[Senate Hearing 110-1233]
[From the U.S. Government Publishing Office]




                                                       S. Hrg. 110-1233

 
            AMERICA'S CLIMATE SECURITY ACT OF 2007, S. 2191

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

                                HEARINGS

                               BEFORE THE

                              COMMITTEE ON
                      ENVIRONMENT AND PUBLIC WORKS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               ----------                              

                      NOVEMBER 8, 13, AND 15, 2007

                               ----------                              

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


            AMERICA'S CLIMATE SECURITY ACT OF 2007, S. 2191




                                                       S. Hrg. 110-1233

            AMERICA'S CLIMATE SECURITY ACT OF 2007, S. 2191

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

                                HEARINGS

                               BEFORE THE

                              COMMITTEE ON
                      ENVIRONMENT AND PUBLIC WORKS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                      NOVEMBER 8, 13, AND 15, 2007

                               __________

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




       Available via the World Wide Web: http://www.fdsys.gpo.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         JOHN BARRASSO, Wyoming1
BERNARD SANDERS, Vermont             LARRY E. CRAIG, Idaho
AMY KLOBUCHAR, Minnesota             LAMAR ALEXANDER, Tennessee
SHELDON WHITEHOUSE, Rhode Island     CHRISTOPHER S. BOND, Missouri

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

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


                            C O N T E N T S

                              ----------                              
                                                                   Page

                            NOVEMBER 8, 2007
                           OPENING STATEMENTS

Warner, Hon. John W., U.S. Senator from the Commonwealth of 
  Virginia.......................................................     1
Boxer, Hon. Barbara, U.S. Senator from the State of California...     2
Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma...     5
Lieberman, Hon. Joseph I., U.S. Senator from the State of 
  Connecticut....................................................     7
Voinovich, Hon. George V., U.S. Senator from the State of Ohio...    10
Klobuchar, Hon. Amy, U.S. Senator from the State of Minnesota....    13
Bond, Hon. Christopher S., U.S. Senator from the State of 
  Missouri.......................................................    14
Carper, Hon. Thomas R., U.S. Senator from the State of Delaware..    15
Vitter, Hon. David, U.S. Senator from the State of Louisiana.....    17
Lautenberg, Hon. Frank R., U.S. Senator from the State of New 
  Jersey.........................................................    18
Barrasso, Hon. John, U.S. Senator from the State of Wyoming......    20
Cardin, Hon. Benjamin L., U.S. Senator from the State of Maryland    21
Craig, Hon. Larry E., U.S. Senator from the State of Idaho.......    23
Sanders, Hon. Bernard, U.S. Senator from the State of Vermont....    25
Isakson, Hon. Johnny, U.S. Senator from the State of Georgia, 
  prepared statement.............................................    27
Alexander, Hon. Lamar, U.S. Senator from the State of Tennessee, 
  prepared statement.............................................    28
Whitehouse, Hon. Sheldon, U.S. Senator from the State of Rhode 
  Island.........................................................    29

                               WITNESSES

Darbee, Peter A., chairman, CEO and president, Pacific Gas and 
  Electric Corporation...........................................    30
    Prepared statement...........................................    32
Pershing, Jonathan, director, Climate, Energy and Pollution 
  Program, World Resources Institute.............................    38
    Prepared statement...........................................    40
Smith, Anne E., Ph.D., vice president, CRA International.........    49
    Prepared statement...........................................    51
    Responses to additional questions from Senator Inhofe........    67
Thorning, Margo, Ph.D., senior vice president and chief 
  economist, American Counsel for Capital Formation..............    75
    Prepared statement...........................................    76
    Responses to additional questions from Senator Inhofe........    88
Barbour, Wiley, executive director, Environmental Resources 
  Trust, Inc.....................................................    88
    Prepared statement...........................................    90

                          ADDITIONAL MATERIAL

Study, International Comparison of Depreciation Rules and Tax 
  Rates for Selected Energy Investments, May 2, 2007............115-154
Letters from:
    James E. Ford, Vice President, Government Affairs, API.......   155
    Joseph M. Stanton, Chief Lobbyist, Government Affairs, 
      National Association of Home Builders (NAHB), October 31, 
      2007.......................................................   159
    Cecil R. Roberts, International President, United Mine 
      Workers of America.........................................   162
                              ----------                              

                           NOVEMBER 13, 2007
                           OPENING STATEMENTS

Boxer, Hon. Barbara, U.S. Senator from the State of California...   165
Warner, Hon. John W., U.S. Senator from the Commonwealth of 
  Virginia.......................................................   166
Baucus, Hon. Max, U.S. Senator from the State of Montana.........   167
Isakson, Hon. Johnny, U.S. Senator from the State of Georgia, 
  prepared statement.............................................   168
Lieberman, Hon. Joseph I., U.S. Senator from the State of 
  Connecticut....................................................   169
Barrasso, Hon. John, U.S. Senator from the State of Wyoming......   171
Carper, Hon. Thomas R., U.S. Senator from the State of Delaware..   172
Voinovich, Hon. George V., U.S. Senator from the State of Ohio...   173
Klobuchar, Hon. Amy, U.S. Senator from the State of Minnesota....   175
Craig, Hon. Larry E., U.S. Senator from the State of Idaho.......   176
Whitehouse, Hon. Sheldon, U.S. Senator from the State of Rhode 
  Island.........................................................   178
Alexander, Hon. Lamar, U.S. Senator from the State of Tennessee, 
  prepared statement.............................................   179
Cardin, Hon. Benjamin L., U.S. Senator from the State of Maryland   180
Bond, Hon. Christopher S., U.S. Senator from the State of 
  Missouri.......................................................   182

                               WITNESSES

Hawkins, David, director, climate center, National Resources 
  Defense Council................................................   184
    Prepared statement...........................................   185
    Responses to additional questions from Senator Lautenberg....   216
Greene, David L., corporate fellow, Engineering Science and 
  Technology Division, Oak Ridge National Laboratory.............   217
    Prepared statement...........................................   218
    Responses to additional questions from Senator Inhofe........   226
Baugh, Robert C., executive director, AFL-CIO Industrial Union 
  Council and Chair, AFL-CIO Energy Task Force...................   228
    Prepared statement...........................................   229
    Responses to additional questions from Senator Inhofe........   235
Sharkey III, Andrew G., president and CEO, American Iron and 
  Steel Institute................................................   236
    Prepared statement...........................................   238
    Response to an additional question from Senator Inhofe.......   240
Rowlett, Donald R., director of Regulatory Policy and Compliance, 
  OG&E Energy Corporation........................................   241
    Prepared statement...........................................   243
    Responses to additional questions from Senator Cardin........   251

                          ADDITIONAL MATERIAL

Report, U.S. Government Accountabilitgy Office (GAO), Climate 
  Change, Financial Risks to Federal and Private Insurers in 
  Coming Decades Are Potentially Significant, March 2007.........   272
                              ----------                              

                           NOVEMBER 15, 2007
                           OPENING STATEMENTS

Boxer, Hon. Barbara, U.S. Senator from the State of California...   347
Barrasso, Hon. John, U.S. Senator from the State of Wyoming......   348
Carper, Hon. Thomas R., U.S. Senator from the State of Delaware..   350
Voinovich, Hon. George V., U.S. Senator from the State of Ohio...   350
Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma...   353
Vitter, Hon. David, U.S. Senator from the State of Louisiana.....   355
Cardin, Hon. Benjamin L., U.S. Senator from the State of Maryland   357
Bond, Hon. Christopher S., U.S. Senator from the State of 
  Missouri.......................................................   360
Lieberman, Hon. Joseph I., U.S. Senator from the State of 
  Connecticut....................................................   405
Warner, Hon. John W., U.S. Senator from the Commonwealth of 
  Virginia.......................................................   426

                               WITNESSES

Krupp, Fred, president, Environmental Defense....................   363
    Prepared statement...........................................   365
    Responses to additional questions from:
        Senator Inhofe...........................................   378
        Senator Vitter...........................................   379
Claussen, Eileen, president, Pew Center on Global Climate Change.   379
    Prepared statement...........................................   381
    Responses to additional questions from:
        Senator Inhofe...........................................   384
        Senator Vitter...........................................   384
Sims, Ron, county executive of King County, Washington...........   385
    Prepared statement...........................................   387
    Responses to additional questions from Senator Vitter........   391
Book, Kevin, senior analyst and vice president, Friedman Billings 
  Ramsey and Company, Inc........................................   392
    Prepared statement...........................................   394
    Responses to additional questions from:
        Senator Inhofe...........................................   400
        Senator Vitter...........................................   401
Berendt, Christopher, director of Environmental Markets and 
  Policy, PACE...................................................   402
    Prepared statement...........................................   403

                          ADDITIONAL MATERIAL

Letters:
    American Chemistry Council, November 9, 2007.................   427
    The Fertilizer Institute.....................................   434
    International Brotherhood of Boilermakers, Iron Ship 
      Builders, Blacksmiths, Forgers and Helpers, November 12, 
      2007.......................................................   437
    International Emissions Trading Association, November 15, 
      2007.......................................................   439
Statements:
    Porcari, John D., secretary, Maryland Department of 
      Transportation.............................................   442
    Wilkinson, Paul, vice president, Policy Analysis American Gas 
      Association................................................   444
    Banks, Jonathan, Clean Air Task Force........................   450
    Report, IPCC Fourth Assessment, Draft Copy-Subject to final 
      copy edit, November 16, 2007...............................   481


            AMERICA'S CLIMATE SECURITY ACT OF 2007, S. 2191

                              ----------                              


                       THURSDAY, NOVEMBER 8, 2007

                                       U.S. Senate,
                 Committee on Environment and Public Works,
                                                    Washington, DC.
    The full committee met, pursuant to notice, at 9:30 a.m. in 
room 406, Dirksen Senate Office Building, Hon. Barbara Boxer 
(chairman of the full committee) presiding.
    Present: Senators Boxer, Inhofe, Lieberman, Carper, 
Lautenberg, Cardin, Sanders, Klobuchar, Whitehouse, Warner, 
Voinovich, Isakson, Vitter, Alexander, Bond, Barrasso, and 
Craig.
    Senator Boxer. Good morning, everybody. The hearing will 
come to order.
    We are here today to consider a landmark global warming 
bill, thanks to the bipartisan leadership of Senators Lieberman 
and Warner. For me as Chair, I couldn't be more proud of the 
work that they have done. I want to thank all members of the 
Committee for really helping us get to this point.
    Senator Warner has a need to go back to his office, because 
he is nursing a serious wound that he encountered. As a result 
of that, I have decided, and Senator Inhofe agrees, that we 
will ask Senator Warner if he will make his statement first.
    Senator, welcome.

    STATEMENT OF HON. JOHN W. WARNER, U.S. SENATOR FROM THE 
                    COMMONWEALTH OF VIRGINIA

    Senator Warner. Thank you, Madam Chairman. I thank my old 
friend and the distinguished Ranking Member.
    I hit a small pothole, but I am on the mend, but under 
doctor's orders I can't sit. That is a unique experience, after 
80 years of healthy life, nor bend. But that soon will pass. In 
the meantime, I just wanted to come up and say two words to 
everybody present: thank you. First and foremost to the 
leadership of this Committee and to my good colleague, Senator 
Lieberman, for enabling this Committee to fulfill what I 
believe is his responsibility to the U.S. Senate. I believe the 
Executive Branch has its position and I think it is important 
that the Legislative Branch fulfill its constitutional 
responsibilities. This Committee, under the Senate rules, is 
the one entrusted to do just that.
    I became interested in this issue, because I do believe 
there are ramifications that relate to national security, 
although they are potential. I have, together with other 
Senators, participated in efforts, which I think are going to 
be successful, to produce a national intelligence assessment. I 
carefully use the word assessment rather than estimate. But I 
believe the document will have a standing equivalent to an 
estimate. That is forthcoming.
    I am also working on the National Security Annual 
Authorization bill. As a matter of fact, we hope to meet again 
today to conclude that. Hopefully there will be a reference in 
there to the need for the various military departments to make 
their own assessments, as well as the Department as a whole.
    So with those things in mind, I just urge the Committee to 
continue its work on this. I readily acknowledge that there are 
many members of this Committee and indeed, members of the 
Senate, that have done a great deal of work on this, and that I 
joined the effort somewhat later in time, but with no less 
energy and commitment to do what I can to see that the Senate 
performs its duties.
    I do believe that in the coming year, the American public 
will look to both the Democratic Party and the Republican Party 
as to their stance on these various issues. I think the 
forthcoming issues will have it as an active issue of debate. 
All the more reason for this Committee to assemble as best we 
can a record, so that people can draw from that record.
    With that, I will wind up and go back down where I occupy 
my prone position and watch this on television. With the 
concurrence of the Chair and Ranking Member, I have questions. 
When my time comes, I believe Senator Lieberman will ask those 
questions on my behalf.
    I thank my colleague from Wyoming from sitting in to the 
subcommittee staff to enable the subcommittee to fulfill its 
work and to go to the full Committee. So I wish you luck. A lot 
is known; a lot is unknown. We have a heavy obligation to the 
extent we can achieve the highest degree of bipartisanship, to 
make those assessments, to prepare this record and to fulfill 
what I believe is the duty of this Committee to report to the 
Senate Floor a bill.
    I thank the Chair, the Ranking Member.
    [Applause.]

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

    Senator Boxer. Senator Warner, go in better health. We know 
you are going to be just fine. We miss you and we feel that the 
work you have done has really been extraordinary for this 
Committee. This is a special day for the Committee as we look 
at this landmark legislation, a very good bill indeed.
    We also, Senator Inhofe and I, on another matter where we 
fully agree, are going to have a great day for our Committee, 
and I just wanted to take a moment out to say thank you for 
everyone's work on WRDA. This was one where we really worked 
together so hard. Senator Inhofe and I, joined by Senators 
Baucus and Isakson, and each and every one of you, all of your 
contributions to the WRDA bill were just really strong. I 
wanted to say to Senator Vitter, I know how much this means to 
you and to Senator Landrieu. I think that the members of this 
Committee, across party lines, showed its desire to help with 
Louisiana. We went down to see with our own eyes and you and 
Senator Landrieu were most helpful to this Committee.
    So it is a good day, from my perspective, on all fronts.
    I am going to put my full statement in the record on this 
matter, but I will quote from it. Senator Warner and Senator 
Lieberman, by coming together to write a bill on global 
warming, I think is leading this Committee in the right 
direction and leading the Senate in the right direction.
    The way I look at it, each of us has several choices here 
in what we decide to do on global warming. One is to do 
nothing. I believe that is very, very dangerous. Two is to 
embrace a dangerously weak bill. I think that is dangerous. 
Because if we pass a weak bill, if we pass a bill that doesn't 
have the proper framework, we could get caught into the aspects 
of the bill that we could never change later, or it would be 
very difficult. So I think doing nothing and passing a 
dangerously weak bill would be something I would oppose.
    Now, that leaves two other options. One is to pass the 
perfect bill. I would say that every member on this Committee 
could write a perfect bill from his or her perspective. I would 
suggest that 100 Senators each could write a perfect bill, 100 
perfect bills. That is not going to get us anywhere. We are in 
the Legislative Branch. We are not executives. We have to work 
together.
    That leaves the final choice, which is a very good bill. I 
believe the bill before us is a very good bill. Can we make it 
better? Absolutely. Can we make it better in Committee? 
Absolutely. Can we make it even better on the Floor? Yes. I 
think the most important thing we can do for the American 
people is to move this process forward. I would say not to do 
that, in my view, is completely irresponsible, given the status 
of what we already know from the scientists on global warming.
    So Senators Lieberman and Warner have given us a pathway. 
Now, I sat through the entire Subcommittee markup, and I want 
to praise certain Senators. Senator Lautenberg, you are one of 
them, but you have to listen.
    [Laughter.]
    Senator Boxer. Because in the Subcommittee, we moved this 
bill forward. We adopted amendments of Senator Lautenberg, 
Senator Sanders, and Senator Barrasso. We did it in, I think, a 
very strong way. Everybody's voice was heard. Some amendments 
were rejected. The reason I believe they were rejected is they 
would have upset the balance so we could move this bill 
forward. Right now, what I hope we can do as we listen to our 
panel and we go through the briefings that we will have is to 
be able to keep that delicate balance that we have across party 
lines to get this bill out.
    This bill will create a great climate for strong economic 
growth, new green jobs, vigorous environmental protection. If 
it is passed as it is, and we look at the modeling, it is 
changing, but it is moving in the right direction. It will be 
the strongest global warming bill, the most far-reaching ever 
passed in the world. The fact that this Committee could do it 
is very exciting. It sets the Nation on a clear path to 
reducing greenhouse gas emissions. The goals are strong and we 
hope to make them stronger.
    We set up a cap and trade program, by the way, cap and 
trade was invented in America, as we looked at the issue of 
acid rain. So we know that it works. It preserves the rights of 
States to go and do even more. It includes provisions to help 
consumers, especially low and middle income consumers. It 
includes measures that will make the substantial auction 
revenues available to help ease the cost of transition, pay for 
weatherization, mitigate potential impacts of energy price 
increases.
    We look at the international scene. I think that Senator 
Warner's interest was indeed sparked by national security. All 
we have to do, folks, is listen to our Pentagon and our 
intelligence people who are there telling us unequivocally that 
unfettered global warming will in fact be the cause of wars. We 
already see some evidence of that occurring.
    So I approach this issue with hope, not fear. I think the 
bipartisan breakthrough on this Committee gives me even 
stronger hope. I don't think we can turn our back on the 
scientists. There is a consensus out there. I don't think we 
can turn our back on the economic analysis or Nicholas Stern 
telling us that every dollar now saves $5 later. So this is in 
many ways a great day for this Committee. I know there will be 
some negative voices, and that is fine. That is part of what we 
do here.
    But I still believe we have the momentum, we have the wind 
at our back, and I want to thank everyone on the Committee for 
their help. I just want to say one word about Senators Inhofe 
and Barrasso for a moment. They have not to this point been for 
the Lieberman-Warner bill. I understand that. They could have 
thrown a monkey wrench into the process and all the rest of it. 
They didn't do that.
    When Senator Inhofe could not be here because he had 
obligations on the Defense Committee, there came Senator 
Barrasso as a, I think, just taking the high road and helping 
Senator Warner. I want to tell you, Senator, publicly, because 
I have told you privately, how much it really meant to me as 
the Chairman of this Committee, and I want to thank you so 
much.
    So to all members, thank you. It is now time to yield to 
Senator Inhofe.
    [The prepared statement of Senator Boxer follows:]

        Statement of Hon. Barbara Boxer, U.S. Senator from the 
                          State of California

    We are here today to consider a landmark global warming bill, 
thanks to the bipartisan leadership of Senators Lieberman and Warner.
    They have worked so hard to come together and craft this 
thoughtful, comprehensive piece of legislation, and we could not have 
done it without their tireless dedication to this issue.
    This legislation brings to us a strong framework and solid 
foundation to build upon, and I am so happy that they were able to 
successfully pass the bill out of their subcommittee.
    Today we will hear that the cap and trade approach is not new, and 
has been applied in the United States for many years. This market-based 
system has been proven to successfully reduce air pollution.
    This bill's approach provides an effective system for emissions 
reduction, and opportunities for businesses to thrive.
    This bill will create a great climate for strong economic growth, 
new green jobs, and vigorous environmental protection.
    There are several important provisions of the bill that make it 
such a breakthrough proposal:
     It sets the nation on a clear path to reducing greenhouse 
gas emissions to avoid the worst effects of global warming.
     The goals in the bill are strong and will continue to be 
reviewed by scientists to ensure we are on the right path.
     It sets up a cap-and-trade program that will establish a 
price signal to drive the development of technologies and encourage 
energy efficiency while keeping costs low.
     It preserves the right of states, including my home state 
of California, to implement their own solutions to global warming, 
building on the significant progress they have already made.
     It includes provisions to help ensure that consumers--
especially low and middle income consumers--will be protected.
     This includes measures that will make substantial auction 
revenues available to help ease the cost of transition, pay for 
weatherization of homes, and mitigate any potential impacts of energy 
price increases on low and middle-income consumers.
     It includes important steps to ensure that action is taken 
internationally to address this problem, and that our national security 
is protected.
     It creates American jobs, supports American workers in the 
transition to a green economy, and it provides support for wildlife and 
natural resources.
    I will continue to work to strengthen this bill at each step of the 
process.
    I believe that it is a moral imperative to do what we can to ease 
the impacts of global warming--not only on the American consumer, but 
on world populations suffering from droughts, floods and famine. I look 
forward to working with communities of faith and others as we work to 
address theses issues.
    It is our obligation to act now. The Intergovernmental Panel on 
Climate Change, or IPCC, has warned of the dangers that global warming 
poses for us all, such as droughts, extreme weather events, threats to 
water resources, more frequent and intense wildfires, threats to public 
health, and the extinction of up to 40% of the species on the planet.
    Sir Nicholas Stern, former chief economist of the World Bank, has 
told us that a dollar invested in combating global warming can save $5 
later.
    We cannot afford to do nothing. We cannot afford to pass a weak 
bill. We must pass the strongest bill we can, but we must remember that 
the perfect cannot be the enemy of the very good.

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

    Senator Inhofe. Thank you, Madam Chairman. I want to make 
sure everyone is aware that you and I will be working together 
at 10:45 this morning, and I am a little concerned now as I 
look around and see the participation that we have. Because I 
definitely want to hear from our witnesses, and I have some 
questions to ask. But also, we need to be down there in an hour 
or two, so we will try to make that happen.
    Let me just say that I appreciate the fact that you have 
commented on my feeling about the process. If anything, I want 
the process to be more than it is right now. I think we need to 
have the administrative analysis of the costs and the benefits 
of this bill. While we don't have a lot of the things I think 
we should have at this point, I think we have some excellent 
witnesses today that will allow us to start talking about what 
we are really addressing here.
    First of all, the Kyoto process, the cap and trade concept, 
is something that has been a total failure. I don't think there 
is anyone in this room, in this Committee, or even in Europe, 
who believes that it has worked. Even the European 
environmentalists say it has not been a success, it has been a 
failure. Only two countries out of 15 western European 
countries have been able to meet their targets.
    So I think if we want to address this thing, there are 
other ways of doing it. I know that several members of this 
Committee are looking to other options. While the supporters of 
putting the brakes on our economy say that our leadership will 
encourage these other countries to follow us down this path of 
self-destruction, I don't hear that. I certainly don't hear 
that from the developing nations. I don't hear it from China. 
China right now has become the number one emitter. It used to 
be just a few months ago the United States. I understand right 
now that India will be passing us up as the greatest emitter of 
greenhouse gases.
    Now, as far as I know, what we always say is, the science 
is settled, the science is settled, the science is settled. I 
want to extend my thanks to my colleague, Senator Craig, who 
yesterday confessed to me that he actually read my whole 2\1/
2\-hour statement on the Floor of the Senate that was a week 
ago Friday. I wish everyone would do that, because what I did 
was, just to show what the science has said, just since 2007, 
this year. So that is something we are not going to discuss 
today, we are not going to debate it. But certainly if you look 
at it, it is not settled.
    But one thing that is for sure is that we are embarking on 
something here that if it became a reality would be a huge 
economic disaster for our country. We have some excellent 
witnesses here today to talk about this. The impacts would be 
terrible, climbing steadily until the costs reach up to about a 
trillion dollars a year. We used to look at the Kyoto, and that 
was going to be $300 billion and this is probably three times 
that.
    So we need to study these things and look and see what the 
cost is going to be, what the benefits are going to be. I look 
forward to this hearing and look forward to joining with you on 
something with which we agree on the Floor at 10:45.
    [The prepared statement of Senator Inhofe follows:]

        Statement of Hon. James M. Inhofe, U.S. Senator from the
                           State of Oklahoma

    Madame Chairman,
    Thank you for agreeing to hold this and next Tuesday's legislative 
hearings on S. 2191 after we sent you a letter complaining about the 
lack of process in the rush to pass this bill out of Committee. But it 
is not enough. We have yet to see any analysis from the Administration 
on the costs or benefits of this bill. We have yet to have your staff 
and those of the sponsors sit down with the staff of all the other 
offices on the Committee to walk through our concerns. The ability of 
stakeholders to comment has been limited. But it does allow us to 
engage in the beginnings of what I hope will be a deliberative process 
going forward.
    On the substance of this bill, I am very concerned. As this chart 
shows and we will hear today, the Kyoto Protocol cap and trade scheme 
has been a complete failure, with only two countries expected to meet 
their targets. Of course, some people try to defend the accord, but 
nobody believes them anymore--not even European environmentalists. Why 
would we want to adopt what is one of the biggest economic and policy 
failures of modern times? Is it credible for supporters to say ``Sure, 
it's failed to reduce emissions or protect Europe's economy, but we 
think we can tweak it to work?'' Is it really wise to bet our 
children's future on a policy we know will achieve nothing?
    EPA's October 1st analysis shows that emissions reductions in the 
range contemplated in this bill will only reduce global greenhouse gas 
concentrations by about four percent--that's right, four percent! In 
the meantime, the world's leading producer of coal--China--has turned 
from a net exporter to net importer of coal and is building three new 
coal plants a week. India's economy is also exploding. Officials in 
both countries have been extremely clear they have no intention of 
slowing their growth out of concern over global warming.
    Yet supporters of putting the brakes on our own economy say that 
our leadership will encourage these other countries to follow us down 
this self-destructive path.
    I am gratified that, even though we have yet to receive an 
Administration analysis of this bill, we do have some credible analysts 
with us here today to discuss the impacts of this bill. And the impacts 
will be terrible--climbing steadily until costs reach up to $1 trillion 
per year and 2 million jobs lost within the 8 years.
    The fact is that this bill ignores we are a growing economy with a 
growing population. It would be extremely costly to the economy to 
flatten emission growth, let alone cut emissions 70 percent.
    This bill does nothing to protect Americans from spiking natural 
gas prices and lost jobs that will go to the emerging nations which 
will emit more greenhouse gases.
    Madame Chairman, it is unfortunate that for a bill this important, 
this costly, and I would add, this disastrous to our way of life would 
be pushed through the Committee process without any real examination 
simply to score political points at a UN conference. I think the 
American deserves more from Congress.

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

    Senator Lieberman. Thanks very much, Chairwoman Boxer, for 
your leadership on this very important subject. I appreciate 
all the support that you have given us as we brought this both 
into fruition and then through the Senate, through the 
Subcommittee on Climate Change with a bipartisan vote.
    We have a problem. Yes, I believe very strongly that the 
scientists are right. It is a broad, international consensus. 
In fact, I think most members of this committee and most 
members of the Congress agree that there is a problem. The 
President of the United States agrees that there is a problem 
of global warming.
    The disagreement now, and this is different than it used to 
be, the disagreement now is what to do about the problem. I 
think that the bill we brought forward, America's Climate 
Security Act, gets the job done and does it in a way that will 
not hurt our economy, in fact, I think will ultimately help our 
economy. Are there costs? There are costs. But forgive the 
homely analogy, but if there was a fire in the kitchen of your 
house, would you pay the cost of the fire department to have 
them come to put out the fire before your whole house burned 
down? I think the answer is yes. That is where we are with 
global warming now.
    I want to take the time that I have to focus in on the cost 
question. In July of this year, the Environmental Protection 
Agency, this is not some environmental group, this is the 
Environmental Protection Agency of the Bush Administration, 
completed an analysis of the climate change bill that Senator 
McCain and I previously put in. The emission reductions 
required in that bill were actually somewhat less than this 
bill that is before us now. So they were comparable.
    EPA's analysis found that the reductions in U.S. greenhouse 
gas emissions mandated by the McCain-Lieberman bill would, 
making conservative assumptions about the pace of emissions 
reductions in the rest of the world, keep the concentrations of 
greenhouse gases in the atmosphere below 500 parts per million 
at the end of this century. When I say conservative assumptions 
about what the rest of the world does, interestingly, that 
means that there is an assumption that the rest of the world 
will do nothing for 5 years, and that China and India, for 
instance, will get on board 5 years after we do, but not really 
do as much as we are doing until 2025 or 2030.
    But still, we are such a critical factor that if we adopt 
the McCain-Lieberman bill or this bill that Senator Warner and 
I have put together now, this bipartisan bill, we would keep 
greenhouse gases below 500 parts per million at the end of this 
century. Why is that important? Because according to the 
consensus of more than 2,000 scientists from around the world, 
the IPCC, keeping the atmospheric concentration of greenhouse 
gases below 500 parts per million will avoid a high risk of 
global warming that will cause severe impacts. So this reaches 
the goal.
    Now, what about the cost? The Clean Air Task Force has now 
completed an economic analysis of the America's Climate 
Security Act, as reported out last Thursday. This analysis uses 
the Energy Information Administration's economic model for 
climate change as applied to earlier legislation. Again, the 
EIA is part of the Administration. Incidentally, EIA reaffirmed 
its confidence in that model in a report that it submitted to 
Senators Inhofe, Voinovich and Barrasso on October 29.
    So the analysis of the Subcommittee-reported bill projects 
that the price of an emission allowance would not exceed $50 
until after 2030. According to EIA's report to the three 
Senators I have mentioned, fuel switching from coal to natural 
gas would not make any economic sense until the price of an 
allowance exceeded $50. So one should not expect fuel switching 
to occur under the America's Climate Security Act before 2030. 
By 2030, even the pessimists say that we will have commercial 
deployment of carbon capture and sequestration technology for 
coal.
    The analysis goes on to project that U.S. gross domestic 
product would more than double by 2030. The projected increase 
is only 1 percentage point lower than the increase projected by 
the absence of America's Climate Security Act and I don't 
believe accounts for the costs of not doing something about 
global warming. Electricity prices, and I want to be really 
specific about this, because there are costs. But as I said at 
the beginning, they are worth it. Electricity rates would over 
25 years rise from 8.1 cents per kilowatt hour to about 9.8 
cents per kilowatt hour.
    Now, are the American people willing to pay that extra 
penny per kilowatt hour over 25 years to do something to stop 
the warming of the planet? I am sure they are. Thus, this most 
recent modeling report on the Subcommittee-reported bill 
confirms the modeling results that I entered into the record of 
the October 24th Subcommittee hearing. In short, the costs are 
manageable. Of course, none of these analyses take into account 
the staggering economic costs that we will face in this 
country, not to mention the impact on our way of life and our 
economy if we fail to curb global warming.
    Thank you, Chairman Boxer.
    [The prepared statement of Senator Lieberman follows:]

     Statement of Senator Joseph Lieberman, U.S. Senator from the 
                          State of Connecticut

    Thank you, Chairman Boxer. I thought I would describe the core of 
America's Climate Security Act and summarize some of the projections of 
the bill's environmental and economic impacts.
    The bill identifies the large greenhouse gas emitting sources that 
will be covered by the bill's emissions cap. Those sources include 
power plants and large manufacturing facilities that burn coal, 
importers and refiners of gasoline and other fossil fuel-based liquid 
fuels, and importers and processors of natural gas. The sources covered 
by the bill's cap are responsible for over 80 percent of U.S. 
greenhouse gas emissions.
    The bill requires each covered source, at the end of each year 
beginning in 2012, to hand over to EPA one emission allowance for every 
carbon dioxide equivalent that the source has emitted in that year. A 
carbon dioxide equivalent is, for each greenhouse gas--and there are 
six of them covered by the bill--the amount of the greenhouse gas that 
makes the same contribution to global warming as 1 metric ton of carbon 
dioxide.
    For each year from 2012 through 2050, the bill identifies the 
specific number of emission allowances that will be made available to 
the entire pool of covered sources for that year. The way the bill 
reduces greenhouse gas emissions is by decreasing, from year to year, 
the number of emission allowances available to the entire pool of 
covered sources.
    The number of emission allowances goes down each year by 1.8 
percent of the 2012 cap level. By 2020, the cap is down to 15 percent 
below the number of carbon dioxide equivalents that the covered sources 
emitted in 1990. By 2050, it is down to 70 percent below the amount 
that the covered sources emitted in 2005.
    The bill directs EPA, at the beginning of each year, to allocate 
all of that year's emission allowances to various government entities, 
public-private partnerships, and covered sources. The largest share 
always goes to the Climate Change Credit Corporation, which is directed 
to auction off all of the allowances it receives.
    Once the initial allocating and auctioning has happened at the 
start of a year, the bill allows for unlimited trading of emission 
allowances. Because the allowances can be bought and sold freely, a 
market develops, and the price of an emission allowance becomes uniform 
across the market.
    A covered source that can reduce its own emissions at a cost lower 
than the market price will do so. If those reductions leave the source 
with more allowances than it needs to cover its own emissions at the 
end of the year, the source will sell the surplus on the market. A 
covered source that cannot reduce its own emissions without incurring a 
cost that exceeds the market price will purchase credits on the market 
in lieu of reducing its emissions. The market thus enables facilities 
to comply with the law at a cost lower than the one they would bear in 
the absence of trading.
    There is a lot more to the bill, particularly when it comes to 
controlling compliance costs for covered sources and using allowance 
allocations and auction proceeds to commercialize advanced technologies 
and protect low-income Americans from economic harm. But what I have 
described represents the core.
    I would like to conclude by mentioning some of the environmental 
and economic impacts that the EPA and Energy Information Administration 
computer models project for the bill.
    In July, EPA completed an analysis of the McCain-Lieberman climate 
bill, whose emissions reductions were somewhat less than what this new 
bill is projected to achieve. EPA's analysis found that the reductions 
in U.S. greenhouse gas emissions mandated by the McCain-Lieberman bill 
would--making conservative assumptions about the pace of emissions 
reductions in the rest of the world--keep the concentration of 
greenhouse gases in the atmosphere below 500 parts per million at the 
end of this century. According to the IPCC, keeping the atmospheric 
concentration of greenhouse gases below 500 ppm will avoid a high-risk 
of global warming that would cause severe impacts.
    Now the Clean Air Task Force has completed an economic analysis of 
the introduced version of America's Climate Security Act. The Clean Air 
Task Force uses a modeling firm called OnLocation, which in turn uses 
the Energy Information Administration's economic model. Incidentally, 
EIA reaffirmed its confidence in that model in a letter that it sent to 
Senators Inhofe, Voinovich, and Barrasso on October 29.
    The analysis of the introduced Climate Security Act using the EIA 
model finds the following:
    First, the price of an emission allowance would not exceed $50 
until after 2030. According to EIA's October 29 report to Senators 
Inhofe, Voinovich, and Barrasso, fuel switching from coal to natural 
gas would not make any economic sense until the price of an allowance 
exceeds $50. So one should not expect fuel switching to occur under 
America's Climate Security Act before 2030. By 2030, even the 
pessimists say we will have commercial deployment of carbon capture and 
sequestration technology for coal.
    The analysis goes on to project that U.S. gross domestic product 
would more than double by 2030. The projected increase is only 1 
percentage point lower than the increase projected in the absence of 
America's Climate Security Act.
    Electricity rates would, over 25 years, rise from about 8.1 cents 
per kilowatt-hour to about 9.8 cents per kilowatt-hour.
    Thus, this most recent modeling report on the subcommittee-reported 
bill confirms the modeling results that I entered into the record of 
the October 24 subcommittee hearing. In short, the costs are 
manageable. And, of course, none of these analyses take into account 
the staggering economic costs that we will face in this country if we 
fail to curb global warming.
    Thank you, Chairman Boxer.

    Senator Boxer. Thank you. You just note that instead of 
doing the usual first come, I went to Senator Lieberman first. 
If there is no objection, I will go down the seniority list, 
but in the case of Senator Klobuchar, who was here first, she 
has to leave at 10:00. So after the next speaker on the 
Republican side, if there is no objection, may I call on her 
next? OK.
    Then we will go to Senator Voinovich. Welcome, Senator.

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

    Senator Voinovich. Thank you very much, Madam Chairman.
    Climate change is a serious and complex issue that deserves 
our full attention. Madam Chairman, I acknowledge your 
commitment to timely legislation. But the abbreviated process 
by which this legislation is moving I don't believe is 
conducive to good public policy.
    Moreover, it is not in keeping with Senate precedent for 
acting on complex legislation or with the standards of courtesy 
by which this body traditionally operates. Consideration of 
legislation of this magnitude, which will touch on every aspect 
of our lives, requires a thorough vetting by the Committee of 
jurisdiction before moving forward. Senate 2199 was introduced 
only a few days ago on October 18, 2007. It is a lengthy, 
complex bill that has major implications for our economy, our 
energy security, our environment and our citizens.
    Senator Lieberman's subcommittee held a single hearing less 
than a week after introduction with only one minority opposing 
witness. Then on October 31, the subcommittee was presented 
with substantive revisions to the bill, prior to a hurried-up 
markup. Now, just 7 days later, I am told that we will just 
have one more hearing next Tuesday before proceeding to a 
markup and a final vote on or before December 5. The pace of 
Committee action is unprecedented, and belies the significant 
impact the bill will have on the United States and 
international economies, the environment and our quality of 
life. Climate policy development necessitates more than 
political will. Members must be accorded the time to ensure the 
policy response is appropriately calibrated.
    At this point, it is not possible to assess the costs and 
benefits of this bill. We do not understand how this 
legislation impact on our GDP or the price, supply or 
reliability of electricity, gasoline and other commodities that 
millions of Americans depend upon every day. I am talking 
bottom line jobs. I am not aware of a credible analysis 
regarding the regressive impacts the legislation may have on 
the elderly, those on fixed incomes and those living in 
poverty, the most vulnerable in our society.
    We have no assurance that the bill's international 
provisions are adequate to ensure the effective participation 
of China, India and other developing nations. The very 
mechanism the bill advances to contain costs seems to be more 
the stuff of academic theorizing than scientific analysis. We 
have heard from no witnesses on the efficacy of the Carbon 
Board and its ability to protect the economy. Veiled allusions 
to the Federal Reserve Board only remind us of the decades of 
trial and error endured before that institution regularized its 
procedures.
    In fact, until being provided with today's testimony, we 
have been presented with no analysis of how these very 
important issues will be affected by the bill. While these 
analyses are helpful, as one might expect, the assumptions 
built into the analysis and their predict impacts are colored 
by their source. So the differences of opinion underscore my 
point: sufficient time has not been provided for members to 
thoroughly analyze the bill.
    At the very least, members should be provided with an 
economic analysis undertaken by an independent agency like the 
Energy Information Administration or the Environmental 
Protection Agency before moving forward. In the past, this was 
considered routine. Indeed, multiple analyses were run at the 
request of Senators Baucus, Carper, Chafee and Obama during the 
2003 to 2005 period when I chaired the Committee and we dealt 
with Clear Skies.
    I am asking that a letter that was sent to Senator Inhofe 
by those Senators be inserted into the record, because they 
said, we want analysis of all the bills before we do Clear 
Skies. We took the time. We had boxes of information, and that 
piece of legislation was like a pimple on the back-end of an 
elephant compared to this legislation that we are talking 
about, which is going to be the biggest elephant in terms of 
our economy, our future and dealing with the environment.
    So Madam Chairman, I think it is important that we 
understand the implications of the votes we take on our economy 
and environment and our respective States and Nation. This is 
serious business. Major organizations have major problems with 
this legislation. The American public deserves to know what 
implication it has for jobs on the vulnerable people that live 
in our society, on our ability to deal constructively with the 
issue of climate change and the speed with which we can move to 
get the technology to capture carbon and to sequester carbon, 
to make a difference.
    So I am asking that you slow it down. I know that Bali is 
coming up in December, and I know that some people would like 
to go with maybe a scalp in their hand for doing something. But 
Madam Chairman, this is too important. This is too important to 
rush it down the road. Thank you.
    Senator Inhofe. Madam Chairman, I would ask for a unanimous 
consent request to have four letters entered into the record 
expressing major concerns.
    Senator Boxer. Certainly.
    [The referenced material follow on pages 148-164.]
    Senator Boxer. Also, I understand that your side would like 
to have Senator Bond be the next Republican after Senator 
Klobuchar.
    Senator Voinovich, I don't think Clear Skies ever became 
law. I think some people come here and they want to get things 
done. For the record, I will say that you don't have to tell me 
that this is important and that voices have to be heard, 
because I agree with you. That is why we have held 20 hearings 
on global warming. As a matter of fact----
    Senator Voinovich. But not on this legislation.
    Senator Boxer. If I might continue. We have held 20 
hearings on the various aspects of global warming and the 
various ways to move to address it. The fact of the matter is, 
we had leaders from State, local government, county government, 
mayors, who are already acting and we heard them. We heard from 
the biggest industries who put forward the very concepts that 
are embedded in this bill.
    So I would take issue to the fact that this is being 
rushed. We may never go to Bali because we may have it 
scheduled here in the Senate, that has nothing to do with it. 
The fact of the matter is, we already have a subcommittee bill 
to go with to Bali and show how we are moving in a bipartisan 
way. That has nothing to do with it. The fact is, this is an 
urgent problem.
    Now, not only have we had 20 hearings on global warming, 
but we have had, as you pointed out, a subcommittee hearing on 
the legislation, a markup on the legislation where over 20 
amendments were filed, and many of them discussed and voted on. 
We have planned two legislative hearings in the full Committee 
on this legislation; two members briefings, one of them I hope 
you will be at this afternoon on this legislation--good. In 
addition, we have daily briefings for individual staff members 
of our colleagues, where my staff is available. I personally am 
meeting with every single U.S. Senator on this Committee who 
wants to meet with me, so we can discuss the matter as deep as 
you want to go. If you are interested in amendments, we welcome 
that. We want this to be a very transparent process.
    So I would only say to you that I disagree with what you 
are saying. We are not rushing this through. We are doing this 
in the right way. I think if you disagree with the bill and you 
don't want to have a bill, I respect that. But I don't think 
that you should criticize the fact of the way we are getting 
this done. Because I think we are listening to members. We 
received a letter from you and other Senators demanding more 
hearings. We put those hearings on as a show of respect. If you 
want to have more briefings, we will have more briefings. We 
will brief every single day.
    I know Senators Lieberman and Warner's staff are ready to 
discuss this. We have invited--so many of your staffs have been 
doing such a great job on that.
    Senator Inhofe. I have to correct you on one thing, Madam 
Chair.
    Senator Boxer. I will yield to you when I complete.
    Senator Inhofe. All right, that is good.
    Senator Boxer. So my point is, you want to debate whether 
or not we should have legislation, but don't bring up Clear 
Skies. That is a failure. That never got done. I am a Committee 
chairman that wants to work with each and every one of you to 
get something done. The American people are tired of the 
partisan bickering. They are tired of us not getting anything 
done. They see this issue coming at them. They are very 
concerned about it. I think the fact that Senators Warner and 
Lieberman reached out across the aisle to bring us a bill that 
is very carefully thought out and didn't just come out of the 
blue, I mean, these provisions in here have been discussed for 
years. Cap and trade system is already in progress in America 
on acid rain.
    So I just wanted to take the strongest objection to your 
points of view. I respect you, I really do. But I don't agree 
with what you are saying.
    Senator Inhofe, I will be happy to give you equal time.
    Senator Inhofe. No, I don't want equal time, because I want 
to get down to the Floor and get this thing done. But it has to 
get in the record that our staff has been requesting meetings 
with your staff for as long as this bill has been discussed, 
and that has been denied. So hopefully today will change that.
    Senator Boxer. OK, I sure would like to see evidence of 
that, but that is--but we are ready to go.
    Senator Klobuchar.

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

    Senator Klobuchar. Thank you, Madam Chair, and thank you 
for holding this historic hearing and for the work you have 
done.
    I also wanted to thank Senator Lieberman and Senator Warner 
for the difficult work they have done.
    What brings me to this issue is just what I have seen in 
our State, where we have hunters in Hibbing, Minnesota, who 
have seen the changes to the wetlands. We have seen ski resort 
owners who have seen a 30 percent reduction in profits because 
there is not enough snow. I went to Greenland and saw first-
hand the melting of these humongous icebergs where the water is 
coming off like spigots and we have lost the size of Texas and 
Arizona combined in ice into the sea.
    With all due respect to my friend, Senator Voinovich and my 
fellow Slovenian, from my perspective of being someone new 
here, we have waited too long. We have waited while States have 
moved ahead and ahead and ahead and developed their own 
standards, where 31 States have had to develop their own 
climate registry because we haven't done it on the Federal 
level. We have waited while wildfires are raging in California, 
and we have seen bills that are similar to this that Senator 
Lieberman and Senator McCain put out there.
    So I think we have studied this enough to know that there 
is a problem. You know, when Justice Brandeis used to talk 
about how States could be courageous and be the laboratories of 
democracy, we have let them do that. Now it is our time. We 
stood in that chamber yesterday while the French President 
stood up and talked about the history of this country and how 
we have been on the front line, taking up bold challenges. When 
he brought up climate change, I would say the vast majority of 
the Senators and the Congressmen stood up and cheered and 
yelled that we were going to do something.
    Well, the rhetoric is over and it is time for action. I 
know that this bill isn't perfect. I am sure there are things--
I would love it to be exactly like our State's law and I would 
love it to have all kinds of things that would promote more 
cellulosic ethanol and wind and specifically mention them. But 
it is not going to be perfect for every State.
    What this bill is is a strong, steady bill that brings in 
this idea of cap and trade that worked so well with reducing 
acid rain. It is going to at least give some direction to 
business to invest with certainty to make the investments that 
we need to get us to where we are so we can lead the world 
instead of just following the rest of the world with investment 
in alternative technology and to be a leader in this new green 
revolution and energy independence. I know there are issues we 
should address, to look at how the climate change evolves and 
if there are going to be some changes in the future and we 
should look back at it to have the proper incentives for clean 
energy.
    But basically, we need to start somewhere, and we need to 
get a bill going. I am not one that believes that we should 
wait until after the Presidential election to act on this. I 
have seen that water coming off those icebergs. I have seen 
what the people in my State see. I have seen the courageous 
acts of leaders across this country, governors, Republicans and 
Democrats, who have been willing to take on this issue. So I 
just don't believe we can wait any longer, and we need to move 
now and I thank Senator Lieberman and Senator Warner for taking 
the lead on this.
    Senator Boxer. Thank you, Senator.
    Senator Bond.

 STATEMENT OF HON. CHRISTOPHER S. BOND, U.S. SENATOR FROM THE 
                       STATE OF MISSOURI

    Senator Bond. Madam Chair, my sincere thanks to you, the 
Ranking Member and my colleagues for allowing me to go forward. 
It is strange being this far down on the table, but I came 
early and appreciate the chance to comment.
    Make no mistake, I support cutting carbon emissions. But 
there are many ways we can cut carbon emissions without cutting 
family budgets, and devastating sectors of America. We have the 
solutions available now, aggressive but achievable CAFE 
standards, a clean portfolio standard, wind, solar, hydro, 
tidal and zero carbon nuclear power, low-carbon biofuels and 
zero carbon nuclear plus capturing carbon emissions, cleaning 
up coal and getting sequestration of that carbon.
    But when I look at the bill proposed by my very good 
friends for whom I have high respect, the Senator from 
Connecticut, the Senator from Virginia, I say this is a very 
problematic bill, among others, for farmers. It is a long and 
complicated bill with many detailed provisions. Staff is still 
struggling to understand it. Every time we peel back the onion, 
we find another layer. Whether the consequences of the 
provisions are intentional or not, vulnerable families, workers 
and farmers caught in its cross-hairs will feel very real pain.
    We are talking about a farm bill on the Floor today. I hope 
nobody makes the mistake of thinking that this cap and trade 
carbon emissions limitation bill won't have a heavy impact on 
farmers. Now, the bill has tried to provide some relief to the 
stakeholders, as we often do around here, in this case with 
free carbon allowances. But no farmer should fail to understand 
that the farm costs of Lieberman-Warner far outweigh the 
benefits. They will suffer record high fertilizer prices. I 
have already pointed out they will go even higher under this 
bill. For years, ammonia fertilizer that puts the nitrogen, the 
N factor, it used to cost farmers $250 a ton. No one thought it 
would break $400. Now it is seeing $500.
    I buy a little bit of fertilizer for my operations. I have 
seen the Triple 13 price go way up because of the cost of the 
nitrogen fertilizer. Not even corn at $6 a bushel can support 
where fertilizer prices are heading. The bill before us will 
make more expensive fertilizer's main ingredient, natural gas. 
But electric utilities competing for natural gas can pay higher 
natural gas prices, passing that along to their consumers. I am 
one of the elderly Midwesterners who has to pay those bills. 
But there are a lot of people who have a lot of problems 
meeting those costs.
    But they buy up natural gas, we drive natural gas-using 
industries offshore and the jobs they create. Foreign 
fertilizer imports are coming in from cheap natural gas 
countries like China, Russia and the Persian Gulf. But they 
have already risen to more than half our supplies.
    Now our farmers are being dependent on Persian Gulf 
imports. Farmers will face much higher fuel costs to run their 
trucks, higher drying costs and higher transportation costs to 
get to the market. The bill attempts to buy off family farmers 
by allocating them Ag and forestry sequestration allowances, 
but the effort falls far short. The total number allocated will 
fall 70 percent by 2050. The amount actually reaching farmers 
is unknown since they must share with forestry. Also it is 
unknown whether active farmers can even continue qualifying 
projects that have to show long-term mitigation benefits.
    How are we going to get our food supplies? Farmers 
receiving allowances will still be deluged with higher 
fertilizer costs, transportation costs and higher heating. The 
Warner-Lieberman Ag Offset program could decimate small 
communities. Desperate electric utilities, lacking technologies 
to cut emissions, would take full advantage of the bill's 
offset. They have billions of dollars to spend retiring crop 
land. Hey, we need that crop land for food.
    But the existing Conservation Reserve Program authorized by 
the Farm Bill took more than 30 million acres out of 
production. I support it, but that program has limits to 
prevent harm to the area because we have already seen harm. 
Because in the West and some parts of the Midwest, communities 
suffered when the economic viability of those serving the farm 
community were destroyed because of excessive CRP enrollments.
    This Committee has not considered these. I think that this 
is just one of the many problems that this bill causes. I 
appreciate the chance to share my concerns and we will be 
hearing more about them.
    I thank you, Madam Chair.
    Senator Boxer. Thank you so much, Senator.
    Senator Carper.

