green technologies. Alternatively, it 
may make sense to take an incremental step with a market based 
regulation of stationary sources, similar to the Clean Air 
Interstate and Mercury rules, so long as it also motivates 
regulated entities to explore emerging carbon capture 
technologies.
    Last, ongoing discussion may be further informed by an 
analysis of the comparative national and global economic costs 
of inaction and limited action vis-a-vis any comprehensive 
emissions control program.
    Madam Chair, this concludes my prepared testimony. I look 
forward to any questions.
    Senator Boxer. Thank you, sir.
    Our next speaker is Mr. Fred Smith, President of the 
Competitive Enterprise Institute. Welcome.
    [The prepared statement of Keven Book follows:]

    Statement of Kevin Book, Senior Vice President, Senior Analyst 
               Friedman, Billings, Ramsey & Company, Inc.
    Thank you, Madam Chairman, Ranking Member Inhofe and distinguished 
members of the committee for the privilege of contributing to the 
important discussion taking place here today. The testimony I will 
provide is my own and does not represent the viewpoint of my employer, 
the Arlington, Virginia-based investment bank Friedman, Billings, 
Ramsey & Company, Inc.
    As an energy policy analyst for Wall Street institutional clients, 
I evaluate potential investment impacts of Government and regulatory 
actions for the men and women who manage other people's money. This 
affords me an opportunity to engage financial investors, corporate 
management teams and policymakers in intellectually honest discussions 
regarding the challenges of balancing environmental stewardship with 
economic growth and national security.
    My testimony today addresses three areas relevant to discussion 
regarding U.S. greenhouse gas emissions reductions: the nature of 
energy investments; potential unintended consequences related to 
market-based regulatory frameworks; and the durability of such 
frameworks when sovereigns confront serious economic hardship.
                  i. the nature of energy investments
    Energy investments require significant capital outlays over long 
periods of time, pushing returns for financial investors far into the 
future. The prospect of significant changes to regulations governing 
energy sector investments can introduce uncertainty that diminishes 
investors' perceptions of value. A dollar today, after all, is worth a 
dollar. A dollar next year is worth less than a dollar today because 
today's dollar could earn a year's interest in a bank account in the 
meantime. The 80 percent possibility of a dollar next year is worth 
still less.
    Financial investors seek returns that outperform industry 
benchmarks. An investor's charter or institutional mandate may define 
the class and type of portfolio assets in which he or she might invest. 
These choices may vary considerably across different firms, funds and 
asset classes but, whatever the criteria, timeframe or style involved, 
investors generally seek to allocate the capital entrusted to their 
care to the highest-yielding investments among competing alternatives.
    Capital-intensive firms compete for investor dollars to fund their 
operations. When investor perceptions of project value diminish, 
corporations must offer investors either higher guaranteed returns (in 
the case of debt) or larger portions of ownership (in the case of 
equity) in order to secure financing. When securities issuers and 
institutional investors cannot agree, investment may stall. When 
issuers face higher costs of capital for essential investment, it can 
deter discretionary spending on research and development and hurt long-
term competitiveness.
    Cost-of-capital concerns are unlikely to be the only reason why a 
number of emissions-intensive energy and industrial producers have 
asked Congress to quickly enact clear and enduring greenhouse gas 
emissions controls; by the same token, it is reasonable to assume that 
these concerns do play a role in corporate decision-making.
    Other stakeholder communities have called for urgent action on 
climate change. Several environmental advocacy groups warn that recent 
warming trends may lead to irreversible feedback loops unless 
Governments can slow, stop and reverse global anthropogenic emissions 
in the near term. Still others have suggested that U.S. leadership 
might promote more-rapid uptake of new emissions standards by U.S. 
trading partners, including less-developed economies that are currently 
exempt from the Kyoto Protocol. Leaving aside the question of whether 
scientific data demand a rush to action, the nature of energy 
investments may present several challenges for policymakers considering 
actions to address climate change.
    First, the energy industry is a world of large numbers and vast 
quantities that can magnify the impact of policy changes. According to 
2004 EPA greenhouse gas emissions data (the most recent available), 
U.S. fossil fuel combustion yielded 5,656.6 TgCO2E 
(teragrams of carbon dioxide equivalent)\1\. Of this, 1,860.2 
TgCO2E came from transportation and 2,290.6 
TgCO2E came from electricity generation. The corresponding 
consumption data are also awe-inspiring. Our Nation uses more than 20 
million barrels of oil each day and light-duty vehicles operating on 
American roads consume approximately 140 billion gallons of gasoline 
each year. Given that gasoline combustion yields approximately 20 
pounds of CO2 per gallon, these numbers add up quickly, 
making the annual carbon footprint of U.S. motor gasoline approximately 
1,250 TgCO2E.
---------------------------------------------------------------------------
    \1\IPCC methodology represents total emissions in terms of their 
``global warming power'' using a standard unit of grams of carbon 
dioxide equivalency. By this mechanism, methane is 21 times more heat-
trapping, making one gram of methane equivalent to 21 grams of 
CO2. Total U.S. greenhouse gas emissions in 2004 were 
7,074.4 TgCO2E. Source: EPA Inventory of Greenhouse Gas 
Emissions and Sinks, 1990-2004, released April 2006. Table ES-3.
---------------------------------------------------------------------------
    This means that an economy-wide $1/metric ton CO2 
charge, whether as a tax or as a cost of purchasing emissions credits, 
would increase the cost of gasoline by approximately $1.25 billion per 
year. Likewise, coal-fired power plants generated approximately two 
billion megawatt-hours of electricity using approximately one billion 
tons of coal in 2005.\2\ Because the combustion of one [short] ton of 
coal yields approximately two metric tons (2,000 kg) of CO2 
charging coal-fired generators $1 per metric ton of CO2 
would increase costs by approximately $2 billion per year at current 
consumption levels.\3\
---------------------------------------------------------------------------
    \2\EIA Electric Power Annual With Data for 2005, updated November 
9, 2006.
    \3\According to EIA Fuel and Energy Source Codes and Emissions 
Coefficients, burning one short ton (2,000 pounds) of anthracite yields 
3,852 pounds of carbon dioxide. The ratios are higher for bituminous 
(4,931 lb/short ton) and lower for subbituminous (3,715 lb/short ton) 
and lignite (2,791 lb/short ton). The 2:1 ratio offers a convenient 
back-of-the-envelope estimate for discussion purposes. Note that carbon 
dioxide values are usually expressed in metric tons (2,200 pounds).
---------------------------------------------------------------------------
    Second, recent history illustrates how policy changes that appear 
to modify small components of energy use may also meaningfully impact 
the economics of related and supporting industries. The Renewable Fuels 
Standard established by the Energy Policy Act of 2005 and the 
corresponding withdrawal of MTBE from the Nation's fuel supply 
increased the ethanol content of gasoline from approximately 3 percent 
to approximately 4.1 percent over the course of a year, a modest 
change. Although gasoline prices rose dramatically during periods of 
ethanol scarcity at the height of the summer driving season, this 
effect disappeared by the end of 2006 and gasoline prices have resumed 
their traditional relationship to crude prices and refinery margins. On 
the other hand, the year-on-year impact on corn prices was much 
starker. Actual corn prices realized by farmers in December 2006 rose 
to almost $3/bushel, more than a 50 percent increase above year-earlier 
prices of $1.92/bushel in December 2005.\4\
---------------------------------------------------------------------------
    \4\These prices could potentially normalize somewhat if USDA early 
planting reports suggest new acreage has come on-stream.
---------------------------------------------------------------------------
    Third, the growth rates of energy use, greenhouse gas emissions and 
economic output tend to be closely correlated, although developed 
economies tend to operate more efficiently on a per-unit CO2 
basis. The U.S. economy currently grows faster than the growth rate of 
its energy use, fossil fuel use and overall greenhouse gas emissions 
(3.0 percent versus 1.2 percent, 1.2 percent and 1.1 percent, 
respectively).\5\ On the other hand, the sole year of carbon emissions 
reductions during the past fifteen years arrived as a result of the 
September 11, 2001 terrorist attacks and associated economic losses--
annual greenhouse gas emissions fell 1.3 percent and the growth rate of 
GDP fell from 3.7 percent to 0.8 percent\6\.
---------------------------------------------------------------------------
    \5\Inventory of Greenhouse Gas Emissions and Sinks, 1990-2004, 
released April 2006. Table ES-8.
    \6\Source: Bureau of Economic Analysis.
---------------------------------------------------------------------------
    Russia provides an even more marked example. Russian President 
Vladimir Putin ratified the Kyoto Protocol on November 5, 2004, 
fulfilling the second of two tests required under the treaty before its 
cap-and-trade system acquired the binding force of international law: a 
minimum of 55 countries had to commit to participate and the 
participating countries had to represent at least 55 percent of the 
world greenhouse gas emissions levels in 1990 (Russian participation 
contributed 17.4 percent of 1990 greenhouse gas emissions towards the 
cumulative total of nearly 62 percent). According to the U.N., Russian 
greenhouse gas emissions levels decreased 32 percent (from 2,974.9 
TgCO2E to 1,944.8 TgCO2E) between 1990 and 2004 with the 
collapse of Russia's industrial economy.\7\ At a credit price of $10/
metric ton of CO2, this lost capacity has a potential value 
of $10 billion per year in emissions credits sales, an attractive 
financial choice for a Nation that generated $613 billion in economic 
output in 2004. On the other hand, this wealth transfer ultimately 
rewards economic contraction instead of providing an incentive for 
Russia to reduce its ``brown'' (conventional) energy production and 
increase its ``green'' energy production.
---------------------------------------------------------------------------
    \7\U.N. Framework Convention on Climate Change, Highlights from 
Greenhouse Gas (GHG) Emissions Data for 1990-2004 for Annex I Parties, 
p. 16, released November 2006 Chinese emissions reached 3,222.4 TgCO2E 
in 2002, making it the world's second largest source of greenhouse 
gases. Between 2002 and 2004, automobile ownership rose another 30 
percent and, during that period, greenhouse gas emissions levels rose 
to 4,707.3 TgCO2E.
---------------------------------------------------------------------------
    In developing economies, income increases can spur greater 
transportation and electricity use of fossil fuels without the 
declining carbon intensity of GDP demonstrated by the U.S. In the 
absence of domestic reforms, it appears that China's transportation-
related carbon emissions growth will continue to accelerate in the 
future, once that Nation's highway system (which essentially doubled in 
size between 1990 and 2003, with most of that growth during the final 4 
years) expands to support the approximately 600 percent increase in per 
capita personal income and licensed drivers and more than fourfold 
growth in motor vehicles over the same period of time. Already, 
economic expansion has led to tenfold growth in Chinese greenhouse gas 
emissions between 1980 and 2000 and Chinese emissions reached 3,222.4 
TgCO2E in 2002, making it the world's second largest source 
of greenhouse gases. Between 2002 and 3004, automobile ownership rose 
another 30 percent and, during that period, greenhouse gas emissions 
levels rose to 4,707.3 TgCO2E.
    Finally, policymakers may wish to consider that Washington 
timelines are often shorter than those that govern energy projects. 
Congress appropriates money on an annual basis and reconvenes every two 
years. Presidential terms are only 4 years long and the Federal 
Government balances its budget in five-year windows. Even the six-year 
terms of U.S. Senators fall short of the time periods that may be 
required to approve permits for new refineries (a seven-year story), to 
produce oil from the Arctic National Wildlife Refuge (optimistically, 8 
to 10 years) or to fully upgrade the efficiency of the U.S. passenger 
vehicle fleet (potentially 15 to 20 years).
          ii. unintended consequences of market-based systems
    A tax on the end-user consumption of greenhouse-gas-emitting fuels 
would provide the most economically efficient means of limiting 
emissions. The shortcomings of this approach have been well documented. 
Consumption taxes tend to be regressive and, depending on their 
magnitude, they may negatively impact the growth rate of GDP. 
Significant new taxes also appear politically unviable at the present 
time. In light of these shortcomings, many policymakers and industry 
stakeholders have supported market-based cap-and-trade programs.
    Cap-and-trade programs offer several advantages. In theory, a 
market-based mechanism for emissions reductions will offer corporations 
the flexibility to choose between undertaking new capital investment, 
purchasing emissions credits from cleaner producers or shutting down 
production entirely. Cap-and-trade systems should reward those 
participants who outperform established targets or meet goals ahead of 
scheduled dates by allowing them to monetize accumulated credits 
through sale to other entities. Imposing a cap-and-trade program is 
unlikely to provoke an adverse capital markets response, either. To the 
extent that financial investors can account for emissions credits or 
capital projects within their revenue and cost projections, a clearly-
defined cap-and-trade trajectory can be factored into long-term equity 
valuations.
    But cap-and-trade mechanisms also have shortcomings. The 
architecture of a credit-trading system requires policymakers to 
consider which entities will be regulated, how allowances will be 
allocated and whether or not to provide for a ``safety valve'' in the 
event that market prices for credits materially exceed entities' 
economically sustainable ability to pay. The Senate Energy and Natural 
Resources Committee treated these topics during its climate summit on 
April 4, 2006. Testimony offered during that event appeared to suggest 
regulating mobile sources upstream (at the refinery or extraction site) 
in order to facilitate implementation and stationary sources downstream 
(at the smokestack) to encourage end-user innovation.
    Although placing the regulatory burden on the shoulders of 
corporations could mitigate regressive effects for low-income 
consumers, it may not eliminate them entirely: power producers and oil 
companies are likely to pass through some portion of higher costs to 
the entire consumer population. This approach could weaken the price 
signals that might motivate individuals to alter their consumption 
behaviors.
    The principle of cap-and-trade is likely to work best under 
circumstances where regulated entities can engage in economic, 
technologically-viable, green behaviors to earn credits for future use 
or sale, as in the case of the scrubber installations during phase I of 
the Acid Rain Program and, more recently, the hundreds of thousands of 
megawatts of scrubbed capacity planned by U.S. coal-fired power plants 
in order to meet Clean Air Interstate Rule targets. Otherwise, a cap 
becomes, in practical terms, a tax on production that may impose the 
greatest impact on producers with the thinnest margins or the smallest 
cash reserves.
    Carbon dioxide (CO2) from fossil fuel combustion makes 
up more than 85 percent of U.S. greenhouse gas emissions, far 
outstripping potential offsets available to regulated entities from 
projects that stem emissions of gases like landfill methane, or PFCs 
and HFCs from industrial production. Although science may soon make 
great strides towards secure sequestration of CO2 in 
underground reservoirs, this option is not available to U.S. emitters 
today. Likewise, it may be years or decades before the Nation can rely 
upon predominantly green energy sources that replace today's 
conventional energy production, like second generation, waste-based 
biofuels, electric cars powered by hydrogen fuel cells and new electric 
generating capacity from nuclear power plants.
    Several legislative proposals address the challenge of implementing 
a cap-and-trade system within an economy that depends on today's 
industrial technology by allocating large blocks of credits to existing 
emitters in early years and decreasing these allocations in subsequent 
years. This, too, may lead to unintended consequences. During the 1995-
1999 first phase of Acid Rain Program sulfur dioxide (SO2) 
credit trading, coal-fired emissions sources in operation prior to 1996 
were given allowances of 2.5 lb. SO2 per million British 
thermal units (mmBtu). Although the biggest emitters faced the lowest 
per-Btu cost of retrofitting and quickly amassed a bank of 11.65 
million emissions allowances (30 percent of total allocation), most 
power plants east of the Mississippi preferentially turned to a 
different brown mechanism for meeting their targets (switching to 
lower-sulfur coal from the Powder River Basin) instead of the green 
choice to install flue gas scrubbers.
    The large bank of emissions allowances kept prices low (in the 
$100-200/allowance range) and gave utilities the freedom to delay 
capital expenditures, but utilities' wait-and-see strategy later 
exhibited several weaknesses. First, rail dislocations out of the 
Powder River Basin increased effective fuel costs for utilities by 
driving demand for sulfur credits. Second, when the 2005 Gulf of Mexico 
(GOM) hurricanes disabled a significant proportion of GOM natural gas 
production, noncommercial traders bet that power utilities would need 
to fall back on high-sulfur coal to generate electricity, bidding the 
thinly-traded market for sulfur emissions allowances up above $1,500 
per ton.
    A similar set of challenges could confront a cap-and-trade 
mechanism that includes a ``safety valve'' to protect economic growth. 
Most safety valve proposals would enable regulated entities to pay a 
defined maximum price per metric ton of CO2 emitted in the 
event that credit prices exceed established thresholds. This may 
present a politically appealing compromise, but it could also undermine 
the market dynamics built into a cap-and-trade system because a safety 
valve price would need to be, by definition, lower than the projected 
market price for emissions allowances under conditions of scarcity. 
When credit prices spike, the expected result would be for regulated 
entities to pay the safety valve price and continue business as usual, 
unless the safety valve price is set high enough to make emitters 
willing to consider new capital investment in green technologies that 
would offer regulated entities sustainable production cost advantages.
                     iii. durability of regulation
    The first Kyoto compliance phase officially begins in 2008 and 
continues through 2012, although the EU Emissions Trading Scheme began 
on January 1, 2005 and electronic trading of Kyoto Clean Development 
Mechanism credits is scheduled to begin in April of this year. The 
first phase of the Regional Greenhouse Gas Initiative (RGGI) commences 
in 2009 and California's Global Warming Solutions Act requires 
enforceable greenhouse gas regulation to begin in 2012. As this august 
body and other Federal authorities continue their deliberations on 
climate change, recent events have led some institutional investors to 
wonder about the durability of existing and proposed climate change 
regulatory frameworks, particularly once these frameworks begin to 
require emissions cutbacks sufficiently austere to threaten economic 
sovereignty.
    Canada's 1990 greenhouse gas emissions totaled 598.9 TgCO2E. The 
Kyoto Protocol set Canada's 2012 target at approximately 563 
TgCO2E, a 6 percent reduction from 1990 levels. 2004 
emissions totaled 758.1 TgCO2E, partly as a result of carbon-intensive 
unconventional oil production in Alberta's tar sands. Evaluating at 
2004 levels, this puts Canada 195.1 TgCO2E behind pace. If 
Canada's emissions continue to grow as they did between 2000 and 2004 
at 1.15 percent per year, 2012 levels could reach 854 
TgCO2E, widening the gap against the Kyoto target to 290 
TgCO2E. If emissions allowances rise as high as they did when the EU 
Emissions Trading Scheme market price peaked at approximately $39/
metric ton of CO2 in April 2006, Canada's annual compliance 
cost could exceed $11.3 billion, or about 1.33 percent of GDP. This may 
seem like a bargain compared to actually reducing emissions, however. A 
November 2006 study by the Canadian Manufacturers and Exporters lobby 
projected that reducing Canada's GHG footprint to meet its target would 
result in annual compliance costs in 2012 of $255 billion, representing 
approximately 30 percent of GDP.
    In December 2005, as the parties to the RGGI prepared to commit to 
the regional, multilateral emissions reduction pact in the wake of 
Hurricanes Katrina and Rita, Massachusetts and Rhode Island decided not 
to sign the December 15, 2005 Memorandum of Understanding (although 
both states rejoined the program earlier this year). Massachusetts 
Governor Mitt Romney justified this move at the time by expressing his 
concern that power utilities could incur unlimited costs if they 
exceeded emissions limits. Massachusetts had plausible grounds for 
concern: winter was fast approaching and natural gas futures were above 
$14/mmBtu, a situation that threatened to markedly increase State 
reliance on coal-fired power.
    Investors evaluating the share prices of potentially-regulated 
entities or considering investment in offset projects or secondary-
market emissions credits (as non-commercial traders) are likely to be 
cautious about the possibility that high prices could motivate 
sovereigns to defect from, or delay implementation of, proposed 
regulatory mechanisms.
                             iv. conclusion
    An economy-wide, cap-and-trade system to control greenhouse gases 
that goes into force too far ahead of the development and 
commercialization of cost-competitive ``green'' alternatives may not be 
the most stable or most efficient mechanism by which the United States 
can modify energy use behaviors in order to address global climate 
change. A market mechanism may give emitters and financial investors 
greater flexibility than a system of direct taxation or strict, per-
unit regulation, but there may be greater value in providing incentives 
for the United States' robust venture capital, private equity and 
capital markets infrastructure to deliver cost-competitive 
technological solutions to emissions challenges without imposing 
nationwide caps. Alternatively, it may make sense to take an 
incremental step by enshrining in law a market-based regulation of 
particulates from stationary sources similar to the Clean Air 
Interstate Rule and Clean Air Mercury Rule in a way that gives 
regulated entities financial motivations to explore emerging carbon 
capture technologies. Last, ongoing discussion may be further informed 
by analysis of the comparative national and global economic costs of 
inaction and limited action vis-a-vis the costs of any comprehensive 
emissions control program.
    This concludes my prepared testimony.
                                 ______
                                 
