[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
Available via the World Wide Web: http://www.access.gpo.gov/
congress.senate
__________
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Washington, DC 20402-0001
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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