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

    Senator Carper. Thank you, Madam Chairman.
    Anyone in this country or the world who might be wondering 
why we haven't made more progress on addressing issues like 
climate change need only listen to the first 30 minutes of 
discussion in this hearing. We are divided on these issues. 
These are difficult issues, there is a lot of disagreement. It 
is not entirely partisan, but it certainly is strong and it is 
just difficult to overcome.
    I just want to start my comments by thanking my friends, 
Joe Lieberman and John Warner and our Chair for having the 
courage, temerity and the will to try to forge a compromise in 
the face of all these different opinions, conflicting opinions. 
It is not an easy thing to do, and I say this as one who sought 
to address this issue, at least with one sector, and that is 
the power plant sector in our country.
    Having said that, I want to be able to support this 
legislation. In order for me to be able to support this 
legislation, I need assurances that the concerns that many of 
you heard me state for years, that we also use this as an 
opportunity to address the emissions of sulfur dioxide, 
nitrogen oxide and mercury, we don't let this opportunity pass 
us by. I am also concerned, deeply concerned, with the way that 
we allocate credits under this proposal, because I believe we 
should allocate credits to those who produce clean energy. We 
ought to incentivize those who are producing the most 
electricity with the least amount of pollution. I have said to 
many of you, I just don't believe we are true to that principle 
here. If we, in my view, for me to be able to support this 
legislation, I need assurances that that will be addressed, 
too.
    I come from a little State on the East Coast, about 100 
miles long and about 50 miles wide at our widest point. 
Delaware and other States along the mid-Atlantic, along the 
East Coast, we find ourselves at the end of the tailpipe, if 
you will, of emissions that are put up in other parts of our 
country. As Governor of Delaware, when we were fighting and 
trying to come into compliance with nitrogen oxide emissions 
and so forth, we literally, we are not in attainment in any of 
our three counties. We could almost close down our State, close 
down our industries in our State, not drive at all, and we 
would still have parts of my State that would not be in 
attainment for ozone.
    It is not our fault. The fault is the people who live in 
West Virginia, where I was born, the people who live in 
Virginia, where I grew up, the people who live in Ohio where I 
went to Ohio State, along with my colleague, George Voinovich, 
the people who live in Kentucky where my sister and her family 
live. They and other States are putting all kinds of stuff up 
into the air, nitrogen oxide, sulfur dioxide and mercury, that 
harms my State, not just my State, the health of people in my 
State, but other States along the East Coast, north and south.
    Delaware has the highest rate of asthma among children of 
any State. One out of every eight kids in my State suffers from 
asthma. I was principal for a day in a school in our State a 
couple of weeks ago, it is a wonderful program that we have. I 
stopped by a lot of classes. I also stopped off to visit the 
school nurse. I said, what kinds of problems are you hearing 
from kids, these are sixth, seventh, eighth grade kids. I 
thought it might be attention deficit disorder, I thought it 
might be flu, I thought it might be this or that. She said, it 
is asthma. We have so many kids here who have asthmatic 
attacks, who have to take medicine every day, who go to the 
hospital. In my State, it is not just by dozens or scores or 
hundreds, it is thousands of kids who are going to be 
hospitalized some time during the course of this year.
    With respect to sulfur dioxide emissions in this country, 
24,000 Americans will die, 24,000 Americans in this country 
will die from sulfur dioxide emissions this year just because 
of those emissions from power plants. Not the other sources. 
Two-thirds of the sulfur dioxide emissions come from power 
plants. Twenty-four thousand, 24,000 this year, over 400 this 
week, today before we go to bed tonight, some 60 more will die 
because of sulfur dioxide emissions.
    We have another chart that shows mercury. I eat a lot of 
fish, maybe you do, too. We encourage people to eat fish 
because it is good for their health. But if you happen to be a 
woman who is going to become pregnant, that child that you are 
going to give birth to may not be so fortunate. Because we know 
in this country there are going to be 600,000 plus kids that 
are going to be born this year to moms who have very high 
levels, carry high levels of mercury, in many cases because of 
the fish that they ingest.
    A large part of that mercury, about 40 percent, I think the 
largest source of mercury pollution in our country comes from 
power plants. For us to ignore the threat to our health caused 
by sulfur dioxide emissions, nitrogen oxide emissions and 
mercury emissions, for us to fail to take this opportunity to 
address them I think we would make a big, big mistake.
    Again, I want to support this legislation. I hope to be 
able to support this legislation. Madam Chair, I have 
indicated, and I appreciate your willingness to meet with all 
of us.
    I will close with this. I appreciate the fact that we have 
tried to address the transportation sector here, and its 
contributions to our problem and to our solution. I would hope, 
and as I said to Chairman Boxer yesterday, I would have us 
focus on three things with respect to transportation. One, 
clean fuels. Two, clean cars. Three, other options to travel 
around our communities, around our States, around our country, 
other than our cars, trucks and vans.
    The last thing I would say, there is going to be an 
amendment on nuclear. I am an advocate of nuclear power. I 
think nuclear energy is part of the solution. We can have a 
nuclear amendment that is offered in Committee or on the Floor 
that actually addresses clean energy and moves us closer to 
clean energy in reducing these emissions, or we can just have a 
nuclear amendment that frankly doesn't move us in the direction 
that we need to go. I think it is important that those of us 
who think that nuclear is part of the solution that we come up 
with a compromise that actually makes sense and gets the job 
done.
    Thank you, Madam Chair.
    Senator Boxer. Senator Carper, thank you for your 
thoughtful presentation today.
    Senator Vitter.

STATEMENT OF HON. DAVID VITTER, U.S. SENATOR FROM THE STATE OF 
                           LOUISIANA

    Senator Vitter. Thank you very much, Madam Chair. I will be 
brief and submit the rest of my statement for the record.
    I certainly agree with you and others that this is an 
extremely important issue. I also agree with you and others 
that the stakes are very, very high. That is exactly why we 
need to make sure we get this right. I also agree with Senator 
Voinovich and others on this side of the Committee who have 
expressed grave concern about this accelerated process with 
regard to this particular bill. Because I don't think it allows 
us the opportunity to get it right.
    Yes, there has been discussion of global warming for years 
in Committee hearings. That is not the same at all as hearings 
specifically on the provisions of this very voluminous and 
complex bill. So I would again urge the Committee to have more 
hearings specifically on this bill, so we can try to get it 
right.
    I don't think there is any State represented here that has 
more at stake, quite frankly, than my State of Louisiana. 
Climate change, global warming, particularly to the extent it 
can affect sea levels, could have an enormous impact on coastal 
Louisiana, the most coastal State, in many ways, of any of our 
States. At the same time, if we act rashly or unwisely and do 
things with regard to our present fuels that aren't justified 
and that don't produce results, Louisiana will be among the 
first States to feel that hit to the economy.
    So we do have to get it right. We do have to figure out 
what will have an impact, what the science supports, how we 
intelligently deal with this issue. I am just very, very 
concerned that we are taking as big and complex and important a 
bill as I have ever seen in the Senate and rushing through with 
regard to it, acting on sound bites, in my opinion, not 
science. Perhaps good politics, but not sound policy.
    I am eager to hear from the witnesses. I am eager to hear 
from more witnesses, so that we can look carefully at a very 
long, complex bill and try to get it right. But I do again 
underscore that I believe we need more time and hearings 
specifically about this bill in order to do that.
    Thank you.
    Senator Boxer. Thank you, Senator.
    Senator Lautenberg.

 STATEMENT OF HON. FRANK R. LAUTENBERG, U.S. SENATOR FROM THE 
                      STATE OF NEW JERSEY

    Senator Lautenberg. Thank you, Madam Chairman. I begin by 
thanking you for holding this hearing. Your leadership has 
spurred action on so many issues of great concern, and we are 
grateful to you for your activity.
    I also want to thank Senators Lieberman and Warner for 
their determination and diligence on this legislation and for 
making changes and improvements as the bill moved through our 
subcommittee. We have to face it: one can't find a more 
critical environmental issue facing this Committee or our 
country or our world than fighting global warming. We need 
legislation that faces this problem head-on.
    Otherwise, I believe that our descendants, as nearby as our 
children and certainly our grandchildren will never understand 
our unwillingness to deal with this situation. We worked very 
hard in this Subcommittee to improve the good start that 
Senator Lieberman and Senator Warner put forward. Together, we 
enlarged the reductions and emissions from 10 to 15 percent by 
2020. By expanding the bill to include natural gas, it 
protected States' rights to go beyond Federal benchmarks and 
created a process for independent scientists to continually 
evaluate whether we need stronger laws to fight the effects of 
climate change over the long term.
    But if we want our actions on global warming to match the 
goals of science, there is still more work that has to be done 
on this bill. The Union of Concerned Scientists has made it 
clear that true leadership against global warming means the 
United States should reduce emissions by at least 80 percent by 
2050. I hear our friends who say they are concerned about jobs 
and the economy and so forth. But my friends, there is an 
endangered species out there. It is called human beings. Unless 
we get onto doing something about it, we will be looking back, 
yes, there will be plenty of jobs available, there just won't 
be enough people to do them.
    Despite these ominous warnings, the bill before us would 
achieve only a 60 percent reduction by 2050, less than what is 
needed to fully protect the world we are accustomed to. We need 
to reach further to meet the long-term standard. The bill also 
gives away cost-free permits for industry to emit greenhouse 
gases until 2035, a full 28 years from now. We need to move to 
a polluter pay system much earlier, and our Committee should 
act aggressively to move this date forward. Moving to a 
polluter pay system will make it a smart business decision for 
companies to reduce their greenhouse gas emissions and develop 
new, cleaner technologies.
    Finally, we should think twice before giving out the 
majority of free permits to companies with the highest level 
emissions, such as coal power plants, to encourage companies to 
go green. Some of these permits should be given to clean 
companies, such as those that promote solar power and other 
energy sources that have fewer or no emissions.
    Again, I think we are off to a good start with this 
legislation. I am hopeful that this bill can be improved as the 
process moves forward. Before closing, Madam Chairman, I want 
to respond to our friend Senator Inhofe, who said cap and trade 
don't work. Well, I will tell you, it had a heck of a good 
effect, positive effect on acid rain. So the system works, and 
we have to be able to use it carefully, but not to ignore it. 
Thank you very much.
    Senator Inhofe. Well, since he referenced me, let me just 
respond to that. Cap and trade in acid rain is not the same 
animal that we are talking about, the cap and trade today. The 
example that we have, the model that we have is in Western 
Europe, of 15 countries, only 2 are able to meet their 
expectations or their goals.
    Senator Lautenberg. I said what I said, thank you.
    Senator Boxer. Thank you, Senator.
    Senator Inhofe. Yes, and I said what I said, thank you.
    Senator Boxer. Yes, you did.
    Senator Lautenberg. Are we going to have a tit for tat?
    Senator Carper. This reminds me of Popeye the Sailor Man. I 
am what I am.
    [Laughter.]
    Senator Boxer. Well, at the next briefing, I will hand out 
spinach to everyone.
    Senator Barrasso.

STATEMENT OF HON. JOHN BARRASSO, U.S. SENATOR FROM THE STATE OF 
                            WYOMING

    Senator Barrasso. Thank you very much, Madam Chairman, and 
thank you for your kind words at the beginning of this hearing. 
As I have stated before, the debate on global warming can't be 
ignored, can't be rejected. We must adapt, we must make 
changes, we must be ready and we must be ready to put our money 
where our best hopes are. A number of us had a chance to sit 
down this morning, Madam Chairman, with Thomas Friedman, the 
author of the book, The World Is Flat. He is working on his new 
book, and it is on energy and a greener planet.
    I will tell you I believe we cannot simply though shut off 
our current traditional energy sources by setting unrealistic 
goals for the industry in my home State, which for the most 
part is carbon-based but also we are committed to renewables in 
our State of Wyoming, where we have been blessed with 
incredible resources and can do a lot to help our Nation become 
energy independent.
    There is a story in today's Wall Street Journal, page A4, 
and it is called, Why Coal Is To Get Additional Attention. The 
International Energy Agency says that with tightening energy 
supplies and a surge in global warming emissions, as China and 
India burn more coal to power their booming economies, it talks 
about China and India, and I am going to go through this 
because of why I believe it is important that we in America 
today invest in the technology. Because no matter what we do in 
America, if we don't have the technology to apply worldwide, we 
are not really going to solve the problem that we are aiming at 
solving, which is a world that by the year 2030 will be 
consuming 55 percent more energy than it is now, with almost 
half of that growth because of soaring demand in China and 
India.
    Coal share is expected to jump to 28 percent of global 
consumption from 25 percent in the next 25 years. There are 
tables that talk about as China's and India's demand for coal 
continues to increase, that will drive up global CO2 
emissions. There are some charts. China and India will account 
for 80 percent of the growth in coal consumption over the next 
two decades. Then it goes on to talk about renewable sources, 
and it says, they will grow, but all renewable energy sources 
will remain a fraction of total energy use globally in 2030 at 
about 10 percent, unchanged from the percentages of today.
    So I look at the current language of the bill, I have 
concerns about the ability of coal-fired power plants to be 
able to capture 85 percent of the carbon emissions. That is not 
scientifically feasible today and I was pleased at the 
subcommittee to hear Senator Lieberman say that he is 
interested in working with me and stair-stepping to that point 
over a number of years going into the future. Because we need 
to innovate, we need to prepare for changes, but we need to 
retain our ability to use the power we need today, so that the 
companies have the resources that they need to develop the 
clean energy technologies that we will need for tomorrow. We 
need to continue to invest in improving existing energy 
industries today, and that is going to create the new jobs and 
strengthen the economy.
    I do worry about unintended consequences that they will 
have, that energy limitations will have on our economy. There 
was a Washington Post article yesterday that speaks to the high 
energy costs that the average taxpayer will have to pay under 
certain legislation. But I want to reiterate that I do want to 
address the problem of global warming. We can get there, but 
only if we show China and India that we can pass a bill that 
strengthens our economy, creates jobs, and develops the needed 
technology that can be used worldwide to continue in our fight 
for a cleaner environment.
    So I would like to continue to work with the members of the 
Committee on achieving these objectives. Thank you, Madam 
Chairman.
    Senator Boxer. Thank you, Senator, very much.
    Senator Cardin.

  STATEMENT OF HON. BENJAMIN L. CARDIN, U.S. SENATOR FROM THE 
                       STATE OF MARYLAND

    Senator Cardin. Thank you, Madam Chair, and let me thank 
you for your leadership on this issue and getting us to where 
we are today. I want to thank Senator Lieberman and Senator 
Warner for their extraordinary leadership and patience as we 
try to put together a bill that will really speak to the 
priorities of our Nation and have an excellent chance of being 
passed. The American Climate Security Act gives us our best 
hope to pass meaningful climate legislation and once again put 
America back into the leadership role on the world stage.
    I am proud to be an original co-sponsor of this 
legislation. The cap and trade program at the heart of the bill 
is an effective method to drive down emissions permanently and 
cost-effectively. By harnessing the power of the marketplace, 
the system puts America's greatest strength, our economy, to 
work on the Nation's most important long-term environmental 
issue.
    I must tell you, Madam Chair, I think this issue represents 
more than just an issue of climate change. It is a matter of 
national security for us to use less fossil fuels, so that we 
can have control of our own destiny on energy, we don't have to 
finance countries that disagree with our way of life. I think 
it is in our economic interests to deal with this issue.
    So I think it is a win-win-win situation, it allows us to 
pay proper attention to our environmental concerns as well as 
dealing with our energy independence and the security issues.
    The American Climate Security Act is based on two important 
pillars. By setting a firm and declining cap on emissions, we 
begin to address the underlying problem of global warming and 
the emission of greenhouse gases into the atmosphere. The bill 
keeps getting better in this regard. It started with the 
announcement of an outline, we then saw the text of the bill, 
which I think was an improvement. We then had the Committee 
markup, which was an improvement. It keeps getting better, 
Senator Lieberman. I applaud you for these efforts.
    We are not quite done yet. I think we can still improve 
this bill and I hope that we will improve this bill. I hope 
that in two respects that we will be able to improve the bill. 
First, it is clear to me from the scientific information that 
is available that we should strive for an 80 percent reduction 
by the year 2050. I hope that will be our goal.
    Second, it seems to me that from the inception of the caps, 
we would be better off auctioning the credits to the utilities 
and the companies, which would give us not only revenue coming 
in earlier, putting market forces to work earlier, but it would 
also give us the financial wherewithal to deal with the 
problems of low and moderate income consumers and the cost of 
energy, as well as developing the types of technologies and, I 
hope, good jobs that Senator Sanders talks about frequently, 
that will be available as a result of new technology.
    So I think for all those reasons, I would hope that we 
would get to an earlier start, a more ambitious goal, and to be 
able to really put our market forces together earlier. I think 
this bill is a great bill, a great start. It restores America's 
international leadership on this issue and I am proud of the 
work of our Committee.
    Thank you, Madam Chair.
    [The prepared statement of Senator Cardin follows:]

      Statement of Hon. Benjamin L. Cardin, U.S. Senator from the 
                           State of Maryland

    Madame Chairman, thank you.
    First of all, let me reiterate my congratulations to Senator 
Lieberman and Senator Warner for the great work they have done in 
crafting the bill we have before us today.
    America's Climate Security Act of 2007 gives us our best hope to 
pass meaningful climate change legislation and once again put America 
back into a leadership role on the world stage. I am proud to serve as 
an original cosponsor of the bill.
    The cap and trade program at the heart of the bill is an effective 
method to drive down emissions permanently and cost-effectively. By 
harnessing the power of the market place, this system puts America's 
greatest strength--our economy--to work on the nation's most important 
long-term environmental issue.
    And climate change represents more than just an environmental 
issue. Our energy independence and our national security are at stake 
as well.
    We need to rid ourselves of a dangerous reliance on imported oil. 
Oil prices now hover around $100 a barrel.
    The amount of our national fortune that is going to regimes that 
stand in opposition to American values is vast and continues to grow. 
This bill can help us break that dependence.
    Reducing our dependence on foreign oil will strengthen American 
security. Reducing the threats posed by climate change will also 
improve American security.
    As defense analysts have pointed out, social disruptions related to 
sea level rise, storm severity, and other climate changes increase the 
risk for instability across the globe. The world is already perilous 
enough.
    This bill presents a way forward.
    America's Climate Security Act is based on two important pillars. 
By setting a firm and declining cap on emissions, we begin to address 
the underlying problem with global warming: the emissions of greenhouse 
gases into the atmosphere.
    The bill keeps getting better in this regard. The outline announced 
in August pointed us in the right direction. The text of the bill when 
it was introduced was further strengthened in this regard, with 
somewhat tighter caps. The bill reported out of the subcommittee moves 
us even further in the right direction.
    We aren't there yet. The best scientific minds in the world tell us 
that we need to reduce emissions by 80 percent by 2050. We should not 
shy away from that benchmark. In fact, we should embrace it. The stakes 
are simply too high for us to come so far, but still fall short of what 
science demands.
    Similarly, the cap-and-trade program in the bill also keeps getting 
better. But I am a firm believer in the power of the American economy 
and in American ingenuity. Rather than giving away allowances to 
certain sectors of the economy for decades, we should adopt a full 
auction of all pollution credits beginning immediately, and put those 
proceeds to the public uses outlined in the bill:
     to cushion cost increases to low- and moderate-income 
consumers;
     to invest in the new 'green' jobs that will transform our 
workforce; and
     to manage our adaptation to changes in the natural and 
world landscapes.
    The legislation also provides some key incentives for energy 
efficiency. Today's witnesses will describe energy efficiency as the 
low-hanging fruit' that can help us get off to a fast start in reaching 
the objectives of this legislation. I want to focus on a specific 
energy efficiency technology that is available today and already 
reaping the kinds of rewards that the larger bill promises.
    The CO2-reducing potential of America's Climate Security 
Act will be enhanced by the deployment of a smart electric grid or 
``Smart Grid,'' which can lower electricity consumption by 10% and 
grid-related emissions by 25%. (DOE, EPRI Study).
    Since grid-related emissions are 40% of total CO2 
emissions in the United States, the reductions that a Smart Grid will 
allow are significant.
    Smart Grid is a 2-way, interactive, data-producing communications 
network that overlays the existing electric grid to transform every 
electrical outlet into a ``smart socket.'' This allows utilities in 
real-time to turn down millions of air conditioners, pool pumps and 
other appliances during times of peak demand to make. This control 
allows Smart Grid to make additional megawatts equivalent to those 
produced by new power plants, but at less cost to consumers and the 
environment.
    Smart Grid is being deployed today by a Maryland company to two 
million homes and businesses in Dallas, Texas.
    As we look ahead to a markup session, I hope that we will take a 
closer look at this successful example and focus on how we can provide 
the right economic signals to deploy these cutting-edge technologies 
sooner.
    This legislation is a major step forward for all of us who want to 
act now to curb the explosive growth in greenhouse gas emissions. It is 
comprehensive and bi-partisan and everyone agrees that this bill 
represents our best hope of enacting meaningful global warming 
legislation during this Congress.
    I will work to further strengthen this strong bill as it moves 
through this Committee and the Senate floor.
    I look forward to hearing from today's witnesses, and moving this 
landmark legislation quickly through the full Committee and on to the 
floor of the Senate.
    Congress and America need to once again establish our rightful 
place as world leaders. Thanks to Chairman Boxer, Senators Lieberman 
and Warner and their America's Climate Security Act, that time is now.

    Senator Boxer. Thank you, Senator Cardin.
    Senator Craig.

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

    Senator Craig. Madam Chairman, thank you very much.
    I don't fear at all the process you have set forward, as 
long as it is open, clearly transparent and allows a fair and 
responsible vetting of alternatives. My position has been 
consistent over the years, Madam Chairman, cap and trade is 
obsolete in its approach toward greenhouse gas reduction. It 
hasn't worked. I don't think it will work. This bill clearly 
distorts. If you are a coal State, you have the allocation. If 
you are not a coal State, you don't.
    My State of Idaho is the cleanest State in the Nation 
today, and we are proud of that. We get nothing but higher 
energy prices. There is no benefit for Idaho unless you design 
a system that is output-based. Therefore, entering this 
concept, the concept is flawed.
    What we are doing in an economy-wide way is simply 
transferring wealth. That does not stimulate the kinds of 
things that we need. When we were crafting EPAC05, I jokingly 
said, Madam Chairman, we ought to call that the Clean Energy 
Act of 2005. Why? Because what it did is now showing up in the 
marketplace. It stimulated nuclear, it stimulated cellulosic in 
the area of biofuels, and it has stimulated greatly 
efficiencies. That is where we ought to be headed, because in 
every one of EPAC05's issues and results, we are producing 
clean energy. We haven't penalized the consumer. We are not 
distorting the marketplace. We are driving ourselves, as we 
should, by allowing our Government to incentivize the 
marketplace toward cleaner energy.
    Now, I am sorry Senator Clinton isn't here today, because 
last week out in Iowa she did something that somewhat surprised 
me, and I was frankly--let me put it this way, Madam Chair, and 
I would wish your attention, Senator Clinton did something that 
surprised me and deserves to be complimented by it. I am going 
to hand around a chart that shows what Senator Clinton has 
proposed as it relates to climate change legislation from CAFE 
to portfolio standards to RFS, incentives, much paralleling 
what the current Administration is doing in some respects, and 
much paralleling what many of us on this side are doing in 
relation to driving the marketplace toward efficiencies and new 
and clean energy.
    So I applaud the Senator, I wish she were here today. I 
don't often compliment her. But she deserves to complimented 
when she gets it right. I find that it is most interesting that 
it is in many ways in conflict with the great piece of 
legislation that some are bestowing compliments on today that 
are driving us in the direction that this Committee thinks it 
is being driven.
    I would request of you, Madam Chair, a thorough analysis, a 
thorough analysis by EIA and by EPA of this legislation. We are 
going to request that. There should be a time of adequacy, so 
that we can thoroughly understand. None of us dispute the 
magnitude of the effort. None of us therefore dispute the 
magnitude of the impact of the effort if we get it wrong. The 
rest of the world is frustrated. They have tried and they are 
failing. It is only through new technologies and efficiencies, 
and incentivizing the marketplace to drive us in that 
direction, that we get there.
    This is not a time to rush to get it wrong. This is a time 
to think about and work at getting it right. Therefore, Madam 
Chair, I would respectfully request that the markup of 
Lieberman-Warner be postponed until we have the effective and 
responsible analyses by those, shall we say, impartial groups 
and impartial observers, so that we can look at this through 
the eyes of somebody other than those of us who by our 
character tend to be a little bit more political than we tend 
to be policy. In this instance, I would hope that we could back 
off, take a deep breath and allow ourselves to analyze what we 
are doing as we do it.
    Thank you, Madam Chair.
    Senator Boxer. Thanks, Senator.
    Since you asked something of me, I will respond to you. We 
haven't even announced when the markup is. So postponing a 
markup that hasn't even been announced doesn't even really make 
much sense.
    The other thing is, we are going to have so many briefings 
here, we are going to make it so easy for members and staff 
that I hope you will feel very comfortable with that. I also--
--
    Senator Craig. Well, Madam Chair, let me say this----
    Senator Boxer. Let me finish first, and then I'm happy to--
--
    Senator Craig [continuing].----asking you to postpone a 
briefing for me does make sense. I am sorry you misinterpreted 
me.
    Senator Boxer. Sir, sir, I didn't interrupt you and I am 
going to finish my comments----
    Senator Craig. Of course you will.
    Senator Boxer [continuing].----and then I will be glad to 
call on you. Thank you very much.
    Senator Clinton is also on Sanders-Boxer. So let's not 
distort Senator Clinton's strong views that we need global 
warming legislation. Yes, she is for all the other things we 
are all for. But she is also for global warming legislation. I 
just wanted to set the record straight on that.
    In any case, Senator, I went back and looked at the record, 
the time before long ago when we passed the great landmark 
environmental legislation. We heard the same thing then: don't 
do it, it is not time, we need more information. We all know 
what a slow dance is around here. We weren't born yesterday.
    So there seems to be a very interesting chorus over there, 
let's slow it down, let's slow walk it. On this side of the 
aisle, and I think Senator Warner believes this, and I am going 
to have a statement e-mailed up and the staff is putting it 
into writing. We think the time is now to act. But we certainly 
will give your side of the aisle on this particular request 
more consideration. We have added hearings, briefings, we are 
happy to do that.
    We think this legislation, this Lieberman-Warner bill, as 
it is being improved, really as it goes through, deserves to be 
examined and looked at. We are very proud of it. So we will be 
happy to do that.
    Senator Craig, did you want to respond to my comment?
    Senator Craig. Thank you, Madam Chair. Your courtesies are 
always appreciated.
    Senator Boxer. Senator Sanders.

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

    Senator Sanders. Thank you very much, Senator Boxer, and 
thank you very much for your leadership.
    We have come a long way in a year, and I think you, Senator 
Boxer, are one of the people responsible for turning this 
debate around. Because all over the world, as people grapple 
with the cross of global warming, they are wondering what is 
happening in the United States. Thankfully, we are beginning to 
at least in a serious way begin to address the problem. As I 
think most members of the Committee know, I have serious 
problems with this legislation, because I believe it does not 
go far enough.
    I don't think it is asking too much from the American 
people to ask why it is that we are not listening to the 
scientific community and doing what they say needs to be done 
to avert the enormous tragedy that faces us if we do not get 
our act together. What the scientific community has said over 
and over again is, we made a mistake. We under-estimated the 
problem of global warming and the severity in which this 
problem is surfacing. Anyone who looks at the front pages of 
the paper any given day knows that they are right. They are 
saying, we have to be more aggressive, not less aggressive.
    Colleagues, what I beg of you, we cannot continue to do 
politics as usual. We need to work this issue without old-
fashioned deal making. The time is too late, the planet depends 
upon bold action. When the scientists are telling us that at 
the least, if we are going to avert a tragedy, with a 50-50 
chance, we need to reduce greenhouse gas emissions by 80 
percent by the year 2050, to my mind, the 63 percent at most 
that Lieberman-Warner does just doesn't go far enough. We have 
to do better than that.
    There are a number of other issues within this bill dealing 
with the auction that I think Senator Carper and Senator 
Lautenberg touched on. I would echo their concerns about the 
need to say to polluters, I am sorry, you can't have 20 or 25 
years to continue to destroy the environment. You must start 
paying if you are going to pollute.
    I also have concerns about the new entrants provisions, 
which gives support to existing fossil fuels, but do not 
encourage the new sustainable energies.
    Mostly I want to spend these few minutes by saying that 
while there is a lot of bad news out there, there is some 
extraordinarily good news. My view, in fact, is we know how to 
reverse global warming. It is out there. Right now, in the 
southwestern part of this country, and I know Mr. Darbee, who 
is head of Pacific Gas and Electric, he will speak to this, we 
are making great strides in energy efficiency. The potential 
out there is enormous. Cities, my city of Burlington, VT, 
States like California, making great strides. One of the major 
concerns I have about this piece of legislation is that when 
you look at the auction beneficiaries, while there is a big pot 
of money for zero and low-carbon energy technology, there is 
not one nickel specific to energy efficiency, which everybody 
knows is the low-hanging fruit. We can make huge gains. Let's 
do that.
    Second of all, in terms of solar energy, Pacific Gas and 
Electric has signed a contract with an Israeli solar plant 
company which will produce 535 megawatts of electricity. That 
is a small nuclear power plant, zero greenhouse gas emission. 
They are estimating that the cost of that will be 10 cents a 
kilowatt hour, competitive day. The cost is going to go up 
minimally over the next 25 years. Let me quote from the Federal 
Government's own National Renewable Energy Lab. They are saying 
``The cost for concentrated solar power technologies are 
declining from approximately 16 cents per kilowatt hour to 
approximately 8 cents in the year 2050,'' 8 cents per kilowatt 
hour for non-polluting solar energy. It is sitting there. These 
plants cost about $2 billion apiece. If we put $20 billion into 
it, we can produce gigawatts of electricity, huge amounts of 
electricity. Why aren't we doing that?
    Wind is sitting out there. We have recently learned that 
there is a small wind turbine manufacturer who for $10,000 can 
produce a small wind turbine that can produce 40 percent of the 
electricity in a given home, $10,000. You subsidize that, as 
California is already doing, by $5,000, we could have millions 
of these turbines out there.
    So my main concern about this piece of legislation is we 
are not taking advantage of the technologies that are existing 
now. I don't know, Senator Barrasso, what the future of clean 
coal is. I don't know that. I am willing to explore it. But 
what I am telling you now is you don't have to spend hundreds 
of billions of dollars on wind and solar to determine whether 
it is going to work. It is working today. We make a grave 
mistake by not working with those utilities like Pacific Gas 
and Electric who are already doing the right thing.
    So let me just conclude by saying, we know the answers. 
They are sitting out there, cities, towns, States are already 
doing it. Utilities are beginning to do it. Let us work with 
those, we can make giant steps forward in saving the planet. 
Thank you, Madam Chair.
    Senator Boxer. Thank you, Senator.
    Just a couple of items, I would ask unanimous consent to 
place Senator Isakson's full statement into the record.
    [The prepared statement of Senator Isakson follows:]

  Statement of Johnny Isakson, U.S. Senator from the State of Georgia

    Thank you Madam Chairman.
    In July 2007, I took a two-day trip to Greenland with members of 
the Senate Environment and Public Works Committee to view the effects 
of climate change and to learn more about its impacts on the ice and 
glaciers of the world's largest island. My visit to Greenland was 
informative to see firsthand what we all hear so much about. What is 
occurring in Greenland today began 14,700 years ago at the peak of the 
last ice age.
    Two brilliant scientists who accompanied us, Dr. Richard Alley of 
Penn State and Dr. Minik Rosing of Denmark, both confirmed that the 
climate has changed naturally in the past, including warming about 
14,700 years ago as the last ice age ended. They told me that most 
scientists believe that at least some of the recent warming has been 
accelerated by carbon. However, they could not say for sure by how 
much.
    With those facts as a backdrop, and given the uncertainty in the 
science behind the causes of climate change, I believe that we should 
take proactive steps, both personally and as a nation, to reduce our 
emissions footprints. One of those steps is addressing the carbon issue 
in the context of promoting all sources of renewable energy. You cannot 
reduce carbon levels without reducing the burning of fossil fuels, and 
you cannot do that without building nuclear power plants and furthering 
the development of cellulose-based energy.
    My state of Georgia already enjoys the benefits of nuclear power 
from Plant Vogtle, which is applying for one of the first Nuclear 
Regulatory Commission licenses for reactor expansion. Our state has the 
greatest supply of cellulose in our forest products industry.
    Our country has responded in the past to challenges with innovation 
and incentives. The issue of carbon reduction in our nation should be 
approached in the same way and through the same processes. Reducing the 
burning of fossil fuels without developing all our renewable resources 
would be a mistake.
    I commend Senators Warner and Lieberman and their staff for the 
bipartisan way in which they came together, and for the work they have 
done in attempting to tackle a tough issue. They are to be commended 
for their efforts. I do have concerns, however, that this legislation 
puts mandates on our economy without providing tools to meet those 
mandates.
    For example I would have preferred to see a bill that is 
comprehensive in not only the requirements for reductions in carbon, 
but also in offering incentives and methods on how to get there. I see 
no specific mention of nuclear power in here. I see no specific 
incentives for retrofitting coal fired power plants so that power 
generators can keep existing baseline capacity. I see no mention of 
programs to help America's manufacturers retool their equipment and 
processes to meet these mandates. In fact, Senator Lieberman in the 
Subcommittee markup said: ``It's hard to imagine that [Lieberman-
Warner] will not cost-over time--these two sectors (electric power and 
industrial), hundreds of billions of dollars to comply with the demands 
of this bill,''
    To Senator Warner and Senator Lieberman's credit, they have pledged 
that they will work with me and others on the Committee who share these 
concerns. I appreciate their willingness to work with us, and look 
forward to doing so through this process. However, I am extremely 
concerned that the additional energy costs in this bill will put a 
significant burden on Georgia's hard working families.
    In closing, I am concerned that, in a rush to judgment, this 
Committee and the Senate will enact measures that will have dramatic 
negative effects on our manufacturing sector while also causing 
significant increases in the cost of power generation. As members of 
the Environment and Public Works Committee we have a very important 
responsibility. We should work to ensure that we enact common-sense 
measures designed to address climate change that have been thoroughly 
debated, while ensuring that the economic impact of these measures on 
our economy is not adverse.
    I yield back.

    We have a message from Senator Warner, he wanted to prove 
to us he has been watching this debate. Here is what he said: 
``This Committee had a chance to hold legislative hearings on 
the Climate Stewardship Act, that was the McCain-Lieberman 
bill, and did not. We are making up for lost time in this 
Congress. Senator Warner.''
    Senator Alexander, I understand you have laryngitis. Do you 
have enough left to say anything at all? No. Well, we will put 
your statement into the record. We need you back, so take care 
of your throat.
    [The prepared statement of Senator Alexander follows:]

 Statement of Lamar Alexander, U.S. Senator from the State of Tennessee

    I believe that there is a scientific consensus that human activity 
is having a significant influence on global temperature increases. Most 
of the warming since 1965 is very likely to have been caused by human 
activity. In other words, global warming is real.
    Since my first year in the Senate--2003--I have introduced 
legislation to put a cap on carbon emissions from the first of these 
large sectors, electricity power plants. These plants produce 40% of 
the carbon dioxide and 33% of the greenhouse gases in the United 
States.
    I will now broaden my legislation to include two other major 
sectors of the economy:
    1. A low carbon fuel standard for the fuels used in transportation. 
Transportation produces another one-third of America's greenhouse 
gases.
    2. An aggressive approach to building energy efficiency. I am still 
working on these pieces.
    Tailoring our approach to just these three sectors--power plants, 
transportation, and buildings--would cover about two-thirds of U.S. 
greenhouse gas emissions.
    This compares very favorably with the Lieberman-Warner bill's 
coverage of the economy which at introduction was described as capping 
75% of the economy (As reported by the subcommittee, the bill's 
coverage is broader because it now caps natural gas producers).
    As we implement laws reducing emissions from these three sectors, 
we can learn more and move on to the other sectors in the future.
    A sector-by-sector approach minimizes guesswork. For example, the 
United States has 16 years experience with a cap-and-trade program 
designed to reduce acid rain pollution from power plants. The program 
cost less than expected. Utilities have experience with how it works. 
And we have in place right now the mechanisms we need to measure and 
regulate carbon from utility smokestacks.
    A sector-by-sector approach allows us to build on steps already 
taken. For example, in the transportation sector, Congress has already 
begun to mandate renewable fuels to reduce greenhouses gases. This 
year, the Senate enlarged that mandate and adopted fuel efficiency 
standards for cars and trucks.
    I believe we should add to those steps a low carbon fuel standard--
that is, requiring transportation fuels to decrease gradually the 
amount of carbon in the gasoline or diesel that they contain--which is 
a logical and manageable next step.
    Finally, both in the energy bill of 2005 and the energy bill that 
the Senate passed earlier this year, Congress began to encourage more 
efficient buildings. Making those steps more aggressive holds the 
promise for enormous carbon savings at the least cost. Japan, for 
example, has found that its major obstacle to reducing carbon emissions 
has been the lack of building energy efficiency.
    Finally, I believe a sector-by-sector approach will do the least 
harm. It avoids imposing new regulations directly on the manufacturing 
sector (who nevertheless may have higher costs for fuel and 
electricity) and therefore avoids adding to the pressures to ship those 
jobs overseas.
    A sector-by-sector approach will allow us to leave manufacturing 
and small business alone for the moment.
    I also believe that a sector-by-sector approach is the easiest 
approach for Members of Congress to understand and explain to our 
constituents. As the recent debate on comprehensive immigration should 
have taught us, this is not an insignificant concern.
    The Lieberman-Warner economy-wide climate change legislation is an 
important contribution. It is a good faith beginning and a complex bill 
which raises lots of unanswered questions.
    Some of the questions raised are:
    1. Why cap and trade rather than a carbon tax?
    2. Why is the cap in the transportation sector a so-called 
``upstream cap''--in other words, a cap on the importer, blender, and 
refiner of transportation fuels?
    3. Does the allocation scheme selected in the Lieberman-Warner bill 
for utilities make sense? The Lieberman-Warner bill will award 
approximately one-third of the allowances to power plants pursuant to 
output allocation. Output allocation rewards fuel-switching to natural 
gas. Output allocation gives natural gas power plants two carbon 
allowances for every one carbon allowance received by coal plants.
    4. Why does the bill employ such a large auction and why does it 
increase so quickly and steeply? Will an auction of this size 
unnecessarily drive up the price of complying with the bill?
    5. This auction is expected to raise extremely large sums of money. 
Where should the money go? Into the Treasury? Should Congress be able 
to appropriate it?
    6. What should the money be spent on?
    7. What should be included in this legislation to keep natural gas 
prices from spiking upwards?
    I know this Committee has had a lot of hearings. But this bill, S. 
2191, was introduced in its current form on October 18, and I think 
members of the Committee should be given more time to review it.
    I see no advantage to sending this bill rapidly to the Senate 
floor.
    The Committee is the place to make any corrections to the bill that 
may be justified.

    Senator Boxer. Senator Whitehouse, you will have the last 
word, I think, from Senators, and then we will finally get to 
our panel.

  STATEMENT OF HON. SHELDON WHITEHOUSE, U.S. SENATOR FROM THE 
                     STATE OF RHODE ISLAND

    Senator Whitehouse. Thank you, Madam Chair.
    One of the things that is said fairly often around 
Government is that we are able to see farther because we stand 
on the shoulders of giants. As we go forward with this 
legislation, we will be focusing, of course, on the areas where 
we still disagree and where work still remains to be done and 
where issues are still not settled. But nothing in that focus 
going forward should take away from the remarkable achievement 
that you have made, Madam Chair, and that Senator Lieberman and 
Senator Warner have made in getting us to where we are today.
    As we go forward, what we will do will indeed be standing 
on the shoulders of, I don't want to say giants, because that 
is not going to be a very good phrase----
    Senator Boxer. Are you saying something about my physical--
--
    [Laughter.]
    Senator Whitehouse [continuing].----but we will certainly 
stand on the shoulders of your giant work.
    I do want to indicate some of the areas that I have concern 
and intend to work with the Chair and with the other members. 
The first is that our greenhouse gas targets need to be 
adequate and they need to be enforceable. They need to have 
teeth behind them. I think those are important, basic points 
and that we need to make sure we are getting to where we need 
to be on that point.
    The second is that the auction needs to be adequate, but it 
also needs to have integrity. This is going to be an important 
process, in which many billions of dollars are going to wash 
around in it. Right now, the entity isn't even subject to the 
Administrative Procedures Act, or even subject to the open 
meetings or open records laws. Only one of the members is 
subject even to advice and consent.
    When you look at how long it took to develop the stock 
markets, the Federal Reserve, when you look at some of the 
market efforts that have been made with California energy 
pricing, I think there is reason to work to improve and help 
guarantee the integrity of this auction process.
    Finally, when it comes to divvying up all the revenues that 
this will produce, I think it is vitally important that we 
focus on the low-income folks who will bear the costs as these 
signals flow through in varieties of products into their 
families' pocketbooks. I am not convinced that we are there 
yet.
    So those are the key issues that I will be working on. I am 
very pleased that the wildlife and conservation issue that I 
have raised appears to be getting a very good response. I look 
forward to that being in the manager's package, if that can be 
arranged. I hope to work with Mr. Darbee and the others in the 
utility community, going back to my days many years ago as a 
utility litigator, to try to further define the role of our 
public utilities, particularly the distribution companies who 
are well regarded by their clients who have consumer 
relationship already and who are in a position to be extremely 
helpful as we implement the conservation piece.
    So I will conclude by saying thank you for where we are so 
far. I look forward to working with this Committee in very good 
faith to get to where we need to be. I salute you for what has 
been accomplished. Thank you.
    Senator Boxer. Senator, thank you so very much.
    As I understand it, we are now ready to turn to our panel, 
which has been very patient. As you can see, this is not an 
easy issue for members on both sides. It is fraught with a lot 
of concern, emotion and we appreciate your patience.
    When I have to leave with Senator Inhofe, it is to make the 
closing arguments on the override of the WRDA bill. At that 
time, I am going to hand the gavel over to Senator Lieberman.
    Why don't we get started now. Mr. Darbee, we are very 
pleased to have you back here. The Committee has already heard 
more than 140 witnesses on global warming. This is your second 
time back, so we welcome you, sir. You are from Pacific Gas and 
Electric, you are the chief executive officer and president.

  STATEMENT OF PETER A. DARBEE, CHAIRMAN, CEO AND PRESIDENT, 
              PACIFIC GAS AND ELECTRIC CORPORATION

    Mr. Darbee. Thank you, Chairman Boxer, Ranking Member 
Inhofe and members of the Committee. Thank you for inviting me 
to speak here today.
    I am here because I am convinced with climate change we 
face an unprecedented challenge. A long-term crisis, but one 
that urgently needs near-term action. A global problem, but one 
that is unsolvable without this Nation's commitment. A threat 
with consequences that defy the imaginable, but one that is 
going to require incredible imagination and ingenuity to 
defuse.
    This is truly going to be a thousand mile journey, and 
right now I believe the world is watching and waiting for us to 
take that proverbial first step. In our analysis, America's 
Climate Security Act provides an appropriate starting point for 
continued debate and progress toward a responsible national 
policy on and in response to climate change. It presents a real 
opportunity to advance the discussion at the Federal level 
where frankly, it must occur. It presents a real opportunity to 
signal that we are serious about coming to grips with our 
greenhouse gas emissions. While it would benefit from 
modifications in some key areas, it presents a real opportunity 
to roll up our sleeves and get to work on this issue.
    We believe the bill's cap and trade approach, together with 
a package of complementary measures, provides an effective way 
to begin ratcheting down America's greenhouse gas emissions, 
while preserving the economy. We especially appreciate the 
focus on energy efficiency. Improving energy efficiency is one 
of the lowest cost options for managing growing energy demand 
while eliminating greenhouse gas emissions. In fact, the cost 
of energy efficiency is about half that for a new gas-fired 
power plant. Thus, energy efficiency helps make the U.S. 
economy more competitive in the world-wide marketplace.
    Policies and incentives should encourage and maximize 
improvements in energy efficiency throughout our economy. This 
bill wisely gives priority to these strategies. One important 
example is its support for decoupling, breaking the link 
between electric sales volume and electric company earnings. 
This is a proven strategy. It effectively removes the financial 
incentives for utilities to simply sell more power. We believe 
it is absolutely fundamental as a country, we want to unleash 
the full potential of our utilities to help consumers use less 
energy and use it more efficiently.
    The bill also deals wisely with the fact that costs for the 
Nation's electric customers will be significant and need to be 
mitigated. A study by the U.S. Energy Information 
Administration suggests that households and businesses at the 
end of the supply chain will bear 87 percent of the carbon 
dioxide compliance costs. Very importantly, this bill allocates 
emission allowances to electric distribution companies on 
behalf of their customers, based on the electric power load 
they serve. This is the right approach. It puts the value of 
the allowances in the hands of electricity customers who will 
ultimately bear the costs of shifting to new, cleaner 
technologies through their electric rates.
    Speaking more broadly about costs, the bill takes positive 
steps toward recognizing that a national program must balance 
the many economic, technology, environmental and societal 
challenges. As I alluded to earlier, we also do see the need 
for modifications. For example, we recommend adding clarity and 
transparency around the workings of the Carbon Market 
Efficiency Board. Also similar to the provisions that are in 
Senator Carper's Clean Air Planning Act, we see opportunities 
to expand the role of offsets to add measures that account for 
the link between power sector emissions and the natural 
variability in weather and precipitation, as well as strong 
incentives for clean generating technologies and recognition 
for early action.
    For example, the bill could also be modified to give more 
credit for early actions to reduce emissions and to speed up 
advances in renewables and other low-carbon technologies by 
distributing allowances based on the generator's efficiency 
rather than on their historic emissions. We believe it is 
important for a share of allowances to be used to encourage 
investments in energy efficiency and new, clean generating 
technologies.
    In closing, I want to underscore again how important it is 
for our Nation to act meaningfully on climate change. In fact, 
the sooner we take concrete action, the smaller will be the 
impact on our economy. The optimist in me is certain that we 
are going to meet this challenge. But the realist in me knows 
that we can't keep putting off our first step. This bill is a 
worthy point of departure for the long journey ahead, the 
result of which must be enactment of an environmentally 
effective and economically sustainable national policy.
    On behalf of PG&E, thank you for the opportunity provided 
today. I appreciate your commitment and I pledge my cooperation 
as you move forward.
    [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 the America's Climate Security Act of 2007. I believe climate 
change 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 sufficient to warrant an aggressive response, 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 that will advance the legislative process.
    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 
mix of electric power of any utility in the country.
    Our work on energy efficiency and support of clean generating 
technologies are part of a broad portfolio designed to provide advanced 
energy solutions 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 AMERICA'S CLIMATE SECURITY ACT

    PG&E believes America's Climate Security Act provides a solid 
starting point for constructively advancing a comprehensive, national 
response to and policy on climate change. The framework established in 
the bill--a cap-and-trade system with key complementary policies and 
measures--provides the foundation for a program that will achieve 
significant and sustained emission reductions from all sectors of the 
economy. Specifically, the bill includes provisions that prioritize 
energy efficiency and technology development and deployment, as well as 
innovative ideas to protect electricity consumers, manage overall 
program costs, and provide states with the resources to help address 
the unique needs of their communities and citizens as we transition to 
a low-carbon economy and adapt to a changing environment. America's 
Climate Security Act takes positive steps toward recognizing that a 
national program must balance the economic, technology, environmental 
and societal challenges of combating climate change.
    While we think that the bill provides a solid starting point, we 
recognize and anticipate that modifications will be made and issues 
debated as the legislative process continues, with a focus on winning 
passage this Congress. We plan to be a constructive voice throughout 
that process. For example, it is our recommendation that the cost 
containment measures in the bill become more robust by providing 
additional clarity and transparency regarding the role and workings of 
the Carbon Market Efficiency Board, and expanding the use and range of 
offsets available to meet compliance obligations. Additional measures 
should also be included that recognize and account for some unique 
characteristics of emissions from the electric power sector that are 
influenced by year-to-year variability in weather and precipitation. We 
also believe that aspects of the bill could be modified to more fully 
recognize early actions taken to reduce greenhouse gas emissions and to 
facilitate and encourage the rapid development and deployment of 
renewable generation and other low-emitting technologies.
    PG&E bases its assessment of the bill and our recommendations on a 
set of principles which guide our thinking on climate policy. These 
include:
     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 from 
the sale of electric power and utility earnings by setting fixed 
revenue levels and thus 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. Importantly, 
failing to recognize early action 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 
actual greenhouse gas reductions, regardless of their geographic 
location or sector of the economy from which the 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 38 other states to develop a consistent set 
of reporting standards and protocols. We believe that this effort can 
serve as a model for a national registry system and that any national 
system should leverage the work that the states have already done.
    These principles guided our analysis of the America's Climate 
Security Act and serve as the basis for some of the specific comments 
raised above. The remainder of my testimony will provide additional 
detail on these and some other aspects of the legislation. We provide 
them in the spirit of our pledge to work cooperatively and 
constructively as the issue moves through the legislative process.

