[Senate Hearing 110-1101]
[From the U.S. Government Publishing Office]






                                                       S. Hrg. 110-1101

       EXAMINING GLOBAL WARMING ISSUES IN THE POWER PLANT SECTOR

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

                                HEARING

                               BEFORE THE

                              COMMITTEE ON
                      ENVIRONMENT AND PUBLIC WORKS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 28, 2007

                               __________

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








       Available via the World Wide Web: http://www.gpo.fdsys.gov


                                _____

                  U.S. GOVERNMENT PRINTING OFFICE
61-973 PDF                WASHINGTON : 2011
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, 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         LARRY E. CRAIG, Idaho
BERNARD SANDERS, Vermont             LAMAR ALEXANDER, Tennessee
AMY KLOBUCHAR, Minnesota             CHRISTOPHER S. BOND, Missouri
SHELDON WHITEHOUSE, Rhode Island

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












                            C O N T E N T S

                              ----------                              
                                                                   Page

                             JUNE 28, 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...     2
Lieberman, Hon. Joseph I., U.S. Senator from the State of 
  Connecticut....................................................     4
Voinovich Hon. George, V., U.S. Senator from the State of Ohio...     6
Carper, Hon. Thomas R., U.S. Senator from the State of Delaware..     7
Craig, Hon. Larry E., U.S. Senator from the State of Idaho.......     7
Sanders, Hon. Bernard, U.S. Senator from the State of Vermont....     9
Alexander, Hon. Lamar, U.S. Senator from the State of Tennessee..    11
Klobuchar, Hon. Amy, U.S. Senator from the State of Minnesota....    12
Warner, Hon. John W., U.S. Senator from the Commonwealth of 
  Virginia.......................................................    13
Feinstein, Hon. Dianne, U.S. Senator from the State of California   179

                               WITNESSES

Darbee, Peter A., Chairman, CEO and President, PG&E Corporation..    13
    Prepared statement...........................................    15
    Responses to additional questions from:
        Senator Boxer............................................    21
        Senator Inhofe...........................................    25
Grumet, Jason, Executive Director, National Commission on Energy 
  Policy.........................................................    25
    Prepared statement...........................................    27
    Response to an additional question from Senator Sanders......    33
Hay, Lewis III, Chairman and Chief Executive Officer, FPL Group..    34
    Prepared statement...........................................    35
    Responses to additional questions from:
        Senator Boxer............................................    98
        Senator Inhofe...........................................   102
Hawkins, David G., Director, Climate Center, Natural Resources 
  Defense Council................................................   104
    Prepared statement...........................................   106
Rogers, James E., Chairman, President and CEO, Duke Energy 
  Corporation....................................................   121
    Prepared statement...........................................   122
    Responses to additional questions from:
        Senator Boxer............................................   133
        Senator Inhofe...........................................   135
Donohue, Thomas J., President and CEO, U.S. Chamber of Commerce..   136
    Prepared statement...........................................   137
    Responses to additional questions from:
        Senator Boxer............................................   141
        Senator Inhofe...........................................   143
Lewis, Marlo, Senior Fellow, Competitive Enterprise Institute....   144
    Prepared statement...........................................   146
    Responses to additional questions from Senator Inhofe........   161
Murray, Robert E., Chairman, President and Chief Executive 
  Officer, Murray Energy Corporation.............................   163
    Prepared statement...........................................   164
    Responses to additional questions from Senator Inhofe........   172
Borelli, Thomas J., Ph.D., Portfolio Manager, Free Enterprise 
  Action Fund....................................................   180
    Prepared statement...........................................   182
      
    Responses to additional questions from:
        Senator Boxer............................................   184
        Senator Inhofe...........................................   186
Newspaper Article, The Columbus Dispatch, January 15, 2006, 
  Safety still an issue in Ohio coal mines; Five killed in 
  underground accidents during past decade, by Randy Ludlow......   193
Letter from John Bruton, Ambassador, European Union, Delegation 
  of the European Commission.....................................   215

 
       EXAMINING GLOBAL WARMING ISSUES IN THE POWER PLANT SECTOR

                              ----------                              


                        THURSDAY, JUNE 28, 2007

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

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

    Senator Boxer. Welcome, everybody. We are really looking 
forward to your testimony.
    We are starting right on time, we have a busy morning. We 
are going to have to take a break an hour from now, so we are 
going to get through as much as we can in that time. Therefore, 
I am limiting the opening statements for all of us to 2 minutes 
each. Hopefully you can do your statements in 5 minutes.
    Before we start today, I want to talk about two wonderful 
pieces of news. First of all, today the bald eagle is being de-
listed from the Endangered Species List. In 1968, there were 
417 mating pairs, and now there are 10,000 mating pairs. I 
think what it shows is that the Endangered Species Act works, 
that environmental laws work, and we are better for it.
    Also, I want to call attention to yesterday's 
groundbreaking announcement by Senators Warner and Lieberman to 
jointly craft an economy-wide cap and trade global warming 
bill. It is an important step forward, and I look forward to 
the results of their efforts. Then we will move forward in the 
full committee as soon as possible.
    I also want to thank Senator Alexander, who has addressed 
the power plant sector's contribution to global warming, both 
in his power plant legislation and in the Capitol Power Plant 
bill that passed as part of the energy bill last week. I have 
asked Senator Carper to sit close to me today, because he has 
been such a leader in looking at this particular sector. His 
work has made a tremendous difference already.
    I want to welcome from my home State of California Peter 
Darbee, the CEO of PG&E, as well as the other utility CEOs here 
today: Mr. Lewis Hay, of FPL Group and Mr. Jim Rogers of Duke, 
and all of our other distinguished witnesses. With the 
announcement by Senators Lieberman and Warner, we are on our 
way toward reporting economy-wide global warming legislation, 
which is the most efficient way to deal with this issue.
    However, this hearing is key, because power plants are the 
single largest CO2 emitting sector in the U.S. 
economy. They account for 40 percent of all emissions. The 
single largest source of fuel for power plants is coal, which 
accounts for 50 percent of our electricity generation.
    In the fight against global warming, the electricity sector 
will play a critical role, both as a source of emissions and as 
a source of emission reductions. In other words, the utility 
sector can be a huge part of solving our problem. That is what 
we hope, that is the spirit in which I have invited you here 
today.
    The technological choices we make in this area will affect 
our ability to combat global warming for many years to come. 
These choices can lead to large decreases in emissions or 
commit us to large increases in emissions. These choices can 
commit us to low cost solutions or to high cost solutions 
later. We need to act wisely and decisively.
    With the help of the experts and CEOs who are here today, 
and with my colleagues from both sides of the aisle, I am 
confident we can find such a solution. I look forward to 
hearing all of the witnesses' testimony and to learn more about 
these important issues.
    Senator Inhofe, you are recognized for 2 minutes.

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

    Senator Inhofe. Well, before you start the 2 minutes, let 
me on behalf of my people who are calling in to register our 
objection to the way this is being run, it is my understanding 
just late last night you decided that everyone would have just 
2 minutes. I don't mind that, really. In fact, we have had so 
many of these hearings, I don't think that there is a lot more 
we can talk about in opening remarks.
    Senator Boxer. Would you start the 2-minute clock, because 
I had 2 minutes?
    Senator Inhofe. OK. First of all, I think this is what, the 
14th hearing we have had now on global warming. This is really 
a lot of fun, I know that. But sooner or later, I would 
recommend to my distinguished Chairman that we had better start 
getting some bills out there. We are not doing anything in this 
committee. We haven't done anything since January. We have 
hearing after hearing after hearing.
    Let me suggest also that you should get some bills out, 
because time is not your friend. It is not every month or every 
week, but every day that goes by there are more and more 
scientists who are coming over who were in the other camp, 
coming over now and saying, the science is flawed and it is not 
real. I have talked about all the universities here in the 
United States in the last hearing that we have had the 
professors that come over. But we have another list right now 
that I will submit for the record. It includes professors from 
the University of Ottawa, from the Australian government and 
from the University of Auckland in New Zealand.
    So it just seems to me that one of the things that you 
folks, and I know there are a lot of you, and we will have a 
chance to talk to you, that are in the utility business, you 
are going to have to understand that there is going to be a 
huge cost. The science is in question, the cost is not. Just 
recently, in looking at the only two bills that are up for 
consideration right now, the Boxer bill and I believe the 
Lieberman-McCain bill, MIT recently came out and said that the 
cost of the Lieberman-McCain bill to our energy consumers is 
about $3,500 a family; the Sanders-Boxer bill would be about 
$4,500 per family.
    What that constitutes is a tax increase 10 times greater 
than the largest tax increase in history to the American 
people. I know that you folks have boards of directors and some 
of you are going to have to do what you can to your bottom 
line. But my board of directors are the taxpayers.
    Thank you, Madam Chairman.
    [The referenced information was not received at time of 
print.]
    [The prepared statement of Senator Inhofe follows:]
       Statement of Hon. James M. Inhofe, U.S. Senator from the 
                           State of Oklahoma
    Madame Chairman, we have never had a legislative hearing to examine 
the many proposed climate bills, and this hearing is no exception. But 
at least today we are discussing some broad concepts. So I would like 
to thank you for taking a half-step forward and urge you to take the 
next half-step. To date, we have had a dozen hearings talking endlessly 
about how urgent and important this issue is, and I believe that they 
have been useless and a complete waste of time.
    For instance, we had a hearing to examine perspectives of religious 
leaders and little was learned. Indeed, you used the hearing to imply 
one of our witnesses of misrepresenting the views of the Southern 
Baptists Convention. But in a direct vindication of his statements, on 
June 13th, the Southern Baptist Convention (SBC) approved a resolution 
on global warming that questions the belief that humans are largely to 
blame for the phenomenon and also warns that increased regulation of 
greenhouse gases will hurt the poor.
    Madame Chairman, you need to hurry if you want to pass legislation 
and you should have hearings on each of the bills. Just last month, it 
was discovered that increasing wind shear from warming will reduce 
hurricanes, not increase them. Increasingly, prominent scientists are 
beginning to reject the global warming hype. Some recent converts 
include Paleoclimatologist Dr. Ian D. Clark, professor of the 
Department of Earth Sciences at University of Ottawa, Mathematician & 
engineer Dr. David Evans, who did carbon accounting for the Australian 
Government, and Climate scientist Dr. Chris de Freitas of The 
University of Auckland, New Zealand.
    But I cannot believe the Senate will pass cap and trade mandates. 
According to MIT, the Lieberman-McCain bill will impose costs on our 
energy sector that are passed onto consumers equal to $3,500 per 
family. The Sanders-Boxer bill would be equal to $4,500 per family.
    Hopefully, today's hearing will be more constructive than past 
hearings. I strongly disagree with the approach being taken by the 3 
utilities represented here today. But I want to be clear--as Ronald 
Reagan used to say, ``my 80-percent ally is not my 20-percent enemy.''
    I have long been a sturdy supporter of our energy sector and 
championed legislation that would increase our supplies and minimize 
regulatory costs. In fact, when I chaired this committee, one of the 
witnesses today, Jim Rogers, testified in favor of my Clear Skies bill. 
Welcome, Mr. Rogers.
    While we disagreed then and now about the need for regulating 
carbon dioxide, we shared the view that 70 percent cuts in air 
pollution could be achieved if we were smart about it. A key aspect of 
that legislation is something that too often gets sugar-coated in this 
debate--we cannot get ahead of the technology and we must not disrupt 
energy markets.
    I also believe our Nation needs more energy and more diverse 
energy. While we continue to move toward greater efficiency, we will 
continue to need more energy to supply our growing nation. We need more 
nuclear generation, more natural gas exploration, more coal and more 
hydro. We need clean coal and coal-to-liquids. And the legislation I 
have supported makes it clear that I back up my beliefs with action.
    The Edison Electric Institute has said that any mandatory 
legislation should be economy-wide. I agree with the sentiment that the 
utility industry should not be singled out for special treatment.
    As I go through the list of things where we agree and disagree, 
when it comes to a utility that parts company with me on this issue, I 
consider it to be my 80 percent ally. Madame Chairman, I guess that 
means you probably belong in the 20 percent range.
    Energy is the most fundamental ingredient of America's economic 
engine. Our Nation has done a poor job in keeping supply up and costs 
down. I would add that the energy bill we just passed does little to 
increase supply, but much to increase costs. Likewise, carbon cap and 
trade schemes would decrease supply while driving costs through the 
roof.
    Ultimately, that means more costs passed onto the consumer in the 
form of higher prices. That is really what today's hearing is all 
about--how much will carbon schemes cost and who will bear the burden 
of these higher costs?
    As each of our utility witnesses speak today, I would like to hear 
their views as to the issue of economy-wide versus utility specific, 
the differences between regulating carbon where the technologies are in 
their infancy and regulating something such as sulfur dioxide where the 
technologies are mature? And I would like all the witnesses to discuss 
the elephant in the living room--costs to consumers and jobs moving to 
China, the biggest emitter of greenhouse gases on the planet.

    Senator Boxer. Thank you, Senator. We will put into the 
record the four bills that deal with global warming that have 
already not only passed the committee but passed the Senate.
    [The above mentioned bills may be found in committee 
files.]
    Senator Boxer. Senator Lieberman.

 STATEMENT OF HON. JOSEPH I. LIEBERMAN, U.S. SENATOR FROM THE 
                      STATE OF CONNECTICUT

    Senator Lieberman. Thanks, Madam Chair. Obviously, Senator 
Inhofe and I have a difference of opinion on this. I suppose 
also I should say on the record of the committee, we have 
brought out a number of bills, most of which or perhaps all of 
which were included in the Energy bill, which passed the Senate 
last week.
    So there is a beginning. I am very proud and grateful that 
Senator Warner and I have, as Chair and Ranking Member of the 
subcommittee of this committee on Climate Change have joined 
together with a clearly stated goal, which is that we want to 
bring to our subcommittee and then hopefully with the support 
of the subcommittee the full committee a bill that really does 
deal in a comprehensive way with the genuine threat of climate 
change and the desire of a lot of people on this panel who have 
said to me, it is time for national leadership on this, it is 
time to give businesses particularly a consistent, predictable 
environment in which to respond to this problem. Everybody that 
I talk to says it is coming. Let's not have us picked apart by 
the various States or others. Let's have, this is a national, 
it is an international problem. We have a national 
responsibility. Let's do it.
    Senator Warner and I have agreed on a set of principles. We 
are going to bring forward an economy-wide cap and trade 
system. Our staffs are beginning this week to meet with 
stakeholders. We invite all of you to be in touch with us to do 
that. We want this to be an open process.
    But we have a clear goal, which is to report a bill, to 
bring a bill, a mark to our subcommittee before the August 
recess, and then hopefully that subcommittee to report it on a 
bipartisan basis. That to me is the significance of John 
Warner, a distinguished member of this committee, this Senate, 
joining together with me on this and then hopefully to the full 
committee.
    I would say, Senator Warner's support gives us reason to be 
believe that for the first time in the history of the U.S. 
Senate, there will be a bill on climate change, a real one, 
reported out of a Senate committee to the floor. That is our 
commitment.
    John said it yesterday, I will just say this in a sentence. 
Most of his career in the Senate has been spent trying to 
protect America from threats to our security. He sees this 
effort to deal with global climate change as consistent with 
all that he has done to protect American security.
    I thank you for your leadership, Madam Chairman, and I 
yield back to you.
    [The prepared statement of Senator Lieberman follows:]
     Statement of Hon. Joseph I. Lieberman, U.S. Senator from the 
                           State of Oklahoma
    Thank you, Madame Chairman. Thank you for your kind words.
    As you know, I have the privilege of chairing the Subcommittee on 
Private Sector and Consumer Solutions to Global Warming. I want to take 
this opportunity to thank my esteemed ranking member, Senator Warner, 
for being willing to embark with me on the process within our 
subcommittee of drawing upon existing bills and new ideas to construct 
a new, bipartisan, economy-wide, cap-and-trade climate bill over the 
weeks ahead. I believe that his commitment to this effort represents a 
true breakthrough.
    In the meetings that we have had already, Senator Warner has 
impressed me enormously--as he always has in our years here together--
with his common sense, his concern for the long-term well-being of the 
American people, and his apolitical, fact-based approach to problem-
solving. I am very fortunate to lead a subcommittee with him, and I am 
confident that the two of us can come to a bipartisan accord that will 
form the basis of broader bipartisan agreement in our subcommittee, and 
then, with the help of all of our colleagues here, in the full 
committee.
    As all of you know, I am already the author, along with my friend 
Senator McCain, of an economy-wide, cap-and-trade climate bill that we 
reintroduced earlier this year. Senator McCain and I remain close 
partners on this issue. I think he expects me to use my position on 
this, the committee of jurisdiction, to help deliver to the Senate 
floor a bill that lives up to the principles around which our Climate 
Stewardship and Innovation Act is built. As Senator McCain and I have 
noted, that bill is not written in stone, and a lot of very promising 
new ideas have arisen in just the last 6 months. I believe the bill 
that Senator Warner and I construct together will take advantage of 
those new ideas, including ones that colleagues of ours have written 
into their own climate bills.
    Senator McCain and I have been honored that 10 of our colleagues, 
including Senators Carper and Clinton on this committee, have co-
sponsored the Climate Stewardship and Innovation Act. When Senator 
Blanche Lincoln became a cosponsor in January, she spoke eloquently 
about the responsibility she feels to protect the economic well-being 
of low- and middle-income energy consumers in Arkansas. She made clear 
that she was putting her trust in me and others to ensure that, as the 
legislation proceeded and evolved, it preserved and indeed enhanced 
protections for those Americans with little or no disposable income.
    When Senator Norm Coleman honored me and Senator McCain with his 
co-sponsorship last month, he and I introduced a resolution to 
memorialize our shared commitment to ensure that the Senate's climate 
legislation would not increase the poverty rate in this country, would 
not drive manufacturing jobs abroad, would ensure that other nations 
did their part too, and would drive investment toward advanced, clean 
energy technologies. Those priorities matter to me, and I know that 
they matter to Senator Warner very much indeed. I think Senator Coleman 
can rest assured that we will meet the commitments of that resolution.
    And we of course will not do it alone. This committee is a 
powerhouse of talent and commitment. I can't wait to roll up my sleeves 
with Senator Warner. And I can't wait to engage with all of my 
colleagues on my subcommittee and this full committee.
    Thank you, Madame Chairman. And thank you for convening this 
hearing, in which we will all roll up our sleeves on this issue 
together. I thank the witnesses for coming and look forward to their 
testimony.

    Senator Boxer. Thank you, Senator Lieberman, for your 
amazing, breakthrough work on this committee.
    Senator Voinovich.

 STATEMENT OF HON. GEORGE V. VOINOVICH, U.S. SENATOR FROM THE 
                         STATE OF OHIO

    Senator Voinovich. Chairman Boxer, I hope today's hearing 
will provide for a well-informed debate on climate change. This 
is a difficult and polarizing topic, and much of what we hear 
in the media and elsewhere does little to advance a reasonable 
solution to the problem.
    Utilities are one of the most heavily regulated sectors of 
our economy and have unique experiences in addressing 
environmental concerns. There is much we can learn from their 
experience. I am particularly happy to see one current and one 
former Ohioan here. I thank Bob Murray and Jim Rogers for being 
here today. I have known Bob Murray since I was Mayor of 
Cleveland ran Cleveland Public Power, and Jim and I worked 
together when he was running Synergy.
    As we move forward with this debate, we must be realistic 
about our ability to affect the outcome. We contribute to a 
warming climate. But as most scientists will admit, even the 
elimination of U.S. greenhouse gas emissions would have 
negligible effects on temperature. Assuming we can make a 
contribution, we must remember this is a global problem and 
will require a long-term solution.
    We should be deliberate in our actions, but not at the 
expense of our energy security and economy. Again, harmonize 
our environment, energy and economy. In this regard, I note the 
vital importance of coal. Coal is our most abundant and 
affordable domestic energy source. Advancing technologies to 
capture and store carbon is the most important way we can 
address this problem responsibly. Any reduction requirements 
must be harmonized with the pace of technology.
    Unrealistic requirements will encourage fuel switching, 
drive up costs for manufacturers and consumers and move jobs 
and even emissions overseas. These costs are not real to States 
with little or no coal, nor are they real to individuals who 
can easily afford them. Any sacrifice too often is meaningless 
to them. But it is not meaningless to coal-dependent States 
like Ohio where our economy is in trouble and natural gas 
prices have increased 300 percent in 7 years. It is not 
meaningless to low-income families who are sacrificing an ever-
increasing percentage of their income to pay their utility 
bills.
    A solution to one problem must not create another, perhaps 
larger problem. I look forward to today's testimony and 
appreciate this panel's participation.
    Senator Boxer. Thank you, Senator.
    I must apologize to my colleagues, because I didn't do the 
early bird rule today. So I will just continue going with 
seniority, since it is just 2-minute openings. I do apologize.
    Senator Carper.

STATEMENT OF HON. THOMAS R. CARPER, U.S. SENATOR FROM THE STATE 
                          OF DELAWARE

    Senator Carper. Thanks, Madam Chair. To our witnesses, 
welcome, thank you for joining us today and helping us in an 
important undertaking, that is, developing consensus around a 
subject around which we need to develop that consensus.
    I agree with most of my colleagues that global warming is 
real. I agree with my colleagues and the President and I think 
most American citizens that we as individuals, our businesses 
and otherwise are contributing to the problem and we need to 
contribute to its solution.
    As a former Governor, I know that among the things 
businesses need is they need certainty. They need to know what 
the rules of engagement are going to be and we need to provide 
that for them. The American people need for us to bear down and 
find common ground on this subject. They need for us to do it 
in a way that harnesses market forces and of course, to do it 
in a way that doesn't put our economy in a tailspin. They need 
for us to do it in a way that doesn't cost consumers an arm and 
a leg.
    There is ironically a whole lot more that we agree on among 
the three pieces of legislation, I think, that are before us: 
Senator Alexander's legislation, Senator Sanders' legislation 
and my proposal. Lamar and I worked actually for the last 
several years to develop that consensus. I think the only major 
area that divides us is how do you allocate the credits. We 
will have some discussion of that today.
    I understand there is actually a new approach that is on 
the table, and we are interested in hearing that fleshed out.
    My preference overall is for an economy-wide bill. I am 
encouraged with the legislation, Madam Chair, and my 
colleagues, that we passed last week. Because we addressed at 
least the emissions from mobile sources for CO2 and 
almost a third of our CO2 comes from our mobile 
sources, roughly 40 percent from utilities. If you put them 
together, that is 75 percent of the emissions of CO2 
in this country. That is mighty substantial.
    The last thing I would say is, the rest of the world needs 
for us to provide some leadership here. This is the United 
States of America. We shouldn't be waiting for the Chinese or 
the Indians or others to decide what to do. We should provide 
that leadership and it starts right here.
    Senator Boxer. Thank you, Senator.
    Senator Craig.

 STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR FROM THE STATE 
                            OF IDAHO

    Senator Craig. Congratulations, Madam Chairman, I 
understand you are a new grandmother.
    Senator Boxer. Thank you very much.
    Senator Craig. That is exciting.
    Senator Boxer. I do have a picture to show you later.
    [Laughter.]
    Senator Craig. I am anxious to see. Boy or girl?
    Senator Boxer. It's my second grandson.
    Senator Voinovich. When?
    Senator Boxer. I will tell you later.
    [Laughter.]
    Senator Boxer. Yes, we will definitely start the clock 
again.
    Senator Craig. The reason I know that is, we were all 
waiting you hopefully to get back for that vote the other 
evening and you missed it. I know none of us like to miss votes 
on energy bills. Then I found out why you had. That was all the 
right reason.
    Thank you for this hearing today, Madam Chairman. I am 
always amazed how busy we get here talking about energy. We 
don't produce one drop of oil nor one kilowatt of electricity. 
But we can sure get in its way.
    Now, we talk a lot about it, because it is the politically 
correct thing to do right now. We wring our hands and stand on 
street corners and we pontificate beyond anyone's imagination.
    Now and then we construct policy that gets in the way of 
its production or partners in it. I would hope, Madam Chairman, 
that anything we do now and into the future shapes a 
partnership, a relationship that doesn't distort the 
marketplace, looks at the reality of what is doable and what is 
not doable, doesn't set up huge obstacles that do two things 
for the American consumer, either deny it energy or cause it to 
have to pay extremely high costs for its energy.
    That is the reality of what we can or cannot do. I am 
always fascinated in cap and trade schemes, and I underline the 
word scheme. Because I watch Europe play the game, not so well. 
They don't understand the scheme except for those who can buy 
it and profit from it. They didn't produce one kilowatt hour of 
power out of it. My guess is they are not much cleaner as a 
result of it.
    But I am always fascinated in the phenomenal innovative 
character of the American economy if we help it, if we partner 
with it. This world would become a very clean place over the 
next three decades because of us, not in spite of us, because 
we are the ones that are going to create the technology, we are 
the ones that are going to innovate, and we are the ones that 
are going to pass it off to the rest of the world to use. Why? 
Because we are rich. Because we have the ability to do it. 
Because we are going to do it, because we are committed to do 
it.
    The only reason we wouldn't do it is if we decided that our 
Government was going to stand in its way, not partner, create 
obstacles and create a less wealthier nation. I have traveled 
to nearly every climate change conference in the world. I have 
watched the cottage industry of climate change grow and prosper 
over the years, and talk about the great problem that the world 
was beset by. None of them could solve it, other than to 
suggest that we all did less, that we move to caves and lighted 
our reading with candles.
    Well, that didn't work. The world rejected that. Poor 
nations said no, they weren't going to put their people through 
it, even though some of our politicians thought it was a neat 
idea.
    Those concepts all got rejected. I am one who early on said 
yes, our world is warming and we ought to know why. If we are 
contributing to it, we ought to stop.
    We are not quite sure yet why it is.
    Senator Boxer. Senator, you have gone a minute over your 
time.
    Senator Craig. Oh, I am so sorry. Well, do I get a little 
grandbaby time?
    Senator Boxer. I gave you that grandbaby time.
    [Laughter.]
    Senator Boxer. I gave you so much extra time because you 
were so nice about my grandson. But your time is running out.
    Senator Craig. All right. Enough said. My point is this, 
Madam Chairman. Let's partner, let's don't stand in the way, 
let's don't play politics with the consuming public and a 
wealthy nation's ability to create and pass those technologies 
through to less capable countries. Thank you.
    Senator Boxer. Thank you so much.
    Senator Sanders.

STATEMENT OF HON. BERNARD SANDERS, U.S. SENATOR FROM THE STATE 
                           OF VERMONT

    Senator Sanders. Thank you, Madam Chair. If I say nice 
things about your grandchildren, will I get extra time, too? 
This is a cap and trade situation.
    [Laughter.]
    Senator Sanders. First, let me say that I look forward to 
working with Senator Lieberman and Senator Warner as a member 
of that committee. We have a major responsibility and we look 
forward to coming up with very strong legislation.
    I would say also, I am delighted to welcome our guests here 
today. I would say to my friend, Senator Craig and others, 
frankly, I think we in the Congress are way, way, way behind 
the American people. I think the American people understand 
that in many ways the debate over global warming is over. The 
scientific community, with almost unanimous belief, believes 
that global warming is real and with almost unanimous belief 
believes that it is man-made, understands that the impact of 
global warming is taking place today, and that if we don't get 
a handle on it, it will be catastrophic in years to come. Our 
job is to catch up to the American people, reverse global 
warming, cut greenhouse gas emissions significantly. I happen 
to believe that the genius of our society, the society that put 
a man on the moon, that rebuilt our war-time economy in the 
early 1940s in a short period of time and then defeated Nazism, 
certainly has the capability, with all of the technology that 
is out there, to break our dependence on fossil fuel, to move 
in a very, very significant way forward in terms of energy 
efficiency, to move to solar energy, to move to wind 
technology, to move to geothermal technology and other 
technologies that are sitting out there right now.
    A month ago, I drove in an automobile that got 150 miles 
per gallon. It is sitting out there waiting to happen. I must 
respectfully disagree with my friends, who say that there will 
be terrible economic implications if we do those things. The 
truth is, the Congress, if we do not act boldly, there will be 
terrible economic implications. If we act boldly, we can create 
millions of good-paying jobs, breaking our dependence on fossil 
fuel.
    Thank you, Madam Chair.
    [The prepared statement of Senator Sanders follows:]
        Statement of Hon. Bernard Sanders, U.S. Senator from the
                            State of Vermont
    Madam Chair, Ranking Member Inhofe, thank you for holding today's 
hearing on global warming issues in the power plant sector.
    As members of this committee know, I am a strong believer in the 
need for the Federal Government to be very bold in reversing global 
warming--the largest environmental challenge humanity has ever faced. I 
have an economy-wide global warming bill, S. 309, that many members of 
this committee, including the Chair, support. That legislation lays out 
a path for reducing our greenhouse gas emissions in a way that will 
give us at least a 50-50 chance to avoid the catastrophic effects that 
the best scientists in the world tell us we can expect if we increase 
global temperatures by over 2 C. And, I note with extreme interest 
that just yesterday Senator Lieberman and Senator Warner, the 
leadership of the Subcommittee on Private Solutions to Global Warming, 
announced their intent to craft an economy-wide global warming bill 
based on already-introduced proposals as well as new ideas.
    I will continue to stand firm for the need for an economy-wide 
approach, and I look forward to working with Senator Lieberman and 
Senator Warner as a member of their subcommittee, but it does seem 
appropriate to be thinking about the various individual sectors that 
would need to be addressed in such an approach. Power plants are 
responsible for roughly 40 percent of U.S. global warming emissions. 
That's a significant amount of our problem. Along with Senators Carper 
and Alexander, I recognized the need for attention to reductions in 
power plant emissions of CO2--and three other harmful 
pollutants: nitrogen oxide, sulfur dioxide, and mercury, and introduced 
a power plant bill, S. 1201. While I know that today's hearing is 
focused on global warming emissions from power plants, I do want to go 
on record as saying that this committee needs to stand up and address 
the other three pollutants too, given the clear public health threats 
posed by air pollution.
    I think that there is much promise as we look to the power plant 
portion of our global warming emissions. The targets and timelines for 
CO2 reductions in Senator Alexander's bill are identical to 
the targets and timelines for CO2 reductions in my bill. Our 
targets and timelines are consistent with reducing the emissions from 
power plants to 1990 levels by 2020. While Senator Carper's targets and 
timelines are a bit different, they are close--so it is clear we have 
much in common.
    While there is much promise for agreement, part of our 
responsibility is to use hearings like today's to learn more about the 
places we have yet to come to agreement and to that end, I want to at 
least mention a few areas of particular interest to me.
    First off, while there is widespread agreement that we need a firm 
cap on emissions and that a cap and trade system will serve the 
purpose, especially for the power plant sector, there are other steps 
that we should be taking to reduce our emissions of greenhouse gases. 
For example, wider use of renewables as well as more efficient products 
will go a long way.
    I would like to see households across the country generating their 
own energy from photovoltaic panels on their roofs and had the Finance 
Committee's renewable energy tax incentives legislation not been 
derailed by some of my colleagues on the other side last week, we would 
have been one step closer to extending the financial incentives for 
such investment. I would also like to see family farmers generating 
electricity from small wind sources--and again, I sure hope we can 
reinvigorate the Finance Committee package so that, for the first time, 
we will provide financial incentives for residential installation of 
wind power.
    On the efficiency front, Philips Lighting has told me that by 
adopting much more efficient lighting we could save the energy 
equivalent of what is generated by 30 nuclear power plants or up to 80 
coal burning power plants--not to mention save consumers and businesses 
approximately $18 billion annually in their electricity bills!
    But, the point I am trying to make is that reduction of our 
emissions from the power plant sector can come through greater use of 
renewables, both by the utilities as well as by individual Americans 
who want to stand up and make a personal contribution to solving global 
warming, and of course, through better energy efficiency efforts. So, 
it is with some concern that I note, to my best knowledge, that my bill 
is the only one of the power plant bills to include a renewable 
portfolio standard and an energy efficiency performance standard. While 
we clearly need an overall cap on emissions, I think that we can help 
move the ball forward by taking concrete steps to increase our use of 
renewables and to be more efficient.
    Second, the issue of how we decide to distribute allocations is 
tremendously important. My power plant legislation calls for an auction 
of at least 50 percent of the allowances, with a 100 percent auction 
within 15 years of enactment. I want to be very careful as we move 
forward to not make some of the mistakes that others have made. I want 
to be sure that we don't give companies windfall profits through free 
allocation of allowances. Additionally, I believe that the proceeds of 
an auction should be used to help low income families and others who 
might need assistance as we reduce our use of fossil fuels.
    Finally, I want to quickly mention that my power plant bill is the 
only one that makes an explicit connection to the economy wide 
reductions of global warming emissions that are required to avert 
catastrophic changes in our climate. While I understand that the 
provision wouldn't be popular with many of the witnesses here today, my 
bill states that if Congress fails to pass legislation affecting at 
least 85 percent of manmade sources of global warming pollutants by 
2012, then emissions from power plants must be decreased each year by 3 
percent through 2050. I mention this here today because I am committed 
to seeing the needed reductions occur on an economy wide basis, 
however, I must be very clear that getting the actual reductions must 
be our overall goal--it is what the future of the planet demands from 
us.
    I appreciate your determined leadership of the Chair to tackle 
global warming and look forward to hearing from our witnesses.

    Senator Boxer. Thank you, Senator.
    Senator Alexander.

STATEMENT OF HON. LAMAR ALEXANDER, U.S. SENATOR FROM THE STATE 
                          OF TENNESSEE

    Senator Alexander. Thank you, Madam Chairman.
    I am very pleased with the steps that we have taken in 
Congress this year to reduce emissions of greenhouse gases. My 
message is that the best way to get to a so-called economy-wide 
proposal I believe is sector by sector. First, we have already 
acted to reduce greenhouse gas emissions from the 
transportation sector. Senator Carper mentioned that. By 2020, 
the new fuel economy standards that the Senate passed are 
estimated to save 1.2 million barrels of oil a day and will 
remove 206 million metric tons of CO2 from the 
atmosphere. We also increased the renewable fuel standard, 
which would reduce greenhouse gases. So that is the fuel part.
    On the efficiency part, the Senate and this Congress has 
taken many initiatives to increase energy efficiency in 
buildings, lighting and appliances, with estimates to save 1.2 
million metric tons of carbon dioxide. So as Senator Carper 
indicated, if you add up fuel and efficiency and then if you 
put making electricity in there, too, which is 40 percent of 
the carbon, you get most of the economy. You add the stationary 
sources, you get most of what is left. I don't believe you will 
ever come up with a real economy-wide cap and trade, because 
you won't end up wanting to put in the service stations and the 
small businesses, et cetera.
    Senator Carper and I worked for a long time on a cap and 
trade system for the electricity sector, which we believe is 
reasonable. The only difference we ended up with it on was 
allocation. I went from one view to another view during the 
time I started. So I am very interested in learning from you 
how to allocate costs.
    I believe, Madam Chairman, in conclusion, that the best way 
to deal with, in a practical and cost-effective way, with 
carbon emissions, is sector by sector. I hope to learn a lot 
today about how to allocate that cost in the most efficient way 
at the lowest cost to the ratepayer.
    Senator Boxer. Senator Alexander, thank you very much.
    Senator Klobuchar has been a real leader in trying to get 
us to count the carbon, with the carbon registry. Welcome.

STATEMENT OF HON. AMY KLOBUCHAR, U.S. SENATOR FROM THE STATE OF 
                           MINNESOTA

    Senator Klobuchar. Thank you, Senator Boxer. I heard from 
my staff that everyone has been congratulating you on your 
grandchild. I am going to congratulate you instead on your work 
on the energy bill.
    But I think that was a good start. I believe there is a lot 
more work that needs to be done. I think the fact that I am on 
the Commerce Committee, that we were able to, on a bipartisan 
basis, get the increased gas mileage standards in place, should 
be a good model for us on this committee. I appreciate the work 
that Senator Lieberman and Senator Warner are doing together, 
as well as the work that Senator Carper and Senator Alexander 
have done. I think that this could be in the same model. It is 
actually one of the more bold things we did with the gas 
mileage standards. It came out of the Commerce Committee on a 
bipartisan basis.
    I have said many times that in my State, people have seen 
global warming. They have seen climate change, whether it is 
people who ice-fish or people who own ski resorts, they are 
starting to see the effects and they are very concerned about 
it. So it is not just the scientists talking about it any more.
    We also have a thriving business community in my State that 
sees the technological possibilities of what Tom Friedman of 
the New York Times has called the Green New Deal if we do this 
right. That we should be, in our country, developing the 
technology instead of letting China and Indian and other 
countries on the front line.
    So I look at this as not only a potential, huge potential 
hazard, as Senator Sanders expressed, but also as an 
opportunity if we do this right. I will say that I have been 
impressed by the numbers of businesses and CEOs that have come 
before them. I would have liked to have seen them, Senator 
Boxer, as vocal as they were when they do appear before a 
committee when we had the carbon counter bill come up. But I 
know there will be other opportunities for that.
    I think that people need to, if they are going to be 
talking about wanting to do something about climate change, we 
clearly need to collect accurate data nationally. Otherwise we 
are going to have 31 States doing it on their own. I think a 
lot of the business people here are nodding their heads about 
that. Then I think we need to act. I think it is going to come 
out of this committee. Thank you very much.
    Senator Boxer. Thank you so much.
    Before I call on you to add your words about Mary Frances, 
I want to say that Senator Carper has reminded me, Mary Francis 
Repko, that this is your last hearing at the committee as you 
go on to meet new challenges in your life. You started in July 
1994, you joined EPW in December 2003. You started in the 
Congress in 1994. You joined EPW in December 2003.
    So we will miss you, and Senator Carper, you wanted to say 
a word.
    Senator Carper. I think my colleagues will agree, I would 
say we are only as good as our staff. We are hopefully at least 
as good as our staff, but we are strengthened by our staff. 
Mary Francis Repko has been just a terrific member of this 
committee staff; for a number of years before that, she served 
with Senator Feingold, as a member of his team.
    She goes to work with one of my favorite people over in the 
House, she goes to work for Steny Hoyer in the Majority 
Leader's office, where she will be a senior environmental 
policy advisor. So we will have a chance to work with her and 
hopefully with him. He will be strengthened, and I think the 
House will be strengthened by her addition.
    Senator Boxer. Mary Frances, stand up a minute, take your 
applause.
    [Applause.]
    Senator Boxer. OK. Now we are going to get back to the 
basics of this hearing, and we are going to hold you to 5 
minutes so we can get through.
    Oh, Senator Warner. We are delighted to see you. You have 
been much praised and we wonder if you have an opening 
statement.
    Senator Warner. Why don't I rest my case on what has been 
said and we will proceed. Thank you very much.
    [Laughter.]
    Senator Boxer. Since it was all beautiful.
    Do you want us to put your statement into the record, 
Senator?
    Senator Warner. Why not.
    Senator Boxer. OK, we will do that.
    [The prepared statement of Senator Warner follows:]
        Statement of Hon. John W. Warner, U.S. Senator from the 
                        Commonwealth of Virginia
    Good morning, gentlemen, and thank you for participating in this 
key hearing of the Environment and Public Works Committee. I am eager 
to listen and learn the perspective of today's witnesses, and thank 
Chairman Boxer and Senator Inhofe, my ranking member, for holding this 
hearing.
    Today's hearing is all the more important to me, given the 
announcement this week that I made jointly with my good friend, Senator 
Lieberman, to seek to come to agreement on a climate change bill in the 
near future. We will spend the next several weeks hearing from 
stakeholders, listening to our colleagues in the Senate, and analyzing 
both existing proposals and new ideas. I want all interested parties to 
have an opportunity to weigh in with us, and look forward to this 
process moving forward.
    While I have already stated my support for an economy-wide approach 
to climate change, the power plant sector is going to compose a large 
portion of the bill Senator Lieberman and I craft, thus I will take 
seriously the testimony I hear today.
    I thank the witnesses.

    Senator Boxer. OK, we will get started now.
    Peter Darbee, PG&E, welcome.