  Responses by Kevin Book to Additional Questions from Senator Inhofe
    Question 1. Mr. Book can you provide more insight as to who will be 
the most heavily affected subgroups of the U.S. popuations? 
Proportional to income, what population groups spend the most money on 
energy?
    Response. Senator Inhofe, in general, Americans whith the lowest 
disposable incomes will be most affected by increases in the price of 
power. In addition. those States with the highest proportions of coal-
fired generation will be most affected by the imposition of a surcharge 
for greenhouse gas emissions. The chart on the nect page should help 
explain this relationship. The data represents statewide averages for 
February 2007 (when I appeared before your committee), although the 
most recently available population numbers are from July 2005. This 
should not materially affect the conclusions. In short, the 10 States 
highlighted in yellow (AK, CA, IA, MA, ME, NJ, NY, OR, RI, VT) are the 
least affected by GHG costs for generation. The 10 States highlighted 
in blue (AL, HI, IL, KY, MT, NC, ND, TN, WV, WY) are the most affected.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Question 2. I was struck by your testimony that meeting the Kyoto 
Protocol by reducing emissions would cost Canada $255 billion in 2012, 
or 30 percent of its GDP. This is an astounding figure. it underscores 
not only how difficult carbon reductions are, but also that many 
Nations will choose instead to simply transfer wealth to other 
countries. What are your thoughts?
    Response. Thank you for your question Senator. My thoughts are 
four-fold on this issue.
    First, it is my personal view that national security is the 
foundation of economic growth. Safe societies produce stable, equitable 
and fast-growing economics. It is not entirely clear that any one 
Nation can consider its sole contributions to climate change or to 
environmental security as a part of its national security equation 
unless it is willing to declare war on another to keep seperate 
environmental and national security. It os also appropriate to consider 
the goal of national security as the first priority of a sovereign 
Government, which puts that Government potentially in conflict with 
broader, global goals of climate change abatement and remediation.
    Second, there appears to be a wealth effect associated with climate 
and environmental stewardship. When economies reach acceptably high 
average levels of wealth and acceptably high minimum levels of social 
welfare, they can afford to slow the rate of change in their growth by 
internalizing the costs of environmental stewardship, as the United 
States has done under the Clean Air Act. Healthy air, land and water 
supplies preserve economic gains by preventing the erosion of property 
values and minimizing the social costs of illness and resource 
insufficiency.
    Third, wealth transfers between emitter Nations and recipient 
Nations may not encounter greater stewardship by the emitter Nation, 
nor greater capacity for the private and public sector emitters within 
that Nation to envest in less-emitting technologies.
    Fourth, wealth transfers may not benefit, and could potentially 
harm, the recipient Nation. Autonomous distributions of wealth between 
an economically fast-growing industrialized Nation (e.g. the United 
States) and a developing, less-deveoped, or recently-diminished economy 
(e.g. sub-Saharan African Nations or several of the former States of 
the Soviet Union) are unlikely to promote a generalized increase in 
social welfare, economic capacity or environmental stewardship in the 
Nation that receives the money unless factors that promote social 
stability are already in place. The benefits of wealth transferred from 
the industrialized world to the developing world may be more likely to 
be misappropriated by Nations in the thrall domestic turmoil or 
sectarian violence.

    STATEMENT OF FRED L. SMITH, JR., PRESIDENT, COMPETITIVE 
                      ENTERPRISE INSTITUTE

    Mr. Smith. Thank you, Chairman Boxer, Senator Inhofe, 
members of the committee. I am Fred Smith, President of the 
Competitive Enterprise Institute, a pro-market and as you see, 
not necessarily pro-business always, policy group.
    CEI examines the wisdom of regulatory policy in a wide 
array of issue areas. As my written testimony notes, CEI 
believes that the risk of global warming must be set off 
against the risk of global warming policies. The proposal to 
create a carbon cartel advanced by the Climate Action 
Partnership is one of those policy risks, a serious one, I 
believe.
    America normally puts people in jail who create anti-
consumer cartels. We do not seek to encourage such behavior, 
nor do we grant such cartels legal protection. Affordable 
energy, the democratization of the elite privileges of the past 
we believe has been a good thing. Cartel-induced price 
increases we think are not.
    The Climate Action Partnership, an alliance of 
environmental and business groups, has been promoted as an 
example of responsible leaders seeking to protect our planet. 
Perhaps. But when businessmen seek politically to achieve what 
they cannot achieve in the marketplace, we should all be a bit 
skeptical. Judge Stiegler, the Nobel price winner, often said 
that businessmen often believe that competition, like exercise, 
is good for other people.
    America has a tradition of economic interest groups 
cloaking their search for monopoly profits under some 
convenient moral clause. The Baptists and Bootlegger paradigm 
that I document in my testimony, that paradigm explains 
unfortunately much of American politics. I think it explains 
the rationale of the partnership.
    The partnership of course recommend so-called market 
mechanisms. The creation of a rationing system that would raise 
the cost of carbon based energy benefiting their preference, 
their products. But markets are institutions that freely allow 
individuals to exchange on a voluntary basis goods and 
services. In a market, the participants determine both the 
price and the quantity of the good or service involved.
    The proposals pushed by the partnership would have the cap, 
the amount of energy we are allowed to use in our daily lives, 
determined politically. The goal of such politically contrived 
markets is for Government to steer for the business and 
consumers to row. Some free markets.
    Many advising business have argued that further regulation, 
global warming regulation is inevitable, that business must 
gain a seat at the table, they must seek regulatory certainty. 
There is a naivete in all this, what I have sometimes referred 
to as Lucy and the regulatory football. Lucy holds the ball for 
the business community, but when they get ready to kick it, it 
slips out of their grasp.
    Business regs, good ones, bad ones, just fix the regulation 
and let us get back to business. It is an admirable goal in its 
own way, but it is very naive. Business it not about certainty. 
This is a fool's search.
    An example. Some oil and gas businessmen initially imposed 
ethanol subsidies, believing that these would destroy energy 
markets. But they soon decided that that was too negative and 
they signed off on a 5 billion gallon ethanol mandate. Did this 
gain them regulatory certainty? Not really. We are now to a 35 
billion gallon mandate, and the discussion of the Farm Bill 
haven't even begun.
    An even more sobering attempt is provided by the late and 
unlimited Enron. That firm was a significant and early champion 
of the efforts now going on to create a carbon cartel. Enron 
had many skills, including great expertise in energy trading, 
an expertise that you in California came to experience more 
directly. Enron lobbied hard for the United States to join the 
EU in rationing carbon based energy. Enron thought, then may 
have well been corrected, that their expertise would allow them 
to dominate the carbon rationing market. Monopolies are always 
popular from those who manage the monopoly.
    The internet, incidentally, is filled with conferences and 
excited language by hedge fund managers who seem pretty 
skeptical of the reality of global warming alarmism but boy, 
are they excited about the profit potential of a massive energy 
rationing market that will operate globally.
    Cap and trade, of course, is going to encounter some 
practical problems. Many of you know it, the partnership is 
certainly aware of those. Firms routinely make rational 
investments which increase energy and material efficiency. 
Those are good things. But should such conventional investments 
receive extra credits? How can we distinguish the business as 
usual investments that are ongoing all the time from the new 
actions sought by the environmentalists? Of course, if everyone 
were above average, a Lake Woebegon world, we would have a more 
efficient economy. But we haven't found ways to do that in 
education, we are not likely to find ways of doing that in the 
economy as a whole.
    The European game playing experience with this process is 
worrisome and should worry all members of this committee under 
the CAP program. Because it is very dangerous to turn loose 
such a political football in the political environment. Hot air 
credits, one Nation State playing games another Nation State, a 
cap and trade system would stimulate the same kind of political 
feeding frenzy we have seen in Europe, we have seen in the 
biofuels area. There are major causes, we have heard, of 
rationing energy. Yet there are no obvious gains, even if one 
accepts the alarmist views of global warming. No one is 
proposing any carbon use curtailment that would do anything 
meaningful to reduce the theoretical threat of carbon use. The 
current proposals are all pain, no gain. The carbon cartel will 
profit, consumers and small business will suffer. Why?
    Business should recognize that the suppression of carbon 
based energy is costly. It was after all the shift from 
renewable fuels, that is wood and charcoal, to carbon fuels, 
coal, oil and natural gas, that triggered the explosive 
economic growth of the last two centuries, almost 1,800 percent 
in the 20th century. But that growth was also accompanied, as 
people have noted, by a slight warming, about .7 degrees. If 
that warming had been prevented, how much economic growth would 
we have been willing to sacrifice for that?
    Research to evolve some non-carbon affordable energy source 
is ongoing, nothing yet on the horizon. Nuclear faces political 
opposition, wind and solar still remain niche energy sources.
    Senator Boxer. Sir, could you wrap it up?
    Mr. Smith. I will. What we should be doing is considering 
auctioning off the credits, considering energy taxes, more 
honest, more transparent. But an even better method would be 
for business to stop playing politics and return to its core 
role of wealth creation. A wealthier world will be better able 
to address the real problems of today in the U.S. and the 
world, and to essentially increase our resiliency to address 
future risk. It will not enrich some special interests. It is 
that motivation, the enrichment of special interests, not civic 
virtue, that I fear motivate those pushing for the creation of 
a Government-sponsored carbon cartel. Thank you.
    Senator Boxer. Mr. Hamm, you are Chairman and CEO of 
Continental Resources, Inc. We welcome you.
    [The prepared statement of Fred L. Smith Jr. follows:]

  Statement of Fred L. Smith, Jr., President, Competitive Enterprise 
                               Institute
    Thank you, Chairman Boxer and members of this committee for 
inviting me to testify today on the Climate Action Partnership's recent 
plan titled ``A Call for Action'' and what it could do to the American 
economy. I am Fred Smith, President of the Competitive Enterprise 
Institute (CEI), a free-market public policy group focusing on 
regulatory issues. I am aware that CEI is regarded as a contrarian 
voice on the science of climate change. However, this hearing is not 
about the science. I am here to talk about the economic effects of the 
Climate Action Partnership's policy recommendations, and so I am happy 
for the purposes of this discussion to accept all the scientific 
arguments behind their proposals.
    By taking that issue off the table, I hope that we can proceed to 
discuss the economic issue without the obfuscation of wrangling over 
the science. I also hope that members of this committee will recognize 
that attempts to allege ``climate denialism'' in response to my points 
are ad hominem attacks not worthy of consideration.
    The theme of my testimony today is that some business leaders 
joining with environmental pressure groups to promote a policy does not 
necessarily mean that the policy is good for the economy or for the 
American people. In general, if a company's stance on an issue appears 
to be too good to be true, it probably is. Strange alliances such as 
these--businesses allying with lobby groups to demand more regulation 
of those businesses--are actually all too common in history, and the 
motivation is rarely altruism.
    We are all indebted to Professor Bruce Yandle of Clemson University 
for introducing us to the concept of ``Baptists and Bootleggers.'' His 
theory's name, first elucidated in 1983,\1\ is meant to evoke 19th 
century laws banning alcohol sales on Sundays. Baptists supported 
Sunday closing laws for moral and religious reasons, while bootleggers 
were eager to stifle their legal competition. Thus, politicians were 
able to pose as acting to promote public morality, even while taking 
contributions from bootleggers.
---------------------------------------------------------------------------
    \1\``Bootleggers and Baptists: The Education of a Regulatory 
Economist'', by Bruce Yandle. Regulation, Viewpoint column, 1983
---------------------------------------------------------------------------
    I shall argue, with evidence, that there appears to be something 
similar going on here. The environmental pressure groups active in the 
Climate Action Partnership are the Baptists, providing a moral screen 
to the Bootleggers, in this case the energy and manufacturing 
companies. I shall outline how the policies laid out in the 
Partnership's ``Call for Action'' actually stand to benefit the 
companies at cost to the economy and consumers. Then I shall reveal 
how, by their actions and in their own words, the Partnership's 
commercial members are fully aware of this. Finally, I shall 
demonstrate how this sort of alliance is unfair and inegalitarian and 
argue that, if legislators and businesses really want to change 
behavior to reduce greenhouse gas emissions, a much different policy 
instrument should be preferred.
    Before I begin, though, a quick word on the issue of ``regulatory 
certainty'': We often hear businesses claiming that they are operating 
in an area of political risk, and that legislation on an issue will 
give them what they call ``regulatory certainty.'' Yet it is well known 
that Congress cannot bind its successors and that agencies with 
devolved powers make new rules and regulations and alter existing ones 
all the time. It is nave to think that legislation offers regulatory 
``certainty.'' The only certainty is that regulatory costs will grow 
unpredictably. The risk of proposed legislation is often far less than 
that of enacted legislation.
    Let us begin by examining the policy at the heart of the 
Partnership's plan, the regulatory capping and trading of greenhouse 
gas emissions. Cap and trade, as it is known, is often described as 
market-based, because there is buying and selling involved. This is a 
misnomer. In fact, cap and trade is an ugly combination of two of the 
greatest ills to affect the market economy over the past 200 years--
cartelization and central planning.\2\
---------------------------------------------------------------------------
    \2\For more on this see Ross McKitrick's paper, ``What's wrong with 
regulating carbon dioxide emissions,'' available at http://www.cei.org/
pdfs/McKitrick.pdf
---------------------------------------------------------------------------
    The central planning issue should be obvious. The cap of cap and 
trade is a target for emissions set by Government agencies. The 
knowledge problem, however, rears its ugly head. Those agencies never 
have enough information to set the cap at the right level. All economic 
decisions involve trade-offs and the trade-offs involved in restricting 
greenhouse gas emissions are mighty indeed.
    We have seen an excellent example in the past few weeks. The 
mandate that every gallon of gasoline sold in this country should have 
a certain amount of ethanol added to it has caused a massive increase 
in the amount of the U.S. corn crop used to make ethanol. In turn, this 
has caused a sharp rise in the price of tortillas in Mexico, leading to 
all sorts of social problems there. Did the legislators consider this 
unintended negative consequence when they passed the law? I don't think 
so. Did the agencies that administer the program consider it? I very 
much doubt it. A greenhouse gas cap would have even more negative 
consequences. To suggest that we can account for all of these is to 
fall into what the Nobel prize-winning economist Friedrich Hayek termed 
the fatal conceit. There will be costs to an emissions cap that no one 
has yet thought of.
    Turning to the expected economics, the figure below represents a 
loss to the economy under a carbon cap that we can predict. It is a 
deadweight loss, reflecting an unrecoverable reduction in real incomes 
caused by the cessation of economic activity. That is a cost to the 
economy that we can measure.
    Yet it is the remaining economic activity that reveals the dark 
secret of cap and trade; it creates a modern-day cartel--a carbon 
cartel, or what the Wall Street Journal aptly called BigCarbonCap-- 
with all the negative consequences that go with cartelization. When 
emitters are given permits reflecting their right to emit a certain 
amount of greenhouse gases, those permits represent a scarcity rent: a 
new, artificial scarcity has been created in something people 
previously did without charge. People will pay for this new right, but 
the money that is used to pay for it is not new money. It represents 
the capitalized value to existing users of the benefits they get from 
fossil fuels and the other sources of greenhouse gases. It is already 
accounted for in balance sheets, investment portfolios, collateral for 
loans and so on. That value is now extracted from its current use and 
sent elsewhere instead--into the hands of the carbon cartel.
    This is what advocates of this policy refer to as the wealth that 
such rationing would create. However, transferring wealth from some 
companies and all consumers to special interests does not create new 
wealth.
    As a result of this cartelization, energy costs rise, consumer 
prices rise, real wages fall, and output and employment fall. We know 
those are the effects of cartels, which is why we used to put the 
people who set up cartels in jail. Yet the Climate Action Partnership 
wants legal blessing for this new cartel. Any legislation enacting cap 
and trade would actually ennoble a new generation of robber barons and 
provide legal protection for their profiteering activities.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    [Note that in the diagram above, the amount of wealth transferred 
from consumers to cartel members greatly exceeds the overall loss to 
the economy. Most analyses of the Kyoto Protocol, the McCain-Lieberman 
bills, and other cap-and-trade proposals miss this crucial point. EIA 
analyses, for example, estimate the impacts of carbon policies on 
energy markets and the macro-economy, but not the wealth transfer 
effects. Cartelization reduces overall economic output, to be sure, but 
consumers take an even bigger hit.]
    We can actually see this process in operation in Europe as we 
speak. The European Union's Emissions Trading Scheme has had a rocky 
first few years. Yet, according to the latest figures from the U.S. 
Energy Information Administration, its prime achievement has been not a 
reduction in greenhouse gas emissions--European CO2 
emissions continue to rise at a faster rate than America's since Kyoto 
was agreed to in 1997--but an actual increase in energy prices coupled 
with vastly increased profits for the utilities who benefited from the 
creation of the European carbon cartel. In Britain and Germany 
electricity and gas prices leapt by over 60 percent in 2005.
    If that wasn't enough, another incentive to businesses to support 
cap and trade comes from the way that it can massively add value to 
otherwise routine efficiency savings. Under the Kyoto Protocol, for 
example, companies in the developing world that reduce output of the 
greenhouse gas HFC-23 are allocated carbon credits representing the 
amount of carbon dioxide-equivalent that they reduce. In total the 
amount of credits so allocated are worth about $5.9 billion when sold 
to countries that want those credits. Yet reducing HFC-23 is actually a 
simple process, achieved by installing scrubbers at a modest cost. 
According to a study published in the journal Nature last week\3\, 
installation of those scrubbers could have been financed by loans or 
grants at a total cost of about $130 million. Thus almost $6 billion 
has been diverted away from other uses into the pockets of industry in 
the developing world. This is a massively inefficient way of achieving 
modest emissions cuts. Worse, it has now become apparent that China is 
creating HFCs--with 12,000 times the global warming potential of 
CO2--for the purpose of being paid to destroy them under 
Kyoto. This is what such schemes have always created, from the British 
in India offering bounties for poisonous cobras--which led to mass 
breeding of the creatures--to the modern-day version of that ploy.
---------------------------------------------------------------------------
    \3\Michael Wara, ``Is the global carbon market working?'', Nature 
445, 595-596 (8 February 2007)
---------------------------------------------------------------------------
    So let us turn to the companies involved in the Climate Action 
Partnership, beginning with Duke Energy Corporation, which formed in 
May 2005 when Duke Energy merged with Cinergy. An October 2006 study by 
the Pew Center on Global Climate Change includes an eye-opening table 
on the per-ton cost of Cinergy's various greenhouse gas emission 
reduction projects in 2004.\4\
---------------------------------------------------------------------------
    \4\Andrew J. Hoffman, Getting Ahead of the Curve: Corporate 
Strategies That Address Climate Change, Pew Center on Global Climate 
Change, October 2006, p. 72.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The table shows that 97 percent of Cinergy's emission reductions 
came from efficiency improvements in its overwhelmingly coal-fired 
electric generating stations. Cinergy's investment of $1.94 million in 
efficiency upgrades reduced the company's carbon dioxide 
(CO2) emissions by 349,882 tons. This works out to a cost of 
$1.11 per ton of CO2 reduced.\5\ Suppose Cinergy were 
awarded early action credits for those reductions, Congress enacts 
Phase I of the McCain-Lieberman Climate Stewardship Act, and 
CO2-equivalent permits sell for $15 a ton in 2010 and $45 a 
ton in 2025, as estimated by the Energy Information Administration.\6\ 
In that case, Cinergy would reap a windfall profit of between 1263 
percent and 3990 percent, for a much smaller cost incurred, that in 
many of their markets they have already passed along to consumers 
anyway.
---------------------------------------------------------------------------
    \5\Someone looking at these numbers might conclude that reducing 
emissions in general, for most companies, is going to be cheap--that we 
can have Kyoto without tears. What the table more likely indicates is 
that Cinergy is an inefficient producer of electric power. The less 
efficiently a company converts coal to electricity, the cheaper it will 
be for that company to reduce energy-related carbon emissions.
    \6\EIA, Analysis of Senate Amendment 2028, the Climate Stewardship 
Act of 2003, http://www.eia.doe.gov/oiaf/analysispaper/sacsa/
index.html.
---------------------------------------------------------------------------
    Another telling example is DuPont. In a press release\7\ timed to 
coincide with publication of the Summary for Policymakers\8\ of Climate 
Change 2007, also known as the Fourth Assessment Report of the 
Intergovernmental Panel on Climate Change, DuPont called for 
legislation to curb greenhouse gas emissions, stating: ``We believe 
that voluntary measures, while constructive, are not sufficient to 
address an issue of this magnitude by themselves.''
---------------------------------------------------------------------------
    \7\DuPont Supports Findings by Intergovernmental Panel on Climate 
Change: Company Calls for Action by Government, Business, February 2, 
2007, http://onlinepressroom.net/DuPont/NewsReleases/
    \8\Intergovernmental Panel on Climate Change, Climate Change 2007: 
The Physical Science Basis, Summary for Policymakers, http://
www.ipcc.ch/SPM2feb07.pdf
---------------------------------------------------------------------------
    A document\9\ that I retrieved courtesy of Archive.org gives us a 
peek at DuPont's original business strategy vis-a-vis carbon cap-and-
trade schemes. Page 2 of the document (``Positive Returns on Greenhouse 
Gas Investments,'' Dec. 2002) reports that in the late 1990s, DuPont 
invested $50 million to reduce nitrous oxide emissions from production 
of adipic acid, a chemical used to manufacture nylon. Nitrous oxide is 
a greenhouse gas (GHG) with roughly 310 times the global warming 
potential of carbon dioxide.\10\
---------------------------------------------------------------------------
    \9\Partnership for Climate Action, Positive Returns on Greenhouse 
Gas Investments: The DuPont Experience with Advancing Environmental 
Goals, December 2002, http://web.archive.org/web/20040405185605/http:/
pca-online.org/our--work/docs/GHG--investment--return.pdf
    \10\EIA, Comparison of Global Warming Potentials from the Second 
and Third Assessment Reports of the Intergovernmental Panel on Climate 
Change (IPCC), http://www.eia.doe.gov/oiaf/1605/gwp.html.
---------------------------------------------------------------------------
    Here's the key part:

    ``By 2000, DuPont had reduced GHG emissions across the company by 
63 percent from the base year of 1990, for a reduction equally 56.2 
million metric tonnes (on a CO2-equivalent basis). In a 
hypothetical market for emission credits, assuming that (a) DuPont was 
awarded a tradable allocation amounting to 90 percent of its 1990 
emissions, and (b) an average market price of $10 per metric tonne of 
CO2, then the GHG reductions as of 2000 have a potential 
market value of $472 million per year--an extraordinary return on 
investment.''
    Extraordinary indeed! Under a mild cap-and-trade program, similar 
to the one envisioned in Sen. Jeff Bingaman's draft legislation,\11\ 
DuPont would realize more than a 900 percent return on investment.
---------------------------------------------------------------------------
    \11\The Energy Information Administration estimates that, under 
Bingaman's proposal, ``allowance prices rise from just over $3.70 per 
metric tons CO2-equivalent in 2012 to the safety valve price 
of $14.18 metric tons CO2-equivalent in 2030.'' EIA, Energy 
Market and Economic Impacts of a Proposal to Reduce Greenhouse Gas 
Intensity with a Cap and Trade System, January 2007, p. vi, http://
www.eia.doe.gov/oiaf/servicerpt/bllmss/pdf/sroiaf(2007)01.pdf.
---------------------------------------------------------------------------
    The Pew Center study notes that in 2004, DuPont sold its nylon 
business, Invista. This removed Invista's emissions from DuPont's 
baseline as well as terminated DuPont's ownership of the related 
emission reductions. However, the Pew report also notes that DuPont, 
through a manufacturing process, eliminated emissions of HFC-23, ``an 
unintended byproduct from the production of HCFC-22, a common 
refrigerant.''\12\ HFC-23 has 12,000 times the global warming potential 
of CO2. The Pew report does not tell us how many tons of 
HFC-23 DuPont reduced, or at what cost per ton. Perhaps DuPont would be 
willing to share this information with the committee. If so, it would 
then be a simple matter to calculate how many carbon dioxide-equivalent 
permits DuPont would stand to gain under an early action credit 
program, and how much profit DuPont could clear assuming a market price 
of a mere $10 per ton of CO2 reduced.
---------------------------------------------------------------------------
    \12\Hoffman, Getting Ahead of the Curve, p. 90.
---------------------------------------------------------------------------
    The Pew study also reports that DuPont's investments in energy 
efficiency saved the company $2 billion since 1990, though it is not 
clear from the text how much of that $2 billion is net savings. In any 
event, by using energy more efficiently, DuPont reduced its greenhouse 
gas emissions by 420 million metric tons. That translates into a $4.2 
billion windfall if DuPont is awarded credits for early action under a 
future cap-and-trade program, again assuming carbon dioxide allowance 
prices of $10 per ton.
    Next, let's consider Alcoa. The Pew study notes that although 
Alcoa, for business reasons, invested in energy efficiency, ``the 
primary focus of Alcoa's GHG reduction efforts thus far rests in 
reducing perflourocarbon (PFC) emissions through anode effects and 
increasing the use of recycled materials.''\13\ Alcoa has reduced its 
PFC emissions by over 75 percent since 1990. The two types of PFCs--
Perflouromethane (CF4) and Perflourethane (C2F6)--have 5,700 and 11,900 
times the global warming potential of CO2, respectively.
---------------------------------------------------------------------------
    \13\Hoffman, Getting Ahead of the Curve, p. 102.
---------------------------------------------------------------------------
    It is cheaper to recycle aluminum than to produce aluminum from 
virgin materials, due to the immense difference in energy costs. The 
Pew study notes that ``aluminum produced from recycled materials 
requires only five percent of the energy needed to make primary 
aluminum,'' with the result that ``almost 70 percent of the aluminum 
ever produced is still in use today,'' and the ``amount of aluminum 
recycled in 2004 equaled the total amount of primary aluminum produced 
in 1974.'' In other words, recycling aluminum is a big part of what 
Alcoa and other aluminum companies do for a living.
    Nonetheless, Alcoa wants to get emission credits for this ordinary, 
profit-seeking, business activity. Here's an excerpt from Alcoa's 
public comment, in June 2002, on the Department of Energy's proposal to 
transform the voluntary reporting of greenhouse gas emissions program 
(VRGGP), established under section 1605(b) of the 1992 Energy Policy 
Act, into a program awarding ``transferable credits'' for voluntary 
emission reductions:

    ``For example, we support an update of section 3.5.6 from your 
Volume I of Sector Specific Issues and Reporting Methodologies'' 
related to estimating project effects of recycling. This document 
should be updated and expanded to quantify entity emissions reductions 
associated with increased recycling and material reuse. From our 
studies, the recycling of materials such as aluminium products can 
provide significant holistic emissions reductions advantages because 
aluminium and other metals consume less energy to produce than from 
virgin materials and these recovered metals are durable and can be 
recycled and reused over and over again.''\14\
---------------------------------------------------------------------------
    \14\Kenneth Martcheck, Alcoa, Public Comments on Doe's Notice of 
Inquiry on Ways to Enhance the Existing Greenhouse Gas Registry, June 
5, 2002, https://ostiweb.osti.gov/pighg/ghga0202.idc.

    In the jargon of greenhouse accounting cognoscenti, Alcoa wants 
windfall profits for ``anyway tons''--credits for doing (or not 
emitting) what the company would do (or would not emit) anyway, for 
purely economic reasons.\15\ In short, they want to be paid for 
activities they have already undertaken because they are profitable. 
The Pew study reports that, ``Of greatest concern to Alcoa is climate 
change legislation that does not recognize companies for taking early 
action. Alcoa seeks the use of a 1990 baseline for determining 
allocations.''\16\ committee members may wish to ask Alcoa how many 
transferable credits the company believes it should be awarded on 
account of its recycling activities since 1990, and whether this 
remains such a pressing matter should Congress prefer instead an energy 
tax which is far less inefficient?
---------------------------------------------------------------------------
    \15\For more on this topic, see Statement of Marlo Lewis on S. 388, 
Committee on Energy and Natural Resources, U.S. Senate, April 14, 2005, 
http://www.cei.org/pdf/4481.pdf.
    \16\Hoffman, Getting Ahead of the Curve, p. 108.

    The Pew study notes that, ``Unlike Whirlpool, which seeks to retain 
credits for the improvements in energy consumption its products may 
offer, Alcoa does not lobby for gaining credits for emission reductions 
by users of its products.''\17\ Well, bravo to that! But the committee 
should be aware that not all aluminum companies abstain from claiming 
credit for other people's emission reductions. For example, Alcan 
Aluminum Corporation, in its public comment on the 1605(b) program, 
suggested that aluminum companies--not automakers or motorists--receive 
credit for emissions avoided due to the use of aluminum in automobile 
manufacture. Alcan explained that, ``for each ton of aluminum that 
displaces the use of steel in a mid-size sedan, over the life cycle of 
that automobile there is a net reduction of 20 tons of GHG emissions. 
These reductions need to be recognized.''\18\
---------------------------------------------------------------------------
    \17\Hoffman, Getting Ahead of the Curve, p. 109.
    \18\Comment of Brenda Pully, Alcan, Public Comments on Doe's Notice 
of Inquiry on Ways to Enhance the Existing Greenhouse Gas Registry, 
June 5, 2002, https://ostiweb.osti.gov/pighg/ghga0202.idc.
---------------------------------------------------------------------------
    Next, let's consider General Electric. In this case, the business 
motivation to support Kyoto-style policy has more to do with expanding 
markets for its products than with reaping windfalls for anyway tons. 
GE is a world leader in manufacturing nuclear reactors, natural gas 
turbines, wind turbines, and integrated gasification combined cycle 
technology. The demand for these products will increase much faster in 
a carbon-constrained world. GE wants Governments the world over to grow 
its business with regulations and mandates.
    Finally, PG&E's economic interest in a national cap-and-trade 
program is, I believe, similar. The company's Web site says that, 
``With significant hydro-electric and nuclear resources, the 
CO2 emissions rate for PG&E's electric-generating operations 
is now among the lowest of any utility in the country. When factoring 
in the power we purchase from other sources, the emissions rate 
associated with the electricity we deliver to our customers is 
approximately 58 percent less than the average among utilities 
nationwide.''\19\ This means that if Congress enacts carbon caps on 
power plant emissions, PG&E will gain an instant competitive advantage 
over power producers that rely more on coal and less on nuclear, hydro, 
natural gas, or wind. PG&E's national market share will grow not 
because it lowers its prices, but because Congress raised its 
competitors' prices.
---------------------------------------------------------------------------
    \19\PG&E, Global Climate Change: Risks, Challenges, Opportunities, 
and a Call to Action, p. 6, http://www.pgecorp.com/corp--
responsibility/pdf/GlobalClimate--06.pdf.
---------------------------------------------------------------------------
    If anyone should be in any doubt about the attractiveness to 
unscrupulous businesses of a Baptist and Bootlegger alliance in favor 
of cap and trade schemes, let us consider the poster child for shady 
modern business practices, Enron. Enron became one of the biggest 
corporate boosters of the Kyoto Protocol. Enron was a natural gas 
distributor, and Kyoto would kill coal-fired electric generation, 
boosting demand for Enron's product. Enron's energy traders also 
expected to make juicy commissions on the purchase and sale of carbon 
credits and profits from creating the trading markets for those 
credits. According to an internal Enron memo, Kyoto would ``do more to 
promote Enron's business than almost any other regulatory initiative 
outside of restructuring the energy and natural gas industries in 
Europe and the United States.''\20\
---------------------------------------------------------------------------
    \20\Paul Georgia, ``Enron sought global warming regulation, not 
free markets,'' February 3, 2002, http://www.cei.org/gencon/
019,02898.cfm.
---------------------------------------------------------------------------
    In addition to all its political lobbying and contributions, Enron 
became a founding member of the Pew Center on Global Climate Change's 
Business Environmental Leadership Council, a leading industry group 
pushing the Kyoto agenda. Enron chairman Ken Lay, along with Fred Krupp 
of Environmental Defense, served on the President's Business Council 
for Sustainable Development, during the Clinton Administration.\21\ 
They also served on the board of the Heinz Center for Science, 
Economics, and the Environment, along with former Alcoa CEO and 
Treasury Secretary Paul O'Neill. The sort of rent-seeking we see now is 
nothing new. Yet we should recognize that, had Enron's lobbying efforts 
succeeded, the United States would have ended up with a costly 
regulatory scheme designed to redistribute wealth from the American 
people to politically powerful special interests like Enron.
---------------------------------------------------------------------------
    \21\http://clinton4.nara.gov/PCSD/Members/index.html.
---------------------------------------------------------------------------
    Now, there is a simple way to mitigate somewhat this problem of 
rent-seeking, but I cannot imagine that it would be attractive to the 
businesses involved in the Climate Action Partnership. It involves the 
auctioning of credits at their initial allocation. Auctions reveal what 
the bidders know about the prize's value. Yet those who win the auction 
do so because they bid more than anyone else thinks the item is worth. 
As such, businesses in Europe have argued strenuously against auctions. 
They currently have a free lunch and are unwilling to pay for it.
    Yet even auctioning still involves costs to the economy. A 1997 
study by Resources for the Future found that even auctioned tradable 
permits were about five times costlier to the economy than implementing 
a simple carbon tax, even when both systems were designed to achieve 
the same level of emissions control.
    What the economics of this situation suggest is that, if you are 
thinking about the economy as a whole--and legislators should be--cap 
and trade is a disastrous idea. To an extent, Professor Greg Mankiw of 
Harvard is right: If we do want to do something about the various 
externalities of fossil fuel use by reducing use of those fuels, a 
carbon tax is the least worst option. Yet, as Mankiw argues, such a 
course of action should also include a reduction of regulations that 
burden the market. A correctly-priced carbon tax, for instance, should 
replace all sorts of other measures aimed at reducing the externalities 
of fossil fuel use. A well-designed carbon tax would mean that we had 
no further need for CAFE regulations, for instance, or certain elements 
of the Clean Air Act. As Tim Harford, author of The Undercover 
Economist, has written:

    [T]he whole point of a green tax is that while we know what we 
want--lower carbon emissions, fewer accidents, less congestion--we do 
not know the best way to get there. We cannot afford to stop all 
pollution. The aim is to stop the low-priority activities and not the 
high-value ones. And the judge of what is really important should be 
each individual, not a posturing politician. The green tax should send 
the same signal to each individual. They can decide for themselves 
whether or not those shooting and fishing weekends are worth the price.
    On the other hand, we should also consider whether we need to pay 
for the externalities. Nobel prize-winning economist Ronald Coase 
suggests we don't always need to. There may be cheaper ways of 
obtaining reductions in externalities than taxation, such as the 
development of new technology. Or, as I have argued repeatedly in the 
context of global warming, building resiliency in society so that the 
externalities become less costly is probably the most cost-effective 
way of dealing with the potential problem. Consider that, for a 
fraction of the cost of the Kyoto Protocol, we could solve all the 
major problems that global warming could exacerbate. We could feed 
Africa, provide clean drinking water, reduce malaria to an 
exceptionally rare disease, and build sea defenses to protect those 
people of the world who live in low-lying areas. All of that now for a 
fraction of the cost of attempting to change the weather in 100 years' 
time.
    Such an approach, of course, requires a vibrant economy and a free 
market. We should remember that capitalism at heart is an egalitarian 
mechanism. That's why it's the American way. As the renowned economist 
Joseph Schumpeter wrote over half a century ago:
    It is the cheap cloth, the cheap cotton and rayon fabric, boots, 
motorcars and so on that are the typical achievements of capitalist 
production, and not as rule improvements that would mean much to the 
rich man.  Queen Elizabeth [the First] owned silk stockings. The 
capitalist achievement does not typically consist in providing more 
silk stockings for queens but in bringing them within reach of factory 
girls in return for steadily decreasing amounts of effort.
    Capitalism becomes an engine of inequality when it is distorted by 
a ruling elite--aristocracy in the U.K. or big corporate cartels and 
their legislative allies in the United States. The corporations we see 
baying for a cap and trade program are out to enrich themselves without 
thought for the poor. For these people, environmentalism is the opiate 
of the masses, keeping them quiet by making them think that what's bad 
for them is good for the planet. A fair approach, an egalitarian 
approach, is to let the market work its magic for the good of all, 
rather than stacking the deck to enrich the few. That's the egalitarian 
message, that's the American message, that's CEI's message. Thank you.
                                 ______
                                 
  Responses by Fred L. Smith Jr. to Additional Questions from Senator 
                                 Inhofe
    Question 1. Environmental special interest groups outspend the oil 
and gas industry significantly in elections by a factor of at least 
three to one. I believe the same is true for all public policy groups 
as well. In your estimation, how much money is given to those urging 
immediate action on climate change compared to contributions to those 
groups that advocate caution before leaping?
    Response. CEI probably devotes more resources to climate and energy 
policy than any other group opposed to regulatory climate policy, and 
our entire budget for all programs including environmental risk, 
technology policy, entrepreneurship, and insurance is about $4 million. 
The annual budgets of the leading groups promoting climate regulation 
are far bigger. Here is a partial list from Bonner Cohen's The Green 
Wave: Environmentalism and Its Consequences (Capital Research Center, 
2006, p. 167):

      National Wildlife Federation, $100,534,318 (2004)
      Sierra Club, $91,843,757 (2004)
      Natural Resources Defense Council, $57,303,087 (2004)
      Environmental Defense, $43,661,043 (2003)
      Defenders of Wildlife, $25,729,780 (2003)
      Earthjustice, $21,090,378 (2004)
      World Resources Institute, $16,179,169 (2003)
      Greenpeace, $15,913,343 (2004)

    Many pro-Kyoto groups raise significant funds from direct mail and 
membership dues. However, many also receive significant funds from 
foundations. In this connection, I attach an excerpt (``Resource 
Rich'') from a forthcoming doctoral dissertation by Angela Logomasini, 
CEI's Director of Risk and Environmental Policy. Angela notes that, 
according to the Chronicle of Philanthropy 2005, charitable foundations 
contributed more than a billion dollars to eleven environmental 
organizations in 2004.
    According to official Senate records, in 2002, Free Market 
Environmental groups like CEI spent a total of $200,000 on direct 
lobbying of Congress. In contrast, mainstream environmental groups 
spent more than $8.6 million on direct lobbying. Please see Angela's 
Excel document titled ``Direct Lobbying.''
    The environmental movement's substantial resources and lobbying 
efforts have been effective in setting the agenda, framing the debate, 
enacting legislation, and adopting regulations. Angela documents this 
in her Power Point presentation titled ``The Green Lobby.''
    Feel free to use the information in these attachments, but please 
cite Angela and CEI, as the documents are pre-publication items.