Electric power consumers will bear the substantial share of the costs 
        of a mandatory climate protection program, so including 
        provisions to mitigate costs to electricity consumers is 
        critical.
    We support the approach taken in the America's Climate Security Act 
to mitigate costs to electricity consumers by allocating emissions 
allowances to load serving entities (e.g., regulated local electric 
distribution companies) on behalf of their electricity customers.
    This approach is consistent with those outlined in separate reports 
from the National Commission on Energy Policy, the California Market 
Advisory Committee, and the Natural Resources Defense Council; each 
have outlined an approach that avoids the inequities and the 
inefficiencies that stem from solely employing an Acid Rain-style, or 
input based, allocation approach, while benefiting electricity 
consumers.
    This allocation approach can help to mitigate some of the issues 
surrounding allowance allocation that arose during the first phase of 
the European cap-and-trade experience, and that we expect to manifest 
itself in electric markets throughout the U.S. For example, in Europe, 
power companies reflected 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. We 
expect this phenomenon to occur in competitive wholesale and retail 
markets throughout the U.S.
    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 states 
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 states 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, whether they 
operate under cost-of-service regulation or are merchant facilities. 
Again, this raises important equity concerns that should be factored 
into the allocation methodology.
    Therefore, we believe that the allocation to electricity consumers 
is an important provision that must be preserved in the legislation as 
the debate moves forward. Taking this approach will distribute the 
allowance value where it should go--in this case, the electricity 
customer--who will ultimately bear the costs associated with making the 
transition to lower-emitting power generation technologies through the 
electric rates they pay each month. A study by the U.S. Energy 
Information Administration suggests that households and businesses at 
the end of the supply chain will bear 87 percent of CO2 
compliance costs. In addition, according to the Congressional Budget 
Office, firms subject to a CO2 cap would pass along most 
such costs to their customers in the form of higher prices, with 
regressive impacts on U.S. households. The distribution of allowances 
for consumer benefit can help offset the price increases experienced by 
consumers.
    So, no matter if a consumer is from a competitive or regulated 
state, a coal-intensive or non-coal-intensive state, electricity 
consumers will experience higher costs; allocating allowances to local 
distribution companies will allow the revenues generated from the sale 
of allowances to be directed most effectively to end use consumers. We 
welcome the opportunity to offer further refinements to the language 
included in the America's Climate Security Act to ensure that it both 
achieves its intended purpose--mitigating costs to customers without 
impacting competitive markets or masking the price of carbon--and does 
so in a way that provides state regulatory bodies with the oversight 
they need to ensure that they have the ability to best direct the 
proceeds to serve the unique needs of the consumers and communities 
whose welfare they are charged with protecting.

Energy efficiency must be a frontline response.
    We are very pleased that the bill recognizes the important role 
that energy efficiency will need to play in meeting our nation's 
climate change objectives. Existing energy efficiency technologies can 
help the U.S. to slow and stop current emissions trends and do so in a 
way that will increase the overall productivity and efficiency of the 
economy. The bill includes numerous provisions that provide significant 
incentives for states, utilities, manufacturers and consumers to 
aggressively pursue energy efficiency, such as: Providing incentives 
for States to pursue policies that ``decouple'' electric utility 
revenues from sales and implement aggressive building codes and 
standards; targeting of auction revenues to ``buy-down'' costs of new 
energy efficient end-use technologies; and providing allowances to load 
serving entities for the amount of electricity their customers save.
    We believe that the energy efficiency provisions included in the 
bill have the potential to make significant contributions to achieving 
the emission reduction targets established. For example, the American 
Council for an Energy Efficient Economy estimated that the energy 
efficiency measures included in the House Energy Bill, many of which 
are incorporated in America's Climate Security Act, could result in 
emissions reductions on the order of 550 million metric tons per year 
by 2030, while Environmental Defense suggested in their analysis that 
the savings could be higher. A recent McKinsey study said that, through 
energy-efficiency, we could reduce the growth rate of worldwide energy 
consumption by more than 50 percent over the next 15 years. And 
McKinsey said we can do this using the technology we have available 
today. Finally, PG&E is an underwriter of a study on the potential for 
energy efficiency savings in the U.S. While the results are not final, 
indications are that the potential for savings in the U.S. are on par 
with or even exceed the potentials McKinsey found in the worldwide 
study. These savings would not only result in positive greenhouse gas 
benefits for the country, but would also help to reduce energy costs in 
the process. What is needed is a shift in current policy to overcome 
market barriers to realizing the significant potential of energy 
efficiency and to accelerate its deployment. We believe that this bill 
provides a significant step in the right direction.

Economic sustainability must be a key program objective.
    We are encouraged that the legislation recognizes that a holistic 
approach to cost containment must be taken and that measures need to be 
put in place that are designed to protect the overall economy--we 
believe the provisions included in the bill are a step in the right 
direction that will not only protect our environment, but also our 
economy and energy consumers. These provisions include allocation of 
allowances to local electric distribution companies on behalf of their 
customers, unlimited trading, offsets, banking, borrowing, as well as 
the recognition that there will need to be some other mechanism to 
ensure that unsustainably high CO2 prices do not jeopardize 
both the existence of the program and the expansion of our economy.
    In this regard, and as the legislative process progresses, we 
suggest that additional provisions be included to provide added 
transparency and clarity on the Carbon Market Efficiency Board (CMEB) 
to ensure that the actions of the CMEB provide the necessary cost and 
environmental certainty for the program. For example, we think the 180-
day period currently specified in the legislation--i.e., the period 
after the CMEB has carried out cost relief measures to expand 
borrowing, but before it may increase allowances for the applicable 
year--is too long to prevent potentially disastrous outcomes for 
companies and significant segments of the economy. During the 
California Energy Crisis, for example, the financial health of the 
state's two biggest utilities was significantly impaired in less than 
180 days, requiring the state to enter into high-price contracts and 
take on the electric purchasing obligation for electricity consumers. 
California's electric consumers are still paying for these high price 
contracts today and the state was required to take on additional debt 
obligations. We suggest shortening the period to 30 days in order to 
avoid such outcomes; this will be particularly important in the first 
10 to 15 years of the program.
    In addition, we suggest that additional criteria be included in the 
legislation to better define what the ``trigger prices'' would be to 
activate the CMEB powers. Currently the bill is virtually silent on 
what criteria will be used to determine the price, making it impossible 
for business to predict the future costs of the program, even within a 
reasonable range. Providing this clarity and transparency will remove 
the subjectivity from the workings of the CMEB and provide the 
certainty needed for investment planning by business going forward.
    We also think that it should be made explicit that the CMEB can 
purchase credits out of the market in order to maintain the lower limit 
of the price range established by the Congressional Budget Office. This 
type of ``price collar'' approach can help manage overall volatility 
and macro-economic costs, while at the same time provide a clear path 
for technology investors and ensure that there is a ``price for 
carbon'' that is recognized by the broader economy. We are continuing 
to think through these very complex and important issues surrounding 
the overall functioning and transparency of the CMEB and will share 
them with the Committee and publicly when we finalize our initial work.
    We also recommend including an additional provision that will help 
entities, particularly in the power sector, manage overall program 
costs and mitigate price volatility. 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 those proposed by Regional Greenhouse Gas Initiative and 
the Clean Air Planning Act, are perfectly appropriate. This flexibility 
is particularly important for the electric power sector because 
emissions within this sector can vary significantly depending on 
weather and precipitation. For example, a dry year reduces 
hydroelectric capacity in California and the Pacific Northwest and 
increases PG&E's reliance on fossil-fired power plants, increasing 
carbon dioxide emissions in that year. Multi-year compliance periods, 
particularly in the early years of the program before companies have 
the opportunity to bank allowances, can allow them to manage 
variability such as this, while also containing costs and reducing 
price volatility within the sector.
    Finally, with regard to offsets, we are pleased that offsets are 
considered as a part of the bill and believe that they are an important 
piece of creating an effective approach to managing the overall costs 
of the program. Offsets can both help provide cost-effective compliance 
options and do so in a way that both reduces the emissions of uncovered 
sectors and sources and that provides added environmental benefits, 
both in the U.S. and abroad. We are particularly pleased that the bill 
recognizes the need for independent, third-party verification of the 
offsets, as that is a key piece of ensuring their overall credibility.
    We do have some suggestions for modifications to both the offset 
pool and the process. First, we suggest increasing the percentage of 
offsets allowed to be used as a compliance option. Again, we believe 
that offsets are an important cost control mechanism and one that can 
provide additional environmental and other ancillary benefits. Second, 
we suggest expanding the sources of offsets to include the preservation 
and restoration of wetlands and preservation of forests because 
research has shown that these activities represent one of the largest 
opportunities to sequester carbon dioxide and mitigate adverse 
consequences of climate change. Third, we recommend taking a 
performance-based approach to measuring the offsets consistent with the 
approach of the California Climate Action Registry. Fourth, all efforts 
should be made to ensure that the offsets are ``real'' (help reduce the 
overall emissions under the cap) and "permanent" (ensuring that the 
reductions are maintained over time). And, finally, while we appreciate 
that the Administrator is provided the authority to expand the offset 
pool beyond agriculture and forestry, we believe it is important to 
make explicit that these other actions are of equal weight and 
importance.

Encouraging the development and deployment of the most efficient, 
        lowest-emitting power generation technologies is key.
    We appreciate that the bill recognizes that new sources of power 
generation will also need access to emission allowances. We are 
encouraged that the approach taken with regard to allocating allowances 
to new power generating sources is based on the performance or 
efficiency of a facility as opposed to the amount of pollution it 
emits. Basing allowance allocations solely on historic emissions only 
serves to reward and encourage the highest emitting resources and 
discourages rapid development and deployment of cleaner, lower-emitting 
technologies.
    We are actively pursuing renewable generation resources on behalf 
of our customers, and have made recent announcements on contracts we 
have signed with wind, geothermal, biogas and solar developers. Earlier 
this week we announced plans to contract for power from a solar 
facility being developed by Ausra Inc., in San Louis Obispo County, CA. 
Earlier this year, we announced a contract with Solel-MSP to purchase 
energy from the Mojave Solar Park. This project will deliver 553 
megawatts of solar power, enough power to serve 400,000 homes. We 
believe the potential for solar thermal technology, as well as other 
concentrating solar power (CSP) technologies, is significant.
    For example, a study by the National Renewable Energy Laboratory 
(NREL) on CSP potential in California and the rest of the Southwest 
indicated that CSP in California could produce upwards of 7 times the 
energy needed to serve the state. NREL also suggests that costs for CSP 
technologies are declining, from approximately 16 cents per kWh on 
average today, to approximately 8 cents per kWh in 2015, assuming at 
least 4,000 MW of CSP were built by then to achieve ``learning curve'' 
benefits. (This compares to estimates for advanced coal with carbon 
capture and storage on the order of 11 cents per kWh or a new 
supercritical pulverized coal plant on the order of 6 to 6.5 cents, 
plus the cost of carbon, which could add upwards of 1.5 cents per kWh 
depending on carbon prices).
    This is just one example of the potential for renewable 
technologies. That is why we believe it is critical for a climate bill 
to not only support the transition to advanced coal technologies that 
release little or no greenhouse gases to the atmosphere, but to also 
provide significant support to accelerating the development and 
deployment of renewable technologies, as well.
    While we recognize that the bill attempts to balance the interests 
of incumbent utilities with the need to encourage the deployment of low 
carbon technologies, we would encourage you to consider (1) making 
clear that the percent of allowances allocated to new entrants 
increases over time, (2) expanding the definition of new entrants to 
include all forms of renewable energy (the bill limits allocations to 
fossil fuel-fired facilities only), and (3) modifying the definition of 
new entrants to include facilities that commence operation in 2000 or 
later.
    First, by gradually increasing the percent of allowances allocated 
to new entrants, investment in new, lower emitting generating 
technologies will be encouraged. The current bill directs EPA to 
establish a reserve of allowances for new entrants, leaving discretion 
for the Agency to establish a ``fixed'' reserve of allowances. We do 
not believe that this was the intent of the legislation. Rather, the 
size of the new source set aside should vary consistent with the 
methodology outlined in Sec. 3903(a)(2) of the bill (i.e., the average 
emission rate multiplied by the output of the facility).
    Second, by including all forms of renewable generation in the new 
entrant reserve, investment in low carbon technologies and more rapid 
development and deployment of these technologies will be encouraged 
(helping to achieve the price points projected by NREL for CSP 
technologies, for example). As currently drafted, the bill may have the 
unintended effect of encouraging investment in fossil fuel-fired 
generating technologies only. Finally, by defining new entrants to 
include facilities that commence operation in 2000 or later, the 
legislation will recognize the early investments that companies have 
made in modern, high efficiency power plants, potentially helping to 
alleviate some of the claims that will be made under the early action 
provisions and helping to free up more allowances for other early 
actions.
    Another alternative to adjusting the generator allocation to 
accommodate renewable generation would be to establish a set aside, 
similar to the bonus allowances established for carbon capture and 
storage. It is our understanding that this bonus allowance system is 
intended to accelerate the development and deployment of advanced coal 
technologies with carbon capture and storage; we suggest a parallel 
system be established for renewable technologies. Accelerating the 
deployment of all of these technologies will help to smooth the 
transition to a low carbon economy and provide additional economic 
opportunities.

Encouraging and recognizing early action is important to successfully 
        achieving climate goals.
    Overall, we are pleased to see that the legislation includes 
provisions to recognize actions taken by companies, consumers and 
states, both as a result of voluntary actions and state greenhouse gas 
reduction programs. We think it is important for U.S. policy to send 
the signal that taking risks and taking early action will be recognized 
under this program. To that point, in Section 3302(b), we suggest 
changing the timeframe for receiving credit for early action from 
``date of enactment of this Act'' to ``the first allocation period.'' 
There will clearly be a lag between the date of enactment and the first 
allocation period, and in those intervening years, this program should 
encourage companies to continue to take action. In the alternative, 
companies may refrain from continuing to take actions prior to this 
date. At the same time, since this section is giving credit to 
companies that need to comply with existing state-only or regional 
programs, many of these programs will come into force in the 2010 to 
2012 time period. Therefore, reductions made in these years should be 
credited as well. We also believe it is appropriate to raise the 
overall limit in terms of allowances available to credit early actions. 
The 5 percent set-aside would equate to approximately 260 million 
metric tons of CO2-e in 2012. Given the spate of activity 
that has occurred in the economy and the plethora of state programs 
slated to come on line in the 2010 timeframe, this number of allowances 
may be inadequate to reward credible early action.

                            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 
climate change and hope that as deliberations move forward, the focus 
remains on establishing a pathway to pass an environmentally effective 
and economically sustainable bill this Congress. I pledge my 
cooperation and support as the process moves forward on debating the 
America's Climate Security Act of 2007 both in Committee and the full 
Senate.
    Thank you.

    Senator Boxer. Thank you so much for that encouraging 
testimony.
    Jonathan Pershing, Director, Climate, Energy and Pollution 
Program, Climate and Energy, World Resources Institute.

 STATEMENT OF JONATHAN PERSHING, DIRECTOR, CLIMATE, ENERGY AND 
          POLLUTION PROGRAM, WORLD RESOURCES INSTITUTE

    Mr. Pershing. Thank you very much, Madam Chair.
    My name is Jonathan Pershing. I am the Director of the 
Climate, Energy and Pollution Program at the World Resources 
Institute, which is a non-profit environmental think tank based 
here in Washington. I am very pleased to be here to speak to 
what I consider the most pressing environmental problem that 
faces the world, and to what I consider a very strong 
legislative proposal that places the United States firmly on 
the path to addressing that problem.
    My written testimony goes through a number of critical 
points, but I will emphasize only four here. First, the problem 
is one of enormous urgency. It requires very aggressive action 
if we are to hope to limit damages. The science is clear. The 
IPCC says that it is unequivocal that the earth's climate is 
warming, and there is greater than a 90 percent probability 
that it is human activities that have caused it. It suggests we 
have to reduce emissions globally 50 to 85 percent below 2000 
levels by 2050 if we would like to see temperatures remain 
below 2 F. If the United States doesn't act quickly and 
aggressively, the rest of the world will lag, and we can't 
afford to wait.
    My second point, the damages from climate will be 
enormously costly. A report authored last year by Sir Nicholas 
Stern, former lead economist at the World Bank, found that the 
costs of climate change could range from 5 to 20 percent of 
global GDP, a staggering $7 trillion. A few recent examples 
demonstrate the cost. California wildfires, which will 
increase, already estimated to run between $900 million and 
$1.6 billion for this series of events alone. The drought in 
the Southeast, the Atlanta Journal Constitution says it has 
already cost the Georgia landscape industry $1.2 billion and 
the Ag industry $782 million, just this one event. Hurricanes, 
projected to increase, well, look at Katrina alone, the damages 
$70 billion to up to $130 billion.
    My third point, the cap and trade system and the 
complementary policies in this act provide strong environmental 
benefits and send a price signal to invest in new technology. A 
price signal is required in order to ensure that polluters 
recognizes their impact, begin to control what has been 
unfettered access to our atmosphere and pay for their 
pollution. The approach has two main attractions: One, cap and 
trade, which is clear and specific limit on emissions, creating 
a price that achieves a target lower than what would otherwise 
be possible. WRI has conducted a preliminary analysis to 
quantify the reductions that might be expected. The Act would 
subject 82 percent of all U.S. emissions to mandatory reduction 
obligations, nearly full economy-wide.
    The bill also includes complementary measures designed to 
achieve reductions in emissions from sectors outside the cap. 
Our estimate is that the bill would reduce covered emissions 
from 2005 levels by 17 percent in 2020 and by 71 percent in 
2050. Total U.S. emissions are estimated to be 16 percent below 
2005 levels by 2020 and 27 percent below 2005 by 2030, if we 
assume, based on EIA numbers, a growth of 0.8 percent in the 
uncovered sectors. Complementary policies in the current bill 
do partly offset some of this growth.
    The cap and trade regime sends a price signal to the market 
and pushes investments to reduce emissions. There is a huge 
range of technology options at low to modest cost. McKinsey, 
the consulting company, suggests that more than 4 billion tons 
of abatement could be provided with current technology at 
prices below $50 a ton. Other estimates support the low price. 
Duke University's Nicholas Institute suggests that GDP would 
increase with no policy about 112 percent between 2005 and 
2030--112 percent with no policies. With the policies, 111 
percent, less than 1 percent difference in the total inclusion 
of all the policies here.
    The bill also provides a number of mechanisms to help 
control compliance costs: Rewards for early action, capture and 
storage; a free and very substantial allocation of 40 percent 
of the total allowance pool; allocation borrowing and banking; 
offset provisions; the Carbon Marketing Efficiency Board. These 
are likely to succeed in smoothing the price, although they are 
somewhat controversial.
    Finally, my last point. The bill sends a strong 
international signal. The global community is assembling in one 
month in Indonesia to continue discussions about global action. 
There will be three issues on the table: Mitigation efforts by 
major emitters, forestry; and approaches to help countries 
adapt to climate change. This bill signals to the United States 
that the United States is acting and will be taking steps. It 
also acknowledges the problem of forestry and seeks to move 
forward on that front. However, the bill does not address the 
issue of adaptation, and this could well be an area where you, 
Madam Chair, and the Committee, may choose to focus further.
    Thank you very much for providing me the opportunity to 
speak. I appreciate the opportunity and the importance of this 
session.
    [The prepared statement of Mr. Pershing follows:]

       Statement of Jonathan Pershing, World Resources Institute

    My name is Jonathan Pershing, and I am the Director of the Climate, 
Energy and Pollution Program at the World Resources Institute. The 
World Resources Institute is a non-profit, non-partisan environmental 
think tank that goes beyond research to provide practical solutions to 
the world's most urgent environment and development challenges. We work 
in partnership with scientists, businesses, governments, and non-
governmental organizations in more than seventy countries to provide 
information, tools and analysis to address problems like climate 
change, the degradation of ecosystems and their capacity to provide for 
human well-being.
    I am very pleased to be here to speak to what I consider the most 
pressing environmental issues faced by the world--and to what I 
consider a very strong legislative proposal to place the United States 
firmly on the path to addressing the problem.

                           URGENCY AND SCALE

    The Earth is warming, primarily due to human activities. The fossil 
fuels that have led to huge increases in human productivity and great 
improvements in human well-being, together with significant 
deforestation, have been the most important causes of global warming. 
The buildup of carbon dioxide and other greenhouse gases (GHGs) is 
accelerating, and unless we act very soon to control emissions warming, 
will rise to very dangerous levels during our children's lifetimes.
    In February 2007, the Intergovernmental Panel on Climate Change 
(IPCC)--the official science process endorsed and supported by the 
world's governments and in which the United States was an active 
participant) released its most recent report. The report states that it 
is ``unequivocal'' that Earth's climate is warming, and confirms that 
the current atmospheric concentration of carbon dioxide and methane, 
two important GHGs, ``exceeds by far the natural range over the last 
650,000 years.'' Further, the IPCC concludes that it is now ``very 
likely'' (greater than 90% probability) that GHG emissions from human 
activities have caused ``most of the observed increase in globally 
averaged temperatures since the mid-20th century.''
    Indeed, the impacts of warming have become increasingly evident. 
Sea ice in the Arctic is shrinking, and Greenland's massive ice sheet 
is receding--far faster even than predicted in the IPCC report released 
prior to this summer's unprecedented melting. Glaciers are rapidly 
shrinking from the Rockies to the Alps. There have been fatal heat 
waves in Northern Europe and a three year drought in the Amazon. 
Farmers and hunters across the United States report changing growing 
seasons and changing bird migration. If we already see these kinds of 
damages with only about 0.6 C (1 F) of warming, the nature of future 
damages, with temperatures ranging to 2C and higher, are likely to be 
catastrophic.
    The IPCC also gave us a clear sense of the emissions reductions 
required to limit the damages--and a timeframe in which to achieve 
them. The IPCC suggests that we must reduce emissions globally by as 
much as 50-85% below 2000 levels by 2050 if we wish to see global 
average temperatures remain below 2 C of warming. We must stabilize 
global emissions by 2035.
    The warming occurring today is the result of greenhouse gases 
emitted over the past half century. The United States, with 4.6 percent 
of the world's population, has contributed 28 percent of the emissions 
currently in the atmosphere.i Our strong economic growth in 
the 20th century was fueled by fossil fuel technologies we invented. 
And it is clear that today the U.S., with the most advanced economic 
and technological resources and capacity, must take the lead in 
transforming the global economy to a low-carbon future. We cannot 
expect the rest of the world to act if we do not--or expect that 
countries with per capita incomes \1/10\ of our own to act until we do.
    The emissions limits we set for the U.S. matter. Action by the U.S. 
will be seen as the benchmark against which other countries will 
measure their commitments. The U.S., with its historical responsibility 
for the current build up of greenhouse gases in the atmosphere, will 
continue to be a key contributor to temperature rise--even as other 
countries may pass us in annual emissions levels. With our European 
allies committing to a 20-30 percent reduction in greenhouse gas 
emissions by 2020 to align with the science, U.S. and European action 
and leadership could help advance the efforts of other countries to 
take action.
    U.S. action alone will not be enough to reduce global emissions to 
the extent required. It is widely understood that without timely and 
aggressive U.S. action, a successful international agreement on climate 
change will be impossible to achieve. The policies you are developing 
here will have the potential to demonstrate the American commitment to 
global action on climate change, and consequently, to move the world.

                      THE COST OF CLIMATE DAMAGES

    The U.S. emitted 7,260 billion tons in 2006,ii and 
because greenhouse gas pollution is not regulated, these harmful 
emissions had no financial consequence to those who produced them--but 
significant consequences to future generations. A price signal is 
required in order to ensure that polluters recognize their impact, 
begin to control what has been unfettered access to our atmosphere, and 
pay for their pollution. Economists consistently point out that there 
is no free lunch; climate change is no exception. A report authored 
last year by Sir Nicolas Stern, former lead economist at the World Bank 
and advisor to then UK Chancellor of the Exchequer (and now Prime 
Minister, Gordon Brown), found that the costs of climate change could 
range from 5 to 20 percent of global GDP. iii In dollar 
terms, this is equal to about $6.98 trillion--a staggering cost against 
which our current mitigation price expectations pale.iv
    A few recent examples demonstrate the point: The California 
wildfires (a phenomenon expected to increase considerably in a warmer 
world), are estimated by Risk Management Solutions, a leading provider 
of products and services for catastrophe risk management, to already 
run between $900 million and $1.6 billion.v The drought in 
the Southeast, a potential harbinger of future events, has led the 
governors of Florida, Georgia and Alabama to request aid from the 
President, and has been reported by the Atlanta Journal-Constitution to 
have already cost the Georgia landscape industry $1.2 billion in losses 
and the agricultural industry $782 million in losses.vi 
Among the most devastating impacts likely to arise from climate change 
is increased frequency of high intensity storms and hurricanes. 
According to the Congressional Budget Office, damages estimated from 
Hurricane Katrina alone are expected to run between $70 and $130 
billion.

                 CAP AND TRADE: A SIGNAL FOR INNOVATION

    It is in the context of the clear understanding of the science and 
impacts of climate change that strong and prompt action is required. 
The Climate Security Act provides this. As with all cap-and-trade 
regulatory systems, the approach in S. 2191 has two main attractions: 
it puts a clear and specific limit on aggregate emissions and it 
achieves the emissions-reduction target at lower cost than would 
otherwise be possible. The cap establishes certainty as to the total 
amount of emissions that will occur under the program. Meanwhile, the 
ability to trade emissions allowances yields cost-savings by promoting 
emissions reductions at those sources that are able to achieve the 
reductions most cheaply. Trading emissions allowances lowers costs to 
the facilities covered under the program. In doing so it reduces 
economic impacts on workers, consumers, and taxpayers.

                       THE ENVIRONMENTAL BENEFITS

    While several organizations are preparing full economic models of 
S. 2191, WRI has conducted a preliminary analysis to quantify the 
emission reductions that might be expected under this bill. Our 
analysis has included three elements of the legislation:
    1. Coverage of the cap
    2. Emission targets
    3. Complementary policies

                                COVERAGE

    It is highly unlikely that all U.S. emissions would ever be 
directly covered in any cap and trade regime. The coverage of the EU-
ETS during phase one was approximately 46 percent of total EU 
emissions. The Northeast states' Regional Greenhouse Gas Initiative 
applied its initial caps to the power sector alone, accounting for 
approximately 22 percent of total regional emissions. The limited 
coverage of these programs reflects the fact that some sources of 
emissions are easier to monitor and track, while others are more 
onerous to regulate. Nevertheless, maximizing the ability of a carbon 
market to find low-cost abatement options generally depends upon the 
inclusion of diverse sources of emissions. More comprehensive coverage 
will be necessary to achieve economy-wide targets while keeping 
compliance costs to a minimum.
    S. 2191 (as amended in subcommittee to include emissions from the 
use of natural gas in the residential and commercial sectors) subjects 
82 percent of all U.S. emissions to mandatory reduction obligations. 
The bill covers emissions from significant facilities in the power, 
industrial and transportation sectors as well as a majority of 
emissions in the residential and commercial sectors. The bill includes 
both reduction obligations, and complementary measures designed to 
achieve reductions in emissions from sectors outside the cap, from 
sectors where a price signal alone is unlikely to spur a technological 
transformation, and includes recognition of state circumstances and 
cost mitigation requirements.

                            EMISSION TARGETS

    S. 2191 sets straightforward annual budgets for covered facilities, 
and does so with absolute rather than relative numbers. WRI estimates 
that the bill would reduce covered emissions from 2005 levels by 17 
percent in 2020 and by 71 percent in 2050. Over the life of the program 
covered emissions are reduced at an average annual rate of just over 3 
percent. However, as noted above, nearly 20 percent of U.S. emissions 
are not covered by mandatory reduction targets under the cap. If we 
assume a rate of growth of emissions of approximately 0.8 percent for 
these uncovered sectors, total U.S. emissions are estimated to be 16 
percent below 2005 levels by 2020 and 27 percent below 2005 levels by 
2030. Interactions between covered and uncovered sectors of the 
economy, particularly in the out years of 2030 to 2050, are difficult 
to assess.\1\ Complementary policies in the current bill will only 
partly offset the growth in the uncovered sectors, and Congress will 
need to further review and adopt additional policies (see chart 1).
---------------------------------------------------------------------------
    \1\ Uncovered emissions growth in WRI's analysis is based on EIA 
projections of these sectors under business as usual reference case, 
and does not capture the potential interactions across sectors. Our 
assessment of emissions trends uncovered sectors may thus be 
conservative.
---------------------------------------------------------------------------
                         COMPLEMENTARY POLICIES

    Although specific mandates are not set for all sectors, S. 2191 
does establish a wide variety of complementary policies to address 
emissions in these uncovered sectors. While many of the policies act 
also as cost-containment mechanisms (reducing overall compliance costs 
from ``covered sectors''), there are several that explicitly reduce 
emissions outside the cap. In particular, S. 2191 incentivizes 
reductions through allowance allocations. The most significant of these 
allocates allowances to the USDA to promote biological sequestration 
through domestic agriculture and forestry programs. While estimating 
these additional emissions reductions is subject to considerable 
uncertainty, figure 2 below shows a potential range that may result 
from the combined policies.
    While the intent of the bill is excellent, there may still need to 
be some strengthening of the rules for biological sequestration, in 
particular to ensure that reductions incentivized through this program 
would be additional and permanent, and that appropriate rules be 
developed to guarantee environmental benefits from this aspect of the 
program.

                          UNDERSTANDING COSTS

    S. 2191 sends a price signal to the market. By capping GHG 
emissions, it implicitly establishes a value on such emissions, and 
pushes investors to design and implement policies to reduce them. 
Economic and technology analysis suggests that the range of options to 
reduce emissions at modest costs is large.
    A study being undertaken by McKinsey vii suggests that a 
wide variety of technologies, with more than 4 billion tons of 
abatement potential, would penetrate the market at costs below $50/ton 
of carbon (see figure 1 below). However, even such a figure is 
misleading: a carbon price of $50/ton does not imply a loss to the 
economy of this amount. Rather, it implies a shift--from systems and 
operations that are GHG intensive to those that are not. In turn, this 
suggests we are likely to see major investment in new energy and 
transport technologies that could continue to power the U.S. economy.

[GRAPHIC] [TIFF OMITTED] T3583.001


    The subject of overall economic cost of emissions limits has been 
much studied. Modeling of S. 2191 as introduced into subcommittee (with 
only modest differences to the current draft proposal) and other 
similar scenarios have estimated that the cost of allowances would rise 
to $26.27 (2005 dollars) by 2020 (see table 1) and to $56.71 by 
2030.viii Since the economy must now internalize the cost of 
carbon where it was otherwise free, there is the potential for these 
costs to influence economic growth.
    However, the economic impact of those prices is extremely small. 
Duke University's Nicholas Institute conducted an analysis of the 
earlier bill draft submitted by Senators Lieberman and Warner to the 
subcommittee. This analysis showed that in a business as usual 
scenario, GDP would increase 112% from 2005 levels by 2030. Under S. 
2191 GDP is projected to rise by about 111% from 2005 levels by 2030. 
The decline in economic activity is less than 1% of GDP over the course 
of the next two decades.
    In the Nicholas Institute analysis, by 2050, the projected increase 
in GDP from 2005 levels is 238%--and under the bill, this would still 
increase by 236.4%. This means that in 2050, the same overall economic 
growth would be observed in the economy, but it would occur about 8 
months later in the calendar year. The scale of the U.S. economy is 
huge, and even small percentages in growth are thus large absolute 
numbers. The context must be taken into account, however, and here it 
is clear: action on climate can be achieved at quite modest costs.
    Table 1 provides the results of several economic modeling studies 
that reviewed cap and trade programs similar to S. 2191. The comparison 
looks both at the price per ton of carbon, and the impact of that price 
level on GDP.

[GRAPHIC] [TIFF OMITTED] T3583.002


    None of the economic analysis developed to date has included a 
complete accounting of the complementary policies or the explicit uses 
of the emissions trading revenues accruing to the government from an 
auction of allowances in minimizing economic impacts. These can be 
substantial. For example, WRI recently facilitated a multi-stakeholder 
process in Illinois to develop recommendations for a state climate 
mitigation program. The diverse stakeholder group was charged with 
submitting policy recommendations to reduce total state-wide emissions 
to 1990 levels by 2020--comparable to near term targets under 
consideration in S. 2191. Illinois is representative of many U.S. 
states as it relies on coal for about half of its electricity 
generation, is home to both large metropolitan areas and rural 
agriculture, and is currently witnessing significant growth in its GHG 
emissions. The policies under consideration included a cap and trade 
program for large emitters in the industrial and electric generation 
sectors as well as several complementary policies addressing energy 
efficiency, renewable energy, CCS equipped coal generation and reducing 
GHG emissions from passenger vehicles. In short, the process reviewed 
many of the approaches proposed in America's Climate Security Act.
    ICF Consulting was contracted by the Illinois to analyze the 
economic costs of the policy package. Economic modeling of the entire 
package of recommendations found that the price of allowances in the 
cap and trade program rose to over $18/tonne in 2020, but that even at 
this price, state GDP increased by nearly 1 percent as compared to 
business as usual. Personal disposable income and net employment saw 
similar gains.x These results are in line with those of a 
similar study led by David Roland-Holst at the University of 
California--Berkley which looked at the economic effects of 
California's GHG reduction policies.xi The policy package in 
that study, which also sought to reduce GHG emissions to 1990 levels by 
2020, found that a cap on emissions in combination with complementary 
policies achieved up to a 3.4 percent increase in state GDP as well as 
an increase in net employment. These state examples show that robust 
and comprehensive climate policy can meet environmental goals while 
enhancing the nation's economy.
    The positive economic impacts of the implementation of a climate 
change regime are obvious. The U.S. economy has grown while becoming 
more efficient and reducing pollution for decades. A price on carbon in 
conjunction with appropriate complementary energy policies can 
accelerate this positive trend. Indeed, as existing and new American 
technologies are likely to thrive in a carbon constrained world, new 
business opportunities will plausibly lead to a more robust economy 
that can generate new jobs while increasing national energy security.

           EASING THE TRANSITION: STRATEGIES TO CONTAIN COSTS

    Although new opportunities will be significant, the cap-and-trade 
program will create uneven costs across the economy. In designing an 
effective cost containment strategy, five economic burdens must be 
balanced:
     cost to any particular company
     cost to an industry
     cost to a region
     cost to a class of consumers
     cost to the economy
    Designing cost mitigation programs will therefore require different 
approaches depending on whose costs one mitigates. There are four ways 
in which the bill seeks to provide economic mitigation assistance: (i) 
free allocation of pollution allowances to regulated entities, (ii) a 
public auction to generate revenue for investment in new technologies 
and provide low income assistance, (iii) inclusion of energy efficiency 
and consumer and state programs as recipients of free allowances for 
public purposes, and (iv) specific cost mitigation programs such as 
offsets and borrowing.
    In addition to rewards for early action and carbon capture and 
sequestration, the bill provides regulated entities a free allocation 
of 40 percent of the total allowance pool, phased out over time, 
disappearing entirely after 24 years. If we assume a price of $20/ton 
of CO2 equivalent, this implies a value of $45 billion in 
transition assistance to regulated entities in the first year of the 
program. For comparison, a recent Congressional Budget Office report 
estimated that as few as 15 percent of freely allocated allowances 
could allow for regulated entities to remain ``whole'' as they 
transition into the new low-carbon economy.xii
    Auctioning allowances and using the revenues to cut distortionary 
taxes may be the most efficient and least expensive approach to 
implementing a market-based system according to economic 
models.xiii Auctions may also allow the government to raise 
revenue for any number of other purposes, including technology 
investments or deficit reduction. Furthermore, evidence exists that 
auctions tend to stimulate greater innovation than free allocations and 
may lead to more efficient investments in technology.xiv 
Real-world complexities, however, such as multiple distortionary 
policies, monopoly power, and differences among regulated firms, 
complicate the issue, making the optimal choice between full auctioning 
and full free allocations of allowances less clear.xv 
However, S. 2191 makes a clear statement regarding the importance of 
auctioning, starting at a level that is far higher than proposed in 
other legislation, and currently surpassed only by individual state 
proposals in the Regional Greenhouse Gas Initiative program in 
Northeast (where most states plan to auction 100 percent of their 
allowances).
    While an auction tempers the politics of allowance distribution, 
there are still important political decisions that must be made 
regarding the distribution of auction revenues. Such revenue will be 
key to mitigating the costs of the program on low-income households, 
for worker transition programs, as well as for funding new low carbon 
technology programs that will ultimately lower overall compliance 
costs. By making specific provisions for such allocations, S. 2191 
seeks to address the potential regressivity of the policy while 
providing dedicated funding to develop the technologies required to 
reduce emissions and ensure the U.S. remains economically competitive.
    Since markets do the best job of controlling costs over time, the 
most effective cost mitigation policy will be based upon the robustness 
of the cap and trade program. There have been concerns raised that 
large price fluctuations may arise in a new GHG market. Such large 
price changes create risks both to firms in terms of technology 
investment, and potential cost to consumers. S. 2191 attempts to limit 
price distortions and fluctuations through two mechanisms: (1) 
allowance borrowing and banking and (2) the establishment of a Carbon 
Market Efficiency Board which can adjust the amount and terms of 
borrowing to limit negative economic impacts. Additional consideration 
will be needed to assure that the Board has a clear, transparent and 
effective governance structure.
    Offsets are another design element that can contain costs. Offsets 
provide regulated entities with additional options to reduce GHG 
emissions that occur outside of the cap. This is desirable as many 
offset opportunities are estimated to be of lower cost than abatement 
options at regulated facilities. A well designed offset program that 
contains a framework to insure that reductions are real, additional, 
permanent and verifiable can lower overall compliances costs while 
maintaining the environmental integrity of the program. S. 2191, 
contains a design framework that should achieve these dual outcomes, 
including offsets from both within the U.S. and internationally.

                        INTERACTION WITH STATES

    To date, states have been leading the policy response to climate 
change; California's AB32 and the Regional Greenhouse Gas Initiative 
serve as two notable examples. Recent WRI work on the influence of 
states in federal policy finds that a common development is for the 
federal government to (at least partially) preempt state authority, and 
set a regulatory floor to which all states must adhere (but which 
states may choose to exceed. xvi
    S. 2191 follows this tradition by applying a uniform national 
policy floor, but by allowing states to exceed this floor based on 
their particular circumstances. This approach achieves a more robust 
environmental outcome than one that stifles the innovation that will 
almost certainly emerge from continued state experimentation. However, 
it also serves to set a national standard that will reduce compliance 
costs for industry, which legitimately fears a patchwork of state 
regulation.
    S. 2191 follows state precedent in another, equally important 
fashion: it explicitly instructs the EPA to cooperate and harmonize 
federal emissions reporting and tracking requirements with the Climate 
Registry, a common emissions reporting and tracking platform in which 
40 states currently take part. The Climate Registry uses generally 
accepted accounting protocols that are common in the private sector and 
in other GHG programs around the world. By adopting this standard, the 
bill provides for a common infrastructure for both state and federal 
programs, and one that already has national buy-in.

                       INTERNATIONAL INTERACTIONS

    The global community is assembling in a month in Indonesia to 
continue discussions about the global action required to protect the 
climate. There are three major issues on the table: mitigation efforts 
by major industrial emissions sources and emitting countries, reducing 
emissions from deforestation and encouraging sustainable forest carbon 
management, and programs and approaches to help countries, ecosystems 
and vulnerable populations adapt to climate impacts.
    America's Climate Security Act focuses on U.S. mitigation efforts, 
but also clearly acknowledges forestry through both the inclusion of an 
offsets program, and through an innovative set aside for forestry both 
in the U.S. and globally. In the U.S. and around the world, impacts and 
costs of climate change are already mounting and hurting the world's 
poor populations and harming fragile ecosystems and water resources. S. 
2191 provides only one lens for this issue--the national security 
implications for the United States of a fragile natural resource base 
and vulnerable populations. The broader adaptation agenda is both a 
responsibility and an opportunity for the U.S. to rebuild its 
international leadership in the climate arena and support robust 
private and public engagement to help protect people and the planet.
    Just as S. 2191 provides a clear roadmap for industry in the U.S. 
on the emissions reductions required through its targets and 
timetables, the bill also signals to the international community that 
the U.S. will take the steps required to reign in its emissions and its 
impact on people and ecosystems around the world. With the U.S. and 
Australia currently reviewing climate policies, and Europe's cap and 
trade program underway, China releasing its National Climate Change 
Plan, and the Meeting of the Parties next month, we can chart a course 
for a new international agreement by 2012.
    Thank you Madame Chair. I appreciate the opportunity to present 
this testimony. I welcome any questions you or the committee might 
have.

[GRAPHIC] [TIFF OMITTED] T3583.003

[GRAPHIC] [TIFF OMITTED] T3583.004

                                 NOTES

    i Environmental Protection Agency, October 1, 2007. 
``EPA Analysis of Bingaman-Specter Request on Global COP2 
Concentrations''.
    ii}See EPA GHG Inventory; http://www.epa.gov/
climatechange/emissions/downloads06/07ES.pdf
    iii}Stern, Nicholas. 2006. Stern Review on the Economics 
of Climate Change. (Cambridge University Press: Cambridge, United 
Kingdom).
    iv}In the Stern report, the upper bound of projected 
costs of climate change were estimated at #3.68 trillion. At the time 
of the report's release, this was equal to $6.98 trillion.
    v}See http://www.rms.com/
    vi}See http://www.ajc.com/news/content/news/stories/
2007/10/20/waterecon1020.html?cxntlid=inform
    vii}This figure, from new analysis underway byu 
McKinsey, is posted by the Wisconsin DNR as part of their work to 
design a state climate change program: http://dnr.wi.gov/
environmentprotect/gtfgw/documents/Ma3TF20071019.pdf
    viii}Showalter, Sharon. October 23, 2007 memo to Joe 
Chaisson, Clean Air Task Force. Re: Warner-Lieberman Bill NEMS Modeling 
Analysis.
    ix}Nicholas: Murray, Brian; Ross, Martin. 2007. ``The 
Lieberman-Warner America's Climate Security Act: A Preliminary 
Assessment of Potential Economic Impacts.'' (Duke University: Durham, 
North Carolina). Data from ``Warner-Lieberman Tighter Cap Scenario'' is 
used to represent the tighter cap of S. 2191 in comparison to the caps 
of the annotated table of contents modeled in the core scenario.
    MIT--Paltsev, et al. 2007. Assessment of U.S. Cap-and-trade 
Proposals. MIT Joint Program on the Science and Policy of Global Change 
Report 146. Data from ``203 bmt limited sectoral coverage'' scenario is 
used to represent less than full-economy coverage of S. 2191.
    CATF: Showalter, Sharon. October 23, 2007 memo to Joe Chaisson, 
Clean Air Task Force. Re: Warner-Lieberman Bill NEMS Modeling Analysis.
    x}Illinois Climate Change Advisory Group, forthcoming. 
Report of the Illinois Climate Change Advisory Group to Governor Rod R. 
Blagojevich. For an overview presentation of modeling results please 
see http://www.epa.state.il.us/air/climatechange/documents/07-09-06/
modeling-of-policy-proposals.ppt
    xi}Roland-Holst, Robert, 2006. Economic Growth and 
Greenhouse Gas Mitigation in California. University of California--
Berkley.
    xii}Congressional Budget Office, 2007. Trade-offs in 
Allocating Allowances for COP2 Emissions. Economic and 
Budget Issue Brief.
    xiii}Fullerton, D., and G. E. Metcalf. 2001. 
Environmental Controls, Scarcity Rents, and Pre-existing Distortions. 
Journal of Public Economics 80(2): 249-67. Goulder, L. H., et al. 1999. 
The Cost-Effectiveness of Alternative Instruments for Environmental 
Protection in a Second-Best Setting. Journal of Public Economics 72(3): 
329-60.
    xiv}Adoption: Evidence from the U.S. Lead Phasedown. 
Journal of Industrial Economics 51(3): 317-43. Milliman, S. R., and R. 
Prince. 1989. Firm Incentives to Promote Technological-Change in 
Pollution-Control. Journal of Environmental Economics and Management 
17(3): 247-65. Popp, D. 2003. Pollution Control Innovations and the 
Clean Air Act of 1990. Journal of Policy Analysis and Management 22(4): 
641-60.
    xv}Babiker, M. H., et al. 2003. Tax Distortions and 
Global Climate Policy. Journal of Environmental Economics and 
Management 46(2): 269-87. Fischer, C., I. W. H. Parry, and W. Pizer. 
2003. Instrument Choice for Environmental Protection When Technological 
Innovation Is Endogenous. Journal of Environmental Economics and 
Management 45(3): 523-45.
    xvi}Aulisi, et al. 2007. Climate Policy in the State 
Laboratory: How States Influence Federal Regulation and the 
Implications for Climate Change Policy in the United States. World 
Resources Institute.

    Senator Boxer. Thank you, sir.
    Anne Smith, vice president, CRA International.

    STATEMENT OF ANNE E. SMITH, Ph.D., VICE PRESIDENT, CRA 
                         INTERNATIONAL

    Ms. Smith. Madam Chairman, members of the Committee, thank 
you for inviting me. I am Anne Smith, a vice president of CRA 
International, an economics consulting firm. My testimony is my 
own and does not represent CRA or any of its clients.
    The economic impacts of any new policy should be carefully 
examined when that policy will be expected to dramatically 
alter patterns in consumer behavior and in markets. This is 
certainly the case for S. 2191. Using CRA's MRN-NEEM model for 
assessing climate policy costs and considering many different 
sets of assumptions, I estimate that the present value of S. 
2191's net costs to U.S. consumers will be between $4 trillion 
and $6 trillion through 2050.
    In terms of GDP, in 2015 alone, GDP would be lower by about 
$160 billion to $250 billion. Eventually, the annual loss in 
U.S. GDP would increase to the range of $800 billion to $1 
trillion, stated in today's dollars. For context, these losses 
exceed our current annual outlays for Social Security.
    In terms of jobs, by 2015 alone, S. 2191 would result in 
net job losses of 1.2 million to 2.3 million jobs. These are 
net losses, despite a substantial increase in so-called green 
jobs. But the most troubling aspect to me of the impact 
estimates is their speed of change. Just to meet the 2015 cap, 
U.S. electricity generators could have to cut their use of coal 
by as much as half, and increase their use of natural gas by as 
much as 70 percent. These shifts are found to be necessary, 
despite large reductions in electricity use and very large 
increases in renewables.
    To deliver that much more gas in a space of just a few 
years would likely cause gas prices to spike far higher than 
the 15 to 20 percent price increases that our and other 
equilibrium models indicate. The problem is that the caps in S. 
2191 are far ahead of the technologies needed to produce deep 
emissions cuts. Everyone likes to say technology is the 
solution, and it will be. But the technologies they are talking 
about will take a lot more time than S. 2191 is allowing. 
Meeting the S. 2191 caps would require large additions of coal-
based generation that captures and stores carbon emissions 
underground.
    My estimates including building as many new power plants 
with this technology as the entire current U.S. fleet of coal-
fired power plants by 2050. My estimates also project enough 
vehicles using enough new zero emitting fuels to displace all 
of the vehicle emissions from the current U.S. vehicle fleet, 
but by 2050. These changes plus much more nuclear power at the 
key technological solutions that are on the horizon. They can 
contribute to very large reductions by 2050.
    However, even by 2025, only about one-tenth of this 
technological potential can be in place, and effectively none 
of it can help meet the caps before 2015. Renewables and energy 
efficiency can start earlier, and they do in my analyses. But 
their potential is just not sufficient to meet the stringent, 
near-term targets of S. 2191 cost effectively. Consequently, 
initial compliance involves a disruptive large switch toward 
natural gas, a fossil fuel that emits a lot of CO2 
in its own right. This is a switch that hardly moves us toward 
greater energy security during that time period prior to about 
2025.
    But then by about 2025, all of that new natural gas 
infrastructure and generation will lose market share to the new 
low-carbon technologies as they start to come online, the ones 
that were needed all along. The rapidly built-up infrastructure 
supply chains for natural gas will become under-utilized within 
about 15 years of being created. We will need to restart the 
coal mines and the transportation network that were shuttered 
so rapidly only 15 years before.
    S. 2191 sets ambitious caps, but its near-term ambitions 
are far ahead of the necessary technologies. Despite the 
economic risks that this poses in the near-term, the bill does 
not provide any protection from leakage when manufactured goods 
from unregulated countries out-compete our own.
    [The prepared statement of Ms. Smith follows:]

  Statement of Anne E. Smith, Ph.D., Vice President, CRA Internatonal

    Madame Chairman and Members of the Committee:
    Thank you for your invitation to participate in today's hearing. I 
am Anne Smith, and I am a Vice President of CRA International. Starting 
with my Ph.D. thesis in economics at Stanford University, I have spent 
the past twenty-five years assessing the most cost-effective ways to 
design policies for managing environmental risks, including cap-and-
trade systems. For the past fifteen years I have focused my attention 
on the design of policies to address climate change risks, and have 
prepared many analyses of the economic impact of climate polices. I 
thank you for the opportunity to share my estimates of the impacts of 
America's Climate Security Act of 2007 (S. 2191) with you. My written 
and oral testimonies reflect my own research and opinions, and do not 
represent any positions of my company, CRA International, or its 
clients.
    Net societal costs are an inescapable aspect of an emissions limit 
via a cap-and-trade program that cannot be eliminated through any 
allocation formula that may be devised. The potential economic impacts 
of any new policy should be carefully explored, but particularly so 
when one expects that the new policy would cause dramatically altered 
patterns of economic activities and consumer behavior. This is 
certainly the case for a greenhouse gas policy such as S. 2191.
    I have estimated the costs and economic impacts of S. 2191 using a 
model called MRN-NEEM that I and my colleagues at CRA International 
have developed over the past two decades specifically to provide a 
credible and state-of-the-art ability to assess greenhouse gas 
emissions control policies. I will summarize the results of these 
analyses in my testimony, and also discuss some other issues with how 
S. 2191 would affect the economy that are not directly addressed in the 
model analyses.