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

    Mr. Darbee. Chairman Boxer, Ranking Member Inhofe and 
members of the committee, thank you for the opportunity to be 
here today.
    I am here today because it is clear that if our country is 
going to step up as a leader on climate change, as we believe 
we can and should, then the U.S. electric industry must also be 
ready to step up and work constructively toward solutions. This 
belief is consistent with PG&E's participation as a founding 
member of both the Clean Energy Group and the U.S. Climate 
Action Partnership. It is consistent with our actions to lower 
PG&E's emissions while helping our customers do the same.
    In fact, today we are launching the industry's first 
program that allows utility customers to voluntarily offset the 
emissions associated with their PG&E service. Our written 
testimony details a full set of principles that should guide a 
national strategy on climate change. I will quickly highlight a 
few of these.
    We strongly support mandatory, flexible market-based 
solutions. We believe emissions reductions must ultimately come 
from multiple sectors of the economy. We believe companies that 
have taken early action should be recognized. We believe 
support for energy efficiency and clean technologies is 
critical, and we believe long-term clarity on emissions 
requirements is needed to help American business plan and 
invest effectively.
    I want to note that Senator Carper's and Senator 
Feinstein's bills incorporate these ideas. We support the cap 
and trade strategy that they would create. It is worth focusing 
on a few issues addressed in these bills, because they 
especially go straight to the heart of today's hearing. Indeed, 
if the goal is to have the electric sector move effectively, 
efficiently and expeditiously, then these are the most 
important areas to consider.
    The first issue is the time horizon for emissions caps. We 
believe caps on emissions should start slowly and then 
gradually ratchet down over several decades. This allows 
technology to evolve. It also provides a long-term price signal 
which can drive investment in low-carbon technologies. In the 
meantime, the caps can be met with existing technologies and 
strategies.
    Energy efficiency deserves special mention here. In 
California, we meet half of our demand growth through energy 
efficiency. Over the past 30 years, we avoided the need to 
build 24 large power plants and we saved customers money. If we 
place a full court press on energy efficiency nationally, we 
could offset the need for significant investments in 
conventional power plants in the near term while advanced low 
and zero emitting technologies become available and 
competitive. This is a common sense, cost effective resource. 
It is critical that we take maximum advantage of it.
    The second important issue is controlling costs by allowing 
flexible compliance options. These bills offer several 
mechanisms that we think are vital. One is utilizing high 
quality greenhouse gas offsets. This allows companies to invest 
in reductions outside of our sector, and it lowers costs by 
providing a broader set of reduction opportunities. For 
example, PG&E is partnering with dairy farms to produce 
pipeline quality biogass for natural gas customers. Other 
effective mechanisms include multi-year compliance periods, 
banking of emission allowances and credit for early action.
    The final key issue for our sector is emissions 
allocations. This is perhaps the most complex and controversial 
aspect of designing a cap and trade program. So I would like to 
take a few principles and outline them that we believe are 
critical. Any effective and equitable allocation strategy has 
to do the following. First, create a smooth economic transition 
for those who are adversely impacted. Second, help advance new 
technologies. Third, avoid penalizing early action. Fourth, 
recognize and compensate customers for higher costs. Fifth, 
avoid creating unintended windfalls for companies granting 
allowances whose value exceeds the cost of addressing the 
problem.
    In our written testimony, we have outlined some of the ways 
we think a cap and trade program can be designed to meet these 
objectives. Thank you again for the opportunity to address this 
committee and for your leadership on this very important issue.
    [The prepared statement of Mr. 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 honored to appear before you this morning to offer my 
views on global warming and options for mitigating greenhouse gas 
emissions in the power sector. I believe climate change and its 
implications is one of the most pressing issues of our time. It is 
clear that the link between greenhouse gas emissions and the Earth's 
warming climate is convincing, the potential consequences serious and 
the need for action urgent. I am pleased that this Committee is showing 
leadership on this very important issue by having a hearing on how to 
address greenhouse gas emissions from the electric power sector, as 
proposed in several pieces of legislation introduced by Senators 
Carper, Feinstein, Alexander and Sanders.
    PG&E Corporation is an energy holding company headquartered in San 
Francisco, California and 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 power delivery mix of any utility in the country. And, today, 
I am pleased to announce that PG&E is formally launching a new program 
for our customers called ClimateSmart. ClimateSmart will allow those 
customers who choose to participate to make their energy use ``climate 
neutral,'' by paying a small premium on their monthly bill to be 
invested in greenhouse gas reduction projects in California.
    Our work on energy efficiency, support of clean generating 
technologies and ClimateSmart are just a few examples of the advanced 
energy solutions we provide to our customers. Through technology and 
innovation we allow our customers to meet their energy needs while 
providing unique opportunities for them to manage their energy use, 
reduce costs, promote new technologies and address climate change.
                   pg&e's position on climate change
    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 and be 
a leader in addressing global climate change.
    The U.S. is among the largest emitters of greenhouse gases, both in 
terms of absolute emissions and on a per capita basis. And, based on 
our wealth and prosperity relative to other nations, it's clear that we 
have the ability to demonstrate leadership and make a difference.
    The U.S. has a tremendous capacity for innovation and it is clear 
that we have the human capital to develop the solutions. By signaling, 
as a Nation, that we are 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 associated with having to make drastic changes 
later.
    From PG&E's perspective, the risk of inaction on climate change is 
tremendous, while, if structured properly, a program to address climate 
change can create economic opportunity for us as a nation and elevate 
the U.S.'s leadership position in the world. The nation's energy 
infrastructure is aging and also must be expanded to meet a growing 
population and a more demanding economy. Hundreds of billions in new 
investments will be made. We could make the same investments we have 
been making for thirty years, or take the opportunity to make 
investments to support the economy as we want it to be, and as it will 
need to be, thirty years from now. These investments can enhance our 
energy security and advance technology, while achieving our climate 
change goals.
    If we do not act now, the U.S. will miss the opportunity to become 
a technology leader, improving our competitiveness, while at the same 
time increasing the risks that dramatic changes in our climate will 
occur, stressing both our economy and citizens.
    That is why, for more than a decade, PG&E has been actively looking 
for ways to address climate change that provide benefits to our 
customers and help advance technology. In order to effectively reduce 
greenhouse gas emissions to levels necessary to avoid dangerous climate 
change, we will need to fundamentally change the way we produce, 
deliver and consume energy in this country and throughout the world. We 
recognized this as a company and determined that it was our 
responsibility to lead and take action, as have others in our industry 
and industries throughout the economy. The actions by companies like 
ours have allowed us to advance technologies and understand the 
possibilities that currently exist, and also to understand what needs 
to be done to move forward. And, it is the investments made by our 
customers, and the customers of others in our industry, that have made 
this possible.
    As climate change is a global issue, policies are needed to both 
maintain and accelerate these types of actions and investments and to 
provide a roadmap for transitioning to a low-carbon economy and the 
energy infrastructure to support it.
    PG&E recommends the following principles to guide the development 
of climate policy that achieves these goals:
     Mandatory greenhouse gas reductions are necessary. Voluntary 
programs alone are insufficient and will not send the appropriate price 
signal to U.S. industry to make a measurable impact on global climate 
change. Only a mandatory, national reduction program is capable of 
stimulating sustained action and investment on the scale required to 
meaningfully reduce emissions and establish the U.S. as a leader in the 
response to global climate change.
     Market-based programs minimize costs and maximize innovation. 
Market-based strategies--such as cap-and-trade--provide the economic 
incentive and the flexibility to cut emissions in the most innovative, 
cost-effective ways. This approach is key to driving development of the 
next generation of clean, highly energy-efficient technologies and 
practices.
     Long-term greenhouse gas targets provide a rational basis for 
action. Addressing climate change will ultimately require stabilizing 
greenhouse gas concentrations in the atmosphere at a level that will 
avoid dangerous climate change. Setting ambitious, but achievable, 
targets now is important because it establishes a clear objective and 
sends the appropriate price signals from which incremental objectives 
and action plans can be created, as technologies emerge and scientific 
understanding progresses.
     Broad-based participation leads to better, more cost-effective 
results. Multi-sector participation creates efficiencies that will be 
essential to keeping costs low. A national program should eventually 
encompass all major sectors that emit greenhouse gases, with each 
sector responsible for its fair share of reductions. Sector-specific 
programs can, however, serve as a starting point for creating the 
infrastructure on which to base a broader, economy-wide program and 
strategy.
     Energy efficiency must be a top priority. Improving energy 
efficiency is one of the lowest cost options for managing growing 
energy demand, while eliminating greenhouse gas emissions. Policies and 
incentives should encourage and maximize improvements in energy 
efficiency throughout the economy. For example, utilities are empowered 
to aggressively pursue energy efficiency and demand response programs 
when regulators ``decouple'' the link between revenues and earnings by 
setting fixed revenue levels and eliminating the financial incentive to 
sell more energy.
     Investment in low-and zero-emission electric generation and other 
technologies is critical. Policies should lower barriers and create 
incentives for investment in renewable power, nuclear power, advanced 
coal technologies with carbon capture and storage, distributed 
generation, advanced transportation options, such as plug-in electric 
hybrid vehicles, and other low-and non-emitting technologies. Driving 
investment in these technologies, along with aggressive support for 
energy efficiency and demand response, will reduce greenhouse gas 
emissions, enhance and improve the efficiency and reliability of the 
nations' energy infrastructure, create economic opportunities for 
American business, reduce reliance on imported fossil fuels, and 
support overall U.S. energy independence and security.
     Early action deserves to be rewarded--not penalized. Policies 
must recognize and provide credit to responsible parties that have 
proactively cut emissions before being required to do so. Ignoring 
prior efforts sends a signal that stepping up, taking risks and taking 
responsibility is not something valued by policymakers. It also puts 
these parties at a competitive disadvantage, forces them and their 
customers to ``pay twice'' for emissions reductions, and discourages 
similarly responsible initiatives in the future.
     Any climate program must be economically sustainable, achieve the 
ultimate environmental objectives of the program, and begin to address 
physical impact and adaptation issues. Some economic sectors, 
geographic regions and income groups may be disproportionately impacted 
by both climate change impacts and mandatory greenhouse gas reductions. 
Any climate protection program needs to take account of these impacts 
and provide appropriate assistance to those impacted constituencies. At 
the same time, policies need to recognize that, ultimately, the 
majority of program costs will be born by energy consumers, and 
policies must therefore be structured to address this issue.
     Near-term opportunities for cost-effective, verifiable greenhouse 
gas reductions should be pursued. Policies should encourage greenhouse 
gas reductions, regardless of their geographic location or from where 
in the economy these greenhouse gas reduction opportunities originate. 
At the same time, a rigorous system must be developed to ensure the 
environmental credibility and integrity of these reductions. Taking 
this approach can help to encourage actions by other countries, spur 
technological innovation, reduce overall compliance costs and offer 
ancillary benefits.
     Standardized emissions reporting is an essential first step and 
must form the basis of any mandatory program. Developing consistent and 
coordinated greenhouse gas emission inventories, protocols for standard 
reporting and accounting methods for greenhouse gas emissions is 
fundamental to establishing a credible reduction program that is 
capable of tracking and verifying progress toward emissions goals and 
facilitating a tradable emissions credit system. PG&E was a Charter 
Member of the California Climate Action Registry, which is now working 
with 30 other State. to develop a consistent set of reporting standards 
and protocol. We believe that this effort can serve as a model for a 
national system and that any national system should leverage the work 
that the State. have already done.
                         developing a response
    These principles guide our analysis of legislative proposals and 
policies and calibrate our participation in various coalitions. For 
example, PG&E is a founding member of both the Clean Energy Group, a 
coalition of environmentally progressive power companies supporting 
mandatory, market-based solutions to addressing climate change and air 
quality, and the U.S. Climate Action Partnership (USCAP), a coalition 
of leading businesses from a diverse range of industry sectors as well 
as leading environmental organizations. Together we support a 
mandatory, flexible, market-based approach to reducing greenhouse gas 
emissions.
    In terms of legislation, PG&E has supported Senator Carper's Clean 
Air Planning Act of 2007 and Senator Feinstein's Electric Utility Cap 
and Trade Act of 2007. At the State level, PG&E was one of a handful of 
businesses to support Assembly Bill 32, the Global Warming Solutions 
Act, California's landmark greenhouse gas legislation. All of these 
legislative proposals recognize that market-based programs are needed 
to address climate change, greenhouse gas emission reductions can and 
must come from various sectors of the economy to allow for the most 
cost-effective reduction options, early actions should be recognized 
and accounted for, clean energy technologies and energy efficiency are 
key to addressing climate change, and a long-term emissions pathway is 
needed to allow for investment certainty and a long-term price signal.
    With regard to the Clean Air Planning Act, one of the bills being 
discussed here today, PG&E also recognizes the importance for our 
industry of having long-term certainty with regard to emission 
reduction requirements for other major air emissions, such as sulfur 
dioxide, nitrogen oxide and mercury. Actions taken and investments made 
to reduce these emissions from power plants can have an impact on a 
facility's carbon dioxide emissions. Having a clear emissions reduction 
pathway for these pollutants, in addition to carbon dioxide, 
particularly in the next 10 to 15 years, will allow for our industry to 
make the most prudent and cost-effective investment choices.
    Our industry is on the cusp of making more than $700 billion in 
investments to meet the future electric needs of this country between 
now and 2020. These are long-term investments, whose costs will 
ultimately be paid by electric consumers. It is imperative that our 
industry be given clear guidance and direction, as soon as possible, so 
that we make the right choices for the environment, for the economy and 
for our customers.
    That is why we support the Clean Air Planning Act of 2007. We 
believe that taking the approach called for in this legislation will 
create clarity for business; create focus for a comprehensive electric 
power sector strategy; provide linkages to other sectors of the economy 
and the world; and allow us to begin to change the U.S. emissions 
trajectory today. This is particularly important given that the power 
sector accounts for approximately \1/3\ of total U.S. greenhouse gas 
emissions.
    I would also like to spend a little time addressing some of the key 
program design elements for reducing carbon dioxide provisions and 
their importance. These include the emissions trajectory, compliance 
flexibility mechanisms and allowance allocation approach. It is these 
provisions that I believe will most directly impact our sector's 
ability to address climate change cost-effectively, efficiently and 
accelerate the transition to the energy infrastructure needed to meet 
our greenhouse gas reduction responsibilities. For purposes of this 
testimony, I will focus on how the Clean Air Planning Act addresses 
these elements.
                          emissions trajectory
    The Clean Air Planning Act provides an appropriate glide path for 
reducing electric sector greenhouse gas emissions by starting slowly, 
and then gradually ratcheting down the cap over several decades. This 
approach provides opportunity for technology solutions to develop, 
while ensuring a significant contribution from the electric sector 
toward a broader, economy-wide reduction goal. It also provides a long-
term price signal, which will be vital for driving investment in low-
carbon technologies.
    Initially, we believe the caps proposed by the Clean Air Planning 
Act can be achieved with existing technologies and investments, 
including energy efficiency, renewable energy, greenhouse gas offsets 
and high efficiency coal and natural gas-fired generating technologies. 
Over time, advanced coal technologies with carbon capture and storage 
capability, next generation renewable technologies, like tidal and 
solar thermal, and advanced nuclear technologies will need to play a 
serious and greater role in America's energy future.
    The European Union's short-term compliance periods--leaving 
industry guessing about their longer-term reduction obligations--is not 
a model to emulate. Businesses, particularly in our sector, need to 
understand what requirements will be for decades, as opposed to years, 
as some technologies, particularly advanced coal with carbon capture 
and storage and nuclear, have long lead times, entail project costs on 
the order of billions of dollars and are meant to serve customers for 
years to come. Again, we recommend a long-term reduction trajectory to 
guide investment decisions.
    I would like to focus for a minute on energy efficiency as a near-
term response option to climate change. Energy efficiency can and must 
play a key role in meeting the nation's energy needs. The recent energy 
legislation passed by the Senate recognized energy efficiency as a 
resource and asks State. to review existing regulatory policies to 
ensure that they do not impede achievement of this goal. In California, 
energy efficiency is the first resource we look at to meet our 
customer's electric demand. In fact, we meet half our demand growth 
(approximately 1 percent per year) through energy efficiency. Over the 
past 30 years, we have avoided the need to build approximately 24 large 
power plants to meet our customers' needs and have saved them money in 
the process.
    Placing this type of ``full court press'' on energy efficiency 
nationally over the next 5 to 10 years could allow the Nation to offset 
the need to make the significant investments in conventional generating 
technologies that are contemplated, while low-and non-emitting 
generating technologies become more competitive and are tested and 
proven. This will help our sector to cost-effectively meet our 
customers' energy needs, slow and potentially stop the growth of 
emissions, maintain investment flexibility and reduce demand on natural 
gas--an important feedstock and energy source for many U.S. 
manufacturers.
    PG&E's customers have seen tremendous benefit from our partnership 
with them on energy efficiency. For example, in partnership with Sun 
Microsystems, PG&E developed an incentive program for energy-efficient 
servers. PG&E also announced the first-of-its-kind utility financial 
incentive program for virtualization projects in data centers, which 
enable customers to consolidate IT workloads, using dramatically less 
energy. One major software firm, for example, was able to consolidate 
workloads that were running on 230 servers onto just 13, capturing tens 
of thousands of dollars in energy savings.
                         compliance flexibility
    We all recognize the need to control the costs of achieving our 
greenhouse gas reduction goals, and the Clean Air Planning Act offers 
several cost control mechanisms that we think are vital to the success 
of a cap-and-trade program. These include greenhouse gas offsets, 
multi-year compliance periods, the banking of allowances and credit for 
early action.
    Greenhouse gas offsets. High quality greenhouse gas offsets--which 
allow power companies to invest in reductions outside of our sector--
reduce the costs of the program by providing a broader array of 
reduction opportunities, while stimulating innovative compliance 
solutions. For example, PG&E is partnering with dairy farms in 
California to produce pipeline quality ``biogas'' to serve our 
customers. This effort will not only reduce greenhouse gas emissions by 
offsetting fossil fuel use and capturing methane that would otherwise 
be released to the atmosphere, but it also diversifies our energy 
supply mix, provides additional economic opportunities to the farm 
sector and advances technology that can be deployed elsewhere in the 
U.S. and abroad.
    Multi-year compliance periods. Cap-and-trade programs for 
conventional pollutants are typically based on annual compliance 
periods. At the end of each year, affected sources retire allowances 
for each ton of emissions they generated. However, because of the long-
term nature of the climate change problem, multi-year compliance 
periods, like the 2-year compliance period proposed by the Clean Air 
Planning Act, are perfectly appropriate. This flexibility is 
particularly useful for the electric power sector because our emissions 
can vary significantly depending on weather and precipitation. For 
example, a dry year reduces hydroelectric capacity and increases our 
reliance on fossil-fired power plants, increasing carbon dioxide 
emissions in that year. Multi-year compliance periods can help manage 
this variability.
    Banking. One of the most important aspects of the cap-and-trade 
regulatory approach is the ability to ``bank'' allowances for future 
years. By allowing companies to, in effect, ``over-comply'' and carry 
forward any excess allowances, banking greatly encourages compliance, 
slowing the accumulation of greenhouse gas emissions in the atmosphere. 
Given the long-life of greenhouse gases in the atmosphere and the 
cumulative effect, the more we can avoid releasing now and in the early 
years of a program, the more flexibility we will have in the future.
    Credit for early action. Even before the program gets underway, 
early reduction credits can be used to encourage investments in low-
carbon technologies. The Clean Air Planning Act creates a limited 
reserve of allowances to reward companies for their early reduction 
efforts. We think that this sends the right signal to industry to act 
now to begin to slow the growth of emissions.
                          allowance allocation
    The methodology used for distributing emissions allowances is 
perhaps the most challenging aspect of designing a cap-and-trade 
program. By capping electric sector greenhouse gas emissions, Congress 
will be establishing a new commodity--the emission allowance. These 
allowances will have tremendous value in the open market, on the order 
of billions of dollars annually, in aggregate, dwarfing any past 
emissions trading market. It's no surprise then that companies and 
other stakeholders have strong opinions about the most appropriate 
method for distributing these allowances.
    Recognizing that there are divided opinions on this subject and 
multiple objectives to serve in allocating allowances, I offer the 
following principles, which guide PG&E's thinking on the distribution 
of allowances and which I believe are generally consistent with the 
recommendations of USCAP.\1\
---------------------------------------------------------------------------
    \1\ USCAP does not endorse any particular allowance allocation 
methodology. The members of the group have a diversity of opinions on 
this issue. The allowance allocation language in the USCAP's 
recommendations provides a framework within which Congress can resolve 
this important question.
---------------------------------------------------------------------------
     Create a smooth economic transition for those that are adversely 
impacted by the program, such as businesses and their employees that 
face intense, international competition.
     Use the allowances to accelerate the development and deployment 
of new technologies, including advanced coal, nuclear and renewable 
generating technologies and carbon capture and storage technologies.
     Avoid penalizing early actors and their customers.
     The customer at the end of the energy supply chain--like the 
households and businesses that we serve--will ultimately bear a 
substantial share the costs associated with the regulation of 
greenhouse gas emissions. The allocation system should recognize and 
compensate for these costs.
     Avoid creating unintended ``windfalls'' for companies by granting 
allowances whose value is far in excess of the costs of compliance or 
of mitigating costs for those company's customers.
    We think there are several options for designing a cap-and-trade 
program to meet these objectives.
    For example, the Clean Air Planning Act initially allocates--at no 
cost--a substantial share of the allowances to the electric power 
sector (82 percent). Only 18 percent of the allowances are auctioned 
initially. Assuming an average allowance price of $10 per ton, this 
translates to the free distribution of more than $20 billion in value 
in the first year of the program alone.
    The bill gradually transitions to a full auction over the course of 
25 years with the revenues dedicated to various initiatives, including 
assistance for displaced workers and disproportionately affected 
communities, low-interest loans, loan guarantees, grants, and other 
financial awards for clean coal technology development and deployment 
and energy efficiency research and development. The bill also 
establishes a special reserve of allowances to provide incentives for 
clean coal technology projects. These incentives will be critical as we 
transition to a lower carbon energy system that allows the U.S. to 
continue to use one of our most abundant energy resources_coal.
    In terms of the allowances that are freely allocated to the 
electric power sector (the bulk of the allowances in the early years of 
the program), the Clean Air Planning Act proposes distributing the 
allowances based on a company's proportional share of electricity 
production or output, with the allocations updated each year to reflect 
a company's current production levels. This approach--known as an 
updating, output-based allocation--naturally adjusts to the changing 
dynamics of the industry. Retired units, no longer generating power, 
are phased out of the allocation, and new generating facilities are 
phased in to the system once they begin generating power. We think that 
this is a significant improvement over the approach used by the Clean 
Air Act's Acid Rain program.
    Also, by distributing the allowances based on electricity output, a 
financial incentive is created for investment in power plant efficiency 
upgrades and you encourage investment in new energy technologies.
    One issue that was not fully addressed in the Clean Air Planning 
Act, but an issue that is gaining increased attention as we unravel the 
lessons from the European cap-and-trade experience, is the treatment of 
allowances in regulated versus unregulated power markets. In Europe, 
and we would expect this to be true in unregulated power markets in the 
U.S. as well, power companies will reflect the cost of allowances in 
their wholesale power prices regardless of whether they initially 
received the allowances for free. Electricity customers pay more for 
electricity and power companies receive a valuable asset in the form of 
allowances.
    In regulated power markets, a different set of issues emerges when 
a large share of the allowances are allocated at no cost to generating 
facilities and energy regulators claim the allowances for the benefit 
of the energy consumers within their jurisdiction. First, some State. 
import a significant share of their power and would never see the 
benefit of the allowances allocated to power plants outside of their 
borders. California, for example, imports 22 to 32 percent of its 
electricity supply and most power distribution companies, whether they 
are investor-owned or municipally owned utilities, purchase power from 
the wholesale markets on behalf of their customers. So while customers 
in State. that import a large share of their power supplies will face 
higher wholesale power prices, they see no benefit from the free 
distribution of allowances to out-of-State power plants. Again, this 
raises important equity concerns that should be factored into the 
allocation methodology.
    The National Commission on Energy Policy, the California Market 
Advisory Committee and the Natural Resources Defense Council in 
separate reports have each outlined an alternative approach that we 
find compelling to avoid the inequities and the inefficiencies that 
stem from an Acid Rain-style allocation approach, while benefiting 
electricity consumers. Rather than allocating free allowances to power 
plants, allowances would be allocated to local electric distribution 
companies on behalf of their customers. Local distribution companies 
would in turn sell the allowances allocated to them to regulated 
sources, returning the proceeds to their customers through rebates, low 
income assistance programs, economic development rates or other 
programs that help to mitigate costs or reduce demand. In this way, you 
ensure that the value of the allowances flows to energy consumers who 
ultimately bear the costs of the program. This provides a more 
equitable and more rational basis for distributing the allowances, as 
compared to an Acid Rain-style, input-based allocation. PG&E has 
expressed support for this concept in the context of California's AB 32 
implementation process.
                            the time is now
    Our country has an 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 me 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 are committed to being a pragmatic, responsible 
participant in this effort.
    On behalf of PG&E, 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 Boxer
    Question 1. As your testimony points out, California has been able 
to meet half its electricity demand growth through energy efficiency. 
What measures or tools have proven useful in encouraging home and 
business owners to become more energy efficiency?
    Response. California has been a leader in energy efficiency for 
more than three decades, allowing the State to keep per capita 
electricity consumption flat--that is, no growth--over over the time 
period), while per capita electricity consumption for the United States 
during the same period has increased by approximately 50 percent. Over 
the next several years, California is poised to build on this success 
by meeting approximately half of its electricity demand growth through 
energy efficiency. PG&E expects to meet this aggressive goal and will 
do so through a variety of measures and programs, which are supported 
by established regulatory structures and other efforts.
    The following summarizes what has helped California be successful 
to date, as well as what PG&E is doing to achieve these aggressive 
energy efficiency goals going forward:
     A supportive regulatory structure and environment.--Many 
rate designs create financial disincentives for utilities to promote 
energy efficiency. California's model of ``decoupling'' removes these 
disincentives: utility revenues and earnings are independent of actual 
energy sales. Decoupling eliminates the financial incentives that are 
found in some state regulatory schemes for selling ever-increasing 
amounts of energy (i.e., the financial incentives are ``coupled'' with 
growth in power sales). Under California's decoupling framework, the 
state's utilities collect no more and no less than the revenues 
necessary to run their business and provide a fair return to 
shareholders. If sales rise above these levels, the extra revenues go 
back to customers, rather than to the bottom line of the company; if 
sales fall below intended levels, utilities are assured they can 
recover the shortfall going forward. Energy efficiency goals can be 
achieved even more effectively if decoupling is combined with 
incentives that help motivate utilities to promote and embrace energy 
efficiency and put it en par with similar investment opportunities, 
such as building new generating facilities.
    In addition to properly aligning incentives for utilities, 
California has recognized the need for long-term commitment to and has 
established a consistent regulatory environment for the development and 
support of leading energy efficiency efforts. For example, PG&E's 
current cycle for program development and investment is 3 years. By 
providing PG&E with a 3-year energy savings target and the authority to 
fund these efforts over this time period, PG&E is able to establish 
programs and measures, and engage with customers on some high-value 
efforts that have longer lead-times. We are also working on provisions 
for the next funding cycle that will allow us to work with customers 
who are designing new facilities many years in the future. By making 
commitments to enhanced energy efficiency early in the design process, 
customers can have assurance that the incentives will be available to 
them even though construction will be completed several years in the 
future. One example is the expected reconstruction of a significant 
number of California hospitals.
    By having an established savings target and consistent level of 
funding over multiple years, we are also able to work with 
manufacturers and distributors of products and energy efficient 
equipment, because we can make multi-year commitments to support 
commercialization and deployment efforts.
    And, finally, California has put significant emphasis on developing 
evaluation, monitoring and verification (EM&V) programs to track and 
account for these savings. Establishing transparent, consistent and 
understandable EM&V methodologies is critical for energy efficiency to 
gain broad acceptance by customers and shareholders, and those 
investing in energy efficiency projects.
     Partnerships with other utilities, regulators, customers, 
and other stakeholders.--California's success with energy efficiency is 
the result of a cooperative working environment at all levels. For 
example, PG&E has partnered with local governments to help them reduce 
energy usage, save money, achieve environmental goals and provide 
additional community benefits. One example is our partnership with 
Sonoma County, in which we helped to establish the Sonoma County Energy 
Watch program. Through this program, which is one of 20 throughout our 
service area, PG&E will work with county representatives to improve 
energy efficiency and reduce greenhouse gas emissions from residences, 
schools, colleges, retail stores, office buildings, the high-tech 
sector and agricultural interests. Some of the key activities include 
facilitating ``building tune ups,'' supporting energy efficiency 
retrofits in wastewater and water treatment facilities, conducting 
outreach to realtors/home inspectors to use building/home inspections 
to identify energy saving opportunities, and conducting targeted energy 
audits, outreach, and training. Through this partnership, we project 
savings of approximately 7.6 million kilowatt-hours for the 2006-2008 
timeframe.
     Efficiency improvements to building codes and appliance 
standards.--Approximately half of the energy savings achieved over the 
past three decades in California are the result of the States 
aggressive building codes and energy efficiency standards for end-use 
equipment and appliances. These codes and standards provide the 
foundation for all other energy efficiency efforts and serve as a 
platform from which new technologies, programs and practices are 
established. PG&E has dedicated employees that support the efforts of 
the California Energy Commission, the U.S. EPA's EnergyStar Program and 
others through our Codes and Standards Enhancement program. The program 
advocates the inclusion of energy-efficiency measures in state codes 
for buildings and appliances and conducts studies that assess the costs 
and benefits of the proposed changes.
     Including manufacturers and distributors in efficiency 
efforts.--PG&E works directly with manufacturers of energy efficient 
products and equipment as well as distributors to help develop and 
commercialize energy-efficient technologies. PG&E will use part of the 
nearly $1 billion we will spend to support our energy efficiency 
efforts through 2008 to ``buy-down'' the costs of these products and 
equipment prior to them reaching the mass market. For example, PG&E 
works with both the manufactures of compact-fluorescent lamps (CFLs) as 
well as the retail outlets, such as Costco Wholesale Corporation, that 
sell the product to reduce the price paid by the consumer at the time 
of purchase. This helps to simplify the process for the consumer and 
make these highly-efficient bulbs more competitive. As a result of 
these efforts, we expect more than 20 million CFLs to be purchased this 
year in our service area alone.
    In addition to working to advance the market penetration of 
existing energy efficient products, PG&E operates an Emerging 
Technologies program to accelerate commercialization of new energy-
efficient technologies. The program identifies promising technologies 
for PG&E to promote to our customers by screening and assessing newly-
commercialized technologies, and identifying and establishing channels 
to deploy these new energy efficiency solutions. With a $3.7 million 
annual budget, PG&E's Emerging Technologies program is targeting more 
than 60 technologies, including light dimming fixtures for commercial 
building stairwells that go to full brightness when someone enters the 
stairwell, energy saving cooling systems for computer data centers and 
high-performance lighting for classrooms.
     Creating targeted customer programs outreach and education 
efforts.--PG&E has more than 900 programs and measures available to 
provide energy solutions to our customers. This allows us to create 
targeted energy solutions that meet our customers' needs and maximize 
energy saving opportunities. These programs are segmented by customer 
class and type and supported by professionals knowledgeable about the 
customer segment being targeted. Some examples of programs and measures 
include comprehensive energy audits for industrial customers, 
refrigerator recycling programs for residential customers to facilitate 
deployment of more energy efficient products, financial incentive 
programs for virtualization projects in data centers, air conditioner 
refrigerant charge and air flow checks for residential and small 
commercial customers in air-conditioning-intensive regions of our 
service area, and design assistance and incentives for refrigerated 
warehouses and other aspects of the agricultural and food processing 
sector.
    In addition to these targeted programs, we work closely with the 
other utilities in California, state and federal agencies, energy 
efficiency and environmental groups, manufacturers and retailers, and 
other stakeholders to educate our customers about the environmental and 
cost-savings benefits of energy efficiency and the programs available 
to help customers. An aggressive education and outreach program is 
critical to overall success, as we must work closely with our customers 
and provide them with the necessary information so that they can make 
informed choices. We conduct these education and outreach efforts in 
multiple languages to ensure that all of our customers are able to 
participate fully and realize the benefits of these programs and 
measures.

    Question 2. You recommend that companies that reduce carbon dioxide 
emissions before they are required to do so be given ``early reduction 
credits.'' How can we be confident that these are actual reductions in 
advance of any legal requirements governing verification of reductions?
    Response. PG&E believes that recognizing early action is an 
important principle for any environmental program so that industry is 
encouraged to be proactive in reducing its environmental impact. This 
is particularly true for climate change, where the challenge is to 
reduce the cumulative build-up of greenhouse gas emissions in the 
atmosphere over many decades. Therefore, actions prior to the start 
date of a program should be encouraged, as should actions taken before 
enactment of federal legislation.
    At the same time, your question raises an important issue regarding 
the environmental integrity of early reduction credits. We believe that 
perhaps the most effective and efficient way to recognize early actions 
and ensure the integrity of such carbon reductions in the power sector 
is through the so-called allocation methodology. Allocating emission 
allowances based on actual carbon output (i.e., lbs. of carbon dioxide 
emitted per megawatt-hour (CO2/MWh))--as opposed to 
allowances tied to levels of historic emissions or the fuel consumed--
will inherently take into account the investments that have already 
been made by companies, and their electric power consumers, in lower-
emitting technologies. Those companies with an emissions rate that is 
below the national average will essentially have excess credits to 
sell, while those with emissions rates above the national average will 
need to purchase credits. This is one method for recognizing early 
reduction investments and encouraging companies to continually make 
investments to reduce their carbon ``footprint'' prior to the start of 
a program. In contrast, if a company believes that it will receive a 
higher share of allowances if it defers making investments in lower 
emitting technologies, then it will continue to emit at current levels, 
or potentially increase its emissions levels, depending on the baseline 
year selected for determining the allowance allocation.
    There are other mechanisms available as well, including creating a 
limited ``set-aside pool'' of allowances available for early reduction 
credits or limiting the distribution of credits to entities that have 
reported reductions under specific programs such as the California 
Climate Action Registry, EPA's Climate Leaders and other voluntary 
programs, or the 1605(6) reporting Program. Requiring such reductions 
to be verified through one of these established programs will help 
ensure that early reduction credits are distributed for actual 
reductions.
    However, unlike using the allocation methodology for recognizing 
early carbon reductions, many of these programs are unlikely to capture 
investments made by electric power customers in things like energy 
efficiency and renewable generation technologies. California's energy 
consumers have paid for deploying these technologies and helped the 
state to achieve significant emissions reductions in the process. Many 
of these early actions would not be fully captured under these other 
methods and therefore must be captured in some other way to ensure that 
these customers do not ``pay twice'' for emission reductions.

    Question 3. If utilities are given allowances for free, will 
utilities pass along the savings to consumers or will they increase the 
price of electricity to reflect the market value of the allowances?
    Response. If allowances are given to utilities (or perhaps, more 
appropriately, generators of electric power) for free, their treatment 
will depend on whether the company is subject to cost-of-service 
regulation or whether the company is a competitive supplier. In 
competitive electricity markets, where electricity rates are set by 
marginal costs, the generators will generally pass on the cost of the 
allowances regardless of whether they were initially allocated for free 
and customers would experience electricity rate increases reflecting 
the market value of the allowances. In contrast, generators subject to 
cost-of-service regulation will generally not be able to reflect the 
value of the allowances in their customer rates because electricity 
regulators will not allow them to pass through the cost of the free 
allowances.
    In response to these dynamics, PG&E and others have been 
considering an alternative emissions allowance allocation approach that 
would both preserve the carbon ``price signal'' needed to stimulate 
demand side responses, while at the same time helping consumers (i.e., 
the households and businesses that ultimately pay the cost of the 
program). This approach involves allocating allowances to local 
electricity distribution companies on behalf of their customers. Local 
electricity distribution companies would be required to sell the 
allowances allocated to them to regulated sources at a fair market-
value, returning the proceeds to their customers through rebates, low-
income assistance programs., or other programs that help to mitigate 
costs and reduce demand. In this way, the value of the allowances flows 
more directly to the energy consumers who will ultimately bear the 
costs of the program. This allocation approach provides a more rational 
and equitable basis for distributing allowances, as compared to an Acid 
Rain-style, input-based allocation system. As explained in my testimony 
before the Committee, PG&E has expressed support for this concept in 
the context of California's AB 32 implementation process.

    Question 4. I understand the merits of your allocation preference, 
but I would like your response to the rationale of other approaches. 
For example, if power plants are given emission allowances that do not 
reflect how much carbon dioxide they emit, won't that make it harder 
for plants that run on coal or other fossil fuels to afford the 
emissions reductions they will need to achieve?
    Response. An allocation approach that reduces the amount of 
allowances provided to fossil fuel-fired power plant--whether it is 
otherwise allocating allowances to clean or renewable energy 
facilities, or auctioning the allowances--may impact the profitability 
of a CO2 emitting facility (simply because they would 
receive fewer valuable allowances), however this will not necessarily 
make it harder for these facilities to continue operating. Power plants 
are dispatched (or called upon to operate) based on their relative 
operating costs, with the lowest cost facilities dispatched first. 
Because coal is an inexpensive fuel source, CO2, allowance 
prices would need to exceed $20 per ton before the operating costs of a 
coal-fired power plant would approach the costs of a natural gas-fired 
power Plant--a much lower carbon-emitting, but more expensive fuel 
option. In general, a coal-fired power plant will remain economic even 
if it were required to purchase 100 percent of its allowances.
    We think this provides policymakers with the flexibility to use the 
distribution of emissions allowances to serve a broader range of public 
policy objectives, rather than simply allocating allowances for the 
economic benefit of coal-based generators and their shareholders. 
Several of these broader public policy objectives were outlined in my 
testimony, including the following:
     Create a smooth economic transition for those that are 
adversely impacted by the program, such as businesses, and their 
employees, that face intense, international competition.
     Use the allowances to accelerate the development and 
deployment of new technologies, including advanced coal, nuclear and 
renewable generating technologies and carbon capture and storage 
technologies.
     Avoid penalizing early actors and their customers.
     The customer at the end of the energy supply chain--like 
the households and businesses that we serve--will ultimately bear a 
substantial share the costs associated with the regulation of 
greenhouse gas emissions. The allocation system should recognize and 
compensate for these costs.
     Avoid creating unintended ``windfalls'' for companies by 
granting allowances whose value is far in excess of the costs of 
compliance or mitigating costs for those company's customers.
    Many of these public policy objectives can be accomplished through 
a combination of the following: allocating allowances to local 
electricity distribution companies on behalf of their customers; 
allocating allowances to generators using an updating, output-based 
methodology; allocating allowances to states for use to support public 
purpose programs or to help disproportionately impacted communities or 
constituencies; and auctioning a portion of the allowances and using 
the proceeds to support various objectives, such as technology 
development and deployment, adaptation assistance, and/or support for 
low-income energy consumers.

    Question 5. Can an allocation system both encourage the use of 
cleaner technologies and help coal-fired power plants reduce their 
carbon dioxide emissions?
    Response. Yes. There are two basic mechanisms by which the 
allocation approach can encourage the use of cleaner technologies and 
help coal-fired power plants reduce their carbon dioxide emissions. 
First, allowances can be allocated to all forms of generation based on 
their proportional share of electricity output, including coal-fired 
power plants equipped with carbon capture and storage technology. By 
issuing allowances based on output, an incentive is created--much much 
like the way the existing production tax credit works--that will 
encourage investment in new, higher efficiency generating technologies. 
Second, proceeds from the auction of emissions allocations--if that 
approach is selected--can be used to defray the costs of clean coal 
technologies through grants, loan guarantees, and other financial 
mechanisms.
                                 ______
                                 
   Responses by Peter A. Darbee to Additional Questions from Senator 
                                 Inhofe
    Question 1. What business risks are associated with potential 
climate change legislation and have these risks been documented in your 
10-K filings with the U.S. Securities and Exchange Commission (U.S. 
SEC) and appropriate disclosure to shareholders?
    Response. PG&E Corporation's and Pacific Gas and Electric Company's 
joint 2006 Annual Report to Shareholders included a discussion of the 
potential operational and financial risks associated with climate 
change and with potential federal and state legislation to address 
climate change. Both the 2006 Annual Report to Shareholders and the 
joint 2006 Annual Report on Form 10-K included a discussion of Assembly 
Bill 32, California's landmark climate change legislation, and Senate 
bill 1368, which impacts long-term power purchase agreements in 
California, and the risk of increased compliance costs and electricity 
prices.

    Question 2. If a cap-and-trade program such as the 2007 Bingaman-
Specter bill and the 2007 McCain-Lieberman bill were implemented, what 
would be the gross costs imposed in your business operations? What 
would be the gross revenue? What would be the net cost/revenue?
    Response. PG&E has not conducted a formal financial analysis of 
either the Bingaman-Specter bill or the Lieberman-McCain bill. We 
expect that it is likely that some provisions in these bills will be 
modified over the course of the legislative process, and that other 
legislative proposals on this subject are likely to be introduced and 
considered as well. In addition, several key aspects of the cited 
pending bills are not fully defined or left to the discretion of the 
administrative agencies to make determinations subject to notice and 
comment rulemakings. Therefore, providing a definitive assessment is 
not possible at this time.

    Senator Boxer. Thank you so much, Mr. Darbee, from Pacific 
Gas and Electric. How many customers do you serve?
    Mr. Darbee. We serve about 15 million customers.
    Senator Boxer. Thank you.
    Our next speaker, we are going to right down, is Jason 
Grumet, executive director of the National Commission on Energy 
Policy.

    STATEMENT OF JASON GRUMET, EXECUTIVE DIRECTOR, NATIONAL 
                  COMMISSION ON ENERGY POLICY

    Mr. Grumet. Madam Chairman, it is a pleasure to be here, 
Senator Inhofe and committee members, on behalf of the National 
Commission on Energy Policy.
    The National Commission on Energy Policy, as you may know, 
is a professionally and ideologically diverse group of 21 
leaders from environmental organizations, business groups, 
globally known scientists, labor leaders, former legislators 
and Government officials. We came together in 2002 with an 
aspiration that we could seek to develop consensus policy 
agreements that might help to forge a more constructive center 
in what we all know too well to be a rather polarized debate on 
energy policy.
    On climate change, Madam Chairman, our Commission embraces 
the recent scientific descriptions offered by the IPCC. We 
believe that it is fundamentally imperative that the United 
States act urgently to reduce our own emissions and to lead the 
rest of the world with true resolve so that we can in fact 
achieve an equitable and effective global program that includes 
all major emitting nations, India, China, Brazil and down the 
line.
    In April 2007, Madam Chairman, we strengthened a number of 
our recommendations and offered some specifics on allocation. 
We have provided those to the committee and we just recently 
completed some economic analyses of those recommendations, 
which we will provide today.
    We fundamentally chose to maintain the basic architecture 
of our recommendations, which we think are critical to maintain 
the economic protection necessary to forge the bipartisan 
compromise that is going to be ultimately necessary to 
legislate on this issue.
    I am going to focus the balance of my remarks on the issue 
of allocation. I would just like to note with some optimism 
that we believe there are three other architectural elements of 
climate change program that hold the key to bridging what has 
been such a contentious and divisive issue. I would like to 
note with greater optimism, Senators Lieberman and Warner, that 
I think they are the same issues that you both identified the 
other day, and we are very eager to work with you to try and 
build that consensus together.
    First and foremost, our commission believes we must 
overcome this false choice between limits on emissions versus 
technology programs. We fundamentally have to have a program 
that balances both. We are going to have to move forward 
quickly with a price that is going to inspire innovation, but 
recognize that we can't set that price at $80 a ton at the 
outset without harming the economy.
    What we can do is very thoughtfully and robustly direct 
incentives toward the key technologies, like carbon 
sequestration, like renewables, that will allow us to both 
advance those technologies quickly while protecting the overall 
economy and allowing time for a transition.
    Second, and I think it is obvious from the opening 
statements today, it was obvious from our experience, we have 
to accept that reasonable, informed and well-intended people 
are going to continue to disagree about whether it is going to 
be cheap and easy or incredibly difficult and costly to reduce 
the carbon intensity of our economy. We have been suffering 
this my ``modeler is smarter than your modeler'' fight for 
about a decade without a lot of progress. It is an insoluble 
problem, because it is based on your projection of the future, 
how fast you think technology will progress.
    It is on this basis that our commission has argued that we 
have to have cost certainty at the outset of this proposal. It 
is going to be controversial. We recognize that. We think there 
are different ways you can do it. At the end of the day, 
though, it can't depend on someone saying, trust me. We have to 
be able to say with absolute surety that the cost can't be 
worse than X.
    Over time we believe that we will evolve and we will have 
more confidence and we will transition to an emissions-based 
certainty. We think that is key. Finally, we have to focus on 
international linkages. America must lead. But at the same 
time, we recognize, as has been said, that this is global 
warming, not American warming. There is going to have to be an 
interactive set of relationships between what the United States 
does and other countries do over time.
    Turning to allocation, let me just start and save some time 
by basically embracing the principles that Peter Darbee 
articulated. We think that they are essentially consistent with 
the commission. I would like to focus for a moment on what 
allocation is and what it isn't. Allocation of permits has 
dramatic effects on the distribution of burdens and the 
benefits of a greenhouse gas program. It does not affect the 
overall cost to society, and at most it has marginal effects on 
the emission performance. This is about how we split up the pie 
at the outset of an emissions trading system.
    Second, contrary, I think, to popular expectation, the 
measure of the costs that a country or a sector bears is not a 
function of their emissions, their fossil fuel input or how 
many permits they have to buy. It is fundamentally a function 
of their ability to pass along increased fuel costs. Many 
sectors of the economy are quite good at that. The petroleum 
sector passes it along with great effect. The coal sector is 
going to have a little more trouble with that.
    Our commission believes that the purpose of allocation 
should be to try to mitigate those near-term transitional costs 
so that we have an equitable distribution, encourage technology 
development, protect consumers and address the costs of 
adapting to climate change that is going to be unavoidable.
    Bottom line, in my last 30 seconds, we believe to fully and 
fairly compensate everybody in the energy sector, you have to 
essentially at the outset of the program allocate about half of 
the permits at no cost. With that, it doesn't mean everyone 
gets 50 percent, some sectors more, some sectors less. But 50 
percent is the most that we need to fully mitigate those near-
term costs.
    It should not be an allocation forever. We believe that 
over time there should be a gradual transition to a full and 
complete auction, and that with an effective approach and 
allocation identifying the balance of market signals, 
technology programs and addressing international issues, we 
hope this committee can bring forward an ecologically and 
economically responsible effort that could become law this 
Congress.
    I thank you for your time.
    [The prepared statement of Mr. Grumet follows:]
 Statement of Jason Grumet, Executive Director, National Commission on 
                             Energy Policy
    Good morning Chairman Boxer and Members of the Committee. I am 
Jason Grumet, Executive Director of the National Commission on Energy 
Policy--a bipartisan group of energy experts that first came together 
in 2002 with the support of the Hewlett Foundation and several other 
private, philanthropic foundations. The Commission's ideologically and 
professionally diverse 21-member board includes recognized energy 
experts from business, government, academia, and the non-profit sector 
(see attachment). In December 2004, we issued a comprehensive set of 
consensus recommendations for U.S. energy policy, which included a 
proposal for a mandatory, market-based program to limit economy-wide 
U.S. greenhouse gas emissions.\1\ More recently, in April of this year, 
the Commission published updated recommendations that called for 
strengthening several key parameters of our original climate-policy 
proposal.
---------------------------------------------------------------------------
    \1\ The full report, titled Ending the Energy Stalemate, can be 
found at www.energycommission.org. The Commission's updated April 2007 
recommendations are also available at the website.
---------------------------------------------------------------------------
    The fact that we are here today, discussing the arcane issue of 
allowance allocation, shows how far the political debate on climate 
change has moved in the last few years. Increasingly, the real question 
for all parties to this debate is not whether we should act, but how. 
What program design will achieve meaningful results, prompt wider 
international cooperation, and set this nation on an economically 
responsible path to a lower carbon future? The proposals now under 
discussion by this Congress contain, in our view, many of the necessary 
elements of a sound solution. At the same time, we are under no 
illusions about the difficulty of building the consensus needed to pass 
legislation. And in that process, we expect few issues will prove more 
important than allocation. Before turning to this critical subject, 
however, I'd like to briefly outline the Commission's broader views 
concerning climate policy and the reasons for urgency in moving 
forward.
                 the science points to mandatory action
    Two years after the Commission released its original report, the 
scientific case for mandatory action to reduce greenhouse gas emissions 
is more urgent and more compelling than ever. Over the last several 
months, the United Nations Intergovernmental Panel on Climate Change 
(IPCC) has been releasing portions of its latest (fourth) assessment 
concerning the science, potential impacts, and mitigation options for 
global warming. The IPCC assessment, which represents the consensus 
view of hundreds of scientists around the world, tells us that evidence 
of global warming from the last 6 years of climate research is now 
``unequivocal.'' It points to multiple lines of evidence, from 
``observations of increases in global average air and ocean 
temperatures'' to ``widespread melting of snow and ice, and rising 
global mean sea level'' and confirms that the current level of carbon 
dioxide (CO2) in the atmosphere ``exceeds by far the natural 
range over the last 650,000 years.''\2\
---------------------------------------------------------------------------
    \2\ APCC, 2007: Summary for Policymakers. In: Climate Change 2007: 
The Physical Science Basis. Contribution of Working Group I to the 
Fourth Assessment Report of the Intergovernmental Panel on Climate 
Change [Solomon, S., D. Qin, M. Manning, Z. Chen, M. Marquis, K.B. 
Averyt, M. Tignor and H.L. Miller (eds.)]. Cambridge University Press, 
Cambridge, United Kingdom. This and other IPCC reports are available at 
http://www.ipcc.ch/.
---------------------------------------------------------------------------
    This increase has already led to warming--11 of the last 12 years 
rank among the 12 hottest years on record. And because of the long-
lived gases already in the atmosphere, this warming will continue. In 
fact, after reviewing the likely impacts of further, unchecked warming, 
the IPCC estimates the onset of many of the most serious consequences--
from damage to coasts from floods and storms, to impacts on water 
supply, disease vectors, and large-scale risk of species extinction--at 
somewhere between a 2C and 3C increase in global mean temperature. To 
limit warming to this level, it is now clear, will require that we 
begin to achieve significant reductions in global emissions by mid-
century. It's an enormous challenge to be sure, since current trends 
are going in the wrong direction. In fact, if nothing is done we can 
expect global emissions to increase by as much as 50 percent in just 
the next 25 years (by 2030). In that case, climate scientists estimate 
that twice as much warming will occur over the next two decades than if 
we had stabilized heat-trapping gases at 2000 levels.
    So to sum up: it is clear that we must begin to face this 
challenge. It is also clear that voluntary action will not be enough. 
That has been the policy of the United States for the last decade or 
more. And while we've seen admirable initiatives from several large 
companies and while important progress has been made in advancing new 
technologies, we are still headed in the wrong direction: down a path 
of continued emissions growth. In fact, U.S. energy-related 
CO2 emissions were 13 percent higher in 2005 than they were 
a decade earlier, in 1995, and 19 percent higher than they were in 
1990. According to the Energy Information Administration (EIA), our 
nation's energy-related CO2 emissions are likely to grow 
another 34 percent by 2030 if current trends continue.\3\ At the same 
time, we know the costs of further delay in initiating reductions are 
likely to be substantial. The faster we can get started, the smaller 
the burden of future mitigation and adaptation efforts and the smaller 
the human suffering and long-term environmental damage.
---------------------------------------------------------------------------
    \3\ Based on reference case forecast in EIA's 2007 Annual Energy 
Outlook. Available at: http://www.eia.doe.gov/oiaf/aeo/aeoref--
tab.html.
---------------------------------------------------------------------------
             elements of an effective climate change policy
    With the potential risks of climate change no longer in doubt, it 
is imperative that the United States engage this issue, act 
responsibly, and provide leadership. Ours is the world's largest 
economy and it accounts for 25 percent of global CO2 
emissions.\4\ Without our participation and leadership, the rest of the 
world cannot effectively address what could be the most difficult and 
far-reaching environmental problem we have yet faced. The Commission 
believes that the U.S. can best provide leadership by adopting 
approaches that do not significantly harm our economy and that 
encourage other nations to take comparable action.
---------------------------------------------------------------------------
    \4\ Note that although carbon dioxide is the predominant greenhouse 
gas, there are other gases that contribute to climate change. These 
include methane, nitrous oxide, and some industrial fluorinated gases. 
These gases would all be covered in the Commission's climate proposal.
---------------------------------------------------------------------------
    As I have already said, the first requirement of an effective 
policy is that it be mandatory. In a competitive market economy, where 
companies are expected to maximize shareholder value, it is unrealistic 
to expect them to invest significant resources absent a profit motive. 
As importantly, if the world's largest economy continues to rely on 
voluntary action alone it is very unlikely that countries like China, 
India, and Brazil will take serious action aimed at limiting their own 
rapidly growing emissions.
    What are the critical components of a mandatory approach? First, we 
believe that the immediate goal should be to put in place a policy 
architecture or framework that can last many years and be adjusted as 
we learn more about the evolving science, economic impacts, 
technological developments, and actions of other nations. We must get 
started with a clear signal to investors, consumers, and other nations.
    Second, a climate change program should be market-based and 
economy-wide. We are convinced that market-based approaches, like the 
landmark Acid Rain Program, are the most effective way to marshal the 
least cost emissions-reduction options and create powerful technology 
incentives. And although the focus of today's hearing is the power 
sector, we believe that a climate program should cover the entire 
economy. CO2 emissions arise from fossil-fuel consumption 
throughout the economy; hence only an economy-wide program can deliver 
maximum emission reductions at the lowest possible cost. The Commission 
believes that the most efficient way to implement an economy-wide 
program is to make the point of regulation upstream (i.e., with fuel 
producers or processors).
    Third, we continue to believe that cost certainty is critical to 
forging the political consensus needed to move forward without further 
delay. Debates about economic impact usually bog down in fruitless 
disagreements over whose economic model uses the right assumptions 
about technology change, fuel prices, and other factors. Different 
assumptions can produce wildly different estimates of the costs of 
reducing emissions. The safety valve feature in our proposal--which 
would make additional emissions allowances available for purchase from 
the government at a predetermined, but steadily escalating price--helps 
to cut through that debate by assuring that the per-ton cost of 
emissions reductions required under the program cannot rise above a 
known level.
    The Commission recognizes that the ``safety-valve'' feature is 
highly controversial because it favors cost certainty over emissions 
certainty. But we continue to feel this tradeoff is justified in the 
interests of overcoming political gridlock and allaying the legitimate 
competitiveness concerns of U.S. workers and industry. At the same 
time, the Commission recognizes that the need for environmental 
certainty is likely to outweigh the need for cost certainty at some 
point in the future. Indeed, once there is greater international 
consensus about the policy commitments needed to address climate change 
it will likely be appropriate to transition away from the safety valve 
toward firm emission caps. Meanwhile, we are also aware that other 
legislative proposals provide alternative cost-containment mechanisms 
and welcome further debate and analysis to determine which approach 
best addresses the cost concerns that might otherwise stand in the way 
of timely action.
    Fourth, the Commission believes that any successful national policy 
must place considerable emphasis on promoting wider international 
cooperation. By some accounts, China is now adding new coal capacity at 
the rate of one large power plant every week to 10 days and is set to 
surpass the United States in total carbon emissions in the next year or 
two.\5\ We continue to believe that the United States should lead and 
that once the United States takes action, it is imperative that our 
major trade partners and other large emitters follow suit. We have 
therefore proposed that the United States (a) review its policy every 5 
years in light of international and scientific developments, (b) 
explicitly link continued tightening of program goals and escalation of 
the safety valve to progress in other countries, and (c) signal its 
intent to work with other countries to forcefully address trade and 
competitiveness concerns if other major emitting nations fail to act 
within a reasonable timeframe.
---------------------------------------------------------------------------
    \5\ See http://select.nytimes.com/search/restricted/
article?res=F50B12F83A5B0C748CDDA80994    DE40 4482
---------------------------------------------------------------------------
    Fifth, the Commission believes that market-based efforts to limit 
greenhouse gas emissions must be accompanied by a major technology push 
to develop and deploy the low-carbon alternatives that will allow us to 
meet our environmental objectives while maintaining secure, reliable, 
and affordable means of meeting our energy needs. We strongly believe 
that a combined strategy of market signals and robust technology 
incentives is the most effective and least costly way to achieve a 
meaningful shift from business-as-usual trends, while equitably sharing 
the burden of emissions mitigation among shareholders and taxpayers. 
Our approach therefore calls for a complementary package of policies 
and public incentives to accelerate the development and early 
deployment of promising energy-efficiency and low-carbon-supply 
technologies. Incentives would be funded from revenues generated by an 
auction of emission allowances, thus avoiding additional burdens on the 
Federal Treasury. I will elaborate on this point later in my testimony.
    Finally, the Commission continues to believe that solutions to 
climate change must be pursued in concert with other critical energy 
policy objectives such as improving America's energy security, reducing 
oil dependence, and ensuring that the nation's energy systems are 
adequate and reliable to meet future needs. Thus, our recommendations 
in 2004 and again in 2007 called for concerted efforts to improve 
vehicle fuel economy; promote cost-effective energy efficiency 
investments; develop promising renewable energy resources, including 
biofuels; diversify available supplies of conventional fuels, 
especially natural gas, in an environmentally responsible manner; 
address obstacles to nuclear power; develop the technologies needed to 
preserve a major role for coal, especially technologies for carbon 
capture and storage; and invest in critical energy infrastructure.
                          allowance allocation
    As I have already noted, the question of how government distributes 
allowances at the outset of an emissions trading program is likely to 
emerge as one of the most important and contentious issues in 
developing viable legislation. It is contentious precisely because 
allowances represent a valuable financial asset--one that could be 
worth, in aggregate, tens of billions of dollars under an economy-wide 
greenhouse gas trading program. How that asset gets divvied up 
obviously matters enormously to the many stakeholders in this debate.
    In past emissions trading programs, notably the U.S. Acid Rain 
Program and more recently, the European Union Emission Trading Scheme, 
the great majority of allowances has been distributed for free to the 
entities that appeared most directly affected by regulation (this 
happened to be electric power generators in the Acid Rain Program and 
both power plants and other large industrial emitters in the European 
program.). The Commission has concluded, however, that these precedents 
do NOT provide a good model for allocating allowances under an economy-
wide U.S. greenhouse gas trading program. Rather we recommend that 
roughly half of the total pool of available allowances be distributed 
for free to industry in the early years of program implementation, 
while reserving the remaining half of the allowance pool to be directed 
for public purposes. Over time, we believe the share of allowances 
distributed for free should diminish gradually and in a predictable 
manner in favor of a more complete auction that would make additional 
resources available for more productive and widely shared societal 
investments.
    Economic analyses conducted by the Commission to explore the 
distribution of costs under its original program proposal suggest that 
this approach will provide adequate allowances to compensate major 
energy-related industries (including suppliers of primary fuels, the 
electric power sector, and energy-intensive manufacturers) for any 
short-term economic dislocations incurred in the transition to a lower-
carbon economy. At the same time, it will reduce the potential for 
large windfall profits and generate substantial public resources to 
assist low-income consumers and to invest in low-carbon technologies 
and end-use efficiency.
    The rationale for this approach is detailed in a recent White Paper 
on allowance allocation developed by Commission staff. The White Paper 
develops a number of crucial points that are important for 
understanding how allowance allocation does and does not affect the way 
an emissions trading program works. Indeed, it is worth repeating some 
of the key conclusions from that report's Executive Summary here:
    (1) Allocation affects the distribution of benefits and burdens 
among firms and industry sectors--it does not change program results or 
overall costs. Under a trading program, using an allowance is always 
costly--even for a firm that got the allowance for free--because it 
means giving up an asset that could otherwise be sold in the 
marketplace. Thus the incentive to reduce emissions is the same for all 
firms, regardless of allocation. Since allowances have real monetary 
value, they can be used to compensate firms or consumers without 
changing how different entities respond to the policy or what measures 
are taken to reduce emissions going forward.
    (2) The sum value of allowances is not a measure of the program's 
cost to society. The market value of allowances in circulation will far 
exceed the costs incurred by society to actually reduce emissions. This 
is simply because the number of tons being reduced or avoided is much 
smaller than the number of tons for which allowances are issued. Trade 
in allowances generates costs for allowance buyers, but equal and 
offsetting gains for allowance sellers. It does not represent a cost to 
society.
    (3) The economic burden imposed on a particular firm or industry 
sector under a greenhouse gas trading program is not a direct function 
of its emissions or fossil-fuel throughput. Rather, the burden depends 
on ability to pass through costs, available emission reduction 
opportunities, and other factors. Available analyses suggest that 
consumers and businesses at the end of the energy supply chain will 
bear the largest share of costs under a trading program, while primary 
producers or suppliers of fossil fuels (oil, coal, and natural gas) 
will bear a smaller share. Certain firms or industries, however, may 
encounter more difficulty than others in passing through costs and may 
bear a disproportionate burden as a result.
    (4) Because they do not bear most of the cost, allocating most 
allowances for free to energy producers creates the potential for large 
windfall profits. Economic analysis suggests that energy companies can 
and will pass most program costs through to consumers and businesses at 
the end of the energy supply chain. Allocating a large share of free 
allowances to these firms would likely result in windfall profits. This 
occurred under the EU trading program and caused considerable political 
outcry.
    (5) Allocation provides an opportunity to advance equity and other 
broad societal interests without diminishing the price signal necessary 
to elicit cost-effective, economy-wide emissions reductions. A trading 
program works by creating market incentives--effectively attaching a 
price to every ton of carbon emitted. Giving away allowances won't 
shield firms or consumers from this price signal (indeed, this would 
not even be desirable since the program will generate efficient 
outcomes only if all parties face the same incentive to reduce 
emissions). But allowances can be used for a variety of productive 
purposes: to compensate those who bear a disproportionate burden under 
the policy, to advance other public policy objectives (such as 
supporting energy R&D), or to provide broad societal benefits (for 
example, making it possible to cut taxes on income or investment).
    Several important implications flow from these conclusions. One is 
that--because cost burdens vary across different sectors and 
industries--there should be no presumption that different sectors are 
entitled to equal shares of allowances, either in absolute terms or as 
a fraction of their emissions or fuel use. Thus, the recommendation 
that 50 percent of the total allowance pool be distributed for free to 
affected industry should not be misconstrued to imply that every sector 
is entitled to 50 percent of its emissions obligation in free 
allowances. Rather, an allocation guided by equity considerations would 
award some sectors significantly more than 50 percent because they face 
substantial un-recovered costs, while it would award other sectors that 
could pass through the great majority of their costs significantly less 
than 50 percent.
    A second very important finding in the NCEP staff White Paper is 
that intra-sector allocation--that is, deciding how allowances should 
be distributed to individual firms from within the share dedicated to a 
particular sector under the broader allocation--may be as difficult and 
contentious in some cases as inter-sector allocation. A particular 
challenge for policymakers in this regard--and one that merits careful 
consideration--is allocation within the electric power sector. Equity 
considerations in this case are complicated by the various regulatory 
structures that govern the electric industry in different State. and 
regions. One concern is that program costs would be largely passed 
through to customers in competitive retail markets (allowing generators 
to ``keep'' most of the asset value of a free allocation), while 
companies operating in regulated markets could be required by 
regulators to use free allowances to offset price impacts to consumers. 
Since retail markets in the most coal-intensive regions tend to be 
regulated, this creates the potential for a perverse outcome in which 
consumers that rely on a more carbon-intensive generation mix see a 
weaker price signal than consumers that rely on a lower-carbon mix.
    In response to these concerns, some have proposed allocating 
directly to electric distribution companies (and providing specific 
guidance to State regulators about the proper treatment of these 
allowances), rather than allocating directly to generators. In this way 
all electric sector allocations would come under the purview of 
economic regulators--State public utility commissions in the case of 
investor-owned utilities, and local boards in the case of publicly 
owned utilities and cooperatives. Proponents argue that these 
authorities are in the best position to sort out the equity 
implications of different allocation schemes, direct appropriate levels 
of compensation to adversely affected firms, and ensure that end-use 
customers, who bear the largest share of the program costs, receive an 
equitable share of the asset value associated with free allowances. 
Others have argued for a hybrid approach that would divide the utility 
sector's share of direct allowances between generation and distribution 
companies.
    In addition, as mentioned above, allowances can be used to advance 
other public policy objectives such as providing incentives for carbon 
capture and storage (CCS). The Commission believes that CCS systems 
should be provided with deployment incentives that are at least equal 
to those currently available under EPAct05 for new nuclear power plants 
and (via the Federal production tax credit) for renewable energy 
resources. In particular, the Commission strongly supports the concept 
of awarding bonus allowances under a greenhouse-gas trading program for 
projects with CCS. The financial incentives generated by such 
provisions could substantially exceed any direct increase in public R&D 
spending on CCS.
    In sum, allowance allocation is extremely important and can be 
complicated. But I don't want to leave the impression that it's too 
complicated. It is neither possible nor necessary to precisely estimate 
net cost burdens for different sectors, let alone individual firms. But 
available economic models do provide a tool for assessing the rough 
distribution of costs and tailoring allocation decisions accordingly so 
that the overall result is generally transparent and can be accepted as 
fair by most parties. The Commission is confident that the initial 
approach we have proposed--by combining a 50 percent free allocation 
with a 50 percent auction--strikes a reasonable balance between the 
interests of consumers and taxpayers and the legitimate cost concerns 
of some industry stakeholders. By providing adequate resources to 
compensate firms that lose under the policy without risking significant 
windfall profits and while also generating resources to assist in the 
transition to low-carbon technologies, we believe this approach will 
help to ensure the success of the overall policy and advance the 
prospects for reaching political consensus.
    Clearly, important debates on allocation and other important 
aspects of climate-policy design lie ahead. In closing, I would like to 
re-iterate that the urgent imperative to act--and to act soon--must not 
get lost as these debates unfold in the months to come. Getting it 
right is important. But so is getting started.
    Thank you for the opportunity to testify today. We hope that the 
suggestions we have put forward will be helpful, even as we recognize 
that ours is not the only approach and that there are many worthwhile 
ideas that the Committee will consider as it moves forward. The 
Commission and its staff will be happy to provide whatever assistance 
we can offer as you continue to engage these issues in the weeks and 
months ahead.
                                summary
    The National Commission on Energy Policy is a diverse and 
bipartisan group of energy experts that first came together in 2002 and 
issued a comprehensive set of consensus recommendations for U.S. energy 
policy in December 2004. Those recommendations included a proposal for 
a mandatory, market-based, economy-wide program to reduce U.S. 
greenhouse gas emissions in a manner that is economically responsible 
and encourages action by our major trade partners. More recently, in 
April 2007, the Commission issued a set of updated recommendations that 
called for strengthening several aspects of our original climate 
proposal.
    These updated recommendations reflect our conviction that the case 
for mandatory action to limit U.S. greenhouse gas emissions has become 
more compelling and more urgent than ever. In our view, the most 
effective approach would:
     Establish a policy architecture that is robust enough to be 
sustained for many years while retaining the flexibility to adjust over 
time as scientific, economic, and technological developments, as well 
as actions by other nations, warrant.
     Be market-based and economy-wide.
     Provide cost certainty as a means of forging the political 
consensus needed to move forward without further delay.
     Create compelling positive incentives for wider international 
cooperation by conditioning future U.S. efforts on comparable action by 
other nations.
     Include a major technology program to spur the development and 
deployment of affordable, low-carbon technologies as a means of 
reducing the costs associated with achieving emissions goals while 
simultaneously advancing energy-security objectives and ensuring U.S. 
competitiveness in future global markets for clean technologies.
     Fairly distribute the burden of regulation among major 
stakeholders--including consumers and taxpayers as well as energy-
intensive industries--while maximizing benefits to society as a whole 
through a thoughtful approach to key design issues such as allocation.
     Place the compliance obligation at or near primary fuel producers 
or suppliers to reduce administrative complexity and the potential for 
emissions ``leakage'' while facilitating efficient pass-through of the 
carbon price-signal
    Allocation--that is, how government distributes allowances at the 
outset of an emissions trading program--is a contentious issue and one 
that is especially important, for reasons both substantive and 
political, to the success of a mandatory policy. The Commission's 
current position on allocation is informed by several years of analysis 
and debate, the results of which are described in a Commission Staff 
White Paper. Our chief conclusions can be summed up as follows:
     Allocation should primarily be used to promote a more equitable 
distribution of cost burdens, recognizing that the overall burden 
imposed by regulation is likely to be small in the context of the 
economy as a whole and that allocation does not affect program 
incentives or outcomes.
     Compensating major energy-related industries (including suppliers 
of primary fuels, the electric power sector, and energy-intensive 
manufacturers) for any short-term economic dislocations incurred in the 
transition to a lower-carbon economy should require no more than 
roughly 50 percent of the total pool of allowances initially available 
on an economy-wide basis under a trading program.
     Remaining allowances should be used to generate funds for public 
purposes, such as mitigating impacts on low-income consumers and 
investing in low-carbon energy technologies and end-use efficiency.
     Over time, the share of allowances distributed at no cost should 
diminish in a predictable manner as part of a gradual transition to a 
more complete auction.
     Within the pool of allowances distributed for free to industry, 
inter-sector allocation decisions should be guided by the incidence of 
actual cost burdens. Because the ability to pass through costs varies 
across different industries, there should be no presumption that 
industry sectors are entitled to equal shares of allowances, either in 
absolute terms or as a fraction of their emissions or fuel use.
     Careful consideration will need to be given to intra-sector 
allocation within the electric utility industry where different 
regulatory structures create the potential for price distortions across 
regulated versus competitive markets. Policymakers should therefore 
explore a variety of allocation options within this sector that would 
assure equitable outcomes for consumers and companies in different 
parts of the country.
    The Commission is well aware that reaching consensus on the issue 
of allocation will not be easy: the subject is inherently complex and 
many of the decisions involved are fundamentally distributional in 
nature, which makes them difficult to adjudicate in a manner that 
satisfies all parties. Nevertheless, few other nuts-and-bolts aspects 
of designing a greenhouse-gas trading program are likely to be more 
important to the ultimate goal of advancing meaningful and 
comprehensive climate policy in the United States.
                                 ______
                                 