    Question 2. You testified about a dead-weight loss to society from 
carbon caps. I realize some companies may make money, but could you 
elaborate on how it will affect the economy as a whole?
    Response. The most important factor affecting the economic impact 
of a carbon cap is its stringency--how much and how fast carbon dioxide 
(CO2) emissions are to be reduced. In a forthcoming CEI 
paper, University of Guelph economist Ross McKitrick examines the 
impacts of the caps proposed in the Boxer-Sanders, Kerry-Snowe, and 
Lieberman-McCain bills--roughly a 70 percent reduction in U.S. carbon 
emissions by 2050. McKitrick notes that the long-term historic rate of 
U.S. emissions intensity decline is 1.7 percent annually. He examines 
the impacts under two scenarios: (a) emission intensity continues to 
decline at the historic rate, and (b) emission intensity declines at 
double the historic rate--i.e., 3.4 percent annually--every year from 
2012 until 2060. ``Either way,'' he comments, the implications for the 
U.S. economy are ``sobering.''
    If emissions intensity continues to decline at 1.7 percent 
annually, given projected US population growth, holding to the emission 
caps outlined in the three bills will require real GDP per capita to 
decline between approximately 52 and 77 percent between now and 2060, 
compared to a projected growth of 197 percent under the base case. This 
results in 2060 real average income between 85 percent and 93 percent 
below what it would be without the legislation.
    If, on the other hand, emissions intensity declines at 3.4 percent 
annually from 2012 through 2060, given projected U.S. population 
growth, holding to the emission caps outlined in the three bills will 
effectively eliminate growth in U.S. real GDP per capita. Instead of 
real average income growing 197 percent by 2060, as in the base case, 
under the three cap-and-trade proposals, real average income will 
change between +13 percent and -46 percent. This results in 2060 real 
average income between 66 percent and 84 percent below what it would be 
without the legislation.
    McKitrick then considers what would be required to meet the 
emission reduction targets and maintain 2.2 percent real per capita 
annual income growth, assuming a wildly optimistic 5.1 percent annual 
rate of emission intensity decline. In that case, there would have to 
be substantial cuts in U.S. population growth. The Lieberman-McCain 
proposal would allow some growth in population, up to 363 million in 
2030 (compared to 390 million in the base case), but all three caps 
would require population cuts by 2050. Lieberman-McCain would require a 
population of 355 million, Kerry-Snowe would require 321 million and 
Sanders-Boxer would require a population of 167 million. These are, 
respectively, 27 percent, 34 percent, and 65 percent below base case 
population levels.

    Question 3. How does carbon rationing affect the poor?
    Response. Carbon rationing is regressive, because the poor spend a 
larger share of their income on basic necessities like food, clothing, 
rent, and energy. The Congressional Budget Office, in its April 25, 
2007 report, Trade-offs for Allocating Allowances of CO2 
Emissions, clearly states:
    Regardless of how the allowances were distributed, most of the cost 
of meeting a cap on CO2 emissions would be borne by 
consumers, who would face persistently higher prices for products such 
as electricity and gasoline. Those price increases would be regressive 
in that poorer households would bear a larger burden relative to their 
income than wealthier households would.
    Millions of U.S. families already feel pinched by the high costs of 
gasoline, electricity, and home heating oil. A cap-and-trade program 
would push energy prices even higher.

    Question 4. Can you discuss further the concept of a cap-and-trade 
cartel?
    Response. Brian Mannix, a former official in President Carter's 
Department of Energy, was the first to call cap-and-trade a ``carbon 
cartel,'' in column published by the Heartland Institute (http://
www.heartland.org/Article.cfm?artId=1063).
    Mannix noted that, as in OPEC, cap-and-trade places a ceiling on 
energy production, albeit on energy from all fossil fuels, not just 
oil. Also, as in OPEC, a cap-and-trade program allocates production 
quota--a.k.a. emission allowances, permits, credits--among the 
participants. As in OPEC, the value of the quota (credits) comes solely 
from the politically-imposed restriction on supply. And, as in OPEC, 
the scheme transfers wealth from consumers to quota holders.
    One difference between cap-and-trade and OPEC is that more special 
interests get to profit at consumer expense. For example, even if 
alternative energy companies hold no credits, the cap skews the market 
in their favor. In addition, because emission credits are tradable 
quota, traders make money from the scheme as well. The rent-seeking 
coalition is huge, as Mannix explains:
    The profits potentially available to the carbon cartel are measured 
in tens of trillions of dollars. Those profits would take a variety of 
forms around the world: tax revenues to Governments; bribes to 
government officials; valuable carbon ``credits'' and ``allowances'' 
that Governments allocate to favored parties; and many, many jobs for 
diplomats, politicians, regulators, tax collectors, lawyers, and 
lobbyists. Other winners would include the industries that compete with 
carbon-based fuels: hydro-power (mostly Government owned), nuclear 
(still a long-shot in the U.S.), and such ``alternative'' energy 
sources as windmills and solar.
    Mannix also explains a chief difficulty in enacting a cap-and-trade 
program how to divide up the booty:
    The carbon cartel's organizers face a key challenge: how to 
allocate the spoils in a way that produces a winning and sustainable 
coalition. Right now the Kyoto formula favors Europe over the U.S.; we 
can expect to see concessions designed to bring the U.S. on board. 
These are likely to be designed specifically to influence U.S. 
politics: Some additional share of the booty will be made available to 
U.S. companies with perceived political influence, or to labor unions--
perhaps the coal miners. Further concessions will be needed to bring 
countries like China and India on board. This is what is being 
negotiated in all those international meetings: not the world's 
climate, but the division of the carbon cartel's plunder.
    The bottom line, though, is that cap-and-trade is not win-win but 
zero-sum. Consumers get fleeced:
    The big losers, of course, will be consumers everywhere. The carbon 
cartel is counting on the fact that the world's consumers are poorly 
informed and poorly organized. Right now Bush is their champion and 
protector, though few of them realize it and he may not fully 
appreciate it himself.
    Thank you again for inviting me to testify. I hope these answers 
help the committee with its deliberations.

    STATEMENT OF HAROLD HAMM, CHAIRMAN OF THE BOARD, CHIEF 
         EXECUTIVE OFFICE, CONTINENTAL RESOURCES, INC.

    Mr. Hamm. Good morning, Madam Chairman, Senate committee 
members.
    I am the Chairman and CEO of Continental Resources, Inc. I 
am also the Chairman of the 1,700 member Oklahoma Independent 
Petroleum Association, and immediate past president of the 
National Stripper Well Association.
    Continental is a mid-size independent oil and gas 
exploration and production company. Last year, Continental 
invested over $300 million drilling 180 oil and gas wells in 
the U.S. My professional training is in geology and my job is 
to find oil and gas, which I have done successfully for the 
past 35 years.
    I am concerned about the impact human activities have, not 
only on our plan, but on future generations. As a parent of 5 
children, grandfather of 10 and the CEO responsible for over 
350 employees and their families, clearly we should make 
reasonable efforts to keep our air and water free from 
pollution. While I do not believe the science of global warming 
is proven or settled, energy efficiency and cost effective 
deployment of technologies that emit little or no greenhouse 
gases, such as wind, solar and other renewable energy sources 
are mostly no-brainers.
    Our priority should be consideration of the direct causes 
of global warming and action to correct those conditions which 
can be affected by mankind. Those conditions include pollution 
of the world's streams, rivers and oceans, clear-cutting of 
vast equatorial rainforests, denuding of the vegetation across 
Africa, encroachment of deserts in China, Africa and the Middle 
East and general over-population conditions of the world.
    Let's first talk about the Kyoto Protocol. Only 2 of the 
original 15 EU countries will meet their Kyoto Protocol 
targets. Any policy ignoring the fact that developing countries 
are accelerating their CO2 emissions will doom our 
children to a lower quality of life as a result. The Kyoto 
Protocol will cost the average family of four $2,700 per year. 
Our GDP will flatten and jobs will move overseas. Yet 
CO2 emissions will continue to arise. Then what will 
our childrens' sacrifices have been for?
    I strongly disagree with the recommendation for fossil fuel 
producers to purchase allowances equal to the emissions 
estimated to be released when a fuel is combusted. While 
characterized as a purchase of an allowance, the economics are 
similar to President Clinton's 1993 Btu tax. Senators from both 
parties quickly realized the high cost the Btu tax would have 
on the U.S. economy and the average American family and that 
proposal was withdrawn.
    The report noted that care should be taken so that policies 
do not merely push emissions from U.S. facilities to overseas 
operations. The imposition of this Btu tax would have that 
effect, because domestic oil and gas production activities 
would be subject to more costly greenhouse gas emission 
regulations than other producing countries.
    The domestic oil and gas industry already has higher 
finding costs and producing costs than that of imported oil and 
gas. The use of CAP proposed Btu tax would further disadvantage 
industry and lead to a reduction in domestic oil and gas 
production.
    Our domestic stripper wells which produce 10 barrels of oil 
per day or less, approximately 1 million barrels per day, and 
contribute 20 percent of our total domestic production would be 
particularly impacted. These wells have the highest production 
costs and lowest profit margins yet are the most stable 
category of production in the U.S. with the very shallow 
decline. That is practically in a stable State.
    The U.S. leads the world in eliminating pollution by 50 
percent reduction in the last 30 years. We have accomplished 
this while simultaneously growing our economy and stabilizing 
energy use. Through oil patch boom and bust cycles, I have 
witnessed the devastating, far-reaching impact of job loss on 
families, and it is not something that I nor you should 
contemplate lightly. Climate legislation that costs the 
American family businessman and future generations loss of 
jobs, a lower quality of life and climbing CO2 
emissions, despite our best efforts, is not good policy.
    That is my testimony. Thanks.
    [The prepared statement of Harold Hamm follows:]

Statement of Harold Hamm Chairman of the Board, Chief Executive Office, 
                      Continental Resources, Inc.
    Good morning Madam Chairman and Senate committee members. My name 
is Harold Hamm. I am the Chairman of the Board and Chief Executive 
Officer of Continental Resources, Inc. I am also the Chairman of the 
Board of the Oklahoma Independent Petroleum Association (1,700 members) 
and immediate past-President of the National Stripper Well Association, 
which represents operators of oil wells only capable of producing 10 
barrels per day or less.
    Continental Resources is a mid-size independent oil and gas 
exploration and production company headquartered in Enid, Oklahoma. 
Last year my Company invested over $300 million drilling 180 oil and 
gas wells in the United States. My professional training is in geology 
and my job is to find and develop oil and gas; which I have done 
successfully for the past 35 years.
    I want to first state that I am concerned about the impact our 
human activities have, not only on our planet, but on future 
generations. As the parent of 5 children, grandfather of 10 
grandchildren, and the CEO responsible for over 350 employees and their 
families, clearly, we should make reasonable efforts to keep our air 
and water free from pollution. While I do not believe the science of 
global warming is proven or settled, energy efficiency and cost-
effective deployment of technologies that emit little or no greenhouse 
gases, such as wind, solar and other renewable energy sources are ``no 
brainers.''
    Let's first talk about The Kyoto Protocol.Only two of the original 
15 EU countries will meet their Kyoto Protocol targets. One year after 
the Protocol was signed, Britain and China's emissions have steadily 
been climbing. China's emissions will eclipse America's carbon 
emissions in 2009. Any policy that ignores the fact that developing 
countries are accelerating their CO2 emissions will doom our 
children to a lower quality of life as a result.
    The Climate Change Stewardship Act would cost the American economy 
1.3 million jobs according to Wharton Econometric Forecasting 
Associates. Through many boom-and-bust periods in the oil patch, I have 
witnessed the devastating, far-reaching impact of job losses on a 
family and it is not something that I, nor should you contemplate 
lightly.
    One recommendation with which I strongly disagree is the 
requirement for fossil fuel producers to purchase allowances equal to 
the emissions estimated to be released when the fuel is combusted. 
While characterized as the purchase of an allowance, the economic 
substance is similar to President Bill Clinton's BTU Tax proposed in 
1993. At that time, Senators from both parties quickly realized the 
high cost the BTU Tax would have on the U.S. economy and on average 
American families and that proposal was withdrawn.
    The report noted that care should be taken so that policies do not 
merely push emissions from U.S. facilities to overseas operations. The 
imposition of this BTU Tax would have that effect because domestic oil 
and gas production activities would be subject to more costly 
greenhouse gas emission regulations than other producing countries.
    The domestic oil and gas industry already has higher finding and 
producing costs than other countries from which we import oil and gas. 
The proposed BTU tax would further disadvantage the industry and lead 
to a reduction in domestic oil and gas production.
    Our domestic stripper wells (those producing 10 barrels of oil per 
day) would be particularly impacted. These wells have the highest 
production cost and lowest profit margins. This production is the most 
stable category of production in the U.S. and has a very, very shallow 
decline and is, in fact, practically in a stable state. Stripper wells 
contribute 20 percent of our domestic production (approximately 1 
million barrels per day).
    The ``upstream'' program recommended by the U.S. CAP which requires 
fossil fuel producers to be covered by allowances that equal the 
emissions released when the fuel is combusted is exactly the type of 
costly regulation that will devastate the domestic oil and gas industry 
without having a direct effect on global greenhouse gas emissions.
    The Kyoto Protocol will cost the average family of four $2,700 per 
year. Our GDP will flatten and jobs will move overseas, yet 
CO2 emissions will continue to rise, then what will our 
children's sacrifices have been for?
    Furthermore, the cap-and-trade approach to reduce greenhouse gas 
emissions has never been implemented on the scale being discussed and 
could have significant, adverse, and unanticipated effects on the U.S. 
economy.
    Though experts debate whether global climate change is affected by 
greenhouse gas emissions, we can be certain that allowance systems 
recommended by U.S. CAP will reduce domestic oil and gas production, 
increase our dependence on foreign sources of energy and have high 
costs to the U.S. economy and average American families.
    Our priority should be consideration of the direct causes of global 
warming and action to correct those conditions which can be affected by 
mankind. Some of those conditions include pollution of the world's 
streams, rivers, and oceans, clear-cutting of the vast Equatorial rain 
forests, denuding of the vegetation across Africa, encroachment of 
deserts in China, Africa, and the Middle East, and general over-
population conditions of the world.
    The United States continues to be a leader in cutting pollution 
across the board. In the last three decades we have significantly 
cleaned up our waterways and cut air pollution by more than half. We 
have accomplished this while simultaneously growing our economy and 
increasing energy use.
    Climate legislation that costs the American family, the American 
businessman, and America's future generations the loss of jobs, a lower 
quality of life and CO2 emissions that continue to climb is 
not good policy.