                   OVERVIEW OF ECONOMIC IMPACT MODEL

    Detailed documentation of the MRN-NEEM model is available on CRA's 
website.\1\ In brief, this model is a ``general equilibrium'' model of 
the U.S. economy. This means that it tracks every dollar that is spent 
in order to reduce emissions through the economy, accounting for 
economic gains in those sectors that provide the goods and services 
that result in emissions reductions, as well as economic costs to those 
who must incur these added expenditures, and to those sectors that lose 
demand as a result of the policy. The model also accounts for any 
changes in the distribution of wealth that result from the combined 
impact of emissions control spending and the disposition of the wealth 
associated with newly created allowances. The results of a model run 
thus reflect the net impact to the U.S. economy after all of the 
winners and losers under a proposed policy have been accounted for. It 
is these net costs that should be compared to the changes in climate-
related risks expected of the policy.
---------------------------------------------------------------------------
    \1\ http://www.crai.com/pubs/pub_7748.pdf
---------------------------------------------------------------------------
    The model assumes that implementation of an emissions cap will 
occur in a least-cost fashion with fully-functional, competitive 
product and allowance markets. The only limits imposed on the 
efficiency of a cap-and-trade market are those that are directly 
specified in a Bill, such as when some sectors are not covered by the 
proposed cap scheme.\2\ Leakage of some economic activities outside of 
the U.S. is also estimated for sectors that face competitors in other 
countries that do not have their own emissions caps.
---------------------------------------------------------------------------
    \2\ Placing sectors that are not covered by the proposed cap into 
the offsets category still limits the program's efficiency.
---------------------------------------------------------------------------
    Additionally, MRN-NEEM assumes all businesses and consumers have 
``perfect foresight'' of future allowance prices and policy 
requirements. This means that the model does not include any costs due 
to uncertainty and ``surprises'' that will probably also be associated 
with compliance with a new policy. It captures only a long-run 
equilibrium in all of the markets, and thus does not include any of the 
costs of an overly rapid shift in markets due to imposition of a new 
policy. The potential disruptiveness of the transition to the new 
equilibrium, however, can be assessed by considering the rate of change 
in key markets observable in the model results.
    MRN-NEEM represents the U.S. economy in 9 geographic regions and 10 
business sectors from 2010 through 2050. Table 1 lists the 10 sectors. 
The model also includes household emissions (including from personal 
automobile use) and government spending. The electric sector--a very 
central playing in the emissions control effort--is represented in 
exceptional detail. Electricity markets are divided into 29 regions 
interconnected by limited transmission capabilities. Every generating 
unit in the U.S. is represented in the model, with its current 
emissions control equipment, and retrofit opportunities. Generating 
emissions of SO2, NOx and Hg (and their associated caps) are 
also included. Use of existing power plants is determined by their 
ability to serve electricity load cost-effectively, and the model 
retires plants that can no longer do this as emissions caps come into 
effect. The model contains substantial detail on new generating 
technologies that can be built, including all of the major forms of 
renewables generation, new nuclear power, and an ability in the future 
to add (or retrofit) carbon capture and storage onto advanced coal-
based generating units.

   Table 1:--Business Sector Disaggregation Used in MRN-NEEM Model for
                            Analysis S. 2191
------------------------------------------------------------------------
              Energy Sectors                     Non-Energy Sectors
------------------------------------------------------------------------
Coal extraction...........................  Agriculture
Oil and gas extraction....................  Energy-intensive sectors
Oil refining/distribution.................  Manufacturing
Gas distribution..........................  Transportation services
Electricity generation....................  Services
------------------------------------------------------------------------

        SUMMARY OF ESTIMATES OF THE ECONOMIC IMPACTS OF S. 2191

Key Assumptions
    Using the MRN-NEEM model, I and my colleagues have prepared a 
number of different simulations of the economic impact of the emissions 
cap-and-trade program of S. 2191. These simulations (or ``scenarios'') 
differ in their input assumptions, thus providing a range of estimates 
of the impact of the Bill that I summarize in my testimony below. The 
range reflects a variety of assumptions about the following key inputs:
     The precise numerical level of the cap.--This is the most 
important cause of the ranges that I will report. Characterizations of 
S. 2191 imply that the cap in 2012 would be set at 2005 emissions 
levels. However, the Bill itself states a numerical cap of million 
metric tons of CO2 in 2012 that is about 10% lower than the 
official U.S. Greenhouse Gas Inventory's 2005 emissions reported for 
the sources that S. 2191's cap would cover. Lacking any information to 
resolve this discrepancy, I present results that have applied a cap at 
the numerical limits stated in Section 1201(D) of S. 2191, and also at 
the higher level that we find reported in the U.S. Inventory. As in any 
cap-and-trade program, the stringency of the cap determines the cost of 
the policy. The scenarios that were run using the more stringent caps 
stated in S. 2191 are generally those that define the more severe 
economic impacts shown in the ranges that I report below. Similarly, 
the scenarios that were run using the less stringent cap levels (based 
on the data published in the inventory for the covered sectors) 
generally define the less severe economic impacts in the ranges that I 
report below.
     Timing for availability of advanced, low-carbon 
technologies.--All scenarios showed exceptional reliance on advanced, 
low-carbon technologies that are not presently commercially available, 
particularly coal-based generation that uses carbon capture and 
sequestration (CCS) and zero-carbon liquid fuels, such as could be 
provided by commercialization of cellulosic ethanol. Scenarios reported 
here reflect a wide range of different assumptions about the date of 
availability and rate of potential construction of CCS technology, 
although even the most ``pessimistic'' of the assumptions used did 
allow a very large amount of the technology to be introduced, as I will 
explain below.
     Cost and effectiveness of advanced, low-carbon 
technologies, and rate of cost improvement.--Although cost estimates 
are available for technologies that will one day come into the market 
place, these estimates are viewed as quite uncertain. They will also 
change over time, even if a current estimate is a sound one for a given 
point in time. Our scenarios reflect a variety of the current estimates 
of technology costs and different rates of improvement over time in 
those costs.
     Rate of growth in electricity demand.--The rate of 
increase in energy demand as the economy grows (i.e., the energy-
intensity of the economy) also contributes to the degree of effort that 
it will take to meet a future cap of any particular level. Our 
scenarios contain a range of base case electricity load growth 
assumptions, generally defined by projections of the National 
Electricity Reliability Council (NERC) which monitors the sufficiency 
of U.S. electricity supplies and by the projections of the Energy 
Information Administration (EIA) in its Annual Energy Outlook 2007.
     Natural gas prices.--Long-term natural gas prices 
forecasts are very uncertain, but can have a significant effect on the 
cost of achieving different CO2 levels. Our scenarios rely 
on the reference cases of the EIA's Annual Energy Outlooks (both 2006 
and 2007) through 2030, where that forecast ends. After that, our 
scenarios vary in whether they assume gas prices would continue to 
increase over time, or would remain flat (in real dollars) after 2030.
     Quantity of offsets allowed.-- S. 2191 would allow a 
limited number of offsets to be used in meeting its caps. There is some 
uncertainty in interpreting its provisions regarding how much 
flexibility these provisions would provide to use a variety of sources 
and types of offsets. Our scenarios use offsets limits that range from 
15% to 30%, reflecting different views on how much could be obtained 
through international channels under Title II.E.
     Quantity of new nuclear capacity that may be built.--All 
of our scenarios allow new nuclear generation to be built after 2015, 
and allow the existing fleet of capacity to remain through 2050. The 
scenarios allow a maximum of 85 to 130 GW of new nuclear capacity to be 
added by 2050 (depending on the scenario), and they all impose limits 
on how fast these can be built. These quantities are approximately 
equal to the amount of nuclear capacity already in place in the U.S., 
and so our analyses essentially double U.S. nuclear capacity between 
now and 2050.
     Degree of emissions banking that will be adopted.--S. 2191 
allows unlimited banking. However, our analyses reveal that the 
incentives to bank in the period 2012-2020 are driven by expectations 
of very rapid allowance price escalation in much later years (e.g., in 
2035-2050). It is debatable whether companies will engage in large 
amounts of banking to optimize costs over such a long period when they 
imply such substantial added near-term cost. Allowing the model to 
simulate such banking reduces total present value of costs, but it 
increases the impacts in the first years of the policy while it reduces 
the later year impacts by even more. Our scenarios include cases with 
and without banking behavior.
    All of our scenarios have substantial quantities of new renewables, 
available immediately. The maximal quantity of different types of 
renewables varies by region, based on publicly available information on 
these resources. Our scenarios do not vary the assumptions about these 
technologies.
    S. 2191 allows some constrained amounts of borrowing. We reviewed 
our scenario results for whether borrowing would occur. We find that if 
long-term incentives are fully considered, there is actually an 
incentive even in the first years of the policy to bank rather than 
borrow. If a more myopic view is assumed, there would be a very slight 
incentive to borrow in the first few years of the period, if there were 
no penalty for doing so.\3\ Given the financial penalties that S. 2191 
would impose, and the limits to borrowing, we do not believe borrowing 
behavior would affect our cost estimates, and we did not make an effort 
to model it directly. We also find it difficult to see how borrowing 
could proceed, given that S. 2191 intend to place allowances into 
accounts only on a year to year basis. Without having possession of 
one's future allocations of allowances, borrowing would be a complex 
process, if possible at all.
---------------------------------------------------------------------------
    \3\ That is, allowance prices in the initial periods when we turn 
off banking rise at about 1% to 4% in real terms into the next 5 years. 
(In later years prices escalate by over 10% per year, implying a great 
desire to have built up a bank before that time period arises.) With a 
real discount rate of 5%, one might wish to borrow slightly from the 
next time period. However, a strong incentive to borrow would only 
occur if we were to see allowance prices falling in real terms, and we 
have not observed that outcome. The decision to tighten the cap in 2020 
between the draft and final version of S. 2191 weakened the potential 
incentives to borrow at the outset.
---------------------------------------------------------------------------
               RANGES OF ESTIMATED MACROECONOMIC IMPACTS

    Figure 1 presents the range of estimates of the marginal costs of 
meeting the S. 2191 caps observed in the scenarios we have simulated. 
In this figure (and all that follow in my testimony), the two lines 
presented reflect the upper and lower bounds of our results.\4\ 
Individual scenarios' results fall inside the ranges presented, with 
the exception of the single highest and lowest estimate for each year.
---------------------------------------------------------------------------
    \4\ These are not ``confidence intervals'' but true minimum and 
maximum values over the set of scenarios we have run. We also note that 
there was nothing in the construction of our scenarios intended to 
capture a probability distribution of any sort. That would require much 
more work than has been accomplished.
---------------------------------------------------------------------------
    The estimates shown in Figure 1 are the marginal costs of control, 
stated as dollars per short ton of CO2-e. This model output 
is commonly described as the allowance ``price.'' However, it is 
important to note (as will be discussed in a later part of this 
testimony) that actual market prices of allowances are highly volatile, 
and rarely reflect their long-run equilibrium level. The results 
presented here indicate the long-run equilibrium prices levels that may 
be expected under various different assumptions. The stringency of the 
cap itself is the greatest driver of these results, with higher prices 
associated with tighter caps. As noted above, just the uncertainty in 
what the actual numerical level of the cap may be under S. 2191 
determines where in the range shown in Figure 1 one might expect to be.

[GRAPHIC] [TIFF OMITTED] T3583.005


    As Figure 1 reveals, marginal costs of controls are projected to be 
in the range of $32 to $55 per short ton of CO2 by 2015. 
Although our projections show prices rising to levels that are much 
higher after 2015, even the 2015 prices are ``high'' in an absolute 
sense. The 2015 projected price levels, if injected into the economy in 
a period of only a few years, would be disruptive to the economy, and 
cause a painful transition. Our modeling effort considers only long-run 
equilibrium outcomes, and does not in any way capture short-term 
transitional costs, that can be much larger. It is my assessment, 
looking at these initial prices levels, that the first few years of a 
cap such as prescribed in S. 2191 would be a time of substantial market 
turmoil that is not reflected in any of the impact estimates that I 
report next.
    MRN-NEEM is a model that optimizes economic welfare. Thus, the 
change in economic welfare that will result from a policy is its key 
output, and it is stated as a present value over the full time period 
analyzed, which is 2010-2050 in the current case. Our scenarios imply 
that S. 2191 would decrease U.S. average economic welfare by 1.1% to 
1.7%. This impact varies by region, and the degree of regional impact 
can be varied by the formulas for allocating the allowances. Our 
analyses included a representation of the allocation formulas in the 
draft version of S. 2191 (i.e., the August ``Annotated Table of 
Contents''). Using that set of allocations and formulas for recycling 
of auction revenues, we find that New York, New England states, and 
California would experience welfare impacts substantially less than the 
U.S. average, while regions heavily reliant on fossil fuel energy 
sources would face impacts somewhat greater than the U.S. average.
    Figure 2 presents these economic welfare impacts restated in terms 
of changes in the annual value of all goods and services consumed by 
the average U.S. household. This measure is very similar to an estimate 
of the change in real disposable income. Our scenarios imply that real 
annual spending per household would be reduced by an average of $800 to 
$1300 in 2015. If the percentage consumption impacts projected for each 
future year were to be stated in terms of current real spending power 
(we use 2010 spending as the proxy for ``current'' here), these 
spending impacts would increase to levels of $1500 to over $2500 by the 
end of our modeled time period, 2050. The costs shown in Figure 2 
reflect the net impact on consumption due to more than just higher 
household energy bills. These costs also capture the net effect of 
increased costs of all goods and services, which require energy to 
produce.
    Another commonly used metric of economic impact is gross domestic 
product (GDP). This declines as consumers demand fewer goods and 
services, and it also declines if U.S. businesses close down due to 
competition from international suppliers. Offsetting these declines are 
increases as new investments are made in advanced energy technologies. 
Our scenarios find a net reduction in 2015 GDP of 1.0% to 1.6% relative 
to the GDP that would occur but for S. 2191. The impact rises to the 
range of 2% to 2.5% thereafter. Figure 3 shows the associated dollar 
amount by which GDP would be reduced in each year, stated in real 2007 
dollars. (Inflation will make the dollar amounts larger over time.) GDP 
would be lower in 2015 by about $160 billion to $250 billion. 
Eventually, the annual loss in GDP would increase to the range of $800 
billion to $1 trillion (stated in real, 2007 dollars). (To provide some 
context, current annual outlays for Social Security are about $600 
billion.)
    Naturally, with reductions in GDP come reductions in real wages and 
job losses. We have estimated 1.2 million to 2.3 million net job losses 
by 2015 over our set of scenarios. By 2020, our scenarios project 
between 1.5 million and 3.4 million net job losses. There is a 
substantial implied increase in jobs associated with ``green'' 
businesses (e.g., to produce renewable generation technologies), but 
even accounting for these there is a projected net loss in jobs due to 
the generalized macroeconomic impacts of the Bill.

[GRAPHIC] [TIFF OMITTED] T3583.006

               RANGES OF ESTIMATED ENERGY MARKET IMPACTS

    Impacts I have presented thus far reflect the economy-wide, or 
``macroeconomic'' impacts that are projected to occur when a cap such 
as that of S. 2191 is imposed. Underlying those impacts are significant 
alterations to the way that energy needs are met. I will now turn to 
some of the changes in fuels and electricity markets that drive the 
macroeconomic impacts described above.
    In the near term, the only way to make large reductions in 
emissions without reducing energy use is to shift from coal-fired 
generation to natural-gas fired generation of electricity. As I will 
show later, the electricity sector is projected to make a very large 
increase in natural gas demand (i.e., up to 4 quadrillion Btus by 2015-
2020). Somewhat offsetting this very large increase, our scenarios also 
project a decrease in natural gas demand from other productive sectors 
covered by the S. 2191 cap.\5\ We project a net change in U.S. natural 
gas demand of up to 3 quadrillion Btus. (For context, current gas 
consumption in the U.S. is about 20 to 21 quadrillion Btus, of which 5 
to 6 quadrillion Btus are consumed by electricity generators.)
---------------------------------------------------------------------------
    \5\ All of the scenarios summarized in my testimony exempted 
household and commercial uses of natural gas, as they were prepared 
before the mark up of S. 2191 in which these sources became covered by 
the cap as well.
---------------------------------------------------------------------------
    Naturally, increases in gas demand will translate into higher 
natural gas prices. Figure 4 presents the percentage changes in 
projected natural gas prices that our analysis estimates would occur 
under long-run equilibrium conditions. Even with a long-run equilibrium 
view, we project gas price increases of 15% to 20% by 2015, and staying 
high through 2030. As I mentioned earlier, however, sudden shifts in 
demand such as those projected by 2015 would cause significant market 
turmoil and much higher price spikes until a new long-run equilibrium 
of gas supply can be established.
    Figure 4 also shows that in later years (i.e., after 2030), natural 
gas demand actually starts to fall relative to currently projected 
future levels. This occurs as more advanced technologies are projected 
to become more widely available. Natural gas may emit less 
CO2 than current coal-fired generation, but it does still 
emit substantial amounts of CO2. In the longer run, as the 
cap tightens further, natural gas becomes the highest-emitting source 
of energy and also starts to face declines in demand. This suggests 
that near-term caps that can only be met through a disruptive shift to 
greater use of natural gas may be a more costly policy than necessary 
to achieve large cumulative, long-run reductions in greenhouse gas 
emissions.
    Our analyses of S. 2191 account for all sources of greenhouse gas 
emissions (including the non-CO2 greenhouse gases) on a 
nearly economy-wide basis. A substantial share of the long-run 
reduction is due to major shifts in all parts of the economy, including 
a transformation of the way that vehicles are fueled. However, the 
majority of the emissions reductions in the near-term come from changes 
in electricity generation emissions. These emissions account for about 
34% of total greenhouse gas emissions today, but they are projected to 
contribute well over 50% of the emissions reductions under S. 2191 
prior to 2030. I will therefore describe now the types of electricity 
sector changes that our analyses are projecting will occur in order to 
achieve the reductions under S. 2191.

[GRAPHIC] [TIFF OMITTED] T3583.007


    Electricity-related emissions changes are projected to come from a 
mixture of use of different fuels, use of different technologies, and 
reduction in electricity demand. These are interrelated phenomena. For 
example, changes in emissions from generation will not be cheap, and 
they will drive up the wholesale price of electricity. That price 
increase, in turn, will incentivize efficiency improvements and 
behavioral changes to consume less electricity.
    Figure 5 presents the range of projected wholesale electricity 
price increases on a U.S. annual average basis after accounting for all 
of the combined effects in their most cost-effective combination. The 
increases are substantial, including a 36% to 65% increase in those 
prices by 2015 alone. They continue to rise thereafter, reaching the 
range of an 80% to 125% increase by 2050. This occurs despite extensive 
technological advancements and efficiency enhancements. These estimates 
do not reflect any of the volatility in allowance or natural gas prices 
that can be expected, particularly in the initial years of the policy.
    Figure 6 portrays the extent to which our analyses project 
electricity growth to moderate. The projected ``business as usual'' 
(BAU) growth in U.S. electricity demand is shown as a range by the pink 
(i.e., upper two) lines (there is a range because our scenarios used 
different BAU growth paths). The range between the blue (i.e., lower 
two) lines shows demand after consideration of price-induced (and 
policy-induced) demand changes. These demand changes are on the order 
of 30% from BAU, and nearly levelize electricity demand growth. They do 
not occur costlessly. This degree of demand reduction can only occur 
because of the electricity price increases shown in Figure 5. These 
declines are, in part, induced by the higher cost of electricity, which 
makes technological and behavioral changes in consumption a cost-
effective choice. However, to some degree, these declines also reflect 
reductions in the productive output of the U.S. economy, which is what 
I meant by the term ``policy-induced'' demand reduction. To some extent 
the latter declines may reflect mere leakage, which I discuss in the 
next section of my testimony.

[GRAPHIC] [TIFF OMITTED] T3583.008

    Demand reduction, although large, contributes a relatively small 
share of the electric sector's emissions reductions. In the short-run, 
the major response is a rapid and large increase in the use of natural 
gas. In the longer-run, new technology plays the major role. Figure 7 
shows the amount of CCS capacity that is assumed to be possible to 
install over time in our set of scenarios. Although not yet 
commercially available, our scenarios allow between 200 GW and over 400 
GW of this technology to be installed by 2030. These are highly 
uncertain assumptions because there has been very little done yet in 
terms of technical feasibility studies to suggest realistic 
expectations for constructing new and replacement generation on the 
rapid timescales implied by this type of policy. The projected uptake 
of this allowed amount is usually at its maximal allowed levels.\6\ To 
put these quantities into context, the current installed capacity of 
coal-fired generation in the U.S. is about 300 GW. Thus, these 
scenarios allow the entire existing coal-fired asset base to be 
effectively replaced with CCS. (There are also very large amounts of 
zero-emitting renewables and nuclear generation that are available--and 
adopted--in these scenarios.)
---------------------------------------------------------------------------
    \6\ Exceptions have occurred in the later years for scenarios with 
the largest allowed amounts of CCS combined with the lowest BAU demand 
forecast. Even in those cases, the projected use is at the maximum 
assumed to be possible in the mid-years, and very near the maximum even 
in the later years.

[GRAPHIC] [TIFF OMITTED] T3583.009


    A notable element of Figure 7 relates to the timing of this large 
potential for future CCS installations. Although the scenarios assume 
that we can effectively replace our existing fossil fueled fleet with 
an equivalent capacity that has very low emissions (due to the CCS), 
this cannot be done in the near-term. Almost no CCS capacity can be 
realistically expected to help meet S. 2191 targets in 2012-2015. Even 
by 2025, the quantity that can realistically be brought into the 
generating system is very small compared to the ultimate potential. In 
brief, the emissions targets of S. 2191 are far ahead of the time curve 
of availability of the most critical technologies for achieving large 
emissions reductions. (We see similar temporal constraints on the low-
carbon vehicle fueling options.)
    With the timing of the target stringencies so far ahead of the 
ability of advanced technologies to respond, the only option of the 
electricity sector to meet the limits of S. 2191 is a large shift from 
coal to natural gas generation during 2012 through 2030, and then an 
equally large shift back in the years from 2030 through 2050. The 
magnitude of these cycles is visible in Figures 8 and 9.
    The projected cycle in coal and gas demands by the electricity 
sector will imply many types of costs and transitional issues not 
apparent in the model results. Huge changes in energy supply 
infrastructure will have to occur to enable both the first phase of the 
cycle (through 2030) and then again for the later phase of the cycle 
(after 2030). This cycle can be avoided altogether by better aligning 
the timing of the emissions targets with the availability of the 
advanced technologies that are expected to represent the long-run 
solution to greenhouse gas emissions. Doing so would also eliminate the 
near-term shocks to energy and electricity prices (such as evident in 
Figures 4 and 5), and allow a more gradual increase to the ultimately 
high prices that are necessary to reduce emissions to levels far below 
current emissions. Given that climate change risks are a long-term, 
cumulative phenomenon and not a near-term acute concern, true policy 
cost-effectiveness will come from a policy that allows a more gradual 
and steady transition to a low-carbon economy.

      LEAKAGE: A CONCERN NOT FULLY ADDRESSED IN THE MODEL ANALYSIS

Some domestic companies whose products compete in international markets 
        are likely to be driven out of business no matter what 
        allocation they receive.
    A generous allocation could increase the shareholder value of a 
company that is unable to increase its prices due to competition in 
international markets (i.e., a ``trade exposed'' industry). However, it 
will do this in a perverse way that policymakers need to be aware of. 
As the price of allowances rises, a company that cannot raise its 
product prices will experience falling margins. If that company is also 
granted free allocations, it can use them to offset some of the costs, 
and thus maintain profitability. However, this will only be true for a 
range of lower allowance prices. At some allowance price point, 
however, the profit margins will be negative and the company will cease 
production. There will be premature retirement of the existing 
productive assets in our trade-exposed sector, and reductions in the 
economic activities associated with those sectors. Given that the cause 
of the closures is international competition, these lost U.S. 
manufacturing activities would be replaced by foreign manufacturing: 
global emissions will not fall but the U.S. economy will still pay the 
price.

[GRAPHIC] [TIFF OMITTED] T3583.010

    This perverse outcome of climate policy is called ``leakage'' 
because the policy is rendered ineffective environmentally when it 
causes emissions to ``leak'' across national borders. Emissions from 
any part of the globe have comparable impacts on climate risks, as they 
all first accumulate together in the global atmosphere to have their 
combined and joint effect on the global greenhouse effect. On the one 
hand, this fact offers important flexibility to reduce emissions 
anywhere in the globe that has cost-effective opportunities to do so, 
and not to confine domestic efforts to actions within U.S. borders. On 
the other hand, it also means that any GHG cap we impose domestically, 
and its attending domestic reductions, may be undermined by offsetting 
emissions increases in nations that do not have comparable caps on 
their own economies. Large sums of money could be spent with no actual 
global environmental benefit. U.S. economic output and jobs leak to 
other countries as well.
    Leakage has often been talked about in very general terms. 
Estimates of leakage due to a U.S. domestic policy are suggested in the 
range of about 10-15%, meaning that for every 10 tons that is reduced 
in the U.S., 1 ton is just emitted elsewhere in the world. This may 
sound like a relatively small price to pay in order to get a net 9 tons 
of reduction from U.S. action. The difficulty with this view, however, 
is that leakage is not a phenomenon that applies to every ton of 
emissions reduction. Instead, there may be almost no leakage associated 
with controls on emissions that are not trade-exposed (e.g., personal 
and commercial transportation, electricity generation, and services), 
but nearly 100% leakage associated with controls on emissions in 
sectors that are trade-exposed (e.g., many of the energy-intensive 
manufacturing processes such as cement, iron and steel, chemicals, 
transportation equipment manufacturing, textiles, etc.). Concentrated 
economic impacts on specific sectors that offer no benefit in terms of 
global emissions reduction make no sense as a matter of policy design.
    The potential severity of the impacts to trade-exposed industries 
appears not yet fully appreciated by policy analysts or policymakers. 
Most of the attention on estimating climate policy impacts has been 
focused on transportation and electricity generation, which are among 
the least concerned with potential leakage. The potential plight of the 
trade-exposed industries has been mostly thought to be something that 
could be dealt with through compensating allocations. While that might 
solve the concerns of some of the shareholders of those businesses, 
policymakers should closely examine whether they are prepared to face 
the economic impacts of reduced exports, increased imports, and losses 
of domestic output of many important elements of the U.S. manufacturing 
base.

   POLICYMAKERS SHOULD FOCUS ON HOW TO LIMIT U.S. EMISSIONS WITHOUT 
                            CREATING LEAKAGE

    There are two ways to mitigate leakage without exempting trade-
exposed sectors from an emissions cap:
    1. The first is to impose domestic emissions limits only as part of 
a global agreement among all nations that compete with our products, or 
which might start to compete once a policy offers them a greater cost 
advantage than they have now. Clearly, the present policy proposals in 
the Congress would not accomplish this.
    2. The second is to find ways to remove the competitive advantages 
of competitors at our borders, through ``border tax adjustments.'' 
Border tax adjustments are allowed only under very special 
circumstances under the rules of the World Trade Organization (WTO).
    The legality of obtaining effective border tax adjustments in the 
case of a cap-and-trade system is quite questionable at present.\7\ 
Title VI of S. 2191 represents an attempt to construct a system of 
border tax adjustments in a way that would be WTO-compliant, but it 
appears to have dubious chances of success in limiting leakage due to a 
cap-and-trade proposal. Title VI contains a complex set of provisions, 
each aimed at addressing one of several hurdles that would be faced in 
order to achieve the ultimate goal of equalizing costs of imports at 
the U.S. border in a WTO-compliant manner. Each of these steps--
believed to be required to satisfy international law--would be open to 
legal challenge, leaving multiple potential ways that the approach in 
Title VI could fail to provide the intended protection from leakage. 
Most critical in my mind, however, is that these many steps require 
time to accomplish. As embodied in S. 2191, the imposition of leakage 
protection might not be possible until 2019. Given that the cap in this 
Bill would start in 2012, this would imply up to seven years during 
which U.S. trade-exposed manufacturers would be facing competitive 
pressures, eroded ability to profitably continue in business, and 
experiencing leakage. Delays of this sort in obtaining that coverage 
are not acceptable for the businesses that face rapidly responding 
markets.
---------------------------------------------------------------------------
    \7\ J. Pauwelyn, U.S. Federal Climate Policy and Competitiveness 
Concerns: The Limits and Options of International Trade Law, Nicholas 
Institute for Environmental Policy Solutions Working Paper NI WP 07-02, 
April 2007.
---------------------------------------------------------------------------
    The method of S. 2191 in Title VI for obtaining WTO-compliant 
leakage protection was crafted to work with a cap-and-trade form of 
proposal. Interestingly, the prospects of successfully and immediately 
implementing border tax adjustments are considered to be much greater 
in the case of a greenhouse gas tax than in the case of cap-and-
trade.\8\ If a carbon tax would provide better prospects for an 
immediate and WTO-compliant border tax adjustment, perhaps we should 
consider applying this type of approach for industries exposed to 
leakage through international competition, so that they at least can 
have the protection from leakage, even while other less vulnerable 
sectors could be in a cap-and-trade scheme if they choose. This might 
be especially useful to consider for certain commodities for which a 
heavy reliance on imported supply might be a strategic concern for the 
U.S. Those having a hand in creating a climate policy for the U.S. 
should become much more familiar with the intricacies of WTO rules, and 
the likelihood of successfully creating immediate and durable 
protection from leakage under different types of greenhouse gas policy 
designs. This needs to be sorted out before and not after a greenhouse 
gas policy is enacted.
---------------------------------------------------------------------------
    \8\ Ibid.
---------------------------------------------------------------------------
In the absence of a clear mechanism for preventing leakage with a cap-
        and-trade system, the only alternative for keeping economic 
        impacts within acceptable bounds is to place a ceiling on the 
        cost of allowances.
    The higher the price of permits under the domestic cap, the more 
serious ``leakage'' is likely to be if there are no border tax 
adjustments in place. Thus, potential for leakage provides an important 
reason for directly ensuring that the price of permits that may occur 
under a domestic GHG cap-and-trade program will remain relatively low. 
The only way to design a domestic cap-and-trade program to address this 
international competitiveness risk is simply to keep the carbon price 
low enough that such losses remain within acceptable bounds. This, 
naturally, limits the amount of domestic emissions reductions that will 
be achieved as well. Until international competitiveness issues are 
resolved (either through coordinated action or a system of border tax 
adjustments) ambitions to make significant reductions through any 
domestic cap-and-trade program will be thwarted, or else highly 
disruptive to key parts of our economy. This also implies that any 
domestic cap-and-trade program that is implemented in advance of 
internationally coordinated efforts should be designed with clearly 
defined permit price caps.

PRICE UNCERTAINTY AND VOLATILITY: ANOTHER CONCERN NOT ADDRESSED IN THE 
                             MODEL ANALYSIS

An allowance price ceiling has important additional merits for 
        businesses and government.
    Prices in all previous and existing cap-and-trade programs have 
exhibited substantial volatility, and this can be expected of GHGs as 
well.\9\ Price volatility, however, is likely to have much greater 
generalized economic impacts with a CO2 cap than for caps on 
SO2 and NOx. CO2 is a chemical that is an 
essential product during the extraction of energy from any fossil fuel. 
As long as fossil fuels are a key element of our energy system (which 
they are now, and will remain for many years even under very stringent 
caps), any change in the price placed on GHG emissions will alter the 
cost of doing business throughout the economy. This is because all 
parts of the economy require use of energy to one degree or another.
---------------------------------------------------------------------------
    \9\ Some have argued that banking reduces price volatility. While 
it may reduce it, it certainly does not eliminate it. For example, the 
Title IV SO2 market has experienced high volatility over the 
past two years, even though it has a large bank already in place. 
During 2005, SO2 permit prices rose from about $600/ton to 
above $1600/ton, then plummeted to below $400/ton by the beginning of 
2007. Additionally, banking offers little price stability at all during 
the start up of a new cap, simply because no bank yet exists, and this 
initial-period volatility can be very large if the first-period cap 
requires a substantial amount of reduction and/or has a relatively 
brief regulatory lead time. The experience of the first year in the NOx 
cap of the Ozone Transport Region of the northeastern U.S. is a classic 
example.
---------------------------------------------------------------------------
    In contrast, under the Title IV SO2 cap, a fluctuating 
SO2 permit price would only affect emissions from coal-fired 
electricity generation. In deregulated electricity markets, coal-fired 
electricity does not always affect the wholesale price of electricity, 
and even significant fluctuations in SO2 permit prices might 
have almost no effect on electricity prices. Even in regulated 
electricity markets, the impact of the SO2 price on the cost 
of all electricity generation would be diluted by the unaffected costs 
of all other sources of generation before it reached customers. Also in 
contrast to an economy-wide GHG cap, no other sources of energy in the 
economy are affected at all by SO2 price changes. Finally, 
under the Title IV SO2 cap, price variations during the past 
year that range from $400/ton to $1500/ton (the range observed in the 
past year under Title IV) have a modest effect on the majority of coal-
fired units that are already either scrubbed or burning low-sulfur 
coal. Such units might see the cost adder due to its SO2 
emissions vary between 7% and 26% of its base operating cost,\10\ and 
(as noted) the impact on consumer's cost of electricity would be much 
smaller, if anything.
---------------------------------------------------------------------------
    \10\ By ``base'' operating cost, I mean the cost of generating a 
unit of electricity before accounting for the emissions price. The 
majority of this cost is the cost of the fuel.
---------------------------------------------------------------------------
    Variation of CO2 prices such as that observed in the EU 
ETS market over the past two years (approximately $0/ton to $35/ton) 
would cause all coal-fired units to see additional costs varying 
between about 10% and 175% of their base operating costs. Further, even 
gas-fired units would experience absolute cost increases equal to about 
half those of the coal-fired units.\11\ Since gas-fired units do 
frequently set the wholesale market price of electricity, consumer 
electricity prices would also vary markedly with the price of GHG 
permits. Retrofits would not be available to attenuate these costs (at 
least, not until even higher permit price levels would be achieved and 
sustained at those levels.) At the same time, all other key energy 
demands in the economy (e.g., for transportation, industrial process 
heat, building heating and air conditioning, etc.) would also 
experience similar fluctuations with varying GHG permit prices. 
Clearly, the effect on the economy could be disruptive.
---------------------------------------------------------------------------
    \11\ However, the percentage increase in the base operating cost 
would be much smaller (i.e., about 30% compared to 175%) because 
natural gas is so much more expensive than coal.
---------------------------------------------------------------------------
    These are not just theoretical calculations. The EU's statistics 
bureau, Eurostat, reports that electricity prices rose significantly 
throughout the EU in 2005. Household rates rose by 5% on average over 
all 25 EU countries, and industrial rates rose by 16% on average.\12\ 
The high prices of GHG permits under the EU ETS during that period is 
widely viewed as having contributed to this price increase, and indeed, 
wholesale electricity prices have fluctuated in step with the wide 
swings in ETS permit prices. It is not clear yet how or whether the 
wide variations in permit prices may begin to contribute to the 
variation in economic activity. However, it should also be noted that 
the EU ETS does not cover all sources of GHGs, or even a majority of 
sources of CO2 emissions in the EU. (This may dampen the 
impacts of CO2 permit price volatility on the EU economy, 
but is also a widely observed flaw in that cap-and-trade system's 
potential to produce sufficient cuts in GHG emissions necessary for the 
EU to meet its GHG targets.)
---------------------------------------------------------------------------
    \12\ Eurostat, ``News Release--July 14, 2006'' (Revised version 93/
2006), available at http:/ec.europa.eu/eurostat
---------------------------------------------------------------------------
    To sum up, price uncertainty and price volatility will impose 
impacts in the case of GHG emissions limits that are completely 
different in scale and scope from those under previous emissions 
trading programs. Their potential to increase variability in overall 
economic activity thus should be viewed as a core concern in designing 
a GHG cap-and-trade program. At the same time, the nature of climate 
change risks associated with GHG emissions is such that it is possible 
to design price-stability into a GHG cap-and-trade program without 
undermining its environmental effectiveness. In the case of a stock 
pollutant such as greenhouse gases, there is no need to absorb high 
costs in return for great specificity in achieving each year's 
emissions cap.\13\ Economists widely agree that the cost to businesses 
of managing the price uncertainty of a hard cap is not worth the 
greater certainty on what greenhouse gas emissions will be from year to 
year.
---------------------------------------------------------------------------
    \13\ Richard G. Newell and William A. Pizer 2003, ``Regulating 
Stock Externalities Under Uncertainty,'' Journal of Environmental 
Economics and Management, Vol. 45, pp. 416-432.
---------------------------------------------------------------------------
    Businesses clearly prefer having reliable allowance price 
expectations, but even governments would probably prefer some stability 
in the year to year revenue streams from an auction. For example, would 
large variability and uncertainty in allowance auction revenues be of 
any use if those revenues are intended to fund important technology-
related projects that have long-term funding needs? Even if the 
revenues would simply be rebated to citizens, would either the 
government or the citizens find any value in such uncertainty in the 
size of the rebate checks?

  A PRICE CEILING IS THE ONLY APPROACH THAT WILL OFFER THE REQUISITE 
                DEGREE OF PRICE CERTAINTY AND STABILITY

    There are various ways to provide much greater price certainty 
under a cap-and-trade program, although none have been used in any 
trading programs to date. One of the simplest concepts that has gained 
substantial attention for GHGs has been called a ``safety valve.'' 
Unfortunately, this term has begun to be used loosely (e.g., under the 
rules of the Regional Greenhouse Gas Initiative, and in California's 
AB32 program) for a variety of mechanisms that do not actually provide 
the price certainty originally intended. To be quite specific, the cap-
and-trade program mechanism that provides the requisite price cap is 
one where the government offers to issue any number of additional 
permits to regulated companies at a pre-specified and fixed price per 
permit. This price is set low enough that it is not considered 
punitive, but rather as an assurance by the government that it would 
not consider control costs above that level to be desirable as a normal 
course of events.\14\ This is the mechanism that has been incorporated 
into the bill of Senators Bingaman and Specter.
---------------------------------------------------------------------------
    \14\ Outside of the U.S., further confusion about the notion of a 
``safety valve'' has been created by application of this term to the 
traditional notion of a penalty for noncompliance. The EU ETS has a 
penalty for noncompliance that is =40/ton CO2 in Phase I and 
will be =100/ton in Phase II, starting in 2008. This is often described 
as a price cap, but its very high level relative to the price at which 
the cap is expected to be met makes it extremely ineffective. Further, 
its role as a penalty rather than as an additional compliance mechanism 
clearly would undermine the willingness of companies to resort to its 
use for planning purposes. The same confusion of penalty and safety 
valve appeared in the proposal for an Australian emissions trading 
scheme released in 2007 by Australia's National Emissions Trading 
Taskforce. The notion of a ``safety valve'' should be clearly separated 
from the role of a noncompliance penalty, with the former being set at 
a price that is considered an acceptable level of policy implementation 
cost, and the latter being set at a much higher level that is 
considered ``punitive'' and not acceptable as an indicator of the cost 
of meeting the policy goals.
---------------------------------------------------------------------------
    Because regulated entities know that they need not ever pay more 
for a permit than the established safety valve price, it functions as a 
price ceiling. No company would ever pay more to purchase a regular 
permit in the emissions market if it knows that it can always obtain 
sufficient permits at that price from the government, if necessary. 
Permit prices may fluctuate at levels below the safety valve price, but 
by judicious selection of an appropriate safety valve price, policy 
makers can ensure that these variations would not rise to a level that 
might be viewed as potentially harmful to the economy at large. If the 
safety valve price is hit on an occasional basis under a cap, then the 
goal of achieving long-term reductions in emissions is not harmed, 
given that the primary environmental risk of GHG emissions is a long-
term, cumulative one. If the safety valve price is hit on a perpetual 
basis, this suggests an important need for policy makers to consider 
how we should address the evidence that meeting targets that are more 
difficult than hoped; however, this policy deliberation will be 
possible without the urgent need to throw ``band-aid'' solutions onto 
the cap-and-trade program, and with concrete evidence of the degree of 
economic pain that is associated with the initially-established maximum 
permit price. A higher price might then be deemed acceptable, but if 
not, the safety valve will have helped us avoid the greater pain of 
learning that fact through a hard cap approach.
    A final advantage of a price ceiling provision is that it will 
limit the potential for gaming and other concerns with market 
manipulation that are often expressed for cap-and-trade schemes. The 
possibility of limiting risks of unacceptably high policy costs, 
providing planning certainty, eliminating wasteful price volatility, 
and mitigating concerns with allowance market manipulations ought to 
seem like a powerful argument in favor of a price ceiling provision.

 THE CARBON MARKET EFFICIENCY BOARD OF S. 2191 WILL NOT PROVIDE PRICE 
                         CERTAINTY OR STABILITY

    Aversion to the idea of a price ceiling has been widespread among 
parties that prefer hard caps at any cost over a long-run policy that 
offers price certainty in exchange for some flexibility in year to year 
emissions outcomes. Recently, a proposal for a ``Carbon Market 
Efficiency Board'' (CMEB) was released that was supposed to offer an 
alternative to the price ceiling approach.\15\ This concept has been 
incorporated into S. 2191 as Title II.F. Title II.F would provide no 
cost certainty at all. In fact, the white paper for the CMEB proposal 
that Title II.F follows explicitly states that it does not wish to 
diminish allowance price volatility: ``The cost relieve measures are 
not intended to relieve brief price spikes that are part of normal, 
healthy market volatility.''\16\ The proposal goes on to assert that `` 
`volatility' in price is expected and even desirable.''\17\ As I have 
noted above, volatility creates unnecessary planning and management 
costs to businesses, and should be eliminated if possible without 
harming one's objectives for reducing emissions within acceptable cost 
bounds. This is entirely possible in the case of a market that is 
entirely the result of regulation, such as an allowance market. The 
CMEB proposal does not meet the objectives of providing price certainty 
or policy cost containment.
---------------------------------------------------------------------------
    \15\ ``Cost Containment for the Carbon Market: A Proposal,'' 
developed in consultation with the Nicholas Institute of Environmental 
Policy Solutions, Duke University, July 24, 2007. Available: http://
www.nicholas.duke.edu/institute/carboncosts/carboncosts.pdf.
    \16\ Ibid., p. 3.
    \17\ Ibid., p. 7.
---------------------------------------------------------------------------
                               CONCLUSION

    There is no question that achieving significant reductions in 
greenhouse gas emissions will be very costly, and it is therefore 
important to strive to minimize those costs. The design of the program 
matters, and mitigating the ranges of costs I have estimated for S. 
2191 will require taking care to incorporate several modifications to 
the present Bill. The most important attributes missing in S. 2191 are:
     An approach that ensures policy costs will be held to a 
level considered acceptable to U.S. citizens.
     A cap stringency that is timed to match the availability 
of new, low-carbon technologies.
     A policy that offers businesses price certainty for 
planning major new investments in new technologies (e.g., in the form 
of a price ceiling).
      A policy that protects against leakage of emissions to 
economically competing nations.
     A supportive set of policies that provide effective 
incentives for research and development on breakthroughs in 
technologies that produce low-carbon energy.
     Provisions in the policy to limit the costs that it will 
impose on the economy overall if emissions reductions turn out to be 
more expensive than considered acceptable.
     A policy that will deliver even larger emissions 
reductions if the targets turn out to be less expensive to achieve than 
is considered acceptable.
    It may be wise for policymakers to take time to consider more 
closely alternatives to the cap-and-trade approach for greenhouse 
gases. Cap-and-trade is not the only form of market-based policy 
option, and others may be more able to offer the above list of 
attributes, and thus be better suited for meeting the challenge of 
reducing greenhouse gases to levels that are being proposed without 
excessive damages to our economy.
                                 ______
                                 
   Response by Anne E. Smith, Ph.D., to an Additional Question from 
                             Senator Inhofe

    Question. Based on your testimony and the testimony of the other 
witnesses, is there anything else you would like to add?
    Response. The figures cited are provided at the end of this 
document.
    Comparisons to the Nicholas Institute Analysis of the Lieberman-
Warner Bill.--I would like to provide some insight about the reasons 
why the Nicholas Institute analysis reputed to be a simulation of the 
costs of S. 2191 are lower than those of CRA International that I 
summarized in my testimony of November 8, 2007. In doing so, I address 
some unfounded criticisms in the testimonies on S. 2191 of others (who 
are unfamiliar with CRA's analysis).
    David Hawkins stated in his written testimony before the EPW 
committee (November 13, 2007, at p. 8) that CRA's analyses are 
unreasonably constraining the use of carbon capture and sequestration 
(CCS) technology, the use of renewables, and emissions reductions in 
the transportation and industrial sector. Mr. Hawkins's statements on 
this matter are unfounded in the facts. Jonathan Pershing made a 
similar statement during the hearing of November 8, in which he said he 
expected that CRA's technology introduction constraints were a reason 
for a difference between CRA's and the Nicholas Institute's different 
cost estimates. Dr. Pershing's guess was not correct.
     First, it should be noted that CRA's MRN-NEEM model and 
the ADAGE model used by Nicholas Institute are both the same generic 
type of model: a computable general equilibrium model. The CRA model 
appears to have a much more detailed representation of the U.S. 
electricity generating sector, with every unit in the country 
individually represented and dispatched economically within 28 
electricity dispatch regions. The main differences in model results 
should therefore be tied to either input assumptions, or modeling 
detail.
     Figure 1 below shows the electricity generation mix in 
CRA's high and low end cases (defined as the runs with the high and low 
CCS uptake assumptions in Figure 7 of my written testimony). I 
developed Figure 1 specifically to compare to Figure A-13 in the 
Nicholas Institute paper on the LW Bill, which I have copied here as 
Figure 2.
     In Figure 1, notice that renewables generation (which 
includes existing hydro) in CRA's analysis more than doubles by 2015. 
In fact, when existing hydro generation is removed, the remaining non-
hydro renewables rise by a factor of 3 to 5 between 2010 and 2015. A 
comparison of Figures 1 and 2 show that CRA's analysis has about three 
times more renewables generation than the Nicholas Institute's 
analysis. Note that CRA's analysis allows a very rapid expansion of new 
renewables during the period 2010-2020.
     Nicholas Institute assumes about 28% more nuclear than 
CRA, which implies that whereas CRA's analysis allows up to 110 GW of 
new nuclear capacity by 2050, the Nicholas Institute is probably 
assuming up to 140 GW. This is not a large difference, but the Nicholas 
Institute is more optimistic about the potential rate of builds of new 
nuclear generation.
     Comparison of Figures 1 and 2 also shows that CRA's high-
CCS case has approximately the same amount of CCS generation by 2050 as 
Nicholas Institute's, and the market penetration of CCS technology (the 
one true ``advanced'' generation technology in either analysis) is 
actually faster in CRA's analysis during the period prior to 2030. In 
CRA's low-CCS case, the reduced access to CCS is compensated by a 
combination of even more renewables, less remaining gas-generation 
(fossil), and greater energy efficiency by the industrial as well as 
commercial and residential consumers.
     CO2 emissions in the non-electric sectors drop 
off substantially in the CRA analysis. For the industrial sector, the 
MRN-NEEM model captures the following inputs to production: materials, 
labor, capital, and energy. These inputs are traded off against each 
other in response to carbon prices meaning that other inputs can be 
substituted for energy. The CRA model does not neglect opportunities to 
reduce emissions in industry as page 8 of Hawkins's testimony suggests.
     Page 8 of Hawkins's testimony says that ``CRA assumes 
business-as-usual coal technology'' (in the baseline). CRA does not 
assume which coal technologies are chosen in the baseline--the 
technologies are chosen by economics. Indeed, IGCC technology (without 
CCS) is chosen by CRA's model in the later years in the baseline. There 
is no IGCC with CCS chosen in the baseline--this is realistic (without 
a price signal to carbon, utilities will not install IGCC with CCS).
    CRA has not been able to determine through the available 
documentation how much energy efficiency is assumed in the Nicholas 
Institute analysis, but it plays a major role in CRA's analysis. There 
is effectively a 0.6 price-elasticity of demand for all forms of energy 
in CRA's MRN-NEEM analysis, meaning that a 100% increase in energy 
prices results in a 60% improvement in energy efficiency. This occurs 
as energy efficiency and conservation--businesses do not have to close 
in order for this amount of demand response to occur in CRA's analysis, 
and it accounts for the large majority of the estimated reduction in 
energy demand that occurs in the MRN-NEEM analysis. This amount of 
energy efficiency response occurs within about 5 years of an energy 
price increase. Most energy analysts would agree that CRA energy 
efficiency assumptions are on the optimistic end of standard practice. 
They are far higher than that found in the EIA NEMS model.
    It is also not possible to compare CRA's input assumptions about 
the transportation sector with those of the Nicholas Institute analysis 
given the information provided in the Nicholas Institute paper. 
However, there is a remarkable degree of improvement in transportation-
related emissions rates over time in the CRA model. This appears in the 
form of a zero-carbon fuel alternative that is a perfect substitute for 
gasoline. (It can be thought of as cellulosic ethanol, but could be any 
new fueling alternative to petroleum products.) In our analyses, the 
alternative fuel starts to be used by 2015, and--as I stated in my 
testimony--by 2050 there is so much used that it is like a 100% 
conversion of all cars on the road today to be zero-emitting. On the 
other hand the Nicholas analysis shows increasing petroleum consumption 
in all years of their analysis (see p. 10).
    The costs of the technologies discussed above are consistent with 
publicly available data. Importantly, we allow learning curves for both 
the zero-emitting fuel, and also for CCS in one case, thus reducing 
technology costs over time. For example, at the outset, the alternative 
transportation fuel with zero-emissions costs 3 times the price of 
petroleum products now in use. By 2050 it costs only 50% more. 
Similarly, in one case, the cost of CCS is 75% lower by 2050 than its 
initial cost at the outset. We assume the current engineering estimates 
for this technology are consistent with costs in 2030, when it ought to 
be a mature technology, but costs continue to be cut in half again by 
2050.
    Clearly technology limits and insufficient representation of the 
industrial and transportation sectors are not the reasons for the 
differences between CRA's and Nicholas Institute's results.--We at CRA 
have concluded that the key reasons for the different costs estimated 
by Nicholas Institute result from a combination of:
    (a) Nicholas Institute assumes a looser cap than CRA does--and one 
that is looser than the 5200 mmt CO2 cap in 2012 that is 
written into the Bill. They say it is 5450 million tons on p.2 of their 
write up. (We used 5200 million tons as dictated by the Bill)
    (b) Inspection of Nicholas Institute paper's figures indicates that 
that analysis appears to assume 30% of the S. 2191 cap may be met using 
offsets, but the Bill only allows 15% through domestic offsets. 
(Regarding the 15% for use of ``international allowances,'' the word 
``offsets'' was actually removed in the markup; we interpret that 
provision to allow U.S. emitters to use actual allowances issued under 
programs like the EU-ETS--if they can be had at a lower cost than the 
going price in the U.S. market, which we assume will not be the case 
anymore in the future than it is right now. Therefore, we do not expect 
significant international allowance purchases.)
    (c) Nicholas Institute apparently assumes offsets (even the 15% 
from domestic sources that we do agree the Bill provides for) are much 
cheaper than we do, by assuming away things like project transactions 
costs and timing constraints in getting forestry sequestration offsets 
to their maximal growth rates. (We have to base this statement on their 
EPA report of Lieberman-McCain analysis assumptions, as the Lieberman-
Warner paper does not explain their offsets cost assumptions at all.) 
CRA has taken a more conservative--and we feel more realistic--
approach.
    As a result, the actual US GHG emissions reductions achieved in the 
Nicholas Institute analysis are far less than those in CRA's analysis. 
Figure 3 shows these emissions for both analyses. As is always the 
case, the larger the emissions reductions, the higher the cost. 
Therefore, the key question in assessing the relative merits of the two 
analyses, is whether CRA or Nicholas Institute have more correctly 
interpreted the wording of the LW Bill regarding the actual level of 
the cap that would be imposed, and the provisions of the Bill regarding 
use of offsets. Assumptions about the quantity of domestic offsets that 
would be available at various prices and in the initial years may also 
be important.
    Analyses of the Lieberman-McCain Bill Does Not Provide a Valid 
Estimate of the Impacts of S. 2191
    In his testimony, Mr. Hawkins repeatedly cited the costs from 
analyses of the Lieberman-McCain Bill as if they are also consistent 
with S. 2191. This is simply not the case. The Lieberman-McCain Bill 
has a much less stringent cap overall, and more lenient limits on 
offsets. Thus, it is not valid to suggest that any estimates made of 
that Bill are representative of cost estimates for S. 2191. CRA has 
also prepared scenarios of the Lieberman-McCain Bill using the same 
sets of input assumptions as we used for some of our scenarios 
representing S. 2191. Uniformly, the impacts for the Lieberman-McCain 
Bill are substantially lower than those we obtain for S. 2191. This 
fact is also reported and discussed at length in the Nicholas Institute 
report on the Lieberman-Warner analysis. As always, the stringency of 
the cap determines the cost and impact of the policy.
    Analyses of Carbon Limits by MIT Do Not Provide a Valid Estimate of 
the Impacts of S. 2191
    Dr. Pershing also cites cost estimates from MIT as if they were 
simulations of S. 2191, which is not correct either. MIT's report did 
not simulate scenarios of any specific bills at all, but only generic 
time paths of emissions reductions. None of those time paths are 
consistent with the caps specified in S. 2191. Additionally, the MIT 
analyses did not address any of the Bill's specific provisions such as 
the limits on the quantities of offsets that may be used for 
compliance. These features change the costs of a policy.
    Lack of Clarity about the S. 2191 Cap Level
    A significant issue with respect to the Lieberman-Warner Bill is 
the level of the cap. As noted in my testimony repeatedly, the 
stringency of the cap is a very significant determinant of its costs.
    The cap covers CO2 and other greenhouse gas emissions 
from the Electric Power, Transportation and Industrial Sectors, as 
defined in ``Inventory of U.S. Greenhouse Gas Emissions and Sinks: 
1990-2005.''\1\ In addition, the Manager's Mark-up also added emissions 
from natural gas combustion. Senators Lieberman and Warner have stated, 
``The cap over those sources starts at the 2005 emission level in 2012 
and then lowers year-by-year at a constant, gradual rate, such that it 
reaches the 1990 emissions level in 2020. . .''\2\ However, the 2005 
emissions level for Electric Power, Transportation and Industrial 
Sectors in 2005 does not equal the 5,200 million metric ton cap 
specified in S. 2191, nor does the 1990 emissions level equal the 2020 
cap.\3\ These cap levels differ by almost 10%, which is particularly 
significant in early years.
---------------------------------------------------------------------------
    \1\ Available at http://www.epa.gov/climatechange/emissions/
downloads06/07CR.pdf.
    \2\ See http://warner.senate.gov/public/
index.cfm?FuseAction=Files.View&FileStore--id=42576573-e4cf-480d-b6fd-
c5964f4f62dd.
    \3\ S. 2191, Sec. 1201(d) of Manager's Markup and Table ES-7 of 
``Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2005.''