Response by Jason Grumet to an Additional Question from Senator Sanders
    Question. Your organization has spent a lot of time modeling the 
impacts of the Commission's original and new recommendations, released 
this April. Based on your new recommendations, what happens to the 
traditional coal boom, meaning coal plants that do not capture carbon? 
Does it go away, shrink or do companies continue to build antiquated 
coal plants?
    Response. To analyze the combined impact of the updated 
recommendations issued by the National Commission on Energy Policy in 
April 2007, the Commission used the National Energy Modeling System 
(NEMS), a detailed model of energy production and consumption used by 
the U.S. Energy Information Administration (EIA) to develop forecasts 
and assess policy options.\1\
---------------------------------------------------------------------------
    \1\ A detailed description of the NEMS model can be found at http:/
/www.eia.doe.gov/oiaf/aeo/overview/index.html.
---------------------------------------------------------------------------
    Our analysis shows that if the Commission's April 2007 
recommendations were implemented no new conventional coal generating 
capacity is built between 2012 and 2030. In addition, during that 
period nearly 38 thousand megawatts of conventional coal generating 
capacity is retired. The combination of the Commission's proposed 
CO2 price signal and deployment incentives for carbon 
capture and storage (CCS)\2\ result in approximately 81 thousand 
megawatts of new coal generating capacity with CCS during the period 
from 2012 to 2030.
---------------------------------------------------------------------------
    \2\ To simulate the bonus allowance program for CCS recommended by 
the Commission, all advanced coal generation with CCS built by 2030 
receives a 1.9 cent per kilowatt-hour production tax credit. As with 
the renewable production tax credit, plants receive the credit for the 
first 10 years of operation.
---------------------------------------------------------------------------
    These figures contrast with the EIA's ``business as usual'' 
forecast, which estimates that 58 thousand megawatts of new 
conventional coal generating capacity will be added between 2012 and 
2030. During this same period 7 thousand megawatts of conventional coal 
generating capacity are expected to be retired, resulting in a net 
increase in conventional coal generating capacity of 51 thousand 
megawatts. The ``business as usual'' forecast does not report any new 
coal generating capacity that is equipped with CCS technology.

    Senator Boxer. Thank you, sir.
    Our next speaker is Lewis Hay, chairman and chief executive 
officer of FPL Group, Florida Power and Light.

   STATEMENT OF LEWIS HAY III, CHAIRMAN AND CHIEF EXECUTIVE 
                       OFFICER, FPL GROUP

    Mr. Hay. Madam Chairman, Ranking Member Inhofe, members of 
the committee, thank you for the opportunity to be here today.
    My company provides electric service to over 8 million 
people in Florida. We are also one of the top four generators 
of electricity in the country. Our generation fleet is one of 
the cleanest in the country and one of the lowest emitters of 
carbon dioxide. We are by far the largest wind energy producer 
and solar energy producer in the country.
    If the rest of the industry were emitting carbon dioxide at 
the same rate as we do, U.S. carbon emissions would drop by 1.6 
billion tons per year, or over 65 percent of our sector's 
emissions. This alone would allow our country to be below Kyoto 
standards. That is without any other industry taking any other 
action.
    We are also ranked first in the Nation in energy 
conservation. In fact, if the rest of the industry had our 
conservation efforts, CO2 emissions would be reduced 
by about 240 million tons per year, or nearly 10 percent of the 
emissions of the entire electric utility sector. These are just 
two examples of what is possible with today's technology.
    Our exceptional environmental performance has not come 
without a cost, however. Our customers in Florida clearly pay 
more for electricity than they would if we had a higher 
percentage of coal in our fuel mix.
    Let me summarize our views on global climate change. We 
believe man-made global climate change is real and requires 
prompt policy attention, but that it is not yet a crisis. We 
must take action, but the wrong actions can be worse than doing 
nothing at all. To be effective, any program must set a clear 
market price on carbon. It needs to apply throughout the 
economy. We need to protect export and import sensitive 
industries, or production will simply flee offshore. We need to 
recycle the dollars that consumers will pay in higher prices 
back to their pockets or we will do serious damage to the 
economy. Finally, we need to fund new technologies.
    In our minds, the simplest, most effective way to do this 
is through a carbon fee. We are not alone in this view. Most 
economists, the Los Angeles Times, The Washington Post, The 
Economist magazine, former Federal Chairman Alan Greenspan and 
many others endorse the concept of a fee. A carbon fee is 
administratively simple; it can be implemented quickly across 
our economy; it is immune from market manipulation; it rewards 
those who have taken prior action; its costs are certain and, 
crucially, it provides us in the industry with clear price 
signals, which we need to make appropriate long-term capital 
decisions.
    We suggest that the price starts out at a very modest 
level, such as $10 per ton of CO2 emitted, and then 
rise predictably, something like $2 per ton per year. To be 
effective, a carbon fee must be recycled, and we believe it 
should be recycled three ways. First, return the bulk of the 
money back to the consumers. Second, protect those industries 
that are genuinely exposed to direct competition from foreign 
firms located in countries without a carbon program. Third, 
fund research into carbon reduction capture and storage 
technologies as well as conservation and other low to no carbon 
power sources, such as nuclear and renewables.
    Many people will tell you a fee is just a tax and a tax is 
politically infeasible. Senators, let me be quite clear: any 
action you take to constrain carbon will effectively impose a 
tax on our economy. With a fee, we have cost certainty. 
However, with unconstrained cap and tarde, we don't. There are 
important differences between a carbon fee and a tax. These 
differences are explained in my testimony.
    However, if a fee really is politically infeasible, then 
the next best alternative is the right type of cap and trade 
program. But not all cap and trade programs are created equal. 
One simple example involves the allocation of free allowances. 
Allowances represent a very valuable financial asset worth 
between $70 billion and $300 billion per year. The specific 
method by which free allowances are allocated is very important 
and is likely to be highly politicized.
    Consider two different ways of allocating allowances to 
electric generation sources. In the first, every megawatt hour 
produced receives the same number of allowances, while in the 
second, allowances are allocated based on historical emissions. 
The first approach rewards efficient, low-emitting generators, 
as they will have to buy fewer credits than inefficient, 
higher-emitting generators.
    The second approach rewards those who have taken no action 
and who have old, inefficient and for the most part fully 
depreciated plants. Which would you rather reward, companies 
that have planned ahead and sought to anticipate policy trends 
and who have low emission profiles today, or firms that have 
sat back and done very little? We believe the answer is 
obvious.
    This is just one of the practical issues with cap and 
trade. Close study of the problems encountered in the early 
days of the European carbon trading scheme have revealed many 
other problems, including the volatility of carbon prices, 
market manipulation, regressive impacts on the poor and 
windfall profits.
    For every problem there is a proposed fix. But each fix 
makes it look more and more like a carbon fee. That said, our 
analysis suggests that the best cap and trade approach is to 
auction the majority of allowances, give away the remainder for 
a short period of time, and the free allowances should be 
allocated on an output basis, not the amount of BTUs consumed.
    Most importantly, it is critical that we have a safety 
valve.
    I see my time is up, so that pretty much summarizes our 
position.
    [The prepared statement of Mr. Hay follows:]
  Statement of Lewis Hay III, Chairman and CEO, Florida Power & Light 
                         Company and FPL Energy
    Madam Chairman, Members of the Committee, thank you for the 
opportunity to be here today. My name is Lew Hay, and I am the Chairman 
and CEO of FPL Group, the holding company for Florida Power & Light 
Company and FPL Energy. Through Florida Power & Light. we provide 
electricity service to roughly half the State of Florida, the fourth 
largest State in the Nation, or over eight million people. Through FPL 
Energy we operate in competitive generation markets In roughly half the 
State. outside of Florida. Together, these businesses operate a fleet 
of over 35,000 megawatts of capacity. making us one of the top four 
generators in the country. Our generation fleet is one of the cleanest 
in the country and among the lowest emitters of carbon dioxide. FPL 
Energy is by far the largest wind energy producer in the country. We 
own and operate approximately one-third of all the wind capacity in the 
country, and our capacity exceeds that of the next eight largest 
players combined. No company anywhere on the globe has developed and 
built more wind capacity than we have. We are also the largest solar 
energy producer in this country and the operator of the two largest 
solar fields in the world. And we have experience with a number of 
other farms of renewable energy production. Thus, I think we can fairly 
claim to know a bit about renewable energy.
    We also know a bit about conservation and energy efficiency. In 
Florida, with the support and leadership of the Florida Public Service 
Commission, we have been actively engaged with conservation and demand 
side management programs for over 25 years. In fact, according to the 
Department of Energy statistics, Florida Power & Light is first in the 
Nation in energy conservation programs among electric utilities. Energy 
efficiency is not something that has just occurred to us recently as 
the right thing to do. Over the years, our demand side management 
programs have enabled us to avoid building the equivalent of 11 major 
power plants and thus to avoid all the emissions that would otherwise 
have resulted. We have calculated that if the rest of the industry had 
conservation efforts roughly as effective as ours it would be as though 
the single largest emitter of CO2 in the U.S. electric 
utility sector did not exist from an emissions standpoint. 
CO2 emissions would be reduced by about 240 million tons per 
year, which is equivalent to 9.5 percent of the emissions of the entire 
electric utility sector.
    We have had a track record of focusing on environmental issues for 
many years. and it has been an explicit part of our strategy to seek to 
build Into our future expectations our view of where future 
environmental constraints will take us. We have sought to look ahead 
and anticipate rather than to wait and react. Because of our past 
actions, our emissions profile today is among the best in the industry. 
To put this in perspective, we have calculated that tithe rest of the 
Industry were today operating at our emissions intensity for Carbon 
dioxide--that is emitting the same amount of carbon for every megawatt 
hour they produced as we do--the U.S. today would be under its Kyoto 
target for total carbon emissions--even without any contribution from 
other sectors. And we know we can do better. So can the rest of our 
industry. But to do better will require the right kind of public policy 
framework.
    We have been able to combine exceptional environmental performance 
with strong financial performance. For 5 years in a row we have been 
named the most sustainable electric utility in the country by Innovest 
Strategic Value Advisors. We are one of 19 U.S. companies that 
Corporate Knights rated in the top 100 sustainable companies in the 
world. And just this year we were named by Fortune magazine as the most 
admired electric utility in that magazine's annual survey of our 
industry. We are proud of our accomplishments and our track record. 
However, our environmental performance has not come without a cost and 
I would be remiss if I did not point that out.
    Today, although our retail rates are below industry averages, our 
customers in Florida clearly pay more for electricity than they would 
if we had a higher percentage of coal in our fuel mix. Conversely, the 
customers of many utilities elsewhere in the country are in our view 
paying prices that are attractively low only because the true cost of 
their environmental impact is not reflected in those prices. We tinny 
believe that the single most impatient step Congress can take is to 
ensure that as we move forward, the cost of emitting carbon into the 
atmosphere becomes fully reflected in the market prices of all products 
and services.
    Major corporate carbon emitters, including electric generators, can 
reduce their carbon footprint by Improving their energy productivity, 
relying more on renewable forms of energy like wind, solar and 
geothermal, burning cleaner fuels and working with their customers to 
encourage more conservation and improve their efficiency (e.g., use 
more efficient air conditioners). But they have little incentive to do 
so because they are not required to pay for their carbon emissions or 
global warning's effects.
    Turning to the specifics of how to deal with global climate change, 
we have dear views. I expect they will in some way challenge every 
member of this Committee. In brief, we believe anthropogenic (man-made) 
global climate change is real and requires prompt policy attention, but 
that it is not yet a crisis. We must take action, but the wrong actions 
can be worse than doing nothing at all. Getting the U.S. economy on a 
path to lower carbon intensity and ultimately reducing carbon emissions 
will got be cost free--but if done correctly it does not need to wreck 
the economy either. The devil is in the details.
    To be effective, any program must
     Set a market price on carbon which will be reflected in the price 
of every good and service throughout the economy;
     Apply throughout the economy, not just for reasons of fairness 
but more Importantly for effectiveness. Carbon is pervasive throughout 
the economy and programs that focus on just one sector, such as our 
own, will not effectively address the problem;
     Protect import-and export-sensitive industries, otherwise 
production simply flee offshore to locations that do not price Carbon 
into their output and,
     Recycle the dolled that will be extracted from end consumers 
through higher prices back into their pockets, or we will do serious 
damage to the economy.
    Our analysis has led us to conclude that the simplest, most 
effective way to do this Is through a carbon fee. As many of you know, 
this view is shared by numerous others who have analyzed the problem, 
including most economists. William Pizer, an economist for Resources 
for the Future and who has studied greenhouse gas controls for more 
than a decade, concludes that, ``find that price mechanisms produce 
expected net gains five times higher than even the most favorably 
designed quantity target.''\1\ Editorials published in The 
Economist,\2\ the Los Angeles Times2 and The Washington 
Post2 have all endorsed the use of a fee, as has former 
Federal Reserve Board Chairman, Alan Greenspan, and former Vice 
President, Al Gore. A carbon fee is administratively simple; it 
automatically becomes economy-wide; it is easy to recycle to consumers; 
and, crucially, it provides us in the industry with the price signals 
we need to make long term capital decisions--the very capital decisions 
that will ultimately determine whether or not we bring down our 
national emissions profile over time. We have suggested that the price 
start out at a modest level--say $10 per ton of CO2 
emitted--and rise predictably each year by, say, $2 per ton?\3\
---------------------------------------------------------------------------
    \1\ Pizer, William, ``Choosing Price or Quantity Controls for 
Greenhouse Gases.'' Climate Issues Brief No. 17 (Washington, DC; 
Resources for the Future), July 1999. A copy of this paper is attached.
    \2\ Copies of these editorials are attached to our written 
testimony.
    \3\ These values can be adjusted upwards each year for general 
Inflation, in order to maintain the desired level of increasing real 
burden.
---------------------------------------------------------------------------
    Many people will tell you that a fee is just a tax, and a tax is 
politically infeasible. In fact, I'm sure you will hear the old 
witticism about waterfowl--if it quacks like a duck, etc. That is a 
good sound bite; but frankly, it's a bit silly. Senators, let me be 
quite dear-any action you take to constrain carbon will effectively 
impose a tax on our economy; that is a simple matter of economics. In 
our view, however, there are Important differences between a carbon fee 
and what most people think of when they think of a tax.
    A tax is designed to raise revenue to fund common needs and social 
services; a carbon fee is designed to change relative prices and to be 
revenue neutral. Taxes are generally designed to be unavoidable. 
Companies can avoid paying a carbon fee by not emitting carbon--exactly 
the behavior we need to encourage. Moreover, if it is effective, in 
time a carbon fee will be self-extinguishing.
    To be effective, a carbon fee must be recycled, and we believe it 
should be recycled three ways. First, the bulk of the fee should be 
returned to consumers directly, and the simplest way to do the is 
through a per capita allowance. Think of it as your personal allowance 
for your carbon footprint. Each year, every adult would receive a 
proportionate share in the proceeds of the aggregate fee, economically 
offsetting the typical emissions profile while preserving the pried 
signal that will discourage the use of carbon intensive products or 
production methods. Second, some of the fee needs to be reserved to 
protect those few industries that are genuinely exposed to direct 
competition from foreign firms that do not have an equivalent cost of 
carbon embedded in their cost structures. Third, a portion of the fee 
needs to be reserved for fundamental research into carbon reduction and 
elimination technologies, such as carbon capture and sequestration, 
without which in the long run we simply will not address the issue. 
ERR' estimates that in order to develop technologies necessary to 
address climate change in the electrical sector alone, RD&D funding 
will need to increase by roughly $1.3 billion per year over the next 25 
years--or a total of $33 billion. I suspect the actual amount needed 
will be at least twice that amount. The balance among the three ways 
for recycling carbon fees back into the economy can be adjusted over 
time, with the allocations to R&D and industry protection diminishing 
as the global economy adjusts to a new State.
    Finally, critics of a carbon fee will say it is not market based 
while cap and bade is. This is just not true--both approaches are 
market based. Under a cap and trade approach, volumes of 
CO2, emissions are established and the market establishes a 
price, while under a carbon fee approach, the price for emitting carbon 
is established and market forces determine the corresponding volumes of 
CO2 emissions. In both cases, market forces determine which 
specific forms of carbon reduction activities in what proportions are 
undertaken by private economic actors.
    A fee is very different from a tax, but in one way it is similar It 
will require real political courage to implement. I believe our 
government has the courage to address this problem the right way. 
However, if a fee really is politically infeasible, then the next best 
alternative is the right type of cap and trade program. But Senators, I 
must caution you that not all cap-and-trade systems are created equal. 
In fact, there are tremendous differences across the array of cap and 
trade proposals that are being discussed. If you pursue cap-and-trade I 
urge you to become personally Involved In understanding the details of 
how it will work and how it will be administered. This is too important 
an issue for it to be delegated to an executive agency without 
considerable guidance from Congress. We support cap-and-trade proposals 
such as Senator Carpets and Senator Feinstein's, which have sought 
appropriately to address some of the practical issues of this approach.
    Let me give you one simple but critical example of the practical 
issues you must address in cap-and-trade. Under a cap-and-trade 
approach, each year a fixed quantity of allowances are created-each 
allowance representing the right to emit a fixed amount of carbon 
dioxide or other greenhouse gas. Unless most of, if not all those 
allowances are auctioned off, which incidentally is an approach that we 
endorse, the specific method by which those allowances are allocated 
across industries and to firms or production sources within those 
industries becomes very important. Allowances represent a valuable 
financial asset. We estimate the total value of allowances per year to 
be between $70 billion and $300 billion--or between $2 trillion and $9 
billion over the first 30 years of a carbon regulatory program--
suggesting that the allocation process will be highly politicized and 
highly susceptible to rent seeking influence in Washington. The initial 
stages of the European carbon trading scheme show how significant the 
allocation question can be. It is widely agreed that allowances were 
over-allocated In some instances, leading to windfall profits for some 
market participants, particularly those participants who were the 
largest emitters of CO2. Whatever approach is taken, you can 
be sure that someone will be unhappy, and In our society that is likely 
to mean litigation, and litigation is likely to sew down the pace at 
which real emission improvements are actually made.
    Consider two different ways of allocating allowances to electric 
generation sources: In the first, every megawatt hour produced receives 
the same number of allowances, a so-called output-based approach; while 
In the second allowances are allocated based on fuel input where every 
BTU of enemy input receives the same number of allowances--a so-called 
input-based approach, Under the first, every generator has to reach the 
same goal, or pay the consequences; under the second, every generator 
has to improve by the same proportional amount or pay the consequences. 
The first rewards those who have already moved to become efficient, low 
emitters, since they will have to buy fewer allowances to reach the 
common goal; while the second rewards those who have taken no action 
and who have old. inefficient and, for the most part, fully depreciated 
plants. As you think about carbon policy proposals, Senators, I urge 
you to consider this issue. Which would you rather reward: companies 
that have planned ahead and sought to anticipate policy Vends and who 
have low emissions profiles today? Or firms that have sat back and 
taken advantage of low cost but high emissions technologies like 
traditional coal generation? We believe the answer should be obvious--
you should not reward the worst emitters. But that is one of the many 
practical consequences that the exact form of a cap and trade program 
will have, and it is one that I urge you to think carefully about\4\ I 
know you will follow your consciences; I hope my testimony will cause 
you to dig further into these practical issues.
---------------------------------------------------------------------------
    \1\ In a recently issued white paper, Clean Air Watch estimates 
that with an input based approach, the top 10 carbon emitting electric 
usury companies would reap a windfall of a range from at least $4.5 to 
$9 billion per year (assuming allowance prices ranged from between $5 
to $10 per ton).
---------------------------------------------------------------------------
    The illustration I have just given you is but one of many practical 
issues with cap-and-trade, Close study of the problems encountered In 
the early days of the European carbon trading scheme reveal many 
others. These problems include:
     How to address differing regional growth rates. Non-updating 
allowance allocations, such as an input-based allocation based on 
historical BTU consumption, would impose large penalties on faster 
growing States, such as California, Arizona, Nevada and Florida,
     How to avoid unnecessary economic damage associated with highly 
volatile permit prices. Even under the highly praised SO2, 
program, the price of SO2 allowances has varied, on average, 
by more than 40 percent Per year and has increased over 80 percent per 
year over the past 3 years. Given CO2's importance to the 
economy, this could have devastating impacts ranging from higher 
inflation, reduced consumer spending and reduced investments In green 
technology.
     How to prevent boarding of credits and other attempts to 
manipulate the market.
    Each proposed ``fix,'' such as including price floors and ceilings, 
adds complexity and possibly other unintended consequences, and, in 
effect, makes a cap and trade system work more and more like a carbon 
fee, albeit without the benefits that a carbon fee brings such as 
predictable pricing, fairness and administrative simplicity.
    That said, we believe that market-based trading schemes can be made 
to work, but the right way to implement them is to auction the majority 
of allowances and give away the remainder for a short transition 
period. Our analysis has convinced us that it is neither necessary nor 
desirable to give away for free any large proportion of the total 
allowances created saga year. In most cases utilities and independent 
generators will recover the costs of purchasing allowances through 
charging higher prices. It is the end consumer who will ultimately bear 
the burden. An auction-based system, with the proceeds of the auction 
recycled direct to end consumers on a per capita basis, best protects 
against unintended windfalls for producers. To the extent that there 
are free allowances, they should be allocated on an output basis (per 
MWH) (with the possible exclusion of nuclear and renewable generation, 
which have already received plenty of government support). The proceeds 
of the auctions should be recycled back into the economy in the same 
three ways as I have described for a carbon fee. Even then, with a cap-
and-trade approach you will face the difficult choice of deciding 
exactly how tight the caps should be each year. Too loose, and we don't 
make the progress we could make too tight and you surely will do 
serious damage to the economy. Unfortunately, as the Intergovernmental 
Panel on Climate Change's own reports acknowledge, no one today can 
tell you what those caps should be so you wit be left to guesswork This 
is another reason why we have concluded that a fee-based approach is 
superior. While there is still some guesswork involved, it is much 
easier to set a path for the future price of carbon than for the future 
volume of emissions reductions that will be manageable without major 
economic damage. And the future price of carbon--a so-called forward 
price curve-is the most crucial piece of information that all of us in 
business need to know in order to make the long-term investment 
decisions without which we will never succeed in bringing doom our 
national emissions profile. If a cap-and-trade approach is used, it is 
critical that a pre-determined ceiling price, or ``safety valve,'' be 
included, in order to avoid the threat of significant economic 
disruption in the event of very volatile allowance pricing.
    Senators, I know that there are some who do not believe that the 
science of climate change is conclusive, or that the consequences are 
certain. We agree. But we know enough to warrant taking action today. 
We know enough to know there is risk of severe consequences, and just 
as we buy insurance or wear seat belts, we need to address that risk 
But just as we don't give up all our income to purchase insurance, we 
need to be balanced in our approach to addressing that risk. A moderate 
carbon fee, escalating steadily and predictably, and recycled directly 
back into the economy, will have only a modest drag on the economy, but 
it will over time induce massive change in our carbon emissions profile 
especially when it is supported by adequate R&D. The same effect can be 
produced, though with greater complexity and less effectiveness, 
through a properly designed cap-and-trade system with a high percentage 
of allowances auctioned and a pre-determined safety valve built in. But 
a pearly designed scheme, or one that does not force a price on carbon 
throughout the economy, will not address the real environmental issue, 
and a will risk major economic dislocation.
    Thank you for the opportunity to contribute to this critical public 
dialog.
                                 ______
                                 
                              Attachments
    ``Doffing the Cap,'' The Economist, June 14, 2007.
    Eilperin, Juliet and Mufson, Steven. ``Tax on Carbon Emissions 
Gains Support; Industry and Experts Promote It as Alternative to Help 
Curb Greenhouse Gases,'' The Washington Post April 1, 2007.
    Green, Kenneth P., Hayward, Steven F., and Hassett, Kevin A. 
``Climate Change: Caps vs. Taxes'' Environmental Policy Outlook No. 2. 
Washington, DC: American Enterprise Institute for Public Policy 
Research, June 2007.
    ``Time to Tax Carbon: A Carbon Tax is the Best, Cheapest and Most 
Efficient Way to Combat Cataclysmic Climate Change,'' Los Angeles 
Times, May 28, 2007.
    Pizer, William, ``Choosing Price or Quantity Controls for 
Greenhouse Gases,'' Climate Issues Brief No. 17, Washington, DC: 
Resources for the Future, July 1999.
    ``Should Big Polluters Own the Sky?,'' Clean Air-Watch, June 2007




    
 Responses by Lewis Hay III, to Additional Questions from Senator Boxer
    Question 1. You advocate a carbon fee as the simplest, most 
effective way to reduce carbon emissions. How can we be sure that a fee 
will achieve the needed level of emission reductions? Couldn't 
companies just decide to pay to pollute?
    Response. Unfortunately, no program design will guarantee a certain 
result, not even a cap and trade. A cap can be missed--there's 
absolutely nothing to guarantee that it won't be--and in fact, the 
European experience suggests that this is quite possible. Although it 
may seem as though a cap gives certainty, we believe this is an 
illusion. Clearly, there is no certainty if the cap and trade system 
includes a safety valve. Furthermore, from a pragmatic perspective, 
there is simply no way a future Congress will not provide relief (in 
the form of deferrals or re-set targets) if it turns out that the 
expected levels of CO2 reduction cannot be achieved at 
reasonable cost. This is exemplified in the recent proposal by Senators 
Landrieu, Graham, Lincoln and Warner in which they propose a Carbon 
Market Efficiency Board. Unfortunately, with a cap, the way this will 
come about is through a rapid, intense run-up in the price of 
allowances, with potentially devastating economic effects and little 
time for industry to anticipate and react, leading to a political 
reaction in the face of economic distress. In contrast, with a fee, if 
the originally set path of future costs does not appear to be 
generating enough CO2 reduction, the future fee path can be 
gently and progressively ratcheted up--but always with direct 
observation over the level of economic hardship imposed by pricing 
carbon directly.
    In addition, we believe this question contains a false premise. We 
do not know today what the ``needed'' level of emissions reduction is. 
In other words, we do not know the exact relationship between 
atmospheric CO2 concentrations and global temperature. 
Currently, there is insufficient scientific evidence to determine this 
(as the most recent IPCC report explicitly acknowledges). Until more 
work can be done and the uncertainty narrowed, the issue is less 
scientific than economic. Global climate change presents the risk of 
future severe economic damage and addressing it will require some 
degree of economic sacrifice. Exactly what the tradeoff should be is 
not yet a matter of science but rather a policy judgment.
    This may seem to be a problem, but we believe it is actually a 
``silver lining'' from a policy perspective. Because climate change is 
a result of the long-term accumulation of greenhouse gases and since 
CO2 remains in the atmosphere for many years, it doesn't 
matter greatly whether we meet a particular annual emissions target in 
1 year or the next. This is especially true in the short-term. What is 
important is that we accomplish long-term goals by setting the economy 
on a new path toward lower carbon intensity and that we do so without 
inflicting major economic damage. Setting volume caps (or targets, as 
they really are) gives us the illusion of certainty, but it does not 
provide certainty. In contrast, a fee, as long as it is not arbitrarily 
shifted over the short term (which it does not need to be), provides a 
much greater measure of predictability to individuals and firms trying 
to make decisions about long-lived assets. Thus, it is far more likely 
to elicit major behavioral change based on sound investment 
decisionmaking.
    The entire question of whether it is better to attempt to control 
price or volume has been extensively studied. One of the best analysts, 
we believe, is Billy Pizer of RFF, who argues that price controls 
induce behavioral changes that can achieve results five times higher 
than quantity targets. A carbon fee can be implemented gradually, thus 
avoiding any economic disruption. That said, since the fee continues to 
escalate and can be anticipated, there's a point when the fee will 
become too expensive to pay. This is the point at which emitting carbon 
becomes economically impracticable, and is also the point at which the 
fee becomes anachronistic, or self extinguishing.
    Advocates of cap and trade argue that the economic models are 
sufficiently robust, that they ``know'' the impact on our economy of 
various caps and the likely resultant CO2 price. While we 
have our doubts about the precision of such models, especially in 
regard to site impacts, if the relationship between carbon limits and 
carbon prices is that well understood, then the impact on 
CO2 emissions levels should be the same regardless of 
whether a price is set or a certain level of carbon emissions is set. 
In other words, if these advocates are correct about the accuracy of 
their models, they should be pleased with a fee and be very confident 
with the end result. If, however, the converse is true--and they are 
wrong about their models--then we will have played Russian roulette 
with our economy by setting a hard cap.
    All programs to control carbon will have both costs and 
uncertainties. No program will provide absolute certainty over either 
price or volume. The best program will, however, reduce the 
uncertainties as much as possible. Both cap and trade and a fee provide 
uncertain results, but since the fee provides a higher degree of 
predictability to guide consumers and producers in their immediate 
economic decisions, the fee is obviously preferred.

    Question 2. How would we know how much to charge for a carbon fee? 
Could we be sure it would stimulate the investments needed to spur 
essential technological developments?
    Response. The most important issue when setting the price for 
carbon is the balance between the need for technological investment to 
bring long-term emissions reductions and the need to avoid economic 
disruption. Emissions reduction is a long-term problem that will take 
many decades to solve. Thus, if we start with a reasonable and steadily 
increasing price, a fee is going to attain a level whereby investments 
and, subsequently, behavioral changes, are imminent. At some level--a 
level that will in due course, though not immediately, become knowable 
to businesses, industries, and innovators--it will simply become too 
expensive to emit carbon into the atmosphere. Prior to this, 
investments will be made and changes will result. Unfortunately, the 
same cannot be said for a cap and trade since it doesn't set a floor--
or guaranteed cost for carbon--and consequently doesn't ensure a 
specified or certain level for returns on investment. As such, not only 
is behavior modification not certain, neither is technological 
advancement. In other words, setting a floor is just as important as 
setting a ceiling.
    In practical terms, a degree of judgment is required in setting the 
price path, since it is desirable not to have to change this with any 
frequency. With carbon, the critical challenge is to estimate what the 
cost of future technology with zero net emissions may be and then to 
set the target price at that level in the timeframe when those future 
technologies are expected to be broadly available. For example, if we 
believe that there is a reasonable probability that carbon capture and 
sequestration could be feasible at commercial scale for a cost of $50 
per ton by about 2030, then the price path should be set to reach $50 
per ton about 2030. It should start out at modest levels, and it should 
rise predictably and progressively. That is why we have proposed 
starting at $10 per ton, which will send a clear price signal but will 
not be massively economically disruptive, and escalate at $2 per ton 
(all values in 2007 dollars, i.e., the actual nominal prices will be 
increased for inflation).
    Such a price profile, if understood and believed, will absolutely 
spur technological development, just as it will spur behavioral change. 
This is particularly true if one believes that the cost to society of 
reducing greenhouse gases will be modest. Importantly, a reasonable and 
progressive price profile will give all economic actors time to 
respond. Investors and consumers will both be able to judge what 
actions to take, and the prospect of earning a predictable return for 
every ton of carbon that a new technology or change in behavior might 
avoid would be an extremely powerful inducement. We know from centuries 
of experience that there is no more powerful incentive to large-scale 
behavioral change than economics.
    A cap and trade, on the other hand, almost entirely ignores the 
economics, focusing instead on forcing a political solution to an 
economic problem. The proponents of certain cap and trade programs 
often point to various economic models as bases for their position, but 
even if these proponents have confidence in the models that support 
their conclusions, they should certainly understand that they can apply 
the same conclusions to a fee and support a much more economically 
efficient means of arriving at the same result! The politically 
convenient support for cap and trade programs is, as The Economist 
notes, quite frankly ``a pity, because most economists agree that 
carbon taxes are a better way to reduce greenhouse gases than cap-and-
trade schemes. That is because taxes deal more efficiently than do 
permits with the uncertainty surrounding carbon control. In the neat 
world of economic theory, carbon reduction makes sense until the 
marginal cost of cutting carbon emissions is equal to the marginal 
benefit of cutting carbon emissions. If policymakers knew the exact 
shape of these cost and benefit curves, it would matter little whether 
they reached this optimal level by targeting the quantity of emissions 
(through a cap) or setting the price (through a tax)'' [``Doffing the 
Cap,'' The Economist, 14 June 2007]. In other words, if we knew either 
the marginal benefit or the marginal cost, then we'd be entirely 
indifferent to the policy solution. But, since we know neither the 
benefit nor the cost--every model, to this point, is at best a rough 
approximation--then we should be obligated to take the path that 
provides cost certainty. This seemingly simple fact is ignored by 
politicians because, as that same Economist article notes, a fee is 
prone to ``ideological caricature.'' Economists, like Alan Greenspan, 
Paul Volcker, Robert Shapiro, and William Pizer understand that the 
solution shouldn't be political, but should be efficient and certain 
and thus all support a carbon fee. For their part, entrepreneurs, 
industrialists and markets respond best to price signals. If there is a 
price on carbon, you can bet safely that they will respond with new, 
lower cost technologies, which in turn helps the overall economy and 
spurs the carbon-free paradigm that any program should aspire to.
    While the exact price profile of the fee is less important than its 
general shape, it is very important that we not err too much to one 
side or the other. For example, if we set the price at $50 in the first 
year or two it will make little difference to the speed with which 
necessary new technologies can be developed and commercialized, but it 
will exact a huge economic cost. This is the great danger with a cap 
and trade system--it will be very easy to inadvertently set a cap that 
cannot practically be met within a particular timeframe. The 
consequence will be that allowance prices will skyrocket unpredictably, 
but too late to induce additional action, and the only possible 
response will be to relax the caps. By then, however, the economic 
damage will have been done.
    It is worth noting that a modern, free enterprise economy like our 
own can adapt very well to moderate, predictable changes in relative 
prices without significant loss of net output. It cannot adapt nearly 
so well to short, sharp shocks (for example, the oil shocks of the 
1970s). A fee system provides predictable, moderately changing prices, 
allowing the economy gradually to adapt to a new, lower carbon 
intensity state. A cap approach runs the risk of inadvertently inducing 
unanticipated and unnecessary economic shocks.
    At its most basic form, a carbon fee creates a supply curve. This 
is key to stimulating the kind of behavioral changes and investment 
decisions that will ultimately abate carbon emissions. Generation 
technologies cost hundreds of millions of dollars, and in some cases--
nuclear, for example--billions of dollars. And, the decisions and 
technologies last a long time. Long-term investment decisions require 
price certainty for justification, not economic models.

    Question 3. How would you recommend recycling some of the proceeds 
from a carbon fee or auction back to consumers?
    Response. It's important to remember that the point of a carbon fee 
or auction is not to raise treasury revenue, but to modify behavior and 
reduce carbon emissions. It should be, in effect, revenue neutral, with 
all proceeds recycled directly back into the economy.
    The proceeds should be employed in three ways:
    1. To abrogate the inherent regressivity of a carbon cost and its 
consequent impact on energy costs, the bulk of the fee should be 
returned to consumers directly through a per capita allowance, a de 
facto personal allowance for carbon. To this end, each year, every 
adult would receive a proportionate share in the proceeds of the 
aggregate fee, economically offsetting the typical emissions profile 
while preserving the price signal that will discourage the use of 
carbon intensive products or production methods. While other methods 
are possible, it is crucial that the return to consumers be independent 
of their carbon footprint, otherwise the price signal effect will be 
lost. Thus, for example, if credits were given to electric load serving 
entities, there is a high likelihood that state-level utility 
regulation would pass these through to consumers based on their 
kilowatt-hour consumption. This would nullify the desired price signal. 
Overall, we believe a simple per capita allowance makes most sense. To 
reflect the inherent efficiencies of families, we suggest that 
dependent children receive a partial allowance (one-third or one-half 
of the adult allowance).
    2. Some portion of the resultant proceeds needs to be reserved to 
protect those few industries that are genuinely exposed to direct 
competition from foreign firms that do not have an equivalent cost of 
carbon embedded in their pricing structures. Similarly, U.S.-based 
industries and firms that export to non-carbon controlled countries 
that are negatively impacted also merit protection.
    3. A portion of the fee needs to be reserved for fundamental 
research into carbon reduction and elimination technologies, such as 
carbon capture and sequestration. Without these technologies, we simply 
will not be capable of adequately addressing carbon abatement. EPRI 
estimates that in order to develop technologies necessary to address 
climate change in the electrical sector alone, RD&D funding will need 
to increase by roughly $1.3 billion per year over the next 25 years--or 
a total of $33 billion. We believe the actual amount needed will be at 
least twice that amount.
    The balance among the three ways for recycling carbon fees back 
into the economy can be adjusted over time, with the allocations to R&D 
and industry protection diminishing as the global economy adjusts to 
the new paradigm. We believe that the vast majority of the dollars 
should go directly to consumers.

    Question 4. How can we encourage utilities to encourage energy 
efficiency on the part of their customers?
    Response. While energy efficiency isn't the only solution, it's 
clearly an important part of the solution. And, importantly, as a 
country--and, in particular, as an industry--we've only scratched the 
surface. There's an enormous potential for more energy efficiency 
measures to be implemented. For example:
    1. Do what Florida does. As a first step, you need look no further 
than to the best of what has already been done. We don't build new 
generation until we've proven that we've exhausted all economical 
conservation and efficiency measures. Consequently, FPL is first in the 
Nation in conservation (our peak demand is just 2 percent of America's 
peak demand, but we've implemented 13 percent of the country's energy 
efficiency and 6 percent of the load management). If the rest of the 
nation's utilities adopted our efficiency standards, it would avoid 
completely the same about of carbon emitted by the nation's largest 
electric utility emitter.
    2. Create economic incentives to do more. Utilities can play a big 
role, but they need an incentive to reduce their existing sales and 
source of profits.
    3. Support infrastructure investments and new rate structures. 
Smart meters and time of day pricing will clearly make energy delivery 
and use more efficient. Such effectual structures, coupled with smarter 
end-use appliances will drive behavioral changes and efficiency.
    4. Ensure that the cost of CO2 is fully reflected in the 
rates that customers are paying. To this point, a carbon fee is the 
clearest and most efficient means to ensure that the price of carbon is 
reflected in the costs of goods and services. Importantly, because they 
would actually hide the cost of carbon, free allowances in a cap and 
trade scheme would have the opposite effect and would actually 
undermine efforts to encourage drive efficiency and behavioral changes.
    5. Implement programs to educate consumers and create awareness.
    Despite our best efforts, energy efficiency is not always top of 
mind for our customers. Many times the most efficient alternative is 
not selected because the customer simply doesn't have the information 
to make an informed decision. Raising public awareness on conservation 
is very costly; education on the best alternatives increases that cost 
even more. Over the last 25 years FPL has worked hard to raise the 
awareness level of energy efficiency and has accomplished an industry-
leading level of success, but meeting the reduction targets that are 
contemplated in most carbon reduction measures would require a 
Herculean effort. To even begin to accomplish such an effort would 
require proactive awareness campaigns from all levels of government, a 
modest but consistent level of funding, and a concerted public/private 
partnership. A small portion of the proceeds of a carbon fee could be 
dedicated to this role.
    Once customers are made aware, the increased incremental cost of an 
energy efficient alternative must then be overcome. Today, utilities 
provide incentives to customers that install energy efficient measures. 
However, such incentives often pale in comparison to the differential 
cost of the more efficient measure. We need a regulatory mechanism that 
allows for larger incentives to help cover the cost of the measure. The 
gap between the cost of an energy intensive end point and the cost of 
an efficient device must be narrowed significantly to make a 
difference. Once again, this is one of the virtues of a fee: it 
translates immediately and directly into a price signal and will 
automatically make any existing potential conservation measure 
inherently more attractive--and in a predictable fashion.