    Senator Boxer. Thank you very much, Mr. Hamm.
    Now we are going to go to Senator Carper, followed by 
Senator Alexander. Each will have 10 minutes. You can 
incorporate your opening statement, whatever you want to do.
    Senator Carper. Madam Chairman, thank you very, very much.
    To our witnesses, thank you very much again for joining us 
and for your testimony.
    What I would like to do is start off by just reading a 
sentence or two from the conclusion of Mr. Smith's testimony. 
Then I am going to ask Mr. Darbee, Mr. Holliday and Mr. Elbert 
just to ponder these words and respond to a question. Here is 
what Mr. Smith said at the end of this testimony: ``The 
corporations we see baying for a cap and trade program are out 
to enrich themselves without thought for the poor. For these 
people, environmentalism is the opiate of the masses, keeping 
them quiet by making them think that what's bad for them is 
good for the planet.''
    What brings you here today baying, if you will, for a cap 
and trade program? Are you out to enrich yourselves, your 
shareholders, at the expense and with no thought for the poor? 
Mr. Darbee?
    Mr. Darbee. Senator, a cap and trade program does not have 
any impact on the impacts of PG&E and Pacific Gas and Electric 
Company. As I outlined in my presentation, we operate under 
decoupling. So if we sell more or less electricity, we are 
indifferent, neutral to that. And there is no way that we can 
make more return for our shareholders as a result of the cap 
and trade program. Our return is limited currently to the 11.35 
percent allowed by the California Public Utilities Commission.
    Senator Carper. What is our motivation, personal or 
corporate, for being here today, sir? Spending all this time to 
put together the partnership and to come here, not just today, 
I know you have been here in the Capitol at least two or three 
times in the last month or so. Why?
    Mr. Darbee. In short, it is to do the right thing, Senator. 
Two years ago when I came into the job of CEO, I asked the 
question, do we have a position on the environment and on 
climate change. The answer is, we have no official position. So 
we undertook a process of scientific inquiry, where we met with 
roundtables of scientists. And coming out of that, the senior 
management team of our company and I concluded that yes, the 
climate is warming. Mankind is likely responsible and the need 
for action is now.
    So out of a belief that this was the right thing to do and 
the responsible thing, in being a corporate leader, we took 
this position. That is why I have come back three times in the 
last month to Washington to make this point.
    Senator Carper. Mr. Holliday, let me ask this. What is your 
motivation? Why all this time and energy are you putting into 
this endeavor?
    Mr. Holliday. Senator, with our 15 years' experience 
focusing on ways to reduce greenhouse gases and have good 
return for our shareholders, we see a large variety of 
solutions at work. That is what we have been doing in our 
country. We think by understanding the rules of the road and 
our terminology here in the United States, our companies can be 
leaders. We see a whole suite of technologies that can solve 
these problems. We think the uncertainty of what regulation 
will do is holding companies back. So we are motivated because 
we think we can actually lead in this and our country can lead.
    Senator Carper. Thank you. Mr. Elbert.
    Mr. Elbert. I would echo my colleague's comments as well. 
BP has been involved and concerned about climate change since 
1997. My motivation, I think, much like the members of the 
committee, I represent a constituency of 36,000 employees and 
substantially more thousands of shareholders. Frankly, this is 
the direction that they have asked us to take. It is the 
direction that we think from a business point of view is the 
right direction to take. Our own experience with our internal 
cap and trade program that we put in place in 1998 demonstrated 
to us the value of that type of program. It captures the lowest 
hanging fruit first, so to speak, at the lowest cost. It has 
been good for business.
    Senator Carper. Mr. Book, I have a question for you. 
Senator Alexander and I and others have worked for several 
years to craft legislation that focuses specifically on one 
sector, CO2 emissions from the utility sector 
stationary sources. Our legislation also calls for reductions 
in sulfur dioxide emissions, nitrogen oxide and mercury for 
three of the pollutants, with the exception of mercury, we call 
for a cap and trade approach.
    While I support the notion of an economy-wide approach for 
reducing, slowing the growth of CO2 emissions, 
stopping the growth of CO2 emissions and reversing 
the growth of CO2 emissions, I think something at 
least 2 or 3 of you have actually said today, I think we have 
to get started somewhere. And the legislation that we have 
proposed actually seeks to do that.
    I would ask of you, why, and your testimony you seemed to 
suggest at the end, at least, that the best approach is a 
sector-specific approach, like the one that Senator Alexander 
and I and others have embraced. Why do you think that is maybe 
the best way to proceed at this point in time?
    Mr. Book. Senator, the history of the sulfur dioxide cap 
and trade program for acid rain reduction has been, I think all 
would agree, a success, provided flexibility between two 
different types of choices that emitters can make. They could 
choose whether or not they wanted to switch coal or they could 
decide whether or not they wanted to take installation of new 
capital equipment.
    There is a precedent there. Companies are being regulated 
in that fashion today under the Clean Air Interstate and 
Mercury Rules. It represents probably a tentative step forward 
with greater clarity than the indistinct step of putting a 
burden on refiners and oil companies without knowing whether or 
not it will change the way drivers behave.
    Senator Carper. Thank you. Mr. Darbee, if I can come back 
to you for a moment. PG&E has worked with Senator Alexander, 
myself and some of our colleagues for a number of years on the 
electric sector, which I have just talked about here and with 
which you are familiar, I believe. How would the approach that 
we have developed help in the context of implementing the U.S. 
CAP economy-wide approach?
    Mr. Darbee. The issue of climate change is a very complex 
subject, as you know, Senator. I believe when one is dealing 
with very complex subjects, sometimes it is easier to break it 
down into smaller sections, smaller problems. So there is merit 
in your approach, which is to start with one industry, get that 
right and then focus on another industry. So the U.S. CAP group 
believes that it is appropriate to have an economy-wide 
program. However, it is quite possible that the most effective 
way to implement that program would be on an industry by 
industry basis.
    Senator Carper. All right, thank you.
    Chad, again, one of the central themes of the U.S. CAP is 
the need to address all sectors of the economy. The U.S. CAP 
approach also recognizes that, as we have said here today, one 
size doesn't fit all. Different timeframes, different 
approaches may be required for different segments of the 
economy. Let me just ask, what do you think is the best 
approach for industrial and the manufacturing sector?
    Mr. Holliday. I think very much like the BP example, within 
DuPont, we put in an internal cap and trade type program, which 
allowed the funds to go to the best projects. We saw the 
creativity come out in our people, and then we saw the kind of 
major improvements we were able to make, like the 72 percent 
reduction in gases. I think it is that approach that works.
    Whether the legislation is passed all at once or in pieces, 
you must decide. I think being able to understand the impacts 
of legislation in one place on another part of the economy is 
very important in your final decisions.
    Senator Carper. Let me follow up if I can. The kind of 
approach that Senator Alexander and I have put forth, what 
would we need to do to get the industrial and the manufacturing 
sector ready to participate in the kind of cap and trade 
approach that we have proposed and which it looks like you have 
already implemented at DuPont?
    Mr. Holliday. I think it is understanding the total 
legislation that will come is important. So if you understand 
one piece but there could be three other pieces, it would 
create a problem, is critical. That is why I think you could at 
least envision the total plan. What I think you will find is 
companies will be very much like DuPont, because our employees 
and our shareholders are asking us to take leadership in these 
areas. I think companies will stand up and do that.
    I have seen a change in the last 2 years. I think you might 
find a different response today than you would have two or 3 
years ago when you first started the legislation.
    Senator Carper. Thank you.
    Another question, if I could, for Mr. Elbert. Mr. Elbert, 
as we well know, the transportation sector is a huge portion of 
our carbon emissions in the U.S. I think utilities, as I 
recall, are about 40 percent of the CO2 emissions 
and I think the transportation sector is maybe another 40 
percent or so.
    More fuel efficient vehicles clearly is part of the 
solution. But can you tell us about the role of the fuels 
industry in reducing greenhouse emissions?
    Mr. Elbert. Sir, I would be happy to. Roughly we would look 
at the transportation sector in three segments. One is the 
vehicles themselves, the other the fuels and the other is just 
customer behavior. We think that there is opportunity for 
improvement to reduce greenhouse gas in all three of those 
sectors.
    with regard to the fuels in particular, there are, we 
believe, through technology, newer better fuels that can be 
developed. I think the industry has shown a track record of 
developing different specialized kinds of fuels to meet 
existing regulation. What we have done is take a step forward 
prior to the regulation and said, we can develop different, 
better fuels. We formed a partnership with DuPont to develop 
just one of those fuels and then we have put quite a bit of 
money into a 10-year program that we think is going to unlock 
quite an exciting new suite of opportunities in the realm of 
biofuels that are both good energy performers in terms of how 
your car operates, as well as being softer on the environment.
    Senator Carper. My time has expired. I look forward to 
hearing a little bit more today about biobutanol and your 
partnership in its development.
    Senator Boxer. Senator, thank you, because I think those 
questions were really important to be asked. Thank you.
    We are going to hear from Senator Alexander for 10 minutes, 
followed by Senator Klobuchar.
    Senator Alexander. Thank you, Madam Chairman. I want to 
thank the witnesses, all of them, for their testimony. It is 
very helpful for us to hear such good arguments on several 
sides of the point.
    Mr. Book, I want to make sure I understand what you said in 
your conclusion. I think I do, but let me go back over it a 
little bit, following up on what Senator Carper said. You say 
alternatively, it may make sense to take an incremental step by 
enshrining in law a market-based regulation of particulates 
from stationary sources similar to the Clean Air Interstate 
Rule and Clean Air Mercury Rule in a way that gives regulated 
entities financial motivations to explore emerging carbon 
capture technologies.
    Now, market based, particulates from stationary sources 
would include sulfur, is that right, and nitrogen and carbon as 
well?
    Mr. Book. Those are gases, but yes, they would as well.
    Senator Alexander. And you say similar to the Clean Air 
Interstate Rule, that is the new rule that EPA Bush 
Administration put in place, which in my opinion is an 
improvement from a clean air point of view over the Clear Skies 
proposal that the President had made. Then you mentioned the 
mercury rule. Now, the mercury rule is, the Administration's 
mercury rule is cap and trade, if I am not mistaken?
    Mr. Book. That is my understanding, yes.
    Senator Alexander. My concern about that is that that 
leaves mercury hot spots, such as the Great Smoky Mountains, 
where I live, mercury is heavier. And then you go on to say, 
plus financial motivations to explore carbon capture 
technology, which you say is not generally available or not 
available at all in the United States. Is that what you said? 
What is the status of carbon capture technology right now in 
the United States, the availability of it?
    Mr. Book. Senator, I believe there are some important 
questions yet to be answered by science and by the market. The 
first two of these is what happens when you sequester 
significant amounts of gas underground. Can it be stored? Does 
it escape? Does it have geologic impacts that we should be 
concerned about?
    The second is how much does that cost relative to the next 
best alternative, or other alternatives, including doing 
nothing. And nothing may not be the preferred alternative 
overall, in the long term. But in the near term, particularly 
financial investors tend to be very shy about making 
investments in technologies that are on the leading edge or not 
ready for prime time.
    Senator Alexander. But I would be correct in saying, the 
way I read it is the way you said it, I think, which is that 
you suggest an alternative might be a bill like the one Senator 
Carper and I have been working on, which doesn't go the whole 
way, which says we know that coal-fired power plants produce 
about 40 percent of the carbon. We have some experience since 
1990 with the cap and trade system there. We can learn from 
that how it might work and what the cost to the economy would 
be of dealing with coal-fired power plants. And then based on 
what we learn there, we can take other steps if they seem 
warranted. Does that seem to you to be a reasonable approach 
without asking you to endorse every provision of a bill we 
haven't yet introduced?
    Mr. Book. Yes, Senator, it is consistent with what has been 
suggested in my contact with institutional investors. They are 
much more enthusiastic about technologies that exist today. 
When they are managing your money, you don't, after all, want 
them betting on stuff that isn't there yet.
    Senator Alexander. Yes. And Madam Chairman, the legislation 
that Senator Carper and I are working on has, basically adopts 
the standards of the Clean Air Interstate Rule for 
NOx and SOx, more or less. It is a little 
stronger on mercury and then tries to address reasonable steps 
toward carbon.
    Let me go to Mr. Darbee. I want to ask you about the west, 
Mr. Darbee, as we work on our bill. I understand there are no 
coal-fired power plants in California at all, is that right?
    Mr. Darbee. I believe that is correct, Senator. A small 
amount of coal-fired power is sent in by transmission lines.
    Senator Alexander. And even though 50 percent of the 
electricity that the United States uses is produced by coal, 
none of it is, almost none of it is in California?
    Mr. Darbee. That is correct.
    Senator Alexander. Now, the Bush Administration's Clean Air 
Interstate Rule that I was just talking about issued in 2005 
doesn't apply to the west if I am correct. Am I correct about 
that?
    Mr. Darbee. I am not certain, Senator.
    Senator Alexander. Anyone know the answer to that?
    Mr. Darbee. My understanding is it----
    Senator Alexander. Well, what I am trying to get to is 
whether, as we work on our bill, it makes a difference to you 
and to other western utilities if the CAIR Act, as it might be 
put into law, does apply to the west? Would it create a 
problem? What are you doing about SOx and 
NOx in California or so far as you know in other 
parts of the west? Is there just not a problem with it?
    Mr. Darbee. In California currently, the vast proportion of 
the power is produced by hydro resources, nuclear resources or 
natural gas, which don't tend to produce SOx and 
NOx. However, not in our territory but in southern 
California, a not insignificant amount of power has been 
produced by power plants out of State that generate power from 
coal. So legislation relating to SOx and 
NOx would impact on those out of State generating 
facilities.
    Senator Alexander. Out of State would mean in the west, but 
not in California?
    Mr. Darbee. That is correct, Senator.
    Senator Alexander. So where, Idaho, Arizona?
    Mr. Darbee. Arizona, Nevada, Idaho would be exempt.
    Senator Alexander. So what SOx and 
NOx standards are there now for those western coal-
fired power plants?
    Mr. Darbee. I am not certain, Senator, since they relate to 
out of State and I haven't really become an expert in that 
area.
    Senator Alexander. OK. Mr. Elbert, I know you're BP 
America. But BP is very much associated with the establishment 
of United Kingdom emissions trading program and the European 
Union emissions trading scheme. Some say that that EU emissions 
trading scheme has been a failure. Is that right or is that 
wrong?
    Mr. Elbert. I think you would have to ask the folks in the 
EU to comment on that. I would say what it does do is gives us 
a model, it gives us a model to look at for the United States 
what things we think would work and what things would not be 
appropriate, would not work.
    Senator Alexander. Mr. Elbert, would you think that an 
approach such as that suggested by Senator Carper and which I 
discussed with Mr. Book would be a reasonable first step toward 
dealing with climate change in the United States?
    Mr. Elbert. Just from what you have described, I would say 
yes. What we are interested in from U.S. CAP and from BP, we 
are interested in a national program, a mandatory program, one 
that covers all sectors of the economy and one that both sets 
some short term and medium term goals, but has a clear vision 
for the future. We do believe that in the fullness of time, we 
need to get to a 60 to 80 percent reduction by 2050.
    So in a sense, any train that is leaving the station, 
anything that is moving us in that direction we are for. We 
would like to see some commitment to the end game.
    Senator Alexander. Mr. Lash, Mr. Holliday, do you have any 
comment on the wisdom or lack of wisdom of taking a first step 
that deals only with carbon from coal-fired power plants as 
opposed to an emissions, economy-wide controls?
    Mr. Lash. Senator, two observations. The SO2 
trading program was narrow because the range of leading sources 
of SO2 was relatively narrow. It was possible to 
focus on a very limited set of sources. CO2 is 
emitted by every part of the economy, not just utilities but 
also automobile drivers, buildings, manufacturers. So the U.S. 
CPA recommendations were very clear in recommending that a 
pathway be established that for all those sectors gives a 
signal about investment and about the need to make future 
reductions.
    We did not take a position with respect to any specific 
proposal about where to begin or how to begin, so long as it is 
part of that larger road map that gives both Mr. Holliday and 
Mr. Elbert clear signals about future investment.
    Senator Alexander. I see my time is about up. That is a 
good point. That a good distinction. But I believe it is true 
that coal-fired power plants produced about two-thirds of all 
the SO2 in our country.
    Mr. Lash. Of the SO2.
    Senator Alexander. Yes, of the SO2. They didn't 
produce it all, they produced about two-thirds. And coal-fired 
power plants produce about 40 percent of all the carbon. And 
the carbon from coal-fired power plants is growing at a much 
more rapid rate, nearly twice as fast as carbon emissions 
generally.
    Mr. Lash. I believe the utility sector produces 40 percent 
of carbon. But I don't think all of that is coal.
    Senator Alexander. Well, the utility sector, nuclear is 20 
percent. So it doesn't produce nay. Hydro is 7, it doesn't 
produce any.
    Mr. Lash. Oil and gas, while they produce much less per 
Btu, also produce CO2 emissions.
    Senator Alexander. They do, but they don't produce as much 
electricity in the United States.
    Mr. Lash. Coal is a little over half the electricity in the 
United States.
    Senator Alexander. Right. Thank you, Madam Chairman.
    Senator Boxer. Senator Alexander, I just wanted to make a 
point before we go to Senator Klobuchar and then Senator 
Warner. My understanding is the Parada bill that passed the 
California legislature and the Governor signed says that any 
electricity that is imported that is derived from coal has to 
be clean coal. So right now we have entities in California that 
are not renewing contracts, because it is not clean coal.
    So my answer to your question is, and I would have to do 
more research, but the cleaner coal that we have, the cleaner 
power that we get from the utility sector, the better it is for 
our State. Because right now, we are stopping importing that 
dirty coal. So I think it helps us at the end of the day to 
have a Federal law that address clean coal and clean utilities.
    Senator Alexander. Thank you, Madam Chairman. I should say 
out of fairness to Mr. Book's conclusion, he did emphasize and 
I didn't very much in my question of him the importance of 
encouraging technologies to deal with clean coal and other 
provisions.
    Senator Boxer. Absolutely, thank you.
    Senator Klobuchar, you have 10 minutes, followed by Senator 
Warner, who has 10 minutes. Please proceed.
    Senator Klobuchar. Thank you. I want to thank all the 
witnesses today, particularly those from the business community 
involved in the Call for Action that you were willing to come 
here today and talk about your vision and what we can do in a 
bigger way, beyond what we are doing. I especially appreciated 
the emphasis in the report on the short term and long term 
goals and the cap and trade system and the focus on discussing 
renewable fuels as well.
    I am from Minnesota, the land of 10,000 lakes. Most of them 
are frozen now. But despite that, there is an overwhelming 
concern in our State about global warming. It comes from 
snowmobilers who don't have enough snow to people who ice fish, 
who find that year by year, it takes longer and longer for them 
to be able to put their fish houses out, to major business who 
either are based in Minnesota or who have a presence in 
Minnesota, from Excel Energy to General Mills to Target. So I 
appreciate your business leadership in this area.
    This committee, under the leadership of our Chairman, has 
focused on this, which I appreciate. Other committees I am on, 
the Commerce Committee, had a hearing last week in which we 
talked about the concerns about elevating politics over 
science. It was a bipartisan hearing and I appreciated Mr. 
Darbee, your talking about bringing scientists in. Because 
there is some concern that we haven't been getting the truth 
facts out of some of the Government scientists.
    I am also on the Agriculture Committee and I am actually 
preparing to introduce a climate change incentive program as 
part of the Farm bill. So you can keep in mind as you talk 
about fuels, Mr. Elbert, as you were before, the idea here is 
to promote cellulosic ethanol and to create incentives for 
farmers who want to reduce their consumption of fossil energy 
by using renewable resources to have incentives for carbon 
sequestration practices. Then also to provide incentives for 
farmers to grow perennial grasses and biomass crops that can be 
made into carbon neutral cellulosic ethanol.
    My first question was just in that area of carbon 
sequestration off of the agriculture area, but into some of the 
things you talked about in the report about carbon 
sequestration technologies and projects and the energy in the 
power sectors. Could you talk about the challenges and 
opportunities of those types of proposals?
    Mr. Lash. We had very clear agreement among the U.S. CAP 
members that we need to accelerate work on capture and storage 
technologies. That would include investment in pilot plants to 
demonstrate the technology. That is the first step. Europe is 
now investing in building several plants. The Department of 
Energy is just in the process of deciding on a first few 
demonstration plants. It is also the recommendation that 
Congress needs to initiate the process of setting the rules 
that would define the measures for safety and reliability in 
terms of carbon storage, which I believe Mr. Book also referred 
to. Without that set of rules and without the initial 
demonstrations, it is very hard to predict the cost.
    In the long term, there is great optimism that that 
technology is going to be available and play a crucial role.
    Senator Klobuchar. Thank you. I also want to talk a little 
bit about the cap and trade program. I believe that harnessing 
the power of the market through cap and trade is a vital part 
of the solution. Your report talks about two possibilities for 
a cap and trade regime. One is an upstream program that is 
focused on fossil fuel providers or a hybrid program that 
includes both upstream and downstream caps.
    Could you talk a little bit about the debate and dialog 
about those two types of programs and what you see as the key 
considerations for determining the most effective way to 
implement cap and trade?
    Mr. Lash. Thank you for the question, Senator. To be clear 
about the U.S. CAP recommendation, we didn't make a call 
between those two.
    Senator Klobuchar. I know. I just was wondering what the 
debate was.
    Mr. Lash. The advantage with upstream is it is very simple. 
The fewer sources that the cap is applied to, the simpler the 
administration. The difficulty with upstream is that upstream 
producers, refineries, coal mines, don't have very much control 
over how the product is used or the technology by which it is 
used, which means they have less capacity to reduce emissions. 
The further downstream that you push a cap, the more 