[GRAPHIC] [TIFF OMITTED] T3583.011

[GRAPHIC] [TIFF OMITTED] T3583.012

[GRAPHIC] [TIFF OMITTED] T3583.013

[GRAPHIC] [TIFF OMITTED] T3583.014

    Senator Boxer. Ms. Smith, I am sorry, we have to cut you 
off there, because Senator Inhofe and I have to run down to the 
Floor. We want to get a chance at some questions.
    Ms. Thorning, you are a Ph.D., you are a senior vice 
president and chief economist at the American Counsel for 
Capital Formation. Welcome.

 STATEMENT OF MARGO THORNING, Ph.D., SENIOR VICE PRESIDENT AND 
    CHIEF ECONOMIST, AMERICAN COUNSEL FOR CAPITAL FORMATION

    Ms. Thorning. Thank you, Madam Chairman. Thank you for 
inviting me to appear before this Committee.
    I will ask that my testimony be submitted for the record, 
and I will just briefly summarize. I have two or three charts I 
would like to draw your attention to.
    My analysis is not based on simulations, as was the 
previous witness, but merely looking at historical data. I 
would like to draw your attention first to the fact that the 
EIA forecast predicts that U.S. emissions will grow by 
approximately 30 percent between now and 2030. As you can see, 
the green line on my first chart shows that. The targets under 
S. 2191 would require a cut by 2030 of over 4 billion metric 
tons. This presents sort of a visual of how stiff the challenge 
is.
    Given U.S. population growth, and projected growth and 
emissions, another way to look at this is with respect to the 
required reductions in per capita emissions. If I could have 
the second chart. Regarding, per capita emissions, the best we 
have ever done to reduce emissions was from 1990 to 2000, where 
we reduced over that whole decade per capital emissions by .8 
percent. The targets in S. 2191 would require a reduction of 
approximately 50 percent by 2030. On that chart, the arrow 
should be out over the 2030. It is also table 1 in my 
testimony. So it would require an effort of 25 to 35 times 
greater than we have ever done before to get per capita 
emissions down to the levels that would be required by S. 2191.
    Another point I would like to make is that the cap and 
trade system may not be the most appropriate way to go. If we 
are going to have a mandatory system of carbon reductions we 
might want to consider that most economists think that a carbon 
tax is a much more straightforward way. It allows for 
flexibility, it allows for economic growth. It prevents gaming 
of the system, as we have seen widespread instances of in 
Europe, and windfall profits being accrued by companies that 
were allocated the credits.
    A third point I would like to make is that the European 
Union is not on track to meet its emission reduction targets. 
In fact, the latest Fourth Assessment Report published in 
October suggests that European emissions will be 7 percent 
above, not 8 percent below, by 2010, without strong new 
measures, including extensive use of JI and CDM. Of course, 
those are subject to verification and may not be able to be 
achieved, given the difficulty of approving those types of 
projects.
    The final point I would like to make is that solutions to 
this important problem, and I think we all agree this is an 
important problem and that we do need to reduce greenhouse gas 
emissions, are going to be based on developing the technologies 
which do not yet exist, as the previous witness made the case, 
to bring down emissions very rapidly.
    But if we take a look at where the emission growth is 
coming from, which as we know is from the developing countries, 
China and India, as my last chart makes the case, right now 
Chinese installed plant and equipment and Indian installed 
plant and equipment is far less energy-efficient than is that 
of the United States and Japan. Each billion dollars of GDP in 
China is associated with about .7 million metric tons of 
carbon. Their new investment, which I believe is the green bar, 
is much more energy-efficient as previous, but not nearly so 
efficient as the United States or Japanese investment. Studies 
by CRA International show that if we could get the latest 
technology into the developing country hands, we could reduce 
emissions by as much as would have been achieved under the 
Kyoto Protocol if all 39 signatories were to meet their target.
    Another point I would like to make is that the U.S. tax 
code, if we could consider improving depreciation, speeding up 
capital cost recovery. Our tax code provides the slowest 
capital cost recovery for energy-efficient investments in the 
industrial world. Smart meters, for example, an investor gets 
only 29 cents back on the dollar after 5 years, whereas in 
China and India you get a dollar back after 5 years. I would 
like to submit a full table for the record documenting that.
    Senator Boxer. Without objection, we will.
    [The referenced information follows on page 87.]
    Ms. Thorning. So finally, if we could consider the fact 
that economic growth itself can be a driver, the United States 
has reduced its emissions faster over the last couple of years.
    Senator Boxer. Sorry to interrupt you. We are going to move 
on now.
    [The prepared statement of Ms. Thorning follows:]

  Statement of Margo Thorning, Ph.D., Senior Vice President and Chief 
           Economist, American Council for Capital Formation

                              INTRODUCTION

    Madam Chairman and members of the Senate Committee on Environment 
and Public Works, my name is Margo Thorning, senior vice president and 
chief economist, American Council for Capital Formation (ACCF),\1\ 
Washington, D.C. I am pleased to present this testimony to the 
Committee.
---------------------------------------------------------------------------
    \1\ The mission of the American Council for Capital Formation is to 
promote economic growth through sound tax, environmental, and trade 
policies. For more information about the Council or for copies of this 
testimony, please contact the ACCF, 1750 K Street, N.W., Suite 400, 
Washington, D.C. 20006-2302; telephone: 202.293.5811; fax: 
202.785.8165; e-mail: [email protected]; website: www.accf.org
---------------------------------------------------------------------------
    The American Council for Capital Formation represents a broad 
cross-section of the American business community, including the 
manufacturing and financial sectors, Fortune 500 companies and smaller 
firms, investors, and associations from all sectors of the economy. Our 
distinguished board of directors includes cabinet members of prior 
Republican and Democratic administrations, former members of Congress, 
prominent business leaders, and public finance and environmental policy 
experts. The ACCF is celebrating over 30 years of leadership in 
advocating tax, regulatory, environmental, and trade policies to 
increase U.S. economic growth and environmental quality.
    Senators Lieberman and Warner and the members of the Senate 
Environment and Public Works Committee are to be commended for their 
efforts to reduce greenhouse gas emissions so as to mitigate the threat 
of human-induced climate change. The questions we need to ask are 
first, what challenges will The America's Climate Security Act of 2007 
(S. 2191) pose for the U.S. economy and second, what type of GHG 
reduction policies should the U.S and other countries adopt to minimize 
the impacts on economic growth and maximize the benefits to the 
environment? Greenhouse gas reduction policies should not be undertaken 
without considering their impacts on energy security, economic growth, 
and U.S. competitiveness. My testimony will address these key issues.

          THE AMERICA'S CLIMATE SECURITY ACT OF 2007 (S. 2191)

    The goal of The America's Climate Security Act of 2007 (S. 2191) is 
to substantially reduce U.S. greenhouse gas emissions (GHGs) over the 
2012-2050 period. The Act covers electric power, transportation, and 
manufacturing sources, which account for 75 percent of U.S. emissions. 
The cap requires reducing emissions to 2005 levels by 2012 and then 
lowers emissions at a constant rate, reaching 1990 levels by 2020 and 
then a target of 65 percent below 1990 levels by 2050. The Act also 
strengthens energy efficiency standards for appliances and buildings in 
order to address commercial and residential sector emissions not 
covered by the emission reduction targets.
     U.S. Projected Growth in Emissions and Population: Effect 
on Achievement of S. 2191 Targets
Emissions Growth
    A major stumbling block to the U.S.'s meeting the S. 2191 targets 
is projected increases in covered emissions (emissions included in the 
bill) and population over the next several decades. According to 
estimates by the U.S. Department of Energy's Energy Information 
Administration, covered emissions under the baseline forecast 
(``baseline'' means no new mandatory carbon emission reduction 
programs) grow by 30 percent from 2012 to 2030.\1\ The baseline 
forecast already includes assumptions about increased energy efficiency 
but, even so, covered GHG emissions are projected to rise to 6,613 
million metric tons of carbon dioxide equivalent (MMTCO2e) 
by 2020, compared to the S. 2191's required reduction to 4,432 
MMTCO2e. Sharp cutbacks in U.S. energy use would be 
necessary to close the 33 percent gap (2,181/MMTCO2e) in 
2020 between projected emissions and the S. 2191 target. By 2030, the 
gap between the baseline forecast and the S. 2191 target rises to 55 
percent or 4,311 MMTCO2e (see Figure 1).
---------------------------------------------------------------------------
    \1\ ``Energy Market and Economic Impacts of S. 280, the Climate 
Stewardship and Innovation Act of 2007''. U.S. Department of Energy, 
Energy Information Administration, August 2007 and ACCF calculations 
using S. 2191 targets.
---------------------------------------------------------------------------
Per Capita Emissions
    The projected increase in U.S. population, from 308 million 
residents in 2010 to 335 million residents in 2020 and 363 million in 
2030, will make GHG emission reductions very challenging, since more 
people means more energy is needed for home heating and cooling, job 
growth and transportation (see Figure 2). To illustrate the difficulty 
of reducing U.S. emissions to S. 2191 levels, consider that over the 
decade between 1990-2000 period, per capita emissions in the U.S. fell 
by only 0.8 percent and they are projected to decline by a total of 
only 0.6 percent from 2000 to 2012 (see Table 1). EIA's forecast 
projects increases in per capita covered emissions between 2012 and 
2030 (see Table 1).

[GRAPHIC] [TIFF OMITTED] T3583.016

[GRAPHIC] [TIFF OMITTED] T3583.017

    In order to meet the emission reduction targets in S. 2191, U.S. 
per capita emissions would have to fall by a total of 13.8 percent over 
the 2000-2012 period, an additional 20.2 percent from 2012 to 2020 and 
a further 27.6 from 2020 to 2030 (see Table 1). In other words, the 
required reductions in per capita emissions are about 25 to 35 times 
greater than what occurred from 1990 to 2000. The technologies simply 
do not exist to reduce total (and per capita emissions) over the next 
17 years by the amounts mandated in S. 2191--to say nothing of the time 
and expense required to replace existing energy-using equipment--
without severely reducing the growth in the U.S. economy and in 
employment. The analysis above tends to corroborate Senator Lieberman's 
recent statement that S. 2191 would cost ``hundreds of billions'' of 
dollars over the next few decades. Previous macroeconomic analyses of 
emission reduction targets similar to those of S. 2191 have concluded 
that the required cuts in U.S. energy use would reduce GDP levels by 
1.5 to 2.5 percent annually and result in significant net job loss.
pros and cons of mandatory greenhouse gas emission reduction programs: 

                   CAP AND TRADE VERSUS A CARBON TAX

    As policymakers deliberate the imposition of mandatory approaches 
to reducing U.S. GHG emissions, it is helpful to evaluate the strengths 
and weaknesses of the two prominent strategies: a cap and trade system 
and a carbon tax. A cap and trade system puts an absolute restriction 
on the quantity of emissions allowed (i.e., the cap) and allows the 
price of emissions to adjust to the marginal abatement cost (i.e., the 
cost of controlling a unit of emissions). A carbon tax, in contrast, 
sets a price for a ton of emissions and allows the quantity of 
emissions to adjust to the level at which marginal abatement cost is 
equal to the level of the tax.
    In a recent paper, Ian Perry of Resources for the Future notes that 
as a result of the success of the U.S. sulfur dioxide trading program 
and the start up of the European Union's Emission Trading System, many 
in Congress have expressed support for a cap and trade system in the 
U.S. Perry cautions, however, that other options, such as tax on carbon 
emissions, may be a superior instrument if a mandatory federal carbon 
emission program were to be established (Weathervane, March 23, 2007).
 Cap and trade system and carbon price volatility
    Price volatility for a permit to emit CO2 can arise 
under a cap and trade program because the supply of permits is fixed by 
the government, but the demand for permits may vary considerably year 
to year with changes in fuel prices and the demand for energy. As 
mentioned above, price volatility for energy has negative impacts on 
economic growth. In contrast, a CO2 tax fixes the price of 
CO2, allowing the amount of emissions to vary with 
prevailing economic conditions.
    For example, in the EU the price of a permit to emit a ton of 
carbon has varied by 17.5 percent per month over the first 22 months' 
operation of the ETS. As a new study by Dr. Michael Canes, senior 
research fellow at LMI, points out, volatility in fossil energy prices 
have strong adverse impacts on U.S. economic growth. Even a reduction 
in the rate of growth from such a shock of as little as 0.1 percent per 
year implies costs of over $13 billion per year. (Why a Cap & Trade is 
the Wrong Policy to Curb Greenhouse Gases for the United States, The 
Marshall Institute, July, 2007).
    In addition, studies have shown that a cap and trade program that 
gives away (rather than auctioning the permits) can be highly 
inequitable; the reason is that firms receiving allowances reap 
windfall profits, which ultimately accrue to individual stockholders, 
who are concentrated in relatively high-income group.
 Cap and trade system and flexibility in timing of reductions
    Many experts conclude that it makes economic sense to allow 
nationwide emissions to vary on a year-to-year basis because prevailing 
economic conditions affect the costs of emissions abatement. This 
flexibility occurs under a CO2 tax because firms can choose 
to abate less and pay more tax in periods when abatement costs are 
unusually high, and vice versa in periods when abatement costs are low. 
Traditional permit systems do not provide similar flexibility because 
the cap on economy wide emissions has to be met, whatever the 
prevailing abatement cost.
 Cap and trade system: impact on consumers and workers
    Regardless of how the allowances were distributed (unless they were 
all auctioned and the proceeds rebated to low income households), 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. In addition, 
workers and investors in parts of the energy sector--such as the coal 
industry--and in various energy-intensive industries would be likely to 
experience losses as the economy adjusted to the emission cap and 
production of those industries' goods declined. (Congressional Budge 
Office, Economic and Budget Issue Brief, April 25, 2007.) In contrast, 
carbon tax revenues could be rebated to low income individuals to 
offset the impact of higher energy prices caused by the tax on fossil 
fuels.
 Impact of a cap and trade system on innovation
    Caps on emissions are not likely to promote new technology 
development because caps will force industry to divert resources to 
near-term, ``end of pipe'' solutions rather than promote spending for 
long-term technology innovations that will enable us to reduce GHGs and 
increase energy efficiency. An emission trading system will send 
exactly the wrong signals to investors because it will create 
uncertainty about the return on new investment. A ``safety-valve'' 
price of carbon (designed to create a sense of confidence about future 
energy costs) can easily be changed. Such uncertainty means that the 
hurdle rate, which new investments must meet, will be higher (thus less 
investment will occur) and they will be less willing to invest in the 
U.S. A tax on carbon would provide more certainty for investors and 
allow them to replace old capital equipment with less carbon intensive 
equipment during the replacement cycle.
 Impact of a U.S. cap and trade system on global GHG emission 
        growth
    Finally, caps on U.S. emission growth are unlikely to succeed 
unless all the relevant markets exist (in both developed and developing 
countries) and operate effectively. All the important actions by the 
private sector have to be motivated by price expectations far in the 
future. Creating that motivation requires that emission trading 
establish not only current but future prices, and create a confident 
expectation that those prices will be high enough to justify the 
current R&D and investment expenditures required to make a difference. 
Motivating new investment requires that clear, enforceable property 
rights in emissions be defined far into the future so that emission 
rates for 2030, for example, can be traded today in confidence that 
they will be valid and enforceable on that future date. The EU's 
experience over the last two years, with the price of CO2 
emission credits fluctuating between 1 and 30 euros per ton of 
CO2, does not inspire confidence in companies having to make 
investment decisions. The international framework for climate policy 
that has been created under the UNFCCC and the Kyoto Protocol cannot 
create that confidence for investors because sovereign nations have 
different needs and values.
 Carbon taxes: potential drawbacks
    A carbon tax, as a system of inducing emissions reductions, is not 
without drawbacks. First, revenues from a CO2 tax (or 
auctioned permits) might end up being wasted; for example, if the 
revenue went toward special interests, rather than substituting for 
other taxes. Second, progress on emissions reductions is uncertain 
under a CO2 tax because emissions vary from year to year 
with economic conditions.
  What Can We Learn from the European Union's Emission Trading System?
    As we attempt to choose the right path for a U.S. GHG emission 
reduction strategy, it is useful to examine the cost-effectiveness of 
current policies to reduce GHG emissions in developed countries. In the 
European Union, reduction of GHGs has become a major policy goal and 
billions of euros, from both the private and the public sector, have 
been spent on this policy objective. Many policymakers, the media and 
the public believe that the European Union's Emission Trading System 
(ETS) has produced reductions in GHG emissions and that their system 
could serve as a model for the U.S. The ETS, created in 2005, is a 
market-based, EU-wide system that allows countries to ``trade'' (i.e., 
buy and sell) permits to emit CO2. The ETS covers about 
11,500 installations and almost half of the EU's GHG emissions.
    The EU 15 (the major industrial countries) have a Kyoto Protocol 
target of an 8 percent reduction below 1990 levels in GHGs by 2010-
2012. The European Environmental Agency's latest projections (October 
2006) show that without strong new measures, EU 15 emissions will be 
7.4 percent above 1990 levels in 2010, rather than 8 percent below as 
required by the Kyoto Protocol (see Figure 3). Further evidence of the 
challenge the EU faces in meeting its Kyoto Targets is found in a 
recent report by the European Commission showing that electricity 
consumption continues to rise. Over the 1999-2004 period, residential 
and commercial electricity consumption increased by 10.8 percent and 
industrial electricity use rose by 6.6 percent in spite of numerous 
incentives to increase EU energy efficiency (Electricity Consumption 
and Efficiency Trends in the Enlarged European Union, Joint Research 
Centre, European Commission, July, 2007).

[GRAPHIC] [TIFF OMITTED] T3583.018


    The fact that the European Environmental Agency projects that the 
EU 15 will be 7 percent above 1990 levels of emissions in 2010 (instead 
of 8 percent below) demonstrates that the mandatory ETS system as 
currently structured is not providing the desired results and that much 
stronger measures will be required to meet the Kyoto Protocol target as 
well as the new post-2012 target. In addition, the EU's new report 
``The Fourth Assessment'' (October 10, 2007) observes that ``a further 
reduction of 7.1 percent or 303 million tonnes of CO2 
equivalent is needed to meet the Kyoto target'' and that further 
domestic policies and measures will have to be implemented. 
Implementing even tighter emission targets or higher energy taxes in 
the EU is likely to be politically difficult.

        STRATEGIES TO REDUCE GLOBAL AND U.S. GHG EMISSION GROWTH

    Slowing the growth of global GHG emissions will depend on factors 
such as increased energy efficiency, technology developments in both 
fossil fuels (carbon capture and storage, for example) and renewable 
fuels (wind and solar, in particular) and, most likely, on increased 
reliance on nuclear power for electricity generation. In addition to 
reducing GHG growth in the developed countries, it will be necessary to 
increase energy efficiency and reduce the growth of greenhouse gas 
emissions in the developing world since that is where the strong growth 
in emissions is coming from (see Figure 4). Making progress on these 
objectives will require a significant commitment of resources, much of 
which will need to come from the private sector.

[GRAPHIC] [TIFF OMITTED] T3583.019


    Technology development and deployment offers the most efficient and 
effective way to reduce GHG emissions and a strong economy tends to 
pull through capital investment faster. There are only two ways to 
reduce CO2 emissions from fossil fuel use--use less fossil 
fuel or develop technologies to use energy more efficiently to capture 
emissions or to substitute for fossil energy. There is an abundance of 
economic literature demonstrating the relationship between energy use 
and economic growth, as well as the negative impacts of curtailing 
energy use. Over the long-term, new technologies offer the most promise 
for affecting GHG emission rates and atmospheric concentration levels.
The role of international partnerships in promoting institutional 

        CHANGE AND FAVORABLE INVESTMENT CLIMATE IN DEVELOPING COUNTRIES

    Research by Drs. David Montgomery and Sugandha Tuladhar of CRA 
International makes the case that agreements such as the Asia-Pacific 
Partnership on Clean Development and Climate (AP6), an agreement signed 
in 2005 by India, China, South Korea, Japan, Australia and the United 
States, offers an approach to climate change policy that can reconcile 
the objectives of economic growth and environmental improvement for 
developing countries. (See www.iccfglobal.org for the full paper.) 
Together, the AP6 partners have 45 percent of the world's population 
and emit 50 percent of man-made CO2 emissions. The 
projections of very strong growth in greenhouse gases in developing 
countries over the next 20 years mean that there is enormous potential 
for reducing emissions through market-based mechanisms for technology 
transfer.
    Drs. Montgomery and Tuladhar note that there are several critical 
factors for ensuring the success of an international agreement which 
relies strongly on private sector investment for success. Their 
research shows that institutional reform is a critical issue for the 
AP6 because the lack of a market-oriented investment climate is a 
principal obstacle to reducing greenhouse gas emissions in China, India 
and other Asian economies. China and India have both started the 
process of creating market-based economic systems, with clear benefits 
in the form of increased rates of economic growth. But the reform 
process has been slow and halting, leaving in place substantial 
institutional barriers to technological change, productivity growth, 
and improvements in emissions. The World Bank and other institutions 
have carried out extensive investigations about the role of specific 
institutions in creating a positive investment climate. These include 
minimizing corruption and regulatory burdens, establishing an effective 
rule of law, recognition of intellectual property rights, reducing the 
role of government in the economy, removing energy price distortions, 
providing an adequate infrastructure and an educated and motivated 
labor force.
 Importance of technology transfer for emission reductions
    As described above, technology is critically important because 
emissions per dollar of income are far larger in developing countries 
than in the United States or other industrial countries. This is both a 
challenge and an opportunity. It is a challenge because it is the high 
emissions intensity--and relatively slow or non-existent improvement in 
emissions intensity--that is behind the high rate of growth in 
developing country emissions.
    Opportunities exist because the technology of energy use in 
developing countries embodies far higher emissions per dollar of output 
than does technology used in the United States; this is true of new 
investment in countries like China and India as well as their installed 
base (see Figure 5.) The technology embodied in the installed base of 
capital equipment in China produces emissions at about four times the 
rate of technology in use in the United States. China's emissions 
intensity is improving rapidly, but even so its new investment embodies 
technology with twice the emissions intensity of new investment in the 
United States. India is making almost no improvement in its emissions 
intensity, with the installed base and new investment having very 
similar emissions intensity. India's new investment also embodies 
technology with twice the emissions intensity of new investment in the 
United States.

[GRAPHIC] [TIFF OMITTED] T3583.020


 The role of economic growth and technology in GHG reduction
    Many policymakers overlook the positive impact that economic growth 
can have on GHG emission reductions. For example, in 2006, while the 
U.S. economy grew at 3.3 percent, CO2 emissions fell to 
5,877 MMTCO2, down from 5,955 MMTCO2 in 2005, a 
1.3 percent decrease. Overall energy use only declined by 0.9 percent, 
indicating the U.S economy is becoming less carbon intensive even 
without mandatory emission caps or carbon taxes.
    Internationally, the U.S. compares well in terms of reducing its 
energy intensity (the amount of energy used to produce a dollar of 
output). The U.S., with its voluntary approach to emission reductions, 
has cut its energy intensity by 20 percent over the 1992-2004 period 
compared to only 11.5 percent in the EU with its mandatory approach 
(see Figure 6). Strong U.S. economic growth, which averaged over 3 
percent per year from 1992 to 2005 compared to about 1 percent in the 
EU, is responsible for the U.S.'s more rapid reduction in energy 
intensity in recent years.
 Accelerating U.S. energy efficiency and GHG reductions
    The development of various high technology programs and new energy 
efficient investments can be accelerated through government programs as 
well as by reforms to the federal tax. For example, some policies may 
be of particular help to taxable entities while others would be of more 
benefit to cooperatives (which pay little or no federal income tax).

[GRAPHIC] [TIFF OMITTED] T3583.021


Companies subject to the federal income tax
    The efforts of U.S. industries to increase energy security and 
efficiency and to reduce growth in GHG emissions are hindered by the 
slow rate of capital cost recovery allowed under the U.S. federal tax 
code and by the high U.S. corporate tax rate. As a new Ernst & Young 
international comparison shows, the U.S. ranks last or nearly last 
among our trading partners in terms of how quickly a dollar of 
investment is recovered for many key energy investments. For example, a 
U.S. company gets only 29.5.cents back after 5 years through 
depreciation allowances for each dollar invested for a combined heat 
and power project. In contrast, in China the investor gets 39.8 cents 
back, in Japan, 49.7 cents, in India, 55.6 cents and in Canada the 
investor gets 79.6 cents back after 5 years for every dollar invested. 
Another example is U.S, investment in ``smart meters'', which can 
substantially reduce electricity use. U.S. investors only get 29.5 
cents back after 5 years, compared to $1.00 in India and 63.1 cents in 
Germany (see Figure 7). (See full report at: http://www.accf.org/pdf/
Energy-Depreciation-Comparison.pdf.)
    In addition to slow capital cost recovery allowances, U.S. industry 
faces the highest corporate income tax rates among our primary trading 
partners. Of the 12 countries in the E&Y survey, only Japan had a 
higher corporate tax rate than the U.S. Reforms to the U.S. tax code to 
speed up capital cost recovery allowances and reduce the corporate tax 
rate would reduce the cost of capital and could have a positive impact 
on energy sector investment, and help ``pull through'' cleaner, less-
emitting technologies.

[GRAPHIC] [TIFF OMITTED] T3583.022


Non-taxable entities
    For non-taxable entities such as electric utility cooperatives, 
other incentives could be provided to encourage the more rapid adoption 
of new technologies to reduce GHG emissions. For example, electric 
cooperatives and their consumers cannot apply or benefit from 
traditional tax incentives because as not-for-profit utilities, they do 
not have significant federal income tax liability to offset. However, 
to ensure that the not-for-profit electric utility sector is able to 
participate in incentives for advanced low carbon technologies, 
incentives comparable to those offered to for profit entities can be 
created. One example is the successful Clean Renewable Energy Bond 
program that permits electric cooperatives and others to issue bonds 
that act as interest-free loans for the purpose of building qualified 
renewable generation. The CREB program can be adapted for other 
technologies that achieve carbon reduction goals. Grants are another 
avenue to assist not-for-profits in adopting new technology.

                              CONCLUSIONS

    To be effective, policies to reduce global GHG emission growth must 
include both developed and developing countries. Polices which enhance 
technology development and transfer are likely to be more widely 
accepted than those that require sharp, near term reductions in per 
capita energy use. Extending the framework of the Asia-Pacific 
Partnership on Clean Development and Climate to other major emitters 
will allow developed countries to focus their efforts where they will 
get the largest return, in terms of emission reductions for the least 
cost.
    Finally, if the United States does adopt a mandatory greenhouse gas 
emissions reduction program, serious consideration should be given to 
implementing a carbon tax rather than an EU-style cap and trade system. 
A key component of any mandatory U.S. program should be allowing 
emissions to increase as both economic growth and U.S. population 
increase.

[GRAPHIC] [TIFF OMITTED] T3583.015

   Response by Margo Thorning, Ph.D., to an Additional Question from
                             Senator Inhofe

    Question. Based on your testimony and the testimony of the other 
witnesses, is there anything else you would like to add?
    Response. Executive Summary.--Impact of S. 2191 on U.S. Energy Use: 
A major stumbling block to the U.S.'s meeting the S. 2191 targets is 
projected increases in covered emissions and population growth over the 
next several decades. Forecasts of baseline covered emissions show 
emissions growing by 30 percent from 2012 to 2030, from 5,995 to 7,783 
million metric tons of carbon dioxide equivalent (MMTCO2e). 
Sharp cutbacks in U.S. energy use would be necessary to close the 55 
percent gap (4,311/MMTCO2e) in 2030 between projected 
emissions and the S. 2191 target.
    Impact of S. 2191 on U.S. Per Capita Emissions: The projected 18 
percent increase in U.S. population from 2010 to 2030 will make GHG 
emission reductions very challenging since more people means more 
energy is needed for home heating and cooling, job growth and 
transportation. Over the entire decade between 1990-2000, per capita 
emissions in the U.S. fell by only 0.8 percent and they are projected 
to decline by only 0.6 percent between 2000 and 2012. To meet the 
emission reduction targets in S. 2191, U.S. per capita emissions would 
have to fall by 50 percent from 2000 to 2030. S. 2191's required 
reductions in per capita emissions are about 25 to 35 times greater 
than what occurred from 1990 to 2000. The technologies simply do not 
exist to reduce emissions over the next 17 years by the amounts 
mandated in S .2191 without severely reducing the growth in the U.S. 
economy and in employment.
    The European Union's Emission Trading System: Many policymakers, 
the media and the public believe that the European Union's Emission 
Trading System (ETS) has produced reductions in GHG emissions and that 
their system could serve as a model for the U.S. Projections show that 
the major EU countries will be 7 percent above 1990 levels of emissions 
in 2010 (instead of 8 percent below). The mandatory ETS system as 
currently structured is not providing the desired results and much 
stronger measures will be required to meet the Kyoto Protocol target as 
well as the new post-2012 target.
    Strategies to Reduce Global and U.S. GHG Emission Growth: Slowing 
the growth of global GHG emissions will depend on factors such as 
increased energy efficiency, technology developments in both fossil 
fuels (carbon capture and storage, for example) and renewable fuels 
(wind and solar, in particular) and on increased reliance on nuclear 
power for electricity generation. In addition to reducing GHG growth in 
the developed countries, it will be necessary to increase energy 
efficiency and reduce the growth of greenhouse gas emissions in the 
developing world since that is where the strong growth in emissions is 
coming from. Initiatives like the Asia-Pacific Partnership on Clean 
Development and Climate and reforms to the U.S. federal tax code to 
reduce the cost of capital for new energy investments as well as 
programs designed for non-profit energy service providers could 
accelerate the uptake of cleaner, less-emitting technologies as well as 
strengthen U.S. economic growth.

    [See pages 115-147.]

    Senator Boxer. Mr. Barbour, please try to keep yourself 
within the limit. I should say, you are the executive director 
of Environmental Resources Trust.

 STATEMENT OF WILEY BARBOUR, EXECUTIVE DIRECTOR, ENVIRONMENTAL 
                     RESOURCES TRUST, INC.

    Mr. Barbour. Thank you, good morning, Madam Chairman and 
distinguished members of the Committee. My name is Wiley 
Barbour, I am the executive director of the Environmental 
Resources Trust, a non-profit organization dedicated to 
pioneering markets to protect and improve the global 
environment.
    I am here today to talk about the design of a greenhouse 
gas emissions cap and trade market that can deliver real 
results in emission reductions, cost effectively, real value to 
market participants and real progress in delivering low-carbon 
technologies and energy alternatives. I am a licensed 
professional environmental engineer. In my earlier life, I 
spent 6 years at the U.S. EPA in the policy office and in the 
Clean Air Markets Division. I coordinated an interagency team 
that was responsible for compiling the Federal Government's 
annual inventory of emissions by sources and removals by sinks 
of greenhouse gases and reporting that to the United Nations 
under the terms of the Framework Convention on Climate Change.
    I believe we succeeded in completing a policy relevant by 
policy neutral analytic framework which is used today by 
modelers, climate modelers, economists and policy makers on 
both sides of the issue. Our expertise is in the measurement of 
greenhouse gas emissions and the verification of corporate and 
project level emission reductions. We also own a portfolio of 
Government-issued allowances and credits. We have engaged in 
multi-million dollar trades of these as we have grown our 
portfolio of these emission allowances over time. I can tell 
you from first-hand experience that these markets work and can 
achieve real environmental benefit.
    We are not an advocacy group. We are an implementation 
shop, if you will. We work with a broad spectrum of companies 
that are serious about getting the numbers right about their 
carbon footprint. We work with Google, Wal-Mart, 
NewsCorporation, the owner of Fox News, Entergy Corporation, 
AIG, amongst many others. Many of these companies and private 
groups that we work with are actively participating now in 
environmental markets and emissions trading. Their motivations 
are as diverse as the companies themselves. Some of them are 
interested in purchasing emission reductions in order to offset 
their emissions and become carbon neutral; some of them are 
trying to sell these as part of a sustainable business 
practice. Some companies we work with are large emitters and 
they are purchasing these types of greenhouse gas offsets 
because they are likely to be regulated. They want a clear 
policy signal from Washington on what counts and what doesn't.
    Also leading exchanges are listening very carefully from 
these statements from companies and trying to figure out what 
types of services they can provide. The New York Mercantile 
Exchange, for example, is working extensively with utilities, 
hedge funds, investment banks, environmental brokers to 
establish a set of contracts that market participants need to 
effectively manage the risk and gain exposure to these markets. 
NYMEX has cared an environmental market steering committee, 
which I chair, and reached out to leading experts in order to 
foresee and prepare for the needs of a future mandatory 
compliance system.
    I believe the lessons we have learned in this country on 
existing markets can serve as a model for the design of future 
markets. A professional community has developed in this country 
that understands how to support this trading system. We have 
the talent pool here that understands, how do we measure and 
monitor and verify these types of emission estimates. Based on 
that, we can create a fully fungible commodity of greenhouse 
gas reductions suitable for exchange in an environmental 
market, markets that will encourage real greenhouse gas 
reductions across the country in an effective manner.
    I am here today to testify to the feasibility of that 
market and the accounting systems that would be required to 
make that work. The one critical piece we are missing is the 
law that mandates that cap. The cap creates the constraint 
which ultimately drives demand. To put it another way, only a 
cap on emissions can create the robust demand for allowances 
and credits that is needed to start and rev this market engine. 
For the last 20 years, we have tried to use voluntary programs 
in the United States, and despite all that outreach and 
participation and consultation of numerous public and private 
groups, the voluntary approach has failed to deliver at the 
national level absolutely reductions, or to even change the 
trend of our growing greenhouse gas emissions.
    I think that we have learned a lot from the acid rain 
program. In the interest of time, I will be very brief. We have 
found that this market-based approach works. It has reduced 
acid rain emissions by 5.5 million tons from 1990 levels. NOx 
emissions are down 3 million tons, and at cost savings of $3 
billion a year as opposed to a typical command and control 
approach, as the Government Accountability Office has recently 
found. This experience that we have gained from the acid rain 
program I think stands us in good stead. We have learned some 
of the provisions from that that I see reflected in the Senate 
Bill before us today. I believe that the greenhouse gas cap and 
trade system will be more complicated and will require 
participation from a larger number of sectors. But many of the 
mechanisms that we have learned apply, and I think we 
understand the core elements. I know given in the interest of 
time, I should probably stop there. So we stand ready to answer 
questions.
    [The prepared statement of Mr. Barbour follows:]

    Statement of Wiley Barbour, Executive Director of Environmental 
                         Resources Trust, Inc.

    Good morning Mr. Chairman and distinguished members of the 
Committee on Environment and Public Works.
    My name is Wiley Barbour, and I am the Executive Director of 
Environmental Resources Trust, a program of Winrock International.
    I'm here today to talk about how to design a greenhouse gas 
emissions cap and trade market that will deliver real results in 
emissions reductions, real value to market participants, and real 
progress in developing low-carbon technologies and energy alternatives.
    I am a licensed professional environmental engineer. In my earlier 
life I spent six years at the U.S. EPA working in the Policy Office and 
in the Clean Air Markets Division. I coordinated an interagency team 
that was responsible for compiling the Federal Government's annual 
inventory of GHG emissions and reporting that to the United Nations 
under the terms of the Framework Convention on Climate Change. I 
instituted an expert and public peer review process which is still in 
use today to allow scientific and technical input into the development 
of the GHG emission calculations and I believe we succeeded in creating 
a policy relevant but policy neutral analytic framework which is widely 
used today by climate modelers, economists, and policymakers.
    Environmental Resources Trust is a politically neutral 501 (c)(3) 
nonprofit organization and we have been working on climate change and 
energy policy since our creation in 1996. Our mission is to pioneer and 
catalyze markets to protect and improve the global environment. Our 
expertise is in the measurement of greenhouse gas emissions, the 
verification of corporate and project level GHG emission reductions, 
and in the provision of registry services to companies who wish to buy 
or sell high quality greenhouse gas emission offsets. ERT owns a 
portfolio of emission allowances and credits and we have engaged in 
multimillion dollar trades as we have grown our portfolio over time, so 
I can tell you from firsthand experience that these markets work and 
can achieve real environmental benefit.
    ERT is composed primarily of scientists and engineers; we are not 
an advocacy group--we are a market implementation shop offering a 
variety of technical services to government agencies, private companies 
and multinational corporations who are serious about engaging in 
emerging environmental markets. We work with a broad spectrum of 
companies that are serious about getting the numbers right--about 
accounting for their carbon footprint with the highest integrity. 
Amongst the companies that have engaged ERT to verify their global 
greenhouse gas emissions are Google, Wal-Mart, NewsCorporation (the 
owner of FoxNews), Entergy Corporation, and AIG.
    Our firm also owns 16,000 SO2 allowances and 
participates in the Acid Rain trading program.
    Many of the companies and private groups we work with are 
interested or actively participating in environmental markets and 
emissions trading. Their motivations are as diverse as the companies 
themselves; some are interested in purchasing verified emission 
reductions in order to offset their own emissions and thus become 
``carbon neutral.'' Some are seeking to sell offsets as part of a 
sustainable business practice. Some of the companies we work with are 
large emitters who are purchasing greenhouse gas reductions because 
they are likely to be regulated under a climate change bill and want to 
gain experience with market mechanisms. These companies are seeking a 
clear policy signal from Washington.
    Leading exchanges are also listening carefully to the statements 
from corporations and trying to forsee how the market can provide 
services. The New York Mercantile Exchange (NYMEX), for example, has 
worked extensively with utilities, hedge funds, investment banks, 
environmental brokers and environmental groups since March, 2007 to 
establish a set of contracts that market participants need to 
effectively manage risk and gain direct exposure to the emissions 
markets. NYMEX has created an Environmental Markets Steering Committee, 
which I serve on, and reached out to leading experts in an effort to 
foresee and prepare for the needs of a future compliance system.
    At ERT, we responded to the demand from the private sector and 
created the GHG Registry, the world's first on-line registry of 
greenhouse gas emissions and reductions. For over a decade, the GHG 
Registry Program has provided the tools, protocols, guidance, and 
infrastructure needed to create a fungible commodity for bilateral 
trading in voluntary environmental markets. The GHG Registry currently 
contains almost 17 million tons of tradable GHG offsets and members of 
the GHG Registry have traded over 1.3 million tons of GHG offsets so 
far this year.
    I believe that the lessons we have learned in the operation of our 
programs are valuable and can serve as a model for the design of 
mandatory markets. ERT's experience demonstrates that a professional 
community has developed in this country that understands how to support 
a trading system. We now have a talent pool in this country that 
understands how verification and monitoring under appropriate rules and 
guidelines can measure real environmental improvements. Based on that 
knowledge, we know that we can create a fungible commodity of 
greenhouse gas emissions, suitable for exchange in an environmental 
market, markets that will encourage real greenhouse gas emission 
reductions across the economy in the most efficient manner.
    I'm here today to testify to the feasibility of a carbon market 
here in the United States. My colleagues in the GHG accounting business 
are doing everything we can to make a market function, but one critical 
piece is missing and that's the law that mandates the cap, which 
creates the constraint, and ultimately drives demand. To put it another 
way, only a cap on emissions will create robust demand for allowances 
and credits that is needed to start the market engine.
    If there is any doubt over this observation, market activities over 
the last few decades should provide sufficient evidence. For the last 
20 years we have tried to use voluntary programs in the United States 
to reduce our GHG emissions. Despite the outreach, consultation and 
participation of numerous public and private groups, the voluntary 
approach has failed to deliver at the national level absolute 
reductions or to change the trend of our ever increasing emissions.
    For all the activity in the voluntary markets, it is nowhere near 
the volume and capitalization we would see under a mandatory system--
that volume would result in real emissions reductions, and would 
mobilize private sector players to develop low carbon alternatives in a 
way that we're not seeing now.

                            II. OBSERVATIONS

    I'm sure that you have heard in previous testimony of the success 
of EPA's Acid Rain Program, which has achieved significant 
environmental and public health benefits through use of a market-based 
approach similar to the cap-and-trade provisions of the Climate 
Security Act of 2007.
    In the eleven years that the program has operated, the Acid Rain 
Program has reduced SO2 emissions by more than 5.5 million 
tons from 1990 levels, or about 35 percent of total power sector 
SO2 emissions. NOx emissions are down by about 3 million 
tons from 1990 levels, so that emissions in 2005 were less than half 
the level anticipated without the program.
    The General Accounting Office recently confirmed the benefits of 
this market approach to reducing acid rain pollution, finding that the 
SO2 allowance trading system has saved as much as $3 billion 
per year--over 50 percent--compared with a command and control approach 
typical of previous environmental protection programs.
    The SO2 program has provided valuable market experience 
for the electric generating industry, virtually all of which will be 
participants in a greenhouse gas emissions trading market. The 
SO2 program is a closed system that affected 3,456 operating 
electric generating units as of 2005 with most emissions produced by 
only about 1,100 coal-fired units. Over 16 million allowances have been 
issued under the Acid Rain program and of those almost 7 million are 
``banked'' by participants seeking the flexibility to use them in the 
future, giving them price certainty and operational flexibility.
    Banking is an important feature of a well designed market based 
system--it incentivizes companies to over comply today and bank their 
unused allowances for later use. Participants in that program have 
expressed enthusiasm for the flexibility this mechanism provides. It's 
often referred to as the ``when/where'' flexibility of the program--
allowing individual firms to determine when and where it is best for 
them to make the required reductions.
    The program contains a robust trading market with multiple 
facilitators participating--including brokerage firms, traders, and 
bilateral, or firm to firm, trading. Despite early concerns about 
companies having to become more savvy about trading, the regulated 
companies have figured out how to do it, and have enjoyed greater 
efficiency in their compliance approaches as a result.
    The success of this program is a direct result of its excellent 
design. We can design a larger greenhouse gas emissions market to 
engage the same mechanisms to create similar efficiencies and 
flexibility--leaving it up to companies to decide how best to meet 
their emissions reduction targets.
    Admittedly, a cap-and-trade program for GHGs will be more 
complicated and require participation of a larger number of sources, 
but many of the same mechanisms apply. The experiences and lessons 
learned from existing greenhouse gas emission--or ``carbon''--markets, 
both here in the US as well as in Europe, will serve us well as we 
develop our own solutions. I'd like to talk a little bit more about:
     What are core elements that make the market work?
     What are the core things you have to watch out for?
     (And I will get into the EU experience on both topics, 
which is very helpful for us.)

                     BUILDING ENVIRONMENTAL MARKETS

    The foundation for a successful market is built on our ability to 
measure, report, and verify GHG emissions by each source and to track 
these emissions over time. A market requires a set of rules governing 
the creation and ownership of allowances and credits and a system to 
track these as they are created, allocated, traded, and ultimately used 
and retired from the system.
    Fortunately, this market infrastructure is largely now in place. 
Based on our experience here in the U.S. with voluntary markets, and 
drawing on the experiences and lessons we have taken away from the Acid 
Rain program, the EU emissions trading program and the international 
GHG market, we now have in place the fundamental building blocks for 
successful environmental markets.
    First, the accounting of emissions and their reductions needs to be 
established and scientifically based.
    We have a scientific basis, grounded in peer reviewed literature, 
for quantifying emissions by sources, and removals by sinks, of 
greenhouse gases. These methods are described and documented in 
guidelines developed by the Intergovernmental Panel on Climate Change 
with extensive input and leadership by U.S. scientists and experts. We 
understand the processes that create greenhouse gas emissions. We have 
accepted methodologies for quantifying emissions of GHGs from 
combustion of fossil fuels, responsible for over 85% of total U.S. 
emissions of GHGs. In addition, we can quantify these emissions with 
very high degrees of certainty, often with a confidence level of plus 
or minus two percent or less.
    Offsets particularly fall into this category. What's needed is to 
match or marry these scientific principles with clear policy guidance 
on what counts, such as: what's the appropriate baseline to count 
emissions reductions against, how to account for non-permanent 
``sinks'', such as forests, create specific rules for offset project 
accounting, such as how long the crediting period would last and how to 
distinguish projects that create additional emissions reductions, and 
the rigor and frequency. A number of entities, including the USDA, EPA, 
and prominent universities have established standards for offset 
projects.
    These measurement protocols and methodologies allow for the 
creation of a standardized, fungible commodity that can be efficiently 
traded.
    Second, establish the mechanisms that will allow this accounting to 
take place. We have software systems, clearing mechanisms, measurement 
techniques, and ways to track ownership of allowances that could be 
rather quickly deployed to support the needs of the GHG cap and trade 
market. Some of these exist within the EPA as a result of the Acid Rain 
program; others, such as the financial clearing mechanisms, have been 
developed in the private sector and stand ready to be used in this 
market.
    Third, establish clear and consistent rules to allow all market 
participants to plan, make decisions, and allocate capital with a 
degree of certainty that the program goals are not going to change, 
such as:
     Reporting requirements need to be clearly stated as soon 
as possible.
     Information about how to apply for early action credits 
needs to be clear.
     Provide requirements for auditing or verification of 
emissions.
     Establish procedures for establishing non-compliance. The 
rules should incentivize compliance, being set up in such a way that 
the penalty for non-compliance exceeds the cost of compliance.
    These rules need to be articulated for the non-electric energy 
sector also, including the agriculture, transportation, and commercial 
sectors of the economy--basically anyone you would expect to be 
participating.
    Fourth, establish market mechanisms, exactly as outlined in the 
legislation, including banking, borrowing, and trading. These 
mechanisms are essential to allowing individual regulated entities the 
most flexibility, including the ability to manage their capital 
investment decisions, in pursuing emissions reduction goals.
    Fifth, allow broad intermediaries, service providers, agregators, 
and other entrepreneurs to participate, harnessing the creativity of 
the private sector. Those participants should be engaged unless there 
were some specific restriction.
    Now I will turn to the core things you need to watch out for.
    One of the things we learned from the earliest phase of the EU ETS, 
the European GHG cap and trade market, was that the allocation process 
itself is a critically important component of both creating a robust 
trading system and achieving the desired environmental outcome.
    In the first phase of the EU ETS, they overallocated allowances, 
and did not allow the value of permits to exist across allocation 
periods--in other words, there was no banking allowed across periods. 
As a result the price, and therefore the value, of those allowances, 
plummeted in the months before the end of the first trading phase.
    This brings up an important point: once regulated entities are 
participants in the market, they will not only be concerned with high 
prices, but they will also be concerned with making sure their 
allowances maintain value--they don't want watch those credits turn 
into ``Monopoly money''. We can easily avoid this problem by allowing 
banking, as the EU now does, and through carefully constructed 
allocation schemes.
    Allocation to individual regulated entities should be conducted 
fairly, but in accordance with the desired environmental outcome; 
allocation at the beginning of a compliance period should be consistent 
with the desired environmental outcome to maintain their value.
    What we need now are clear market signals from policy makers, and 
clear guidance from the federal government on the rules of the road. In 
the absence of federal leadership on these issues, a host of NGOs, 
states, and industry groups have waded into these waters. The result 
has been some disagreement over what counts but this is not an 
intractable problem.
    I believe that S. 2191 contains many the most important elements 
and provides an excellent framework for developing a robust U.S. 
greenhouse gas emissions trading market.
    Once we have clear rules of the road the market will function and 
help identify the least cost approaches to reducing GHG emissions. I 
look forward to working with the Committee, EPA, DOE, and my colleagues 
in the private sector to assist in the transition to mandatory markets. 
I thank you for your time.