    Question 5. If utilities are given emission allowances for free, 
will utilities pass along the savings to consumers or will they 
increase the price of electricity to reflect the market value of the 
allowances?
    Response. We think there is a very real risk that with any 
allowance program in which there are free allocations there will be 
misappropriations. Free allowances are inherently problematic. There 
are, quite simply, too many things that can go wrong to make them 
worthwhile.
    While we cannot know for sure exactly what will happen, we can make 
reasonable assessments. In deregulated markets, generators are unlikely 
to pass along any net savings to consumers. Prices are set by the 
market, and the market price will likely increase by the marginal 
producers' incremental cost of CO2 compliance. Other 
generators will benefit from this to the extent that their cost of 
CO2 compliance is less than that of the marginal producer. 
If they receive free allowances, they will keep this difference as 
well.
    In traditional, regulated markets, the amount of savings customers 
will realize, and how they will realize it, will be a function of each 
utility's State public service commission. It is hard to predict how 
each PSC will act. Some will likely require a pass through to customers 
based on their electricity consumption. We view this as a significant 
problem, because it will nullify the price signal that is crucial to 
send to customers if they are to be encouraged to change their behavior 
and become more energy efficient. Other PSC's might implement different 
pass-through mechanisms, with unpredictable results.
    Of course, it is possible that some utilities will try to convince 
their PSC's that they have to pay twice to deal with carbon: first by 
paying for CO2 allowances and second by building new low (or 
no) carbon generation; and as such they should be allowed to sell their 
allowances and keep the proceeds to help recover their costs. We have 
heard this argument used by some generators. It is, however, quite 
without merit. They may choose to pay the cost of carbon for each 
megawatt hour either of two ways: by purchasing an allowance, or by 
creating new, clean generation. But they will never have to pay twice 
for the same megawatt hour.
    Since free allowances are inherently problematical and somewhat 
unpredictable in their distributional effects, we believe they should 
be avoided. Clearly, however, if there are any free allowances they 
should be distributed based on efficiency--thus, rewarding the very 
behavior a climate bill would purport to encourage. Some companies and 
sectors argue that allowances should be distributed based on historic 
pollution. We find this unjustifiable for two major reasons: (1) our 
customers pay more already because they've already made investments in 
clean, efficient generation (i.e., this penalizes those who are 
efficient and/or who took early action) and (2) Florida is a rapidly 
growing State that would be essentially be penalized for growth under 
an input, or historic, scheme. Customers of low-cost traditional coal 
generation enjoy substantially lower rates than customers of cleaner, 
more efficient generation. There's an obvious correlation between 
carbon emissions and cost. Even after adding the cost of allowances, 
coal customers will still pay less. It makes no sense to subsidize 
lower rates and higher emissions on the backs on consumers who pay 
higher rates but have lower emissions. Further, there's no logic 
whatsoever in looking at historic emissions. It doesn't solve the 
problem and doesn't encourage technological innovation. Certain regions 
of the country could meet a mandated reduction simply because their 
population is declining and thus their energy consumption and resultant 
emissions are declining. Consequently, they would have no incentive to 
make investments in new, more efficient technologies. On the other 
hand, certain regions--such as the Southeast and Southwest--would be 
punished for simply growing in population.
    Since allowances have value and thus create a cost for carbon, it 
is logical to assume that all electric rates will increase. It follows 
that if some allowances are free, then some consumers will end up 
essentially paying more for electricity while the utilities are held 
harmless. Of course, if there's an over-allocation of allowances, then 
those entities can actually sell the allowances and make a profit, 
while charging the increased market for electricity. This scenario is 
especially convoluted in deregulated markets where a clearing price is 
set--likely at an elevated level--and the states' Public Service 
Commissions have less control over the process. To this point, in 
Germany both E.ON and RWE have been charged with doing exactly this, 
selling electricity to their customers at market price and selling free 
allowances for profit, in effect double charging their customers.
    Even if this does not happen, however, there is a perverse effect 
from free allocation of allowances. If the value of the allowances is 
passed through to consumers as a reduction in the price of a kilowatt 
hour of energy, then the consumer promptly loses the price signal that 
we need to send if the large reductions in carbon intensity that are 
possible through end user efficiency and conservation are actually to 
be achieved! Either way there is a problem.
    These problems are inherent in the approach of free allocations. 
They are avoided if we choose a carbon fee with per capita recycling. 
Regulated utilities will pass on their costs directly, while the 
wholesale price of electricity will rise in de-regulated markets, so 
end-use consumers will see the right price signals and will have 
appropriate incentives to conserve and be efficient, but because the 
vast bulk of the dollars will be recycled directly into consumers' 
pockets the economy will not be hurt significantly. Again, the 
superiority of the fee approach is clear.
    If a cap and trade system is used, allowances should be auctioned, 
with the proceeds recycled as we have discussed for the fee approach.
                                 ______
                                 
Responses by Lewis Hay III, to Additional Questions from Senator Inhofe
    Question 1. What business risks are associated with potential 
climate change legislation and have these risks been documented in your 
10-K filings with the U.S. Securities and Exchange Commission and 
appropriate disclosures to shareholders?
    Response. The business risks associated with climate change 
legislation generally fall into three categories.
    1. Climate change legislation can result in higher operating costs 
that may not be recovered in prices paid by customers. This is 
particularly a possibility for generation units in competitive markets, 
but it could also happen for regulated generation.
    2. Climate change legislation can mean higher capital expenditures 
resulting from the investments necessary to comply with the new rules 
(e.g., improvements to plant efficiency, CO2 capture and 
storage technology). Again, these costs may or may not be recoverable 
in rates.
    3. Climate change legislation can render current generation assets 
obsolete and, therefore, create the risk of unrecoverable, or stranded, 
capital costs. Further, current generation assets might have their 
output materially reduced, which would likewise create the risk of 
unrecoverable, or stranded, capital costs.
    We believe that we have made the appropriate disclosures to 
investors in Part 1, Item 1A: Risk Factors of our 2006 10-K filings. 
The commensurate excerpt from this section is noted below.
         ``FPL Group and FPL are subject to extensive Federal, State 
        and local environmental statutes as well as the effect of 
        changes in or additions to applicable statutes, rules and 
        regulations relating to air quality, water quality, climate 
        change, waste management, wildlife mortality, natural resources 
        and health and safety that could, among other things, restrict 
        or limit the output of certain facilities or the use of certain 
        fuels required for the production of electricity and/or require 
        additional pollution control equipment and otherwise increase 
        costs. There are significant capital, operating and other costs 
        associated with compliance with these environmental statutes, 
        rules and regulations, and those costs could be even more 
        significant in the future.''
    In addition to the risk factors section above, which is designed to 
provide investors a high level view of the broad array of risks to 
which the business is exposed, FPL Group also includes discussion of 
environmental matters in Part 1, Item 1: Business. An excerpt from this 
section specific to climate change is noted below.
    ``Climate Change--As a participant in President Bush's Climate 
Leader Program to reduce greenhouse gas intensity in the United States 
by 18 percent by 2012, FPL Group has inventoried its greenhouse gas 
emission rates and has committed to a 2008 reduction target of 18 
percent below a 2001 baseline emission rate measured in pounds per 
megawatt-hour. FPL Group believes that the planned operation of its 
generating portfolio, along with its current efficiency initiatives, 
greenhouse gas management efforts and increased use of renewable 
energy, will allow it to achieve this target. In addition, FPL Group 
has joined the U.S. Climate Action Partnership, an alliance made up of 
a diverse group of U.S.-based businesses and environmental 
organizations, which in early 2007 issued a set of principles and 
recommendations to address global climate change and the reduction of 
greenhouse gas emissions.
    The U.S. Congress is considering several legislative proposals that 
would establish new mandatory regulatory requirements and reduction 
targets for greenhouse gases. Based on the most current reference data 
available from government sources, FPL Group is among the lowest 
emitters of greenhouse gases measured by its rate of emissions to 
generation in pounds per megawatt-hour. However, these legislative 
proposals have differing methods of implementation and the impact on 
FPL's and FPL Energy's generating units and/or the financial impact 
(either positive or negative) to FPL Group and FPL could be material, 
depending on the eventual structure of any legislation enacted and 
specific implementation rules adopted.''
    For a full list and description of all of the risk factors 
impacting our business, please see our full 10-K filing which can be 
accessed via the Internet at www.FPLGroup.com.
    In addition to this formal documentation, our regular 
communications with investors frequently include discussion of the 
specific topic of climate change, which is increasingly of interest to 
many investors. Because the range of alternatives for addressing 
climate change is so wide, at this stage it is impossible to provide 
specific guidance on the impact that legislation might have. As the 
above excerpt notes, the impact on FPL Group could be materially 
positive or negative, depending upon the specifics of the program, if 
any, eventually adopted.

    Question 2. If a cap-and-trade program such as the 2007 Bingaman-
Specter bill and the 2007 Lieberman-McCain bill were implemented, what 
would be the gross costs imposed in your business operations? What 
would be the gross revenue? What would be the net cost/revenue?
    Response. It is impossible to provide specific answers to these 
questions, as the results depend both on presently unspecified but 
important details of how these proposals might be implemented and on 
how markets in different parts of the country react. Generally 
speaking, we can say that we would incur significant costs to purchase 
needed allowances, and these costs would likely be higher with the 
Lieberman-McCain bill over time, because of its more aggressive 
emissions targets, but we have no way of estimating how much these 
costs would be. Similarly, we have no way at present of knowing whether 
or to what extent any of the FPL Group companies might receive 
allocations of allowances, and even if they did, what the value might 
be. Finally, we have no way of knowing how much the price of 
electricity would rise in markets in different regions of the country 
in response to the additional cost of required purchases of allowances.
    All these uncertainties, which are very large, emphasize some of 
the reasons we believe a carbon fee is the best way to address climate 
change. Not only are there inherent uncertainties, but in a cap-and-
trade regime these uncertainties will be reflected in volatility of 
carbon prices. This greatly complicates, and likely delays, investment 
decisionmaking, and it is only through long-lived investments, 
involving huge amounts of capital, that we will eventually be able to 
address the problem of climate change.
    For all these reasons, we believe a fee is superior to cap-and-
trade. We don't support or advocate for the passage of either the 
Bingaman-Specter bill or the Lieberman-McCain bill. We do believe that 
climate change is a real long-term threat to our economic welfare and 
we do believe it warrants action in the near term. But we share Senator 
Inhofe's concern that poorly implemented legislation risks inflicting 
economic damage without helping the longer term environmental issue. 
Like Senator Inhofe, we believe that significant scientific uncertainty 
remains and that some of the more extreme scenarios painted by climate 
change alarmists simply aren't supported by the evidence. A prudent 
middle ground is warranted, in our view.
    A carbon fee that starts at a moderate level and escalates 
progressively and predictably, as I discussed in my testimony, can 
address the real concern with climate change without inflicting 
economic damage. It is worth noting that a modern, free enterprise 
economy like our own can adapt very well to moderate, predictable 
changes in relative prices without significant loss of net output. It 
cannot adapt nearly so well to short, sharp shocks (for example, the 
oil shocks of the 1970s). A fee system provides predictable, moderately 
changing prices, allowing the economy gradually to adapt to a new, 
lower carbon intensity state. A cap approach runs the risk of 
inadvertently inducing unanticipated and unnecessary economic shocks.

    Senator Boxer. Thank you very much, sir.
    Our next speaker is David Hawkins, director, Climate 
Center, Natural Resources Defense Council. Welcome.

   STATEMENT OF DAVID G. HAWKINS, DIRECTOR, CLIMATE CENTER, 
               NATURAL RESOURCES DEFENSE COUNCIL

    Mr. Hawkins. Thank you very much, thank you for inviting 
NRDC to testify today. It is gratifying that the committee is 
meeting to discuss how to develop protective climate 
legislation, not whether.
    I would like to just touch on four questions. First, what 
emissions targets do we need? In my view, and in the view of 
the scientific community, to have a 50-50 chance of preventing 
really calamitous changes in the climate, we need to cut global 
emissions by the year 2050 by about 50 percent. Now, since 
developing countries' emissions are going to grow somewhat 
before they start to turn down, that implies that 
industrialized countries, including the United States, really 
need to be planning for cuts in emissions from today's levels 
by about 80 percent by the year 2050.
    To reach such levels by 2050, we have to have interim 
reductions that get us well along the way. We think that 
reductions of about 40 percent by 2030 are going to be needed 
in order to make the 80 percent by 2050 achievable. Now, for 
the electric power sector, this suggests cuts on the order of 
those in Senator Sanders' bill, S. 1201, which is about 35 
percent below today's levels in the year 2025.
    The second question is, are reductions of that magnitude 
achievable? Yes, they are. In the power sector, in particular, 
we have largely untapped potential in efficiency and 
renewables, and in the ability to deploy CO2 capture 
and geologic disposal.
    A recent study of the potential of just efficiency and 
renewables alone based on DOE laboratory reports and other 
sources indicates that power sector CO2 reductions 
of about 37 to 50 percent from today's levels by the year 2030 
are achievable.
    The next question is one that has been touched on by the 
previous witnesses; how to distribute emission allowances. NRDC 
believes that the optimal approach here is to recognize that 
permission to emit pollutants is a public resource. Allowances 
should be held in trust for the public and distributed in ways 
that will produce public benefits. This can be done through an 
auction, as Mr. Hay just described, with the revenue disbursed 
according to statutory formula and criteria, or it can be done 
by distributing allowances directly for certain uses, according 
to the same formula and criteria.
    In either approach, the legislation should provide for a 
public trustee to administer the statutory program. The 
resources should not go to the Treasury.
    The overarching goals of any allowance allocation program, 
in addition, obviously, to reaching the emission reductions, 
should be, one, to keep the cost of the program as low as 
possible for residential and other customers by encouraging 
investment in end-use efficiency and by avoiding wealth 
transfers from consumers to upstream entities; to encourage 
deployment of technologies needed to significantly reduce 
emissions in key sectors, such as mainstreaming carbon capture 
and disposal in the electric sector, retooling the auto 
industry to produce hybrids and other low-emitting vehicles, 
and accelerating the deployment of sustainable, low-carbon 
motor fuels and renewable energy.
    How to prevent high costs, the last topic. The best measure 
to control costs, in our view, is broad availability for 
trading to achieve compliance under the cap. Now, some are 
advocating that the emission reduction program should be called 
off or suspended if the compliance price exceeds a 
congressionally set price ceiling. This so-called safety valve 
concept would allow emissions to increase above permitted 
levels and thus would undermine the purpose of the law, which 
is to set us on a course to achieve predictable reductions in 
emissions over the next several decades.
    A price ceiling would also undermine innovation by creating 
a risk that investments in low-emitting technologies might be 
worth a lot less if they came in with initial costs even 
slightly above the price ceiling. For these reasons, we 
strongly oppose the price ceiling approach. We believe that 
banking of emission reductions allows firms to hedge against 
possible high-cost periods and combined with trading for 
compliance, should provide adequate protection against price 
spikes.
    If Congress does consider additional cost control 
provisions, they should be designed to not undercut the 
required emission reductions and the market mechanisms that 
drive those reductions. One approach that should be considered 
is authorization to borrow allowances from future years and 
repay them with interest. Together, banking and borrowing can 
stabilize long-term costs and eliminate the risk of price 
spikes while preserving the environmental integrity of the 
long-term caps on emissions.
    That concludes my testimony. Thank you.
    [The prepared statement of Mr. Hawkins follows:]
   Statement of David G. Hawkins, Director, Climate Center, Natural 
                       Resources Defense Council
    Mr. Chairman and members of the Committee, thank you for providing 
the Natural Resources Defense Council (NRDC) the opportunity to present 
its views on Global Warming Issues in the Power Plant Sector. NRDC is a 
national, non-profit organization of scientists, lawyers, and 
environmental specialists, dedicated to protecting public health and 
the environment. Founded in 1970, NRDC serves more than 1.2 million 
members and supporters from offices in New York, Washington, Los 
Angeles, San Francisco, Chicago and Beijing.
    NRDC strongly supports enactment of legislation to achieve major 
reductions in global warming emissions from the key emitting sectors in 
the U.S. economy. NRDC is a member of the U.S. Climate Action 
Partnership, which has urged Congress to enact such legislation. 
Electricity production is a critical feature of our economy and 
addressing global warming emissions from this sector and others is 
essential if we are to avoid the worst damages from a radically 
disrupted climate system.
    Electricity has brought us an unequalled quality of life and a 
thriving economy but it continues to be produced in ways that also 
bring us large and unnecessary harm to human health and to the 
environment. The electric generating sector remains the largest single 
polluting activity in the United States. Electric generators are 
responsible for two-thirds of America's sulfur dioxide pollution, 
nearly one-third of its nitrogen oxides, forty percent of carbon 
dioxide and more than one-third of remaining mercury emissions.
    Together these ``four horsemen'' of power plant pollution cause 
tens of thousands of premature deaths each year and hundreds of 
thousands of respiratory illness cases. They also kill lakes and 
threaten forests, contaminate fish, and fill the skies over national 
parks with haze. Carbon dioxide from the electric generating industry 
traps heat in the atmosphere, leading to disruption of the climate that 
we all depend on to maintain life as we know it on this planet.
    If these words strike any of you as familiar, it is because they 
are the opening paragraphs from my testimony to this Committee on the 
same subject in 2001. I decided to repeat them here as a reminder that 
all of us have failed in the past to address this issue with the 
urgency that is warranted. NRDC is gratified that, in recent months, 
the sense of urgency has increased in America and we applaud this 
Committee for its efforts to move forward with greater dispatch.
    Legislation that is effective in achieving emissions from all major 
emitting activities in the U.S. is essential but this hearing focusing 
on the electric sector is helpful in illuminating a number of issues 
that are relevant both to the electric sector and to other industries 
that would be included in multi-sector legislation.
                   the importance of the power sector
    Several factors make it critical to address the electric power 
sector in any global warming bill. First, there is the sheer size of 
power's contribution to global warming emissions: in the U.S. electric 
power emits about 40 per cent of our total carbon dioxide 
(CO2) emissions and the global share is similar. Once 
emitted, this CO2 pollution load remains in the atmosphere 
for centuries. Half of the CO2 emitted during World War I 
remains in the atmosphere today. A second feature of the power sector 
is the very long life of power generation plants. Some power plants 
built at the start of World War II are still operating and plants built 
in the last couple of decades will likely operate for 60 to 80 years. A 
third feature is that we do not today possess low-cost commercially 
demonstrated systems for removing CO2 from our existing 
fossil power station designs. That may change and might even change 
rapidly but we cannot ignore the risk that new power plants built today 
might operate for decades without meaningful reductions in their 
CO2 emissions if they are not designed with the need for 
carbon management in mind.
    These facts put a premium on prompt adoption of legislation that 
will cause electric sector investments to be made in a manner that 
favors low CO2 options. Our dependence on coal to generate 
power, both in the U.S. and globally, makes this challenge even 
greater. The very attribute of coal that has made it so attractive--its 
abundance--magnifies the problem we face and requires us to act now, 
not a decade from now. Until now, coal's abundance has been an economic 
boon. But today, coal's abundance, absent corrective action, is more 
bane than boon.
    Since the dawn of the industrial age, human use of coal has 
released about 150 billion metric tons of carbon into the atmosphere--
about half the total carbon emissions due to fossil fuel use in human 
history. But that contribution is the tip of the carbon iceberg. 
Another 4 trillion metric tons of carbon are contained in the remaining 
global coal resources. That is a carbon pool nearly seven times greater 
than the amount in our pre-industrial atmosphere. Using that coal 
without capturing and disposing of its carbon means a climate 
catastrophe.
    And the die is being cast for that catastrophe today, not decades 
from now. Decisions being made today in corporate board rooms, 
government ministries, and congressional hearing rooms are determining 
how the next coal-fired power plants will be designed and operated. 
Power plant investments are enormous in scale, more than $1 billion per 
plant, and plants built today will operate for most of this century. 
The International Energy Agency (IEA) forecasts that more than $5 
trillion will be spent globally on new power plants in the next 25 
years. Under IEA's forecasts, over 1800 gigawatts (GW) of new coal 
plants will be built between now and 2030--capacity equivalent to 3,000 
large coal plants, or an average of ten new coal plants every month for 
the next quarter century. This new capacity amounts to 1.5 times the 
total of all the coal plants operating in the world today.
    The astounding fact is that under IEA's forecast, 7 out of every 10 
coal plants that will be operating in 2030 don't exist today. That fact 
presents a huge opportunity--many of these coal plants will not need to 
be built if we invest more in efficiency; additional numbers of these 
coal plants can be replaced with clean, renewable alternative power 
sources; and for the remainder, we can build them to capture their 
CO2, instead of building them the way our grandfathers built 
them.
    If we decide to do it, the world could build and operate new coal 
plants so that their CO2 is returned to the ground rather 
than polluting the atmosphere. But we are losing that opportunity with 
every month of delay--10 coal plants were built the old-fashioned way 
last month somewhere in the world and 10 more old-style plants will be 
built this month, and the next and the next. Worse still, with current 
policies in place, none of the 3,000 new plants projected by IEA are 
likely to capture their CO2.
    Each new coal plant that is built carries with it a huge stream of 
CO2 emissions that will likely flow for the life of the 
plant--60 years or more. Suggestions that such plants might be equipped 
with CO2 capture devices later in life might come true but 
there is little reason to count on it. While commercial technologies 
exist for pre-combustion capture from gasification-based power plants, 
most new plants are not using gasification designs and the few that 
are, are not incorporating capture systems. Installing capture 
equipment at these new plants after the fact is implausible for 
traditional coal plant designs and expensive for gasification 
processes.
    If all 3,000 of the next wave of coal plants are built with no 
CO2 controls, their lifetime emissions will impose an 
enormous pollution lien on our children and grandchildren. Over a 
projected 60-year life these plants would likely emit 750 billion tons 
of CO2, a total, from just 25 years of investment decisions, 
that is 30 percent greater than the total CO2 emissions from 
all previous human use of coal.
                   what emission targets do we need?
    A central question that faces drafters of all environmental 
legislation is what should the targets be? Because of the long life of 
greenhouse gases, especially CO2, in the atmosphere, the 
long life of energy producing investments and buildings that use energy 
and the rapid growth in the global economy, we need to design 
legislation that will set a path that brings emissions down starting 
soon and persisting over decades in a predictable fashion.
    As detailed more fully in Appendix 1 of my statement, to have 
better than even odds of avoiding truly catastrophic disruption of 
earth's climate, the United States and other industrial nations need to 
adopt a declining emissions cap that starts reducing emissions soon and 
reaches 80 percent below current emission levels by 2050, and 
developing countries need to promptly reduce their emissions growth and 
follow suit with similar reductions later in the century.
    As discussed in Appendix 1, if national emission reductions start 
soon, we can stay on a prudent climate protection path with an annual 
emission reduction rate that gradually ramps up to 3.2 percent per 
year. But if we delay a serious start by, for example, 20 years and 
allow continued emission growth at nearly the business-as-usual rate, 
the annual emission reduction rate required to stay on this path jumps 
to 8.2 percent per year (see Figure 1 in Appendix 1). In short, a slow 
start forces a crash finish.
    Some analysts argue that delay is cheaper because we will develop 
breakthrough technologies in the interim. But that outcome is 
implausible for three reasons.
     First, delay dramatically increases the emission reduction rate 
required later. Cutting emissions by more than 8 percent per year would 
require deploying advanced low-emission technologies several times 
faster than conventional technologies have been deployed over recent 
decades.\1\
---------------------------------------------------------------------------
    \1\ Hawkins, D. ``Policies to Promote Carbon-less Energy Systems'' 
Proceedings of the 7th International Conference on Greenhouse Gas 
Control. Technologies (GHGT7). September 5-9, 2004, Vancouver, Canada.
---------------------------------------------------------------------------
     Second, without meaningful near-term market signals, there will 
be little incentive for the private sector to direct significant R&D 
resources toward developing the breakthrough technologies. Hope will 
rest entirely on the Federal R&D program, which now is far too small to 
yield the required results.
     Third, without different market signals, a new generation of 
conventional power plants, vehicles, and other infrastructure will be 
built during the next two decades. Our children and grandchildren will 
then have to bear the costs of prematurely retiring an even bigger 
stock of highly emitting capital than exists today. Even with a 
substantial discount rate, it is virtually impossible that delaying 
emission reductions will be cheaper than starting now.
    Given the power sector's large contribution to annual and 
cumulative CO2 emissions, it will be necessary to achieve 
large reductions in total power sector emissions if we are to achieve 
reductions in total emissions on the order of 80 percent by 2050. That 
said, it is worth noting that the question of where reductions must be 
achieved is not necessarily identical to the question of how emission 
reduction costs are best distributed in our society. However, 
legislation that proposes targets for particular sectors, such as 
Senator Sanders' bill, S. 1201, which contains targets for the power 
sector, should specify targets that are sufficiently ambitious to be 
consistent with where total U.S. emissions need to go. S. 1201 would 
cap power sector emissions at current (2006) levels in 2011, with 
emissions declining to approximately 10 percent below current levels by 
2015, approximately 25 percent below current levels by 2020, and 
approximately 35 percent below current levels by 2025.
    Are reductions like these achievable? Yes, they are. A robust 
portfolio of energy efficiency, major expansion of renewable generating 
resources and deployment of CO2 capture and geologic 
disposal (CCD) at fossil generating plants can achieve these targets in 
our view. Some would add increased reliance on nuclear energy to this 
mix, although the recent Keystone Center report on this subject 
suggests that high cost of new nuclear power plants, their lengthy 
construction period, the current dependence on large Federal subsidies 
and incentives to stimulate private investment in the sector, 
unresolved waste management and disposal issues, and a massive 
requirement to replace the current installed base of nuclear plants 
before 2050, will all make it difficult for nuclear to make a 
significantly greater contribution to carbon reductions than is already 
being contributed by today's fleet of nuclear power plants.\2\
---------------------------------------------------------------------------
    \2\ Notwithstanding their low-carbon advantages, the complete 
cradle-to-grave fuel cycles for nuclear and coal-or natural gas-fired 
plants with carbon capture have other serious non-carbon environmental 
drawbacks that make them inherently less sustainable than increased 
efficiency and wind, solar, geothermal, combined heat and power, and 
industrial waste-heat cogeneration options. So our energy strategy 
should prioritize large-scale deployment of these carbon-displacing 
options, with fossil energy with CCD and nuclear competing under a cap 
to supply the remainder of our future electricity requirements.
---------------------------------------------------------------------------
    We also believe these reductions are affordable. For example, NRDC 
and colleagues at Princeton estimate that all of the new coal plant 
capacity forecast to come on line in the U.S. between 2012 and 2020 
could be equipped with CO2 capture and disposal systems at a 
cost equal to a 2 percent increase in average retail electricity rates 
in 2020.
    For a strategic sector like power generation, NRDC believes that it 
is important to combine the driver of broad cap and trade permit 
program that delivers economic and planning signals to all players with 
well-designed performance requirements to accelerate the use of low 
carbon generating technologies. Both S. 1201 and S. 309, an economy-
wide measure sponsored by Senator Sanders and 17 other Senators, 
contain provisions for a minimum emission performance standard, 
``birthday'' provisions to assure that aging plants cleanup or be 
replaced, and a low-carbon generation requirement. These provisions all 
would stimulate deployment of CO2 capture and disposal 
systems faster than would occur in a cap and trade program alone. NRDC 
believes that U.S. leadership in this area is an important business 
opportunity and is essential to shape investment decisions in fast-
growing developing countries that plan to use substantial amounts of 
coal.
                        distributing allowances
    Another issue of great interest to the power sector and of even 
greater public policy importance concerns how pollution allowances are 
allocated or distributed under a cap and trade program. NRDC believes 
pollution allowances are a public trust. They represent permission to 
use the limited capacity of the atmosphere, which belongs to all of us, 
to dispose of global warming pollution. This limited carrying capacity 
is not a private resource owned by historical emitters.
    Emissions allowances will be worth tens of billions of dollars per 
year, and their value will increase over the first decades of the 
program as the pollution cap declines. Providing more than a small 
fraction of the allowances for free to pollution sources would give 
their shareholders an enormous and undeserved financial windfall.
    For these reasons, NRDC opposes grandfathering of emissions 
allowances to firms based on historical emissions, heat input, fuel 
sales, or other factors. Grandfathering the allowances would generate 
huge windfalls and transfers of wealth. Economists at the Congressional 
Budget Office, Resources for the Future (RFF) and other institutions 
have determined that grandfathering all emissions allowances would give 
the recipient companies an asset worth seven times the costs that they 
could not pass on to energy consumers.
    Stanford University and RFF economist Larry Goulder has shown that 
in an economy-wide upstream cap and trade program, it would require 
only 13 percent of the allowances to cover the costs that fossil-fuel 
providers would not be able to pass on to consumers.\3\ Dallas Burtraw 
and RFF colleagues have shown similar results for a cap and trade 
program on electricity generators.\4\ The Congressional Budget Office 
has reached the same conclusion.\5\ In the United Kingdom, the 
Government has determined that free allocation of allowances to 
electric generators has resulted in windfall profits of over $500 
billion.\6\
---------------------------------------------------------------------------
    \3\ Morgenstern et al., ``The Distributional Impacts of Carbon 
Mitigation Policies,'' Issue Brief 02-03 (Resources for the Future, 
Feb. 2002), http://www.rff.org/Documents/RFF-IB-02-03.pdf.
    \4\ Morgenstern et al., supra.
    \5\ See e.g., Terry Dinan, ``Shifting the Cost Burden of a Carbon 
Cap-and-Trade Program,'' (Congressional Budget Office, July 2003); CBO, 
``Issues in the Design of a Cap-and-Trade Program for Carbon 
Emissions,'' (Nov. 25, 2003).
    \6\ House of Commons, Environmental Audit Committee, ``The 
International Problem of Climate Change: UK Leadership in the G8 and 
EU,'' p. 17 (Mar. 16, 2005).
---------------------------------------------------------------------------
    To avoid these windfalls, allowances should be held in trust for 
the public and distributed in ways that will produce public benefits. 
This can be done through an auction, with the revenue dispersed 
according to legislated formulae and criteria, or by distributing the 
allowances themselves according to the same formulae and criteria. In 
either approach, the legislation should provide for a public trustee to 
administer the allowances.
    The overarching goals should be (1) to keep the cost of the program 
as low as possible for residential, commercial and industrial consumers 
(especially low-income consumers), by encouraging investment in end-use 
energy efficiency measures and by avoiding wealth transfers from 
consumers to upstream entities, and (2) to encourage deployment of the 
technologies needed to significantly reduce emissions in key sectors 
(e.g., mainstreaming carbon capture and disposal in the electric 
sector; retooling the auto industry to produce hybrids and other low-
emitting vehicles; accelerating deployment of sustainable low-carbon 
motor fuels and renewable electricity).
    NRDC believes the allowance resources should be used for four broad 
objectives (elaborated in Appendix 2):
    (1) To reduce overall costs for individual and business consumers 
(especially low-income consumers) through energy efficiency investments 
(50 percent).
    (2) To accelerate deployment of the ``big change'' technologies 
that we will need to cut emissions in key sectors (25 percent).
    (3) To provide transition assistance to impacted workers and 
heavily affected firms, and adaptation assistance to communities, 
farmers, wildlife managers (20 percent).
    (4) To encourage carbon reductions outside the cap, and early 
reductions, while preserving the cap (5 percent).
    To the extent that any emission allowances are allocated to the 
electricity industry, rather than auctioned, NRDC recommends that 
distribution companies receive these allowances rather than generators. 
The problem with allocating allowances to generators is rooted in 
equity concerns: about 40 percent of U.S. generation sells its output 
at market prices into various largely unregulated wholesale markets, 
while the rest remains subject to diverse forms of cost-of-service 
price regulation.\7\ Impacts of allocations on consumers and 
shareholders will vary widely and State regulators will not be able to 
respond to real or perceived inequities. Generators can be expected to 
pass through the increased price of carbon regulation in their 
wholesale prices, and also to keep the proceeds from the sale of 
allowances allocated to them initially. Consumers obviously will see 
the price signal, but not the benefits from the allowance allocation. 
The problem has already surfaced in European markets, leading United 
Kingdom authorities to conclude that initial allocation to electric 
generators serving competitive markets resulted in large windfall 
profits.\8\
---------------------------------------------------------------------------
    \7\ This is the estimate of the Electric Power Supply Association, 
which represents competitive power suppliers.
    \8\ House of Commons, Environmental Audit Committee, ``The 
International Problem of Climate Change: U.K. Leadership in the G8 and 
EU,'' p. 17 (Mar. 16, 2005).
---------------------------------------------------------------------------
    Electricity distribution companies, by contrast, provide service 
under continuous price regulation from either State commissions (for 
investor-owned utilities, accounting for about three-fourths of retail 
sales) or local boards (for publicly owned utilities and cooperatives, 
which serve the rest of the nation). The regulators can ensure that the 
value of these allowances is used for designated public purposes, 
including energy efficiency programs and rate adjustments.
    Congress would have a wide range of options in making allocations, 
ranging from the carbon content of electricity delivered by 
distribution companies to the volumes of electricity delivered (with 
numerous intermediate compromise possibilities). Utilities that 
distribute mostly coal-fired electricity are likely to advocate an 
emissions-based formula on the grounds that they will see the largest 
increase in electricity costs as a result of the CO2 
emissions cap. Utilities that distribute mostly low-emission resources 
are likely to advocate a formula based on electricity sales on the 
grounds that their customers are already paying higher prices for a 
cleaner generation portfolio.
    Whether or not the allocations should be updated over time is an 
independent question. A phaseout of any free allocations to the private 
sector diminishes the case for updating in general (the more rapid the 
phaseout the less need to update the free allocation). Any allocation 
based on carbon content should definitely not be updated because that 
would create a perverse incentive to increase emissions in order to 
obtain a larger allocation, raising the overall cost of achieving the 
emission cap (or increasing actual emissions if a safety valve is in 
effect). There is a better argument for updating a sales-based formula 
as a matter of equity between high-growth and low-growth areas. Such an 
approach would need to include an adjustment for independently verified 
energy efficiency to ensure that updating does not create a 
disincentive for additional energy efficiency improvements.
    The simplest approach would be to allocate based on electricity 
sales during the same historical period used for allocating to other 
sectors. If Congress decides to allocate (in part or in whole) based on 
historical emissions, however, calculating the carbon content of those 
electricity sales is certainly feasible and should not be seen as an 
obstacle to allocating to distribution companies. As long as the 
allocation is to distribution companies (to avoid windfall profits) and 
is not updated in a way that creates perverse incentives (to avoid 
raising costs or emissions) then the specific allocation formula is a 
matter of regional equity and an appropriate subject for negotiations 
during the legislative process.
               addressing concerns about unexpected costs
    Defects of the safety valve. While the cap-and-trade model has 
worked well for acid rain control, some observers are pushing for a 
``safety valve'' as a safeguard against permit costs exceeding a 
predetermined level.
    The fundamental problem with the safety valve is that it breaks the 
cap without ever making up for the excess emissions. Simply put, the 
cap doesn't decline as needed or, worse, keeps growing. A better 
approach to cost-control is possible.
    ``Safety valve'' is actually a misleading name. In boiler design, 
the role of a safety valve is to allow pressures to build within the 
vessel to working levels, well above atmospheric pressure. A safety 
valve's function is to open in the rare occasion when the boiler is 
pressured beyond its safe operating range, to keep it from exploding. 
In the life of a well-run boiler, the safety valve may never open.
    Imagine, however, a boiler designed with a valve set to open just 
slightly above normal atmospheric pressure. The valve would always be 
open, and the boiler would never accomplish any useful work.
    That is the problem with the safety valve design in two other 
proposals advanced by Senator Bingaman and by Representatives Udall and 
Petri. The valve is set at such a low level that it could be open more 
than it is closed.
    A safety valve also would prevent U.S. participation in 
international trading systems. The market price of CO2 in 
the European Union's emissions trading scheme, for example, has already 
exceeded the U.S. safety valve price proposed in the Bingaman and 
Udall-Petri proposals. If trading were allowed between the EU and the 
U.S., a major distortion would occur. European firms (acting directly 
or through brokers) would seek to purchase U.S. lower-priced 
allowances. Their demand would almost immediately drive the U.S. 
allowance price to the safety valve level, triggering the ``printing'' 
of more American allowances. European demand for newly minted U.S. 
safety valve allowances would continue until the EU price dropped to 
the same level. The net result would be to flood the world market with 
far more allowances--and far less emission reduction--than anticipated 
even under the National Commission on Energy Policy recommendations.
    Much like other forms of trade barriers, a safety valve distorts 
the free flow of allowances in an international trading system. A 
safety valve distorts trade in the same way as when a country fixes the 
price of its currency and avoids letting its currency find its 
appropriate exchange rate based on market forces.
    A new approach: borrowing. NRDC has proposed a new approach to 
controlling unexpected costs. In our estimation, the greatest fear of 
many in industry is that short-run costs will fluctuate unexpectedly, 
much as natural gas prices have spiked in recent years. Setting a long-
term declining emissions cap opens the door to an innovative way to 
avoid short-term cost volatility: Firms could be allowed to borrow 
emissions allowances from future years, using them early in times of 
unexpected cost pressure, and paying them back when short-term spikes 
recede.
    Current legislative proposals already allow firms to make 
reductions in advance when prices are lower than expected and bank 
allowances for future use. Borrowing would open the opposite 
possibility.
    Absent borrowing, firms can comply only with current or banked 
allowances. Allowance prices thus reflect the current marginal cost of 
compliance, and that price can spike in response to short-term 
conditions (e.g., a delay in bringing on a new technology, or a surge 
in economic activity). Borrowing would let firms use emissions 
allowances from future years, stabilizing prices against unexpected 
short-term fluctuations. The long-term cap will be maintained, because 
borrowed allowances will be repaid, with interest, by releasing fewer 
emissions later when the short-run pressures are relieved. Together, 
banking and borrowing can stabilize long-term costs and eliminate the 
risk of price spikes while preserving the environmental integrity of 
the long-term caps.
    The combination of a long-term emissions pathway and borrowing has 
a clear advantage over the safety valve because it does not break the 
cap and permanently allow excess emissions. (Proposals allowing 
unlimited ``offsets''--credits for emission reductions not covered by 
the cap--also have the potential to break the cap if credits are 
awarded for actions taking place anyway, a problem endemic to past 
offset programs.)
    Legislation to permit borrowing will need to include certain 
safeguards. First, there needs to be an interest payment pegged to be 
slightly higher than commercial lending rates in order to discourage 
businesses from treating allowance-borrowing as a no-interest 
alternative to regular financing. Second, there need to be appropriate 
mechanisms to secure repayment and guard against defaults. One option 
is to limit borrowing to 5 years in advance, with the option to borrow 
again if repayments are completed. A second option is to require that 
borrowers be bonded or otherwise secured against defaults.
    In summary, it is urgent that we develop and adopt legislation in 
this Congress that will put the United States on a predictable and 
manageable path toward greatly reduced global warming emissions. Such a 
path is completely compatible with a growing economy. Indeed, failure 
to address global warming now will expose our economy to threats of an 
unprecedented magnitude as our country and the rest of the world 
attempt to deal with an unraveling of the hospitable climate that has 
allowed civilizations to flourish over the past 20 millennia. We know 
how to design legislation that works for the electric power sector and 
for the economy as a whole. It is time to begin.
    Mr. Chairman and members of the Committee, this concludes my 
testimony. I am happy to answer any questions you may have.




    Senator Boxer. Thank you very much, Mr. Hawkins.
    Our next speaker is Jim Rogers, chairman, president and CEO 
of Duke Energy. Welcome, sir.

STATEMENT OF JAMES E. ROGERS, CHAIRMAN, PRESIDENT AND CEO, DUKE 
                       ENERGY CORPORATION

    Mr. Rogers. Thank you. Madam Chair Boxer, Ranking Member 
Inhofe and members of the committee, I want to thank you all 
for inviting me here to share my views on how we can work 
together to slow, stop and reverse the country's greenhouse gas 
emissions.
    One of my first jobs after law school was as a consumer 
advocate in Kentucky. I challenged the increases proposed by 
utility companies in the 1970s. Today, I am here as an advocate 
for Duke Energy's 4 million electricity customers in five 
States in the Midwest and the Carolinas. These customers rely 
upon coal-fired generation for 70 percent of their electricity.
    I am also here to advocate for the tens of millions of 
electric customers in the 25 States where more than 50 percent 
of the electricity is generated using coal. You can see the 
chart over there, in the green are the 25 States where more 
than 50 percent of the electricity comes from coal.
    To address climate change, we must have a bridge. I want to 
underscore that, a bridge, to a low-carbon economy. To cross 
that bridge, I have advocated for many years that we need an 
economy-wide cap and trade program for CO2. A cap 
and trade program with an appropriate allocation of allowances 
will protect consumers as we develop technologies to reduce 
carbon dioxide emissions.
    In 1990, Congress provided a similar bridge when it passed 
the Clean Air Amendments, legislation that has dramatically 
reduced SO2 emissions. This bridge has been a 
transition mechanism of allowance allocations. As CEO of a 
legacy Duke Company in Indiana in 1989, I advocated for 
SO2 cap and trade legislation. I can tell you from 
first-hand experience, it is delivering extraordinary results. 
By 2010, Duke Energy and its predecessor companies will have 
invested $5 billion to retrofit our plants, to reduce SOX and 
NOX by more than 70 percent, and all of this is done at a lower 
cost than we were predicting in 1990.
    During this period, we were given permission to emit 
SO2 from our existing generation fleet. This allowed 
us to use these plants to produce electricity while advanced 
emissions technology was developed and installed. As demand 
grew over the years, we purchased allowances to serve our 
customers.
    Also over time, as our allowances were reduced, we 
purchased additional allowances. While customers bore the cost 
of buying these allowances and paying for the SO2 
retrofits, the cap and trade program protected them, and 
importantly, protected them from major rate shock and 
unnecessary economic harm.
    Some have suggested that CO2 allowances should 
be auctioned, you have heard that here today. But an auction 
approach would unfairly and disproportionately harm regions 
that depend on coal, especially the 25 States in the Midwest, 
Southeast and Great Plains, forcing customers from these 
regions to bear the cost of buying allowances for existing 
plants, while at the same time bearing the cost of retrofitting 
and replacing existing plants would result in a double hit, 
paying twice for the bridge. Also, it would be 
counterproductive to the long-term goals of climate change 
legislation.
    Additionally, it is unfair to allocate allowances based on 
megawatt output, as some suggested even here today. This would 
give permits to power plants such as nuclear or hydro that have 
no CO2 emissions. These plants were conceived and 
built decades ago, long before anyone raised carbon concerns.
    Duke Energy is the third largest coal generator. We are the 
fourth largest nuclear generator. We are planning to build two 
nuclear units. From our perspective, there is simply no 
economic justification to give allowances to nuclear and hydro 
plants that will not incur any cost to comply with the program. 
Doing so would be like giving these companies a printing press 
to make money at the expense of other regions of our country. 
There is no justification for such a windfall.
    It is also important for us to acknowledge that if we are 
not serious about building more nuclear generation in this 
country that we are not serious about climate change. Nuclear 
energy has a demonstrated safety record. It is efficient, 
economical and the basic technology is available today. There 
is no way that we can realistically obtain significant levels 
of carbon reduction and achieve our country's future economic 
goals without expanding its use.
    Climate change is one of the most important issues of our 
time. Getting it right for our customers and your constituents 
will be a marathon, not a spring. But Chair Boxer, let me, if I 
may, tell you how I judge my decisions. I am judged quarterly 
by investors and annually. But I apply the grandchildren's 
test, particularly on important issues about environment, 
important issues about supplying and balancing these competing 
needs. Because when I apply the grandchildren's test, the 
grandchildren's test to me is this. My hope is, and I have 
seven grandchildren, when my grandchildren look back and they 
are my age, at the decisions I made about the environment, I 
want them to say, my granddaddy's decision is still a good 
decision, even today.
    So I think as we work our way through this, applying that 
test is important. Because we are ready to cross the bridge. We 
need to go to work now and we do not need to delay, the sooner, 
the better. Thank you very much.
    [The prepared statement of Mr. Rogers follows:]
      Statement of James E. Rogers, Chairman, President and CEO, 
                        Duke Energy Corporation
    Chairwoman Boxer, Ranking Member Inhofe and members of the 
Committee. Thank you for inviting me to share my thoughts with you this 
morning on how we as a nation should address the issue of global 
climate change. I believe this can be done with appropriate design of a 
comprehensive, long-term program that caps emissions, provides the 
right cost-control tools and supports the development, demonstration 
and deployment of new technologies. Both cost containment and 
technology development are critical if Congress is to craft and enact a 
workable climate change protection act.
    For today's discussion, I want to focus on four very important 
aspects of a climate change policy--allowance allocations in a cap and 
trade program, carbon capture and sequestration, energy efficiency and, 
last, nuclear power generation. But before I get into the specifics, I 
believe there are some core principles we must keep in mind as we move 
forward on climate change legislation:
    1. Flexibility. Legislation should recognize the successes of past 
environmental programs by enacting a cap that features flexibility 
through the inclusion of a tradable allowance market. But Congress must 
also recognize the need to contain costs--especially to those living in 
areas of the country that rely on coal. Congress should not penalize 
past fuel choices.
    2. Broad Coverage. The program should apply economy-wide, resisting 
the urge to focus solely on the electric sector. A broad program is the 
most cost-effective approach and will set the country on a course of 
greenhouse-gas emission reductions. Programs that focus on only one 
sector will fail to reach emission reduction goals.
    3. Cost Containment. Because a cap-and-trade program for greenhouse 
gas emissions will impact all sectors of the economy, we believe that, 
in order to alleviate concerns over implementation costs, the program 
should contain provisions that create an escalating allowance price cap 
or that cap the allowance price for a period of time.
    4. Meaningful reductions that track technology development. It is 
important to start a cap now, and to gradually reduce that cap so that 
technologies have time to develop and deploy. Recognizing that it is 
difficult to set a course for 50 years or more, Congress should mandate 
periodic reviews to ensure that projected technology development and 
the cap trajectory are in sync.
    5. Customer Impacts. Replacing our energy infrastructure will take 
time and money. We did not build it overnight, and we will not replace 
it overnight. Consumers should not be penalized for fuel choices that 
were made 40-plus years ago. Areas of the country facing the largest 
increases in electricity rates due to climate change policy also 
represent the nation's industrial heartland. How allowances are 
allocated will directly impact the cost of electricity and the prices 
these consumers pay. We must get that right.
    6. Technology Innovation. The program must actively support the 
development and deployment of low-carbon baseload generation 
technologies (including coal with carbon capture and sequestration). 
Widespread availability and deployment of such technologies will be key 
to managing GHG emissions in the power sector without disrupting the 
economy. This will require substantial near-term Federal financial 
support--the carbon price signal will not by itself be able to drive 
the needed technology revolution quickly enough.
    7. Nuclear Expansion. Climate change policy must address and remove 
barriers associated with nuclear energy production. We cannot meet our 
greenhouse gas reduction goals without expanding the role of nuclear in 
this country's energy mix.
    8. Diversity in energy supply. Congress must recognize that no 
single energy source will address the climate change challenge and at 
the same time meet growing demand. We will need all five fuels--
nuclear, coal, natural gas, renewables and the ``fifth fuel,'' energy 
efficiency. We will need to use existing technologies as well as 
develop new ones on all fronts.
                    duke energy's role in the debate
    Duke Energy Corporation is one of the nation's largest generators 
of electricity. We serve nearly 4 million customers in North Carolina, 
South Carolina, Indiana, Ohio and Kentucky. Duke Energy has 
approximately 37,000 megawatts of generating capacity in the U.S., 
about half of that in coal-fired power plants. More importantly, in 
2006 Duke Energy produced nearly 150 million megawatts-hours of 
electricity, 71 percent from our coal plants and 27 percent from our 
three nuclear plants in the Carolinas.
    I am often asked why, as the CEO of the third-largest consumer of 
coal in the U.S., I am so outspoken on the need to address climate 
change through legislation. For several years now, I have been talking 
about the need to regulate greenhouse gas emissions. In my judgment, 
the science, as expressed by the Intergovernmental Panel on Climate 
Change and the National Academy of Science, is persuasive, and the call 
to action is compelling. This call to action led Duke Energy to join 
nearly two dozen other leading companies and environmental 
organizations to form the United States Climate Action Partnership 
(USCAP). The members of USCAP are united in calling on the government 
to enact Federal legislation to limit greenhouse gas emissions, and we 
have developed a set of high-level recommendations for the design of 
such legislation. \1\
---------------------------------------------------------------------------
    \1\ United States Climate Action Partnership, ``A Call to Action'' 
(January 2007).
---------------------------------------------------------------------------
    As the leader of an electric utility, my first obligation is to 
make sure that the lights come on when our customers flip a switch. And 
I don't mean to sound glib with that statement. Electric production and 
delivery require a complex network of power generation, transmission 
and distribution capability. Until we develop advanced storage 
technology we must generate electricity the instant it is required--
constantly and simultaneously matching supply with demand. In addition, 
this discussion of climate policy is occurring as we are beginning a 
new building cycle, as well as investing significant dollars in 
controlling sulfur dioxide, nitrogen oxides and mercury emissions.
    We are facing significant capital decisions based on increased 
energy demand, along with rising prices, environmental challenges and a 
national yearning for energy independence. There is no ``silver 
bullet'' that will address all of those concerns. It is our 
responsibility as electric utilities to balance four criteria in 
meeting our customers' needs--to provide them with energy that is 
available, affordable, reliable and clean.
    In striking that balance, it is critical that we understand the 
environmental expectations of those who regulate us. In short, we ask 
that Congress replace uncertainty with clarity, and carefully consider 
the needs of the environment, the economy and growing customer demand 
in crafting climate change policy. In the electricity sector, where 
capital investments are large and long-lived, clear signals on the 
approach to climate change are critical.
    With the recent Supreme Court decision on climate, which makes the 
future of U.S. climate regulation even murkier, the need for certainty 
through congressional action is more critical than it was just a few 
months ago. And I believe that providing that clarity, particularly in 
recognition of the immense capital costs associated with changing out 
our current fleet of power plants to become a less carbon-intense 
society, is one of the most important tasks that Congress will tackle 
in the months ahead.
    I believe the best way to accomplish that critical task is (1) to 
control greenhouse gas emissions through an economy-wide, market-based 
cap-and-trade program that utilizes a safety-valve price mechanism, (2) 
to support the development, demonstration and deployment of new 
technologies that will enable us to reduce greenhouse gas emissions 
over the long term, and (3) to remove barriers to the deployment of 
zero-emission nuclear energy. For our discussion today, I would like to 
emphasize a few specific items--an allowance allocation approach, 
carbon capture and sequestration challenges, energy efficiency 
incentives and the removal of barriers associated with nuclear power.
      allowance allocations: a fair, effective and tested approach
    The more than 1,500 pulverized coal units in the U.S. today provide 
just under 336 gigawatts of generating capacity to consumers in 47 
states. As reflected in the chart below, many states are highly 
dependent on coal generation, and the consumers in those states will 
bear the largest costs of climate change regulation. More than 50 
percent of the electricity in 25 States comes from coal generation.