complicated it is to administer, because there are more and 
more sources included. But the better you are able to reach the 
decisionmakers who control the level of emissions, essentially 
what we were suggesting is that you need to find a mix that 
works relatively effectively at aiming at the sources that can 
make the reductions without making it unmanageable.
    I think Mr. Book pointed out that if you go all the way 
upstream, essentially the cap operates like a tax. It just adds 
to the tax all through the economy. You don't know how much you 
will get in terms of reductions.
    Senator Klobuchar. Anyone else?
    Mr. Holliday. I think the key aspect of whichever form of 
cap we have has to preserve the free market. So that would be 
the criteria we would look at, is to make sure that the 
creativity of Americans and American business can respond. 
DuPont does business in 70 different countries. What we have 
seen is the ability of the financial system working with the 
national labs, with companies, we can find solutions. If it is 
too complicated or hard to understand or implemented over too 
long a period of time, I think we will miss an opportunity.
    Senator Klobuchar. I was curious, Mr. Elbert, about the 
figures you threw out there, which were quite amazing, about 
the investment in energy efficiency of $450 million by 2010 and 
how it has already turned approximately $1.6 billion through 
the end of 2005, through reduced energy costs for BP. Could you 
elaborate on that a little bit?
    Mr. Elbert. I think this is just an example that, in our 
mind, from our own experience, that investments in energy 
efficiency pay big dividends. We invest in making a process 
more efficient and we are rewarded by lower energy costs. We 
are of course, besides providing energy, we are a very energy-
intensive business. To the extent we can reduce the costs of 
the energy we use, it is good business.
    Mr. Smith. I think that point is well taken, but of course, 
you can achieve that result much more smoothly with far less 
administrative costs by essentially imposing a charge on carbon 
use. If we believe carbon use has to be reduced, which 
certainly many of the committee members do, then a tax is a 
much more direct and honest and transparent way of achieving 
it. It works this way throughout the whole economy without the 
micromanagement and the detailed intervention which does not 
have a good track record around the world anywhere.
    Senator Klobuchar. Would anyone like to respond to that?
    Mr. Darbee. I might add, having been trained as an 
economist, and understanding that there is value in 
internalizing the externality, the externality is emitting 
carbon into the environment, that from a theoretical 
standpoint, a carbon tax is the purest and most efficient way 
to get at that question. We have looked at the question of the 
practical and political realities of that and we understand 
that a lot of leaders right now are not inclined to implement a 
significant tax on the economy. Therefore, we felt that a cap 
and trade program would approximate the effect of a carbon tax 
and therefore be both effective and pragmatic in the real world 
and political world we live in.
    Senator Klobuchar. Very good, thank you.
    Senator Boxer. Senator Klobuchar, thank you very much.
    Senator Warner, we are very happy you are here, and you 
have 10 minutes, please.
    Senator Warner. Thank you very much, Madam Chairman. I 
first want to express my appreciation to you for the leadership 
that you have taken on this issue. Together with Senator 
Carper, who has for many years, since the first day you joined 
this committee, it has been a matter of great interest to you. 
My colleague here from Tennessee likewise.
    I am one that I confess to be on a learning curve. But I 
have watched this debate sort of from the sidelines here in the 
Congress as the Government has tried to take some leadership 
and the scientific community. But I really believe by virtue of 
what you have done, that you are beginning to move this whole 
concept into the big leagues now and you have our attention. 
Because when I see such an extraordinary cross-section of 
America's free enterprise system together with the 
environmental groups come and form a group like this, you have 
my attention. Because I know that each of you, with the 
exception of the environmental groups, have to deal with 
stockholders. And the stockholders may be looking at this with 
a wary eye, thinking that maybe it is going to cut into the 
bottom line and so forth. That is understandable. That is our 
system.
    But we had a panel here the other day, a magnificent group 
of individuals, going down to very fundamental things about how 
it is affecting the trout in America and our wildlife. It was 
an enjoyable hearing for those of us that found time to be 
present. So I think we are underway.
    What I would like to ask you first is, I look at this, if I 
want to get back to you, is there a central group that you have 
set up to represent you? Are you going to have somebody in 
Washington? Because it has been my experience here, I have been 
here quite a few years, unless you have somebody that is 
really, really on tap and responsible to come and give us the 
best advice your effort might be anywhere near as effective. 
Because I can't get on the phone and call up all of you trying 
to find somebody. Can you help me a little bit on that?
    Mr. Lash. Senator Warner, my colleagues have turned to me 
to respond to that. The group has operated completely by 
consensus. We continue to operate by consensus. We have no 
executive director. Each of us is represented by our staff. We 
all have staff here in Washington and any of them can respond 
for the group.
    Senator Warner. All right. So that is for the time being. 
It may be well be in due course you will have to bring this 
together.
    Second, is this a closed end fund or an open end fund? Can 
other industries join?
    Mr. Holliday. Senator, we would welcome other companies and 
industries to join. We think as we started this it was a small 
enough number that we could have the debates and we had 
extensive debates for almost a year. But we welcome other 
industries to join.
    Senator Warner. Anybody else want to comment on that ? This 
is freewheeling. Then I will allow our two colleagues at the 
end to comment after I am finished with a series of questions, 
and then you can address any aspect of my line of questions you 
might wish.
    Mr. Smith. Just one comment, Senator.
    Senator Warner. Yes.
    Mr. Smith. One thing that seems to be lacking in this 
hearing and many hearings is we see a lot of big businesses. We 
don't see many small businesses which are less prepared to 
address the regulatory costs of compliance and some of these 
incredibly complicated things we have heard about. So in some 
ways I would hope that somewhere at some point you might want 
to have a special hearing devoted to the impact on smaller 
business.
    Senator Warner. Madam Chairman, I think that is a point 
well taken. I accept that as a very valid, constructive 
critique of this whole subject we have today.
    Let's go back to the cost to the American taxpayers of 
these various programs that we have under scrutiny here. How do 
you justify to your stockholders and then to the American 
taxpayer when the rest of the world seems to be moving at its 
own pace? It seems to me that is where we could be pulled down 
on this issue, unless we all get into the boat and pull on our 
oars.
    So are you going to take part in this international issue 
that is coming along? Kyoto expires here in a couple of years. 
I don't know there is much likelihood that we will be a 
signatory in that brief remainder of its life. But at the same 
time, our Government can't just sit still. We have to plan for 
the future. Because I believe that most of these concepts are 
going to take a long time to get started.
    But the old bottom line, which you have to address every 
day, is going to begin to talk about it. Mr. Darbee, I see you 
are eager to answer that question.
    Mr. Darbee. Thank you, Senator. We believe that the United 
States has a unique place in the world as a leader. If you look 
at our carbon emissions, a country of 300 million is emitting 
more carbon today than all of China and all of India, whose 
population is in the billions. So we contribute a 
disproportionate amount of carbon into the environment.
    The second thought is that we are among the richest or the 
richest Nation in the world. But in addition to that, we also 
have demonstrated a unique track record in innovation. Given 
all those factors, our proposal would be that the United States 
step out and take a leadership position on this issue. But at 
the same time, what we have done so is turn to others in the 
world as different Senators here have suggested, and really 
encourage the involvement. Our company has already worked with 
China on the question of energy efficiency. They have visited 
our State and our company. We have sent representatives to 
China and they have expressed keen interest in energy 
efficiency, because they recognize that they are wasting vast 
amounts of electricity and power, and that not only is that bad 
for the climate, but it is not good for their economy, it is 
very inefficient.
    So I think that the concern raised, are we going to step 
out and expect others to come with us is a valid one. But given 
the position that I mentioned, that we contribute a 
disproportionate amount of carbon, that we are a very wealthy 
Nation and that we are very good at innovation, if we don't 
step out, if we say we are not going to take any action until 
you all move, I think other countries will look at us and say, 
why should we, who are not as wealthy, who don't have the 
innovative capabilities and all, and who contribute less, why 
should we step out first?
    So I think it is our role as a leader in the world.
    Senator Warner. All right. Are you going to recommend to 
the Congress maybe a specific piece of legislation?
    Mr. Darbee. We have not, we as a group as mentioned before, 
U.S. CAP, is not taking a position on any piece of legislation. 
We as a company have, and we supported Assembly Bill 32 in 
California, and we have supported the Feinstein-Carper bill 
here in the Senate. We have supported the Kappa proposal as 
well.
    Senator Warner. Anyone else wish to address any of those 
issues that I raised? Yes, Mr. Holliday.
    Mr. Holliday. Senator, DuPont does business in 70 
countries. So we operate under Kyoto today in many countries. 
So what we see is the opportunity to learn from those first 
attempts and do it much better. So I think this is the 
opportunity we see.
    The second question is around India and China and they are 
important questions. What I hear from our employees in India 
and China is the U.S. takes leadership. I think then you have 
the right to insist that they follow, w will have the 
leadership to allow that to come forward. But it is an 
important step to be taken.
    Senator Warner. These emissions, while we are on China, 
seem to have manifested themselves ever so clearly in China, 
fortunately not to the degree in this country. In other words, 
you see pictures of just the environment being devastated as a 
consequence of their level of emissions. Am I not correct in 
that?
    Mr. Lash. That is absolutely true, Senator. In fact, for 
their own reasons, to address the immediate problems of 
pollution and energy dependence, the Chinese have taken actions 
which in fact reduced their intensity of CO2 
emissions, although they would never say that was for climate 
change reasons.
    Senator Warner. What about India? Do they have comparable 
problems?
    Mr. Lash. Yes.
    Senator Warner. Is the manifestation of the pollution as 
clear in India as it is in China?
    Mr. Lash. Just speaking from personal experience, there are 
cities in China where you can't go without having lung 
problems. I do not think it is as bad in India.
    Senator Warner. Thank you very much. Thank you, Madam 
Chairman.
    And good luck. Let's hope that you augment your ball team 
and get more in. Because the more to come, the more attention 
you are going to get in this old outfit called the Congress. I 
will tell you that.
    Senator Boxer. Senator, thank you so much for that point. I 
want to mention to you, Senator Warner, that in their report, 
they do lay out various options for us to look at. So it is a 
good document.
    Senator Lautenberg, 10 minutes.
    Senator Lautenberg. Thanks, Madam Chairman, for holding 
this hearing. I would like to ask that my full statement be 
included in the record as if read.
    Senator Lautenberg. But I do just want to note a couple of 
things, and just to say, we know about the intra-governmental 
panel on climate change report that said, warming of the 
climate system is unequivocal and that human behavior is very 
likely the cause. Just last week, we heard something similar 
from Exxon Mobil, and by the way, Senator Inhofe, I want to 
just clarify one thing. I spent 30 years building a company, 
even though Senator Inhofe says that we don't have enough 
people around here who have----
    Senator Inhofe. I still think so. I always acknowledge that 
you are there. There should be more like you and me. I agree.
    Senator Lautenberg. Well, I am not sure about you, but----
    [Laughter.]
    Senator Lautenberg. In any event, we are dear friends, for 
the audience, who doesn't see us fighting in the other rooms. 
We are, and with great respect.
    So when I see a group of CEOs come in and say, hey, we have 
a problem, we want to help clear up this problem, and when I 
see that Exxon just last week, I think, said the appropriate 
debate is not whether the climate is changing but what we 
should be doing about it. The same ExxonMobil, and they are a 
terrific company, but they did spend $16 million between 1998 
and 2005 to dispute the science that supports global warming.
    Both of these statements say the same thing, so when I 
listen to each of you and your testimonies of value, I do have 
some differences. Mr. Holliday, you just said something, that 
in the countries in which you operate that you follow the Kyoto 
principle. What kind of an impairment has it been? Would you 
not go to a country that has signed the Kyoto accord?
    Mr. Holliday. Absolutely not. What we have found is by 
applying our technology and getting ahead of the curve and 
anticipating when it is coming in, we can be very successful. 
So I don't know if a single decision that we have made to not 
go to a country because of Kyoto.
    Senator Lautenberg. By the way, the company I helped found 
is called ADP, Automatic Data Processing. We have 46,000 
employees and the longest growth record of any company in 
America. It grew at 10 percent in its profit over the previous 
year. Longest record in history, 43 years in a row. So I have 
to make sure that my dear friend, Senator Inhofe, knows that I 
wasn't out there just wasting time before I came to the U.S. 
Senate.
    [Laughter.]
    Senator Lautenberg. I had an experience in 1992 in Brazil 
at something called the Earth Summit. Al Gore made a terrific 
speech and we salute the Kyoto Accord, but we don't want to 
sign it. I think, Mr. Darbee, you said something that struck a 
chord with me, and that is, where is our leadership? We have 
seen that we have lost it in places around the world because of 
decisions that we have made, or didn't make. We have a 
responsibility. We practically own the place. So why shouldn't 
we go ahead and do it?
    So that brings me to Mr. Smith. And I am curious about a 
couple of things, about your organization. Is yours a 
membership organization?
    Mr. Smith. No.
    Senator Lautenberg. No?
    Mr. Smith. No.
    Senator Lautenberg. Who is the Competitive Enterprise 
System?
    Mr. Smith. We are a pro-market, public----
    Senator Lautenberg. Institute, sorry.
    Mr. Smith. We are a pro-market, public policy group. We get 
our support from anyone who is willing to tolerate our 
independence, and there are too few of them.
    Senator Lautenberg. Well, you are here, and the Institute 
has put out some ads that are fairly significant. They have to 
be paid for, obviously. What kind of revenue does your 
organization have?
    Mr. Smith. Our budget is a little less than $4 million. It 
was about $3.8 million last year. It has grown, we started in 
1984. Our staff is about 27 now. And the ads, our budget was 
considerably smaller than some of our opponents on the other 
side. I would say we have spent about $50,000 on our ad 
campaign. That was out of, incidentally, general overhead for 
our organization.
    One little point that was made both by yourself----
    Senator Lautenberg. Well, I don't want to lose my time.
    Mr. Smith. I am sorry. But we have signed Kyoto, remember 
this.
    Senator Lautenberg. Yes. Well, you say we have signed it. 
Do we fully endorse the----
    Mr. Smith. We signed it. We didn't ratify it. And I think 
one of the things we might want to do is consider ratifying it.
    Senator Lautenberg. I am sorry?
    Senator Boxer. As I understand it, President Clinton signed 
Kyoto, right?
    Mr. Smith. Right.
    Senator Boxer. But President Bush rescinded it, is that 
correct?
    Mr. Smith. No, that is not correct.
    Senator Lautenberg. It was not ratified.
    Mr. Smith. It has not been ratified, that is the point.
    Senator Lautenberg. So then we are obviously not committed 
to adhering to their principles.
    When I was at this Earth Summit meeting, I approached one 
of the interior ministers of a Latin American country where 
they are regularly burning the Amazon forest. I asked him why 
they were assaulting the environment the way they were with 
that policy and that it was helping to create acid rain and 
various other problems. So he said, well, our farmers have no 
other way of sustaining themselves. So one of our farmers, if 
he cuts an acre of trees, it is enough to sustain his family 
for life. He said, but one of your chemical workers in a day 
can help discharge far more in that day than the farmer in his 
lifetime. And therefore, America, if you want us to stop 
burning the forests, then maybe you ought to help us give that 
farmer a way of life, maybe contribute to his well-being.
    And therein to me lies a little bit of a complicated 
situation. We want other people to behave better than we do. I 
sat in the office of the environmental minister in China and he 
complained about our profligate use of fossil fuels and what we 
were doing. I asked him, we were on the 23d floor, I asked him 
if he could see the ground from the office that we were in. 
Well, he said, it was a bad day environmentally and they 
couldn't do it.
    So no matter what, we set a terrible example. And so, and 
Mr. Smith, I really, I don't get your commentary and I don't 
know whether you make these statements in your advertising that 
Greenland's glaciers are growing, not melting. But everybody I 
know that has been there says the melt is a very serious 
threat. I have been to the South Pole. Have you had a chance to 
get down there?
    Mr. Smith. I just came back from Louisiana, but it wasn't 
quite the South Pole.
    Senator Lautenberg. I wish I could help you get to the 
South Pole and spend a few days there and meet with the 
scientists.
    Mr. Smith. The point you made about the difference between 
poorer countries and richer countries is a very important one. 
We use a lot of energy, we use a lot of materials. We use them 
much more efficiently in a sense because we are richer and 
wealthier, we are able to do that. The challenge is to bring 
the energy-poor material parts of the world back to our 
standards. Because a wealthy, technologically adroit country is 
more resilient, more able to address global warming problems 
than other ones.
    Senator Lautenberg. You had a chance to make your statement 
and this is my turn.
    The question that arises, is regulation necessarily a bad 
thing, I mean, you know, heaven forbid that we didn't have 
traffic lights and regulate the speed of cars. But just to sum 
up, it is terrific that those of you who head companies are 
involved in the business world but think we ought to do 
something about these greenhouse gases, I read one of you had 
10 grandchildren. So do I.
    The last thing I want them to do is be the canaries in the 
coal mine and find out 20 years from now that they are not 
well. I have one grandchild who has asthma. When the 
environment is not good, when it is a smoggy day, that poor kid 
has a very tough go. So we have to look beyond these things. I 
don't say cut down on profitability. I don't say penalize 
people by taking away their jobs. Not at all. But there is 
enough brilliance in our business community, in our scientific 
community, to solve these problems and to get on with it. But 
if we throw out these objections that have no basis in fact, 
then it doesn't do anybody any good and we are left standing 
pat, which is not good. May be good in Las Vegas, it is not 
good here.
    Senator Boxer. Thank you, Senator Lautenberg.
    Senator Bond, we are going to go to you for 10 minutes. And 
just so everyone knows, we will go to Senator Sanders. Then at 
that point, we will make our final questions and comments, and 
we will thank you all for being so patient and being such a 
good panel.
    Senator Bond, you have 10 minutes.
    Senator Bond. Madam Chair, thank you very much for giving 
me the opportunity. I apologize, we had already scheduled large 
groups of constituents this morning when we got notice of the 
hearing. I apologize for coming late and I apologize to the 
witnesses.
    I would say first of all, we appreciate your convening this 
panel on the Climate Action Partnership. I would say in 
reference to the discussion about Kyoto, my memory is not 
great, but I believe after Kyoto was negotiated and signed by 
President Clinton, it came back to the United States and I 
believe I joined with Senator Byrd on a resolution saying, do 
not ratify this agreement because it leaves out India and 
China, the biggest polluters, it imposes unbearable costs. If I 
recall, the vote was 95 to nothing, or maybe 97--95 to nothing. 
Therefore, as we say in the country, that dog didn't hunt.
    I appreciate very much all of you coming here to talk about 
what we can do to improve the environment. We have made 
tremendous gains in the environment in recent years. I commend 
the leadership of the business community. Your job is to make a 
profit so you can provide good jobs to workers, provide 
dividends to the retirees and others who hold the stock. You 
make the economy work.
    And when you pursue constructive proposals to lessen 
emissions of all kinds, greenhouse gases among them, you are 
doing great work.
    However, I have some questions when I see members of 
industry and business pursuing goals that are very harmful to 
other industries but profitable for them. This is not the first 
time that some in industry have shown their support toward 
carbon caps, for example. Indeed, I think, Madam Chair, if we 
look back to the Clinton administration meetings with Mr. Ken 
Lay of Enron over the Kyoto treaty, we will see some 
interesting things. This is a Washington Post article headlined 
``Enron Also Courted Democrats: Chairman Pushed Firm's Agenda 
With Clinton White House.'' An internal Enron memo said that 
the Kyoto agreement, if implemented, would do more to promote 
Enron's business than almost any other regulatory initiative 
outside of restructuring the energy and natural gas industries 
in Europe and the United States.
    That is a pretty clear-cut statement. Everybody knows where 
they are. They went on to describe that an international 
agreement to combat global warming also dovetailed with Enron's 
business plan. Enron's officials envisioned a company at the 
center of a new trading system that would curtail the use of 
coal-fired plants that emitted carbon dioxide, while 
encouraging new investments in gas-fired plants and pipelines. 
Precisely Enron's line of business.
    The bubble that we mentioned earlier shows why Enron 
officials were so elated. They think that it would promote 
Enron's business more than any other regulatory initiative. 
They would profit off the pain of other industries and 
consumers, regulated companies or individuals who are captive 
to coal and other sources of energy. But this example, Madam 
Chair, shows how companies of all stripes sometimes are willing 
to work for environmental goals, because it fits their business 
model, pads their bottom line and maybe or maybe not furthers 
the environmental goals and the well-being of the economy.
    That is why I am not worried as much about what certain 
companies think about carbon caps, but how vulnerable, poor and 
middle class communities, especially in my midwestern coal-
dependent State, are firmly in the cross hairs of carbon cap 
plans. And we know that we are targeted. And we know big 
railroads still make money under any scenario. They pass their 
costs straight onto American families and workers. As we saw in 
last year's run-up of gasoline prices, even raw materials like 
oil increased in price to record levels. Big oil still made 
profits selling gasoline.
    Now, some on the committee, and I am not one of them, would 
describe big oil's profits as ill-gotten windfall profits. They 
are huge, but they are less than the profits in many other 
sectors. So let's be fair about it: making a profit is what 
they are there for. Indeed, one member of the U.S. CAP 
partnership testifying here today made over $22 billion in 
profits last year. And who picked up the tab to fill those 
corporate coffers? We as consumers did. That is what happens 
when the cost rises of a basic necessity we can't do without, 
we might have to pay. We paid when gasoline prices went up, we 
will pay when natural gas prices go up further. And that is one 
of the biggest worries that I have that continue to ruin 
industries, farmers, poor individuals who have to heat with 