    Senator Boxer. Mr. Barbour, thank you very much.
    I will start right away. Ms. Smith, you are sort of the 
voice of doom and gloom on this today, laying out what horrible 
things are going to happen to us if we adopt this environmental 
landmark legislation. I looked over a list of your clients, and 
I want to make sure I have it right. Is OPEC one of your 
clients, ma'am?
    Ms. Smith. Not one of mine.
    Senator Boxer. No, one of the firm's.
    Ms. Smith. I don't know.
    Senator Boxer. Well, it is in the list of your clients. Is 
ARCO one of the firm's clients, ma'am?
    Ms. Smith. It has been in the past.
    Senator Boxer. How about American Petroleum Institute, 
Chevron, ConocoPhillips, ExxonMobil, Halliburton, Occidental 
Oil and Gas, and Shell Oil? Are they your clients, the firm's 
clients as well?
    Ms. Smith. Anything listed on our web site are previous 
clients of ours. We have acknowledged that we worked for them 
publicly on some issue. We work in many areas far beyond 
environmental----
    Senator Boxer. Well, I am just trying to make a point. 
Because I think when witnesses come before us and give us 
``independent analyses'' I think it is really important to 
know, just as you want to know what our views are, and we are 
an open book on that, who you have represented in the past. The 
Natural Gas Supply Association, it goes on and on and on.
    So I am going to place the list of clients into the record, 
and I think the people need to put----
    Ms. Smith. That is the nature of working for business, to 
help--that is the nature of working for business, is to help 
them do a better job meeting their requirements.
    Senator Boxer. Well, there is business and there is 
business when it comes to global warming. We have had many 
businesses here that are very much in favor of moving, I mean, 
I don't need to name them all. So I want to make sure people 
know who your clients are when you come up and you give us 
these analyses.
    Ms. Smith. Among them are some who are supporting 
legislation for climate policy.
    Senator Boxer. Excellent.
    Now, I want to know, Ms. Smith, when you made your 
analysis, did you go look at what is going on in California? Do 
you believe in general that environmental laws are in conflict 
with a strong economy? Is that your underpinning belief?
    Ms. Smith. No, I do not believe that. I don't believe the 
economy could not reduce emissions, I said that the timing of 
these caps is too tight in the near term to achieve the caps 
without disruption in the near term. I did not say that we 
can't achieve large emission reductions and economic growth.
    Senator Boxer. Well, excuse me, I listened to you and you 
talked about reductions in GDP, reductions in GDP, you said 
overall there will be all these job losses, even though we will 
have some growth. I asked you if you looked at the California 
experience, because on a bipartisan way, we have led the way. 
Do you know we'd be the fifth largest economy in the world if 
you looked at our State GDP? Are you aware of that, in 
California?
    Ms. Smith. Yes, I am, and I am aware that California has 
achieved enormous reductions in energy intensity in its 
economy. I am also aware that this has in large part occurred 
as much of the energy intense manufacturing has moved to other 
parts of the United States.
    Senator Boxer. Well, ma'am, I would like to tell you if you 
want to check out job growth in California, increase in 
incomes, and what has happened there, particularly in a 
bipartisan way as we have moved toward environmentally friendly 
legislation, including basically the Sanders-Boxer bill, with 
those goals, the excitement there, I would just say to both of 
the economists here, I would be happy to work with you on 
meeting some of our economic leaders in California. Because I 
think Mr. Barbour made the point very clearly that in fact, 
there is very good news on the horizon.
    Now, what I am going to do now is hand my questions over 
for another round to Senator Lieberman, hand him the gavel. I 
want to thank members of the panel very, very much for your 
testimony.
    Senator Inhofe.
    Senator Inhofe. Thank you, Madam Chairman. I think this is 
going to work, she is going to go down and take the first 7\1/
2\ minutes and I will be right behind you.
    Very quickly, let me just ask two yes or no questions to 
you, Mr. Darbee, and to you, Mr. Pershing. First of all, Mr. 
Darbee. If your company could not receive free allowances 
initially, would you still support the bill, yes or no? Time is 
getting by us here.
    Mr. Darbee. I would have to look at the whole structure, 
but probably not.
    Senator Inhofe. All right, thank you very much.
    Mr. Pershing, would you organization support significant 
increases in nuclear power?
    Mr. Pershing. My expectation is that we might, depending on 
the circumstances.
    Senator Inhofe. Ms. Smith, let me ask you a question. The 
organization CRA, have they ever in the past represented any 
environmental companies or organizations or any cap and trade 
organizations?
    Ms. Smith. Yes, we have.
    Senator Inhofe. Now, I would like to ask you a question, 
and put it in some words that we can understand. I would like 
to ask you, how large are the costs to American consumers? 
Would they absorb? Can you kind of put these numbers in terms 
of a family budget, so we have some idea of what we would be 
talking about? Quickly.
    Ms. Smith. Yes. We are estimating in 2015 between $800 and 
$1,300 per household per year. It rises after that.
    Senator Inhofe. Very good. Ms. Thorning, you heard the 
answer or the statement that was made by Ms. Smith about the 
targets in this bill getting out ahead of the likely 
availability of technology. Do you want to comment on that, 
targets and then technology?
    Ms. Thorning. The targets are very, very right, and the 
capital stock turns over very slowly. I think many policy 
analysts, many politicians need to be aware that the average 
appliance may last 10 to 12 to 15 years, the average car lasts 
8 years, the average production facility in a factory may last 
25 to 35 years. Utility plants maybe 60 years or longer. So the 
slowness of the capital stock turnover means that it is much 
more cost effective to replace capital during the normal 
replacement cycle, and that is why more time to meet tight 
targets would substantially reduce the cost of these targets.
    Senator Inhofe. Very good. Ms. Smith, I wrote down a 
statement that was made by the chairman of the subcommittee, 
Senator Lieberman, that we should not expect fuel switching 
under this bill, because it won't happen until the price of an 
allowance hits $50 a ton. Comment, please?
    Ms. Smith. That is about right, and we see prices of 
allowances hitting about that level earlier. We see the fuel 
switching because in the early years, the cap that is stated in 
the bill is extremely tight. In fact, it does not even appear 
to match 2005 emissions, even though that is its purported 
level. There is a lot of confusion in our minds. We have looked 
at analyses where the cap is looser, and of course the costs 
are lower. That is the issue of the timing.
    Senator Inhofe. What would happen to U.S. industries like 
steel, cement, if this bill should pass and we were to comply 
with these emission requirements?
    Ms. Smith. I am sorry, I missed----
    Senator Inhofe. What would happen to U.S. industries like 
iron and steel and cement? Do you have any comments on that?
    Ms. Smith. I was mentioning leakage when I had to end my 
testimony. Our industries that compete in international 
markets, both those who compete in export and import markets, 
are extremely exposed by the high prices, not just of their own 
emissions, but of the electricity that they will have to use in 
their production processes. Some of these industries are so far 
on the edge that if there are not border tax adjustments, which 
are not in this bill, in a timely manner, they will likely 
suffer huge losses in their market shares.
    Senator Inhofe. All right, and Ms. Thorning, can households 
and businesses change their stocks of energy using appliances 
and factory equipment quickly, and how long does the average 
piece of equipment last?
    Ms. Thorning. People would be surprised that the average 
auto is probably kept in service 8 years or longer. Appliances 
last 10 to 15 to 20 years, and of course, plant and equipment 
in factories may often last 35 to 40 years. Utility plants, 50, 
60 years or even longer. So capital turns over very slowly.
    When we put premature requirements to curb emissions, we 
make the existing capital stock obsolete.
    Senator Inhofe. With 10 seconds here, I would like to ask 
you, I have commented several times, Ms. Smith, that I think a 
carbon tax is a more honest approach to it, and I would like to 
know why wouldn't a carbon tax be better than the cap and 
trade?
    Ms. Smith. I believe it is far more suited to this 
particular issue of climate policy.
    Senator Inhofe. Thank you. Thank you, Mr. Chairman.
    Senator Lieberman [presiding]. Thanks, Senator Inhofe.
    I think I am next in the order. Senator Warner would then 
be next after me. Because he can't be here, he has given me 
some questions.
    I think what I will do is try not to take the full 10 
minutes, but rotate back and forth and ask a sampling of 
questions from each of us.
    Let me go first to Mr. Darbee, because I thought you had a 
good statement and a very important exchange with Senator 
Inhofe, where he asked you if you would support the bill if the 
power sector didn't get any allowances free. You said you would 
think about it, but probably not. I understand that, that is 
part of the balance that we put in the bill.
    But meeting these tough standards, particularly by 2020, to 
take us back below 1990 emissions, is going to cost the power 
plant sector of our economy hundreds of billions of dollars. 
Incidentally, where else would you get that except to raise 
rates? So one of the reasons why the rate impact is ultimately 
so low, as you pointed out in your testimony, is because you 
are getting those allowances for the initial years and of 
course, you are also getting some of the proceeds of the 
auctions.
    I just want to briefly ask you to comment, because you made 
an interesting suggestion, that you would like to see more 
detail in the Carbon Market Efficiency Board, which is the 
other kind of emergency mechanism we built in here to protect 
the economy. Just give us an idea of one or two of the things 
you would like to see the Market Efficiency Board have.
    Mr. Darbee. Certainly, Senator. We have been giving this a 
lot of thought. One of the concerns on the part of business has 
been about possibly a mystical Fed-like mechanism. Therefore, 
we felt it would be better if there was more transparency. So 
what PG&E is recommending is the idea of a collar. That is that 
we would establish a ceiling for the price of carbon which 
would rise over time, as well as a floor for the price of 
carbon that would rise over time. The effect of this would 
provide assurance to policy makers and to businesses that the 
costs would not run up unexpectedly to high levels, somewhat 
like what we saw in California, with high energy prices, they 
went up much higher than people anticipated they ever would 
with deregulation.
    At the same time, the positive for perhaps the 
environmental community and certainly for venture capitalists 
and industrialists, is with the floor price of carbon, there 
would be certainty as to what the range of the price of carbon 
would be over a series of years. So we think that this balances 
both the concerns for the environment as well as pragmatic 
concerns about moderating the impact on the economy as well as 
providing certainty for investment. So we are intrigued by 
that, and we think that if those standards and prices were 
public and the Fed mechanism were required to enter the market, 
engaged in open market operations to stabilize the price of 
carbon and keep it in that area, that band, we think it would 
be very constructive.
    Senator Lieberman. Very interesting ideas. We will continue 
to talk about them.
    Senator Warner's first question was to you, too. I will ask 
you this part of it. How can we expedite the availability of 
the technologies needed to reduce greenhouse gas emissions, 
from your point of view?
    Mr. Darbee. We think this cap and trade program would be 
the best solution in that respect. Because what is necessary is 
to put a price on carbon. Therefore, some technologies which 
might be otherwise more expensive in effect are advantaged by 
this, and certainty is created for venture capitalists as well 
as for industrialists.
    So we think that the thing that could promote the 
development of these technologies best is to internalize the 
externality which now exists. That externality is the ability 
to spew carbon into the atmosphere at no cost.
    Senator Lieberman. Thanks. I will go back to my next 
question, which is for Dr. Pershing. You mentioned in your 
testimony three separate modeling studies by the Nicholas 
Institute at Duke, MIT and the Clean Air Task Force. Dr. 
Smith's testimony presents modeling results that differ greatly 
from those three others. What do yo think is the reason for 
that? Can you suggest anything in her analysis and theirs that 
might have led to such different predictions?
    Mr. Darbee. I think there are a number of things that do 
that. Always, when one does models, the issues that one assumes 
and the inputs have enormous implications on the outputs. In 
this particular instance, it is always a question of where you 
start.
    These particular studies sought to start with what I think 
of as fairly standard projections. They began with some 
historical trends and projected forward using the Energy 
Information Administration, systems like EPA has run out going 
forward. They assume, for example, that the technology that we 
may have going forward has a trend looking like that of the 
past. You can go fairly quickly, new technologies can 
penetrate. As I understand Dr. Smith's testimony, there are 
some limits on what technology might happen and the rate.
    These assessments assume that you can look at all sectors. 
They assume that you can look at the energy sector, at the 
transport sector, multiple options, multiple directions. As I 
understand again, although I have not seen her model in detail, 
it does not include all options in all sectors. My sense, 
finally, is that you get some change in the expected GDP and 
how things are recycled through the system. If you assume that 
there is going to be some benefit in terms of reducing those 
overall costs, for example, returning the revenues back to 
technology, which might reduce the price, returning the 
revenues back to the economy for distribution, you again get 
lesser impacts on the overall economy.
    Senator Lieberman. That is very helpful. I thank you for 
that.
    Let me go back to a question from Senator Warner. A second 
question was to Mr. Barbour. We are all wanting to say, so I 
have to get it off my chest, if you are Haley Barbour's wiley 
cousin. Because we always thought that Haley was fairly wiley.
    Mr. Barbour. Only if there might be a significant 
inheritance. But no, no family connection that I am aware of.
    Senator Lieberman. Just re-elected Governor of Mississippi, 
so we congratulate him.
    Here is Senator Warner's question. In your written 
testimony, you write, I believe that S. 2191 contains the most 
important elements and provides an excellent framework for 
developing a robust U.S. greenhouse gas emissions trading 
system. Senator Warner's question is this. Of the criteria you 
listed, what are the components of this legislation, America's 
Climate Security Act, that you think are most important for 
market efficiency?
    Mr. Barbour. Thank you, Senator. I think the fundamental 
design element of a cap and trade system is the when and the 
where flexibility. That is really from my experience working 
for many years as a consultant to industry a very desired 
feature from industry. They want the flexibility to decide the 
schedule and the timing and the location of the reductions, so 
that they can achieve the least cost reductions at the most 
efficiency way possible. I think that is inherent in the design 
of a system.
    I also think that the banking provisions are very, very 
important. Under the current SO2 allowance trading 
program, about 16 million SO2 allowances have been 
issued.
    Seven million of those have been banked by participants 
seeking the flexibility to use those in the future, give them 
price certainty and some operational flexibility. This banking 
is an extremely important feature of a well-designed system. It 
incentivizes companies to over-comply today so that they can 
bank these unused allowances for later use. It incentivizes 
companies like my own to purchase these to send a signal of 
scarcity, so in essence, I can put money to bear in the most 
cost-effective way possible to get SO2 allowances. I 
can buy the permits.
    I think that this is an essential feature that has been 
well-represented and it is probably, as we look at some of the 
problems that we have seen in the European Union trading 
system, it is that failure of banking, the initial phase by 
definition did not allow the allowances to transfer into the 
next phase, and their value rapidly went to zero as we 
approached the end of the period.
    Senator Lieberman. Thanks very much.
    I think I am going to submit the other questions that both 
Senator Warner and I have for the record to you, so we can give 
everyone else here a chance to ask questions. This may suggest 
a new way of questioning. If you ask one question, one Senator 
to ask questions for himself and another, you actually take 
less time.
    [Laughter.]
    Senator Lieberman. I can't figure that out economically. 
Maybe somebody here on the panel could help me.
    Senator Carper, you are next, and then Senator Voinovich.
    Senator Carper. Thank you, Mr. Chairman.
    I want to ask really a question, I thought I heard Mr. 
Barbour and also Mr. Darbee talk about offsets, and to speak in 
terms that said offsets are an important way to help hold down 
reducing CO2 emissions. I would like to ask each of 
you to take just a minute and explain why, then I am going to 
ask each of our other three witnesses to let us know whether or 
not they agree or disagree. One of the things I like to do with 
a diverse panel like this is to find consensus. This is an 
issue that we need to broaden consensus, not diminish it. My 
hope is that this is one of the areas we can do that.
    So Mr. Barbour, and then Mr. Darbee, your thoughts again on 
the value of offsets, holding down the costs as we try to 
reduce CO2 emissions.
    Mr. Barbour. Thank you, Senator. I think the provision of 
the use of offsets to meet compliance is very wise, and if 
anything, I think I am a proponent of even greater use of 
offsets. I think this provides really a unique opportunity to 
capture the entrepreneurial spirit, the engineering know-how of 
our country and our problem solvers here. The offset provisions 
allow project developers to go into areas that might not be 
covered directly by a cap, areas such as going into dairy 
operations, hog farms, landfills, abandoned coal mines, a 
variety of parts of the economy that are difficult to capture 
as a point source. It allows the project developers to invest 
capital in ways they can reduce greenhouse gas emissions. 
Fortunately, we have a system in place, as I had described in 
my testimony, a well-developed set of scientifically based, 
empirically based methodologies and procedures to capture and 
measure those greenhouse gas emissions and to do so 
efficiently, to report those and to track those over time, so 
that those reductions we can be assured of, they are real, they 
are measurable and they can become part of the overall 
compliance system.
    Senator Carper. Thank you, sir.
    Mr. Darbee, your thoughts, please.
    Mr. Darbee. The offset mechanism actually is one of the 
reasons that a cap and trade program is better than a tax. 
Because if you are a company, let's say, like Pacific Gas and 
Electric Company, where it would cost you $15 to eliminate the 
need for, to reduce a ton of carbon, the alternative that they 
have is we might be able to go out and buy an offset which 
would accomplish the same for $5. Therefore, we would opt, by 
the $5 solution rather than the $15 solution.
    So in short, offsets unleash the creativity and the 
innovation of the free market place, and therefore it delivers 
the opportunity to solve this problem of global warming more 
cost effectively than other alternatives.
    Senator Carper. Thank you.
    Mr. Pershing, Ms. Smith, Ms. Thorning, your thoughts?
    Mr. Pershing. I would agree with both of those two 
comments. I would add only that the need to ensure careful 
monitoring, verification, transparency, those kinds of 
questions, verifiability, must be assured or you don't have the 
value of the offsets. But I very much agree.
    Senator Carper. Thank you.
    Mr. Barbour, do I understand, and I am going to come back 
to Ms. Smith and Ms. Thorning, do I understand that your 
company actually validates offset projects, is that what you 
do?
    Mr. Barbour. Yes, sir, we do. We have developed greenhouse 
gas monitoring, reporting and verification protocols for a 
number of different sectors. We are also working with U.S. EPA 
and the Department of Energy on ways to measure and develop and 
quantify these things.
    Senator Carper. Good. Ms. Smith, back to you, please.
    Ms. Smith. A couple of points. Offsets are a good thing to 
add. They do help reduce the cost of the program. The limits on 
the offsets in the bill have something to do with the high 
cost, and it actually explains some of the differences between 
our cost estimates and those of the Nicholas School paper.
    But I also want to note that you can do offsets under 
carbon tax. There is no reason that can't happen as well.
    Senator Carper. Thank you.
    Ms. Thorning.
    Ms. Thorning. I would just like to add the point that 
verifying the offsets can be a sticky issue. We have seen the 
issue with the Chinese offsets apparently being fraudulently 
generated and the carbon footprint initiative, a lot of that 
has been apparently not substantial offset. So you do need a 
real bureaucracy to monitor this sort of initiative.
    Senator Carper. Thank you. As I recall, the offsets that 
are permitted or allowed under this bill have to be found 
within the United States, which I think is important, an 
important point. Let me just say how much we appreciate your 
being here and your providing this testimony and your 
willingness to respond to our questions. Frankly, to a number 
of you for your help in trying to chart these difficult waters 
and to come to a consensus.
    Mr. Darbee, I think both Senator Lautenberg and I mentioned 
earlier in our statements that allowances, we favor an approach 
which provides allowances on the basis of output. The idea is 
to reward those who produce the most electricity with the least 
amount of pollution. I believe a number of my colleagues 
believe it is important to incentivize renewables, including 
solar, wind, geothermal and so forth. I say that as an advocate 
of nuclear, too.
    Could you just explain for us briefly in ways that people 
can understand it, how output based allowances would do this? 
Can you give this a shot?
    Mr. Darbee. Yes, I can, Senator. The way the allowances 
would work under an output basis is a company would receive a 
certain amount of allowances which they would apply to the 
kilowatt hours or megawatt hours that they would sell. The 
beauty of this is the contrast with applying or allocating 
allowances by historical standards. If one were to give 
allowances to, let's say coal generators that had emitted a lot 
of carbon in the past, then there wouldn't be an incentive for 
them to change. In fact, they might continue at the extreme 
producing electricity with coal for decades.
    Whereas if you provide allowances to those people that have 
low carbon emissions and it is based on output, you in effect 
are rewarding that kind of behavior and promoting more of it. 
The same would go with renewables as well as new cleaner 
technologies. So allocating allowances on the basis of output 
promotes the kind of behavior that we want to see out of the 
economy. It in effect provides economic advantage to those 
people who produce no carbon at all as they generate 
electricity or very low levels of carbon, such as natural gas-
fired generation.
    Senator Carper. Good. Thank you very much for that 
response.
    Senator Lieberman. Thanks, Senator Carper.
    Senator Voinovich.
    Senator Voinovich. Thank you, Mr. Chairman.
    Ms. Thorning, could we put your charts up on the--the 
charts that showed China--yes, that is the one right there. 
Associated Press, November 7, Beijing: China will reject any 
agreement that calls for binding limits on carbon dioxide 
limits that will replace the Kyoto Protocol, EU officials said 
Wednesday. Today, London, the Economic Times: India will become 
the third biggest emitter of carbon dioxide by 2015, and rapid 
economic growth of the country and its neighbor China will have 
devastating consequences for the world's energy supply unless 
the two Asian giants make efforts to curb demand and greenhouse 
gas emissions, the International Energy Agency warned on 
Wednesday.
    There are those that look at what we are doing and conclude 
that unless we understand that it is a global problem and that 
we do something about it, that is more rapid than frankly what 
this bill provides, that in terms of making a difference and 
reducing greenhouse gases and climate change it is just 
fruitless. I for one think that what should drive this issue is 
technology, the technology to capture carbon, sequester the 
carbon. I think members of this Committee know we had a 
FutureGen project that we tried to get in Ohio. They are going 
to build that in 2012.
    My concern is that there is an urgency for us to move as 
quickly as possible to fast track this technology so that we 
get it right here, and then it is available for us to sell to 
other places in the world. That should be the thing that drives 
this. Mr. Chairman, I feel that this may not get the job done, 
this cap and trade. My feeling is that we ought to come up with 
some idea where we can look at the status of where our 
technology is, where can we find the money to move this along 
much quicker than what we anticipated.
    We talked earlier about a Manhattan Project, we talked 
about responding to Sputnik. I would like your comments on 
that, and I think it was you, Ms. Smith, who talked about a 70 
percent increase in natural gas costs as we try to ramp this 
thing up and get the technology. I have to tell you, and maybe 
I look at things differently than some of the members of this 
Committee, but we have lost jobs in our State, substantially, 
because of high natural gas costs. I live in Cleveland, OH. My 
heating bill is up over 300 percent over what it was in 2000. I 
have people in my town that are poor and the elderly that are 
really hurting because of these high energy costs.
    One example, the chemical industry. We were number one in 
plastics when I was Governor, $19 billion exported in 1997. Now 
we import chemical products. I would just like your comments 
about the reality of what we are talking about here and are we 
moving fast enough and have we given enough consideration to 
the economic impact that it would have on this Nation.
    Ms. Smith. We need to time the stringency of the caps to be 
consistent with the availability of the technologies. We also 
need, and S. 2191 fails to do that at this point. That is why 
there is such a shift in gas in some of the projections. A 
looser cap in the near term made up perhaps by a tighter cap in 
the long term could reduce the cost because it would be timed 
better with the technology.
    But also really importantly, there is no emphasis in this 
bill on establishing funding for research and development to 
actually bring down the costs of these technologies. While we 
may be able to get them out in the 2020 to 2050 time frame, 
they are still quite costly. Something needs to be done to 
bring those costs down to make us want to incur those costs as 
well later in time.
    Senator Voinovich. Ms. Thorning.
    Ms. Thorning. I would just like to add that the Asia 
Pacific Partnership which was put in place in 2005 is 
designated to do exactly what you are asking, how to get 
technology transferred to developing countries. Of course, the 
Major Economies Initiative that is a follow-up to the G8 
meetings is an attempt to broaden that. The Asia Pacific 
Partnership, the goals of that are to encourage business to 
business transactions, so that technology can be transferred. 
The study that we released last year by CRA International 
looked at what are the barriers to getting this technology 
transferred in places like India and China. In China, a key 
barrier is lack of protection for intellectual property rights, 
corruption, inability to get money in and out. In some cases, 
like India, a key problem is government ownership of major 
industrial sectors.
    So changing the institutional framework in developing 
countries can promote the kind of business to business 
transactions that will enable them to get access to our 
technology and Western technology without requiring huge 
Government subsidies. The Asia Pacific Partnership already has 
130 program in effect, including one by Caterpillar Tractor, 
where they are capturing methane at Chinese coal plants and 
using it to produce electricity.
    So there is a lot going on, and I think we need to build on 
these types of programs.
    Senator Voinovich. Thank you.
    Senator Lieberman. Thanks, Senator Voinovich.
    Senator Lautenberg, let me just mention that we are about 6 
to 7 minutes into a vote. I believe that Chairman Boxer's 
intention was to have one round and then adjourn the hearing. 
So I will stay a while and then leave, and turn the gavel over 
to--I think she intended to adjourn it. So people who want to 
go and come back, and I will pass the gavel to the next sitting 
Senator.
    Senator Lautenberg.
    Senator Lautenberg. Yes, I would ask any of our friends on 
the panel, we thank you for your testimony, even though we have 
substantial agreement with some of you and disagreement, and 
agreement with others. So I will try to ask the questions 
quickly and if you could respond fairly quickly.
    One thing I want to get off the table here is we constantly 
refer to the specter that India, China, et cetera, these giant 
developing countries bring as dangerous to us with the 
greenhouse gas production. But in some cases, we invited that. 
Our automobile industry didn't compete in the marketplace while 
cars came from Japan and took over the market, and make them 
more efficient, et cetera. So when we look and see what 
happened to us, and our profligate use of fossil fuels and 
without regard cost us our leadership. We can't ask these 
things of these countries because we don't deserve it. It was 
the talk, not the walk, that we provided.
    I want to ask Ms. Smith, do you think that our pace as 
presently structured in the Lieberman-Warner bill would be too 
rapid an attempt to reduce greenhouse gases, endangering our 
economy, et cetera?
    Ms. Smith. It depends on how rapidly you want to go, you 
take on more costs. What I am presenting is that the rapid pace 
that occurs in the time period 2012 out through about 2020 to 
2025 is so tight that it gets ahead of the technology. That 
doesn't mean that it will be cheap to do it later, but at least 
it is doable later without the disruption.
    Senator Lautenberg. How about the longer term target that 
is tentatively listed here, 60, somewhere between 60 and 80 
percent reduction in the year 2050? Is that too aggressive?
    Ms. Smith. It is extremely costly to meet, but it can be 
met without the disruption if we have a slower transition to 
it.
    Senator Lautenberg. OK. Do you see any dangers to society, 
humankind, wildlife, et cetera, as a result of global warming 
impact?
    Ms. Smith. For the differences in a cap that is half as 
tight or as tight as the one in the bill currently, there would 
be no differences environmentally in the near term, from those 
near term differences.
    Senator Lautenberg. No, your view, apart from what is in 
front of you at the table. Do you think that, are there real 
dangers that come from having growth in global warming?
    Ms. Smith. There is a serious risk issue that needs to be 
dealt with as a risk management situation.
    Senator Lautenberg. OK, so it is not like a fire in the 
forest or the town or anything like that? You don't see an 
immediate need to get on these things, start squeezing down, et 
cetera?
    Ms. Smith. Immediate reductions by the United States of 
this degree will not do anything to the rate of change. What is 
needed is global action, concerted, unified global action over 
the long haul.
    Senator Lautenberg. OK. Does the rapid ice melt around the 
world, do you believe that is taking place?
    Ms. Smith. I am not an expert on the science, but I don't 
doubt that there is melting in some parts----
    Senator Lautenberg. You don't have enough knowledge from 
things that you see, from reports that we get, that there is 
rapid ice melt?
    Ms. Smith. There is ice melt in parts and there is ice 
build-up in others. But I am not debating that there is warming 
going on, not at all.
    Senator Lautenberg. I see enormous danger to sitting by, 
again, I used the example once before here, and that is that we 
are the doctor, and we know that we have to administer 
medicine, the question is how strong and how soon.
    Mr. Pershing, under this bill, new coal plants, coal power 
plants, can still be built without deploying any new technology 
to make them cleaner or more efficient. State of Kansas 
recently denied a permit for a coal plant because of global 
warming. Do you think Congress ought to require that all new 
coal plants use the most effective technology available as they 
produce these facilities?
    Mr. Pershing. I think there is a very strong case to be 
made for requiring significant additional obligations on coal-
fired plants, which tend to yield substantial portions of the 
total greenhouse gas emissions globally. If we do that, we are 
likely to make the technology penetrate more quickly. You can 
increase over time the level of stringency of those 
obligations. The cap and trade program essentially does that by 
providing a price and an incentive through a price mechanism to 
make that case. But additional resources could usually be also 
provided to promote the technology and create standards.
    Senator Lautenberg. Mr. Chairman, I make the observation, 
and I will steal seconds here, that the large percentage of 
view, the largest percentage coming from the table is that cap 
and trade works, contrary to some of the opinion that we have 
heard from the table here. Thank you.
    Senator Lieberman. Thanks, Senator Lautenberg. I must say 
that we have worked on this a lot, but it is a real pleasure to 
hear those who have thought about this a lot and lived within 
the system in some places as it has been carried out, certainly 
in the acid rain area, to hear you talk about it, because it 
has a vitality to it. This is a classically American, 
entrepreneurial market-based response to a mega environmental 
problem. I just don't think there is, you can have debates 
about whether we are doing it exactly right, whether we can fix 
it in some ways, how much it will cost. But I don't think there 
is a better way to deal with this problem than the way we are 
doing it. The contributions you have all made are great.
    Perfect timing, Senator Craig. Let me indicate how we are 
going to proceed. I want to thank the witnesses, all of you, 
for your testimony. I appreciate it very much. It has been 
helpful to the Committee. I am going to depart to vote; I 
cannot return. I know a couple of the other Senators are coming 
back, I know Senator Sanders is coming back. So Senator Craig, 
I am giving you the liberty to question until one other Senator 
comes back. This could be, this is a very open, participatory 
committee.
    The last Senator here who has not had questions yet will 
have the authority to adjourn the hearing. I thank you again 
very much, and call on my colleague, Senator Craig.
    Senator Craig [presiding]. Mr. Chairman, thank you very 
much. I shall try to do you no harm.
    [Laughter.]
    Senator Craig. Like all of us, we thank all of you for 
being with us today and the thought that you have put into it. 
I think all of us recognize that getting this issue right has 
all the right impacts on our world and our economy, and getting 
it wrong could have all the wrong impacts in a very severe way. 
I am very slow to move in shaping public policy until I am 
convinced that the modeling we use, the science we use and all 
of those things are as accurate as we can get it. I have looked 
at this issue for many years; I have traveled the world to most 
of our climate change conferences. I recognize concerns and 
urgencies. I also recognize in some instances the near 
impossibility of getting where some of us think we ought to go.
    Mr. Darbee, let me start with you. In 2006, 24 percent of 
PG&E's total electrical output or generation was nuclear power. 
In your view, can this type of cap and trade legislation be 
implemented without a significant commitment to new nuclear?
    Mr. Darbee. We have taken a look at the growth with respect 
to energy needs through the period 2030 through the EPRI 
organization which represents the electric utility industry. 
What is clear from that is that America's energy needs are 
going to grow very substantially on all fronts.
    So what EPRI looked at was how much energy efficiency we 
will need, which is substantial, how much in the way of 
renewables, that amount is substantial, clean carbon 
technologies, IGCC with sequestration, very substantial. There 
remains a very significant gap beyond that. We believe at this 
time because of the size of that gap that nuclear needs to be 
on the table as an option.
    But I do want to say that we also see great opportunity in 
the solar-thermal technology. Therefore, there is the 
possibility in many parts of the United States that if that 
technology grows sufficiently strongly as we anticipate it 
might, that could substitute for a substantial amount of 
nuclear power. So we think that the United States needs to keep 
its options open until that technology proves itself. But even 
with that, because of different climate differences in the 
United States, some amount of nuclear power may be required.
    Senator Craig. In all of those instances, to bring a new 
unit of any type of production online, what is the average cost 
per kilowatt hour? Well, let's say photovoltaic, or solar in 
the instance that you are looking at and building.
    Mr. Darbee. Let me give you, if I may, the whole spectrum. 
In terms of, we translate it through to the cost to the 
customer. So with respect to, let's say, coal today from 
existing facilities, probably 3, 4 cents. Nuclear today from 
existing facilities, 4 cents; hydroelectric today, existing, 3 
cents.
    If you look at the costs of solar-thermal that was 
mentioned today, 10 to 12 cents seems to be the range, with the 
opportunity going toward 8. If you look at photovoltaic, it is 
pretty expensive, it is about 30 to 40 cents a kilowatt hour 
before you look at installation costs. So I think that probably 
gives you the spectrum.
    Senator Craig. It does, it is an irony, or I should say a 
uniqueness of market in place at this moment in time. My State 
of Idaho is growing very rapidly. We are also fortunate that we 
have a largely hydro-based electrical economy, so we have the 
lowest cost power in the country. About 40 percent of our in-
migration is coming out of California and they are retirees who 
are seeking our State for a variety of reasons, and clearly in 
the cost of all their dialogues is the cost of living and 
energy.
    My frustration, because the Chairman was talking about the 
dynamics of a California economy, it may be a dynamic place if 
you are alive, middle-aged and working hard. If you are retired 
or poor, a problem begins to happen. We see a substantial 
migration out of California today into Idaho and other places 
where there are different attributes, but one of them being 
cost of living. Energy is a very real factor there.
    Now, that leads me to you, Mr. Pershing, as it relates to 
how we allocate. Because we are a clean State, we don't have a 
carbon footprint of any kind, we don't have that kind of 
legacy. So it is not clear to me that a cap and trade system 
can be implemented without causing severe regional economic 
impacts. Idaho does not want to lose its advantages. Clearly, 
new energy in Idaho is going to be more expensive. We all know 
that all new energy is more expensive than old energy. It is 
also cleaner; we also understand all of those arguments. Idaho, 
as I have said, is one of those States that is the cleanest and 
least cost.
    So I guess my thoughts to you are one, WRI's allocation 
preference, free or not free?
    Mr. Pershing. WRI would propose that there be some mix. We 
believe that in the initial phase, it doesn't seem politically 
possible to manage it with an entire auction, so we would start 
off with some share of being freely allocated. We do believe 
the auction should be phased out over time. The more quickly it 
can be done the more quickly you get to an economic efficiency.
    But I would note that there is a space in this whole area 
for something to be done with the revenues, and with the 
allowances. This could provide partly, for example, mechanisms 
that are allocating allowances to the States, for some way to 
offset some of the costs that you have identified. There also 
is quite a lot of information in the economic literature and 
various studies being done for the States individually that 
suggests that some of these outcomes may not be as negative as 
you suggest. For example, while the electricity price that you 
pay may go up, the total electricity that you consume may go 
down. The balance between those may actually lead to a stable 
or even a marginal reduction in the price.
    The State of Illinois did this kind of analysis and showed 
that.
    Senator Sanders [presiding]. Thanks. I guess I am acting 
Chair here.
    Larry, you were about 2 minutes over, as I understood it. 
Is that right? He had about 7 minutes, I think.
    Senator Craig. OK, fine, thank you.
    Senator Sanders. It doesn't look like a whole lot of us 
here, so----
    Senator Craig. Why don't we do that, I will stay for a 
couple more minutes. There are a few more questions I would 
like to ask. Thank you.
    Senator Sanders. OK. Let me ask Mr. Darbee a question. Mr. 
Darbee, on page 12 of your written testimony, you mentioned, 
you discuss a study from the Federal Government's own National 
Renewable Energy Lab solar plants to be?
    Mr. Darbee. Well, absolutely, Senator. I might say one 
thing, before when we were talking about different 
technologies, I failed to mention that new clean coal 
technologies cost about 8 cents a kilowatt hour as we expect 
nuclear about 10 cents.
    Senator Sanders. We are not really sure about clean coal, 
are we?
    Mr. Darbee. We are not, indeed. So going to your point 
about solar-thermal technology, we as a company are very 
excited about that, because it is significantly cheaper than 
photovoltaic. So we are seeing the prices in the areas that you 
have mentioned 10 to 12 cents right now and likely, hopefully 
will go to 8 cents. That is what the vendors are telling us.
    Senator Sanders. I am not an expert on this, but everything 
being equal in terms of gas and other forms of energy, one 
assumes over a 25-year period that is going to go up pretty 
steep. If one were looking at 8 cents per kilowatt hour, in the 
year 2035 or whatever, am I wrong in saying that would be 
really quite cheap electricity?
    Mr. Darbee. You are absolutely right. One of the things is 
with solar power, there is no input cost and no input 
uncertainty as there is, say, with natural gas, coal, things 
like that. So that is the case. The other thing is the 
technology is pretty simple and practical. You are basically 
taking the sun, concentrating it with mirrors, putting it on a 
pipe, turning water to steam and turning a turbine.
    Senator Sanders. Let me ask you this. You have signed a 
contract with a company called Solel for a 553 megawatt plant, 
is that right? I understand that in your part of the world, you 
and other utilities have a number of plants--you are thinking 
about developing a whole number of plants. What is the 
potential out there? How much electricity can we be generating, 
do you think, through solar plants?
    Mr. Darbee. We are setting a target of 2,000 megawatts over 
the next number of years, 5 to 10 years. So the potential 
actually in the sunny parts of the United States, southwest and 
west in particular, what we are seeing is, we could deliver 
more solar-thermal power than nuclear plants, because frankly a 
nuclear plant takes 10 years to build, at least, probably.
    Senator Sanders. Sorry to be interrupting you----
    Mr. Darbee. So, very substantial.
    Senator Sanders. Again, going back to this National 
Renewable Energy Lab, they are talking about the possibility of 
solar plants producing upwards of seven times the energy needed 
to serve the State of California. That sounds like an enormous 
amount of electricity and huge potential out there. Is that 
correct?
    Mr. Darbee. That is, and that is conceivable, yes.
    Senator Sanders. The other point that I want to make, when 
you talk about whether it is 8 cents or whatever it may be per 
kilowatt hour, as I understand it, you are just including now 
the investor production tax credit as your Federal assistance 
here?
    Mr. Darbee. That is correct.
    Senator Sanders. Now, our friends in coal, and I am not 
against coal, I want to explore the potential of clean coal, 
they are talking about getting hundreds and hundreds of 
billions of dollars in subsidies. Now, if we said to you that 
the Federal Government would build one of your $2 billion 
plants, we would put 50 percent of the cost in, am I wrong in 
saying that you could drive the price down to consumers to 
perhaps 4 or 5 cents per kilowatt hour?
    Mr. Darbee. You are correct, Senator.
    Senator Sanders. So I would simply say that before we talk 
about spending, I mean, this is a huge and significant 
statement that Mr. Darbee is making. This is not an unknown 
technology. This is a technology that is online now and will be 
only growing. It seems to me incumbent upon the Federal 
Government to strongly support it.
    My last question, Larry, I am going to take just two more 
minutes then give it over to you, is that I noticed in your 
remarks you talked a little bit about the provision regarding 
new sources for energy production. You noted in your testimony, 
basing allowance allocations solely on historic emissions only 
serves to reward and encourage the highest-emitting resources 
and discourages rapid development in deployment of clean or 
lower-emitting technologies. Can you elaborate on that, please?
    Mr. Darbee. Basically, if one allocates enough allowances 
to existing old coal plants, the incremental cost of running 
those plants in a carbon-constrained environment will be zero. 
Therefore, people will continue to run the plants; in effect 
they are subsidized.
    So we believe that by shifting the allowance allocation to 
relatively clean fuels or non-emitting forms of generating 
energy, that will promote the right behavior of rewarding those 
people that produce the cleanest technology.
    Senator Sanders. I should just say that we are going to 
offer an amendment dealing just with that issue in the 
subcommittee. We will probably revisit that later on.
    Senator Craig.
    Senator Craig. Mr. Chairman, thank you very much.
    Mr. Pershing, you were completing a thought when time ran 
out. Let me ask this question, because I said it in my opening 
statement, and it frustrates me a great deal as we begin to 
move dollars around the country that actually don't produce 
clean energy. I use the phrase, a transfer of wealth.
    Is not the allocation process, and you talked about rewards 
and benefits, is that not a transfer of wealth so legislated?
    Mr. Pershing. To a certain extent, of course it is, yes. 
The issue in part is with what end and to what purpose. So in 
this instance, what we are seeking to do is to move revenues 
from systems, energy-generating systems that are highly carbon-
intensive to those that are low carbon-intensity. Those should 
in theory be managed through a price mechanism and a structure. 
But it will move money from one place to another.
    Senator Craig. Thank you.
    Dr. Smith, 2191 attempts to aggressively cut domestic 
greenhouse gas emissions, so your testimony indicates that it 
will only be achieved through the transfer of domestic 
manufacturing activities from the United States to 
international competitors. We know that many of those 
international competitors will not be in any form of compliance 
until technology reaches them that allows them to comply. Under 
this scenario, what are the impacts to the economy, jobs, and 
frankly, to the global environment?
    Ms. Smith. What you have described is what we call leakage, 
it is leakage of emissions from the United States to another 
country. When either United States or foreign sources supply 
our demand, our needs, with goods and services, emissions 
occur. We can either produce them ourselves and emit it here, 
or we can try and cap our emissions here. If the result of that 
is to create competitive disadvantage so that in fact we start 
to buy imports, all we have done is move the emissions from the 
United States to another part of the globe. The environment 
gains nothing if that occurs.
    I would like to correct something you said, I did not say 
that the entire cap is met through leakage. I did say that a 
cap with this degree of price increase, without protections at 
the border for our industry, which are not in the bill, those 
protections, would create tremendous amounts of leakage that 
would just be a perverse consequence of the bill. It would hurt 
our economy and do nothing for the environment.
    Senator Craig. Thank you.
    Dr. Thorning, I am not sure whether this fits, but I find 
it a fascinating idea. On October 20 of this year, San 
Francisco turned out their lights. They were out for an hour in 
an attempt to save electricity. I am told that to some it was a 
very frightening experience, because they didn't have the 
security that lights and energy brought them.
    You indicate that we would have to reduce our energy usage 
by significant amounts to meet the goals of 2191 based on the 
timing that all of you have spoken to. Can you give us an idea 
how realistic this energy savings approach is and would 
California have to go from 1 hour to 2 hours? Or I should say 
San Francisco. California didn't do it all.
    Ms. Thorning. The targets on S. 2191 are so tight that it 
would clearly impinge on consumers' lifestyles. I think it 
would require, as my testimony suggested, by 2030, reducing 
emissions by approximately 50 percent on a per capita basis. 
Stop and think what that means to what kind of appliances, what 
kind of house, what kind of transportation system you have. It 
would require much dimmer lighting, much more emphasis on 
building efficiency and so forth. All of those changes can be 
made in time. But because of the length of life of our capital 
stock, it is very, very costly, as Dr. Smith's analysis 
suggests, to make these transitions in a matter of 15, 20 or 
even 25 years.
    So I think we need to look very carefully at the kind of 
challenge we are putting in front of consumers and business 
with the targets in this bill.
    Senator Craig. Thank you, 36 seconds left, quick question 
of you, Mr. Barbour. How can we be certain that any cap and 
trade system employed here in the United States can in fact 
avoid the volatility that the European experience has had, and 
when it was established over there, the reaction to it?
    Mr. Barbour. Senator, I think there were several lessons to 
be learned from that experience. Certainly there was an over-
allocation of allowances to industry, which, once that was 
discovered, that really diminished their value over time. So 
the allocation needs to be tightly matched to the desired 
environmental goal, not only to reach that goal, but also to 
preserve their value over time. Secondly, as I had mentioned, 
there was no provision for banking into the next period. It 
simply ended, and that really drove the value to zero. I think 
we still have yet to discover how well the system will work. 
The Kyoto Protocol's first compliance period actually begins in 
2008, 2012. So it is a little premature to judge. Maybe in 2012 
we will know how well the system works. But it hasn't even 
started yet.
    Senator Craig. Thank you all very much for your time with 
us. We appreciate it.
    Senator Sanders. Senator Whitehouse.
    Senator Whitehouse. Thank you all for staying with us. I 
appreciate the time that you have given us. It is important 
work that we are embarked on, and it is important to get it 
right.
    I would be interested in anybody's thoughts on how to 
police the integrity of the auction and trade system. I think 
the concept that we are getting at is the right one. But we are 
almost still at the position paper level. We have seen over and 
over again markets that overheated, we have seen markets that 
were taken advantage of by people who were out to game the 
system. We have an entire Securities and Exchange Commission 
set up to police our capital markets. We have had unpoliced 
markets in, for instance, electric energy in California that 
created disastrous outcomes. Enron trade in a sort of quasi-
market in energy futures and was a phony and fraud, it was a 
nightmare for people who were involved with that.
    So I think between where we are now and where we need to 
get when this bill emerges, there have to be some pretty 
serious safeguards built into that process to make sure that it 
is not captured. Particularly you consider that billions and 
over time perhaps even trillions of dollars of carbon or 
greenhouse gas credit might very well flow through the entity 
that markets them. There is an enormous motivation, just as 
there is in this building, of people to try to get their hooks 
into that money for ulterior purposes than just the public 
benefit.
    When you consider the safeguards that are set up here, the 
safeguards that are set up in our judicial system, the 
safeguards that are set up for the stock market, the safeguards 
that are set up everywhere, this thing right now looks like the 
wild west. Where would you recommend that we go for models? We 
could probably try to think this thing through from scratch, 
but usually it is better to try to get some tested ideas that 
have withstood some practical experience in their areas. Where 
should we go to fill in that concern about these markets either 
being run out of control or corrupted or gamed by speculators?
    Mr. Darbee.
    Mr. Darbee. Senator, that is something we have given a lot 
of thought to. Having been in California at the time that Enron 
was taking advantage of it, we had a fair amount of experience. 
We have several thoughts in that regard.
    Senator Whitehouse. One quick interruption. You can agree 
with me that if there is a market failure of some kind 
happening, relying on the market to sort it out doesn't help?
    Mr. Darbee. Exactly right. I think in general, the SEC is a 
good model. Many people think that we have gone possibly too 
far with Sarbanes-Oxley and put a lot of cost on it. But 
certainly prior to Sarbanes-Oxley I think the SEC regulation of 
the security markets was viewed as really the model in the 
word. So the SEC is very capable of identifying market 
manipulation. That is certainly what we saw in the energy 
crisis in California, where Enron and others, it would appear, 
took advantage of the market. Of course, those players have 
settled and paid hundreds of millions, if not billions of 
dollars, to rectify that.
    So I think we would want to take a look at how the SEC 
monitors the securities markets, and establish a similar 
methodology with respect to the energy markets, and also 
monitoring the financial instruments that are synthetic 
alternatives to the real-time market there. So that is the 
first.
    Second, as I mentioned earlier, and I am not sure if you 
were here at the time, we would like to propose extending on 
the Fed model that is embedded in the Lieberman-Warner 
legislation and have the Fed-like entity that is created work 
with a collar on prices that would rise over time. 
Specifically, there would be a proposed ceiling for the price 
of allowances, a proposed floor for it. What would happen is 
when the prices started to go above market, the Fed-like entity 
would borrow from the future allowances to provide supply into 
the market, to handle that pressure. Because we saw in 
California, when the markets went out of control on energy, the 
price of energy went up far more than anybody expected. I think 
as policymakers, you want to be concerned to protect against 
things like that. That wouldn't be good for the environment, 
this policy, or for the economy.
    At the same time, by creating both the floor and the 
ceiling, which would rise over time, what would happen is there 
would be increased certainty on the part of venture capitalists 
and industrialists to create new technology as they go down, 
because they will know what the price of carbon is within a 
range over a period of time. So we think that that would be 
very helpful to resolving this problem. So those are just a 
couple of suggestions.
    Senator Sanders. Why don't you take another minute, if you 
need?
    Senator Whitehouse. I don't need another minute, I just 
would wish to hear from the other witnesses, to the extent that 
others have something to add.
    Senator Sanders. Sure.
    Senator Whitehouse. Mr. Pershing.
    Mr. Pershing. Thank you very much. Just one comment to add 
to Peter Darbee's, which is the other side of the equation, how 
can you monitor it effectively. We actually have a whole series 
of techniques that would enable us to do that. One of the best 
examples clearly is the continuous emissions monitor that comes 
at the end of the smokestack. But there are others that could 
be applicable and parallel for almost all sectors.
    Then we need a registry. We have to have a place to record 
this information and to allow for full transparency in that. I 
would note that there are now more than almost 40 States that 
have been working collectively to design exactly that kind of 
registry. That provides a very good model for a place to start.
    Senator Whitehouse. Ms. Smith.
    Ms. Smith. I would just like to comment on the idea of a 
price ceiling and the idea of a collar. That will be the 
mechanism that will provide some certainty in the market, will 
reduce the degree to which businesses face huge risks in the 
face of uncertain auctions and the volatility in prices that 
will occur in the market, which really undermine the ability of 
businesses to plan against a long-term future cap.
    The only problem I would like to point out is that a 
collar, where there is a price ceiling and a price floor that 
is pre-established will not be viable to sustain over the long 
period, unless those prices that are established are consistent 
with the cap and what the CPA will cost to achieve. So one can 
resolve the volatility and should through a price ceiling. But 
the only way to ensure that certainty on the prices over the 
long run will be a price ceiling, more in the form of a safety 
valve. But that is necessary in order to make this a viable 
policy going forward, to provide protection against the kinds 
of risks, economic risks in the short run that I was talking 
about.
    Senator Whitehouse. Ms. Thorning, would you like to say 
something?
    Ms. Thorning. I would just like to make one observation 
about the idea that the SEC might be a model for this. With the 
SEC, you have buyers and sellers on opposite ends of the 
transaction. They each have an interest in policing the 
accuracy of the information, because if one cheats, the other 
one loses, it is a zero sum game. But when you have an ETS, it 
could be in both parties' interest to collude, and it is not a 
zero sum game. So I think using SEC as a regulatory model may 
not hold in this type of situation.
    Senator Whitehouse. Mr. Barbour.
    Mr. Barbour. I appreciate the concern. I think the Carbon 
Market Efficiency Board has implemented in the legislation, I 
think it addresses that as well as we can.
    Mr. Darbee. If I can just add one other thing. People look 
to Europe and say, gee, that is an example of where the cap and 
trade system didn't work too well. As people recall that 
experience, the price of allowances went up very, very high and 
then came down and were very low. The idea of a collar would 
protect against both instances.
    So if allowances were issued, additional ones at the time 
that there was a lot of demand and prices were heading up, the 
benefit of the collar is that the Fed-like mechanism would be 
in purchasing allowances if in fact we saw the prices go back 
down. That purchase of allowances would bring them into the 
collar range, and therefore avoid a problem like we saw in 
Europe.
    Senator Sanders. Thank you, Senator.
    Let me just very briefly ask what will be the last 
question. Ms. Thorning a moment ago indicated that if we move 
forward vigorously in cap and trade the result might be a 
significant lowering of our standard of living and cutbacks in 
electric consumption and so forth. I would simply say that in 
my city of Burlington, Vermont, we have grown reasonably well 
over the last 15 or 16 years. The city is, because of strong 
energy conservation, approaches, we are consuming no more 
electricity than we did 16 years ago. I think in California, 
over a 30-year period, as I understand it, per capita electric 
consumption has remained fairly level. I am not aware that the 
people in California are living in caves and huts and seeing a 
major decline in their standard of living.
    So my question that I throw out is, what is the potential 
of energy conservation? Maybe Mr. Pershing, do you want to 
start that off, and is there great potential out there?
    Mr. Pershing. I think there is enormous potential. The 
models range quite substantially. In addition to the examples 
that you cited, there are clearly equivalent examples in 
Europe. I would note that even countries like China, which was 
raised earlier by Senator Craig, has a very aggressive energy 
efficiency program precisely for this reason. In fact, it is 
driven partly by climate change, but even more by energy 
security. It is that dynamic that reduces the total costs at 
very modest overall effort with side benefits, benefit for 
local pollution, benefits for jobs and the local economy, which 
are things like installation of insulation and things like new 
technologies around efficient lighting.
    We had a comment earlier that you couldn't do much for your 
lighting, you would have to have dim lights. Well, we went to a 
compact fluorescent and got a 50 percent improvement. We can go 
now to an LCD and we can get an additional 70 percent 
improvement. I don't believe that the problem is 
insurmountable. Efficiencies are huge.
    Senator Sanders. Mr. Darbee, did you want to comment on 
that?
    Mr. Darbee. Senator, I have heard people in our industry 
suggest, as we have heard here today, that the technology 
doesn't exist and we need to wait until it does. My reaction to 
that is that it is nonsense. The experience you cited in 
Burlington, VT, the experience that we have shown in California 
is that with just energy efficiency alone, there are great 
strides that can be made.
    We have actually entertained delegations from China looking 
at the experience of energy efficiency in California. They are 
gobbling up that information and taking it back and applying it 
to China, because they know that they are using energy in a 
wasteful fashion and that not only is that bad for the 
environment, but they want to be even more competitive than 
they are today. They know that energy efficiency will make them 
more competitive.
    So there is a lot we can do today with just energy 
efficiency. Of course, technology is developing all the time. 
So the time for action is now, and waiting is not the 
appropriate course of action.
    Senator Sanders. OK, maybe on that tone we will wrap it up. 
On behalf of the Chair, let me thank all of you very much. It 
has been a very productive hearing. Thank you.
    [Whereupon, at 12:30 p.m., the committee was adjourned.]
    [Additional material submitted for the record follows.]