    Congress must recognize that this fuel mix cannot change overnight. 
Coal is the most abundant energy resource in this country, and 
historical decisions have led us to power half of our country with this 
natural resource. We will have to transition gradually to a less 
carbon-intensive economy, and consumers in these states should not be 
disproportionately impacted as we move forward.
    Therefore, it is essential that Congress put forward a clear 
trajectory that allows companies time to invest and build. That means 
companies must be able to change out their current fleets in a 
timeframe that does not stretch capital expenditures to a point where 
Wall Street reacts by increasing capital costs and downgrading 
companies. In addition, customers must have time to absorb those huge 
capital expenditures. Even though utilities build power plants and 
depreciate them over a 30-year period, the massive transformation that 
climate change legislation will require will mean an impact on rates in 
the near and long term.
    Much of the climate debate is centering on how an allowance to emit 
carbon dioxide will be allocated to companies. Under a cap-and trade 
program, for every ton of carbon that is emitted there must be an 
allowance surrendered. While the design of an allowance allocation 
system can be complex, we have the benefit of experience with the 
effective process that Congress put in place for the electric sector 
under the Clean Air Act Amendments of 1990. In fact, many of the 
members of this committee played an important role in that landmark 
legislation. \2\ This successful approach provided for the granting of 
allowances based on the amount of emissions or heat input in a 
historical period. Some refer to this as an ``input'' based approach 
where the allocation of allowances is based on the average fuel-
adjusted heat-input (or emissions) in a recent historical period.
---------------------------------------------------------------------------
    \2\ More recently, EPA adopted a similar yet improved approach for 
allocating NOx allowances in the Clean Air InterState Rule and for 
allocating mercury allowances in the Clean Air Mercury Rule.
---------------------------------------------------------------------------
    Two primary issues have emerged regarding allowance allocations. 
Some have taken the position that all or most allowances should be 
auctioned rather than granted. Some also argue that the allowances for 
the electric power industry should be allocated based on the amount of 
energy or megawatt--hours being produced rather than the amount of 
emissions or heat input. This is referred to as an ``output'' based 
approach. Both the significant auction \3\ and output approaches are 
contrary to the methods Congress and the EPA have successfully used in 
the past to reduce emissions, and both should be avoided in climate 
change legislation.
---------------------------------------------------------------------------
    \3\ Under the Clean Air Act, approximately 3 percent of the 
allowances were auctioned, primarily to assure liquidity of the 
emissions market.
---------------------------------------------------------------------------
    I would like to take a moment to remind the Committee what 
allowances stood for when they were first adopted by Congress in 1990. 
Title IV, Section 403 (f) of the Clean Air Act Amendments of 1990 
stated that ``an allowance allocated under this title is a limited 
authorization to emit sulfur dioxide in accordance with the provisions 
of this title. Such allowance does not constitute a property right.'' 
The Act makes it very clear that an allowance represents an emission. 
It does not represent cash for hedge funds or nuclear owners or 
investment bankers to play with. It is a method for tracking emissions 
and transferring permits when a company is able to more economically 
reduce emissions at one plant than at another.
    According to recent testimony by career EPA staffer Brian McLean, 
Director of the Office of Atmospheric Programs, Office of Air and 
Radiation, before the House Energy and Commerce Committee, Subcommittee 
on Energy and Air Quality, March 29, 2007, ``Emissions cap and trading 
is an alternative to traditional regulation and credit trading, not 
simply a trading feature added to existing regulation . . . . 
Individual source control requirements are not specified but each 
source must surrender allowances for compliance equal to its actual 
emissions.'' Mr. McLean goes on to point out how effective the program 
has been both in its simplicity, and in controlling costs of the 
program. He notes that the program resulted in earlier emission 
reductions than required and reduced compliance costs by more than two-
thirds of initial EPA and industry estimates. And, finally, he points 
out that the method of distributing allowances is critical to the 
distribution of economic impacts and is therefore an important design 
feature. Putting a price on allowances directly increases compliance 
costs and the economic impact on consumers.
    Again, several members of this committee played an important role 
in 1990 Clean Air Act landmark legislation and I ask you and the rest 
of the Committee to think about the important steps you took to reach 
an agreement to make historic reductions in air emissions. You have 
that same responsibility before you today. The way in which you design 
legislation will directly affect consumers and businesses in this 
country. I caution you to resist the call of those who would make this 
equally historic environmental legislation significantly more expensive 
than it has to be.
          an auction approach removes the bridge to the future
    Any allocation approach should be viewed as a transitional program. 
It is simply a bridge to the point in time at which we can de-carbonize 
our economy. Keep in mind--our electric power system has been more than 
a century in the making--and we won't revamp it in a decade. But over 
time, advanced new technology will be the key to virtually de-
carbonizing our country's energy system. As we approach that point, the 
granting of allowances can be phased out.
    An auction approach takes away the bridge. It would 
disproportionately and unfairly burden those regions that are most 
dependent on coal--the Midwest, Southeast and Great Plains states. 
Forcing customers in the 25 States that currently depend on coal-fired 
generation for most of their electricity to bear the cost of buying 
allowances, while at the same time bearing the cost of replacing the 
existing carbon intense generation with lower carbon alternatives, 
would result in a double hit to those customers. That double hit simply 
is not equitable, and there is no reason to penalize those customers 
while rewarding hedge funds and others who would like to have a new 
commodity to play with. It serves no environmental purpose and that was 
never the purpose of emission permits in the first place. \4\
---------------------------------------------------------------------------
    \4\ Thus, one of the key USCAP recommendations is that a 
significant portion of allowances should be initially distributed free 
to economic sectors particularly disadvantaged by the price effects of 
a cap. USCAP, ``Call to Action,'' at p. 8.
---------------------------------------------------------------------------
    Using my company as an example may help to clarify the issue. Duke 
Energy's customers depend on coal-fired generation for most of their 
electricity. Those plants were built decades ago, long before anyone 
raised carbon concerns. A carbon cap that becomes more stringent over 
time will require us to reduce the amount of carbon our plants emit. 
That will require us to build new, low-and non-emitting plants, and 
install carbon capture and sequestration technologies. Our customers 
will bear the burden of the cost to de-carbonize our generation fleet. 
And, because our current fleet is more carbon-intensive than those 
found in some other regions of the country, the costs to build and 
install this equipment will be proportionately higher than in areas 
that are less dependent on coal. Until new technology becomes available 
and new plants can be built, we have to run our coal plants to meet the 
needs of our customers. To run those plants, we will need allowances. 
Again, requiring our customers to pay disproportionately higher fleet 
modernization costs, and at the same time pay the cost of allowances 
until the fleet can be de-carbonized, is an unfair double punch. \5\ 
The rate shock to customers and the disproportionate damage to the 
economies in the 25 States that depend on coal are neither reasonable 
nor equitable.
---------------------------------------------------------------------------
    \5\ The effect on customers of companies smaller than Duke Energy 
could be even worse. If Congress makes the decision to charge companies 
for the right to operate their current fleets of power plants, you will 
be greatly reducing the capital available to de-carbonize their fleets. 
For smaller companies, you may be removing that capability all 
together.
---------------------------------------------------------------------------
      an emissions-based allocation approach is fair and effective
    Allocating allowances using an average fuel-adjusted heat-input 
approach mitigates rate hikes and other associated costs that otherwise 
would be felt by the customers in states heavily dependent on coal. But 
it is important to note that this approach would not totally block the 
policy price signal from reaching the customer, as is sometimes 
claimed. Rather, it dampens the rate impacts--rates will still increase 
owing to the fact that: (1) allowance prices will increase over time, 
(2) generators will change the order in which they dispatch their 
plants in response to market forces, and (3) generators will make very 
large investments in new low-and non-emitting plants, which show up in 
electricity prices one way or another.
    Some suggest that a better approach is to allocate allowances on a 
total energy output basis (based on megawatt-hours produced). 
Allocating allowances on an output basis would do two things. First, it 
would provide firms which have significant non-emitting generation 
(nuclear and renewable) with a windfall gain. We understand this, 
because we own and operate a sizable nuclear fleet in the Carolinas. 
These assets will already be advantaged in the market under a cap-and-
trade program, with no compliance obligation; they need no allocation. 
Second, it would take allowances away from coal-fired generation that 
would incur the greatest compliance cost, ultimately impacting the 
customers who depend on that coal generation. This would place a 
disproportionate share of the program's costs on states that are more 
heavily dependent on coal.
    Suggestions that output-based allocations will encourage the 
deployment of non-emitting generation are without merit and miss the 
point of the allocations. What we're talking about here is the 
generation on the ground--existing assets that serve our nation's 
electric needs, powered by fuels and technologies that made the most 
economic sense at the time in accordance with our State regulations, 
and which cannot be shut down and replaced overnight. As in the Clean 
Air Act, which used an input-based approach, all new entrants must 
purchase allowances if they want to build plants that emit.
    Accordingly, under both input-and output-based approaches, market 
forces and the cost of carbon apply equally to all new generation 
decisions. In the future, new technologies will be deployed because the 
changed regulatory environment and a rising carbon price signal will 
make them the most economic choices, regardless of how Congress 
allocates allowances to existing units.
    In any event, we believe that Congress should make the decisions on 
allowance allocations and spell out the details in legislation, rather 
than leave those critical policy decisions to the discretion of an 
administrative agency. The allocation of allowances will have critical, 
multi-billion-dollar impacts on the distribution of compliance costs 
associated with a cap-and-trade program.
                   encouraging and funding innovation
    As the door opens to what will become a carbon-constrained economy, 
we face a clear challenge. No technological solutions are available 
today to scrub carbon out of the flue gas or to generate large amounts 
of emission-free electricity from coal. Promising new technologies are 
being researched and developed, but right now no reliable technology is 
available that we can add to the back or front end of our coal plants 
to eliminate carbon dioxide emissions.
    This has two implications for the nation's climate policy. First, 
before such technologies are widely available, a cap-and-trade program 
must be carefully calibrated so that allowance prices are high enough 
to pull technology off the shelf, but not so high as to be onerous. 
This requires careful attention to the trajectory of the emissions cap 
and safety valve--and a clear ability to adjust the trajectory of each, 
in response to technology developments.
    Second, the prospect of future CO2 allowance prices is 
not, by itself, a sufficient driver for developing technology quickly 
enough, and thus an affirmative technology policy must be part of the 
larger climate change policy. One of the principal recommendations of 
USCAP is that a climate change program should couple a carbon price 
with a targeted set of policies to promote development and deployment 
of low-carbon technologies. \6\ For carbon capture and sequestration, 
this means the development of a substantial and reliable source of 
funding for large-scale demonstration of technologies. I encourage 
Congress to closely review the long-term funding programs that help 
promote the development of IGCC, oxyfuel combustion and other advanced-
coal technologies. You should look for research programs that can be 
combined and where efficiencies can be gained, as well as creative ways 
to further reduce risk taken on by utilities that are using new or 
emerging technologies.
---------------------------------------------------------------------------
    \6\ USCAP, ``Call to Action'' at p. 7 (``[A]n effective climate 
change program must include policies to promote significant research, 
development and deployment of hyper-efficient end use technologies, 
low-or zero-GHG emitting technologies, and cost-effective carbon 
capture and storage, which will be particularly important in the 
deployment of advanced coal technologies.''); see also p. 9.
---------------------------------------------------------------------------
                             carbon capture
    Much work remains to develop the technologies for carbon capture, a 
technology still in its infancy when applied to utility operations. 
Ninety percent carbon capture, for instance, installed at a 600-
megawatt IGCC plant, would consume about 13 percent of the net power 
output; installed at a 550-megawatt pulverized coal plant, it would 
consume approximately 30 percent of the net power output. Clearly, 
considerable work lies ahead to reduce those power requirements.
    As importantly, we need as strong a commitment to develop 
technology that can capture carbon from our large fleet of already-
existing coal plants. There are more than 1,500 pulverized coal units 
in 47 states. Most of these plants are not yet near the end of their 
useful lives. Clearly, retrofit technologies must be developed to 
mitigate carbon emissions from these facilities. We cannot ignore these 
plants as we build the next generation of shiny new plants using 
advanced technologies. In my view, it is risky to place your bets on 
just one technology, which is why I believe we need to develop carbon 
capture technologies to keep these plants operating.
                          carbon sequestration
    Carbon capture and storage (CCS) for coal-fired power plants is a 
critical technology if we are to achieve our environmental goals while 
continuing to use our abundant domestic coal resources. CCS captures 
the CO2 from the power plant and channels it underground for 
permanent storage in deep geological formations. However, this storage 
capacity is not available everywhere and, contrary to some statements 
I've seen recently, the technology itself is not fully developed and 
ready for deployment.
    We believe CCS ultimately will prove to be one of the least-cost 
ways to reduce CO2, and we are actively involved in projects 
to advance the research. Duke Energy is hosting a small-scale Phase II 
sequestration demonstration project at its East Bend power plant in 
Kentucky, which will involve injection of CO2 into deep 
saline reservoirs in the area, between 3,000 and 4,000 feet below the 
surface. If the site is determined to be suitable, about 10,000 tons of 
CO2 would be injected in 2008. The sequestration will be 
subject to monitoring, measurement and verification.
    Duke Energy's commitment to CCS also includes membership in three 
DOE-funded carbon sequestration regional partnerships (the Midwest 
Regional Carbon Sequestration Partnership, the Midwest Geological 
Sequestration Consortium and the Southeast Regional Carbon Partnership) 
which are collecting, sharing and assessing data. DOE's National Energy 
Technology Laboratory (NETL) manages a number of regional sequestration 
consortia, creating a nationwide network to help identify the best 
technologies, regulations and infrastructure needed for carbon capture 
and storage. These partnerships will support multiple small-scale 
projects that will provide invaluable information on siting, 
monitoring, evaluation and public acceptability of carbon 
sequestration.
    Expanded Federal financial support will be necessary to continue 
the process of demonstrating geologic sequestration. USCAP has 
advocated that Congress fund at least three full-scale CO2 
injection demonstration projects, each at a scale equivalent to the 
CO2 emissions produced by a large coal-fired power plant. 
\7\ The MIT Future of Coal study calls for three to five demonstration 
projects at a projected cost of $500 million to $1 billion over 8 
years. \8\
---------------------------------------------------------------------------
    \7\ USCAP, ``Call to Action,'' at p. 9.
    \8\ Massachusetts Institute of Technology, ``The Future of Coal: an 
Interdisciplinary MIT Study,'' (2007), at pp. 53-54, 97.
---------------------------------------------------------------------------
    In addition to proving the technology and geology for 
sequestration, a number of critical regulatory and legal issues will 
need to be resolved. As USCAP has stated, ``Congress should require the 
EPA to promulgate regulations promptly to permit long-term geologic 
sequestration of carbon dioxide from stationary sources.'' \9\ In 
addition to developing an appropriate regulatory system that will 
specify the ground rules for sequestration projects and enhance public 
acceptability, Congress should also provide appropriate protections 
against costly litigation and liability claims. The potential for 
significant liability claims and litigation defense costs, even when 
facility operators comply with all regulatory requirements, will be a 
significant damper on the commercial development of sequestration 
facilities. Given the speed with which we will need to put 
sequestration capacity into operation, we cannot simply wait to see if 
the common law in each State develops in a way that acceptably 
moderates these liability and litigation risks. Instead, I expect that 
the legal and liability issues must be settled before any company will 
feel comfortable moving forward with a large-scale CCS project.
---------------------------------------------------------------------------
    \9\ Id. MIT's Future of Coal report makes similar recommendations. 
MIT, ``The Future of Coal,'' at p. 98.
---------------------------------------------------------------------------
    Finally, despite all the seeming activity described above, CCS 
development needs a much greater sense of urgency if we are truly to 
respond to the climate problem. To paraphrase an MIT economist who has 
looked at this problem--if CCS doesn't work, we are in big, big 
trouble. I would characterize the current focus on CCS as something of 
a hobby. It should be an obsession, and receive a great deal more 
attention and resources.
                           energy efficiency
    While the deployment of carbon capture and sequestration 
technologies and the buildout of new nuclear generation will take 
several years, we have other opportunities to reduce our carbon 
emissions in the short term. One of those opportunities is to revisit 
the way we as a nation think about and use energy.
    Electric utilities have the expertise, the infrastructure, the 
customer relationships--and a responsibility as well--to make 
efficiency a significant part of the energy mix. We call it our ``fifth 
fuel'' --as important as coal, nuclear, natural gas and renewables in 
meeting our customers' energy needs.
    Energy-saving programs can range from simple onsite energy audits, 
to the use of sophisticated technologies to monitor and control 
customers' own energy use.
    The key for the success of these programs is to compensate 
utilities for meeting demand--whether we do that by producing 
electricity, or conserving it. As the fifth fuel, we believe energy 
efficiency should be treated like any other type of production.
    Most State regulatory regimes include inherent disincentives for 
energy efficiency efforts. Some regulatory innovations, such as 
decoupling, are aimed at taking away disincentives, rather than 
creating incentives. We're working to change that paradigm, by 
encouraging our regulators to allow utilities to earn a return on their 
investments in saving watts, just as they would for generating watts. 
This new paradigm would give us an incentive to fully develop all 
economically sound energy efficiency programs.
    Taking variable costs such as fuel and emission costs into account, 
the energy efficiency model we are proposing produces a triple win--for 
customers, for companies and for the environment.
    Last month we took the first step at Duke Energy. We filed our 
energy efficiency plan with the North Carolina Utilities Commission. 
This proposal is designed to help our customers conserve energy and 
reduce their power bills, without sacrificing comfort or convenience. 
New energy efficiency technologies are available now to help us do just 
that.
    While State public service commissions must take the lead, Congress 
can encourage the states to review their ratemaking policies as they 
relate to energy efficiency. I encourage you to include such 
considerations in any climate or ``pre-climate'' legislation.
                                nuclear
    It is imperative that we have multiple options for reducing 
greenhouse gas emissions. Energy efficiency plays a role and the 
importance of developing new technologies to capture and sequester 
carbon cannot be underestimated. However, there is no way this country 
will meet long-term emission reduction goals without nuclear power.
    Expansion of our nuclear power generation will be critical to 
meeting our long-term emission reduction goals as well as maintaining 
our country's diverse energy supply mix. Today, 104 reactors produce 20 
percent of U.S. electricity, and nuclear energy represents nearly 
three-quarters of all non-emitting electric generation. In the 
Carolinas, nuclear energy provided 47 percent of the electricity to 
Duke Energy's customers in 2006. By using nuclear energy instead of 
coal for a portion of our generation, Duke Energy has avoided the 
release of an estimated 1.1 billion tons of CO2 since our 
three nuclear stations entered service.
    In its recently issued report on strategies for addressing global 
warming, the Intergovernmental Panel on Climate Change emphasized that 
nuclear power is ``an effective [greenhouse gas] mitigation option.'' 
\10\ The IPCC further determined that, to the extent that new nuclear 
plants could displace existing and planned fossil fuel-fired plants, 
``net CO2 emissions could be lowered significantly.'' \11\
---------------------------------------------------------------------------
    \10\ Intergovernmental Panel on Climate Change, Working Group III 
Report: ``Mitigation of Climate Change'' (May 2007) (pre-copy edit 
version), available at http://www.mnp.nl/ipcc/pages--media/AR4-
chapters.html, at p. 26.
    \11\ Id., at p. 66.
---------------------------------------------------------------------------
    It is vitally important that we keep our existing nuclear power 
fleet running, while adding new nuclear capacity. Accordingly, the 
Federal Government needs to meet its commitments and obligations, work 
to remove barriers toward expansion of nuclear power, and help build 
continued public confidence in nuclear energy and the management of 
nuclear waste.
    To make this possible, we need new energy policies in the nuclear 
power area. \12\ Building new nuclear power assets involves major 
capital commitments. With every new nuclear power plant, however, the 
public gains a substantial amount of new, affordable, carbon-free 
power. Therefore, I would call on the government to follow through on 
establishing and implementing a workable loan guarantee program, as 
authorized in the Energy Policy Act of 2005, in order to lower the 
capital costs of bringing new nuclear generation on line.
---------------------------------------------------------------------------
    \12\ The need for nuclear energy policies to promote greenhouse-gas 
emissions mitigation was also a conclusion of a major multidisciplinary 
study undertaken by MIT. See at MIT, ``The Future of Nuclear Power: an 
Interdisciplinary MIT Study,'' (2003), at p. 88 (``Our position is that 
the prospect of global climate change from greenhouse gas emissions and 
the adverse consequences that flow from these emissions is the 
principal justification for government support of the nuclear energy 
option.'')
---------------------------------------------------------------------------
    New capital is not enough, however. We need to have a sound, 
stable, and certain regulatory environment for nuclear power. Most 
importantly, we need a system for handling used fuel and nuclear waste, 
one that we all can feel confident and secure about. This means:
     Establishing a credible management and governance structure that 
will be responsible and accountable for management of used fuel and 
high-level waste. The Federal Government has missed one milestone after 
another, including its obligation to begin accepting used fuel by 1998. 
This has resulted in deterioration in the public's confidence in our 
ability to manage used fuel. We need a management and governance 
structure, modeled on private-sector principles, to strengthen 
accountability and to provide program management continuity.
     Ensuring that there is adequate funding and resources to 
implement this structure, and providing for independent oversight of 
the collection and expenditures of funds. To date, over $28 billion has 
been committed to the Nuclear Waste Fund, with Duke Energy's customers 
contributing over $1.2 billion of this amount. The status quo, where 
these moneys continue to be collected, yet are used for other than 
their intended purposes, does not enhance public confidence in the 
government's ability to manage this program or these funds.
     Authorizing the consideration of all feasible options for 
management of used fuel, including fuel recycling as an alternative to 
direct disposal or a companion strategy. When used fuel is discharged 
from a reactor, it still contains a significant amount of recoverable 
energy value. Used-fuel recycling is not a new concept or technology--
it is used by many countries including France and Japan as a means of 
recovering and reusing the remaining fissile content. Recycling needs 
to be further considered for the U.S. nuclear fuel cycle.
     Providing statutory direction on the application of the National 
Environmental Policy Act (NEPA) as it applies to the licensing of new 
nuclear plants. A NEPA review of environmental impacts of a potential 
terrorist attack on a nuclear power facility offers no benefit to such 
a facility's security--already fully addressed by NRC requirements--or 
the NRC's consideration of environmental concerns, as NRC regulations 
already require the agency and licensees to consider the environmental 
impacts of events that could result in releases of nuclear material or 
radiation. Clarification and reinforcement of the roles of the various 
Federal agencies (NRC, Office of Homeland Security, etc.) in the 
assessment of and preparations against potential terrorist attacks is 
needed to ensure individual licensing proceedings for nuclear 
facilities are not protracted over this issue.
    Duke Energy believes that nuclear power is an indispensable 
resource for a clean energy future. Indeed, our company is moving 
forward with a major new investment in nuclear generation in South 
Carolina. However, it will take a credible and stable regulatory 
environment to make it possible for this country to achieve its low-
carbon potential with new nuclear generation.
                     comprehensive solutions needed
    In preparing our company to operate successfully under carbon caps, 
we have come to realize that there is no one-size-fits-all approach to 
reducing greenhouse gas emissions. It will take a suite of actions to 
lighten our nation's carbon footprint. As I've often said, ``there is 
no silver bullet--just silver buckshot.'' Our industry will need to 
invest in coal with carbon capture and sequestration, nuclear, 
renewables and energy efficiency to tackle the climate challenge 
effectively and economically.
    I am confident that Congress can structure climate legislation in a 
way that protects our economy, allows continued use of abundant 
domestic energy resources and leaves a better environment for our 
grandchildren. That legislation can and should be structured in a 
manner that promotes innovation, encourages investment in new and 
emerging technologies, and fairly distributes the costs.
    I am encouraged that this Committee has begun a thorough 
examination of this critical issue. I thank you for the opportunity to 
share my views, and I look forward to working with you.




Responses by James E. Rogers to Additional Questions from Senator Boxer
    Question 1. You believe that economy-wide regulation is essential 
to effectively tackling our global warming problem. Can a power sector-
only bill be a piece of a larger regulatory regime?
    Response. An economy wide cap and trade program that includes all 
the emission sources under the same cap is the best solution because it 
is the most inclusive--meaning, it covers the emissions from the entire 
economy and ensures that all emissions ``see'' a single price signal 
created by the program. Some of these emissions cost very little to 
reduce, so their inclusion in a single program helps lower the overall 
cost of reducing emissions. In addition, establishing multiple programs 
to reduce emissions adds to the administrative complexity and cost to 
achieve overall reduction goals. A single program is administratively 
more efficient.
    A power sector only approach covers only a little more than a third 
of U.S. greenhouse gas emissions, so additional programs and systems 
will have to be put in place to control the other two-thirds of the 
emissions adding unnecessary costs to consumer products. In addition, 
if some sectors are not covered under an overall program and have less 
restrictive requirements, consumers would be incentivized to move away 
from the decarbonizing electric sector to the higher emitting sources 
that are not covered under the cap and trade program. Such a result 
would defeat both the environmental goals and the cost-effectiveness 
Congress seeks.

    Question 2. You recommend that global warming legislation set a cap 
on the price of allowances so that companies could simply buy 
allowances when the cost of making reductions became ``too high.'' How 
could we sure that the price cap was set at the right level to spur the 
technological developments needed to significantly reduce greenhouse 
gas emissions?
    Response. In reality, it isn't only about costs, but costs and 
price volatility. A price cap is an essential element to control the 
cost impacts while the energy sector transforms to lower emitting 
technologies. Providing compliance cost certainty protects against the 
risk of high costs and/or price volatility rendering the program 
unacceptable to the American public. The levels of an economy-wide 
emissions cap and safety valve price must be calibrated to the expected 
demonstration and commercial viability and availability of Carbon 
Capture and Storage and advanced nuclear technologies. Setting the 
emission reduction path on a slow, stop and reverse trajectory while 
using a safety valve price guards against unacceptably high rate shocks 
or high price volatility (swings between high and low prices) on 
consumers.
    Allowance markets are often volatile, moving sometimes rapidly from 
high to low prices. These fluctuations make it much more difficult to 
time the expenditures of large sums of capital, which, in turn, acts as 
a disincentive to more rapid deployment of new technologies. A strong, 
consistent and predictably increasing CO2 price will do two 
things: First, it will protect customers from unforeseen energy price 
shocks, particularly in the early years of the program when many low-
carbon technologies, including carbon capture and storage have yet to 
be demonstrated at a utility-scale. And second, it can arrest the 
volatility that not only adds uncertainty to the consumers' energy 
choices and costs but also discourages the technology development and 
deployment you seek.
    Also, concern remains that tackling climate legislation for the 
first time will result in costs rising very quickly and causing severe 
economic hardship. And, because many consumers reside in the industrial 
heartland of our country--the fear is compounded by the fact that 
consumers will be hit by rising electric costs and the flight of large 
industrials to overseas markets that are not burdened by climate 
regulations. One mechanism to help curb those fears is to place a cap 
on costs. As the emissions cap declines, industries will be looking for 
methods of changing out old technology for newer lower emitting 
technologies, but allowing that change to happen on a trajectory that 
the economy can absorb is of utmost importance. A mechanism that 
recognizes when that trajectory is following an economically 
unforgiving upward curve is something that will be necessary to help 
those Members concerned about cost controls be more comfortable with 
climate legislation. In addition, unlike with the Clean Air Act where 
technology to remove the regulated pollutants was available; no 
specific carbon dioxide removal technology exists today. If that 
technology does not become available as the cap declines, then 
protections must be in place to deal with that possibility.

    Question 3. I understand the merits of your allocation preference, 
but I would like your response to the rationale for other approaches. 
For example, if emission allowances are allocated largely based on 
power plants' current carbon dioxide emissions, doesn't that reward the 
power sector's highest emitters--coal fired power plants--and penalize 
those utilities that have invested in cleaner technologies?
    Response. Emissions control programs have never been and shouldn't 
in the future be a matter of rewarding or punishing anyone. Carbon 
dioxide emissions are currently unregulated and the goal of climate 
legislation should simply be to reduce those emissions over a period of 
time that is doable and that does not hurt consumers.
    As I stated in my testimony, as many as 25 States for historical 
reasons and the availability of local resources, use coal to produce 
the majority of their energy. While the goal of climate legislation is 
to move the country toward lower emitting sources, that can't happen 
overnight. These regions still have a large amount of heavy 
manufacturing (which tends to be more energy intensive than other 
sectors).
    The method of distributing allowances will be critical to the 
distribution of the economic impacts of climate change legislation. 
Consumers in states that are highly dependent upon coal will bear the 
largest cost of climate change legislation. Providing allowances to 
non-emitting generation and a disproportionately large allocation to 
natural gas generation will simply increase the costs that consumers in 
these coal-dependent states must bear. Coal units can't be turned off 
tomorrow. They'll need to continue to operate for many years until new 
lower and non-emitting generation technologies can take their place. A 
fair allocation of allowances must be provided to help transition the 
affected regions to lower emitting generation technologies over time 
without imposing on them an unreasonable and unfair economic burden.
    An input-based allocation approach is simple and economically the 
fairest way to allocate allowances for both generators and consumers. 
It allocates allowances to each emitting source based on their recent 
CO2 emissions (i.e. their compliance burden.) It doesn't 
give allowances to non-emitting generation facilities that do not need 
them (as would occur with an output-based allocation approach) and it 
doesn't give a disproportionately large allocation to natural gas 
generation as would also occur under an output-based approach. 
Allocating allowances to non-emitting generation would result in a 
windfall for these sources at the expense of coal-fired generation and 
its customers. And given that combined-cycle natural gas generation on 
average emits about 60 percent less CO2 per mwh than coal, 
it doesn't make economic sense to give allowances to each type of 
generation at the same rate, as would occur with an output-based 
approach. An emissions-based approach is similar to the approach used 
by EPA in several electric sector cap-and-trade programs and it is the 
approach best suited to moderating the impacts of regulation on 
electricity users.

    Question 4. If utilities are given emissions allowances for free, 
will utilities pass along the savings to consumer or will they increase 
the prices of electricity to reflect the market value of the 
allowances?
    Response. For power companies like Duke--which serves millions of 
customers with electricity generated substantially from coal-fired 
power plants--the most reliable approach for moderating electricity 
price impacts is to allocate allowances at no cost within the electric 
sector to fossil-fueled generation on the basis of historical 
emissions. Whether an allowance allocated at no cost is sold in the 
market or used to cover emissions, the value of that allowance to 
regulated generators will flow directly to the electricity customers, 
mitigating some of the costs that consumers would otherwise have to 
bear. Such an approach will not shield customers from higher 
electricity prices completely, but will act to dampen price increases, 
spreading out the impacts over several years as opposed to impacting 
customers hard in the first year of the program.
    Past history is the judge. Allowances to emit were awarded to the 
emitting facilities. Those allowances were turned in at the end of the 
year and matched the cap. The awarding of allowances simply protects 
consumers in coal dependent states from the huge price spikes that 
would occur if companies had to purchase all the allowances needed to 
continue operating existing plants, while also having to invest in new 
technologies. In fact, most companies would have a very difficult time 
from a capital perspective being able to invest in new technologies if 
they had to purchase the right to run their existing generation.
    Duke Energy recognizes that the plan we support for allocating 
allowances within the electric sector is not necessarily applicable for 
generators located in deregulated electricity markets. Prices in 
deregulated markets would increase regardless of the allocation level 
to generators because the price is set by the bid of the next least 
costly plant needed to operate to meet demand. In these markets, such 
an allocation may indeed result in windfall profits while providing no 
benefit to consumers. Duke is working on a companion allocation 
methodology that may be appropriate for these markets that we would be 
happy to discuss.
                                 ______
                                 
   Responses by James E. Rogers to Additional Questions from Senator 
                                 Inhofe
    Question 1. What business risks are associated with potential 
climate change legislation and have these risks been documented in your 
10-K filings with the U.S. Securities and Exchange Commission and 
appropriate disclosures to shareholders?
    Response. The business risks to Duke Energy Corporation of 
potential climate change legislation clearly depend on the specifics of 
the legislation itself. Broadly, Duke Energy Corporation is subject to 
numerous environmental laws and regulations and compliance with these 
environmental laws and regulations, and potential additional laws and 
regulations, can require significant expenditures. Legislation 
associated with the regulation of greenhouse gas emissions could result 
in the creation of additional costs in the form of taxes or emission 
allowances.
    Duke Energy has provided such disclosure to shareholders in the 
Duke Energy Corporation Form 10-K filing for the year ended December 
31, 2006. See ``Risk Factors'' at page 30 and ``Management's Discussion 
and Analysis of Financial Condition and Results of Operations'' at page 
83.

    Question 2. If a cap-and-trade program such as the 2007 Bingaman-
Spector (sic) bill and the 2007 Lieberman-McCain bill were implemented, 
what would be the gross costs imposed in your business operations? What 
would be the gross revenue? What would be the net cost/revenue?
    Response. The economic impacts of any greenhouse gas cap-and-trade 
policy on Duke Energy will depend on numerous factors, including the 
design features of the cap-and-trade program, the changes in fuel 
prices and electricity prices that result from implementation of the 
program, the demand response to higher electricity prices, the 
availability and cost of new lower and zero emitting generation 
technologies, and the regulatory treatment of costs resulting from the 
program. The design features of a cap-and-trade program that will have 
the greatest impact on costs include the level at which the cap is set, 
the method(s) used to distribute allowances, whether the policy 
includes a safety valve, and if so, the level at which it is set.
    With all these factors and the uncertainty of how the design 
features will be drafted, if included at all, it is not possible to 
calculate a meaningful estimate of cost, etc. This illustrates how 
critical it is that the design features be drafted in a responsible 
manner and a greenhouse gas cap-and-trade policy provide for a large 
allowance allocation and include a safety valve on the price of 
allowances. These two policy tools will have a tremendous impact on 
controlling program costs, and ultimately the cost to consumers.

    Senator Boxer. Thank you so much, sir, for your eloquent 
testimony.
    Just because Senator Inhofe was asking, this is the plan 
that we are going to follow today. I want to get through as 
many as I can before the votes start, so we will just keep 
going and I think once we get down to the floor, we might want 
to stay there for a few minutes to see what is happening. What 
we will do is we will get as many speakers as we can in. We 
will take a break, we will go to the floor. We will return 
within 15 to 30 minutes of our departure time. So if you can 
talk among yourselves and maybe bond and come up with a great 
plan for Senators Warner and Lieberman.
    [Laughter.]
    Senator Inhofe. Madam Chairman, I think it might be worth 
making sure our panel knows what we are voting on, because it 
is the immigration vote. Obviously, we are not going to miss 
it.
    Senator Boxer. Right. We are not. The vote is supposed to 
be now, but it could slip.
    Let's just move ahead. Mr. Tom Donohue, we are very pleased 
to have you here, CEO and President of the U.S. Chamber of 
Commerce. Welcome.

STATEMENT OF THOMAS J. DONOHUE, PRESIDENT AND CEO, U.S. CHAMBER 
                          OF COMMERCE

    Mr. Donohue. Thank you, Madam Chairman. I am very pleased 
to be here.
    As you and the members of the committee know, the Chamber 
has been very engaged with the members of this committee and 
with members of the House and Senate on the critical energy and 
environmental questions facing our country. We are working hard 
to preserve the best features of the bipartisan Energy Policy 
Act of 2005, which if fully implemented will help address many 
of the concerns we share about the security, diversity and 
cleanness of America's energy supply.
    In addition, you noted we have recently formed the 
Institute for 21st Century Energy, led by General Jim Jones, 
who will lead a bipartisan, inclusive effort to shape a 
thoroughly rational, long-term approach to energy acquisition, 
efficiency, infrastructure and the management of global 
warming. The Institute's first product has been made available 
to you today. I hope you will put my comments at the end of the 
record. You ought to take it home and share it with your 
children, it is really interesting, the myths and realities of 
American energy.
    Achieving energy security while also reducing carbon 
emissions is one of the most critical challenges of our time. 
The Congress and indeed the entire Nation is engaged in a 
difficult balancing act between meeting our growing needs and 
protecting the environment. The Chamber is deeply concerned 
with the Congress' ability to balance these two goals. Failure 
to strike the right balance can result in lost jobs, increase 
electricity prices and the migration of industries to foreign 
nations.
    As much as we would like to believe that there is a silver 
bullet, we think it is going to take a whole lot of movement in 
the right direction to deal with the facts and not the myths. 
The fact is that our energy needs will continue to grow, no 
matter what we do. Even with the efficiency gains that have 
been discussed, and there is more that we can do, we must find 
a way to secure the fuel and power we need for a growing 
country, while also protecting the environment and addressing 
the risk of climate change.
    Now, today's witnesses, many of whom are members of the 
Chamber and have a view on what we should think, have offered 
specifics and will offer other specifics to address these 
challenges. You may have noticed that their proposals are not 
all the same.
    What is clear to me, however, and to the Chamber, is that 
as the Congress considers such policy options as cap and trade 
or carbon taxes or other approaches, we need all the facts, all 
the experience and a real serious consideration of the 
unintended results. We look forward to participating in that 
debate. We need to study these options carefully and we need to 
know where we are going before we go there. I would be glad to 
elaborate some more on that in the questions.
    Although our members may have differing views, they come 
together on a serious of principles I think they all agree on. 
They first believe that whatever we do must preserve American 
jobs and international competitiveness of U.S. industries. They 
believe that to be international in scope and encompassing 
developing nations, any plan has to look at China and India and 
others. The Chairman knows that 30 percent, or almost that much 
of the pollution in her own State comes from those countries.
    We need to promote the development and the global 
deployment of greenhouse gas reduction technologies, and we 
might even make a buck on it. We need to reduce barriers to the 
development of climate-friendly energy sources and we need to 
promote energy conservation and efficiency. If we follow that 
list of requirements, we are going to make better judgments in 
our companies, in our Congress and in our country.
    Now, I will as time allows, just quickly say that climate 
legislation, we have to deal with it, but we need to keep a lot 
of people working. I would also say that any climate 
legislation has go to be international. If we sit around and 
just do it here, the idea suggested that we would reduce our 
emissions by 80 percent is a great idea. If somebody has that 
silver bullet, I would like to see it.
    Third, the Chamber believes that all climate change 
legislation has to promote the accelerated development of 
technology that is going to help us reduce climate problems 
from the traditional fuels that we are going to be using in 
this country until our grandchildren are sitting here. We 
absolutely believe that whatever we do, that we have to make it 
affordable, diverse and secure and I believe your point, Jim, 
that if you don't believe in nuclear energy after everything we 
know about its safety, then you are not serious about serious 
climate change.
    I have run that very quickly to my schedule, I know you 
have yours. I look forward to our discussion. Thank you, Madam 
Chairman.
    [The prepared statement of Mr. Donohue follows:]
          Statement of Thomas J. Donohue, President and CEO, 
                        U.S. Chamber of Commerce
    Good morning, Chairman Boxer, Ranking Member Inhofe, and members of 
the Committee on Environment and Public Works. My name is Thomas J. 
Donohue and I am President and Chief Executive Officer of the U.S. 
Chamber of Commerce. The Chamber is the world's largest business 
federation, representing more than three million businesses and 
organizations of every size, sector, and region. On behalf of the 
Chamber and its members, I thank you for the opportunity to testify 
here today.
    You have asked me to come before the Committee today to discuss 
global climate change proposals and their relation to the power plant 
sector. The Committee should be commended for exploring the impact of 
the numerous legislative proposals on power plants. If Congress follows 
through with legislation, but does not carefully consider the impact 
provisions such as mandatory emissions caps, carbon capture and 
sequestration, and mandatory renewable portfolio standards will have on 
industry, the Chamber believes the economic consequences could be 
severe.
    The 110th Congress is performing a balancing act, striving to 
preserve energy security while also limiting energy use and the fuels 
to be used for the purpose of addressing climate change. On one hand, 
Congress seeks to place serious limits on energy exploration, but, on 
the other, continues to push for energy independence and carbon-
constraining climate change legislation. The Chamber is very concerned 
with Congress' perceived ability to balance these two goals. If energy 
independence is what we truly want, we can certainly achieve it; we 
have more than enough energy sources (ranging from coal and oil shale 
to wind and photovoltaic) that, when used in conjunction with one 
another, can make the country energy independent, but not any time soon 
and perhaps not even in this century.\1\ However, when we add caveats 
to how that energy independence must be achieved--such as legislation 
that reduces greenhouse gas emissions without also funding technology, 
or with a federally mandated renewable portfolio standard (RPS), or by 
limiting oil and gas exploration on Federal lands and in the Outer 
Continental Shelf--the balancing act will give way to one extreme or 
the other.
---------------------------------------------------------------------------
    \1\ Edmonds, J.A., et al., Global Energy Technology Strategy: 
Addressing Climate Change (May 2007), available at http://www.pnl.gov/
gtsp/docs/gtsp--2007--final.pdf.
---------------------------------------------------------------------------
    What Congress must continue to recognize, as it crafts this 
legislation, is that electricity is the ``juice'' that runs our 
country. And this country will depend on the sustainability of the 
``juicers''--coal, natural gas, petroleum, nuclear, and hydropower, to 
name a few--for the foreseeable future. We simply cannot flip a switch 
and power our country exclusively on renewable energy sources. (Even if 
we could--and we cannot--we need energy corridors to move that 
electricity from rural areas to urban regions, and Congress is taking 
steps to shut down these corridors as well.) By promoting renewables at 
the expense of other energy sources, Congress is picking winners and 
losers--and the losers will be the power plants that generate the 
electricity to run this great nation.
    As you know, many of this country's power companies are members of 
the Chamber. In fact, several companies joining me today on this panel 
(Duke Energy, Florida Power & Light, Murray Energy, and Pacific Gas & 
Electric) are Chamber members, and each has a different view for 
addressing global climate legislatively. Some advocate for cap-and-
trade, RPS, or more nuclear. Others want an international, voluntary 
program, such as the Asia-Pacific Partnership. For this reason, I 
believe the best place to begin my discussion of how to address climate 
change is with the five core principles the Chamber utilizes to 
evaluate any proposed climate change solution. The Chamber measures all 
proposed climate change legislation against the following standards:
    Does the legislation. . .
    1. Preserve American jobs and the competitiveness of U.S. industry;
    2. Provide an international, economy-wide solution, including 
developing nations;
    3.  Promote accelerated development and deployment of greenhouse 
gas reduction technology;
    4. Reduce barriers to the development of climate-friendly energy 
sources; and
    5. Promote energy conservation and efficiency.
    I urge you to view my testimony today as a valuable resource. The 
Chamber and its members have already had the internal debate on climate 
change, and our five core principles are largely the result of that 
discussion. The Chamber has not endorsed one specific solution or one 
specific piece of legislation, but over the years has supported 
legislation that funds research, development and deployment of 
technology, and that promotes energy efficiency.
    Let's not turn our backs on the energy companies that made America 
great. Instead, let us work with those companies to develop the 
technology to make their energy--indeed, all energy--clean, efficient, 
and affordable. Only then will we be able to solve the global climate 
challenge.
  i. preserve american jobs and international competitiveness of u.s. 
                                industry
    Any climate change solution, no matter what it is, must preserve 
American jobs and the competitiveness of American industry. Even areas 
served by large power companies (who arguably would be able to afford 
either the technology or the extra credits necessary to stay in 
business) would feel the strain, both from increased costs of doing 
business and other regions' inabilities to keep up. A 2005 analysis 
done by CRA International found that, for legislation aimed at reducing 
greenhouse gas emissions to 2000 levels by 2010, and continuing at that 
rate until 2020, the cost to business and society would be substantial 
while the effects of climate change would not be reduced.\2\ 
Specifically, CRA found that such legislation would cost the average 
household $450 to $720 per year until 2010, rising to $490 to $810 
until 2020. The U.S. would lose 550,000 to 840,000 jobs by 2010, and 
793,000 to over 1.3 million jobs by 2020.\3\ Coal production would 
decline by 22 to 42 percent, electricity generation by 7 to 14 percent, 
and oil refining by 6 to 13 percent.\4\
---------------------------------------------------------------------------
    \2\ CRA International, ``Costs to the Nation under Proposed Federal 
Cap and Trade Legislation to Limit Greenhouse Gas Emissions,'' June 21, 
2005, available at http://www.accf.org/pdf/statestudies2/US-2005 
percent206-21-05.pdf.
    \3\ Id.
    \4\ Id.
---------------------------------------------------------------------------
    These negative effects are within the realm of possibility when 
considering industry's inability to meet the aggressive targets set by 
many of the climate change bills currently before the Senate. 
Assessment of U.S. Cap-and-Trade Proposals, a study recently performed 
by energy experts at the Massachusetts Institute of Technology, 
analyzed three scenarios, which roughly mirrored the targets sought in 
bills introduced by Senators Bingaman, McCain-Lieberman, and Sanders-
Boxer, respectively.\5\ The forecasted increases in electricity prices 
found by the MIT panel are simply staggering: from 2015 to 2050, 
Senator Bingaman's bill will increase prices by 31 to 59 percent with 
nuclear in the mix, 34-66 percent without; the McCain-Lieberman targets 
will increase prices by 51 to 59 percent with nuclear, 51 to 75 percent 
without; and the Sanders-Boxer bill will raise prices by 56 to 59 
percent with nuclear, and 60 to 78 percent without.\6\ Faced with such 
rising energy costs, it would be no surprise to see many heavily 
energy-dependent industries migrate overseas and take American jobs 
along with them. The chemical industry has already done so.\7\
---------------------------------------------------------------------------
    \5\ Paltsev, S., et al., Assessment of U.S. Cap-and-Trade 
Proposals, Apr. 1, 2007, available at http://web.mit.edu/globalchange/
www/MITJPSPGC--Rpt146.pdf.
    \6\ Id.
    \7\ Greg Schneider, Chemical Industry in Crisis: Natural Gas Prices 
Are Up, Factories Are Closing, And Jobs Are Vanishing, WASH. POST, Mar. 
17, 2004, at E01.
---------------------------------------------------------------------------
  ii. must be economy-wide, international in scope, and must include 
                           developing nations
    Any climate change program must be long-term, international, and 
economy-wide. Domestic emissions constraints, without corresponding 
long-term cutbacks in greenhouse gas emissions from nations such as 
China and India, will not only fail to make the required impact on 
levels of greenhouse gases in the atmosphere, but could also 
irreparably harm our country's ability to compete in the global market.
    As the Task Force on Hemispheric Transport of Air Pollution (HTAP) 
made clear just last week, emissions measured in American cities do not 
always originate within American borders.\8\ Climate change legislation 
must therefore target the citizens and businesses of all nations, not 
simply domestic power plants and fossil fuel producers. If not, the 
effects on the U.S. economy, consumer prices and jobs could be 
disastrous.
---------------------------------------------------------------------------
    \8\ Task Force on Hemispheric Transport of Air Pollution, 2007 
Interim Report (June 2007), available at http://www.htap.org/
activities/2007--interim--report/reading/TF%20HTAP%202007% 
20Exec%20Sum%20070612.pdf.
---------------------------------------------------------------------------
    Similarly, any long-term climate change action plan absolutely must 
include developing nations such as China and India. Chinese emissions 
are projected to increase 119 percent and Indian emissions 131 percent 
between 2004 and 2030.\9\ Unless developing nations are engaged, 
domestic emissions controls would penalize domestic businesses that 
attempt to compete in the world market while non-participating 
developing nations continue to get a free ride.
---------------------------------------------------------------------------
    \9\ International Energy Agency, World Energy Outlook 2006, 
available at http://www.iea.org/textbase/weo/index.htm.
---------------------------------------------------------------------------
    The good news is, we have a mechanism to accomplish an 
international, economy-wide solution that has brought developing 
nations--even China and India--to the table: the Asia-Pacific 
Partnership for Clean Development (APP). The bad news is, APP is not 
receiving the time, attention, or funding it needs to accomplish its 
goals. APP is still in its relative infancy, and needs both (a) time to 
develop and demonstrate climate-friendly technology, and (b) increased 
funding from the World Bank and the International Monetary Fund.
    The United States is not holding up its end of the bargain with 
respect to APP and technology development and deployment. The Energy 
Policy Act of 2005 (EPAct), which contains more than 60 provisions 
requiring the U.S. Government to engage with the private sector and 
develop innovative climate and energy technologies, is embarrassingly 
under-funded. To make matters worse, several bills in Congress attempt 
to repeal and/or de-fund those EPAct provisions that have begun to make 
a difference.
    President Bush recently announced plans for an international summit 
at which the 10 to 15 nations responsible for approximately 85 percent 
of the world's global emissions will begin a dialog on the best way to 
reduce those emissions responsibly. As Council on Environmental Quality 
Chairman Jim Connaughton recently stated, any near-term domestic 
efficiency gains will be overwhelmed by the rise of coal-based power 
generation in China, India, South Africa, Mexico, Central and Eastern 
Europe, and Russia.\10\ Those countries will continue to use coal 
because they are trying to advance their economies, trying to lift 
people out of poverty, trying to provide clean water, and trying to use 
energy to run air pollution controls. And energy is necessary for all 
of that. The purpose of President Bush's proposed summit is to find a 
shared technology-development pathway, to bring the cost of these 
expensive technologies down so that they will be used by China, India 
and other developing nations.\11\
---------------------------------------------------------------------------
    \10\ Press Briefing by Senior Administration Officials on the 
President's Trip to Europe and the G8 Summit, Radisson Hotel, Rostock, 
Germany, June 6, 2007; available at http://www.whitehouse.gov/news/
releases/2007/06/20070606-5.html.
    \11\ Id.
---------------------------------------------------------------------------
 iii. promote accelerated development and deployment of greenhouse gas 
                          reduction technology
    The development and deployment of affordable, widely available 
climate-friendly technology is crucial to preserving jobs while 
controlling emissions. Carbon capture and sequestration, next-
generation nuclear power, and other cutting-edge technologies must be 
researched, developed, demonstrated and deployed. Without widespread 
availability of these and other technologies, the power plant sector 
may not be able to continue producing power to meet local and regional 
demands while also satisfying aggressive carbon emissions caps.
    Although some of these technologies exist, they are by no means 
cost-effective or commercially viable. Current emissions control 
technologies are too expensive for all businesses to utilize under 
their respective business models.\12\ Larger businesses can arguably 
afford the high cost of this technology while continuing to turn a 
profit, but small and mid-sized businesses cannot.
---------------------------------------------------------------------------
    \12\ Paltsev, S., et al., Assessment of U.S. Cap-and-Trade 
Proposals, Apr. 1, 2007, available at http://web.mit.edu/globalchange/
www/MITJPSPGC--Rpt146.pdf.
---------------------------------------------------------------------------
    Similarly, new technologies are far from simple to deploy. Siting, 
permitting, insurance coverage, and liability exposure concerns will 
remain major roadblocks, as will high costs for materials, labor, and 
construction expertise. The overall costs of wind, nuclear, and 
liquefied natural gas regasification facilities continue to increase 
due to rising costs of materials.
    Carbon capture and sequestration technology is perhaps the best 
example of our ongoing technological struggle. The Future of Coal, a 
report released in March 2007 by a consortium of faculty and energy 
experts at MIT, found that, even with a high price on carbon (due to a 
legislative or regulatory cap or tax), coal, the leading source of 
carbon-dioxide emissions from electricity generation, will continue to 
be a major source of electricity due to its sheer abundance and an 
increasing worldwide demand for energy.\13\ However, the report 
criticizes current efforts by the U.S. Department of Energy (DOE) to 
research carbon capture and sequestration, and calls for a $5 billion, 
10-year program to research, develop and (most importantly) demonstrate 
on a realistic scale the technology necessary to capture and store 
carbon dioxide from coal-fired power plants.\14\ The MIT report also 
cites additional hurdles, such as (1) coal gasification limitations, 
(2) near-prohibitive costs of retrofitting existing coal plants to 
capture and sequester carbon, and (3) DOE's failure to determine system 
costs through the FutureGen project.
---------------------------------------------------------------------------
    \13\ Deutch, J., and Moniz, E., The Future of Coal: An 
Interdisciplinary MIT Study, March 14, 2007, available at http://
web.mit.edu/coal.
    \14\ Id.
---------------------------------------------------------------------------
    The MIT study concludes that coal demand is not going anywhere, yet 
we are now facing imminent legislation that will constrain coal power 
plants' abilities to meet this growing demand while failing to provide 
an adequate technological alternative. It is for this reason that, if 
Congress does anything, it must absolutely provide comprehensive 
research and development incentives to stimulate technological 
innovation. Without such incentives, emissions controls will likely 
fail.
   iv. reduce barriers to the development of climate-friendly energy 
                                sources
    If Congress is truly determined to (a) cap greenhouse gas emissions 
and reduce those levels over time, (b) require mandatory renewables 
from every state, and (c) attempt to achieve some level of energy 
independence, it must remove all barriers to the development of clean, 
climate-friendly energy sources. It must stop creating barriers to 
``national interest'' transmission corridors recently designated by 
DOE. And it must not only provide incentives for so-called 
``renewables'' such as wind, solar and geothermal, but also clean 
energy sources such as coal, hydropower, nuclear power, biofuels, and 
clean-burning natural gas. If the true policy goal is to encourage 
energy production, there is no legitimate reason why innovative energy 
technology producers are left standing at the door as they get ready 
for the marketplace. Congress must be pragmatic about its energy 
strategy, and any legislation should be technology-neutral so that 
Congress avoids picking technology winners and losers.
             v. promote energy conservation and efficiency
    The amount of energy required to produce a dollar's worth of goods 
and services in the U.S. economy fell by more than 50 percent between 
1949 and 2004, as a result of improvements in energy efficiency, 
structural shifts in industry, and other related factors.\15\ From 1980 
to 2004, industrial delivered energy use per dollar of industrial value 
of shipments declined by an average of 1.6 percent annually.\16\ 
According to the Energy Information Administration, although energy use 
generally increases as the economy grows, continuing improvement in the 
energy efficiency of the U.S. economy and a shift to less energy-
intensive activities are projected to keep the rate of energy 
consumption growth lower than the GDP growth rate.\17\
---------------------------------------------------------------------------
    \15\ U.S. Department of Energy, Office of Energy Efficiency and 
Renewable Energy, ``Highlights of Energy Intensity Trends--Total 
Energy,'' available at http://intensityindicators.pnl.gov/total--
highlights.stm.
    \16\ Energy Information Administration, Annual Energy Outlook 2007, 
at 79, available at http://www.eia.doe.gov/oiaf/aeo/index.html.
    \17\ Id.
---------------------------------------------------------------------------
    Chevron began tracking energy use across all operations in 1992, 
and reports that since beginning company-wide efforts, energy 
efficiency has been increased by 24 percent.\18\ Since the 1992 
inception of the Environmental Protection Agency's Energy Star program, 
Eastman Kodak Company has reduced its use of energy by more than 15 
percent.\19\ 3M has improved its worldwide energy efficiency by 29 
percent since 1998.\20\ United Technologies Corporation improved its 
worldwide normalized energy consumption performance by 39 percent from 
2002 to 2006.\21\ These are but a few examples of how business and 
industry are seeking out and taking advantage of energy efficiency 
opportunities; there are thousands of other companies doing the same.
---------------------------------------------------------------------------
    \18\ Chevron Corporation, ``Energy Efficiency and Conservation,'' 
available at http://www.chevron.com/social--responsibility/energy--
conservation/.
    \19\ ENERGY STAR Awards for Sustained Excellence and Corporate 
Commitment, 2005, available at http://www.energystar.gov/
index.cfm?c=pt--awards.pt--es--winners--2005.
    \20\ 3M Corporation, ``Improving Energy Efficiency,'' available at 
http://solutions.3m.com/wps/portal/3M/en--US/global/sustainability/s/
performance-indicators/environment/energy-efficiency/.
    \21\ United Technologies Corporation, 2006 Corporate Responsibility 
Report, at 4, available at http://www.utc.com/responsibility--reports/
2006/2006--utc--corporate--responsibility.pdf.
---------------------------------------------------------------------------
    Energy efficiency makes good business sense: such practices, where 
cost-effective, often afford sizable reductions in operating costs. The 
flip side to this argument, however, is that companies are typically 
reluctant to implement cost-ineffective energy efficiency measures.\22\ 
Historically, lawmakers have used policy instruments to ensure cost 
recovery for such cost-ineffective measures. This is the absolute wrong 
way to promote energy efficiency. The market should decide which energy 
efficiency technologies are winners and losers, not politicians. 
Governmental intervention should only be considered as a last resort, 
following careful examination of all long-term benefits and drawbacks.
---------------------------------------------------------------------------
    \22\ The exception to this rule might be businesses that act as 
``first movers,'' such as those seeking to gain technological expertise 
or establish primacy in intellectual property rights on energy 
efficiency technology.
---------------------------------------------------------------------------
                                 ______
                                 