natural gas.
    Although Enron did not survive to see the day, the future 
is clear with carbon caps. Less coal, more natural gas demand 
and higher profits from higher prices. That will mean higher 
prices for heating our homes in the winter, higher prices for 
air conditioning our homes in the summer and higher costs for 
blue collar manufacturing workers supporting their middle class 
families. Unless of course, they happen to be in plastics or 
other businesses that depend upon natural gas and are forced to 
move offshore, so they just plain lose their jobs, as they have 
in the past.
    Am I here to blame the companies today? No. I expect you to 
do what you are supposed to do, provide a return to 
shareholders by investing in new technologies and businesses 
where you will have a competitive advantage. But let's not get 
that competitive advantage by sticking it to some people who 
are the least able to handle those costs. Make no mistake about 
what is going on. Some companies will do just fine in a world 
where energy costs more. But that success too often comes at 
the pain of the poor, the disadvantaged, the struggling middle 
class workers who can least afford higher carbon cap prices.
    Please, go forward with nuclear and all the plans you can. 
But don't saddle the midwest, our workers, our farmers and our 
poor, with outrageously high prices of natural gas caused by 
carbon caps.
    For a question, Mr. Smith, witnesses here of the regulated 
utilities claim that carbon caps would not help them. Could you 
help illustrate further how a carbon cap may hurt competitors?
    Mr. Smith. I think it is quite clear when you look at what 
is going on in Europe now, where we have, as has been pointed 
out, the model example of how our cap and trade system works in 
general, just pick up any internet writing about the utility 
industry in Europe, the parts of the airline industry in 
Europe, the British who basically rushed in and put severe caps 
on their industry and then recognized that the French and the 
Germans didn't. Or parts of the industry which got covered and 
parts didn't. Parts of the industries, I think it is Spain now 
rushing around saying, we are OK, we bought lots of clean 
development credits out of somewhere in Asia.
    What we are seeing in Europe is a willingness to sign 
symbolic agreements and then when the price tag of those comes 
into play, a lot of fancy footwork to basically pretend that if 
there was only the United States would screw itself to, then we 
would all be well off. Europe is finding it impossible, with 
higher energy taxes, with a much more favorable environment for 
lowered energy use in the United States, to meet their Kyoto 
pledges. So they are actually increasing CO2 
emissions faster than the United States is.
    Senator Bond. They are increasing faster?
    Mr. Smith. Faster.
    Senator Bond. Why is that happening? Tell me.
    Mr. Smith. They are lying, basically. Part of it is they 
didn't cover everything. Their cap did not cover the 
transportation and consumer sector.
    Senator Bond. Well, that is good.
    Mr. Smith. Well, good, except----
    Senator Bond. Yes, it is good for the transportation and 
consumer section.
    Mr. Smith. I think it is a better thing that carving it 
across the board. But basically Europe has pretended to do 
things and blamed all of their shortfalls on the United States. 
It is not a good model for any place. It is certainly not a 
good model for the United States.
    Senator Bond. And they are not pushing it, and we are not 
going to get it in China and India, are we?
    Mr. Smith. I don't think so. China has now determined that 
they are energy poor and don't want to stay energy poor. I was 
at Kyoto and the Chinese delegate there said, many of you 
people in the west are telling us to cut down energy use. 
Remind me of the wealthy man in the top hat walking by seeing a 
little peasant warming their food over a little thing and 
saying, put that fire out, you are causing global warming.
    Senator Bond. Thank you very much, Mr. Smith. I have used 
up my time. Thank you, Madam Chair.
    Senator Boxer. Thank you, Senator. We will put into the 
record our research on Europe and whether or not they are 
meeting the goals that is in direct conflict with what you 
stated, Mr. Smith. Tony Blair, when he called a bipartisan 
group over at the embassy was very clear that they are meeting 
their goals and that they are doing really well economically.
    Mr. Smith. U.K.
    Senator Boxer. We will put that in the record. He spoke for 
the EU.
    [The referenced material can be fond on page 117.]
    Senator Boxer. Senator Sanders, please go ahead. I am going 
to ask Senator Carper to take the gavel. I have a couple of 
meetings. I will be right back.
    Senator Sanders. Thank you, Madam Chair. I am new to the 
Senate, and what I am learning very quickly is that when you 
are on 5 committees and you have 4 hearings simultaneously, it 
is a little bit difficult to do all the things that you want to 
do. So I apologize for being late.
    As everybody here knows, the International Panel on Climate 
Change released a report very recently, which included work by 
over 1,000 scientists from over 100 countries. They made two 
points very clearly, and they made it very clearly before this 
committee last week: No. 1, global warming is of course real; 
No. 2, global warming is almost definitely man-made; and 
further, if we do not get a handle on global warming, the 
results for our country and for the world could be catastrophic 
in terms of increased flooding, increased droughts, rising sea 
levels, human illness and many other impacts which will lower 
the quality of life for hundreds of millions of people.
    So as a result of what is going on in the scientific 
community, Senator Boxer and I introduced legislation that 
would reduce greenhouse gas emissions to 1990 levels by the 
year 2020, and they would lower them to 80 percent of 1990 
standards by 2050. Now, some people say, well, that is pretty 
extreme, that is pretty radical. But I think the real issue is, 
what happens to our country and our world environmentally and 
economically if we do not address the crisis of global warming. 
I think one of the good pieces of news is that while the 
political will here in Washington has been significantly behind 
the American people, it has been lagging, we have all kinds of 
technology out there that are moving rapidly to help us address 
these concerns. We know, I know at least, I can't speak for 
anybody else, but it is beyond comprehension that the vehicles 
that we drive today, despite huge explosions of technology, 
give us worse mileage per gallon than 20 years ago. How could 
that possibly be? Huge potential in terms of energy efficient 
vehicles.
    We know that compact fluorescent bulbs will save us huge 
amounts of greenhouse gas emissions. We know that we are 
sitting just at the cusp of a revolution in terms of solar 
energy, in terms of wind power, in terms of hydrogen. We are 
making some progress in biofuels. We have a long way to go. 
Geothermal. All of these technologies are sitting there waiting 
to move forward, I think with a partnership between the 
Government and the private sector.
    So my question, and let me start off with Jonathan Lash, 
whom I have known for years and who worked on environmental 
issues in the State of Vermont. Jonathan, nice to see you here.
    Mr. Lash. Thank you.
    Senator Sanders. My question is a simple one. People talk 
about economic dislocation if we move forward significantly to 
reduce our dependence on fossil fuels. What is the economic 
implication if we do not move forward, and if we do not address 
the planetary crisis of global warming?
    Mr. Lash. Senator, that is of course the key question. I 
thought I would actually cite an unusual authority in 
responding to this. I found a speech that Paul Volcker, the 
former chairman of the Federal Reserve, gave a week ago, 
talking about exactly that question. He said he didn't think 
that the effect of controlling greenhouse gases would be that 
bad for the economy overall, and second, if you don't do it, 
you can be sure that the economy will go down the drain in the 
next 30 years. He was referring to the impacts that the IPCC 
had described.
    Senator Sanders. Right. So the issue that we have to look 
at is not just the economic dislocation of what happens if we 
move forward, but the much more severe economic problems that 
will result if we do not move forward and if this planet faces 
the kinds of potential disasters that we might. Just looking at 
Hurricane Katrina and that particular disaster.
    I would like to ask Mr. Darbee and perhaps Mr. Holliday, 
that when we talk about economics and attempting to address 
global warming, what kind of immediate job creation 
opportunities exist as well? I am sympathetic to a concept 
called the New Apollo Project, which suggests that we can 
create hundreds of thousands of new jobs as we make our country 
more energy efficient and as we move finally in a serious way 
toward sustainable energy. Mr. Darbee, do you want to take a 
shot at that?
    Mr. Darbee. Certainly, Senator. When we looked at the 
question of AB 32 in California, what we saw was that 
legislation was supported not only by ourselves but also the 
venture capital community. They are enthusiastic about the 
investment opportunities. In fact, during the last couple of 
years, because of all the concern on energy, investment in the 
venture capital community in energy has really developed very 
substantially. I have spoken with venture capitalists, some of 
the most renowned on the peninsula about solar thermal and what 
can be done there. The technologies are truly exciting.
    One additional point I would make is that when decoupling 
was introduced 30 years ago in California, many people opposed 
it, particularly in our own company. And it was implemented 
because it represented change and uncertainty. But it has been 
a tremendous success in terms of energy efficiency in 
California, for the people of California. And it has been just 
fine for our company.
    Second, with respect to acid rain legislation that involved 
a cap and trade program here in the United States, what people 
were concerned about was the impact on jobs and the like. And 
what happened in that instance was, we solved the problem of 
acid rain more quickly than we expected and much more cheaply 
than we expected, because we unleashed the power of the 
marketplace. So I am optimistic and very much in agreement with 
you. There may be some costs associated with dealing with cap 
and trade. But the cost of not could be catastrophic.
    Senator Sanders. Would you agree in general that we have 
tremendous economic opportunities as we break our dependence on 
foreign oil, as we break our dependence on fossil fuels, and we 
move A, to energy efficiency and B, to the new technologies of 
sustainable energy?
    Mr. Darbee. Absolutely. And one other that I haven't 
mentioned is plug-in hybrid vehicles.
    Senator Sanders. I want you talk about that one. Before you 
go there, I want to ask you a question. Who killed the electric 
car? I saw the movie and I want to know.
    [Laughter.]
    Mr. Darbee. I can't answer that question, but what I will 
say is we are exceedingly excited about plug-in hybrid cars. 
Not only am I concerned about the climate, but I am very 
concerned about energy security here in the United States. The 
fact remains, with the existing capacity, resulting from off-
use peak periods and the like, that we can support 180 million 
plug-in hybrid vehicles with the capacity, the generating 
capacity that exists today and is not utilized at night.
    Senator Sanders. I share your thoughts. But here is my 
concern. Having seen that movie and other things, I don't want 
to Detroit to be telling us all these wonderful things are 
going to be happening. You ask these guys when these cars are 
going to get on the market, they are not very clear about that. 
Oh, the hydrogen car, well, we don't know when it is coming on 
the market.
    Let me get back to the electric car, which was utilized in 
California, is that today something that can be useful in 
helping us address pollution and fossil fuels?
    Mr. Darbee. Absolutely, yes. What we have seen in 
California is there has been very significant demand for the 
hybrid vehicles to date. And the leap to the plug-in hybrid is 
not very far at all. We understand actually GM is also moving 
on that front. But clearly, Toyota has taken a real leadership 
role there. And we are looking to absolutely take full 
advantage of the opportunities there.
    Senator Sanders. Madam Chair, on that note, I have to say, 
what really is incomprehensible to me is that despite the 
substantial amounts of corporate welfare that Congress has 
given Detroit, we find Toyota and Honda doing a much better job 
in producing energy efficient cars. I think that is 
unfortunate.
    Mr. Holliday, did you want to respond to the question of 
what kind of economic gains can we make as we move to energy 
efficiency and breaking our dependence on fossil fuels?
    Mr. Holliday. Let me talk about one we are experiencing 
today. We go back 25 years, we have 200 gallons of ethanol per 
acre of corn here in the United States. As a result of 
technology, we are at 400 gallons today. When we use the entire 
corn plant in the efficiencies our scientists have developed, 
we anticipate 1,000 gallons, it is possible.
    So we are creating economic jobs today, this season----
    Senator Sanders [continuing]. For farmers who very often 
need that help.
    Mr. Holliday. Your work will allow us to take the 
legislation forward and get the technology working, we could 
double again where we are. That is the kind of solution we see 
as possible.
    Senator Sanders. Madam Chair, I am very happy to say that 
we have States like New Jersey, Illinois, California, who 
recognize what you and I do, that in fact we can move forward 
boldly, we can reverse global warming and we can create in this 
country a significant number of good quality, good paying jobs 
as we save the planet.
    Thanks very much, Madam Chairman.
    Senator Boxer. Senator, thank you for your line of 
questioning. I would like to associate myself with your 
remarks. And that Who Killed the Electric Car is worth seeing. 
Somebody has to explain to me why GM had every one of those 
cars flattened.
    Senator Sanders. Can we bring those guys in here? That 
would be an interesting hearing.
    Senator Boxer. Actually, it would be interesting. Why don't 
you give it some thought. Put it together and we'll maybe let 
you chair it.
    Senator Sanders. Senator Inhofe, I want to give you 10 
minutes, because you have asked if you could precede me and 
then I will close it up with my 10 minutes. Please proceed.
    Senator Inhofe. Thank you, Madam Chairman.
    Let me first of all, I recognize, Senator Sanders, you 
believe what you said in your opening remarks in terms of 
science being settled and it is real and all that. And yet you 
were not here during my opening statement. I listed many, many 
leaders that were leaders 15 years ago--it has been that long, 
hasn't it?--who are now coming around and questioning the 
science and totally changing their position, totally. One was a 
leader in France, one was a leader in the U.K., one was a 
leader in Israel and in the United States, a former founder of 
Greenpeace International.
    So we have a lot of people who are saying now that the 
science has changed. I recognize you don't agree with that. But 
I think you guys, I hope that in your private lives, maybe not 
your corporate lives, you look at these things and see that 
there is certainly a lot of doubt about it. As far as IPCC is 
concerned, I was surprised, even though what they came up with 
was a summary for a policymakers, and it is not the scientists, 
not the scientists, these guys are politicians, they are 
policymakers, they have already decided how, they were the ones 
who started this thing in the first place.
    And yet they came out at the same time and said that man's 
contribution to CO2 or anthropogenic gases is 
downgraded 25 percent. That is IPCC that said that. The United 
Nations came out with a report the same week, saying that the 
amount of emissions coming from livestock is greater than that 
of all the cars, all the SUVs, all the trucks, all the man-made 
gases. That is there.
    So we look at these things, and the more I hear people say 
hysterically, science is settled, science is settled, science 
is settled, the more I wonder about it. And then you find out 
why when you see people who are coming our direction.
    Let me just say two things, Mr. Darbee, real quickly. I 
think you are wrong in one area, and that is in terms of China. 
I think you said that China, that the United States emits more 
CO2 than both China and India. I don't think that is 
correct. They are saying now that by 2009, China will pass up 
the United States as a major emitter, and I think in 2012, 
India will. Would you disagree with those two statements?
    Mr. Darbee. I think both statements are correct, that is in 
your statement, Senator. Currently we produce more 
CO2, but they are projected to surpass us.
    Senator Inhofe. That is correct. Certainly currently that 
is correct, and I think as you recall in my opening statement, 
when I talked about the problems we are going to have with all 
the gas-fired plants in China, it is going to be even worse. 
Then I just ask just one other question. In the Wall Street 
Journal, by the way, Madam Chairman, I want to ask that the 
Wall Street Journal article of January 26th of this year, If 
the Cap Fits, be made a part of the record immediately after my 
opening remarks.
    Senator Boxer. Certainly.
    Senator Inhofe. In that, they single out a number of 
utilities of which PG&E is one. It says, our utilities that 
have made big bets on wind, hydroelectric and nuclear power, so 
a Kyoto program would reward them for simply enacting their 
business plan and simultaneously sock it to their competitors. 
Do you disagree with that statement?
    Mr. Darbee. I absolutely do, sir.
    Senator Inhofe. All right, that is fine. I just wanted to 
see if you did.
    Mr. Holliday, I understand your company has historically 
produced an enormous amount of greenhouse gases, but not 
CO2, and that through various process changes, you 
have reduced your emissions, well, the report, said, by 72 
percent from 1991 levels. I think the other report says 60 
percent from 1990. That was about the same. And I understand 
that at $10 per ton of CO2 price, credits based on 
that baseline year would have a potential market value increase 
to you of $472 million. Do you disagree with that?
    Mr. Holliday. I haven't done the calculations or seen them, 
sir.
    Senator Inhofe. Well, I think maybe you have and maybe 
forgot, because this is in your report, the PCA, Partnership 
for Climate Action. By 2000, DuPont had reduced greenhouse gas 
across the country by 63 percent. Then it goes into the same 
analysis of the $10. Then it goes on to say if it is $20, it 
would be a billion dollars. You don't necessarily disagree with 
that?
    Mr. Holliday. Sir, we made these steps because they were 
good decisions for our shareholders.
    Senator Inhofe. I was asking the result of these steps, 
does your company stand to make that much in the event we use 
$10 or $20, the two examples that we gave?
    Mr. Holliday. Sir, I have not seen those calculations. I am 
sorry, I can't answer, I will be glad to get back to you.
    Senator Inhofe. Well, let me ask you another thing, too. 
Some of the environmentalists have said that the emitters 
should be responsible for historic emissions. Do you object to 
that? Now, be careful when you answer, because when we draft 
this bill, I want to be able to say that DuPont is on record by 
saying that they don't mind going back and having historic 
emissions as a part of an emissions program.
    Mr. Holliday. I think any particular piece of legislation 
we have to take as entirety, so I couldn't comment on one 
phrase without knowing its context.
    Senator Inhofe. But you are not saying right today that you 
would oppose historic emissions being included in a formula?
    Mr. Holliday. I don't see a basis for looking back, I don't 
understand the details of how that would be done, sir. I would 
be glad to look at it with you.
    Senator Inhofe. Well, I don't know the details, either. But 
if you reduced emissions that much, and you end up paying for 
having had that much before and not getting credit for reducing 
them, that is what we are talking about.
    Mr. Elbert, I understand that BP is the third largest 
producer of solar panels in the world, and you plan to triple 
sales from 100 megawatts per year to 300, is that correct, Mr. 
Elbert?
    Mr. Elbert. I believe that is correct, yes.
    Senator Inhofe. Would you share with us what your current 
gross revenue is from the sale of solar panels today?
    Mr. Elbert. I can't. I would be happy to. I don't have the 
number off the top of my head. What I will say about our solar 
business is that we have been in it for 30 years. That business 
first turned to profit 2 years ago. We have been committed to 
this for a long time. We are growing the business at roughly 30 
percent per year. It is a small base.
    Senator Inhofe. That is fine. I can't help but thinking, 
when you were testifying about BP, they are already operating 
in U.K. for a great amount of their business and it probably 
would have some benefits to having the rest of the world 
treated the same as U.K. does.
    Mr. Book, first of all, I think that as Mr. Smith, I 
believe, said, that maybe it would be more transparent and 
maybe it would be more honest if we just had a CO2 
cap. Frankly, I think it would. I would rather do that so 
people would know just what it is. There is no tax increase 
that is worse than a hidden tax you can't explain to people. 
What do you think?
    Mr. Book. To the extent that there are no ways to generate 
offsets, there is nothing you can bring to the market to sell, 
then what you are really doing is you are taxing. Now, that 
doesn't mean that there won't always not be offsets, and 
provisions can be made to look ahead at when technology catches 
up.
    Senator Inhofe. You mentioned, I believe, Russia, was it 
you or one of the other witnesses?
    Mr. Book. I did, yes.
    Senator Inhofe. All right. I was in Milan, Italy, this is 
kind of interesting, when their economists were saying they do 
not believe in the science in terms of man-made anthropogenic 
gases causing climate change. But they were going to sign onto 
the Kyoto because, I was in aviation for a long time, flew an 
airplane around the world, went all the way across Siberia. All 
I could think of, hour after hour after hour, all those 
resources down there and they aren't doing anything with them. 
Those would all end up as credits, wouldn't they?
    Mr. Book. Well, their emissions that don't have any more 
amount to about a thousand million metric tons.
    Senator Inhofe. And if you put a dollar figure on that for 
Russia?
    Mr. Book. At the peak of the European emissions trading 
scheme prices in April of 2006, you would have about 39. So 
that is about 39,000, that is $39 billion a year in revenue for 
Russia.
    Senator Inhofe. Mr. Smith, it is pretty clear that--well, 
let me do it this way. In my opening statement I talked about, 
and I have never stated it this way before, but it occurred to 
me a couple of days ago, we looked back and checked and found 
that what we are talking about doing now represents the largest 
single tax increase in the history of America. According to--
and I can cite the sources--the one prior to this was 1993, the 
Omnibus Budget Reconciliation Act of 1993, increased, created 
36 percent and 39.6, rates for individuals, 35 for 
corporations. It goes on and on. That represented a $32 billion 
hit for our economy.
    This represents at least a $300 billion hit for our 
economy. Would you characterize that as a tax increase?
    Mr. Smith. Not as a tax increase. If we go the cap and 
trade route, we are doing it in a very dishonest way. If we 
really believe that global warming and carbon emissions are the 
serious problem that people say they are, then we have a duty, 
I think, to be honest with the American people. When Churchill 
argued that Germany was a threat to the world, he didn't 
promise us we could change a few light bulbs and the world 
would be OK. He promised blood, sweat and tears. I think an 
honest debate on this would indicate there are real costs of 
global warming on the poor, on small businesses, on the world, 
and we should be willing to pay those costs if we honestly 
believe this is a serious problem.
    Senator Inhofe. I'd like to extend it for 2 minutes, 
because I wanted to ask Mr. Hamm a question.
    Senator Boxer. Of course.
    Senator Inhofe. I knew you would, and I appreciate it very 
much.
    I still call it a tax increase. We can use our own 
definitions.
    Mr. Hamm, I can remember probably many, many years ago, I 
was a very small child at that time, but I actually was a tool 
dresser in a cable tool rig. They don't use cable tool rigs any 
more, but I know a little bit about the industry and about one 
individual. His name was A.W. Swift, who actually was taxed out 
of business. I went by to see him, this was many year ago, and 
his cable tool rigs were all stacked up. He said, you know, 
between regulation and taxation, I can no longer supply America 
with the cheap gas that I have been doing.
    In your case, I think it was Mr. Book who said that this is 
a tax on production. Do you agree with that?
    Mr. Hamm. Yes.
    Senator Inhofe. How would that affect you?
    Mr. Hamm. Well, it would hurt, especially our stripper 
wells, marginal wells that just barely get by right now. It is 
a very stable form of production. But frankly, additional tax 
would just plug them. Once they are plugged, they are gone 