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            AMERICA'S CLIMATE SECURITY ACT OF 2007, S. 2191

                              ----------                              


                       TUESDAY, NOVEMBER 13, 2007

                                       U.S. Senate,
                 Committee on Environment and Public Works,
                                                    Washington, DC.
    The full committee met, pursuant to notice, at 11 a.m. in 
room 406, Dirksen Senate Office Building, Hon. Barbara Boxer 
(chairman of the full committee) presiding.
    Present: Senators Boxer, Inhofe, Baucus, Lieberman, Carper, 
Cardin, Klobuchar, Whitehouse, Warner, Voinovich, Isakson, 
Alexander, Bond, Barrasso, and Craig.

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

    Senator Boxer. The hearing will come to order.
    We are holding this hearing to further consider the 
landmark global warming legislation of Senators Lieberman and 
Warner. They have been working on this comprehensive bill for 
several months. I cannot tell you how grateful I am for their 
continued leadership.
    I also want to say thank you to the other members of the 
Committee and also to the staff on both sides. I think we 
showed last week when we had an open briefing that members were 
interested and staff was absolutely prepared to answer each and 
every question.
    We are going to continue this, and I know Senator Alexander 
has some concerns about the schedule, and I want it to be noted 
that we already have moved to add hearings, briefings and also 
every day, all that any staffer of any Senator on the Committee 
has to do, or any Senator has to do is call here and they will 
have a private meeting set up with the appropriate staff. So 
thank you to all for your continued engagement as we move 
toward a markup.
    The legislation before us provides a strong framework for 
global warming action. We are building upon this foundation and 
I am committed to making this the best bill that it can be. I 
remain dedicated to a deliberative and transparent process. We 
have had, as you know, over 20 hearings on global warming. This 
is our third hearing specifically on this bill. We have a 
fourth one on Thursday. We will continue to work on legislation 
in consultation with stakeholders, members and staff as we 
proceed.
    I want to thank your witnesses for coming today. I look 
forward to your testimony. I know this was short notice, I 
really appreciate that you are here. And I face this challenge, 
as I have said many times, with hope, not fear. By facing this 
challenge now, we can maximize our chances of avoiding the most 
dangerous effects of climate change, and we will position 
America to capitalize on the tremendous opportunities ahead.
    I believe we have a moral obligation to do everything we 
can, starting now, to fight global warming. When we do, we will 
reinforce our role, America's role, as a beacon of hope to 
other nations who look to us on these important issues.
    With that, I would yield to Senator Warner.

     STATEMENT OF HON. JOHN WARNER, U.S. SENATOR FROM THE 
                    COMMONWEALTH OF VIRGINIA

    Senator Warner. Thank you, Madam Chair.
    I am still in a rapidly mending posture, but I am not able 
to bend or sit. But that doesn't keep the old brain from 
cranking away, and I will proceed to my office now where I take 
a more relaxed position to thereby take in every single bit of 
wisdom you will impart today. I thank this distinguished panel.
    Madam Chairman, I have watched you and the distinguished 
Ranking Member and others on this Committee consult with 
Senator Lieberman and myself about procedural matters. I think 
we are doing everything we can to strike a balance in the sense 
of urgency to move on with this legislation against the need to 
allow members of the Committee to advocate their positions and 
to otherwise address it so that we can have a good 
understanding as we proceed toward markup.
    Now, we certainly are all aware in this room about the 
potential economic impacts of this legislation. So last week, 
Senator Lieberman and I wrote the Department of Energy 
Information Administration and the EPA, and I will just read 
one of the letters: ``We are writing to request that the EIA 
estimate the economic impacts of S. 2191, America's Climate 
Security Act,'' and a similar request being made to the 
Environmental Protection Agency. ``We ask that these agencies 
begin this process by meeting with our staff as soon as 
possible to discuss the parameters, methods and duration of the 
analysis.''
    That I think will be a helpful step. Also, I want to thank 
several colleagues on my side of the aisle who, while they 
still have some very grave concerns about the legislation, are 
trying to offer cooperative suggestions by which we could 
perhaps in the markup session address with the thoroughness 
that they deserve, such issues as are of concern to them. I 
hope that the December markup session as now scheduled does 
have that much flexibility to add on time to allow colleagues 
on this side to have their issues addressed. I particularly 
want to thank my colleague from Tennessee.
    With that, Madam Chairman, I yield the floor and return to 
my office off-campus, so to speak.
    Senator Boxer. Senator Warner, thank you for your continued 
leadership. As you know, it was your strong words that led to 
this additional hearing and additional briefings, and yes, we 
are not going to rush a markup. We are going to start it and we 
are going to end it when everyone feels they have had a chance 
to offer their amendments and their comments. We will work with 
your staff and you on that so that you feel satisfied.
    Senator Warner. Thank you very much.
    Senator Boxer. We are going to go in order of seniority, so 
we are going to go to Senator Baucus.
    .

 STATEMENT OF HON. MAX BAUCUS, U.S. SENATOR FROM THE STATE OF 
                            MONTANA

    Senator Baucus. Thank you very much, Madam Chairman. Thank 
you for holding this very, very important hearing. You are 
showing great leadership, and this is a very important thing to 
do. I thank you for it.
    And obviously, I thank my colleagues, Senators Lieberman 
and Warner, for all the work that you have put into this 
project. You have worked very, very hard, listened to a lot of 
people, various perspectives, and made your own judgment as to 
what you thought would be a good start. We all thank you for 
all of that.
    Baseball great Wade Boggs once said, and I have chosen Wade 
Boggs, because he is both a Yankee and a Red Sox player, he 
said, ``I didn't get over 1,300 walks without knowing the 
strike zone.'' Well, Madam Chairman, I think the Senators 
serving on this Committee have all played crucial roles in 
passing important pieces of legislation. We are fortunate to 
have such experienced and dedicated public servants seated on 
this Committee. I think we all know a strike when we see one. 
And I think most will agree that this ball is a strike, it is 
down the middle.
    I am wary, however, of some of the proposals that have been 
made that would pull this bill too far one direction or 
another. America's Climate Security Act apparently hit the 
sweet spot. It once again makes the United States a leader in 
addressing climate change. It is very important that we do 
that, for the United States to be a leader by calling for 
emissions reductions of 70 percent below 2005 levels by the 
year 2050.
    The bill also keeps the economy growing by including 
important incentives for carbon capture and sequestration 
technology. This technology will allow the United States to 
continue to use its most abundant and affordable energy source: 
coal. In my State of Montana alone, we have 120 billion tons of 
coal, that is one tenth of all the coal in the world. The bill 
also includes provisions allowing America's farmers and 
foresters to generate offsets. These provisions both contain 
the costs to the economy and create new sources of revenue for 
America's farmers and ranchers. Even if only half of Montana's 
feed growers switched to no-till farming, they could generate 
as much as $48 million annually in revenue.
    The balance Senators Warner and Lieberman have achieved in 
their bill is no small task. I have heard some of my colleagues 
say that the bill goes not far enough one direction or the bill 
does not go far enough. Some have said that caps should be 
tighter and allowances to industry phased out more quickly. I 
have heard other colleagues say that Congress should cede its 
authority to tighten the cap in future years to the 
Administration. I must respectfully disagree with these 
proposals.
    We will not solve climate change with one bill. What we 
need is a Marshall Plan for America that aims to build a 
cleaner economy. The United States did not rebuild Europe after 
World War II in a day. It took time. Likewise, addressing 
climate change will take years and multiple policies, such as a 
greening of the tax code, working with our trading partners, 
increasing competitiveness and efficiency of our economy.
    I am also afraid that through a good intention shifting of 
allowances and auction revenue we may upset the delicate 
balance currently in the bill. I have heard some of my friends 
say the bill does not do enough to incentivize nuclear, 
renewable energy and natural gas. Clearly we will need all of 
these energy sources to meet the needs of our economy. But I 
must say under the bill as currently drafted, all of these 
energy sources are already eligible for incentives.
    So my colleagues have also stated an interest in allocating 
allowances to existing power plants based on electricity 
output. I disagree. That approach would amount to subsidizing 
existing plants with no economic or environmental added value. 
Allowances should go to those power plants that need them in 
order to comply with regulations and invest in cleaner 
technologies.
    America's Climate Security Act is a strong, balanced bill. 
We have the pitch we want and we ought to hit it out of the 
park. Thank you.
    Senator Boxer. Thank you, Senator.
    Senator Isakson.

 STATEMENT OF HON. JOHNNY ISAKSON, U.S. SENATOR FROM THE STATE 
                           OF GEORGIA

    Senator Isakson. Thank you, Madam Chairman.
    I will submit my entire statement for the record, as 
unanimous consent to submit the entire statement and I will be 
brief, just make a couple of points and move on so we can hear 
the testimony.
    I believe that we should take proactive steps, both 
personally and as a Nation to reduce our Nation's footprint. 
One of those steps is addressing the carbon issue. The only way 
you reduce that is by addressing the burning of fossil fuel. 
The only way that you do that substantially is by looking at 
alternative sources and existing sources, particularly the 
enhancement of nuclear, cellulose-based ethanol and other 
renewable sources.
    I don't see the emphasis in this legislation on nuclear 
that I would like to see. I think that is one of the main ways 
we do it.
    I would like to welcome Dr. Greene and all the members who 
are here today. I read Dr. Greene's testimony earlier, and as a 
person interested in transportation, I look forward to his 
testimony on the effects of cap and trade as a carbon reduction 
policy for the transportation sector. I am especially 
interested in his thoughts on low-carbon fuels such as 
cellulose-based biofuels. While his testimony focuses on 
surface-based transportation, I am also interested in hearing 
his views on how cap and trade will affect other transportation 
sectors, such as the airline industry, which is a huge part of 
my State of Georgia's economy.
    I welcome all of our panelists who are here today, and I 
think the Chairman for giving us this opportunity at this 
hearing.
    Senator Boxer. Thank you, Senator. We will put your full 
statement in the record.
    Senator Lieberman.

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

    Senator Lieberman. Thanks very much, Chairman Boxer. Thanks 
for holding this hearing, a series of hearings in a very, what 
I think is a very deliberative process. I know some of our 
colleagues have been concerned about the time given it. We have 
had a lot of hearings in this Committee and we are going to 
continue to have a lot of hearings before we get to the markup.
    And then as always happens with any major piece of 
legislation, and this is just about as just about as major as 
you can get, when we get to the Floor, there is going to be a 
lot of time to work together to try to find common ground. 
Senator Alexander made reference to former Senator Dirksen 
convening, opening up his office for deliberations on the Civil 
Rights Act when it got to the Floor during the 1960s; Senator 
Mitchell, former majority leader, did the same with the Clean 
Air Act. Those meetings went on for weeks and weeks and weeks, 
but finally reached resolution and progress. I believe we can 
do that here.
    So there is a lot to do in this Committee, but this is not, 
if we are able to report it out, the end of the process. I want 
to come to Senator Baucus in this regard. I thought his opening 
statement was excellent; not the least reason for which was his 
mention of Wade Boggs to bring out this figure of 
reconciliation between these two deeply competitive forces, the 
Yankees and the Red Sox, and to evoke thereby the possibility 
of reconciliation across different points of view on climate 
change is inspirational. I thank him for that.
    And look, as Senator Baucus said, some want it go further 
one direction, others want to pull it back. We want to do this 
thoughtfully, but let's be honest with one another, because 
most of us here recognize the reality that the globe is 
warming. We are in a race with time here. One can conjure, talk 
about Nero fiddling while Rome burned, one can conjure up a 
picture in one's mind where we continue to debate and pursue 
the perfect climate change bill while the waters are rising 
along the coasts of America and the rest of the world and the 
climate is adversely affected. We cannot let that happen.
    In my statement opening the last hearing, I talked about 
the various projections of costs for America's Climate Security 
Act, which in my opinion are manageable and relatively minor, 
considering what we will achieve thereby, which is to avoid the 
potentially disastrous consequences of climate change. I just 
want to spend a moment to talk about a factor that is not 
calculated in those estimates of cost, which is, what are the 
costs of not doing anything? The IPCC has cited some factors 
here and real world consequences, and basically concludes that 
the United States will shoulder quite significant costs by mid-
century unless we act now to reduce our greenhouse gas 
emissions.
    Let me give you some of the examples. Warming in our 
western mountains will decrease the snow pack, causing more 
winter flooding, reduced summer flows and increased competition 
for already strained water resources. So we have the costs and 
conflict. Droughts and new invasions of insects will kill crops 
as well as forests and leave forests even more prone to fires, 
more costs and dislocation. Coastal communities and habitats 
will be battered by intensified storms with the damage 
compounded by more erosion, again, enormous costs.
    In March, the Government Accountability Office issued a 
report entitled Climate Change: Financial Risks to Federal and 
Private Insurers in Coming Decades are Potentially Significant. 
Madam Chair, I would ask unanimous consent to place that report 
in the record at this time.
    Senator Boxer. Without objection.
    [The referenced material follows on page 272.]
    Senator Lieberman. But here are some of the report's 
conclusions in brief. Storm-related economic losses will 
increase at an exponential rate as storm strength increases. 
Category 4 storms tend to cause 100 times the economic damage 
that category 1 storms cause. And real climate change will 
bring about more category 4 storms. One half to two thirds of 
the structures in U.S. flood plains do not have flood insurance 
at all.
    The Federal Government's two main insurance programs, the 
National Flood Insurance Program and the Federal Crop Insurance 
Program, have grown markedly more exposed to weather-related 
losses since 1980. The impact of unchecked global warming on 
those two programs alone, according to the GAO, could 
substantially increase the annual budget imbalance, and 
therefore the overall deficit, of our Government.
    Thus I would submit in closing, Madam Chairman, that the 
economic costs to this Country of unchecked global warming will 
be grievous by mid-century unless we act not to mandate 
significant reductions in greenhouse gas emissions as America's 
Climate Security Act does. I thank the Chair.
    [The prepared statement of Senator Lieberman follows:]

     Statement of Hon. Joseph I. Lieberman, U.S. Senator from the 
                          State of Connecticut

    Thank you, Chairman Boxer. I would like to spend a few minutes 
discussing cost. Here are some of the costs-expressed in terms of real-
world consequences--that the Nobel Prize-winning Intergovernmental 
Panel on Climate Change--the IPCC--finds the United States will 
shoulder by mid-century unless we act now to reduce our greenhouse gas 
emissions:
    Warming in our western mountains will decrease the snowpack, 
causing more winter flooding, reduced summer flows, and increased 
competition for already strained water resources.
    Droughts and new invasions of insects will kill crops as well as 
forests, and will leave forests even more prone to fires. Coastal 
communities and habitats will be battered by intensified storms, with 
the damage compounded by more erosion.
    In March, the Government Accountability Office issued a report 
entitled, ``Climate Change: Financial Risks to Federal and Private 
Insurers in Coming Decades are Potentially Significant.'' I seek 
unanimous consent to place that report in the record.
    Here are some of the report's conclusions:
    Storm-related economic losses increase at an exponential rate as 
storm strength increases. Category 4 storms tend to cause 100 times the 
economic damage that Category 1 storms cause.
    One-half to two-thirds of the structures in U.S. floodplains do not 
have any flood insurance at all.
    The federal government's two main insurance programs--the National 
Flood Insurance Program and the Federal Crop Insurance Program--have 
grown markedly more exposed to weather-related losses since 1980.
    The impact of unchecked global warming on those two programs alone 
could, according to the GAO, substantially increase the annual budget 
imbalance and the overall deficit.
    In 1999, the Agriculture Department's Risk Management Agency 
declared, ``The risks of climate change, such as higher temperatures, 
changes in precipitation, increased climate variability, and extreme 
weather events can result in significant impacts on agriculture, 
forestry, and rural areas.''
    Thus, I would submit, Madame Chairman, that the economic cost to 
this country of unchecked global warming will be catastrophic by 
midcentury unless we act now to mandate significant reductions in 
greenhouse gas emissions.
    On its own, America's Climate Security Act would, according to the 
Natural Resources Defense Council, reduce total U.S. greenhouse gas 
emissions by 18 to 24 percent below the 2005 level by 2020 and by 59 to 
66 percent below the 2005 level by 2050.
    According to the modelers at the Environmental Protection Agency, 
those reductions in U.S. emissions would keep atmospheric greenhouse 
gas concentrations below dangerous levels even if countries such as 
China and India did not start taking serious action until 2025.
    I will digress to say that I believe those nations can and should 
start acting sooner. No one seriously believes, though, they will start 
until we do, considering that we are responsible for most of the global 
warming that is now irrevocably dialed into the climate system. 
Besides, I for one would prefer that we develop advanced energy 
technologies here, and export them there, rather than the other way 
around.
    So the emissions caps in America's Climate Security Act are tight 
enough to avert the economic catastrophe this nation will face if we 
fail to take strong action now. What is the cost of implementing 
America's Climate Security Act?
    At last week's hearing, I reviewed some of the findings that the 
Clean Air Task Force had reached using the Energy Information 
Administration's model.
    First, the price of an emission allowance would not exceed $50 
until after 2030. According to EIA's October 29 report to Senators 
Inhofe, Voinovich, and Barrasso, fuel switching from coal to natural 
gas would not make any economic sense until the price of an allowance 
exceeds $50. So one should not expect fuel switching to occur under 
America's Climate Security Act before 2030. By 2030, even the 
pessimists say we will have commercial deployment of carbon capture and 
sequestration technology for coal.
    The analysis goes on to project that U.S. gross domestic product 
would more than double by 2030. The projected increase is only 1 
percentage point lower than the increase projected in the absence of 
America's Climate Security Act.
    Electricity and natural gas rates would, over 25 years, rise by 
about 18 and 5 percent, respectively.
    However, because of the technology development and deployment and 
energy efficiency measures in the bill, energy usage would drop 
considerably. The drop in energy needed would result in reduced monthly 
electrical and natural gas bills for residential, commercial and 
industrial customers.
    So, it turns out that the bill's cost is very manageable--and 
miniscule compared to the cost of inaction.
    Thank you, Chairman Boxer.

    Senator Boxer. Senator, thank you for that statement.
    Senator Barrasso.

STATEMENT OF HON. JOHN BARRASSO, U.S. SENATOR FROM THE STATE OF 
                            WYOMING

    Senator Barrasso. Thank you, Madam Chairman. As I stated 
throughout the debate on this legislation, we must adapt, we 
must make changes to address the effects of global warming. We 
must be ready to put our money where our best hopes are. We 
cannot simply shut off current, traditional energy sources.
    I have stated that the current language that requires any 
new coal-fired power plants to be able to capture 85 percent of 
its carbon emissions is not feasible today. We must, as a 
Nation, invest in the technology to let us make the best use of 
all of our energy resources.
    Today we have incredible resources of coal in places like 
Wyoming and Montana. It is recovered there because of the 
investment of the infrastructure and the skilled work force. 
Now, those things may not be there in 20 years if we prevent 
new coal-fired plants from being built because we require them 
to sequester 85 percent of the carbon today instead of a staged 
or stepped approach over time.
    Now, I have heard members say that we should not let 
perfect be the enemy of good, and I think that applies here. 
There is also no doubt that we have to take care of those who 
are negatively impacted by this bill. Some of those will be 
Wyoming residents who have terrific jobs, they have retirement 
plans, they have health insurance. I am not yet satisfied with 
the answers that I have gotten regarding how many workers are 
going to be displaced by this Act. It seems fair that we have a 
real figure. American workers deserve no less.
    I also believe that States will have to play a vital role 
in this regard. The Carbon Market Efficiency Board must address 
the significant harm not just to the Country, but to individual 
States. The bill, to me, as drafted, has still a one size fits 
all approach to the States. We must give each State flexibility 
to spend money to assist their people as they see fit.
    Finally, let me reiterate that I do want to address this 
problem of global warming. We can get there, but only if we 
show China and India that we can pass a bill that strengthens 
our economy, that creates jobs, that looks after our workers, 
that develops the needed technology and then allows those 
nations to use that technology to address the problem on a 
worldwide basis, not just a national basis.
    I would like to work with you, Madam Chairman, to make sure 
that the legislation we pass achieves those objectives. Thank 
you very much.
    Senator Boxer. Thank you, Senator Barrasso.
    Senator Carper.

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

    Senator Carper. Thank you, Madam Chair.
    To our witnesses, welcome. It is good to see all of you. We 
appreciate your time with us today and your testimony and your 
responses to our questions.
    Most of us had a chance last week to say our piece and we 
did. I am not going to say much today, but I just want to 
reiterate a couple of points if I could. I hope to support the 
legislation that is before us on which this hearing is being 
held. I want to support this legislation on which this hearing 
is being held. In order to be able to do so, I need to be 
assured on three points.
    One is that we are not going to forget as we go through 
this process the problems that are created, particularly for 
those of us on the eastern side of the United States who suffer 
because of emissions of sulfur dioxide, nitrogen oxide and 
mercury. I need to be assured that the allocation of credits 
will be just somewhat better balanced, so that a few more 
credits can go to the producers of electricity producing that 
electricity with reasonably less input, less energy in the 
first place.
    The third point, I want to make sure that as we pass this 
legislation, we don't do so in ways that punish companies that 
are already taking early action to help reduce the threats to 
our world and to our atmosphere.
    I suggested last week that I thought we might be able to 
broaden support for our legislation by addressing three areas 
that are addressed, but I think not directly in our 
legislation. One of those is with respect to transportation. I 
think our focus should be on clean fuels, clean cars and trying 
to encourage ways to provide transportation options to people 
other than our cars, trucks and vans.
    A second is to see if we can't put together an amendment 
that speaks to the potential that nuclear can provide in 
helping to address our dependence on foreign oil and the 
creation of these greenhouse gases. The third way I think we 
may be able to provide support for this bill in Committee or 
beyond Committee on the Floor is to better protect the U.S. 
industrial sector in a way that recognizes that they have 
already made significant CO2 reductions. I think one 
of our witnesses will speak to that today, and we need to be 
mindful of that and reflect that in the legislation that we 
pass.
    Thank you, Madam Chair.
    Senator Boxer. Thank you, Senator Carper.
    Senator Voinovich.

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

    Senator Voinovich. Thank you, Madam Chairman.
    Starting from the flawed premise that trading programs are 
the only vehicles we can use to address climate change, we now 
begin the second of three hearings on yet another iteration of 
a cap and trade bill. The key variable in determining cost-
effective carbon reductions is the extent to which the program 
can cause the development and deployment of research and 
development of transformational technology.
    But aggressive caps and time frames are more likely to 
stimulate avoidance behavior in the form of fuel switching or 
buying carbon offsets instead of investment in needed R&D 
efforts. That is the opinion of many organizations that have 
looked at this legislation.
    Moreover, the severe costs of the policy undermine economic 
growth and therefore starve capital markets of the true tools 
needed to invest in innovation. Indeed, this will be a very 
costly policy, and will do little to affect the problem of 
global climate change. This is demonstrated by EIA's analysis 
of S. 280, that was the Lieberman-McCain bill, a less 
aggressive predecessor to this legislation that predicted to 
the economy and standards of living, even while assuming 
increases in nuclear and biomass generation and a development 
time line for carbon and capture sequestration technology, that 
due to political, regulatory, financial and technical 
obstacles, achieving what we say we are going to achieve would 
almost be impossible.
    If the results were adjusted to account for more realistic 
scenarios of our Nation's future energy future, as in the 
recent analysis that I requested along with Senators Inhofe and 
Barrasso, the results are staggering. Among other things, the 
analysis predicted that by 2030, the policy could increase 
natural gas prices by 49 to 72 percent; increase electricity 
prices by 38 to 45 percent; reduce GDP by a factor of well over 
a trillion dollars. Of course, EIA's use of discounting and 
their inability to accurately account for costs beyond 2030 
masks the policy's true costs due to rapidly escalating impacts 
that are expected beyond this period.
    Now, many engaged in this debate will downplay the impacts 
described above. But increasing home heating costs by 38 to 45 
percent would have real impact outside of the beltway, 
especially those who are on fixed incomes. One of last week's 
witnesses suggested that job losses in certain sectors would 
simply be made up by shifting jobs to other sectors. But the 
witness failed to recognize that we are talking about real 
people, real families and real communities. What am I supposed 
to say to the men and women, families and communities that find 
themselves on the wrong end of the shift? I think Senator 
Barrasso made a good point of that in terms of the people that 
are already working.
    The impact is particularly troubling when one considers 
that this wealth transfer will move resources from areas like 
the South and Midwest, whose States' per capita income largely 
fall below the national average, to other areas of the Country.
    Madam Chairman, I think it is time to focus on American 
strengths of entrepreneurship and innovation. If we do so, we 
can create appropriate incentive for the development and 
deployment of new technologies. We will master the carbon 
challenge and lower the costs of control to the point where the 
developing world won't view these continued emissions as a 
source of competitive advantage. In a real sense, such a new 
way of viewing the challenge of carbon emissions is our only 
valuable chance of success.
    Basically what I am saying is, we are going into a new 
regime. One of the things that I am going to ask in my letter 
to EPA be included in the record----
    Senator Boxer. Without objection.
    Senator Voinovich [continuing].----is asking them to look 
at the administration of this program, the number of people 
that are going to be involved in administering it, the number 
of new boards and commissions that we are going to be setting 
up in this legislation. I just came from the Oversight and 
Government Management Homeland Security, and Senator Lieberman 
is familiar with it, 22 agencies, a gigantic management 
challenge that has not been met. That place is still--pardon 
me--screwed up. It seems to me that when we talk about a brand 
new regime, new responsibilities for the Environmental 
Protection Agency and moving some things out of USTR there, and 
out of the Department of Energy, that we should look at some 
other options. That option, in my opinion, is trying to figure 
out, as the Chairman of this Committee and I talked about 4 
months ago, is some type of response like we had to Sputnik, to 
find the resources that we have to jump start the technology 
initiative here in this Country so that we can solve the 
problems that we have here in the United States and at the same 
time then sell that technology to the Chinese and to the 
Indians and whoever else is out there in these emerging 
economies that we have throughout the world.
    For us just to do this and adopt this regime without being 
realistic about the impact that it is going to have on reducing 
greenhouse gases and on our competition, I think is naive. I am 
hoping that somewhere, somehow between the time that we mark up 
this bill, that we will have an opportunity to look at my 
suggestion in terms of how do we get that done.
    Senator Boxer. Thank you, Senator.
    Senator Klobuchar, welcome.

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

    Senator Klobuchar. Thank you very much. I was sitting here 
trying to think of my own sports analogy, Chairman, after I 
heard Senator Baucus. After our weekend at home with the 
Gophers having their worst season ever and the Packers shutting 
out the Vikings, I decided to stay away from those.
    But I will say that I did visit with some third graders 
yesterday as well as some fifth graders and high school classes 
at three different schools, one in a more suburban area, one in 
greater Minnesota and one in an urban area. These kids are 
ready to go. I asked them why they thought that they were so 
focused on climate change and doing something about it, and 
that some of the grown-ups weren't. They said, well, that is 
because the grown-ups aren't going to be around when we have 
kids. They seemed very, actually quite educated on the topics 
of what is going on. It brought me back here promising them 
that I would give their thoughts to this Committee.
    I believe that at its core, the America's Climate Security 
Act of 2007 offers an incredibly strong framework for 
addressing climate change. I think that is because there is no 
single industry or source that is responsible for greenhouse 
gas emissions, and because of that, there is no single policy 
or technology that is going to solve global warming. That is 
why I like the idea of this comprehensive approach. As someone 
once said, we don't need a silver bullet, we need a silver 
buckshot.
    This is more than just a cap and trade bill. It provides 
support for the research and development of clean technologies. 
It provides direct incentives for energy-efficient products and 
develops a wide range of climate adaption programs. I also 
think it is important to note that it is not a cure-all. It is 
meant to work in tandem with other policies that we have 
developed and that we are developing. That is why I am glad, 
when I read your testimony, Dr. Greene, your written testimony, 
and I couldn't agree with you more that cap and trade works 
best in combination with other measures.
    As members of the Commerce Committee, a number of us on 
this Committee have worked hard to increase the fuel efficiency 
standards of the Nation's cars and trucks. In my opinion, you 
cannot view the increase in the CAFE standards in a vacuum, 
that it can't be a separate policy. I believe that together, 
the upstream cap on greenhouse gas emissions in the 
transportation section of this bill, along with the 35 mile per 
gallon CAFE standard, will significantly reduce greenhouse gas 
emissions.
    I believe we also can't separate out what the States are 
doing now. I have told this Committee several times about how 
aggressive on a bipartisan basis our State has been with a 
Republican Governor and a Democratic legislature. States 
already implementing greenhouse gas reduction strategies and/or 
renewable electricity standards make it easier to achieve the 
targets in this bill. I think that is why it is important to 
make sure that we facilitate these interrelated policies as 
much as possible.
    I believe it is important that we recognize the leadership 
certain States have taken. We should also recognize States that 
are working hard to meet their own aggressive renewable energy 
standards when allocating allowances. We should also set the 
baseline for allocations at an appropriate point in time, so as 
not to penalize these States for their farsighted action.
    This is a hearing to examine the nuts and bolts of 
America's Climate Security Act of 2007. So I look forward to 
hearing from our panelists on not only the nuts and bolts of 
this bill, but how it interacts with other policies that we 
already have in place or that we are considering now before 
this Congress, including the renewable electricity standard 
that is in the House side of the Energy Bill and the CAFE 
standard increase that is in the Senate side of the Energy 
Bill.
    Thank you, Madam Chairman, and I look forward to working 
with you and all my EPW colleagues on reporting a strong bill 
to the Senate Floor.
    Senator Boxer. Thank you, Senator.
    Just in terms of how we are going to proceed, Senator Craig 
is next and then Senator Cardin has graciously said, Senator 
Whitehouse, since you have been here for so long, that you will 
go next and then he will be the next Democrat.
    So we will go to Senator Craig.

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

    Senator Craig. Madam Chairman, thank you very much.
    The hearings of last week, the questioning sessions, the 
hearings this week and more to come with the questioning 
sessions are extremely valuable. If anybody doesn't believe 
that this is a complex bill, then they ought to start trying to 
read it and understand it. That is going to be critically 
important for us to even attempt to get it halfway right. To 
understand the complexities and broad implications of capping 
an entire economy is really beyond any of our talents or our 
abilities. So to try to understand that, the letter that we 
have sent, the letter that Senator Warner mentioned that he and 
Senator Lieberman have sent to EIA and EPA are critical. That 
is part of the overall understanding that we have to have 
before we can vote responsibly on this kind of policy.
    So in all fairness, Madam Chairman, I am glad the Bali or 
Bust idea is out. I am glad we are going to take now a sit-
down, roll up our sleeves approach instead of trying to get an 
awfully good byline in a statement coming out of Bali in 
December. It may be good for international politics, but it 
would be very bad for our policy. So thank you.
    We still stay at it, we will stay diligent. Just beginning 
to peel back the pieces here, the page after page, is 
reflective of some 25 or 30, 40 amendments that my staff and I 
feel would be necessary to offer in a responsible way. Or we 
could do the Markey approach to the EPAC policy of 2005 and we 
could do hundreds of amendments which would be deleterious. But 
we will look at a good number.
    Cap and trade approaches of the kind that we are now 
referencing, oh, well, we did SO2, and therefore we 
can do this, that is pretty wrong-headed in my opinion, and I 
think a very poor analogy when you are addressing carbon in 
every sector of the U.S. economy. What is it Senator Barrasso 
just said? Here is the impact we think could happen to Wyoming, 
because they are a coal-producing State. Idaho is not a coal-
producing State. We happen to be the cleanest State in the 
Nation as it relates to particulates in the air.
    And we happen to be largely a renewable energy State, which 
means our power bills go up fairly dramatically because we gain 
no benefit from this bill. Whereas in Wyoming, their power 
bills go up at the same rate, but they lose jobs in the 
meantime, potentially. Those are the realities on a State by 
State basis that clearly we have to grasp and understand, if we 
are going to be not only responsible to our environment on the 
long term, but responsible to our environments, and that 
includes working environments and economies, in the short term.
    The bill is not ready for prime time, even though the 
advertisements have been top of the line. And it won't be ready 
for prime time until we do exactly what you have outlined that 
we are going to now do, Madam Chair, and I truly appreciate 
that. This is a piece of work, a potentially major public 
policy that demands scrutiny of the closest order, and I am 
glad you are now willing to allow us to do that in a way that I 
think the Senate best operates. I thank you.
    Senator Boxer. Senator, I just want to be clear, I was 
always intending to allow the longest possible time for a 
markup. You will have 40 amendments, I am sure that Senator 
Bond will raise you one, and Senator Alexander, and we are 
ready. We are ready to stay as long as it takes.
    Senator Craig. That is very productive, thank you.
    Senator Boxer. We are absolutely prepared for that and we 
expect that. We will start on December 5, and we will go as 
long as it takes to deal with all amendments that are offered.
    Yes, Senator Lieberman?
    Senator Lieberman. I was just--thank you, you just 
clarified that we are going to go ahead in December, which is 
very important.
    Senator Boxer. Yes.
    Senator Lieberman. I do want to, on the Bali or Bust idea, 
I want to encourage Senator Craig and others to think more in 
favorable terms of Bob Hope and Dorothy Lamour in the Road to 
Bali, a very happy ending.
    [Laughter.]
    Senator Craig. Oh, if it was only Bob Hope again. Thank 
you.
    Senator Boxer. Senator Whitehouse, we look forward to your 
remarks.

  STATEMENT OF HON. SHELDON WHITEHOUSE, U.S. SENATOR FROM THE 
                     STATE OF RHODE ISLAND

    Senator Whitehouse. Thank you, Chairman. I will be very 
brief. I appreciate Senator Cardin yielding his hard-earned 
seniority to me very briefly for this.
    Senator Klobuchar. Yes, but he made a deal that you had to 
mention Chesapeake Bay.
    Senator Whitehouse. I was just about to say, it is 
something he learned, no doubt, on the shores of the Chesapeake 
Bay.
    [Laughter.]
    Senator Whitehouse. As we go forward, I would be very 
interested in hearing from the witnesses about three areas 
where I think there is still work to be done. Let me put this 
in the context of saying that I think what Chairman Boxer has 
accomplished here is extraordinarily significant. I think the 
sponsorship of Senator Warner and Senator Lieberman is 
extraordinarily significant. We have come an enormously long 
way. But as I said before, we may be standing on the shoulders 
of these giants, but there is yet work to be done. I think that 
the areas in which there is work to be done is to inquire into 
whether the standards that we have set for ourselves are truly 
adequate. Unlike the sort of traditional haggling, split the 
baby school of legislation, there is a bar here. If we miss it, 
it is going to be very unfortunate. So the adequacy of the 
standards and the ability to enforce them, or the actions that 
are triggered if it looks like they are not going to be met I 
think are a significant piece.
    The second significant piece to me is the integrity to 
market. We are putting an awful lot of this Nation's wealth 
through the cap and trade process. I am at this point not yet 
satisfied with the governance. I am at this point not yet 
satisfied with the protection of that entity from market 
manipulation by crooks and speculators. And at this point I am 
not yet satisfied that we can distinguish real from counterfeit 
savings in this process. So there are at least three layers of 
integrity protection that I think that facility needs. As 
important as that facility is, we have to get it right.
    And the third is, I think the concern of fairness to low-
income folks who are not a part of this discussion is very 
important. An enormous amount, as I said, of our Nation's 
wealth is going to be put through this process. That creates an 
enormous motivation for special interests to line up and get 
their grab on all of that. I think it is very important for all 
of us to sequester whatever we need to for designated purposes 
to try to balance the economy and so forth.
    But really the bulk of the return on this has to go back to 
the people who are going to pay it in the end, which is the 
American consumer, and the low-income American consumer will 
take the hit harder than anybody else. So I am interested in 
issues like the CBPP's ideas for flowing it through EITCs, 
through the electronic benefit transfer, through the 
withdrawal, so that it is more automatic and flows back to 
folks. But I think it is vitally important what you have 
accomplished, and I appreciate it, Chairman.
    Senator Boxer. Senator, we are as you know working with you 
and your staff on these matters.
    I just wanted to, while we have the maximum number of 
people here, go through what we are doing on this bill so you 
can make some notes. We have of course this hearing. Then we 
have a briefing today, 2:30 to 3:00 is closed for members, and 
then 3:00 is open. Hearing on Thursday morning on the bill at 
10 a.m. There is regular staff level meetings all through the 
week on demand for whoever wants them, members and staff. And 
then a modeling briefing on Wednesday for staff and Senators, 
if they wish to come. So I wanted to announce that, while 
everybody is here.
    And now, Senator Alexander, the floor is yours.

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

    Senator Alexander. Thank you, Madam Chairman. And thank you 
for the extra hearings, extra briefings, extra time. That is a 
big help.
    I want to especially welcome David Greene from the Oak 
Ridge Laboratory, a real expert on many things, including fuel 
efficiency. I would like to state my view as clearly as I can. 
I want a bill. I want to be able to vote for a bill on climate 
change. I think the time to act is now. From my first year in 
the Senate, Senator Carper and I offered legislation that put 
cap and trade on power plants, that is 40 percent of the carbon 
dioxide, 33 percent of greenhouse gases. We still agree on 
every part of that except allocation. Senator Lieberman and I 
are now co-sponsoring of that bill. So I want a bill.
    My respectful suggestion to the Chairman and to the 
sponsors, and they have big decisions to make on how to 
proceed, I know they don't want to lose momentum, are two. One 
is, I think we would be better off with a sector by sector 
approach, rather than the current structure. And two, I think 
it is very important that we take sufficient time in the markup 
process to bring a bill toward the Floor that can get 60 votes.
    Let me describe what I mean by sector to sector. I am 
looking for the lowest cost, simplest, easiest to explain, 
fewest surprises piece of legislation that will address climate 
change in this session of Congress. There is a danger of this 
becoming like the comprehensive immigration bill, which started 
out great but ended up not passing, because there were so many 
problems with it.
    I would rather start out with the other end. What steps 
would I suggest? One would be the electricity step and two 
would be the transportation step. And that would be it. That 
would be two thirds of the carbon produced in our economy 
today. We might even get more out of those two segments, 
depending upon what the standards are. With electricity, I am 
ready to vote for a cap and trade program for power plants. We 
have had 16 years experience on that with acid rain, we know 
what we are doing. We can measure it. I think it would make 
sense. We can explain it.
    Two, I would add to that everything we can think of that 
has to do with green buildings. Japan has said it has had its 
biggest problem reaching its own standards since Kyoto because 
of buildings. And we can a lot with buildings, so we could take 
just the electricity sector and get at least a third of the 
carbon.
    Second, with transportation, how would we do that? Well, 
the easiest thing and the first thing to do would be for the 
House to pass the Senate Energy Bill, which has a CAFE standard 
that is far-reaching and that would require 35 mile per gallon 
standard by 2020. The second thing to do is also in that bill, 
which is to go from 7 to 36 billion gallons of renewable fuels. 
A third thing to do would be a low-carbon fuel standard for all 
fuels. The Chairman has proposed that, others have as well. I 
think it might be better than a so-called upstream cap on fuel, 
which I don't fully understand. I am afraid the upstream cap on 
fuel might simply add a cost to gasoline without changing 
behavior.
    One of the examination of the McCain-Lieberman bill 
suggested that such a cap on gasoline would add 25 cents to the 
cost of a gallon of gas. And that is a big increase. So a low-
carbon fuel standard might be better. So then we could explain 
we are stepping out with electricity and then with 
transportation. Those are two big steps, 65 or 70 percent of 
the economy, rather than the 80 or so which I understand this 
structure is. I think it is more likely to get 60 votes, and 
then we could take other steps as they seem to make sense.
    The problems and issues that I would like to see discussed 
by the witnesses include the low-carbon fuel standard, they 
include the auction, most auctions in Tennessee are designed to 
get the highest price. I think we want the lowest price. I 
would like to know what we are going to do with all this money. 
Nothing is more dangerous in Washington, D.C. than a pile of 
unallocated money that Congress can get its hands on.
    The allocation system is a very difficult problem and will 
be in the Committee. It seems to me that the one here 
encourages the use of natural gas. That is bad for farmers, 
homeowners and manufacturers, and causes those in fossil fuel 
States to pay twice.
    So I agree with Senator Carper that we ought to also deal 
with sulfur, nitrogen and mercury. That is as important to me 
as carbon in this bill. And I agree with Senator Isakson that 
we ought to be dealing with nuclear. That is an inconvenient 
truth as well. That is most of the solution, along with 
conservation and efficiency.
    So I hope, Madam Chairman, to be able to vote in the end 
for the bill. I thank you for the extra time, and I look 
forward to attending all the briefings.
    Senator Boxer. Thank you so much, Senator.
    Senator Cardin.

  STATEMENT OF HON. BENJAMIN L. CARDIN, U.S. SENATOR FROM THE 
                       STATE OF MARYLAND

    Senator Cardin. Thank you, Madam Chair. It is nice to get 
my seniority back.
    [Laughter.]
    Senator Cardin. First, let me agree with some of the 
comments of Senator Alexander, but let me point out that the 
immigration bill was not marked up in Committee. I think that 
was one of the problems we had. I am going to thank the 
Chairman of our Committee for an open process that has been 
used on this very important legislation. Many members 
introduced legislation. The Chairwoman then gave us a chance to 
come together and allow the Chairman and Ranking Member on the 
Subcommittee to come up with a bill and I feel very confident 
with Senator Lieberman and Senator Warner's leadership that 
hopefully, Senator Alexander, we can reach that 60 vote 
threshold. Because I think that would make life a lot easier.
    In order to accomplish that, we all have to listen a lot 
more and be willing to come to a bill that can pass but can 
also be a meaningful bill and not just insist on our specific 
revision being included in that bill. I hope we will be able to 
do that, because I think the issues are very important to our 
Country and very important to our international leadership. 
Again, I congratulate our Chairman Boxer and Senator Lieberman 
and Senator Warner for giving us the leadership.
    Now that I said we have to listen, let me tell you what I 
think needs to be in the bill. Let me just use my time to talk 
about one specific issue that I hope we can strengthen, and 
that is the use of public transit. I particularly want to 
comment on Dr. Greene's testimony. He makes a very interesting 
point. He notes that we burn 6,300 gallons of oil every second 
to fuel our transportation sector. So it is no wonder that we 
have to look at a more responsible transportation policy. That 
sector is responsible for one quarter of the greenhouse gas 
emissions, according to the EPA's study for 2005. I think the 
funding that is provided in the bill that we have before us is 
allowable activities for State funds to be able to use for 
transit.
    But I think we need to be stronger. Because I don't think 
that is strong enough to make the type of progress that we need 
in public transit. We need to get people out of their cars into 
fast, convenient and reliable mass transit systems. We need 
that to reduce greenhouse gases; we need that to become energy 
independent. We need that to improve the quality of life, and 
anyone in this region knows all too well how difficult gridlock 
becomes as you try to move around the Washington area. Not only 
just during rush hours, during just about any time of the day. 
So we need to make a more significant investment in public 
transportation.
    Operating costs for transit systems are already 
skyrocketing as fuel prices have increased. That is only going 
to continue. We need to rebuild our aging transit 
infrastructures in many of our cities as well as new systems to 
meet growing demands.
    So for all of those reasons, I would hope that we would 
find a way to have more specific funds available through this 
legislation to help absorb the problems that will be confronted 
by our constituents. One of the things that Senator Whitehouse 
talked about is the economic impact of this bill, who is going 
to be adversely affected by the additional cost of energy. 
Well, public transportation allows us to deal with the social 
needs of the people in our community. I think it is very 
appropriate that we do more to help provide that alternative to 
transit users.
    The problem is not only because of large rises in fuel 
prices, it is also increased ridership. It has been its own 
problem in getting the type of funds in order to keep the 
system in the condition that is needed to meet increased 
demands.
    So I will be interested in listening to our witnesses 
today. I can assure you I am very much interested in working 
with the leadership of this Committee and every member of this 
Committee in the Senate to achieve a meaningful bill, a bill 
that really will move us in the necessary directions to deal 
with global climate change, that will provide the credibility 
for U.S. leadership internationally and one that we can be 
proud of to have been able to get enacted into law.
    Thank you, Madam Chair.
    [The prepared statement of Senator Cardin follows:]

      Statement of Hon. Benjamin L. Cardin, U.S. Senator from the 
                           State of Maryland

    Madame Chairman, thank you.
    Given our late starting time today, I will keep my remarks to a 
minimum.
    There are a number of facets to dealing with the global greenhouse 
gas emissions issue. Our complex economy will be affected in numerous 
ways. I want to take a moment to focus on one of them: transit.
    In Dr. Greene's testimony today, he notes that we burn 6,300 
gallons of oil every second to fuel our transportation sector. It is no 
wonder that this sector is responsible for more than one-quarter of all 
U.S. greenhouse gas emissions in 2005, according to the EPA.
    Although funding for transit systems is one of the allowable 
activities for state funds in the legislation we are considering, I am 
concerned that it is not sufficient. We need to get people out of their 
cars and into fast, convenient, and reliable mass transportation 
systems. That will take a major investment.
    Operating costs for transit systems are already skyrocketing as 
fuel prices have increased. That's only going to continue. And we need 
to rebuild aging transit infrastructures in many of our cities as well 
as new systems to meet our growing needs.
    The bill currently envisions a mechanism to cushion the rate 
increases low- and middle-income Americans are likely to feel from 
rising utility rates as we reduce our carbon emissions. But the 
legislation does not provide a similar cushion for someone who rides 
the bus or subway to work everyday to absorb the rising costs of 
transit.
    Here in the Washington metropolitan area, the Metro system is 
considering a record rate increase. This is due in large part to rising 
fuel costs and increased ridership. We should be encouraging more 
people to take the bus and subway, but if they are faced with rapidly 
rising costs, we may be squandering a great opportunity to reduce 
greenhouse gas emissions from the transportation sector.
    I will be interested in hearing from today's witnesses on this 
crucial aspect of climate change legislation. And I look forward to 
working with the bill's sponsors and the members of this Committee to 
craft a stronger commitment to transit in the bill as we move toward 
markup.
    Thank you.