    This country's energy goals will be met only by a commitment to 
technology innovation and to all types of available energy sources. 
Power plants, the industrial lifeblood of our country, must not be 
unnecessarily constrained by climate change legislation without first 
being afforded the technology necessary to meet those controls. Just 
like the American public itself, diversity of domestic energy 
production is vital to continued economic prosperity. If you ignore 
this truth, you will be turning out the lights on our country's 
economic future--literally.
    Thank you for the opportunity to testify today. I look forward to 
answering any questions you may have.
        Responses by Thomas J. Donohue to Additional Questions 
                           from Senator Boxer
    Question 1. You emphasize the importance of developing climate-
friendly technologies. Haven't we seen that regulation can spur 
technological development by giving businesses a reason to find low-
cost ways of reducing pollution?
    Response. In terms of greenhouse gas regulation specifically, we 
have seen quite the opposite. The European Emissions Trading Scheme 
(ETS), and the flawed regulation behind it, has resulted in permit 
prices so low that technological innovation costs significantly more 
than it does to purchase credits to cover increased emissions. The ETS, 
in essence, has actually reduced incentives for companies to limit 
their emissions. First among many culprits for this outcome is the 
allocation system used by ETS. As would be the case in the United 
States, each participating nation in the ETS cap-and-trade system was 
forced to choose winners and losers through the allocation process. 
Participating ETS nations chose to over-allocate credits to its 
regulated entities, which led to reduced permit prices, increased 
emissions, and virtually no technological innovation.
    American technological prowess is evident from the fact that we 
have made even greater gains than the Europeans without a mandatory 
emissions trading scheme like ETS. In 1980, the United States consumed 
approximately 19,000 Btu per dollar of gross domestic product (GDP); 
today, that figure is at 8,000 Btu per dollar of GDP.\1\ What these 
numbers show is that, over the last 30 years, businesses have gotten 
two-thirds of their energy needs from technology-based efficiency 
gains. The will of business to ``do good'' is very strong, but with 
rising population and a growing economy, Congress should be providing 
incentives to these businesses to develop even more technology instead 
of punishing them. Regardless of regulation in place, business will 
always have one very large reason to continue to develop climate-
friendly technologies: competition from other businesses.
---------------------------------------------------------------------------
    \1\ ``International Total Primary Energy Consumption and Energy 
Intensity,'' Energy Information Administration, available at http://
www.eia.doe.gov/emeu/international/energyconsumption.html.
---------------------------------------------------------------------------
    Global climate change is not simply a domestic issue, and the main 
problem with regulation to address the problem of climate change--at 
least the type of domestic greenhouse gas regulation pondered by this 
Committee--is its narrow scope. Domestic greenhouse gas regulation will 
not affect emissions from developing nations, and without the 
participation of these nations, global greenhouse gas levels will not 
change.\2\ A recent study by Dr. Leon Clarke at Pacific Northwest 
National Laboratory, entitled ``CO2 Stabilization in a 
Heterogeneous World,'' demonstrates that failure to secure 
participation from all nations--both developed and developing--will 
cause extreme price fluctuations in the price of carbon and will 
greatly reduce our ability to achieve overall global emissions 
targets.\3\ Any solution to climate change must be international in 
order to succeed.
---------------------------------------------------------------------------
    \2\ See, e.g., Clarke, L., ``CO2 Stabilization in a 
Heterogeneous World,'' (July 13, 2007); available at http://
www.uschamber.com/issues/index/environment/climate--change.htm.
    \3\ Id.

    Question 2. If companies aren't required to reduce global warming 
pollution, can we really expect enough of them to do so on their own, 
particularly if their competitors aren't following suit?
    Response. As Dr. Clarke's research demonstrates, for global 
greenhouse gas emissions levels to be affected in any meaningful way, 
international participation is required.\4\ There is a significant 
distinction to be made here: reductions in absolute greenhouse gas 
emissions are not the same as reductions in greenhouse gas 
concentrations. While it is certainly conceivable to reduce our 
country's absolute greenhouse gas emissions (i.e., X tons of carbon), 
local emissions reductions alone will do virtually nothing to impact 
global greenhouse gas emissions concentrations. Therefore, failure to 
secure international participation, for even ten years, could 
significantly limit the effectiveness of global greenhouse gas 
reductions.
---------------------------------------------------------------------------
    \4\ Id.
---------------------------------------------------------------------------
    We must deal with reality: China and India have already stated that 
they will not agree to mandatory greenhouse gas emissions caps\5\ 
Forced to deal with the world as it is, the best way to bring these 
countries into the fold is not through regulation aimed only at 
limiting domestic emissions. Rather, we need to engage these nations 
through the mechanisms that continue to work, such as the Asia-Pacific 
Partnership for Clean Development (APP) and the President's recently-
announced 15-nation summit.
---------------------------------------------------------------------------
    \5\ ``Poor nations vow to do `fair share' on climate,'' Reuters 
News Service, June 8, 2007; available at http://www.reuters.com/
article/worldNews/idUSL0881479620070608.

    Question 3. So far, our Nation's refusal to adopt mandatory limits 
on our greenhouse gas emissions has not persuaded developing nations to 
agree to such limits. What do you think is the best way to persuade 
large emitters like China and India to reduce their global warming 
pollution?
    Response. The Chamber respectfully disagrees with your assumption 
that our nation's refusal to adopt mandatory greenhouse gas limits has 
somehow caused developing nations to refuse such limits. These 
countries have routinely refused to implement mandatory emissions 
controls, and nothing the United States has done (or will do) will 
persuade these rapidly-developing nations that mandatory controls make 
economic sense. the reason is simple: the governments of China and 
India are burdened with rapid economic development for billions of 
inhabitants, and they do not see an economically feasible way to reduce 
emissions without impeding their ability to provide for their citizens. 
As we stated in the Chamber's response to Question 2 above, the best 
course is to engage these nations through existing partnerships, such 
as APP and the President's 15-nation summit.

    Question 4. Has the Chamber considered the costs of global warming 
to its members? Aren't many of its members already being affected by 
rising insurance prices that reflect the increased risk of extreme 
weather events that are associated with global warming?
    Response. The Chamber's member companies have many lines of 
insurance (e.g., D&O, E&O, commercial general liability, workers' 
compensation) whose premiums are unaffected by weather patterns. Only a 
small portion of most companies' insurance portfolios--commercial 
property, and, where applicable, builder's risk--is even remotely 
affected by the weather.
    At the risk of answering a question with another question, we ask 
whether the Committee has evaluated the impact of international border 
pollution on its decision whether to regulate greenhouse gases in the 
United States without also securing international participation. The 
recent report by the Task Force on Hemispheric Transport of Air 
Pollution, a joint research group organized by the United States and 
the European Union under the purview of the United Nations Economic 
Committee for Europe, indicates that emissions emanating from China, 
India and other nations do not simply disappear into the atmosphere; 
instead, wind carries those emissions to the United States, where 
domestic air quality levels are impacted.\6\ As a result of the global 
economy, many of the Chamber's members operate not just in the United 
States but throughout the world. If the United States is over-
regulated, those businesses could view such regulation as an incentive 
to move their operations to a developing nation (such as China or 
India) where emissions regulation is more permissive and less costly. 
The emissions generated in those countries will then be carried over to 
the United States as a result of international border pollution. It is 
certainly foreseeable that over-regulation in our country, without 
cooperation from all other nations, will lead to higher pollution 
levels in the United States and more lost jobs.
---------------------------------------------------------------------------
    \6\ Task Force on Hemispheric Transport of Air Pollution, 2007 
Interim Report (June 2007), available at http://www.htap.org/
activities/2007--interim--report/reading/ TF%20HTAP%202007% 
20Exec%20Sum%20070612.pdf
---------------------------------------------------------------------------
                                 ______
                                 
        Responses by Thomas J. Donohue to Additional Questions 
                          from Senator Inhofe
    Question 1. Can you elaborate why you think rising energy costs 
will harm businesses?
    Response. All cost increases affect the competitiveness of an 
industry; rising energy costs are no exception. The impact will be felt 
both directly and indirectly. Direct costs will be, quite simply, the 
fact that increased costs to manufacture equipment, produce goods, and 
maintain an office will further limit profits. Indirect costs will come 
in the form of business migration: the primary goal of a business is to 
make money, and if it is significantly easier to do so in another 
country, the business will move.
    Dr. Clarke's report provides a good illustration of the impact 
U.S.-only climate change regulation will have on energy costs, and, 
therefore, American competitiveness. Should the United States impose 
limitations on itself while its competitors operate without carbon 
constraints, the costs to stabilize CO2 levels globally 
skyrocket.\7\ Businesses will migrate to new locations with little to 
no emissions controls (such as China or India) and greenhouse gases 
produced at those locations will carry back over to the U.S., forcing 
even more businesses to leave and making our nation even less 
competitive in the global market.
---------------------------------------------------------------------------
    \7\ Clark, L., ``CO2 Stabilization in a Heterogeneous 
World,'' (July 13, 2007); available at http://www.uschamber.com/issues/
index/environment/climate--change.htm.

    Question 2. Can you tell us about the impacts on businesses if we 
pass cap-and-trade legislation and do not have the technology necessary 
to meet the targets?
    Response. This is a perfect example of the conflict highlighted in 
the Chamber's written testimony to the Committee. The United States 
depends on fossil fuels for energy production, and will continue to do 
so for the foreseeable future. In fact, energy demands continue to 
rise. Policymakers preach goals of ``energy independence'' and ``energy 
security,'' yet repeatedly impose limitations on the country's ability 
to meet these objectives by: (a) taking steps to limit oil and gas 
exploration; (b) rolling back transmission and other provisions 
contained in the Energy Policy Act of 2005 (EPAct); and (c) refusing to 
site new nuclear power plants, permit Yucca Mountain, and reopen spent 
fuel reprocessing.
    This conflict is typified by the government's repeated failure to 
implement technology provisions mandated by EPAct. EPAct contains more 
than 60 provisions that specifically address new energy production and 
efficiency technologies. The Chamber has done extensive research on the 
status of these 60 provisions, and found an embarrassing number of them 
to be un-funded, underfunded, or simply not implemented at all. If the 
goal is to develop new technologies--and to own the intellectual 
property from these technologies--Congress should be focusing its 
efforts on funding and implementing EPAct, not ``reinventing the 
wheel'' on energy policy.

    Question 3. How does the Supreme Court's ruling in Massachusetts v. 
EPA affect your view of climate change? Should EPA be regulating 
greenhouse gases under the Clean Air Act?
    Response. The Chamber is hesitant to speculate as to the scope of 
the Supreme Court's ruling in Massachusetts v. EPA--the Chamber is a 
trade federation, not a law review--but suggests that more guidance may 
be necessary to fully interpret the scope of EPA's authority to 
regulate greenhouse gases under the Clean Air Act. However, regulation 
undertaken by EPA on its own motion poses many of the same problems as 
legislation currently introduced in Congress: none of these regimes 
adequately address the problem of international participation. The Task 
Force on Hemispheric Transport of Air Pollution has found that 
emissions from China, India and Southeast Asia substantially affect 
background air quality levels in the United States. Without a truly 
international climate change solution, as domestic regulation tightens 
greenhouse gas levels over time, emissions from those developing 
nations will continue to increase. It is certainly possible, if not 
probable, that large numbers of states will be penalized for 
substantial emissions emanating from outside their borders.

    Senator Boxer. Thank you, sir, for your contribution to 
this debate.
    Our next speaker is Marlo Lewis, a senior fellow at the 
Competitive Enterprise Institute.
    Welcome, sir.

STATEMENT OF MARLO LEWIS, SENIOR FELLOW, COMPETITIVE ENTERPRISE 
                           INSTITUTE

    Mr. Lewis. Thank you, Chairman Boxer and members of the 
committee, for inviting me to testify today.
    Jonah Goldberg, the columnist, notes that the Earth warmed 
about 0.7 C in the 20th century, while global GDP increased by 
some 1800 percent. For the sake of argument, says Goldberg, 
let's agree that all of the warming was anthropogenic, the 
result of economic activity. Let's further stipulate that the 
warming produced no benefits, only harms. That is still an 
amazing bargain, Goldberg remarks. Average life expectancies 
doubled in the 20th century. The human population nearly 
quadrupled. Yet per capita food supplies increased. Literacy, 
medicine, leisure and even in many respects the environment 
hugely improved, at least in the prosperous west.
    This suggests a thought experiment. Suppose you had the 
power to travel back in time and impose carbon caps on previous 
generations. How much growth would you be willing to sacrifice 
to avoid how many tenths of a degree of warming? Would humanity 
be better off today if the 20th century had half as much 
warming but also a half or a third or even a quarter less 
growth? I doubt anyone on this committee would say yes. A 
poorer planet would also be a hungrier, sicker planet. Many of 
us might not even be alive.
    How much future growth are you willing to sacrifice to 
mitigate global warming? That is not an idle question. Some 
people believe we are smart enough now to measurably cool the 
planet without chilling the economy. But Europe is having a 
tough time meeting its Kyoto commitments and Kyoto would have 
no detectable impact on global warming.
    Three of the main climate bills introduced in the Senate 
this year would require CO2 emissions cuts of about 
60 percent by 2050. Yet the Energy Information Administration 
projects that in 2030, U.S. emissions will be about 33 percent 
above year 2000 levels. I submit that nobody knows how to meet 
the targets in those bills without severe cuts in either 
economic growth or population growth.
    But won't the bill's carbon penalties make deep emission 
reductions achievable by spurring technological change? I doubt 
it. Europe has been taxing gasoline for decades at rates that 
translate into carbon penalties of $200 to $300 per ton of 
CO2. Where in Europe is the miracle fuel to replace 
petroleum? Where are all the zero emission vehicles? EU 
transport sector CO2 emissions in 2004 were 26 
percent higher than in 1990.
    The Energy Information Administration analyzed the market 
impacts of a relatively modest $7 per ton CO2 
emission cap in the Bingaman-Spector legislation. The proposed 
cap decreases projected investment in coal generation by more 
than half.
    However, it does not make carbon capture and storage 
economical. Would a bigger regulatory hammer do the trick? No. 
It would just drive more investment out of coal generation.
    Regulatory climate strategies put the policy cart before 
the technology horse. Not until markets are capable of 
producing vast quantities of affordable energy without 
emissions would it be reasonable for Congress to consider 
mandatory emission cuts.
    Policy makers concerned about global warming should do 
three things, CEI believes. First, encourage worldwide R&D 
investment in non-carbon emitting technologies. This should be 
the focus of post-Kyoto diplomacy. Second, eliminate tax and 
other political barriers to innovation and capital stock 
turnover. Third, for a fraction of Kyoto's cost, target 
international assistance on those threats to human health and 
welfare where we know how to do a lot of good for each dollar 
invested. This could not only save millions of lives today, it 
could also help developing countries become wealthier and less 
vulnerable to climate-related risks.
    Thank you again for the opportunity to present my views. I 
would be happy to try and answer your questions.
    [The prepared statement of Mr. Lewis follows:]



  Responses by Marlo Lewis to Additional Questions from Senator Inhofe
    Question 1. Some people say we can learn the lessons of the failed 
Kyoto cap and trade approach in setting up our system so that we don't 
make the same mistakes. Do you think that is correct or is the scheme 
itself fundamentally flawed?
    Response. Cap-and-trade schemes are inherently vulnerable to 
political manipulation, because emission permits are politically 
created assets. In international trading systems, each government has 
an incentive to practice carbon mercantilism--skew baselines and 
allocations to increase domestic firms' supply of permits vis-a-vis 
their foreign competition. In Europe's Emission Trading System (ETS), 
member states handed out permits for more tons of carbon dioxide 
(CO2) than their firms were emitting. When these shenanigans 
came to light, carbon credit prices cratered. Outright cheating--false 
reporting of emissions data--may also occur in countries like Russia, 
where institutional safeguards for transparency and accountability are 
weak.
    A U.S. cap-and-trade program would undoubtedly be more rigorous and 
accountable than the ETS. But price volatility would still be a 
problem, as the history of the U.S. sulfur dioxide (SO2) 
cap-and-trade program shows. Economist William Nordhaus observes that, 
``SO2 trading prices have varied from a low of $70 per ton 
in 1996 to $1,500 per ton in late 2005. SO2 allowances have 
a monthly volatility of 10 percent and an annual volatility of 43 
percent over the last decade.''\1\ A recent AEI paper also points out 
that, ``Over the last 3 years, SO2 permit prices have risen 
80 percent a year, despite the EPA's authority to auction additional 
permits as a `safety valve' to smooth out this severe price 
volatility.''\2\
---------------------------------------------------------------------------
    \1\ William Nordhaus, ``Life after Kyoto: Alternative Approaches to 
Global Warming Policies'' (NBER working paper no. W11889, December 
2005), 15, cited by Kenneth P. Green, Stephen F. Hayward, and Kevin A. 
Hassett, Climate Change: Caps vs. Taxes, American Enterprise Institute, 
June 1, 2007, http://www.aei.org/publications/filter.all,pubID.26286/
pub--detail.asp.
    \2\ Green, Hayward, and Hassett, Climate Change: Caps vs. Taxes.
---------------------------------------------------------------------------
    In a forthcoming CEI paper, University of Guelph economist Ross 
McKitrick explains that reducing CO2 is inherently more 
difficult than reducing SO2; hence that price volatility is 
likely to be greater under a carbon cap-and-trade program. Sulfur 
dioxide emissions had been trending downward for almost two decades 
before the SO2 trading program was enacted. Technology for 
removing SO2 (scrubbers) was proven and widely available. 
Utilities had the option to purchase low-sulfur coal. In contrast, 
CO2 emissions have been trending upwards for decades, 
CO2 scrubbers do not exist, and there is no low-carbon coal.
    For the same reasons, a U.S. carbon cap-and-trade program would 
raise consumer electricity prices even if U.S. utilities behave better 
than did their German counterparts. Under the ETS, German utilities 
obtained most of their permits free-of-charge. They nonetheless raised 
rates to cover their alleged compliance costs.
    One thing is clear. The allocation rules will reflect special 
interest politics, not the general interest of consumers in affordable 
energy. The hearing provided a telling example.
    Peter Darbee, chairman and CEO of PG&E in California, advocated a 
cap-and-trade scheme that allocates emissions permits based on each 
emitter's historical level of energy produced rather than on its 
historical level of emissions. This would favor utilities (like PG&E!) 
that don't burn much or any coal and instead already rely on higher-
priced lower-emitting fuels.
    In contrast, Jim Rogers, chairman and CEO of Duke Energy, advocated 
a cap-and-trade scheme that allocates permits based on each emitter's 
historical level of emissions rather than on its historical level of 
energy produced. This would favor companies (like Duke!) that burn a 
lot of coal. They would in effect be paid to switch to producing more 
expensive electricity from lower-emitting fuels.
    Perhaps the only allocation scheme both PG&E and Duke would regard 
as ``fair'' is one that lets them pass compliance costs onto consumers.
    Some say we could avoid the pitfalls of the ETS by auctioning 
emission permits among the relatively small number of ``upstream'' 
firms that sell coal, oil, and natural gas rather than allocating the 
permits free-of-charge to thousands of large ``downstream'' emitters. 
An upstream cap is administratively simpler. However, an auction would 
take much of the fun and profit out of cap-and-trade. Many firms who 
lobby for cap-and-trade do so in the expectation that they will 
``earn'' credits for actions already taken (``credit for early 
action'') or receive credits gratis for doing what they do anyway.

    Question 2. Explain further why penalizing fossil fuel use through 
carbon mandates won't encourage new technologies.
    Response. Small carbon penalties are unlikely to create profit 
potentials big enough to justify major R&D investment in unproven 
technology. On the other hand, big carbon penalties can stifle the 
growth on which R&D programs ultimately depend. To believe in the 
technology-transforming power of mandates, one must have a strong faith 
in the wisdom of central planners--their ability to hit the sweet spot 
between penalties that are too light and penalties that are too heavy.
    An example in my written testimony illustrates the point. EIA 
projects that the $7 per ton carbon penalty in the original Bingaman-
Specter draft legislation would reduce new investment in coal 
generation by more than half. However, the penalty would not make 
investment in carbon capture and storage (CCS) economical. A bigger 
regulatory hammer might do the trick--but only if people were still 
willing to invest in coal! If a $7 per ton penalty drives out more than 
half of all new coal investment, tougher penalties might well kill coal 
as an electricity fuel. That is especially likely once investors 
realize that cost ``certainty'' is impossible, for reasons discussed 
next.

    Question 3. Additional comment on cost ``certainty.''
    Response. The National Commission on Energy Policy (NCEP) argues 
that a ``safety valve''--a statutory ceiling on the per-ton cost of 
carbon reductions--should remove the fear that cap-and-trade would harm 
the U.S. economy. A safety valve, says NCEP, puts an end to years of 
sterile, my-model-is-better-than-your-model, debate over how much cap-
and-trade would cost. We know in advance the maximum cost of carbon 
reductions--it is spelled out in the statute.
    This argument is dubious for three reasons. First, as noted above, 
a similar ``safety valve'' did not prevent large price spikes in the 
SO2 trading program. Second, no Congress can bind a future 
Congress, and once a new form of economic intervention is adopted, the 
door is open for more aggressive interventions of the same sort. The 
Federal income tax, which originally was supposed to apply only to the 
very rich, is the prime example. Another example with immediate 
relevance is the 7.5 billion gallon biofuel mandate, enacted in 2005. 
Less than 2 years later, Congress was debating mandates five times as 
large.
    Third, none of the cap-and-trade bills under consideration would 
prohibit EPA from adopting national ambient air quality standards 
(NAAQS) for CO2. Absent such prohibition, a NAAQS rulemaking 
for CO2 is an almost inevitable outcome of the Supreme 
Court's decision in Mass v. EPA. The costs of a NAAQS program for 
CO2 are potentially limitless.
    In Mass v. EPA, the Court told EPA to consider regulating 
CO2 emissions from new motor vehicles under Section 202 of 
the Clean Air Act. This sets the stage for a NAAQS rulemaking.
    EPA's first step in regulating an air pollutant under Section 202 
is to make a ``judgment of endangerment.'' Such a regulation must be 
based on an official judgment that emissions of said pollutant 
``endanger public health or welfare.'' Section 202 directs EPA to take 
account cost and technological feasibility when setting emission 
standards for motor vehicles. That is why plaintiffs argued that 
CO2 emission standards for cars would not harm the auto 
industry.
    What plaintiffs conveniently neglected to mention is that an 
endangerment finding for CO2 under Section 202 would trigger 
regulatory action under other Clean Air Act provisions. The most 
important is Section 108, the cornerstone of the NAAQS program. Whereas 
Section 202 sets emission rate (grams per mile) standards, Section 108 
sets pollution concentration (parts per million) standards. That is, a 
NAAQS specifies how many parts per million (or billion) of a substance 
is allowable in the ambient air. The NAAQS program requires states to 
adopt policies that will reduce concentrations of the pollutant of 
concern to the allowable level.
    And here's the kicker. In Whitman v. American Trucking, the Court 
said EPA may not take cost and feasibility into account when setting 
NAAQS.
    In short, Mass v. EPA created a regulatory Pandora's Box. The Kyoto 
Protocol would barely slow the increase in CO2 levels, yet 
could cost the U.S. economy hundreds of billions of dollars annually. 
One prominent scientist guesstimated that it would take ``thirty 
Kyotos'' to stabilize atmospheric CO2 concentrations at a 
safe level. Plaintiffs in Mass v. EPA argued that current 
CO2 levels endanger public health and welfare.
    So if EPA were to develop NAAQS for CO2, the agency 
would face enormous pressures to set the standard below current 
atmospheric levels. However, there is no known way to lower atmospheric 
levels or even freeze them in place short of massive de-
industrialization.
    That the winning plaintiffs in Mass v. EPA viewed their lawsuit as 
a step toward economy-wide CO2 controls under the NAAQS 
program is no mere matter of logical inference. In 2003, three of the 
State AG plaintiffs, including lead attorney Tom Reilly of 
Massachusetts, filed a notice of intent to sue EPA unless it initiated 
a NAAQS rulemaking for CO2.
    House Energy and Commerce Committee Chairman John Dingell's 
discussion draft legislation would have forestalled a NAAQS rulemaking, 
perhaps indefinitely. Dingell argued--correctly--that vehicular 
CO2 standards are fuel economy standards by another name, 
and only one agency has the expertise to administer fuel economy 
standards: the National Highway Traffic Safety Administration (NHTSA). 
By reasserting NHTSA's sole jurisdiction over fuel economy regulation, 
Dingell's bill would have denied EPA the opportunity to make a judgment 
of endangerment about CO2. That in turn would have kept EPA 
from pulling the regulatory trigger that starts a NAAQS rulemaking. But 
under pressure from Chairman Boxer, Speaker Pelosi, Chairman Waxman, 
Governor Schwarzenegger, and others, Dingell shelved his bill.
    The bottom line: None of the climate bills Congress is debating can 
provide even the semblance of cost certainty, because none of the bills 
prohibits EPA from regulating CO2 under the NAAQS program.
    Thank you again for the opportunity to present my views.

    Senator Boxer. Thank you, sir.
    Mr. Murray, we welcome you. You are chairman, president and 
CEO of Murray Energy Corporation.

 STATEMENT OF ROBERT E. MURRAY, CHAIRMAN, PRESIDENT AND CHIEF 
          EXECUTIVE OFFICER, MURRAY ENERGY CORPORATION

    Mr. Murray. Thank you, Chairman Boxer and members of the 
committee.
    At the outset, I want to congratulate the majority of this 
party and the Senators for picking three electric utilities 
that are outside the mainstream beliefs of the electric utility 
industry in the country. These three utilities are three of the 
four that have joined the U.S. Climate Action Partnership that 
advocate cap and trade. Cap and trade is a misnomer for people 
that don't know what they are talking about. It will destroy 
the American economy and it will depend on an international 
global trading marketplace, where under the Kyoto Protocol, 
which has been a farce, the other countries of this world who 
want to take economic advantage of us have already said they 
will cheat.
    So I want to make it clear, these three and the other ones 
that belong do not represent the mainstream electric utilities 
in this country. But I congratulate the majority for having 
them here.
    Climate change, or the so-called global warming issue, is a 
human one for American citizens, as the present courses of 
action being proposed by the U.S. House and Senate members and 
some Republicans will result in little or no environmental 
benefit, but will definitely destroy the lives or quality of 
life of millions of working American families and citizens on 
fixed incomes who depend on low-cost electricity for the 
maintenance of their jobs and living standards. Frankly, I feel 
very threatened about this, and afraid for these people who 
only want to work in honor and dignity.
    These global warming proposals will kill; Johns Hopkins 
says up to 150,000 premature deaths every year. Reducing carbon 
dioxide emissions will impact our poorest families the worst. 
Raising energy costs will cost American jobs. The legislation 
you have proposed to date will lead to the deterioration of the 
American standards of living and accelerated exportation of 
more of our jobs to China and developing countries, who have 
already repeatedly advised, as recently as last week, June 21, 
that they were not going to do anything about their carbon 
emissions.
    Remember, Senators, this is supposed to be a global warming 
issue, not a U.S. warming issue. All you are doing with this 
draconian legislation is destroying the families' standards of 
living, the ability to have jobs, increase the costs to people 
on fixed incomes, and export jobs to China who have already 
said they are not going to do anything about their emissions.
    I don't buy that argument that the United States has to 
take the leadership. What? In destruction of more jobs? In the 
exportation of more jobs? Let's get real. You can't do this 
without worldwide participation, and you are not going to have 
it. All you are going to do is destroy American families and 
people on fixed incomes, their standard of living. It may not 
happen today, but they will get wise to it. And majority party, 
it will be the legacy that you leave for America.
    The science of global warming is suspect. But there is no 
question what will happen to people on fixed incomes and 
American working families, 3 million of them to 4 million, 
according to Penn State. You know, Gore touts that Rachel 
Carson was his role model. She led to the banning of DDT, she 
killed millions of human beings around the world, no question 
about it. Now we have Albert Gore out there doing the same 
thing.
    But is it going to be your legacy? Because I can tell you, 
Senators, that Lieberman bill, with McCain, destroys the 
American economy. Even the Bingaman-Spector bill will dial out 
52 percent the lowest cost electricity in the United States, 
which is coal-fired, and destroy our economy.
    It is virtually impossible to create a job today in our 
economy, and I don't know how many of you have actually created 
a job, but it is hard. But I can tell you that losing high-
paying jobs by curtailing coal's use and the lowest cost 52 
percent of electricity in America, will be extremely 
destructive. I don't need Albert Gore's computer model to tell 
me this. I saw it under the Clean Air Act Amendments of 1990. I 
saw a families separated, marriages broken up, I saw lives 
destroyed, I saw communities disrupted that will never come 
back in Ohio; 36,000 jobs in Ohio alone with the Clean Air Act 
Amendments.
    Some of the elitists in this country and many in our 
congressional leadership today, particularly from California 
and New England, and the entertainment industry, including Mr. 
Gore, who cannot tell fact from fiction, have demonstrated an 
Olympian detachment from the impacts of draconian climate 
change. For them, the jobs and dreams destroyed as a result 
will be nothing more than the statistics and the cares of other 
people. The consequences are abstractions to them, but they are 
not to me. Because I can name many of the thousands of 
Americans whose lives will be destroyed by this ill-conceived 
global goofiness.
    It is a human issue, not just an environmental one.
    [The prepared statement of Mr. Murray follows:]
Statement of Robert E. Murray, Chairman, President and Chief Executive 
                   Officer, Murray Energy Corporation
    We thank the Members of the Senate Environment and Public Works 
Committee for the opportunity to provide this testimony today.
    The climate change, or so-called ``global warming'', issue is a 
human one for American citizens, as the present courses of action being 
proposed by the U.S. House and Senate Majority Members and some 
Republicans will result in little or no environmental benefit, but will 
definitely destroy the lives or quality of life of millions of working 
American families and citizens on fixed incomes who depend on low cost 
electricity for the maintenance of their jobs and living standards. We 
feel very threatened, and frankly afraid, for these people, who only 
want to work in honor and dignity and have an acceptable quality of 
life, from what is going on in the Congress.
    Raising energy costs, as this Congress seems intent on 
accomplishing, will kill American people. A Johns Hopkins University 
study revealed that replacing three-fourths (\3/4\) of United States 
coal-based energy with higher priced energy will lead to one hundred 
fifty thousand (150,000) extra premature deaths annually, and with no 
benefit to the global environment.
    Reducing carbon dioxide emissions will impact our poorest families 
the hardest, according to a recent report by the Congressional Budget 
Office. A 15 percent (15 percent) reduction in carbon dioxide emissions 
under a so-called cap and trade emissions system, a euphemism for 
politicians and many others who do not understand the subject and that 
it cannot work, will cost the poorest of our citizens 3 percent (3 
percent) of their annual household income. The 15 percent (15 percent) 
reduction will cost the poorest 20 percent (20 percent) of Americans 
twice as much as the cost to the richest 20 percent (20 percent), as a 
percentage of total income. Usually, you congressional leaders in the 
Majority would condemn this as heartless and unconscionable.
    Rising energy costs will also cost American jobs. The hysterical 
and out of control climate change or global warming issue, and the 
legislation that you have proposed, will lead to the deterioration of 
the American standard of living and the accelerated exportation of more 
of our jobs to China and other developing countries, which have 
repeatedly advised, as recent as last week, that they will not limit 
their carbon dioxide emissions.
    According to a Pennsylvania State University study, replacing two-
thirds (\2/3\) of United States coal-based energy with higher priced 
energy will cost America three million (3,000,000) jobs, with an upward 
estimate of possibly four million (4,000,000) American livelihoods.
    Albert Gore touts that his role model has always been Rachel 
Carson, with her picture on his wall, who led the environmental 
movement to ban DDT. She and her environmental followers killed 
millions of human beings around the World with the ban on DDT, which 
has since been found by the World Health Organization to be very safe 
to humans in controlling global epidemics.
    It seems to us that the leadership of this Congress, with the 
support of the Majority of this Committee and some Republicans, are 
intent in helping Mr. Gore and those of his ilk in achieving his 
unquestionable legacy, which will be the destruction of American lives 
and more death as a result of his hysterical global goofiness, with no 
environmental benefit. This then will be your legacy, also, as our 
current congressional leadership indicates from your statements and 
actions to date.
    We do not know how many Members of the Congress, and particularly 
the Democrat Majority, have actually ever created a job for anyone. I 
have created three thousand three hundred (3,300) primary jobs and up 
to thirty-six thousand (36,000) secondary ones, according to The 
Pennsylvania State University, from a mortgaged home, and I can tell 
you that it is virtually impossible to do so today in our great country 
due to difficulties imposed by our own government at every turn.
    From your statements and actions to date, few of our congressional 
leaders are giving adequate attention to the destruction that we will 
see for American working people and for those on fixed incomes from all 
of the energy and climate change proposals that have been discussed, 
introduced, or enacted in the House and Senate to date.
    We are losing high paying manufacturing jobs in America to foreign 
countries at a rapid rate. The economic havoc that will be wrought on 
our country as a result of curbing coal's use, which accounts for the 
lowest cost and fifty-two percent (52 percent) of our electric 
generation, will be beyond comprehension.
    I do not need one of Albert Gore's computer models to tell me this, 
as I saw what the enactment of the Clean Air Act Amendments of 1990 by 
this Congress did to the lives of many Americans. It resulted in the 
closure of one hundred eighteen (118) mines and the elimination of 
thirty-six thousand (36,000) primary and secondary jobs in Ohio alone. 
Some of these impacted communities will never recover. Families 
separated, some were impoverished, and many lost their homes because of 
legislation that the Majority in this Congress and the 
environmentalists call a ``success''. Again, I did not learn of this 
destruction from computer models--I lived it and saw it firsthand. 
Climate change is a human issue.
    Some wealthy elitists in our country and many in our congressional 
leadership, particularly from California and New England, and in the 
entertainment industry, including Mr. Gore, who cannot tell fact from 
fiction, have demonstrated an Olympian detachment from the impacts of 
draconian climate change policy. For them, the jobs and dreams 
destroyed as a result will be nothing more than the statistics and the 
cares of other people. The consequences are abstractions to them. But, 
they are not to me, as I can name many of the thousands of American 
citizens whose lives will be destroyed by these elitists' ill-conceived 
``global goofiness'' campaigns.
    It appears that the leadership of this Committee and of this 
Congress are attempting to export the draconian, so-called ``global 
warming'' measures, already enacted in California and proposed in some 
New England states, to the remainder of America. The residents of these 
states have not yet realized the cost to them of these actions. When 
they do, I would not want the legacy that the politicians from these 
areas, including some from your Majority, seem intent on leaving. The 
Pennsylvania State University study also shows that if coal production 
is curtailed by two-thirds (\2/3\) in America, California, itself, will 
lose fifty-eight million dollars ($58,000,000) annually in economic 
activity, and households will see an income decline of twenty-two 
million dollars ($22,000,000) per year. Most especially, three hundred 
thirty-nine thousand (339,000) Californians will lose their jobs. The 
nearly one million (1,000,000) person exodus from California last year 
is just the beginning. No business owner will ever consider choosing to 
site in California, because we can all, including those producing the 
economic studies, see the devastating economic decline that is imminent 
there, as well as in New England, from their actions and proposals.
    While California will be adversely affected, the Central United 
States will be devastated from the curtailing of coal production, as 
this same study estimates that at least one million five hundred 
thousand (1,500,000) jobs will be lost in Arkansas, Iowa, Kansas, 
Louisiana, Minnesota, Missouri, Nebraska, Oklahoma, and Texas, alone. 
Also, the survival of the entire railroad industry in our country will 
be threatened.
    The most ``inconvenient truth'' is that we do not know how to meet 
current, much less anticipated future, United States and global energy 
needs with low-and non-emitting technologies. Carbon penalties will 
suppress economic growth, rather than catapult human civilization into 
a ``beyond petroleum'' era. Until markets can actually supply large 
quantities of affordable, emissions-free energy, Congress should not be 
debating carbon caps, carbon taxes, or carbon emissions standards. The 
Majority seems to have taken the position that we do not need science 
or technology, because we are going to have legislation. Again, we are 
very threatened and afraid for all Americans on fixed incomes and our 
workers as a result of many of the statements and actions of this House 
and Senate. It is time that common sense be introduced into this 
hysterical, out of control, climate change debate, which alleged 
phenomenon, to our Nation's best scientists, is based on faulty 
science. While the science is uncertain, the congressional leadership's 
proposals and statements to date will definitely result in devastating 
economic hardship to our families' lives.
    Remember, China announced last winter, and again June 21, just this 
past week, that they are not going to do anything about their carbon 
dioxide emissions post-Kyoto Protocol in 2012, nor have they done 
anything to date. According to a new study released by The Netherlands 
Environmental Assessment Agency, China's emissions surpassed those of 
the United States in 2006. By 2020 China, alone, notwithstanding the 
other G-77 nations, will consume five (5) times as much coal as the 
U.S. Thus, all of your proposals will simply export more American jobs 
to the developing countries, destroy the lives of many Americans, 
particularly those in manufacturing and on fixed incomes, and actually 
add more carbon dioxide emissions to the earth's atmosphere. China is 
currently bringing a new, 500 megawatt, coal-fired power plant on-line 
every week, and four hundred fifty-five (455) of them are in the 
planning stages.
    Remember, the U.S. economy is uniquely vulnerable to schemes for 
capping coal use. Europe is not, which explains why Europeans pay 
little for capping carbon emissions and why they are so eager for us to 
cap ours. I can understand the incentives of European leaders in the 
competitive global marketplace. What we cannot understand is the 
congressional indifference.
    If climate change is really a global issue, what is needed is the 
serious public investment of several billion dollars per year of 
taxpayer money over the next two (2) decades in its research. This 
investment will cost a trifle of any other course of action and will be 
productive.
    While they are at it, the elitists who propose that we make do with 
less coal should explain the consequences to our national security. We 
are a country that is dangerously dependent on foreign energy--and at a 
time of fierce new competition from foreign rivals for the World's 
dwindling supply of oil. A decade ago, China was a net oil exporter. 
Last year, China's oil imports accounted for forty percent (40 percent) 
of the entire increase in global oil production.
    Unilaterally restricting our reliance on coal takes us exactly in 
the wrong direction. It is naive and irresponsible for policymakers to 
think that an energy-dependent country like ours will not be vulnerable 
to foreign influence in the decades ahead.
    Coal production is fundamental to the United States economy. 
Another Pennsylvania State University study found that, in 2015, if 
left alone, coal could contribute one trillion dollars ($1,000,000,000) 
to the United States economy and provide six million eight hundred 
thousand (6,800,000) jobs and three hundred sixty-two billion dollars 
($362,000,000,000) in household income.
    Unfortunately, there are a number of American companies, through 
the so-called U.S. Climate Action Partnership, that are promoting 
constraints on coal use and an irrational cap on carbon dioxide 
emissions to achieve greater profits and other competitive advantages, 
which transparent motivations are not in the best interests of American 
citizens.
    These Companies include: General Electric, DuPont, Caterpillar, 
American International Group, General Motors, Dow Chemical, Johnson & 
Johnson, PepsiCo, Marsh, Boston Scientific, Alcoa, Alcan, Siemens, 
British Petroleum, Shell Oil, ConocoPhillips, Excelon, Entergy, PG&E, 
and PNM Resources.
    Their proposed ``cap and trade'' scheme will not work and will be 
devastating for our country. ``Cap and trade'' would depend on an 
honest global emissions trading market where other countries will not 
cheat. It is ``smoking opium'' to think that our competitors will not 
cheat, as they already have under the farce called the Kyoto Protocol. 
Remember, leaders, the issue here is supposed to be ``global warming'', 
not ``U.S. warming''.
    Again, these Companies have demonstrated the willingness to 
devastate the overall American economy for their own short term gains. 
Americans who are on fixed incomes or who depend on low cost 
electricity for their jobs to be competitive in the global marketplace 
had better be wary of these other American companies and their profit 
and competitive advantage motives.
    In addition to these un-American Companies, we also have (1) 
nuclear power and natural gas producers looking for a larger share of 
coal's electricity market; (2) environmental groups hoping deceitful 
alarmism will scare gullible, guilt-ridden consumers and entertainers 
into filling their coffers; (3) news media fear mongers seeking higher 
ratings and newspaper sales; and (4) academics and think-tank know-it-
alls eager to climb aboard the latest grant money train no matter where 
it is headed.
    Carbon dioxide is a combustion product vital to how civilization is 
powered. It cannot be legislated or regulated away. Without drastic 
technological breakthroughs, it is not possible to stabilize 
atmospheric carbon dioxide emissions, even if it were necessary, and 
meet global energy demands. The only way to reduce emissions over the 
next two (2) decades, according to the most reliable sources, is to 
force Americans to use less energy than at present, much less.
    Even the Bingaman/Specter legislation proposed will cut U.S. coal-
fired electricity generation by two-thirds (2/3), according to the 
Energy Information Administration in a report published this year. The 
policy being advocated to prohibit coal fired power plants without 
carbon capture and sequestration technology will simply result in 
future blackouts and severe job destruction in our country. In a recent 
study by the Massachusetts Institute of Technology entitled ``The 
Future of Coal'', it is estimated that it will take eight (8) years and 
up to two hundred million dollars ($200,000,000) just to demonstrate 
the economic, environmental and technical performance of large scale 
carbon capture and storage technology. The study also shows that, at 
best, coal use will be less than half that of a no-cap case, and this 
would be disastrous.
    We need to be realistic. The one billion five hundred million 
(1,500,000,000) tons of carbon dioxide, which likely is not 
contributing to any global warming, produced in the United States each 
year is equivalent to three (3) times the weight and one-third (\1/3\) 
the volume of all natural gas transported by the United States pipeline 
system. Our country does not have, and cannot have, the infrastructure 
to support the carbon capture, transportation and sequestration 
technology advocated by virtually every bill introduced in the Congress 
to date. Also, the liability and property rights issues that will be 
generated for the carbon dioxide sequestration will make it impossible 
to implement, again, with no environmental benefit.
    We can tell you for certain that your global warming debate in the 
Congress, unfortunately for our country, has already very adversely 
affected the perceptions of and investment in the United States coal 
industry. We are being weakened daily by these discussions, and America 
cannot be without the lowest cost fifty-two percent (52 percent) of our 
electricity that the industry provides. No doubt, many coal producers 
will not survive the discussions of the draconian regulations that are 
taking place. You cannot legislate the policy cart before the 
technology horse, which you are trying to do.
    We are already seeing the adverse affects of your global warming 
policies in the ethanol debacle, the use of which this congressional 
majority, this past week, demanded be drastically increased. Yet, 
ethanol from corn is twenty-six percent (26 percent) fuel inefficient, 
as it takes 1.26 times as much fossil fuel energy to make a gallon of 
cellulosic ethanol than that which we get out of it. Also, it depends 
on a fifty-one cent ($0.51) per gallon subsidy from the taxpayer. As a 
result, you in Congress have now raised the cost of steaks by five and 
one-half percent (5.5 percent) from a year ago, and chickens are up 
seven and seven-tenths percent (7.7 percent). According to a new survey 
by the Food Marketing Institute, more than forty percent (40 percent) 
of American consumers are changing their food buying habits in response 
to high energy prices. People are being forced to make the decision 
between the purchase of food or heat. The real cost of ethanol is far 
higher to Americans than the fossil fuels that you are attempting to 
eliminate and with no environmental benefit.
    The American family is about to be a victim of one of the biggest 
con jobs in the history of this Republic. Congress could soon 
arbitrarily restrict the use of coal, our Nation's most abundant and 
affordable fuel for generating electricity. This leadership does not 
appreciate the pain that such a program will inflict on ordinary 
Americans, but when they start feeling it, it will be your legacy.
    For the many reasons provided herein, and others that could not be 
presented today, the errant leadership of the U.S. Congress must stop 
the dishonest, hysterical, out of control campaign to enact the 
currently proposed climate change legislation that will result in no 
environmental benefit, but will destroy the very lives of our citizens 
on fixed incomes and America's working families.




