[Senate Hearing 110-1101]
[From the U.S. Government Publishing Office]
S. Hrg. 110-1101
EXAMINING GLOBAL WARMING ISSUES IN THE POWER PLANT SECTOR
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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
_____
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COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
BARBARA BOXER, California, Chairman
MAX BAUCUS, Montana JAMES M. INHOFE, Oklahoma
JOSEPH I. LIEBERMAN, Connecticut JOHN W. WARNER, Virginia
THOMAS R. CARPER, Delaware GEORGE V. VOINOVICH, Ohio
HILLARY RODHAM CLINTON, New York JOHNNY ISAKSON, Georgia
FRANK R. LAUTENBERG, New Jersey DAVID VITTER, Louisiana
BENJAMIN L. CARDIN, Maryland 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
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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
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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.
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\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.
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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\
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\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/.
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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 2C and 3C 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.
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\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.
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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.
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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.
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\5\ See http://select.nytimes.com/search/restricted/
article?res=F50B12F83A5B0C748CDDA80994 DE40 4482
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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\
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\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.
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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).
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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\
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\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.
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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\
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\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.
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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\
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\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).
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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\
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\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).
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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\
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\1\ United States Climate Action Partnership, ``A Call to Action''
(January 2007).
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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.
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\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.
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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.
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\3\ Under the Clean Air Act, approximately 3 percent of the
allowances were auctioned, primarily to assure liquidity of the
emissions market.
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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\
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\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.
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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.
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\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.
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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.
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\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.
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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\
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\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.
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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.
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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\
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\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.
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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.
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\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.'')
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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.
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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.
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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.
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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.
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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.]