forever.
    Senator Inhofe. Yes, people don't understand that, that you 
plug a well and you can't just unplug it. I have had a hard 
time explaining even to members of this committee. It is gone 
in most cases.
    Mr. Hamm. And in order to avoid pollution, when you plug 
one, you actually have to cement it off. You just can't afford 
to go back and redo that well.
    Senator Inhofe. Particularly in marginal wells or stripper 
well production. Now, I have also had it stated that if we had 
all of the marginal wells producing today that we have closed 
down in the last 20 years, it would equal more than we are 
importing from Saudi Arabia. Now, I have the documentation for 
that, so I don't think anyone is going to challenge that. But 
it does show the contribution that the small stripper well 
operator is making to the overall what I consider to be an 
energy crisis.
    You testified about how our country rejected Clinton's Btu 
tax. Yet the costs of his Btu tax were much smaller than the 
cost of carbon caps.
    Senator Boxer. Senator, you have gone over your time.
    Senator Inhofe. Anyway, we will do our best to keep you, 
Mr. Hamm, in business and making the contribution as you have 
in the past for good, cheap energy for America. Thank you very 
much for what you have done.
    Mr. Hamm. Thank you.
    Senator Boxer. Thank you, Senator.
    So I am going to take the last 10 minutes here and say to 
Mr. Hamm, we will be concerned, whatever we do, that the 
impacts on this economy will not be devastating. And I would 
say to back that up, we ought to look at what Paul Volcker 
said. I know it was referred to, but I think it is important to 
read to you what Paul Volcker said, who is a very respected 
economist, I would say, on both sides of the aisle.
    He said ``Measures to reduce global warming would not be 
devastating economically and the United States has been 
particularly delinquent on the issue.'' He made these comments 
to the American Chamber of Commerce. He said, if we don't 
address global warming, he says ``You can be sure the economy 
will go down the drain in the next 30 years.'' So, wakeup call 
to those in the business community that are not looking past 
their next profit and loss report. I am an ``old'' economics 
major, old in quotes, of course, and I could tell you that it 
doesn't do you much good in the long run if these impacts come 
true.
    The science is clear. The very scientists from the IPCC 
were here briefing members of this committee. And there is no 
debate any more; 2,500 scientists were involved in that. I am 
sure when Mr. Darbee sat down for his economic roundtable, he 
would have been relieved if there were some people who said, 
don't worry, Mr. Darbee, just do business as usual, you are 
cool. But that is not what is going on.
    So, reality check, and a check of the long term. And I 
know, Mr. Hamm, you referred in your statement that you are 
concerned about pollution. You have family, and of course, I so 
respect that. So we will figure out a way to get people through 
this. We have done it before. A river was on fire, we passed 
the Clean Water Act, people couldn't breathe, you saw the air, 
we passed the Clean Air Act, the Safe Drinking Water Act. 
Business sat there, oh, my goodness, this is going to be the 
end of the world.
    Remember when we thought about seat belts and air bags and 
how Detroit said, oh, my God, it is the end, seat belts and air 
bags. Now they take credit for seat belts and air bags.
    So I just think we need to be calm about this. I always 
find it amazing when my Ranking Member, who I wish was here, 
says which side are the hysterics coming from. They are not 
coming from my side. We see a problem, we want to solve it. And 
we want to solve it in a way where we are all together, 
Republicans, Democrats, business, environmentalists, consumers, 
everyone.
    Volcker said, what may happen to the dollar and what may 
happen to growth in China or whatever, he said, raising his 
voice, pale into insignificance compared with the question of 
what happens to this planet over the next 30 or 40 years if no 
action is taken. The scientists seem pretty well agreed, he 
says, that global warming is still potentially manageable if we 
act decisively, beginning now into the next decade or so, by 
taking measures that are technically and economically feasible.
    Now, Paul Volcker is not by nature an hysterical person. He 
is an economist. They are far from hysterical. He is looking at 
the economics of doing nothing versus the economics of doing 
the right thing, and he comes down on the side of doing the 
right thing, things that my colleague, Tom Carper, Senator 
Alexander are trying to do, Bernie Sanders and I with our 
bills, we all are trying to do the right thing.
    But let me tell you what I think the wrong thing is. The 
wrong thing is to say, yes, we voted 10 years ago against 
Kyoto. I mean, that is a correct fact. But if you don't follow 
up with the fact that in 2005, we changed position in the 
Senate and in a very Republican Senate, we had 53 votes to say, 
there ought to be mandatory, market-based limits on emissions 
of greenhouses gases. Let's stop and reverse the growth of such 
emissions.
    So just to say we said that 10 years ago and then not say 
that we have responded, we have responded to the changes.
    And just let me say, I very much support free speech. So 
anyone can say anything they want and I would throw myself in 
front of a truck for your right to say it. But don't use guilt 
by association and say that companies are sitting here today 
and other people and other organizations that are not here 
today and small businesses who may not be here today, don't 
compare them with Enron. What is that about?
    Mr. Smith did it by innuendo, Senator Bond did it. It is 
outrageous. Enron, a company so close to President Bush that 
its CEO had a special loving name. They are gone. And a lot of 
their remnants are in jail, thank goodness for that.
    So don't use Enron as a way to defame people who support 
action on global warming. I resent it and I will call you on it 
every time you do it. And let me tell you how I will call you 
on it. It is not only the corporations that are here today, 
some of whom I fight with on other matters, but who I praise to 
the sky today for what they are doing. But it is also a huge 
number of small businesses in my home State. The Small Business 
California, SBCal, all of those companies say, yes, we support 
AB 32 in California, which is a tough and stringent bill, like 
the one Bernie and I have.
    And the people who support that, the American Academy of 
Pediatrics, American Lung Association, California Nurses 
Association, California Thoracic Society, compare them to 
Enron? Faith-based organizations, California Catholic 
Conference of Bishops, Interfaith Power & Light, Lutheran 
Office of Public Policy and others, Enron? Organized labor, 
California Nurses, California Federation of Teachers, the 
firefighters, the State, county and municipal employees, the 
League of Women Voters, and the Republicans for Environmental 
Protection? Enron?
    Cut it out. If you can't make an argument, you can't make 
an argument. But don't use guilt by association in a matter of 
science. It is not right. We can disagree with each other 
without throwing around Enron and other demeaning comparisons. 
It is very disturbing to me.
    Now, I wanted to say to Mr. Elbert of BP, you mentioned 
your big initiative in California and Illinois, which is a $500 
million biofuels program. It has hit the wires today. It is 
huge news in my State. Thank you for it.
    And I want to ask you something. How can we make sure our 
cars can use those biofuels that you and I think Mr. Holliday 
are also working on?
    Mr. Elbert. The particular biofuel that DuPont and BP are 
working together on, biobutanol, works quite well in the 
current internal combustion engine. It is different from 
ethanol.
    Senator Boxer. How close are we from getting that to 
market?
    Mr. Elbert. I will check with my colleague, but I believe 
our plans are to introduce it in 2 years.
    Mr. Holliday. Yes, we will have some demonstration product 
by the end of this year and we think we will be commercial and 
competitive by 2010.
    Senator Boxer. So what you need to do then at that point is 
to get those pumps into the stations, is that what we need to 
do to get those pumps available? Will you open up new stations, 
or will you lease?
    Mr. Holliday. That is the advantage of working with BP, 
because they have the route to do that.
    Senator Boxer. They can do that in their stations.
    Mr. Elbert. The benefit of biobutanol is that it doesn't 
require special pumps. It can be blended directly into the 
gasoline.
    Senator Boxer. How much greenhouse gas emissions from 
there? What is the cut in it, compared to what you have now? Is 
it 30 percent less greenhouse? Do you know what it is?
    Mr. Elbert. No, it is quite less.
    Senator Boxer. I need to know that, if anyone knows that. 
If we could get that in writing to the committee.
    Mr. Holliday. We will confirm. It is bout 25 percent less. 
We will confirm the exact number.
    Senator Boxer. The last point I want to make is again, 
getting back to the economics hat. I talked about Volcker. Mr. 
Book, I respected your testimony, I thought it was actually 
fairly balanced, I appreciate it.
    Mr. Book. Thank you.
    Senator Boxer. But the Stern review has made some important 
points. And Nicholas Stern, the former chief economist of the 
World Bank, conducted a recent study, October 2006. The 
principal conclusion is that the overall cause of climate 
change are equivalent to losing at least 5 percent of global 
GDP each year. In a worst case scenario, the loss of 20 percent 
of global GDP.
    Based on the report's findings, he says $1 invested now can 
save $5 later. The cost of taking action to prevent atmospheric 
concentrations can be limited to 1 percent of GDP. So it is 
limited to 1 percent to save potentially 20 percent. So I am 
asking you, as an economist, do you have reason to doubt 
Nicholas Stern? Does he not bring the proper credentials to the 
table here?
    Mr. Book. Sir Stern's credentials are absolutely 
impeccable, and of course, he is testifying before another 
committee today.
    Senator Boxer. Yes.
    Mr. Book. My concluding point is to suggest, Madam Chair, 
is that the Stern review is one point of view on the forecasted 
costs of inaction. What probably this august body and other 
Washington organizations can do is look at their own 
assessments, make their own forward looking projects as to what 
the costs of limited, complete and no action might be, and then 
make an informed judgment. Because the Stern review is just one 
perspective.
    Senator Boxer. But you would agree it is best to keep 
politics out of it? In other words, that is why I am so 
impressed. You want to keep politics out of these reviews, 
don't you? That is an important point.
    Mr. Book. The essence of economic analysis is to make 
clarifying assumptions about what you think something will be 
worth or what you are going to impute the value of some action 
or interaction to be. That is necessarily subject.
    I would suggest that by having many data points instead of 
just one, you actually reduce some of the subjective risk and 
you get a better spectrum of analysis that gives you a better 
answer.
    Senator Boxer. Well, I just want to make the point that I 
am not going to shop around until I get an answer I like. I am 
going to go with the most renowned people, and that to me is 
the most important, keep the politics out of it. Because that, 
we don't want to do that. What I have criticized this 
Administration for is taking the science out of clean air. We 
had a whole hearing on that. Used to be they were right in the 
front end of the process. Now they have been relegated to 
making a comment at the end. We just have to work to keep the 
science clean. That is very important.
    So let me just say, as I close down this hearing, how 
impressed I am with this panel, all of you. I really 
appreciated the way you approach this. And one of the things I 
take away from this, as I sat back and I turned to Bettina 
Poitier, our chief here, is that the low hanging fruit is right 
there for us, and it is called energy efficiency. Whether or 
not you believe like I do and most of us here, that there is no 
question that the science is there or not, energy efficiency is 
the low hanging fruit that is going to help us all in our 
businesses, in our pocketbooks and the rest.
    So we have certain things that we can do pretty quickly 
here to begin to fight back against global warming. At the same 
time, take measures that are going to be beneficial for the 
American people. I just want to thank you all. We will be 
working closely with you, and again, I want to say to the 
businesses who are here who have stepped out on this, when 
history is written you will be noted in a very positive way.
    Thank you very much. Our meeting stands adjourned.
    [Whereupon, at 12:45 p.m., the committee was adjourned.]
    [Additional statements submitted for the record follow.]
      Statement of Senator Christopher S. Bond, U.S. Senator from 
                         the State of Missouri
    Thank you, Madame Chairman, for convening this hearing on the 
United States Climate Action Partnership. This is not the first time 
that industry has worked alongside environmentalists. Indeed, this is 
not even the first time that some in industry have thrown their support 
toward carbon caps.
    Indeed, we need only think back to Clinton administration meetings 
with Enron's Ken Lay over Kyoto treaty negotiations. This Washington 
Post article ``Enron Also Courted Democrats: Chairman Pushed Firm's 
Agenda With Clinton White House'' chronicled how, ``[i]n a White House 
meeting in 1997. . .  Lay urged President Clinton and Vice President 
Gore to back a market--based approach to the problem of global 
warming--a strategy that a later Enron memo makes clear would be `good 
for Enron stock.'''
    In describing how an ``international agreement to combat global 
warming also dovetailed with Enron's business plan, Enron officials 
envisioned the company at the center of a new trading system. . .  
[that would] curtail the use of. . .  coal-fired power plants that 
emitted. . .  carbon dioxide, while encouraging new investments in gas-
fired plants and pipelines--precisely Enron's line of business.''
    This text bubble details why Enron officials later expressed 
elation at the binding carbon caps in the Kyoto protocol. According to 
the Washington Post:
    an internal [Enron] memo said the Kyoto agreement, if implemented, 
would ``do more to promote Enron's business than almost any other 
regulatory initiative outside of restructuring the energy and natural 
gas industries in Europe and the United States.''
    This example shows how companies of all stripes are willing to work 
for environmental goals if it fits their business model and pads their 
bottom line. That is why I am not worried as much about what certain 
companies think about carbon caps, but how vulnerable poor and middle-
class communities, especially in my Midwestern coal-dependent State, 
are firmly in the cross-hairs of carbon cap plans.
    Big Oil will still make their money under any scenario. They pass 
their costs straight on to American families and workers. Just look at 
last year's run-up in gas prices. Even though their raw material, oil, 
increased in price to record levels, Big Oil still made profits selling 
gasoline. Some on this committee would describe these Big Oil profits 
as ill-gotten windfall profits. Indeed, one member of the U.S. CAP 
partnership testifying here today made over $22 billion in profits last 
year.
    And who picked up the tab to fill these corporate coffers? You, me 
and all of us as consumers. That is what happens when the cost rises of 
a basic necessity we cannot do without. We must pay. We paid when 
gasoline prices went up. We will pay when natural gas prices go up 
further. Although Enron did not survive to see the day, the future is 
clear with carbon caps: less coal, more natural gas demand, and higher 
profits from higher prices.
    That will mean higher prices for heating our homes in the Winter, 
higher prices for air conditioning our homes in the Summer, and higher 
costs for blue collar manufacturing workers supporting their middle-
class families.
    Are the companies here today to be blamed? No, they are doing what 
they are supposed do: provide a return to shareholders by investing in 
new technologies and businesses where they will have a competitive 
advantage.
    But we cannot mistake what is going on here. Some companies will do 
just fine in a world where energy costs more. But that success will 
come at the pain of the poor, the disadvantaged, the struggling middle-
class workers who can least afford higher carbon cap prices.
    Thank you.
                               __________
   Enron Also Courted Democrats; Chairman Pushed Firm's Agenda With 
                          Clinton White House
              the washington post, january 13, 2002 sunday
    Democrats are savoring the chance to use embattled Enron Corp.'s 
Republican ties to embarrass the Bush administration at upcoming 
congressional hearings. But Republicans might turn the tables, to some 
extent at least, because Enron has courted and supported prominent 
Democrats as well.
    According to internal Enron documents and the recollections of 
former employees, Chairman Kenneth L. Lay had the ear of top Democrats 
in the 1980s and '90s. He and his colleagues used that access to 
promote the company's interests with the Clinton administration and key 
congressional Democrats.
    In a White House meeting in August 1997, for example, Lay urged 
President Clinton and Vice President Gore to back a ``market-based'' 
approach to the problem of global warming--a strategy that a later 
Enron memo makes clear would be ``good for Enron stock.''
    The following February, Lay met with Energy Secretary Federico Pena 
to urge White House action on electricity legislation favored by Enron. 
Pena ``suggested that President Clinton might be motivated [to act] by 
some key contacts from important constituents,'' according to another 
Enron memo.
    Taking the cue, Lay, one of 25 business executives on Clinton's 
Council on Sustainable Development, wrote to the president the same 
day.
    Lay and other Enron executives showed a clear preference for 
Republicans in their political giving. Lay personally gave GOP 
organizations $325,000 during the 2000 campaign. But the company itself 
was often more evenhanded.
    The corporation contributed $532,000 in unregulated ``soft money'' 
to Democratic coffers during the 2000 election, only slightly less than 
the $623,000 that went to GOP groups, according to PoliticalMoneyLine, 
a Washington research group. Enron's political action committee also 
gave $10,000 to the New Democrat Network, which was co-founded by 
Senator Joseph I. Lieberman (D-Conn.). Lieberman, the Democratic vice 
presidential nominee that year, now chairs the Senate Government 
Affairs Committee, which is leading an inquiry into Enron's collapse.
    Several senior Enron officials spent election night at Vice 
President Gore's headquarters in Nashville.
    The Center for Responsive Politics estimates that Republicans 
received 73 percent of total donations from Enron, its executives and 
its employees over the past 12 years. Still, many of the congressional 
members soon to investigate Enron--Democrats as well as Republicans--
have enjoyed the company's largess. Enron or its executives have given 
money to nearly half of all current House members, and to almost three-
quarters of the Senators, according to groups monitoring political 
donations.
    The company backed Charles E. Schumer (D-N.Y.) in his successful 
1998 campaign to oust Republican Senator Alfonse D'Amato. Schumer's 
views on electricity deregulation dovetailed closely with Enron's. Two 
years later Schumer, who has advocated deregulation as a way of 
reducing New York State's high power costs, co-authored a bill to 
restructure electricity markets along lines favored by Enron.
    Enron also has supported Senate Energy Committee Chairman Jeff 
Bingaman (D-N.M.), whose State is traversed by a major east-west Enron 
gas pipeline.
    Former employees say Lay's friendships with other Democrats were 
based as much on rapport as pragmatism. This group includes former 
senator Bob Kerrey (D-Neb.), whose brief 1992 presidential bid had 
Lay's backing, and Senator Evan Bayh (D-Ind.), with whom Lay served on 
the Eli Lilly Co. board of directors in the 1990s.
    He donated to the 1994 campaign of Texas Governor Ann Richards, a 
Democrat, and served on her business council. And it was a Democrat, 
former Treasury Secretary Robert E. Rubin, who called a Treasury 
official last November 8 to inquire about Enron's situation shortly 
before it collapsed.
    As Enron transformed itself from an old-line gas pipeline company 
into an innovative, risk-taking trader of gas, electricity and more 
exotic derivatives in the early 1990s, it needed both Democrats and 
Republicans to help remove regulatory obstacles.
    ``Ken Lay would write letters and pick up the phone to call whoever 
was needed, and the party didn't matter that much,'' said one former 
employee.
    In 1992, a Democratic-controlled Congress approved a major Energy 
bill that set the stage for a new wholesale electricity marketplace. 
Trading companies such as Enron could use the transmission lines of 
regulated utility companies to sell blocs of electricity to private 
customers.
    In 1994, the Washington-based Export-Import Bank approved a $302 
million loan to promote Enron's investment in a power plant in Dabhol, 
IN. According to a 1997 article in Time Magazine, Clinton took a 
personal interest in the project, deputizing his chief of staff, Thomas 
``Mack'' McLarty III, to monitor it. McLarty later became a paid 
adviser to Enron.
    A McLarty aide explained yesterday that the White House involvement 
was part of a broader administration effort to help U.S. companies take 
advantage of new opportunities abroad.
    In 1996, the Federal Energy Regulatory Commission, stocked with 
Clinton appointees, helped Enron with a series of orders that weakened 
the monopoly of nuclear and coal-burning utilities. In July of that 
year, Enron gave $100,000 to the Democratic Party.
    The Clinton administration's interest in an international agreement 
to combat global warming also dovetailed with Enron's business plans. 
Enron officials envisioned the company at the center of a new trading 
system, in which industries worldwide could buy and sell credits to 
emit carbon dioxide as part of a strategy to reduce greenhouse gases. 
Such a system would curtail the use of inefficient coal-fired power 
plants that emitted large amounts of carbon dioxide, while encouraging 
new investments in gas-fired plants and pipelines--precisely Enron's 
line of business.
    But the effort faced powerful opposition from auto makers, oil 
companies and utilities. In early 1997 the Senate unanimously 
instructed the administration not to agree to any carbon-reducing 
strategy that would harm the U.S. economy.
    On August 4, 1997, Lay and seven other energy executives met with 
Clinton, Gore, Rubin and other top officials at the White House to 
discuss the U.S. position at the upcoming conference on global warming 
in Kyoto, Japan. Lay, in a memo to Enron employees, said there was 
broad consensus in favor of an emissions-trading system.
    Enron officials later expressed elation at the results of the Kyoto 
conference. An internal memo said the Kyoto agreement, if implemented, 
would ``do more to promote Enron's business than almost any other 
regulatory initiative outside of restructuring the energy and natural 
gas industries in Europe and the United States.''
    At Lay's meeting with Pena on February 20, 1998, he spoke of 
restructuring the U.S. electricity market in ways that would benefit 
Enron. Lay pressed the administration to propose legislation that would 
assert Federal authority over a national electricity market.
    According to a company version of the meeting, Lay and Pena agreed 
that a go-slow approach to deregulation, advocated by Senate Energy 
Committee Chairman Frank H. Murkowski (R-Alaska), was unacceptable. 
Pena asked Enron officials to keep Energy Department staffers posted on 
developments in Congress, and solicited comments on the 
administration's draft of its Comprehensive National Energy Strategy, 
an Enron document said. Lay felt the draft was ``headed in the right 
direction'' except for a few points, the document said.
    The 2000 presidential election posed a dilemma for the company, 
sources say. While Lay supported George W. Bush, some officials in 
Enron's Houston and Washington offices backed Gore and Lieberman. Lay 
personally contributed $325,000 in soft money to GOP campaign 
organizations that year, and gave no soft money to Democratic groups. 
After the election, Lay chipped in $100,000 to the Bush inaugural 
festivities.
    On the eve of the 2000 election, Enron hired a Democratic official 
from the Treasury Department to run the company's Washington office. 
Sources say the move infuriated GOP House leaders, who retaliated by 
shutting Enron representatives out of several key strategy meetings on 
electricity legislation.
    Hoping to return to the GOP's good graces, the company in April 
2001 hired the Washington lobbying firm of Quinn & Gillespie. Its 
senior partner, Ed Gillespie, had been a top campaign adviser to the 
new president, Bush.
    For the first half of the year, the firm collected $525,000 in fees 
from Enron, a hefty sum but well worth it, according to a former Enron 
employee.
    ``It was Eddie [Gillespie], not Ken Lay, who got us to people in 
the White House and Congress,'' the employee said.

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