         Responses by Robert E. Murray to Additional Questions
                          from Senator Inhofe
    Question 1. A lot of people seem to think we don't need coal and we 
can keep the lights on and air conditioners running with natural gas or 
wind power. In short, they think coal is obsolete. Can you tell us why 
these people are wrong?
    Response. Coal remains the most abundant and affordable energy 
resource available to the United States. The U.S. Energy Information 
Administration (``EIA'') estimates that, by 2030, fifty-seven percent 
(57 percent) of all electricity generated in the United States will 
come from coal, if the industry is not destroyed by the current 
intentions of some in the Congress to enact so-called ``global 
warming'' legislation.
    The major argument behind coal's continued use in our country is 
national population growth and rapid development in the Southeast and 
West. A growing population demands more energy, and, as a result, the 
EIA estimates that total U.S. energy consumption will grow by forty-one 
percent (41 percent) by 2030. Also, electricity consumption is 
projected to grow to 5.5 billion kilowatt hours from the current 2.1 
billion kilowatt hours in this timeframe.
    The average delivered price of coal--owing to its abundance and 
accessibility in the United States--has remained stable while other 
fuel sources have experienced price increases due to increased 
production costs, larger profit margins, geo-political instability, 
resource availability, and the state of America's import 
infrastructure. Indeed, electricity manufactured from natural gas now 
costs at least four (4) to five (5) times the cost of electricity from 
coal, with generation from nuclear, and particularly renewable, sources 
costing even more. Rightly, coal has underpinned the growth of the U.S. 
gross domestic product since the 1970s.
    Coal's stability and impact on the economy must be emphasized. Coal 
is not reliant on the natural fluctuations of wind and sun, and does 
not generate a harmful waste by-product that requires long-term 
storage. The 240-year supply of coal in the United States makes it the 
ideal energy source to power our homes, our businesses and industries 
and--in the not-too-distant future--our vehicles.
    If coal is constrained through a precipitous climate change or 
renewable portfolio standard policy, energy options become limited. The 
EIA estimates that in a scenario where coal use is constrained, the 
consumption of energy from renewable sources changes only slightly from 
current levels. Capital costs, regional characteristics and production 
limitations combine to limit the use of renewable sources such as wind, 
geothermal or solar. In the EIA base case, the outlook is actually for 
the share of renewable fuels in the power generation sector to remain 
flat--at nine percent (9 percent)--and for nuclear fuel's share to 
actually fall.
    By the end of the EIA forecast period (2030), the percentage of 
electric power generated by fuel type is as follows:

          Coal--54 percent
          Nuclear--4 percent
          Renewables--6 percent
          Natural gas--36 percent

    There are no other options than coal for low cost electricity 
generation that will allow American's manufacturers to be competitive 
with their products in the global market place and to hold down 
electric rates for our citizens on fixed incomes.
    The National Petroleum Council's (``NPC'') report, Facing the Hard 
Truths About Energy, which was delivered to the Secretary of Energy on 
July 18, 2007, indicates, among other conclusions, the following 
finding: Coal, oil, and natural gas will remain indispensable [emphasis 
added]. I urge all the members of the Committee on Environment and 
Public Works to acquire and examine this report and findings therein. 
Respected authorities such as the National Petroleum Council, the 
Energy Information Administration, the International Energy Agency, the 
Global Energy Technology Program, the Electric Power Research 
Institute, the Climate Change Science Program, the Massachusetts 
Institute of Technology, and numerous other credible sources all 
indicate that a future without coal is not possible. It is noteworthy 
that some of these projections carry far into the future--as much as a 
century or more. Collectively, this work and findings therein represent 
the thinking of some of the best and most respected minds in the 
country.
    However, every bill addressing so-called global warming that has 
been introduced by the Congress, and now proposed by Senators John W. 
Warner and Joseph I. Lieberman, will eliminate low cost coal-fired 
electricity from America, our manufacturers and our citizens on fixed 
incomes.
    What other options do we have? The nuclear industry observes that 
dozens of new reactors must be built over the next twenty (20) years 
simply to maintain nuclear power's current nineteen percent (19 
percent) share of the growing electricity market. Assuming that nuclear 
energy will take a protracted time to develop--which, owing to waste 
storage and local community opposition, is reasonable--the only 
economical choice becomes natural gas. As stated above, delivered 
natural gas prices have seen great fluctuations since the late 1990s, 
and it is often imported from unstable regions of the world.
    Liquid natural gas (``LNG'') is an expensive alternative energy 
source, but siting LNG plants is proving to be very difficult because 
of local and environmental pressure group opposition.
    Wind power cannot be used to provide electricity base loads and 
must be backed up by a more reliable source of electricity such as a 
coal--fired power plant. Furthermore, no other source of electricity, 
except hydropower, can compete with the price of coal. Electric rates 
are the lowest where coal is the primary fuel.
    In summary, America's growing energy needs, forty-one percent (41 
percent) by 2030, cannot be met without higher coal production. Any 
alternatives being offered are impractical and considerably more 
expensive than coal. Congress must recognize, which it has not under 
its recent energy and climate change proposals, that coal has an 
indispensable role in the delivery of low cost energy to our citizens 
and in the economic competitiveness of our country.

    Question 2. You testified about our pipeline limitations in terms 
of capturing, transporting, and sequestering carbon. Can you elaborate?
    Response. Projections of the cumulative amount of carbon dioxide 
that may in the future be required to be captured, transported and 
sequestered (for example, that of Mr. James Dooley, Senior Staff 
Scientist, Joint Global Change Research Institute, Pacific Northwest 
Laboratory) could be on the order of tens of billions of tons annually. 
That is nearly 10,000 time the current global carbon dioxide storage 
industry as it exists today. Further, the Massachusetts Institute of 
Technology (``MIT''), in its report entitled ``The Future of Coal'', as 
well as the Battelle Global Energy Technology Strategy Program 
(``GTSP''), in their report entitled ``Global Energy Technology 
Strategy--Addressing Climate Change'', identify a number of significant 
issues relating to carbon capture and storage even before the 
consideration of pipeline infrastructure. These include geologic 
storage capacity; the engineering and technological challenges to 
retrofitting the current fleet of coal-fueled power plants with carbon 
capture equipment; developing technology to the point of an affordable 
per ton emissions price; site selection and liability issues; 
determining if any markets for carbon exist; minimizing parasitic 
energy loss at electric power plants, estimated to be about twenty (20) 
percent; and funding support for carbon capture and storage research 
and development programs.
    Further there are numerous unresolved uncertainties about how to 
address the site-monitoring, insurance, liability and property rights 
issues involved in carbon transfer and storage. A huge pipeline system 
will be needed to transfer the carbon dioxide to locations for 
sequestration. With American's current litigious society, there is 
virtually no chance that these pipelines can be sited, or that the 
liability and property rights issues involved in carbon transfer and 
sequestration can ever be resolved for decades, if at all. We often 
cannot even site an electric transmission line in America today. 
However, once again, these concerns are preceded by the fact that, 
according to the Energy Information Agency, no full scale commercial 
carbon capture technology will be available until 2020. And, the 
Congress has demonstrated no will to provide the amounts of capital 
that will need to be expended to mature this technology.
    We urge all members of the Committee on Environment and Public 
Words to acquire the aforementioned reports and examine them. In short, 
the capturing, transporting and sequestration of carbon remains a 
virtually impossible task that cannot be accomplished for at least 
twenty (20) years, if at all. Indeed MIT and GTSP do not perceive the 
possible wide spread deployment of carbon dioxide capture, transport 
and sequestered technology before about 2050.

    Question 3. Are there any points you would like to elaborate on?
    Response. Every so-called ``global warming'' or climate change 
proposal of the current U.S. Congress, including the outlined one from 
Senators Warren and Lieberman, will destroy the American economy by 
eliminating the fifty-two percent (52 percent) lowest cost electricity 
in our country. As a result, more jobs will be exported to 
manufacturers in foreign countries, such as China and India, which have 
already stated, repeatedly, that they are not going to do anything 
about carbon dioxide emissions. Furthermore, our citizens on fixed 
incomes will not be able to afford their electric bills under all of 
the House and Senate proposals. All of this is absolutely for no 
environmental benefit, according to the vast majority of the most 
respected climatologists in the World.
    Second, I would like to submit for the record a letter that I wrote 
to Chairman Boxer replying to her ill-informed accusations made against 
Murray Energy's mine safety record in an attempt to discredit my 
testimony. This letter to Chairman Boxer is attached, which shows that 
my Companies and my safety records are among the best of any mining 
companies in the World, and I was recently given the Chief Executive 
Officer's Leadership Award for this by the International Society of 
Mine Safety Professionals.
    In addition, we believe that, if the Senate Environment and Public 
Works Committee acquires the above noted reports and information, 
members of the Committee will understand better the need for coal. In 
addition, the production of ``Facing the Hard Truths About Energy'' 
report, that was recently produced for the Secretary of Energy, will be 
helpful to the Committee in that more than three hundred fifty (350) 
highly knowledgeable participants from energy industries, energy 
consultants, energy efficiency advocates, financial communities, 
academia, professional societies, environmental groups, nongovernmental 
organizations and United States government were involved. This report 
even engaged energy ministers in nineteen (19) countries.
    Effort by the Congress to enact so-called ``global warming'' or 
climate change legislation should be abandoned in view of the facts set 
forth in the aforementioned begun. Otherwise, we will be driving 
America to energy starvation and economic disaster.




    Senator Boxer. Thank you, sir.
    I ask unanimous consent to place in the record a statement 
by Senator Feinstein about the utility bills before the Senate.
    [The prepared statement of Senator Feinstein follows:]
       Statement of Hon. Dianne Feinstein, U.S. Senator from the 
                          State of California
    Madame Chairman, members of the Committee, thank you for this 
opportunity to discuss legislation to address the No. 1 environmental 
issue facing this planet--global warming.
    Let me begin by commending my good friend and colleague, Senator 
Boxer, for her leadership on this issue.
    I would also like to thank the members of the Committee for your 
great diligence and hard work on this difficult issue. I have 
particularly enjoyed working with Senator Carper, with whom I have 
cosponsored the Electric Utility Cap and Trade Act of 2007.
    Last week, the Senate worked out the details of a landmark 
compromise to aid our economy, improve our security, and tackle our 
nation's second largest source of greenhouse gasses--automotive 
emissions.
    This legislation broke a stalemate that we have faced for over two 
decades. It was an important first step in a comprehensive effort to 
reduce greenhouse gas emissions.
    Today, we can take the next step. We have an historic opportunity 
to build-upon this momentum. We are poised and ready to take on an even 
greater legislative challenge--reducing emissions from our nation's 
single largest source of greenhouse gasses, electric utilities.
    To that end, I have introduced the Electric Utility Cap and Trade 
Act. This bill, which is cosponsored by Senator Carper, establishes a 
national cap and trade system for electric utilities, which account for 
one-third of our nation's greenhouse gas emissions.
    The bill has been endorsed by 6 major energy companies, and is the 
most far-reaching bill to garner strong support from the electric power 
industry to date.
    These companies include:
     Pacific Gas & Electric (PG&E) Corporation,
     Calpine,
     Florida Power & Light,
     Entergy,
     Exelon, and
     Public Service Enterprise Group.
    Together, these companies operate in 42 states, produce 
approximately 150,000 megawatts of energy, and provide more than 15 
percent of the U.S. electricity.
    Here is how the bill would work. It would establish a cap and trade 
program for the electricity sector. The cap is designed to provide both 
flexibility and long-term regulatory certainty.
     In 2011, the bill would cap greenhouse gas emissions at 2006 
levels--a 6 percent reduction from anticipated emissions from the 
electric sector.
     In 2015, it would ratchet the cap down to 2001 levels--a 16 
percent reduction from anticipated levels.
     In 2016, the bill would reduce the cap further to 1 percent below 
2001 levels. And, from 2017 to 2019 it would require additional annual 
1 percent reductions.
     By 2020, emissions would be reduced 25 percent below anticipated 
levels.
    And after that, emissions will be reduced even further--by an 
additional 1.5 percent a year and potentially more--if the EPA, based 
on scientific evidence--believes that more needs to be done to avert 
the most dire consequences of global warming.
    That's the cap. It is consistent with the best available science, 
and provides flexibility to alter the pace of future change, in 
response to future advances in our understanding of the Earth's 
climate.
    The bill also establishes emissions credit trading and banking, 
which gives companies additional flexibility to embrace new 
technologies, encourage innovation, and find the lowest cost reductions 
across the entire economy.
    Additional flexibility comes through the unlimited use of an 
offsets program. This would include farm, forest, wetland and 
international offsets to provide significant cost control measures 
without weakening the program's overall effectiveness.
    These offsets will only be issued to projects that can ensure real 
greenhouse gas reduction benefits. Under this program, companies can:
     Buy low-cost emission ``credits'' from farmers, foresters and 
other landowners who reduce tillage and change other cropping 
practices, grow trees, and protect wetlands and forests.
     Buy up to 25 percent of their carbon credits from low-cost 
projects in developing nations and other countries, allowing U.S. 
companies to profit from selling technologies to developing nations.
     If the cost of the program gets too high, EPA will let companies 
buy more low-cost carbon credits from foreign nations or postpone some 
emission reductions until a later date.
    Finally, the bill provides for flexibility through innovation. By 
giving a portion of emission credits for free on the basis of 
electricity production and auctioning the remainder, the bill speeds 
the development of new energy and efficiency technologies that will 
provide a diverse set of strategies for reducing greenhouse gas 
emissions.
    In 2011, when the program begins, 15 percent of credits will be 
auctioned, steadily rising to 100 percent auctions by 2036. Based on a 
price range of $5-$30 per ton of carbon dioxide equivalent, these 
auctions are expected to raise $2-$12 billion by 2011; and $9-$55 
billion by 2036.
    These auctions will not be a new tax, and proceeds will go directly 
to the development and deployment of low-carbon energy and industrial 
technology.
    I believe that this bill's greatest asset is its combination of 
certainty and flexibility.
     It provides the certainty of a long-term cap that is consistent 
with the recommendations of the environmental and industry leaders 
working together in the United States Climate Action partnership 
(USCAP).
     It provides the flexibility needed to meet the cap in the most 
cost effective manner--including offsets, and alter the schedule of 
future emissions reductions in a manner consistent with the best 
science the world has to offer.
    The bill also addresses critical details of program design, such as 
how many credits auctioned, how free credits are given to utilities, 
and how farm, forest, and wetland credits are integrated into the 
program.
    The use of offsets, in particular, will enable low cost reductions 
in greenhouse gas emissions, with simultaneous improvements in air 
quality, wildlife habitat, and water and soil conservation.
    I believe that certainty, flexibility, and environmental protection 
are bipartisan principles to which we can all agree. The challenge is 
to work out the details.
    Fifteen States, with more than 100 million citizens and 
representing over one-third of the U.S. population, have already agreed 
to binding cuts in greenhouse gas emissions. The citizens and elected 
leaders of these States have set a bold historic precedent. The States 
are leading the way, and it is time for Congress to act.
    I urge my colleagues to join me in working to craft a bipartisan 
compromise that moves aggressively to reduce greenhouse gas emissions, 
while treating all parties in a fair and equitable manner. And I 
believe the Electric Utility Cap and Trade Act of 2007 provides a 
strong foundation for this compromise. Together, we can move one step 
closer to a comprehensive answer to the problem of global warming. And 
the time to act is now.
    Thank you.

    Senator Inhofe. I would ask unanimous consent to place 
Senator Bond's opening statement into the record.
    [The prepared statement of Senator Bond was not received at 
time of print.]
    Senator Boxer. Certainly.
    Anybody else have an opening statement they wish to place 
into the record?
    OK, so we are going to finish this now, Dr. Borelli, you 
will be our last person to speak, and then we will take a break 
and come back and continue with questions. Go ahead, Doctor.

STATEMENT OF THOMAS J. BORELLI, Ph.D., PORTFOLIO MANAGER, FREE 
                     ENTERPRISE ACTION FUND

    Mr. Borelli. We thank the members of the committee----
    Senator Boxer. Oh, I am sorry, I didn't give you a proper 
introduction. You are the portfolio manager of Free Enterprise 
Action Fund.
    Mr. Borelli. That is correct, Madam Chair.
    We thank the members of the Committee on Environment and 
Public Works for inviting me to provide this testimony today. I 
am Tom Borelli, portfolio manager of the Free Enterprise Action 
Fund, a publicly traded mutual fund. Our fund seeks to increase 
our returns by advancing free market principles in the 
companies we own.
    All too often, today's CEOs make decisions based on 
appeasing social and political pressure or by trying to 
generate revenue through legislation. In our view, these 
strategies are short-sighted, because they stymie competition, 
innovation and jeopardize future earnings. For these very 
reasons, we strongly oppose cap and trade legislation and 
company participation in the U.S. Climate Action Partnership.
    Accordingly, we are in opposition to legislation that sets 
carbon dioxide limits and allocations for the utility 
industries, including companies we own, like PG&E and Duke 
Energy. While the science implicating human activity on global 
warming is uncertain and speculative, the economic costs of cap 
and trade legislation are certain and severe. We are deeply 
concerned about the effect of cap and trade on both the U.S. 
economy and on future profitability of the companies we own in 
our portfolio.
    Some CEOs support cap and trade because they think they can 
ride the waves of political opinion and gain the political 
process to obtain Government subsidies and greater carbon 
allocations. Others support cap and trade because they think it 
is good public relations. However, jumping on the global 
warming bandwagon to be liked or chase transient uncertain 
gifts from Congress does not constitute a sound business plan. 
The Free Enterprise Action Fund is the only mutual fund that is 
using its shareholder standing to demand a debate about global 
warming in the board room.
    Through our interactions with CEOs are some of the largest 
companies in America, we have discovered that they have not 
evaluated or disclosed the severe economic consequences of cap 
and trade legislation to their customers or their shareholders. 
By neglecting to conduct proper due diligence regarding the 
impact of carbon dioxide regulations to their business, these 
CEOs are deceiving their shareholders. Such deception and 
negligence potentially exposes these companies to lower 
earnings and possibly shareholder lawsuits.
    Many CEOs are ignoring Government studies that estimated 
the economic impact of cap and trade. For example, the Energy 
Information Administration found cap and trade will raise 
gasoline prices by nearly 53 percent, raise energy prices by 
more than 86 percent and reduce economic growth by almost 2 
percent. More recently, the Congressional Budget Office report 
on cap and trade reported the costs will be borne by consumers, 
especially the poor, who would face persistently higher prices 
for products, such as electricity and gasoline.
    Given the severe impact on high energy prices on economic 
growth, CEOs should be very worried about cap and trade. 
Unfortunately, we have found that many CEOs are detached from 
economic reality. Caterpillar's participation in U.S. CAP is a 
perfect illustration of CEO incompetence and deception 
surrounding cap and trade legislation.
    Caterpillar's CEO admitted he did not conduct a cost 
benefit analysis before deciding to join the U.S. CAP. In 
addition, he was not aware of the CBO study that found these 
regulations would hurt his coal industry customers. 
Caterpillar's future profit depends on a growing economy and 
growth in the energy and mining industries. In fact, according 
to its 10K filings with the Securities and Exchange Commission, 
it cites a decline in economic growth in the mining industry as 
a key business risk.
    Yet Caterpillar is supporting cap and trade regulations 
that are going to harm the economy and the coal industry, a key 
customer for Caterpillar. Astonishingly, Caterpillar is 
lobbying against its own earnings. Not only is the CEO harming 
the economy, he is keeping his shareholders in the dark. 
Nowhere does Caterpillar disclose that its support of cap and 
trade can lead to a decline in its own business.
    Similarly, Dupont's 10K repeatedly warns its shareholders 
about the negative impact of high energy prices on its 
business, but nowhere can shareholders find any disclosure from 
Dupont that cap and trade will raise energy prices. From the 
perspective of a portfolio manager, I am extremely concerned 
about the economic impact of cap and trade legislation on the 
economy and our portfolio. Growth of the stock market depends 
on cheap and plentiful energy supply to feed a thriving 
economy. Capping energy is capping economic growth.
    This matter brings to mind a saying attributed to Socialist 
Karl Marx and Vladimir Lenin: the last capitalist we hang shall 
be the one who sold us the rope. Companies supporting cap and 
trade are not only selling the rope, they are building the 
scaffold. Thank you.
    [The prepared statement of Mr. Borelli follows:]
     Statement of Thomas J. Borelli Ph.D., Portfolio Manager, Free 
                         Enterprise Action Fund
    We thank the Members of the Committee on Environment and Public 
Works for inviting me to provide this testimony today.
    I am Tom Borelli, a portfolio manager for the Free Enterprise 
Action Fund (ticker FEAOX) a publicly traded mutual fund. Our fund 
seeks to increase our returns by advancing free market principles in 
the companies we own. To meet our financial goals and the free market 
values of our shareholders, we frequently challenge CEO decisions that 
may harm the company's long-term profitability.
    All too often, today's CEOs make decisions based on appeasing 
social and political pressure or by trying to generate revenue through 
legislation that favor their company. In our view, these strategies are 
shortsighted because they stymie competition, innovation and jeopardize 
future earnings.
    For these very reasons, we strongly oppose cap and trade 
legislation and company participation in the United States Climate 
Action Partnership (USCAP). Accordingly, we are in opposition to 
legislation that sets carbon dioxide limits and allocations for the 
utility industry.
    While the science implicating human activity on global warming is 
uncertain and speculative, the economic costs of cap and trade 
legislation are certain and severe. We are deeply concerned about the 
affect of cap and trade on both the U.S. economy and on the future 
profitability of the companies in our portfolio--including PG&E and 
Duke Energy.
    Some CEOs support cap and trade because they believe they can ride 
the waves of public opinion and game the political process to obtain 
government subsidies and greater carbon allocations. Others support cap 
and trade because they think its good public relations.
    However, jumping on the global warming bandwagon to be liked or 
chase transient and uncertain gifts from Congress does not constitute a 
sound business plan.
    Moreover, by pursuing these ill-conceived strategies, CEOs are 
overlooking their primary responsibility to their shareholders.
    The Free Enterprise Action Fund is the only mutual fund that is 
using its shareholder standing to demand a debate about global warming 
in the boardroom. We have challenged numerous corporations--including 
those in the utility industry--to justify their support of carbon 
dioxide regulations.
    For example, we have written to utility companies including PG&E 
asking them to justify their support of carbon dioxide emission limits 
and to estimate the increase in energy costs to consumers. Their 
response has been superficial, dismissive and did not disclose an 
estimated rate increase to consumers.
    However, our advocacy efforts beyond the utility industry are more 
illuminating. Through our interactions with the CEOs of some of the 
largest companies in America, we have shockingly discovered that they 
have not evaluated or disclosed the severe economic consequences of cap 
and trade legislation to their customers or shareholders.
    By neglecting to conduct proper due-diligence regarding the impact 
of carbon dioxide regulations to their business, these CEOs are 
deceiving their shareholders. Such deception and negligence potentially 
exposes these companies to consumer dissatisfaction, lower earnings and 
possibly shareholder lawsuits.
    Specifically, companies are negligent because they are:
     Refusing to consider alternative views on the science
     Refusing to conduct basic cost-benefit analysis of the regulatory 
scenarios like cap and trade on their business
     Failing to disclose the consequences of cap and trade legislation 
to their shareholders
     Failing to disclose that pursing cap and trade regulations may 
harm its customers and shareholders
    Many CEOs are ignoring government studies that estimate the 
economic impact of cap and trade. For example, during the Clinton 
administration the Energy Information Agency found under the best 
scenario, cap and trade will:
     Raise gasoline prices by nearly 53 percent
     Raise energy prices by more than 86 percent
     Reduce economic growth by 1.9 percent, which is $256 billion of 
2006 GDP
     Reduce economic activity across most industries including the 
construction, manufacturing, transportation and finance industries
     Raise interest rates because higher energy prices will exert 
upward pressure on overall prices and contribute to inflation
    More recently, the Congressional Budget Office (CBO) report on Cap 
and Trade concluded:
    ``. . . 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.''
    Given the severe impact on energy prices and overall economic 
growth, CEOs should be very worried about cap and trade legislation. 
Unfortunately, we found through our questions at annual shareholder 
meetings that CEOs are detached from the economic reality of cap and 
trade. For example:
    GE's CEO Jeff Immelt refuses to have GE report to its shareholders 
regarding the cost and benefits of the company's support of global 
warming regulations. Moreover, he claimed he could grow GE's earnings 
even if cap and trade legislation caused a decline of GDP of 2 percent. 
Followers of GE's stock will recognize that the company's share price 
has underperformed the stock market under good economic conditions.
    J.P. Morgan's CEO Jamie Dimon was unaware of the economic impact of 
cap and trade but said he would not support regulations that would harm 
his company's earnings. Yet the company's environmental policy states 
they are going to lead an effort to lobby for a national policy on 
global warming.
    Citi's CEO Chuck Prince was also unaware of the economic impact of 
cap and trade but he felt the economic pain resulting from global 
warming regulations is worth the environmental gain. Citi supports a 
national policy to reduce greenhouse gas emissions but its funding of 
new coal power plants is the subject of criticism by environmental 
activists.
    Caterpillar's CEO James Owens admitted he did not conduct a cost-
benefit analysis of cap and trade before deciding to join USCAP. In 
addition, he was not aware of the CBO study that found cap and trade 
regulations would hurt his coal industry customers.
    This CEO survey illustrates a complete ignorance about the 
consequences of global warming regulations on the economy and their 
businesses.
    Caterpillar's participation in USCAP is a perfect illustration of 
CEO incompetence and deception surrounding cap and trade legislation. 
Caterpillar's future profit depends on a growing economy and growth in 
the energy and mining industries. In fact, according to its 10-K filing 
with the Security and Exchange Commission (SEC), it cites a decline in 
the economic growth and a decline in the mining industry as a key risk 
to its business.
    Yet inexplicably, Mr. Owens is a member of USCAP, which supports 
cap and trade regulations that are going to harm the economy and the 
coal business--a key customer for Caterpillar products. Astonishingly, 
CEO Owens is lobbying against his own earnings!
    Not only is Owens harming his company, he is keeping his 
shareholders in the dark. Nowhere does Caterpillar disclose to its 
shareholders that its support of cap and trade can potentially lead to 
a decline in its business.
    Similarly, DuPont is another member of USCAP who may be lobbying 
against its own earnings. DuPont's 10-K filing repeatedly warns its 
shareholders about the negative impact of high-energy prices on its 
business. Yet according to government studies, cap and trade will 
increase energy prices. Again, nowhere can shareholders find any 
disclosure from DuPont that its involvement in cap and trade 
regulations is a potential business risk.
    From the perspective of a portfolio manager, I am extremely 
concerned about the economic impact of cap and trade legislation on the 
economy and our portfolio. Growth of the stock market depends on a 
cheap and plentiful energy supply to feed a thriving economy. Capping 
energy is capping economic growth.
    More concerning is the myopic view of CEOs who only talk about the 
so-called benefits of addressing global warming but are totally unaware 
of the ramifications of carbon caps on the U.S. economy.
    What little gain a few companies may obtain from cap and trade must 
be balanced against the overall affect the legislation will have on the 
economy. Ironically, a few companies may win the battle for cap and 
trade but loose the war for earnings because of an economic downturn.
    This matter brings to mind the saying attributed to socialists Karl 
Marx and Vladimir Lenin: the last capitalist we hang shall be the one 
who sold us the rope. Companies supporting cap and trade are not only 
selling the rope, they are building the scaffold.
                                 ______
                                 
      Response by Thomas J. Borelli to an Additional Question from
                             Senator Boxer
    Question. You assert that the science linking human activity and 
global warming is speculative despite the recent report by the 
International Panel on Climate Change that it is more than 90 percent 
certain that human activities are largely responsible for global 
warming. Earlier in your career, you served as the manager of corporate 
scientific affairs for the Philip Morris Company in 1990. Philip Morris 
long disputed the link between smoking and lung cancer in the face of 
strong and ultimately overwhelming scientific evidence to the contrary. 
What is your personal standard for deciding when scientific evidence is 
sufficient to warrant action by businesses or government to save lives 
that might otherwise be lost?
    Response. First, I'd like to thank the Environment and Public Works 
Committee for the opportunity to testify on this important topic. Only 
an open and honest public debate will enable Congress to arrive at the 
proper legislative outcome regarding global warming.
    My views on human activity and climate change are an outgrowth of a 
diverse array of career experiences, which includes science, government 
and public policy. Starting with my undergraduate degree in 
microbiology, I earned a masters degree and doctorate in biochemistry 
and molecular biology where I conducted applied and basic research for 
General Foods. In 1987, I worked as a staff member for the Democratic 
majority for the House Science, Space and Technology Committee.
    Following my congressional experience, I worked for Philip Morris 
(now Altria) in a variety of roles in corporate affairs. After leaving 
Altria in 2005, I co-founded an investment company, Action Fund 
Management LLC, which serves as an advisor to the Free Enterprise 
Action Fund--a publicly traded mutual fund.
    In the course of my broad work experience, I have acquired a deep 
and unique understanding regarding the interplay between science and 
politics and the affect government action has on corporations and the 
economy.
    All too often, the politicization of science has caused significant 
harm to the public--including reduced individual liberties, onerous 
laws that harm company earnings, lost jobs and diminished U.S. 
competitiveness in a global marketplace--with little, if any, public 
benefit.
    Given my collective experiences, I'm deeply concerned about 
government overreaction to fears about climate change. Unlike previous 
environmental issues, legislative efforts to control carbon dioxide 
emissions have the potential to transform our economy.
    I view legislation to restrict carbon dioxide emissions to address 
global warming concerns via a cap-and-trade scheme in a very different 
light. Not only is there great uncertainty regarding the impact of 
man's influence on global climate change, but the proposed government 
action to restrict carbon dioxide emissions will hurt the economy, 
reduce our standard of living, drive employment overseas and 
dramatically reduce our liberty--all causing massive harm to society.
    I also want to thank you for drawing my attention to compare the 
scientific evidence regarding cigarette smoking and global warming. 
While epidemiology and climate sciences are vastly different, some of 
the underpinning principles of determining causation are relevant. I 
believe this comparison will enlighten the committee to recognize the 
major scientific gaps regarding the link between carbon dioxide 
emissions and global warming.
    The evidence linking atmospheric carbon dioxide (the subject of 
cap-and-trade legislation) to global warming does not support many of 
the criteria that were used to establish the causal relationship 
between smoking and lung cancer.
    For example:
    Temporal relationship.--The exposure occurs before the outcome.
    With cigarettes, smoking precedes the occurrence of lung cancer.
    However, global warming data obtained from ice core samples shows 
that atmospheric carbon dioxide follows warming. This finding is the 
exact opposite of the assumptions made in climate models that predict 
man made climate change.
    In addition, the temperature changes in the 20th century don't 
correlate with atmospheric carbon dioxide levels. For instance, the 
greatest amount of warming occurred in the early part of the century 
while a period of global cooling happened from the 1940s to the 1970s, 
even though that is when increasing levels of atmospheric 
CO2 occurred.
    Specificity.--A particular agent causes a specific outcome.
    Cigarette smoking caused a significant increase in lung cancer 
rates. Prior to smoking, lung cancer was a rare disease.
    Regarding global warming, carbon dioxide is a minor greenhouse gas. 
Water vapor and methane have significantly greater ability to absorb 
and trap heat. In addition, natural sources of greenhouse gases far 
exceed the amount of carbon dioxide attributed to human activity.
    Second, periods of global warming have been independent of human 
activity and carbon dioxide levels. For example, historical records 
during the past millennium show there was a medieval warming period 
when Vikings farmed Greenland and a mini ice age during the 14th to the 
19th century.
    Plausibility.--The correlation between agent and outcome agrees 
with the accepted understanding of the scientific process.
    Since cigarette smoke contains thousands of chemicals including 
many carcinogens, the relationship between smoking and lung cancer is 
consistent with the theory of chemical carcinogenesis.
    Regarding global warming, however, the observed warming is greater 
on the earth's surface than in the lower atmosphere (troposphere). This 
observation is directly opposite the climate model predictions for 
greenhouse gas warming where warming is suppose to occur initially in 
the lower atmosphere.
    Alternative Explanations.--In order to prove causality it is 
important to rule out other explanations.
    With cigarette smoke, no other agent was identified that could 
explain the significant relationship between smoking and lung cancer.
    With global warming, recent evidence strongly supports that the 
solar activity of the sun may be responsible for the warming of the 
earth. Recent studies found a correlation between increased solar 
activity--measured by sunspots--with increasing earth temperatures, as 
well as a decrease in solar activity with decreasing temperatures.
    Given the serious data gaps regarding the relationship between 
carbon dioxide emissions and global warming, I believe the prudent 
government response should not involve cap-and-trade legislation.
    Clearly, there remains great scientific uncertainty surrounding the 
role played by carbon dioxide in global warming. In this instance, I 
recommend the Congress take a very conservative stance and follow the 
Hippocratic Oath: first do no harm.
                                 ______
                                 
      Responses by Thomas J. Borelli to Additional Questions from 
                             Senator Inhofe
    Question 1. What is missing regarding business risks in the 10-K 
filings?
    Response. Federal securities law requires publicly traded companies 
to file detailed annual reports with the U.S. Securities and Exchange 
Commission (Form 10-K) disclosing their business and financial 
condition.
    In addition to comprehensive disclosure, companies are required to 
``describe in plain English'' their operating environments and disclose 
business risks that could have a measurable impact on future operations 
and earnings.
    As part of this filing, companies disclose a variety of external 
factors such as litigation, regulations and other government actions, 
as well as economic conditions that could adversely affect a company's 
future and serve as a warning to current and prospective investors.
    Companies participating in the U.S. Climate Action Partnership 
(USCAP) have failed to disclose the potential adverse business 
consequences of cap-and-trade legislation in their 10-K filings. For 
example, Caterpillar Inc.--a USCAP member--failed to disclose that its 
active support of cap-and-trade may harm the company reducing economic 
growth and reducing demand for coal. The coal industry is a major 
customer of Caterpillar.
    In Caterpillar's 2007 10-K filing, the company acknowledges that a 
decline in economic growth and a decline in the mining industry is a 
key business risk. For instance, it states:

        Changes in Economic Conditions of Industries We Serve.--The 
        energy and mining industries are major users of our machines 
        and engines. Decisions to purchase our machines and engines are 
        dependent upon performance of these industries. If demand of 
        output in these industries increases, the demand for our 
        products would likely increase and vice versa.

    Yet despite Caterpillar's dependence on the energy and mining 
industry, the company supports cap-and-trade regulations that are 
likely to damage those industries. The Congressional Budget Office's 
(CBO) report ``Trade-Offs in Allocating Allowances for CO2 
Emissions'' reported that a cap on carbon dioxide emissions could 
result in a 40 percent decline in U.S. coal production.
    Moreover, Caterpillar's voluntary participation in USCAP is 
controversial and has already cost the company one of its customers in 
the coal industry. Murray Energy Corporation refuses to buy Caterpillar 
products because the company's active support of cap-and-trade 
threatens the coal industry.
    Finally, Caterpillar's membership in USCAP is not based on a 
thorough review of the impact of cap-and-trade on its business. 
Caterpillar CEO Jim Owens stated at the 2007 shareholder meeting that 
the company had not conducted a cost-benefit analysis to estimate the 
business impact of cap-and-trade regulations. Instead, Caterpillar's 
participation is based on his view that the company needed a ``seat at 
the table'' with the other industries and activists that are pursuing 
regulations.
    Shareholders should be informed through its 10-K filing that: (1) 
cap-and-trade regulations are harmful to Caterpillar's business because 
of the impact of the legislation on the economy and the coal industry; 
(2) Caterpillar's support for cap-and-trade regulations is 
controversial and it may result in a boycott of its products and; (3) 
Caterpillar did not conduct an analysis to determine the benefits and 
risks of participation in USCAP.
    Interestingly, Caterpillar finds it appropriate to list even remote 
business risks like disease epidemics in its 2007 10-K filing:

        Disease Epidemics.--Historical data shows that major flu 
        epidemics often caused sharp drops in economic output. Such 
        epidemics are difficult to forecast, either in their occurrence 
        or in their impact. So, such an event would have the potential 
        to impact our results more unfavorably than we would assume in 
        our outlooks.

    Yet the company fails to disclose that its support of cap-and-trade 
legislation will harm its business.
    Shareholders have a right to know the consequences of Caterpillar's 
effort to support cap-and-trade legislation. Fair, transparent and full 
disclosure of the business risk of cap-and-trade would allow 
shareholders to make an informed decision about investing in 
Caterpillar.
    The aforementioned disclosures would allow shareholders to evaluate 
the external business risk of global warming regulations on 
Caterpillar's business by providing insight into the judgment, and 
decisionmaking capability of company management.

    Question 2. As a portfolio manager what concerns you regarding cap-
and-trade legislation?
    Response. Cap-and-trade legislation would harm the investment 
community in three major ways.
    First, cap-and-trade legislation would harm the economy and the 
future profitability of businesses. Yet despite these negative 
consequences, corporations have not factored these costs in their 
estimates of future earnings.
    This assessment is based on our experience at shareholder meetings 
where we discovered that CEOs were surprisingly ignorant regarding the 
negative impact of cap-and-trade regulations on the economy.
    Business leaders are unaware that the Energy Information 
Administration's (EIA) study of cap-and-trade found that prices for 
energy and gasoline would rise significantly and that economic growth 
would decline by almost 2 percent.
    Higher energy prices would increase operating costs and negatively 
affect earnings. Consumers would also bear the cost of higher energy 
prices, reducing disposable income and leaving fewer dollars to spend 
on goods and services. Finally, higher energy prices would increase 
inflationary pressures.
    Because of higher energy prices and a decline in economic growth, 
cap-and-trade legislation would harm individual company earnings, the 
economy and stock market prices.
    In addition to the direct impact on earnings, companies have not 
considered or contemplated the consequences of fanning the flames of 
global warming hysteria on their products--this is especially true for 
companies that are participating in the United States Climate Action 
Partnership (USCAP).
    Environmental activist calls for immediate reductions in carbon 
dioxide emissions are creating a legislative and public policy 
nightmare for some corporations.
    General Electric faces legislation in California calling for the 
banning of incandescent light bulbs--a company product and invention of 
company founder, Thomas Edison. Activists are also calling for a ban on 
the use of coal-fired electricity power plants thereby jeopardizing 
GE's technology for reducing carbon dioxide emissions from coal-fired 
power plants.
    PepsiCo faces calls for the banning of bottled water. Elected 
officials responding to the populist theme of combating global warming 
are actively pursing efforts to reduce bottled water consumption. 
Aquafina, the top selling brand of bottled water, is a PepsiCo product.
    The mayor of San Francisco recently banned the purchase of bottled 
water by the city government. The mayor justified his action by 
stating, ``As the city advances its Local Climate Action Plan to combat 
global warming, it is paramount that we initiate policies that limit 
the most significant contributions to climate change.''
    San Francisco is not an isolated case. Salt Lake City Mayor Ross 
(Rocky) Anderson is urging the U.S. Conference of Mayors to promote tap 
water as a way to limit greenhouse-gas emissions. New York City just 
initiated a $700,000 media campaign to promote the use of tap water 
over bottled water. News articles on the campaign note that plastic 
water bottles are disposed in landfill sites, and production and 
distribution contributes to global warming.
    As the bottled water movement moves nationwide, it will threaten a 
major growth area for the entire bottled water industry, harming the 
profitability of PepsiCo, Coke and Nestle.
    Finally, companies are keeping shareholders in the dark about the 
consequences of cap-and-trade on their businesses. Companies like 
Caterpillar (see above), PepsiCo, GE, and DuPont are not disclosing the 
impact of these regulations in their 10-K filings with the Securities 
and Exchange Commission (SEC).
    Unfortunately, without company disclosure about the harmful impact 
of cap-and-trade legislation on their company, portfolio managers and 
the public are making investment decisions devoid of such knowledge.

    Senator Boxer. Well, I look forward to coming back----
    [Laughter.]
    Senator Boxer [continuing]. And hearing from some of the 
great capitalists respond to your charges. It will be extremely 
interesting. I wouldn't miss it for the world.
    So I will be back, as I hope everybody will be back. Just 
talk among yourselves and we will get back as soon as we know 
what the situation is with immigration. So we will see you 
within probably 20 minutes, a half hour at most.
    We will stand in recess.
    [Recess.]
    Senator Boxer. The committee will come to order.
    We will start with the questioning. Each colleague will 
have 5 minutes. I will now go to the early bird, so Paul, if 
you could keep me advised as to who was here first, that would 
be fine.
    Excuse me, I am just trying to find a paper here. Dr. 
Borelli, you and Mr. Murray were very hostile, in my opinion, 
toward the utility companies who are here today who serve 
millions of Americans, and questioned their adherence to 
capitalism. I think Mr. Murray actually blamed the Clean Air 
Act Amendments for marriages breaking up. Now, I have heard a 
lot in my lifetime, but I have never heard anyone blame the 
Clean Air Act for marriages breaking up.
    So I am just going to ask my friends from the utilities who 
are here today to address the issue as to whether they think 
that their companies are abandoning capitalism and if they are 
somehow out of the mainstream of where they ought to be. I am 
going to start with Mr. Darbee.
    Mr. Darbee. Thank you, Madam Chairman. We actually think 
that it is very important to take this stance. It is very 
consistent with the view of our shareholders. What we have 
found is that 70 percent of the people in California view 
themselves as very concerned about the environment. They are 
our customers, and our regulators feel the same way. They have 
totally supported the view. So when you are meeting your 
customers' needs and your regulators' needs and you are moving 
in a consistent direction, that usually is consistent with 
meeting the needs of your shareholders.
    Additionally, it occurs to us that there may be liabilities 
for companies in the future and problems for companies in the 
future that arise from global warming. For example, it is 
anticipated, as the Earth warms in the next 50 years, that 
rainfall in California will be very substantially diminished. 
That means that our hydro facilities will be providing less 
water as they are this year, and therefore, we will not have 
access to clean, inexpensive hydro energy.
    So we have thought long and hard about the approach we are 
taking and its relationship with the shareholder and concluded 
it is very consistent with that. We have discussed it 
extensively at our board level and they have agreed with that 
conclusion and supported it heartily.
    Senator Boxer. Thank you. Now I would ask Mr. Jim Rogers to 
comment, and then Lewis Hay. Just to remind everyone, President 
and CEO of Duke Energy, is Duke Energy becoming socialistic and 
communistic or what?
    Mr. Rogers. We are far from that. I should say that Mr. 
Murray is one of our important coal suppliers. We buy over 4 
million tons a year of coal from him. I appreciate his 
comments, but the fact of the matter is, he is a little off the 
mark. Because one of the reasons that we are addressing this 
issue is because we think it is critical that we do. We are the 
third largest consumer of coal in the country. We burn almost 
50 million tons of coal a year. We want to make sure we can 
build a bridge to a low-carbon economy. This is all about 
getting going and building a bridge.
    We are going to go there, whether we go there in 20 years 
or 40 years or 60 years, we are going to go there. The sooner 
we go to work, the most cost-effective it will be. As I said at 
the outset, I am here on behalf of my consumers. I will tell 
you, I was the only CEO in the industry that supported the 
Clean Air Act Amendments in 1990. I took a lot of criticism for 
that. But at the end of the day, we have made it where I can 
see that we are on the edge of stepping off the SO2 
bridge. We have done it without any adverse impact on our 
customers. And we smoothed the transition, because we started 
early. My judgment is, we can smooth the transition into a low-
carbon economy if we start early.
    Senator Boxer. Thank you. Then finally, answering the 
charges that you have lost your way, Mr. Hay, could you 
comment?
    Mr. Hay. First of all, I would echo the comments of my 
peers, I agree with them, so I am not going to repeat them. But 
no, we have not abandoned capitalism. We are very clean, as I 
mentioned in my testimony, and yet we are still a profitable 
company and doing very well. In fact, Fortune Magazine just 
named us the most admired company in our industry.
    What I think is most important, and what I think Mr. Murray 
is probably alluding to, is that we need cost certainty. If we 
have great cost uncertainty, it could do damage to our economy. 
If we extract a lot of costs from our customers, it could do 
damage to our country. So that is why we propose recycling it.
    I did want to comment on the jobs aspect, because I think 
that is an important issue. We are concerned about jobs. We 
don't want jobs to go overseas, and that needs to be addressed 
in any program that is put forth. But the one thing I want to 
say is, there are going to be plenty of jobs available as we 
build new nuclear plants, as we build more wind facilities, as 
we build geothermal facilities, all of that. We can't get 
enough skilled workers as it is. If we do something about the 
environment, we are going to need a lot more.
    Further, that is not just going to be nuclear and those 
kinds of facilities. It is going to be new, cleaner coal 
plants. Just as an interesting point, if we replaced the oldest 
fully paid, fully depreciated coal plants that are the most 
inefficient out there, just with conventional coal plants, 
nothing fancy from a technology standpoint, we could reduce our 
industry's emissions by over 10 percent. So I think we are 
going to be still burning a lot of coal in the future, and I am 
willing to bet on our engineers and technologists to come up 
with ways to do it even cleaner in the future.
    Senator Boxer. Thank you, sir.
    I am going to put into the record the report that I 
received from the British Environmental Minister, where he says 
that since 1990 in Great Britain they have had a 15 percent 
reduction in carbon, since 1990, and their GDP rose 45 percent. 
So maybe Mr. Murray and Mr. Borelli might want to take a look 
at that.
    [The referenced material was not received at time of 
print.]
    Senator Boxer. Thank you. I have gone over for a minute, so 
I am happy to give an extra minute to Senator Inhofe.
    Senator Inhofe. Thank you, Madam Chairman. I think a couple 
of good things have happened in this hearing. For one thing, 
there seems to be a lot of support in the event that it came 
about for an economy-wide as opposed to a utility-wide approach 
to this thing. I have felt the same way. I think it is 
important, if everyone is going to be miserable, let them all 
be miserable.
    The other thing that I think is significant is the 
discussion as to whether or not a carbon tax in the event that 
we are doing something like this, I would think that would be, 
and I think there were five people who mentioned in their 
opening statement that probably would be the best approach if 
we had to get to that point. Real quickly, I would just ask, 
does anyone disagree with that? To me it is a more honest way 
of doing it. Does it masquerade the cost of this thing? Are 
there those who disagree with that?
    [Several witnesses raise hands.]
    Senator Inhofe. OK, that is, well, now, you are one of them 
who was on that side of it, I think, Mr. Darbee. You testified 
earlier this year that a carbon tax is the most efficient way 
to regulate greenhouses gases. That is out of your testimony.
    Mr. Darbee. Right.
    Senator Inhofe. But let's go to the next question.
    Mr. Darbee. Was that a question, Senator?
    Senator Inhofe. No, it wasn't a question. It was a 
statement. It was out of your statement.
    Let me ask, Mr. Donohue, is there any cap and trade policy 
out there that you would be for?
    Mr. Donohue. We have watched very carefully what has 
happened in Europe, their efforts to deal with Kyoto. The 
Chairman made the point of what happened in England and what 
they basically did is eliminated their coal-fired plants, for a 
number of reasons. We have watched what has happened there with 
upstream and downstream cap and trade issues, with a great deal 
of complexity and some corruption.
    But if you had a cap and trade system that measured against 
our five criteria, was structured in such a way that it had 
strong support and it protected jobs, it used new technology, 
did a lot of other things, didn't put a great, huge new 
bureaucracy in, we would look at it. What I am asking, and what 
I believe this committee ought to think very seriously about, 
is how do we get an unemotional, serious look at the unintended 
circumstances of whatever we choose to do.
    As I said in my statement, we are going to take a very hard 
look at this. We are going to listen to everybody's position on 
it. We are going to measure it against our criteria and we are 
going to be open to learning. If we are going to operate on 
these issues without learning, without looking at what happened 
to others, without considering questions, you saw the stuff 
with ethanol, that everybody was passing last week. At the same 
time, we are getting a report that that is going to make it 
impossible for us to reach our objectives in protecting the 
atmosphere.
    So we need to look at what is going on. Senator, I look 
forward to working with you and a lot of people here to learn 
as much as I can to share that with my members and to come up 
with something that deals with this.
    Senator Inhofe. I appreciate that. Yes, Mr. Lewis.
    Mr. Lewis. [Remarks off microphone.] Senator Inhofe, thank 
you. First, about Britain's emission reduction, that was the 
result of the dash to gas tax. That is when Britain, for 
economic reasons, switched from taxpayer-subsidized coal to 
free market natural gas, which made a lot of sense when natural 
gas was less expensive than coal. But now coal is cheaper than 
natural gas, so Britain is switching back from natural gas and 
Britain's emissions are going up.
    But as far as this whole issue of cost certainty and carbon 
taxes and so on, the whole idea of cost certainty or regulatory 
certainty is a chimera. It is impossible. Just think about the 
biofuel mandate that was enacted in 2005, which was supposed to 
go up to 7.5 billion gallons. Now all of a sudden, we have 
proposals for mandates up to 36 billion gallons. Every time you 
put in place one of these policies, you just open the door for 
demands for even tougher policies.
    I want to make one point clear, which I think is critical 
and I don't think enough people are paying attention to it. 
Unless the legislation you are considering takes the regulatory 
action out of EPA's hands with respect to carbon dioxide, you 
can't even have a pretext of cost certainty or regulatory 
certainty, because as soon as EPA gets around to making a 
judgment that carbon dioxide emissions endanger public health 
and welfare, it will have to start a NAAQS (National Ambient 
Air Quality Standards) rulemaking. The Supreme Court has 
forbidden EPA to take costs and technical feasibility into 
account when setting national ambient air quality standards. 
Some folks at this table think the current CO2 
levels endanger public health and welfare, the only way we can 
lower CO2 levels below current levels would be by 
de-industrializing the world.
    Senator Inhofe. That is a good point. I am glad you brought 
that up. We are rapidly running out of time here.
    I just wanted to ask Mr. Murray, first of all, I appreciate 
your testimony. Back in 1997, when we have our 95 to 0 vote on 
the Byrd-Hagel amendment, that was all of us up here who were 
there at that time voted in favor of that, saying that we would 
not agree to this type of an approach unless the developing 
nations would participate and it would not hurt the economy. Do 
you feel strongly that that should be true today?
    Mr. Murray. [Remarks off microphone.] Yes, back to 1995 
[inaudible] should be the one taking?
    First of all, globally, the Kyoto Protocol is just a farce. 
Not one country except Sweden has complied. The Chairman 
mentioned Great Britain. They took credit for excluding the 
coal industry and going to four times more expensive RC gas 20 
years ago, and they retroactively took credit. These foreigners 
are going to cheat, and every bill that you have introduced 
depends on global trading. They are interested in the standard 
of living. They will continue to cheat.
    The coal use in China right now will increase five times 
between now and 2020, five times. They are bringing on a new 
500 megawatt power plant every 5 days. They have 455 on the 
drawing board. I say this with all the respect that I can: it 
is smoking opium for this Senate to take a position to destroy 
American jobs, quintuple the cost of living for people on a 
fixed income, and export the jobs to countries who have already 
said they are going to continue to emit CO2.
    So nothing has changed, Senator. It still should be at 25. 
The Chairman said she didn't believe what I said about Ohio. 
You have my invitation, Ma'am, to come out, because you people 
inside the beltway and you Senators do, on the majority side, 
give a clear appearance that you don't have the foggiest idea 
what a person does to pack a lunch and go to work or wear a 
hard hat.
    Senator Boxer. Sir----
    Mr. Murray. You are inside the beltway. I know what is 
going on out there.
    Senator Boxer [continuing]. Sir, I would appreciate you 
didn't have that kind of edge. Because I have some information 
here about you, that you have the biggest fines against you of 
any other miner in Ohio. You know, you come up here and say how 
much you care about ordinary people, the Clean Air Act split up 
families. But we read here in The Columbus Dispatch of Ohio, 
that you own the two largest mines which recorded injury rates 
about a fourth higher than the national average. So let's not 
have a double standard about how much you care about people. 
That is all I will say on the point.
    Mr. Murray. Madam Chair, I am going to respond to that. You 
are flat-out wrong.
    Senator Boxer. Fine.
    Mr. Murray. That information came from your friends at the 
United Mine Workers and the unions. It is not fair. Today, my 
safety record at my coal mines, and I take it to bed with me 
every night, and I resent you bringing this in.
    Senator Boxer. Right.
    Mr. Murray. Because my employees are important to me, and I 
take their safety to bed every night. My safety record today is 
one of the best in the coal industry anywhere. So don't take 
propaganda from the United Mine Workers and tell the public 
that it is fact. Because you are flat-out wrong, Madam.
    Senator Boxer. OK, sir. We will place in the record an 
article from The Columbus Dispatch of Ohio, January 15, 2006, I 
am not going to argue with you, sir, I am going to put this and 
let it stand. It is cited chapter and verse. But I don't 
appreciate your attacking members of this committee.
    [The referenced material follows:]



    
    Senator Boxer. Now, we are going to move on.
    Mr. Murray. I don't appreciate your attaching every 
American working person.
    Senator Boxer. Sir, if you had the record among American 
workers that I had, you would be happy.
    Let me call on Senator Carper.
    Senator Carper. Now onto more mundane matters.
    [Laughter.]
    Senator Carper. I want to go back to a point I made 
earlier. Senator Alexander and I, in fact, to an extent Senator 
Sanders and I, we actually agree on a lot. Personally, I want 
an economy-wide bill.
    But in terms of how we proceed with respect to utility 
emissions, we want to address four pollutants, not just 
CO2. We want to address sulfur dioxide, nitrogen 
oxide, and mercury as well. In fact, Senator Alexander and I 
both have basically the same goals. By 2015, we want to reduce 
nitrogen oxide emissions by 70 percent; by 2015, we want to 
reduce sulfur dioxide emissions by some 80 percent. Both of 
those are a cap and trade approach. By 2015, we would like to 
reduce mercury emissions from plants that generate mercury by 
90 percent.
    We also agree that by 2016, CO2 emissions from 
utility plants ought to be back where they were in 2001. That 
is a lot of agreement. We also agree to a cap and trade 
approach, we agree that we want to have some element of an 
auction in terms of the allocation approach. I call for going 
to a full auction system by 2036, he calls for maintaining it, 
I think, at about 20 percent auction in terms of the allocation 
of credits or allowances. So there is actually a whole lot of 
agreement.
    We have heard in the testimony here today though sort of 
whether we agree on a carbon tax, I don't think that is going 
to happen, at least not on my watch, on whether it should be an 
output-based allocation, should it be an input-based 
allocation. My approach, and the approach that the co-sponsors 
of my bill have said, and some of you have agreed to, and I 
thank you for that, we ought to try to reward those who create 
electricity, the more electricity with the least amount of 
input is something we ought to be incentivizing. That is really 
our focus. I realize that others don't see it that way.
    I talk a lot about, along with my friend, Joe Lieberman, 
here, we talk a lot about third ways. I think third way, 
Democratic way, Republican way, well, how about a third way. 
Today I want you to think about a fourth way, and I want to ask 
some of our witnesses to think about a fourth way. The fourth 
way may be one of the ways, output-based allocation, input-
based allocation and auction approach, and maybe another 
approach that a couple of you are familiar with and we are 
hearing folks talking about, where the allocation doesn't go, 
credits don't go to the power generators, but rather, it might 
go to local distribution companies.
    I would just like to have some discussion on that. Mr. 
Darbee, if we could start off with you, I would kind of like to 
go down the row here. But Mr. Darbee, any comments you have on 
that, and we will just go to Mr. Grumet and to others, please.
    Mr. Darbee. I would be happy to, Senator.
    I think it is important that as one approaches this 
problem, we learn from the successes of acid rain, as well as 
the problems in Europe. What we saw in Europe with the cap and 
trade program implemented there, one, there were too many 
allocations, allowances that were allocated. But also what we 
saw was the producers that were generating energy received 
these allowances and in effect, they were rewarded twice. The 
price of power went up and they received payments for that, 
because of the coal. But then they also received the 
allowances. That was problematic.
    We have thought about that, and felt that the right 
solution would be to distribute the allowances to the load 
serving entities of the utilities. Now, I am sure many would 
say that is a very self-serving point of view. But at the same 
time, in every statement we have said, we feel then the 
benefits of that should be passed directly to our customers.
    So we would propose that some of the funds might be used 
for technology, R&D, so that would be it. Also for the people 
who are suffering from an income standpoint and can't afford 
the price of power, that they would get the benefits. Then 
something like an average payment out to the customers, not a 
per kilowatt bill, but an average payment out to them would be 
useful. That way, there wouldn't be any windfall for 
generators, and the people who have paid already for high-
priced power, as we have in California, at about 8\1/2\ cents 
per kilowatt hour for energy, they would not pay twice for a 
cap and trade program, not pay twice for clean energy, they 
would in fact get a credit back, recognizing that they have 
supported clean energy for a substantial period of time.
    Senator Carper. Could we ask for an additional 2 minutes, 
just to let a couple more people respond to that one question?
    Senator Boxer. Go ahead.
    Senator Carper. Thank you very much. Mr. Grumet, I would 
ask that you be pretty crisp in your response.
    Mr. Grumet. I will do my best, Senator. Let me just reflect 
broadly on the challenge. That is that the electric sector is 
complicated because of the diversity of generation, different 
carbon footprints, and the diversity of regulatory structures. 
So one of the big challenges with the electric sector that we 
don't deal with in the petroleum sector is that we have 
regulated and de-regulated companies. Those different 
regulatory treatments affect how companies can pass the costs 
through, which at the end of the day really is what matters, 
the costs you bear are the costs that you receive in fuel 
prices that you can't pass on to somebody else.
    The commission is grappling with a concern which would have 
kind of a perverse impact, which is that in a regulated coal-
heavy utility portfolio, free allocations would be required by 
the State regulators to be passed through to the ultimate 
consumer. The good news is you would lower the price, the bad 
news is you basically are blunting the purpose of the program. 
A natural gas company with much lower carbon footprint in a de-
regulated State would pass the entire cost along to consumers. 
So you could actually have a situation where lower carbon-
producing utilities in de-regulated States, that their 
customers would receive a higher price signal than heavier 
intensive carbon generators in a regulated industry. So the 
idea is that the distribution companies, since they are all 
regulated, provide an opportunity to basically leapfrog over 
the generators to the State regulators.
    Senator Carper. I am going to ask you to wrap it up right 
there, if you would just bear with me. I want to hear from 
David Hawkins. Do you have any comments on this, Mr. Hawkins?
    Mr. Hawkins. Yes, Senator, and I will be brief. We believe 
that if there are allocations outside the auction approach that 
they should be made to the local distribution companies. We 
think that is the right place to do it.
    Senator Carper. Mr. Hay?
    Mr. Hay. I think that is an idea that has a lot of merit. I 
do have one concern.
    Senator Carper. What would that be?
    Mr. Hay. That would be just how, you are now delegating to 
each State public service commission how to get the money back 
to the customers. You may end up with very different 
approaches, and it could dilute the price signal that customers 
need. But other than that, I think the idea has tremendous 
merit.
    Senator Carper. Good. Mr. Rogers, you have about 10 
seconds. I'm sorry.
    Mr. Rogers. I think it has merit, but I would say go back 
and let's stay grounded as to why the allowance system was 
developed in 1990. It was really to use those allowances to use 
existing plants to continue to run through the transition 
period. It was to help those that are adversely impacted. That 
is the sole purpose. There are a lot of other good reasons to 
use these allowances, I am sure. But the reality is, the 
purpose was to help those that are adversely affected. That is 
those 25 States where more than 50 percent of the people rely 
on electricity from coal. We have to help them transition. 
Allowances are nothing more than a transition mechanism.
    Senator Carper. Thanks. I would just conclude by saying my 
friend Mr. Donohue is pretty good at finding a deal. There may 
be an agreement to be found on this. I would welcome your 
helping us define that.
    Mr. Donohue. I look forward to working with you, Senator.
    Senator Boxer. Senator Voinovich, and then we are going to 
go to Senator Klobuchar.
    Senator Voinovich. Thank you, Madam Chairman.
    I would like to call the attention of the witnesses and the 
committee to the map that was submitted as part, I think, of 
Mr. Rogers' testimony, and would like to bring to the attention 
of this committee that the perspective of members of the U.S. 
Senate have a whole lot to do with whether they are in the 
green, the red or the blue. I can understand the gentleman from 
California, you have 1 percent from coal. So you have a 
different perspective on things than some of the other people 
here that represent other States.
    Senator Boxer. I think it is a little more than that. It is 
not 1 percent.
    Senator Voinovich. That is what it says.
    Mr. Darbee. It is about 1 percent, Senator. We used to have 
a lot more coal, but we have worked very hard to clean up that 
portfolio.
    Senator Boxer. Yes, used to be a lot more. Thank you.
    Senator Voinovich. OK, so I think also that the colors also 
will color the judgment on allocation of credits. I would again 
like to bring to the attention of the utilities represented 
here, and this committee, that the long-term reconciliation of 
differences of opinion among the utilities on how credits be 
allocated is very important. Down the road, if we go and get 
any kind of legislation passed, Madam Chairman, that will be 
the Achilles heel, as Senator Carper and I know, when we worked 
together last year on another piece of legislation.
    The question I have is, assuming that you agree that 
technology is not currently commercially available to capture 
and store carbon, how would you pay to accelerate the 
technology to make it commercially viable? Or do you believe 
that using an economy-based cap and trade, an economy-based 
protocol, will stimulate and fast-track the technology? That is 
one question. Mr. Lewis, I would like you to respond to that.
    The second question is, if I have the time, is that how do 
you deal with nations who compete with the United States of 
America who have made it very clear that they aren't going to 
sacrifice jobs on the altar of the environment, and pretty, I 
mean, I know the Chinese, and I will tell you, jobs trump 
everything. So I would like to hear from you, Mr. Lewis.
    Mr. Lewis. Thank you. You often hear climate change 
described in terms of a security threat, and you even hear 
people say, even the military now looks at this as a security 
threat. Well, in the history of this country, to my knowledge, 
we have never addressed security threats by constraining 
particular sectors of the economy with regulation or even the 
entire economy. What we have done is tax people, for example, 
to build the atom bomb, the Manhattan Project, or the Apollo 
Project, which is often invoked as a metaphor for what we ought 
to do in the area of climate change.
    So I would recommend that if there is this great potential 
for carbon capture and storage, fund it through tax payments, 
and not through cap and trade that is put in place before we 
know that carbon capture and storage is economical. There is a 
huge study out, just a few months ago by MIT, The Future of 
Coal, and I am sure many people have looked at it. But it 
basically says it will take $250 million and 8 years just to 
determine whether carbon capture and storage is economical, 
assuming at $30 a ton carbon dioxide penalty. That doesn't even 
address all of the problems with infrastructure and liability.
    How many decades has it been since some people thought it 
was a good idea to have a depository for spent nuclear fuel in 
Nevada? Chairman Reid says that will never happen on his watch. 
So how many people are going to want to have billions of tons 
of CO2 stored in their State, or want to have a 
pipeline system comparable to the natural gas pipeline system 
running through their back yards?
    So the idea that we should require CO2 
reductions now as if we already knew that carbon capture and 
storage was economical and could ever become operational, I 
think is putting the cart before the horse.
    Mr. Donohue. Senator, may I just add one sentence on the 
issue about China and India? We all know that they are creating 
a lot of pollution that comes to California and the West Coast 
and other places. It is very difficult in India, with 800 
million people still digging in the dirt, and you are right on 
target. The only thing I see coming out of China and India that 
is encouraging at this point is that they are focused on energy 
efficiency, that is, how to get more kilowatts out of less 
energy. The new foreign minister, who used to be the Ambassador 
to the United States, is absolutely laser-focused on that. I 
think that will begin a small diminution in the pollution. We 
ought to encourage that.
    Senator Voinovich. By the way, the legislation, the Hagel 
bill that we got passed, has helped that, because we created 
the Asian Pacific Initiative, which is where we should be 
going. But the issue is that if we move down, we have to 
capture some way some of the costs that we are going to have, 
versus the costs that they are not willing to come up with, in 
terms of our competitive position.
    Mr. Donohue. I agree with that, Senator.
    Mr. Murray. Senator, one quick comment on your question. 
The Energy Information Administration of the Department of 
Energy says that carbon capture technology will not be 
available until 2020, at the earliest. MIT has confirmed this 
in a study that Marlo referred to. As long as you don't have 
the technology to capture, as long as we are going to have an 
international marketplace in which the cap and trade would take 
place, it is a figment of an imagination. It will never work. 
It will work to the disadvantage of the United States of 
America and these people, that I truly care about, that are 
working families and people on fixed incomes.
    So anything that this Senate would ever do must be 
international. The other countries must step up. It is naive to 
think that we have to take the lead. They are not going to. 
They are not going to follow us. So I think we need to look at 
America first.
    The fact that technology is not there, it is a dishonest 
international marketplace, cap and trade is a figment for 
people that don't know what they are talking about.
    Senator Boxer. Thank you, Senator Voinovich.
    Senator Klobuchar.
    Senator Klobuchar. Senator Lieberman can go before me, 
Senator Boxer. I have a few minutes left. I think he was next, 
right?
    Senator Lieberman. You can go ahead.
    Senator Klobuchar. All right, thank you.
    I first wanted to note for the record, I know we were 
talking about miners. My grandpa worked in iron ore mines, he 
wore a hard hat every day, Mr. Lewis, and my dad grew up 
working in the iron ore mines. They also both loved their 
environment and were great outdoors people. My grandpa was a 
great hunter, and I believe there are ways to work on these two 
issues, the workers' issues as well as the environmental issues 
together. That is what I have been trying to do here.
    So my approach is to look at how we can make sure that we 
are protecting consumers as we go forward, what I consider with 
our major challenge, which is doing something about climate 
change. I wanted to ask you, Mr. Grumet, there was some 
discussion about this MIT study about how it would, I think it 
was Mr. Donohue that talked about how it would result in 
significant electricity price increases. I have to tell you, 
from my perspective with Excel Energy in Minnesota, not in the 
cap and trade context, but in the renewable standard, we have a 
25 percent renewable standard by 2025. They don't believe it is 
going to lead to increases and have been supportive of this 
measure.
    So I think Mr. Donohue said it would increase electricity 
rates by 30 to 75 percent, according to the MIT study. Is that 
your take on this study?
    Mr. Grumet. Well, Senator Klobuchar, we did look at the MIT 
study, which I think is a very good study. One of the pieces I 
think in the description that I was confused by, Mr. Donohue, 
was that it implied that all of the increases over this 25-
year-period were going to be due to the climate program. My 
read of the study is that under business as usual, electricity 
prices are presumed to increase by 38 percent. So I think you 
need to subtract that 38 percent from your 30 to 75 number as a 
starting point, so that you can isolate what is actually being 
attributed to climate change.
    Now, we have not looked, at the Energy Commission, all of 
the bills. I think most people are aware we have worked closely 
with Senators Bingaman and Specter, and I had looked at the 
assessment of that bill. I was also taken that the 
characterization from the Chamber just ignored the cost cap in 
the Bingaman-Specter bill. While that cost cap is not popular 
with everybody, its purpose is to avoid these kinds of, I 
think, rather exaggerated assessments that it is not possible 
to have a cap and trade system without harming the economy. I 
think that we have demonstrated clearly, EIA has demonstrated 
clearly that of course, that is not true. We agree with the 
Byrd-Hagel requirements; we agree with the need for 
international linkage. But we don't take the defeatist tone 
that it is not possible.
    Our own assessment of what the MIT study said about the 
Bingaman-Specter bill is that it would increase electricity 
prices by about 5 to 10 percent between now and 2030. That is 
real. We have just submitted to the record our own analysis of 
the Commission's now-strengthened proposals, which would raise 
the cost cap to a starting point of $10, and our own 
assessment, which we will share with you, suggests that 
optimistically the cost increase would only be 5 percent. 
Pessimistically, worst case, if the safety valve was triggered 
right away, it would be 15 percent.
    The last thing I will say is, under no circumstances could 
a carbon system that started with a $10 price cause the 
electricity prices to go up by more than 15 percent if that 
price was triggered right away. I think taking the ``I think'' 
and ``I hope'' and ``please trust me, I am a good guy'' out of 
the equation, is going to be necessary to forge the kind of 
compromise we are going to need to legislative.
    Senator Klobuchar. Thank you.
    Mr. Donohue, you said in your testimony here that you 
wanted to have all the facts for us to go forward. I guess that 
seems to me inconsistent with the position of the Chamber in 
the last few weeks on the carbon registry bill that I put 
forward, which was supported by Senator Lieberman, Senator 
McCain, Senator Coleman, Senator Snowe, Senator Collins, none 
of which I would really describe as radicals on the economy. 
Yet you have sent this key vote alert, saying that in fact this 
bill may be considered a key vote for Senators, presumably if 
they voted against it.
    I just wanted to ask you some things that were contained in 
this letter. Because really, the idea was to get a national 
registry, giving the EPA the power to get the information. In 
the letter you said that it would be overbroad, unduly 
burdensome and would be virtually impossible to implement. I am 
just wondering where you came from on that, given that right 
now, we have about two or three different agencies collecting 
this information. Some do it every 3 years, some do it every 
year, some do it every few weeks. I wonder why you would 
consider this so impossible to implement and overbroad.
    Mr. Donohue. Thank you for asking, Senator. I thought you 
might react to our letter.
    We sent that letter for three reasons. The first is that 
our understanding was that while working on the energy bill, we 
were going to try and leave the carbon and the cap and trade 
carbon issues and all of that to these hearings and to future 
legislation. That is how it was described that we were going to 
deal with this matter. There was no conversation about it ahead 
of time, and that was our first reaction.
    The second reaction was that we really believe that there 
is great question with some of the carbon collection, 
information collection. We thought it would be very, very 
useful to have this conversation and to measure those pieces of 
legislation against the objectives we are all trying to get to. 
The third reason that we oppose that is that we thought it was 
going to get very much, it was going to have a negative effect 
on a lot of the other things that we were trying to deal with 
in that energy bill, where we were basically rolling back all, 
many of the good things that were put in place in 2005.
    Having said that, and I am not sure that is satisfactory, 
going forward, we will be very happy to sit down and talk with 
you about it in the right piece of legislation, with adequate 
discussion and hearings, and you may be very persuasive. 
Certainly there is nothing personal in going after that bill. 
It was something that was put in at the last minute without 
preparation, without discussion, and in a way that we thought 
would be detrimental and ought to be heard in another forum. We 
would be glad to work with you on it.
    Senator Klobuchar. Mr. Donohue, if I could just respond to 
that, one of the reasons we did it is that many large 
corporations were calling for this, because of the fact that we 
have 31 States doing this, developing their own registry. I 
believe that if you look at the record from other hearings, 
this kind of thing, a national carbon registry was discussed 
that didn't dictate what the policy was. If you are talking 
about past actions, the Senate actually passed, Senator 
Brownback and Senator Corzine introduced nearly the exact same 
amendment that said it would be voluntary. If the registry 
contained less than 60 percent of the total national greenhouse 
gases in the United States, this was 5 years ago, then it would 
become mandatory.
    Now, that bill, which was part of the energy bill, actually 
never became law. But if you are talking about past actions, 
this has been discussed. I do look forward to talking with you 
about this in the future. But I just believe that some of the 
allegations made in the letter, for whatever purpose you did 
it, were not correct.
    Mr. Donohue. Thank you. I look forward to talking to you, 
Senator.
    Senator Klobuchar. Thank you.
    Senator Boxer. Thank you very much, Senator, for your 
leadership. There is no question this is coming. So we look 
forward to your continuing to give us your thoughts and ideas 
as we move this along.
    Senator Whitehouse.
    Senator Whitehouse. Thank you, Chairman.
    When I first started out in my public service career, I was 
involved in utility regulation. Way back in the early 1980s, we 
did one of the first what we called conservation rates, with 
Narragansett Electric, part of the New England Power System in 
Rhode Island. I was representing the Attorney General in those 
negotiations. This was before phrases like demand side 
management, which are old hat now, even came up. This was sort 
of primitive.
    So now looking at an environment under which you all are 
under enormous environmental pressure with respect to your 
emissions, and when you look at the various slices of a 
solution, you see that one of the largest slices is reducing 
demand. It also tends to be one of the cheapest slices. In 
fact, from a lot of perspectives, it is actually a net gainer 
economically.
    Again, it has been a while since I have been involved in 
this, because the conservation rates were many years ago, and 
Mr. Rogers, I practiced down at FERC, which at that point 
didn't have a great interest in these matters. But I gather 
that is improving since then.
    What do you think is the best way, I am going to ask this 
of the utility representatives, Mr. Darbee, Mr. Hay and Mr. 
Rogers, what do you think is the best way for the Senate, for 
Congress to help you institutionalize increasing conservation 
and efficiency into your power mix, so that it is seen as much 
of your portfolio as any other and you are able to recover it, 
your investment in that sort of a power source?
    Mr. Darbee.
    Mr. Darbee. Senator, you are absolutely on target. I assure 
you that so long as power companies produce more profits by 
generating more power, they will do it as surely as the sun 
rises tomorrow. Thirty years ago in California, the regulators 
and policymakers took an approach that we actually opposed at 
the time. What they did was they broke the linkage between 
making more money and selling more kilowatt hours. It is called 
decoupling. That neutralized the incentive for us to sell more 
power.
    Then they overlaid on that a system of incentives that 
amounted to more than $100 million, for us to encourage our 
customers to use less. That program has been fantastically 
successful. It has avoided, as I said in my statement, the 
construction of 24 power plants in the last 30 years.
    During that period of time, per capita energy use in 
California has remained flat, whereas across the country it has 
gone up 50 percent. So my point is, the technology for clean 
coal doesn't exist today. But if we align the financial 
incentives for utilities, we could make great movement forward. 
That actually would cause the United States to be more 
competitive with other countries, because we would use power 
more efficiently.
    We have sent delegations to China, and the Chinese have 
looked at this, because they are very inefficient, how they use 
power. They want to come up the curve on energy efficiency as 
quickly as they can. So actually, they want to take steps 
toward solving global warming and being more efficient and more 
competitive. So I think that is a critical thing.
    I just want to go back to one of the earlier comments. 
Anyone who is really serious about dealing with global warming 
understands that we need a carbon registry to set the baseline 
as soon as possible.
    Senator Whitehouse. Understood. Mr. Hay, if you could just 
elaborate a little bit in your answer on what the next steps 
would be. I think a lot of people have put the kind of price 
signal in for conservation. But yet, when we look at the 
conservation piece, it is still huge. So what are the next 
steps that we need to take, so that you all have the proper 
incentive and the proper reward to really pursue additional 
home insulation, whatever the steps are that will make the most 
sense?
    Mr. Hay. Thank you, Senator. Generally, I agree with your 
comments. I think there is a huge opportunity in energy 
conservation. We have done some benchmarking across our 
industry and the performance is very varied, from some 
companies that are doing a fantastic job, like Mr. Darbee's, 
and I would rate my company in the same way, and the DOE does 
as well, to some that have done nothing.
    Nonetheless, I do think it is, and I agree with Mr. Darbee 
that we need more incentives, and that will move us forward. 
But it is a State by State issue. We have different regulatory 
structures literally in every State. Decoupling is one 
solution. But I would point out in Florida, we have a totally 
different approach. Our PSC will not allow us to build a new 
plant until we have proven to them that we have done everything 
economically possible in terms of energy efficiency and 
conservation.
    So while we do have an incentive to sell more power, 
generally, we can't do it, we don't have the means to do it, 
unless we prove to our commission that we have done everything. 
The only thing I can say going forward, besides getting all the 
States aligned and sort of benchmarking and getting everybody 
to the levels that the top performers are at. As I said, that 
would reduce emissions by about 10 percent in our sector.
    There is, it is still a State by State issue. There are new 
technologies that could allow us to do even better than what we 
are doing today.
    Senator Whitehouse. Thank you. I just got the courteous 
permission of the Chairman and of Senator Lieberman to allow 
Mr. Rogers to answer as well, even though I am over my time.
    Mr. Rogers. Senator, I am very supportive of what you are 
proposing. In the 20th century, we provided universal access to 
electricity. That was our mission. In the 21st century, I think 
our mission should be to provide universal access to energy 
efficiency products and services. It is going to require a 
paradigm change in terms of how we are regulated at the State 
level. I think that we have a proposal that we filed in North 
Carolina called Save a Watt, where we get rewarded in the same 
way we get rewarded for building a new megawatt, for every 
megawatt we can reduce, we earn off of it.
    So the way to think about this is that historically, think 
about the last decade and a half, the real price of electricity 
has gone down. Most of the DSM programs that came out of the 
1980s or 1990s were about educating consumers, where the bill 
was a small part of the disposable income and it was back of 
mind. You spent a lot of money moving it to top of mind. It 
didn't really work, although more and more people are becoming 
aware.
    What we really need is to change the mission of utility 
companies in this country and give them the mission to go in 
and put chips in refrigerators, chips in air conditioners, to 
give them the mission to invest in new infrastructure and 
commercial businesses and industrial businesses, so that at the 
end of the day we can reduce usage, and do it systematically.
    Senator Whitehouse. Including timing costs, changing the 
time of day of use, all those sorts of things.
    Mr. Rogers. But I would go even a step further. Most of our 
customers have busy lives. We are connected with price signals 
24/7. If we put a chip in the refrigerator or the air 
conditioning and we can remotely control it, our goal is to 
maintain their comfort and convenience while at the same time 
making sure we are reducing the demand at key times.
    So I think there is a lot of rich thinking, and I should 
say, I am currently co-chairman of the National Action Plan on 
Energy Efficiency, as well as co-chair of the Alliance to Save 
Energy. So I have been very engaged in this issue. I see great 
promise in the future.
    But what you all need to do is really encourage States, 
develop principles and really say to the State, you have to 
change the paradigm, you have to give these companies the 
mission to give universal access to energy efficiency products 
and services.
    Senator Whitehouse. Very good. I would be pleased to 
followup with any of you offline. I know my time has expired. I 
do have some familiarity with your industry from my past. I do 
think this is an important thing to work on. I look froward to 
working with you, and I thank the Chair.
    Senator Boxer. Thank you, Senator Whitehouse.
    Senator Lieberman.
    Senator Lieberman. Thanks, Madam Chair. Thanks to the 
witnesses for your testimony. We have heard some very helpful 
testimony this morning. I think it comes at a moment where, as 
I said earlier, I believe that a majority of members of this 
committee, certainly of the subcommittee that I am privileged 
to chair, but I believe the overall committee, are ready to 
write a bill. In other words, we have heard a lot of testimony, 
people have reached a judgment that climate change is a real 
problem, that the way to deal with it is through a national cap 
and trade system to create some predictability, set national 
goals and figure out the best way to achieve them.
    Having reached that understanding and agreement and 
alliance with Senator Warner, which I deeply appreciate, he and 
I both understand, as we now begin to reach out to the 
stakeholders in the business community and the environment 
community, experts of various kinds on this, that we have a lot 
of decisions to make within that larger architecture that I 
have described. In that sense, your testimony today has been 
very important.
    Mr. Donohue, I particularly want to thank you. I think your 
testimony on behalf of the Chamber of Commerce has been very 
encouraging to me, which is to say that you have recognized we 
have a problem and you have left yourself open on behalf of the 
Chamber to a national cap and trade system, depending on how it 
works. I really invite you and your staff to get involved with 
us in putting it together.
    You made a statement in response to the question Senator 
Inhofe asked about whether under any circumstance you could see 
yourself supporting, or the Chamber supporting cap and trade, 
which was, you said it was possible, you would want to see the 
details, and you were concerned about unintended consequences. 
I think that is the phrase you used. I agree with you. Senator 
Warner and I and others have talked about this. This is the 
question that some resolve with what they call a safety valve, 
others call it an off ramp.
    John Warner, I am going to give him credit, because I am 
sorry he is not here to say it himself, he said we ought to 
have an off ramp, but it ought not to be too easy an off ramp. 
Because if it is too easy an off ramp, then the economic 
calculations that some of the witnesses made, to invest 
enormous amounts of money in complying with technology to 
comply with this system, could be thrown totally off, because 
the market will be skewed.
    So John used the example of the highways, which, if they 
are dramatically downhill, then there are emergency off ramps. 
That is what we are looking for, is an emergency off ramp. That 
is why, I am going to ask Mr. Hawkins in a minute, but that is 
why I am troubled by some of the proposals to have Congress 
mandate a price off ramp, which I think may be much too 
inflexible. We are looking for, Senator Warner and I are 
looking for some kind of market mechanism here.
    So first off, I wanted to thank you, Mr. Donohue, invite 
your participation. Second, ask if you have any thoughts about 
how we might create an emergency off ramp. Because we want 
this, obviously, to deal with a critical environmental problem. 
But we also want it not only not to be harmful to the economy, 
we hope it will help.
    Mr. Donohue. Senator, first of all, thank you for your 
comments. Than you for your logic in trying to figure out what 
might be the benefit and/or the unintended circumstances. We 
very much look forward to working with you and your colleagues 
on that. I am not going to attempt, in the middle of my members 
that all have different views, which I promise you are going to 
bring them to some collective effort over time, to comment on 
off ramps, simply to say that your instincts, which usually are 
pretty good about things like this, encourage me as I might 
encourage you, and we will sit down and talk about it. We need, 
all of us, to get smarter on this. We need to look ahead to the 
cause and effect of what we do. If we take just a little longer 
to get that done, I think in the last analysis, when we look 
back on whatever we do, we will feel better about it. So we 
look forward to a vigorous participation with you and I will 
assure you that not only the Chamber but its companies are 
always available to you and your colleagues to talk about it.
    Senator Lieberman. Thanks, Mr. Donohue.
    Mr. Hawkins, you, I think, were the one who testified, or 
maybe one of two, about so-called safety valve or off ramps. I 
want you to offer some testimony about what you have heard and 
whether you have any ideas about how we would best do this.
    Mr. Hawkins. Yes, thank you, Senator. I do appreciate the 
emphasis on the idea of an emergency.
    What I would say is that the problem with the safety valve 
or the off ramp concept is that it undermines the basic market 
provisions of the cap and trade system.
    Senator Lieberman. Right.
    Mr. Hawkins. We are going to depend to get costs reduced in 
this program on the ingenuity of entrepreneurs who see a 
business opportunity that basically say, it is a new world. 
Low-carbon energy resources have an economic value. I can put 
money into it, I can go to my board of directors and get money 
allocated for the intense expenditures that may be necessary up 
front to bring an innovative new product or process to market. 
They need for that business plan to work to know that the 
market signal is going to be there.
    If you introduce these concepts of off ramps or safety 
valves, you fundamentally conflict with that. You set a number 
that they know they have to beat, or their investment is going 
to be either worth nothing or worth a lot less. That makes it a 
more difficult hurdle to get that work done, which could, 
ironically, lead to higher overall prices for this program. 
Somebody might be paying money to the Treasury to purchase 
these additional printed allowances, but they wouldn't be 
getting the emission reductions.
    So we think that the concept of banking as a hedging 
strategy, the concept of borrowing, are ways to address this 
issue, and perhaps the metaphor is, rather than an off ramp, it 
is a lane change. But let's stay on the road.
    Senator Lieberman. So you would prefer to, you would see 
the banking and borrowing provisions, which I think it is fair 
to say Senator Warner and I will include in our draft, as the 
answer to that problem as opposed to an off ramp, emergency or 
otherwise?
    Mr. Hawkins. It is part of the answer, Senator. Another 
answer, frankly, comes from all sorts of groups. We will have 
all sorts of information about how well this is performing.
    There is always the off ramp that Congress has, which is to 
take a look at a program, see how it is working, and if the 
case can be made that some adjustment in time tables or rates 
are appropriate, then Congress can respond. We have seen that 
happen in the Clean Air Act over the past 35, 37 years. The 
first schedule for attaining the health-based standards in the 
1970 Clean Air Act was 1975. There have been a series of 
adjustments, both in the tools and the objectives over time. I 
am sure everyone doesn't think it has been a model of 
perfection, but it has worked to clean up the air, to provide 
real signals for progress. It has done it with an economy that 
has grown rapidly in the meantime.
    Senator Lieberman. I will tell you that Senator Warner and 
I have been talking about using some of the thinking of the 
U.S. Climate Action Partnership as a basis for what we are 
going to put together. The goal there is a 2050 goal and a 60 
to 80 percent range of reduction of current greenhouse gas 
emissions. To do that and avoid potentially disastrous economic 
consequences as part of a crash program toward the end, you 
also have to set some goals and points of review by Congress of 
how this is working at 5, 10, 15 year periods. So we would like 
to obviously involve all of you in helping us present interim 
goals that are reasonable and doable.
    I note Mr. Darbee, Mr. Grumet and Mr. Hay.
    Mr. Darbee. Senator, let me say that I think you have it 
exactly right, that we should have an off ramp. But it should 
be somewhat of an emergency off ramp. We are thinking about 
prices between, let's say, $10 and $20 for carbon, somewhere it 
should be set. That off ramp price should go up every year on a 
prescribed and gradual rate over time.
    In California, some years ago, we implemented a 
deregulation plan. The results of that, because reality was 
different than the theory that we anticipated, was 
catastrophic. It was a complex situation, but it was 
catastrophic. My concern is when one has a model, it may look 
good. But in implementation it may look significantly 
different. Therefore, a safety valve at a high level that is 
difficult to access makes sense. Because we wouldn't want a 
repeat of the catastrophic experiment we had with deregulation 
in California to occur on a broader scale with respect to cap 
and trade in the United States.
    Senator Lieberman. Good point. Very helpful.
    Mr. Grumet.
    Mr. Grumet. Thank you, Senator Lieberman. Just a couple of 
quick points. Our Commission is focused very much on the on 
ramp to this debate, recognizing that at the moment, the price 
of venting a ton of carbon into the atmosphere is zero. What an 
off ramp does, regardless of the price, is it takes the anxiety 
out of the debate. That does reduce the signal, because anxiety 
encourages some people to put in great efforts.
    But we also think it is probably the critical aspect that 
is going to allow 60 members of the U.S. Senate to move this 
Congress. The two other points I would make quickly, and I 
agree very much with David and Peter, that this should not be 
an escape valve, this should be an off ramp. The analysis that 
we have just presented suggests that you can achieve 
significant reductions along the lines of what we proposed with 
a starting price of $10 that does go up every year and never 
trigger the safety valve, if you are basically optimistic about 
the pace of technology, if you believe that vehicle fuel 
economy standards are going to be increased, if you believe 
that we are going to see more renewables, you will never 
trigger the safety valve.
    So I think there is a bit of a choice here, and you have to 
pick one side of the argument. If you are as I am, and I think 
David, a technology optimist, then the off ramp is there to not 
convince us that we need it, but it is to address the people 
who are no longer in the room that this is a program that they 
can tolerate. If you are a pessimist, then we actually think 
you need it.
    The last thing I will say is, I think we focus too much 
just on the price signal. Because ultimately we are not going 
to set a carbon price at the outset of this program which is 
going to be adequate to move us quickly toward things like 
carbon sequestration. I just don't believe it is possible.
    However, we have another option. We can invest significant 
resources to accelerate those technologies. If you took the 1.9 
cents per kilowatt wind production tax credit, and afforded it 
to carbon sequestration, which it presently doesn't have access 
to, that is a $24 a ton incentive. What our commission has 
proposed is to couple these two things, to have a starting 
price of $10, which we think we could get done right now, and 
then provide through bonus allocations an incentive for zero-
based coal equal to what we provide for wind. That is $24, day 
one, legislation that I think you could enact in this Congress, 
you could have a $34 price signal for carbon sequestration. 
That is real money, and I think it could happen soon.
    So our argument is just not to focus simply on the price 
signal or on the technology but think about how you can put 
them together in a way that can move us toward timely action.
    Senator Lieberman. Thanks. Mr. Hay, last word, because I 
have to go. Maybe some of you have to go, too.
    Mr. Hay. [Remarks off microphone.] I would be happy to 
comment on that. I agree with Mr. Darbee's comments. 
[inaudible.]
    Senator Lieberman. Right.
    Mr. Hay. Even in very well established markets, like the 
gas market that has been around for years, we are now seeing 
evidence just earlier this week that it is possible that a 
company like Amarinth may have manipulated the gas market last 
summer, costing consumers huge amounts of money in terms of 
increased costs of natural gas.
    So every time we do a tweak to cap and trade, we do run the 
risk of unintended consequences. For instance, banking and 
borrowing, I think if it is done right, it could work. But I do 
worry about people borrowing and banking to hoard credits and 
therefore manipulating the market. I just want to urge you, 
every market that we have ever tried to start in this country, 
and I am a big believer in markets, but you have to do it 
carefully. The electricity markets in some of the States that 
have them, they are still changing the rules today, many, many 
years after they have been established. As we saw in 
California, if you get it wrong, it can be devastating. So we 
have to be very careful and think this through.
    Senator Lieberman. Very helpful.
    Jim, did you want to say something?
    Mr. Rogers. I think the important point here is that you 
have a goal of 20, 50, 60 to 80 percent.
    Senator Lieberman. Right.
    Mr. Rogers. So you need to be careful in terms of how you 
set the off ramps, how you set the pricing on the way. Because 
for instance, most estimates today say to get carbon capture 
and sequestration, you need the price to be about $25 to $30, 
to kind of give you the range, to bring that online. So again, 
I think the other important point is, if you don't have a solid 
carbon price, and I am supportive of this safety valve concept, 
but if you undermine the price, it gets very difficult to have 
a clear price signal, so the behavior actually is real 
behavior. So that is the challenge.
    Senator Lieberman. That is the challenge, to make sure that 
in trying to reduce some of the anxiety, to deal with the 
unintended consequences, we don't eliminate the market-based 
aspect to what we are trying to do here. Because that clearly 
is one of its most attractive features. Of course we know in 
other circumstances, such as the Clean Air Act, it has worked.
    So your testimony has been very helpful. I do want to say, 
again, for Senator Warner and myself, our door is open, I 
suppose to anybody who agrees that we have a problem and we 
have to do something about it. Then we will figure out together 
how to do it best. We are going to focus on this intensely in 
the coming weeks. Because we really do set ourselves a goal for 
being able to present a mark from the two of us to our 
subcommittee before we break for the August recess.
    Thank you all, very, very much. Thanks, Madam Chairman, for 
an excellent hearing.
    Senator Boxer. Senator Lieberman, thank you for your 
amazing leadership on this, not just this partnership with 
Senator Warner, but your previous partnership with Senator 
McCain, and all the work you did before most people even knew 
this was an issue. I just want to thank you so much.
    I just want to say, Mr. Grumet, I have here an analysis of 
the Bingaman proposal which I think you have been working on 
with the safety valve and without a safety valve. My problem is 
that you have it with a safety valve, the kind that you want, 
it doesn't do that much better than business as usual. So I 
would hate to see us construct an entirely new system here that 
has a purpose, and as Mr. Rogers says, undermines the price, 
and then we wind up not making much progress. That is something 
I don't want to be associated with.
    So I am going to let you see this analysis.
    Mr. Grumet. Whose analysis is it?
    Senator Boxer. Whose analyses is this, Mike?
    Mr. Grumet. Oh, it is a chart.
    Senator Boxer. WRI, the World Resources Institute. I am 
going to show this to you, because if this is wrong, that would 
be good.
    Mr. Grumet. It is wrong. I am very familiar with it. It is 
wrong, and we provided you some detailed economic analysis 
today which shows you can get a 15 percent reduction from 
business as usual without triggering a $10 safety valve.
    Senator Boxer. Fifteen percent reduction?
    Mr. Grumet. Fifteen percent reduction.
    Senator Boxer. What do you think we should do for the 
environment?
    Mr. Grumet. I think ultimately we need to get a 60 to 80 
percent reduction by 2050.
    Senator Boxer. Exactly.
    Mr. Grumet. However, I am much more interested in focusing 
on the next 15 years than the next 50 years. I think the 
science says more than anything that we need to act with 
urgency. So I am very concerned that we can have the debate 
about an 80 percent reduction for another 8 years.
    Senator Boxer. I couldn't agree with you more. I agree with 
you.
    The problem is, where we might differ, I don't know, 
because we really haven't had a chance to discuss this at 
length, is that I believe, and I have said this to the CEQ who 
had this argument, because President Bush doesn't want to have 
any mandatory caps, he is different from where you are, they 
just say, we need technology to solve this. Totally right. But 
if you don't have the credibility, if you don't have the 
consistency, if you don't have the certainty, you are not going 
to get the technology.
    How do I know this? I am from California. I meet with 
venture capitalists every day. I meet with the business 
community in Silicon Valley and they want certainty. Well, 
first, let me say I am going to close this. I just want to 
thank everyone on the panel. This has been very, very, very 
instructive. It actually turned into a broader discussion than 
I even thought it would, and given the announcement that 
Senators Lieberman and Warner made, it was a very fitting day 
to have this. We didn't know when we set it we would have that 
great news, that they were working on this.
    But I guess what I want to do is actually direct my closing 
comments to Mr. Donohue and also echo the view that, I am very 
pleased at your being open to looking at this. In all my 30 
years of public life, it has been a long time, I have never 
seen business so far ahead of Government on an environmental 
issue. I just want to say to those of you who are out there, 
thank you, thank you, thank you. I think the factors that weigh 
into this are people who are responsible, responsible about 
their country, about their grandkids, about the future. I think 
Mr. Rogers alluded to this.
    But I am not corny enough to think that it stops there. It 
is also a sensible business decision to make. We need a planet 
that is going to survive. Let's just be honest. If the 
scientists are right, yes, there are a few who don't agree, and 
we know that. But if the vast majority of scientists are right, 
we have a problem on our hands. One of the things I realized 
when I started to immerse myself a little bit into these 
predictions is that the good news is, the things that we do to 
combat global warming are all really good for us, they are good 
for consumers, they are good for our health, they are good for 
our families.
    So this is, I believe, instead of approaching this with 
fear, we should approach it as a huge opportunity for America. 
I think the vision that I see is not one of people suffering, 
but rather, the creation of a whole new green economy. We are 
already seeing it in my State. I think if we took off our green 
eyeshades for a minute and just looked at a little bit at the 
bigger picture. When we put the green eyeshades back on, I 
think we will see real opportunity.
    Now, who are these businesses? I mean, these are the 
businesses that belong, just some of them, to the U.S. Climate 
Action Partnership: Alcoa, Alcan, Boston Scientific, BP, 
Caterpillar, Conoco, Deere, Dow, Duke, Dupont, FPL, GE, GM and 
now Ford and Chrysler have jumped on, Johnson and Johnson, 
Marsh, PepsiCo, PG&E, I don't know if I mentioned, Shell, 
Siemens Corporation, it goes on and on.
    This is capitalistic America saying that we should respond. 
This is an opportunity. They have risen to the challenge.
    I realize, Mr. Donohue, that you represent a way broader 
cross section. But what I want to say is, in America, if we 
grab onto a challenge, there is nothing stopping us. We all 
know why we are so proud to be Americans. That is how I see 
this.
    Now, I look at my home State, the most energy efficient 
State, the least energy use per capita, a State that has had 
enormous growth, people want to come there. The job 
opportunities are enormous. It is so amazing to me, to see what 
we have done.
    So I hope, Mr. Donohue, and I am sure you do come out to 
California now and then. I would love to be with you when you 
visit Silicon Valley and talk to some of our people. Some of 
them came and actually talked to Senator Warner about the 
opportunities. As we go into the century and get deeper into 
the century, we should be a leader, we shouldn't shrink from 
the challenge. We shouldn't sit there and say, oh, China is not 
doing this, oh, India is not doing this. We don't wait around 
for China to do the right thing. We lead the way.
    I think with the news today, yesterday, that we had from 
members of my committee that have forged a bond to commit to 
producing this legislation, we have this chance now. I want as 
the Chair of this committee, to hear all of you. I want to hear 
from coal country. I want to hear from everybody. Because I 
think we can make this a win-win. Surely if we do nothing, if 
we walk away from this challenge, it is a lose-lose, all across 
the board, it just is.
    I mean, again, as a spiritual person, and we had the most 
amazing testimony from religious leaders here, it is God's 
green Earth. So we can't walk away from this challenge. Now, if 
some scientists have exaggerated this thing and it is only half 
as bad as they said, we are ahead of the game. If it is worse 
than they said, we will do as much as we can to get ahead of 
it.
    But as I say, Mr. Donohue, I think you are a pivotal person 
here. I want to imbue on you this strength to take this on and 
to do your level best and to lead. Because what a moment we 
could have in history here if we made that breakthrough. So 
sir, would you like to respond?
    Mr. Donohue. Well, first of all, Madam Chairman, I would 
like to thank you for your confidence in the Chamber and your 
thoughtful comments. I would like to make just two additional 
issues. I was very pleased to hear yourself and Senator 
Lieberman and others talk about a willingness to consider these 
matters in a broader context, as you indicated, the hearing has 
expanded, so that we could look at the unintended 
circumstances, so we might look just a little bit further 
ahead, and we would make more thoughtful decisions. I look 
forward, on behalf of all of the names you read and the people 
here, and you can see they don't all agree on everything, 
participating in this process.
    The second thing is, I would like to see you in California, 
and I would like us to go together to the high-tech area, and 
have a little fun on one thing just beyond the normal 
conversation. We are beginning to look at how much electricity 
is consumed by all of the high-tech devices, all of the 
servers, all of the Internet, all of that. Those companies had 
better get involved in this, because the percentage of 
electricity that they are using would astound them, and it is, 
because they are beginning to look, and it astounds us. It is a 
good place to go, and I accept your invitation.
    Senator Boxer. Good.
    Mr. Donohue. I will try and find out when we are both going 
to be there at the same time.
    Senator Boxer. Well, we will work on that.
    Mr. Donohue. I would also invite you to come to the 
Chamber.
    Senator Boxer. Sure.
    Mr. Donohue. We will get together a broader group of 
industries to express some of their interests and concerns, 
some of them legitimate and some of them probably not, and let 
you have an opportunity to talk to them. I thank you very much 
for including us.
    Senator Boxer. Absolutely. I think this is essential. As 
Chair of this committee, one of the first things I said when I 
took the gavel is, I want to bring bipartisanship back to this 
committee. Because this committee has an unbelievably wonderful 
history. All the landmark laws, whether it is Endangered 
Species Act, that I opened up with, so I am closing full circle 
here, with the fact that we are able now to de-list the bald 
eagle, because of the Endangered Species Act. We have had 
successes in the Clean Air Act and the Safe Drinking Water Act, 
and the Clean Water Act, all of these, the Superfund Program, 
all of those, not without controversy, not without difficulty. 
But the fact of the matter is, Republicans and Democrats, 
Presidents of both parties, Congresses led by both parties, we 
have managed to keep these laws. I view what we are going to do 
here on climate change as one of those landmark moments.
    I am a believer in America doing the right thing at the end 
of the day. We will do the right thing here. I am a believer in 
listening to all sides before we decide. I do agree with you, 
when we go to the Silicon Valley and when we visit the various 
communications sectors down there, they understand that they 
have a responsibility.
    The most beautiful thing, I think, about that area is, and 
I will tell you a story, Mr. Donohue, that just amazed me, when 
I first ran for the Senate, I went to the Silicon Valley and I 
had a meeting with a very large group there. I thought, well, 
they are going to tell me, I am going to ask them the most 
important thing I could do for them, because I always like to 
ask that question of every group, what is the most important 
thing, or the two most important things.
    I felt it was going to be, lower my taxes, lower my taxes. 
I went in there and they said, education. Please, we have got 
to have an educated work force. So then I thought, I pushed 
them further. What is your second most important issue? I 
thought they would say lower my taxes. They said, housing. We 
really worry that our workers can't afford the housing prices 
here in California.
    So this is a group that really, they do very well, but they 
do good things for the country. What could be better than that, 
to have a business that does so well, and many of you represent 
those businesses who do so well, but also, you are stewards of 
the environment and you care about our families. This is really 
important.
    So Mr. Donohue, you and I will work together and go west.
    Mr. Donohue. Senator, you ended with a story, perhaps I can 
end with a story.
    Senator Boxer. Sure.
    Mr. Donohue. Since the early 1970s, this country has spent 
$3 trillion cleaning the air, the water and the land, along the 
lines of some of the issues you have discussed. The Federal 
Government of the United States has spent about 20 percent of 
that. I would probably say it has encouraged the spending of a 
good deal more of it. But when you look at the accomplishment 
that we have made in this country to date on that with 80 
percent private money, and compare it to what some of our 
developed nation trading partners have done, notwithstanding 
the press that we get on the subject. I am very proud of what 
we have done and I look forward to seeing how we can do more in 
the future.
    Senator Boxer. It is a good story. It is a good story, it 
is a great story.
    On this one, we are going to work together, or we really, 
we won't succeed. So we must work together.
    So I want to thank all of you very much, and we stand 
adjourned.
    [Whereupon, at 1 p.m., the committee was adjourned.]




                                  