    Senator Boxer. Thank, Senator Cardin.
    Senator Bond. Last but absolutely not least.

STATEMENT OF HON. CHRISTOPHER BOND, U.S. SENATOR FROM THE STATE 
                          OF MISSOURI

    Senator Bond. Thank you, Madam Chair. It is a pleasure to 
join you for another one of these hearings and raise concerns 
as you may expect I will about what I think are some of the 
untoward impacts of a cap and trade bill.
    I raise these in the sincere hope that the Committee will 
consider them carefully. In the past, I have talked about how 
the poor will suffer from higher heating and power costs. Last 
week, I expressed the views of the agricultural community on 
how farmers would be hurt under this particular cap and trade 
system. Today, I address how blue collar jobs across America 
are at risk under the bill my distinguished friends from 
Connecticut and Virginia have offered. Middle class families, 
supported by blue collar breadwinners, those aspiring to the 
middle class or those hanging on to their middle class lives, 
their health care, their meager retirement savings, can all 
suffer under this bill. Many of the blue collar jobs depend on 
energy-intensive manufacturing.
    Now, we know that natural gas is a key raw material and 
electricity and natural gas are both essential to power 
manufacturing. I said last week how important natural gas was 
in fertilizer for farmers and in the farming operation. But 
rising energy prices from this bill, I believe, will threaten 
blue collar jobs in automotive assembly, steel, aluminum, 
cement, plastics and fertilizers. These manufacturers will flee 
high prices, as they have already done. They have fled the 
United States and taken the jobs with them to lower energy cost 
countries as close as Mexico or as far as China. No matter how 
far away they go, they will find cheaper energy there and we 
will feel the pain here.
    Here is a picture of an aluminum smelter, not the one in my 
State, but that is an aluminum smelter. One just like it on the 
banks of the Mississippi River in New Madrid, Missouri. The 
plant employees 1,100 people with a payroll of over $43 million 
annually. This is a critically important industry and thousands 
of middle class families depend on that payroll. Just like New 
Madrid, dozens of communities' school budgets and fire 
departments would be decimated without the payrolls of those 
smelters.
    Now, here is a picture of Main Street of New Madrid, 
Missouri. It is a wonderful town. But there is not a whole lot 
there. The average family income in New Madrid is $27,400. 
Outside of the town, where they don't have the jobs and the 
smelter, poverty runs as high as 30 percent. Middle class 
employment supporting jobs are few and far between. If higher 
energy prices under Lieberman-Warner force these aluminum jobs 
overseas, New Madrid families as well as families across the 
Country will join the poverty rolls.
    We have another key hiring industry in Missouri, cement. It 
is a carbon producer. Limestone is a key component. Processing 
the limestone releases carbon dioxide. Firing the kiln to make 
cement requires energy either from natural gas or coal, and 
that releases carbon. So much carbon that a ton of carbon 
emissions produces only enough cement to generate a $10 profit.
    Now, let me give you basic economics here. A new cost of 
$15 per ton for that ton of carbon, when they are only making a 
$10 profit, would erase the profit and put that maker of cement 
out of business, in the hole. Instead of losing money, American 
producers would choose, rationally, to benefit, take the 
benefit of cheaper energy sources in Mexico, Korea or China.
    Missouri has cement plants, but its communities will not be 
the only ones to lose those blue collar jobs. Thirty-nine 
States across America also risk losing their cement jobs to 
overseas competition. All of the orange States, States like 
Oklahoma, Virginia, Ohio, Georgia, Tennessee, Wyoming, and 
Idaho are all in the cement job chopping block.
    My friends on the other side of the aisle will not be 
spared. California, Montana, New York and Maryland are all in 
the cement job loss cross-hairs. It doesn't have to be this 
way. We can do, as my colleague from Montana said, have a 
Marshall Plan for clean energy. Get nuclear power, which 
legislation and Governmental action has stalled too long, but 
which is a very significant part of the solution. We can get a 
clean portfolio standard.
    I support an aggressive but achievable auto emissions 
standard or CAFE standard. And we need clean coal technologies 
and sequestration. This is where we should be putting our money 
rather than expecting to mandate draconian standards for cap 
and trade that will do nothing. They will not produce the 
technology we need, and they will drive jobs overseas and have 
a devastating impact on our economy.
    I thank you, Madam Chair.
    Senator Boxer. Thank you very much.
    Well, now we are on to our panel. Thank you for your 
patience.
    So let me welcome all of you again. David Hawkins, 
Director, Climate Center, NRDC. I will be able to stay for the 
first panelist, then I have to fulfill an obligation and I will 
be back. Senator Lieberman is going to hold the gavel until I 
get back. So please proceed, Mr. Hawkins.

STATEMENT OF DAVID HAWKINS, DIRECTOR, CLIMATE CENTER, NATIONAL 
                   RESOURCES DEFENSE COUNCIL

    Mr. Hawkins. Thank you, Madam Chairman.
    My primary message today is that we have no time left for 
delay. We are already seeing the kind of damage that a 
disruptive climate can inflict: drought, floods, fires, insect 
infestation, stronger storms, killer heat waves. The problem 
with climate disruption is that it is a front-loaded problem. 
What I mean by that is, we create the harm long before we can 
see it around us. The global warming pollution that we have put 
up in the last 25 years has already locked in additional 
climate disruption. It is already in the pipeline. That added 
disruption is like an armed missile, and we have already pushed 
the button to launch the missile. We don't know how much damage 
the missile will do, but it is speeding toward us.
    The job for us today is to stop launching more missiles. 
Now, the good news is we have the ability to solve this problem 
by creating the conditions where clean energy solutions get 
built and get rewarded in the marketplace. America's Climate 
Security Act will bring these solutions forward, showing U.S. 
leadership, proving we can act to protect the climate, creating 
new business opportunities in a world that will reward low-
polluting products and services.
    We have all heard the claims that the bill will be too 
costly. Well, these claims are made with broken calculators. 
They are based on an imaginary future, a future where climate 
disruption is assumed to have no impact on the performance of 
the economy. That is not the real world. As Sir Nicholas 
Stern's study has pointed out, in the real world, climate 
disruption will harm economic growth. The growth-maximizing 
strategy is to protect the climate, not to poison it.
    The critics' imaginary business as usual future is like a 
plan for a new airliner, an airliner that has no air 
conditioning, nothing to eat or drink, a 50 percent chance of 
being grounded every time it gets out on the tarmac for 
mechanical problems, and a 10 percent chance of crashing on 
every flight. When presented with a better design that will get 
us to our destination safely, and with reasonable comfort, they 
argue, we can't afford it. Well, the truth is, the modeling 
that they are peddling is no bargain: it won't work.
    Now, the bill before you contains numerous provisions to 
allow its pollution reduction targets to be achieved 
efficiently and at low overall costs. Let me quickly list them. 
First, trading. Trading of emission control obligations under 
the bill will allow the lowest cost opportunities to be pursued 
first. Second, banking. Banking of emission reductions allows 
firms to make hay while the sun shines, and used the banked 
reductions to reduce costs later. Third, public purpose 
investments, by gradually shifting all allowance allocations to 
public purposes through auctions and public purpose allowance 
accounts, the bill recognizes the power of emission allowances 
to drive new technology, promote efficiency, protect consumers 
and vulnerable firms, such as cement and smelters.
    Fourth, offsets. The offsets provisions of the bill balance 
the risk that some offsets may be of questionable value in 
reducing the emissions against the benefit of creating 
incentives for additional low-cost reductions in areas that are 
too complex to regulate directly. In addition, the bill allows 
borrowing of allowances from future years to deal with tight 
market conditions or periods before new technologies come 
online.
    The Carbon Market Efficiency Board, with broad powers to 
adjust terms to create market conditions that enable us to 
smoothly transition from the unsustainable business as usual 
path to one that protects the climate. And finally, the bill 
addresses the concern about international competitiveness by 
establishing a program that ensures countries which fail to act 
to cut emissions will not gain a market advantage over our 
domestic economy.
    Now, in each of these key areas, reduction targets, 
allowance allocations, cost containment, complementary 
policies, international issues, protection of the vulnerables, 
you have heard expressions of concern. And NRDC shares a number 
of those concerns, as I note in my testimony. But we are ready 
to work to address those issues that the bill moves forward and 
hope others will participate in that same spirit of 
cooperation.
    Finally, no one is under the illusion that the bill 
reported from this Committee will go immediately to the 
President's desk for signature. There will be continuing 
negotiations over key issues at every step in the process. But 
the imperative now is to take the next step so that the later 
steps are possible. So we ask the Committee to approve critical 
strengthening amendments and then to report a bill to the full 
Senate this year.
    The world is watching what this body does. The opportunity 
to make a positive impact on the pace of required action is 
enormous, and we urge you to seize it. Thank you.
    [The prepared statement of Mr. Hawkins follows:]

Statement of David Hawkins, Director, Climate Center, Natural Resources 
                            Defense Council

    Thank you for the opportunity to testify today regarding America's 
Climate Security Act. My name is David Hawkins. I am the Director of 
the Climate Center of the Natural Resources Defense Council (NRDC). 
NRDC is a national, nonprofit organization of scientists, lawyers and 
environmental specialists dedicated to protecting public health and the 
environment. Founded in 1970, NRDC has more than 1.2 million members 
and online activists nationwide, served from offices in New York, 
Washington, Los Angeles and San Francisco, Chicago and Beijing.
    Chairwoman Boxer, I would like to thank you for the opportunity to 
testify and share NRDC's views on the America's Climate Security Act 
(S. 2191) and for your leadership in addressing the critical challenge 
posed by global warming. I also want to thank Senator Lieberman and 
Senator Warner for all of your work to develop this legislation and 
improve it in Subcommittee. We view favorable Committee action on this 
measure as an important, initial step toward enactment of comprehensive 
global warming legislation and we look forward to working closely with 
you, and the other members of the Committee, as you act to report 
legislation to the full United States Senate.
    On October 24th NRDC President Frances Beinecke testified before 
the Subcommittee on Public and Consumer Solutions to Global Warming and 
Wildlife Protection on America's Climate Security Act (ACSA).\1\ In her 
testimony she stated that the time for action on global warming is now. 
Climate scientists warn us that we must act now to begin making serious 
emission reductions if we are to avoid truly dangerous global warming 
pollution concentrations. Failure to pursue significant reductions in 
global warming pollution very soon will make the job much harder in the 
future--both the job of stabilizing atmospheric pollution 
concentrations and the job of avoiding the worst impacts of climate 
chaos.
---------------------------------------------------------------------------
    \1\ Frances Beinecke, Testimony before the Subcommittee on Public 
and Consumer Solutions to Global Warming and Wildlife Protection 
Committee on Environment and Public Works, ``America's Climate Security 
Act'', October 24, 2007. http://docs.nrdc.org/globalwarming/
glo--07102401A.pdf.
---------------------------------------------------------------------------
    A growing body of scientific research indicates that we face 
extreme dangers to human health, economic well-being, and the 
ecosystems on which we depend if global average temperatures are 
allowed to increase by more than 2 degrees Fahrenheit from today's 
levels. We have good prospects of staying below this temperature 
increase if atmospheric concentrations of CO2 and other 
global warming gases are kept from exceeding 450 ppm CO2-
equivalent and then rapidly reduced. To make this possible requires 
immediate steps to reduce global emissions over the next several 
decades, including action to halt U.S. emissions growth within the next 
few years and then cut emissions by approximately 80% by mid-Century.
    This goal is ambitious, but achievable. It can be done through an 
annual rate of emissions reductions that ramps up to about a 4% 
reduction per year. But if we delay and emissions continue to grow at 
or near the business-as-usual trajectory for another 10 years, the job 
will become much harder. In such a case, the annual emission reduction 
rate needed to stay on the 450 ppm path would double to 8% per year. In 
short, a slow start means a crash finish, with steeper and more 
disruptive cuts in emissions required for each year of delay, or if 
insufficient action is taken a seriously disrupted climate.

                           COSTS OF INACTION

    The claim that climate protection is ``too expensive'' treats it 
like a discretionary expense--perhaps like a luxury car or exotic 
vacation that is beyond this year's budget. No harm is done by walking 
away from a high-end purchase that you can't quite afford. But if we 
walk away from climate protection, we will be walking into danger. 
Unless we act now, the climate disruption will continue to worsen, with 
health, economic, and environmental costs far greater than the price of 
protection.
    Scholars and economists have only begun a serious assessment of the 
costs of inaction but it is clear from their work that it is climate 
disruption, not climate protection programs, which will wreck the 
economy.
     The Stern Review, sponsored by the British government and 
directed by Sir Nicholas Stern, formerly the chief economist at the 
World Bank, estimated that 5% of world economic output would be lost, 
given a narrowly defined estimate of economic damages. Add in an 
estimate for environmental damage and for the increased chance of an 
abrupt climate change catastrophe, and Stern's estimates of losses from 
climate disruption climb to 11% or more of world economic output.\2\
---------------------------------------------------------------------------
    \2\ Sir Nicholas Stern, ``Stern Review: Economics of Climate 
Change'', January, 2007. http://www.hm-treasury.gov.uk/
independent--reviews/
stern--review--economics--climate--
change/stern--review--report.cfm.
---------------------------------------------------------------------------
     A recent study from the University of Maryland reviews the 
extensive research literature on the costs due to plausible climate 
change in the U.S., including coastal property losses from sea level 
rise, increased damages from intensified hurricanes, drought and 
wildfire risks in the west, disruption of water supplies, decreased 
agricultural yields in most of the country, and many more harmful 
impacts.\3\
---------------------------------------------------------------------------
    \3\ M. Ruth, D. Coehlo, D. Karetnikov, ``The US Economic Impacts of 
Climate Change and the Costs of Inaction,'' A Review and Assessment by 
the Center for Integrative Environmental Research (CIER) at the 
University of Maryland, October 2007. http://www.cier.umd.edu/
climateadaptation/index.html.
---------------------------------------------------------------------------
    This extended excerpt from the report provides a sobering summary 
of how high the economic stakes are:
    ``The effects of climate change will be felt by the entire nation:
    `` all sectors of the economy--most notably agriculture, 
energy, and transportation--will be affected;
     essential infrastructures that afford us reliable services 
and high standards of living (such as water supply and water treatment) 
will be impacted; and
     ecosystems, on which quality of life relies (such as 
forests, rivers, and lakes), will suffer.
    ``In the West and Northwest, climate change is expected to alter 
precipitation patterns and snow pack, thereby increasing dry fuel loads 
and the risk of forest fires. Forest fires cost billions of dollars to 
suppress, and can result in significant loss of property. The Oakland, 
California fire of 1991 and the fires in San Diego and San Bernardino 
Counties in 2003 each cost over $2 billion. Every year for the past 
four years, over 7 million acres of forests in the National Forest 
System have burned with annual suppression costs of $1.3 billion or 
more.
    ``The Great Plains and the Midwest will suffer particularly from 
increased frequency and severity of flooding and drought events, 
causing billions of dollars in damages to crops and property. For 
example, the North Dakota Red River floods in 1997 caused $1 billion in 
agricultural production losses, and the Midwest floods of 1993 
inflicted $6-8 billion in damages to farmers alone.
    ``The Northeast and Mid-Atlantic regions will see increased 
vulnerability to sea level rise and storms. Depending on the category 
of the event, evacuation costs for the Northeast region may range, for 
a single event, between $2 and $6.5 billion. Since 1980, there have 
been 70 natural weather-caused disasters, with damages to coastal 
infrastructure exceeding $1 billion per event. Taken together, their 
combined impact surpassed $560 billion in damages.
    ``Decreased precipitation levels in the South and Southwest will 
strain water resources for agriculture, industry and households. For 
the agriculturally productive Central Valley in California alone, the 
estimated economy-wide loss during the driest years is predicted to be 
around $6 billion per year. Net agricultural income for the San Antonio 
Texas Edwards Aquifer region is predicted to decline by 16-29% by 2030 
and by 30-45% by 2090 because of competing uses for an increasingly 
scarce resource--water.
    ``The true economic impact of climate change is fraught with 
``hidden'' costs. Besides the replacement value of infrastructure, for 
example, there are real costs of re-routing traffic, workdays and 
productivity lost, provision of temporary shelter and supplies, 
potential relocation and re-training costs, and others. Likewise, the 
increased levels of uncertainty and risk brought about by climate 
change impose new costs on the insurance, banking, and investment 
industries, as well as complicate the planning processes for the 
agricultural and manufacturing sectors and public works projects. Since 
the early 1990s, and especially during the 21st century, significant 
progress has been made in understanding the impacts of climate change 
at national, regional, and local scales.''\4\
---------------------------------------------------------------------------
    \4\ Ibid.
---------------------------------------------------------------------------
     States particularly vulnerable to climate change are 
likely to suffer considerable negative economic impacts. Florida, a 
prime example, can expect large revenue losses due to decreases in 
tourism as the climate worsens, losses to coastal residential property 
from sea level rise, intensified hurricane damages, and increased 
electricity costs for air conditioning. Those categories of damages 
will significantly affect the gross state product. In addition, 
Florida, like many other states, will face a water crisis, as hotter 
temperatures increase the demand for water but decrease the usable 
supply.
    Inaction on climate change also increases the chance of an abrupt, 
irreversible catastrophe, which would be much worse than the 
predictable costs of inaction discussed above. This point is emphasized 
in the Stern Review, and the economic analysis behind it is supported 
by recent research by Harvard University economist Martin Weitzman.\5\ 
The collapse and complete melting of either the Greenland or West 
Antarctic ice sheets would cause sea levels to rise by 20 feet or more, 
causing devastation of coastal cities and regions where a large 
fraction of the American population lives. No one can say for certain 
at what temperature this will occur, but it becomes more likely as the 
world warms. We are taking a gamble, where the stakes are unbelievably 
high and the odds get worse the longer we stay on our current course.
---------------------------------------------------------------------------
    \5\ See, e.g., ``On Modeling and Interpreting the Economics of 
Catastrophic Climate Change,'' (November 2007), where Weitzman argues 
that conventional cost-benefit analyses of climate change are 
misleading because they ignore nontrivial risks of genuine disaster. 
``Standard conventional cost-benefit analysis (CBA) of climate change 
does not even come remotely close to grappling seriously with this kind 
of potential for disasters. When CBA is done correctly, by including 
reasonable probabilities of (and reasonable damages from) catastrophic 
climate change, the policy implications can be radically different from 
the conventional advice coming out of a standard economic analysis that 
(essentially) ignores this kind of potential for disasters.'' http://
www.economics.harvard.edu/faculty/Weitzman/papers/Modeling.pdf
---------------------------------------------------------------------------
    No sensible person bets his or her home on a spin of the roulette 
wheel. But inaction on climate change is betting the only home humanity 
has. Who knows, we might get lucky and win the bet; a few scientists 
still doubt that hurricanes are getting worse. But the consequences of 
a bad bet are enormous. Without arguing that Katrina was ``caused'' by 
global warming, the misery it caused the people of Louisiana and 
Mississippi and the continuing economic turmoil it produced are wake-up 
calls that show how much harm a disrupted climate can produce.
    A catastrophe, such as 20 feet or more of sea level rise, is not 
certain to occur; we don't know enough today to say how quickly we may 
lock in these catastrophic events with current emission paths. But 
homeowners buy fire insurance although they are not likely to have a 
fire next year; healthy young parents buy life insurance to protect 
their children, although they are not likely to die next year. The most 
catastrophic dangers from climate change are so immense that even if we 
believe the chance of catastrophe is small, it is irresponsible to 
ignore them. Taking action against climate change is life insurance for 
our home planet, needed to protect everyone's children.

                      COSTS AND BENEFITS OF ACTION

    The debate on global warming in Washington has turned decisively 
from ``Is it a problem?'' to ``What are we going to do about it and how 
much is it going to cost?'' In fact, we can't afford not to solve 
global warming. Economic analyses of the cost of reducing global 
warming pollution do not attempt to tally the benefits of preventing 
global warming. As the studies just discussed make clear, the costs of 
inaction are far higher than the costs of reducing emissions.
    Even considering only the direct economic implications, it is clear 
that action to reduce global warming pollution presents opportunities 
as well as costs, as recognized by the leading business and 
environmental leaders that have formed the US Climate Action 
Partnership. We need only look to California as a prime example of how 
aggressive implementation of climate friendly energy efficiency 
measures has been accompanied by strong economic growth. Due to these 
measures, California's per capita electricity consumption has been 
level over the last 30 years while that of the US as a whole has 
steadily increased. Per capita electricity consumption in California is 
now more than 40 percent lower than in the rest of the country. 
Meanwhile, from 1990 to 2005 the California economy grew by more than 
50 percent in real terms, an average annual growth rate of 2.9 
percent.\6\ And from 2003-2006 California has had an average annual 
real growth rate of 4 percent, while nationally the growth rate was 3.1 
percent per year.\7\
---------------------------------------------------------------------------
    \6\ California Department of Finance, http://www.dof.ca.gov/html/
FS--DATA/STAT--ABS/TABLES/d1.xls.
    \7\ Bureau of Economic Analysis, U.S Department of Commerce, http:/
/www.bea.gov/national/xls/gdplev.xls.
---------------------------------------------------------------------------
    The results of recent economic studies analyzing the costs of 
global warming cap and trade bills have shown that we can cut our 
global warming pollution substantially in a manner that is affordable 
for consumers and the US economy as a whole.
    A useful starting point is EPA's analysis of the ``Climate 
Stewardship and Innovation Act of 2007'' (S. 280), introduced by 
Senators Joe Lieberman (I-CT) and John McCain (R-AZ) in January of this 
year.\8\ This bill is similar to ACSA in its cap levels and overall 
structure. The bottom line from this EPA analysis is that solving 
global warming is affordable.
---------------------------------------------------------------------------
    \8\ United States Environmental Protection Agency's Analysis of 
Senate Bill S. 280 in the 110th Congress, The Climate Stewardship and 
Innovation Act of 2007, July 2007. http://www.epa.gov/climatechange/
economicanalyses.html#s280
---------------------------------------------------------------------------
    EPA finds that reducing global warming pollution will have an 
imperceptible effect on economic output overall. If we take no action 
to cut emissions, GDP is projected to grow at 2.61-2.72 percent per 
year from 2010 to 2050, which of course ignores the prospect that 
climate disruption in this period would harm the economy. With S. 280, 
GDP grows between 2.54-2.69 percent per year. EPA's analysis, which we 
consider to be conservative, finds that the reduction in GDP growth 
from enacting the Climate Stewardship Act is a mere 0.03-0.07 percent 
per year. If S. 280 were enacted, consumption of goods and services by 
U.S. households would increase 103% between 2005 and 2030, according to 
the Applied Dynamic Analysis of the Global Economy (ADAGE) model used 
by EPA, which is virtually indistinguishable from the 105% increase 
projected without the legislation. Of course, household consumption is 
not the same as welfare. It does not include the value we place on 
reducing the risk of catastrophic storms, preserving our favorite 
beaches and alpine meadows, and preventing polar bears and countless 
other species from being driven to extinction.
    What about energy prices? Changes would be far smaller and less 
disruptive than those consumers have experienced in recent years. 
According to EPA's analysis, S. 280 would have modest impacts on 
electricity and gasoline prices, and natural gas prices would not be 
significantly affected. The ADAGE model projects that the price of 
CO2 allowances will be $27/ton in 2030, which would add 23 
cents per gallon to the price of gasoline. But unlike recent, much 
larger, price increases, the money won't go to OPEC or national oil-
producing economies under laws like ACSA. The money we spend on global 
warming solutions will be spent in the U.S., creating new jobs and 
economic opportunities. ACSA helps ensure this result by directing over 
time the entire economic resource created by the emission allowance 
program to public benefits, such as helping finance more fuel-efficient 
vehicles, homes, and appliances for American consumers and promoting 
the deployment of climate-friendly technologies here at home.
    EPA projects that S. 280 would increase electricity prices somewhat 
(less than 1 cent per kilowatt-hour), but we don't write checks for 
prices, we write them for energy bills. EPA concludes that under S. 280 
the total cost of generating electricity would decrease 7 percent in 
2025 because energy efficiency measures will reduce total electricity 
consumption. Along with lower power production come significant health 
benefits from lower particulate and mercury emissions from power 
plants.
    Using a version of the ADAGE model employed by EPA, the Nicholas 
Institute at Duke University just completed an analysis of the August 
2nd version of ACSA.\9\ Their results were very similar to EPA's 
results for the Climate Stewardship Act. In particular, the Duke study 
found that compliance with the targets has a small effect on rising 
GDP. By 2030 GDP is projected to increase 112% from 2005 levels in the 
Reference Case, and by 2050 the projected increase in GDP from 2005 
levels is 238%. Under ACSA, GDP is projected to increase 111% by 2030 
and 236% by 2050.
---------------------------------------------------------------------------
    \9\ B.C. Murray and M.T. Ross, ``The Lieberman-Warner America's 
Climate Security Act: A Preliminary Assessment of Potential Economic 
Impacts'', October 2007. http://www.nicholas.duke.edu/institute/
econsummary.pdf.
---------------------------------------------------------------------------
    In reality, the opportunities to cost-effectively reduce total 
energy demand are greater than considered in EPA's or Duke's analysis. 
Stronger building and appliance efficiency standards, a national 
Renewable Electricity Standard, and higher vehicle fuel economy 
standards are all part of a sound energy policy designed to increase 
energy security and lower consumer costs by overcoming market barriers 
that are slowing the adoption of these technologies. These policies 
would also help achieve the global warming pollution reductions 
required by ACSA, reducing compliance costs. EPA's analysis of S. 280 
does not consider these complementary energy policies. As a result it 
understates the role that renewable energy and vehicle efficiency 
improvements can play in achieving the emission reductions required by 
the bill, and overstates the role of other low-emission electricity 
generating technologies, offsets, and international credits. Several 
such complementary energy policies are included in ACSA and Congress 
can act even more quickly to adopt these policies by enacting this year 
a strong energy bill incorporating the best elements of the House- and 
Senate-passed bills.
    It bears highlighting that no economic model can fully anticipate 
the advances in technology likely to be spurred by a policy package 
that caps and reduces emissions and uses allowances and performance 
standards to promote innovation. For example, prior to enactment of the 
cap on SO2 emissions in the 1990 Clean Air Act amendments, EPA 
projected that the price of SO2 allowances would be $500-$1000 per 
ton.\10\ In fact, prices have been far lower, generally in the range of 
$100 to $200 per ton until it became clear that emission limits would 
be tightened further than originally enacted by Congress.
---------------------------------------------------------------------------
    \10\ Acid Rain Program: 2005 Progress Report, http://epa.gov/
airmarkets/progress/docs/2005report.pdf
---------------------------------------------------------------------------
    To ensure the affordability of a global warming cap and trade bill 
the legislation must be designed smartly. That means establishing a 
firm pollution cap that will spur innovation, allowing trading such 
that emission reductions can be made at least-cost, and using the value 
of emission allowances in the public interest making it possible to 
offset any increases in energy costs for low and middle-income 
consumers. A recent MIT analysis of the Lieberman-McCain Climate 
Stewardship Act found that a family of four could receive in 2015 more 
than $3500 in revenue from the auction of allowances under this 
legislation, increasing over the years of the program.\11\
---------------------------------------------------------------------------
    \11\ S. Paltsev, J.M. Reilly, H.D. Jacoby, A.C. Gurgel, G. E. 
Metcalf, A.P. Sokolov, and J.F. Holak, ``Assessment of U.S. Cap-and-
Trade Proposals'', MIT Joint Program on the Science and Policy of 
Global Change, Report No. 146, p. 25, April 2007. http://web.mit.edu/
globalchange/www/MITJPSPGC--Rpt146.pdf
---------------------------------------------------------------------------
    Some economic analyses estimate much higher costs. In particular, 
during the hearing last Thursday (November 8, 2007) you heard testimony 
from Dr. Anne Smith of CRA International and Dr. Margo Thorning of 
American Council for Capital Formation. We believe their analyses are 
seriously flawed. The attached memorandum from several well respected 
economists who have worked and published in the field of climate 
economics and energy economics for over three decades identifies some 
of the most serious defects, including the failure to examine the 
economic benefits of protecting the climate and the unjustified 
assumption that the business as usual economy operates in a perfect 
welfare-maximizing fashion. The memo's purpose is to promote 
understanding of the issue of abatement cost studies by pointing out 
the economic logic, assumptions, and deficiencies of the CRA and ACCF 
analyses in relation to best-practice in this field. This is especially 
important because these analyses have been privately produced and have 
not appeared in the peer-reviewed literature.
    Focusing briefly on Dr. Smith's testimony, her analysis suggests 
that most of the emission reductions will occur in the electricity 
sector, neglecting opportunities to reduce emissions in industry and 
the transportation sector. Further, the CRA model limits the amount of 
advanced technology that can come into the electricity sector in the 
future--for example, constraining deployment rates for carbon capture 
and disposal systems and assuming less penetration of renewable energy 
than Energy Information Administration's Annual Energy Outlook.
    Other issues with CRA modeling include an artificially high 
emissions ``baseline'' (what would happen without a cap), which results 
in much higher costs for complying with emission caps. For example, the 
Energy Information Administration estimates additional lower carbon 
energy capacity will come on board even without a climate policy. EIA 
assumes that in coming decades if new coal plants are built they will 
probably be IGCC plants. However, CRA assumes business as usual coal 
technology and therefore factors in the full cost of new advanced 
technologies like IGCC with CCS when only the incremental costs of CCS 
should be included, thereby significantly increasing the overall cost 
estimates.
    As a result of these and other assumptions, the cost impacts 
predicted by CRA are much higher than EPA's or Duke University's 
Nicholas School's recent modeling, which find that compliance with the 
emissions targets has only a small effect on GDP.
    Finally, CRA's suggestion that delaying emission reductions would 
reduce costs ignores the primary driver of innovation. Entrepreneurs 
will only invest in developing and deploying the low-emission 
technologies we need if a market for these innovations is established 
by capping global warming pollution now. Delaying action will only 
delay progress in further reducing the costs of the many technology 
options available today.
    When all is said and done, solving global warming is not only 
affordable, it is likely to be beneficial to the economy as well as our 
environment and public health. But even if it costs several times as 
much as EPA's or Duke's estimates, it is still a much better choice 
than gambling our future through inaction. (See attached ``Economists' 
Statement on Climate Change'')
    We have the solutions--cleaner energy sources, new vehicle 
technologies and industrial processes and enhanced energy efficiency. 
What we lack is the policy framework to push business investments in 
the right direction and to get these solutions in the hands of 
consumers. America's Climate Security Act is a solid start on a policy 
framework that will trigger the necessary technological innovation in a 
manner that will strengthen our economy and lower the risk of 
catastrophic climate disruption.

     GLOBAL WARMING POLLUTION REDUCTIONS UNDER ACSA (AS AMENDED IN 
                             SUBCOMMITTEE)

    NRDC appreciates that ACSA was amended in the Subcommittee last 
week to expand its coverage of natural gas emissions. The bill covers 
all sources of global warming pollution that emit more than 10,000 tons 
of carbon dioxide equivalent per year in the electric power and 
industrial sectors as well as all transportation fuel providers whose 
products will produce more than 10,000 tons per year when consumed, and 
as amended in the Subcommittee, all emissions from natural gas 
consumption in the United States.
    The expanded coverage adopted in Subcommittee significantly 
increases the emission reductions that ACSA would achieve. A recent 
analysis by the World Resources Institute (WRI) estimates that the 
bill, as amended, covers 84% of U.S. emissions, up from 75% as 
originally introduced.
    The impact of the bill on total greenhouse gas emissions depends on 
assumptions made about state action, emissions from non-covered 
sources, and changes in biological carbon sequestration. The bill 
includes incentives for states to adopt climate policies that are more 
stringent than the federal program, to adopt and enforce model building 
codes, decouple electric and gas utility revenue from sales, and make 
energy efficiency investments as profitable as increasing energy 
supplies. The bill also includes energy efficiency standards for 
residential boilers and provisions requiring regular updates to 
residential and commercial building codes. Finally, the bill sets aside 
5% of the total allowance pool to promote increased biological 
sequestration in domestic farms and forests and an additional 2.5% for 
similar international efforts.
    These provisions will reduce emissions from non-covered sources 
below business as usual levels but the magnitude of these benefits is 
difficult to quantify. NRDC has constructed an Optimistic and 
Pessimistic case to bound the likely range of total greenhouse gas 
emission reductions under the bill.
     State Programs:
          The Optimistic case assumes that any states that 
        enact climate programs more stringent than the federal program 
        retire the bonus allowances allocated to them (2% of the total 
        allowance pool). While the bill makes clear that states have 
        the authority to enforce global warming pollution standards 
        more stringent than federal requirements currently there is no 
        clear mechanism by which these state programs would result in 
        reductions in national emissions other than by retiring their 
        bonus allowances. Further elaboration of the state authority 
        provisions could allow for greater national benefits from state 
        programs.
          The Pessimistic case assumes that these states 
        programs help achieve the emission caps specified in the bill 
        but do not achieve additional environmental benefits.
     Emissions from non-covered sources:
          In the Optimistic case non-covered emissions from the 
        residential and commercial sectors and non-covered methane 
        emissions are assumed to decline at the same annual rate as 
        they did from 2000 to 2005 (0.7% and 1.2%, respectively). 
        Emissions of nitrous oxide and other non-covered greenhouse 
        gases are assumed to remain constant at 2005 levels. In 
        addition, the 7.5% allowance set aside for biological 
        sequestration is assumed to generate one ton of benefits for 
        each ton of allowances devoted to this purpose.\12\
---------------------------------------------------------------------------
    \12\ While some ``anyway'' tons are likely to be promoted through 
these programs the cost per ton to reduce emissions through biological 
sequestration is expected to be less than the market price for 
allowances within the cap. The assumption here is that price 
differential between the incentives for biological sequestration and 
the price of allowances sold compensates for the anyway tons.
---------------------------------------------------------------------------
          In the Pessimistic case emissions from all non-
        covered sources are assumed to increase at the rate projected 
        by EPA in its analysis of S. 280 using the ADAGE model (0.3% 
        per year) and the 7.5% allowance set aside for biological 
        sequestration is assumed to generate 0.5 tons of benefits for 
        each ton of allowances devoted to this purpose.
    Based on these assumptions, we estimate that ACSA, as reported by 
the Subcommittee, would reduce total U.S. greenhouse gas emissions by 
18 to 24 percent in 2020 compared to 2005 levels. By 2050 the bill 
would reduce total emissions by 59 to 66 percent. More detailed results 
are provided in the table below.


--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                      Estimated Range of
                                                                            Estimated Total     Estimated Total      Reductions in       Reductions in
                        Year                             Emissions of          Emissions           Emissions        Emissions from     Total Greenhouse
                                                        Covered Sources     Optimistic Case    Pessimistic Case     Covered Sources      Gas Emissions
                                                                               (MMTCO2e)           (MMTCO2e)        (2005 Baseline)     (2005 Baseline)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2012................................................              5,773               6,359               6,715                  6%               8-12%
2020................................................              4,920               5,538               5,923                 20%              18-24%
2030................................................              3,854               4,517               4,933                 37%              32-38%
2040................................................              2,789               3,501               3,945                 54%              46-52%
2050................................................              1,732               2,499               2,966                 72%              59-66%
--------------------------------------------------------------------------------------------------------------------------------------------------------

                         COVERAGE OF EMISSIONS

    The cap and trade program should cover as much of the economy's GHG 
emissions as is possible. We commend the Subcommittee for expanding the 
bill's coverage to include all emissions from the use of natural gas. 
Similar to the transportation sector, it is not feasible to cover 
emissions from natural gas use in homes and offices at the point of 
emission due to the very large number of small sources. It is, however, 
feasible to include these emissions within the cap by moving the point 
of regulation upstream. We believe the most straightforward way to 
implement full coverage of natural gas is to keep coverage in the 
electric power and industrial sector at the point of emission as in 
ACSA as introduced, and to make all natural gas distributors above a 
given size threshold responsible for managing allowances for emissions 
by their residential and commercial customers (e.g. all distributors 
that sell natural gas to residential and commercial customers, the 
combustion of which generates more than 10,000 tons of carbon dioxide 
equivalents).\13\
---------------------------------------------------------------------------
    \13\ 10,000 tons of CO2 corresponds to 183 million cubic 
feet of natural gas. There are about 500 entities that distribute this 
volume of natural gas or more to residential and commercial customers.
---------------------------------------------------------------------------
    Alternatively, allowances could be managed by interstate and 
intrastate pipelines or by a combination of natural gas processors, 
importers, and pipelines for gas that is not processed. Downstream 
sources would not be required to submit allowances for emissions 
associated with their use of natural gas. This option is only 
acceptable if it is implemented in a way that prevents bypass of the 
point of regulation. Furthermore, this option moves the point of 
regulation further away from the actors who have direct control or 
influence over emissions. This could reduce the responsiveness of 
emitters to the cap, increasing compliance costs.

          ALLOWANCE ALLOCATIONS AND OTHER POLICIES UNDER ACSA

    ACSA would implement its cap and reductions through an allowance 
trading system. NRDC agrees that--combined with complementary policies, 
some of which are contained in this bill and in other legislation, such 
as the pending energy bill--this is the most effective and efficient 
approach to curbing global warming pollution. As the sponsors are 
aware, a cap and trade system requires attention to how the emissions 
allowances are allocated, and for what purposes. It is important to 
distinguish between the abatement cost of a cap and trade system and 
its distributional implications. The abatement cost will be 
significant, but far less than the cost of inaction. At the same time, 
the value of the pollution allowances created by the law will be higher 
than the abatement costs: some estimates place their value between $30 
and 100 billion per year.
    NRDC believes these pollution allowances are a public trust. They 
represent permission to use the atmosphere, which belongs to all of us, 
to ``dispose of'' global warming pollution. As such, they are not a 
private resource owned by historical emitters and such emitters do not 
have a permanent right to free allowances. The value of the allowances 
should be used for public purposes including promoting clean energy 
solutions, protecting the poor and other consumers, ensuring a just 
transition for workers in affected industries, and preventing human and 
ecosystem impacts both here and abroad, especially where they can lead 
to conflicts and threats to security.
    ACSA embraces the principle that these pollution allowances should 
be used for public purposes but it implements the principle too slowly. 
NRDC believes that over the first 25 years of the program the bill 
gives away more allowances to the biggest emitting firms than is needed 
to fully compensate such firms for the effects of their compliance 
obligations on the firms' economic values. The result is that there are 
not enough allocations available to fully meet public needs. As 
discussed more fully below, the allowance allocations in the bill can 
be substantially improved.
    ACSA also allows the owner or operator of a covered facility to 
satisfy up to 15 percent of a given year's compliance obligation using 
``offsets'' generated within the United States. These offsets would 
come from activities that are not covered by the emissions cap. The 15 
percent limitation is essential to ensure the integrity of the 
emissions cap in the bill and to spur technology innovation. The total 
amount of offsets allowed should not be increased. In addition, as 
discussed below, further changes to the bill should be made regarding 
the types of offsets that should be allowed and the conditions for such 
offsets.
    We are pleased to note that ACSA includes ``cost containment'' 
provisions that protect the integrity of the emissions cap and preserve 
incentives for technology innovation. In particular, we commend your 
rejection of the misnamed ``safety valve'' concept that would allow the 
government to print unlimited pollution allowances at a set price.
    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. ``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 on 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 other legislative proposals. The valve is 
set at such a low level that it is likely to be open virtually all the 
time.
    In addition to breaking the U.S. cap, a safety valve also would 
prevent U.S. participation in international trading systems. If trading 
were allowed between the U.S. and other capped nations, a major 
distortion would occur. Firms in other countries (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. Foreign demand for newly-minted U.S. safety valve 
allowances would continue until the world 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.
    Although NRDC believes that the primary and most effective cost 
containment device in any mandatory legislation will be the cap and 
trade system itself, NRDC also supports other means of providing 
flexibility. Banking has long been a feature of cap and trade systems. 
We also support the bill's provisions allowing firms to borrow 
allowances with appropriate interest and payback guarantees. The bill 
includes a further provision, nicknamed the Carbon Fed, based upon a 
proposal developed by Senators Warner, Graham, Lincoln and Landrieu. 
The board created under this provision is charged with monitoring the 
carbon market and is authorized to change the terms of allowance 
borrowing, including the interest rate and the time period for 
repayment. Crucially, however, the Carbon Fed does not have the 
authority to change the cumulative emissions cap. Under such a 
proposal, the environment is protected and cost volatility is 
minimized.

                    AREAS FOR ADDITIONAL IMPROVEMENT

    While ACSA provides a solid framework for sound global warming 
legislation, there are some significant areas in which it can and 
should be substantially improved. A more detailed discussion of these 
areas follows:
Scientific Review of Targets
    The bill as introduced includes a provision under which the 
National Academy of Sciences would assess the extent to which emissions 
reductions required under the Act are being achieved, and would 
determine whether such reductions are sufficient to avoid dangerous 
global warming. However, unlike the similar provisions of the Sanders/
Boxer legislation, ACSA does not authorize the Environmental Protection 
Agency to respond to the NAS assessments and reports by adjusting the 
applicable targets. The bill should be revised to allow EPA to take all 
necessary actions to avoid dangerous global warming by requiring 
additional reductions, including by changing applicable targets or 
through increasing the coverage of the bill.
Complementary Performance Standards
    Performance standards for key sectors are an important complement 
to the comprehensive cap on emissions. The bill recognizes the 
importance of performance standards for building codes and appliance 
efficiency and contains standards for these energy consuming 
activities. But energy producers also need performance standards to 
avoid counterproductive investments in the early years of the program.
Carbon Capture and Disposal
    Perhaps the most important performance standard for the energy 
production sector is for coal-fired electric generation. It is critical 
to recognize that continued investments in old technology will ``lock 
in'' high carbon emissions for many decades to come and create a 
tremendous economic burden. This is particularly so for the next 
generation of coal-fired power plants. Power plant investments are 
large and long-lasting. A single plant costs around $2 billion and will 
operate for 60 years or more. If we decide to do it, the United States 
and other nations could build and operate new coal plants that return 
their CO2 to the ground instead of polluting the atmosphere. 
With every month of delay we lose a piece of that opportunity and 
commit ourselves to 60 years of emissions. The International Energy 
Agency (IEA) forecasts that more than 20 trillion dollars will be spent 
globally on new energy technologies between now and 2030.
    It is critical that we stop building new coal plants that release 
all of their carbon dioxide to the air. The Sanders-Boxer bill contains 
two complementary performance standards for coal plants and we 
recommend the Committee incorporate these concepts into ACSA. The first 
standard is a CO2 emissions standard that applies to new 
power investments. California enacted such a measure in SB1368 last 
year. It requires new investments for sale of power in California to 
meet a performance standard that is achievable by coal plants using 
CO2 capture.
    The second standard is a low-carbon generation obligation for coal-
based power. The low-carbon generation obligation requires an initially 
small fraction of sales from coal-based power to meet a CO2 
performance standard that is achievable with carbon capture. The 
required fraction of sales would increase gradually over time and the 
obligation would be tradable. Thus, a coal-based generating firm could 
meet the requirement by building a plant with carbon capture, by 
purchasing power generated by another source that meets the standard, 
or by purchasing credits from those who build such plants. This 
approach has the advantage of speeding the deployment of carbon capture 
systems while avoiding the ``first mover penalty.'' Instead of causing 
the first builder of a commercial coal plant with carbon capture to 
bear all of the incremental costs, allowance incentives and the 
tradable low-carbon generation obligation would spread those costs over 
the entire coal-based generation system.
    With such performance standards included, the bill could--at no 
added cost--prevent construction of new uncontrolled coal power plants 
and free up some of the incentive allowances for other purposes.
    The bill contains several incentive provisions to reward developers 
who incorporate carbon capture and geologic disposal systems for new 
coal plants. NRDC supports such incentives though we believe that the 
bill currently over allocates to carbon capture and disposal (CCD) 
projects. In particular, the program for advanced coal under the 
auction is limited to 20 GW, but is allocated more revenue than it 
would need to deploy this capacity. As a result this amount could be 
reduced significantly without reducing the number of projects that are 
supported. In addition, the bonus allowance program for CCD provides 
more of an incentive than is needed given the caps in the bill. These 
revenues and allowances could be put toward other public benefits such 
as the adaptation needs of disadvantaged peoples and communities in the 
U.S and internationally who will be adversely affected by global 
warming impacts.
    Some have argued that key technologies, such as carbon capture and 
disposal (CCD) are not yet available or are only available now at 
exorbitant cost. Such arguments are incorrect. All the elements of CCD 
systems are actually in use today but not are used in an integrated 
fashion. Arguments that claim full CCD systems are not ready because 
they are not in use today, under today's market conditions, 
fundamentally miss the point that sound global warming legislation will 
create the market conditions for deployment of such systems going 
forward from today.
    Expert studies have concluded that we have the knowledge base now 
to proceed safely with geologic disposal of carbon dioxide in the 
amounts produced by the typical coal fueled power plant.\14\
---------------------------------------------------------------------------
    \14\ See, e.g., the ``Special Report on Carbon Dioxide Capture and 
Storage'' of the Intergovernmental Panel on Climate Change discussed in 
Appendix C. See also, MIT's report on ``The Future of Coal'' (2007). 
The MIT report's lead authors, Professors John Deutch and Ernest Moniz, 
had this to say about the safety of multi-million ton injection 
projects to the Senate Energy and Natural Resources Committee in March 
2007: Each plant will need to capture millions of metric tonnes of 
CO2 each year. Over a 50-year lifetime, one such plant would 
inject about a billion barrels of compressed CO2 for 
sequestration. We have confidence that megatonne scale injection at 
muiltiple well-characterized sites can start safely now, but an 
extensive program is needed to establish public confidence in the 
practical operation of large scale sequestration facilities over 
extended periods and to demonstrate the technical economic 
characteristics of the sequestration activity.'' (Deutch, emphasis 
supplied); ``I think the important thing to emphasize, so there's no 
confusion, is that we feel very, very confident about the wisdom of 
going ahead now with those mega-ton per-year projects.'' (Moniz). U.S. 
Senate, Energy and Natural Resources Committee, ``Future of Coal,'' 
March 22, 2007, S. Hrg. 110-69 at 9, 11.
---------------------------------------------------------------------------
    Taking a frozen snapshot of the cost of carbon control technologies 
today is also misleading. Think how wrong such an assessment would have 
been if applied to computer technology at any point in the last thirty 
years. Speed and capacity have increased by orders of magnitude as 
costs plummeted. We now carry more computing power in our cell phones 
than the Apollo astronauts carried to the moon. Once market signals are 
in place, it will be the same for technologies such as carbon capture 
and disposal.\15\
---------------------------------------------------------------------------
    \15\ Appendix C contains a more thorough discussion of the 
readiness of carbon capture and disposal systems.
---------------------------------------------------------------------------
Low-Carbon Fuels Standard
    Other complementary policies should also be considered for sectors 
such as the transportation area. NRDC supports a Low Carbon Fuel 
Standard, which would cut greenhouse gas emissions from fuels by 10% 
from today's levels by 2020 and spur development and use of cellulosic 
ethanol and other low carbon fuels. We support inclusion of such a 
performance standard in ACSA. It is also important to note that other 
ongoing efforts in the Senate, such as the Corporate Average Fuel 
Economy measures included in the Senate energy bill, could lead to 
substantial reductions in greenhouse gas emissions and if enacted, will 
provide another important complement to the provisions in ACSA.
Offsets
    ACSA allows the owner or operator of a covered facility to satisfy 
up to 15 percent of a given year's compliance obligation using 
``offsets'' generated within the United States. These offsets would 
come from activities that are not covered by the emissions cap.
    While there are many emission reduction activities outside the cap 
that are worth encouraging, many experts have worked for more than 30 
years in an attempt to produce reliable, workable offset programs in 
both the clean air and global warming contexts but there is little 
reason for satisfaction with the results. Even if criteria for 
measurability and enforceability are met, offsets still have the 
potential to break the cap because of difficulties in assuring that 
actions being credited are actually ``additional''--i.e., that they are 
not simply actions that would have taken place anyway in the absence of 
credit.
    The additionality problem is not readily soluble, because it is 
extraordinarily difficult to devise workable rules for determining 
business-as-usual baselines at the project level. In some areas, 
credits may leverage new actions that would not have occurred, with a 
minimum of credit bestowed on ``anyway'' actions. But far more often, 
``anyway'' actions make up a large--even dominant--fraction of the 
reductions credited. If offsets represent even a small percentage of 
``anyway'' tons, climate protection actually moves backwards. A full 
ton is added to the cap in exchange for an action that may represent 
only 0.9 ton of reduction--or worse, 0.1 ton of reduction. With each 
offset, net emissions increase.
    Offsets also can delay key industries' investments in 
transformative technologies that are necessary to meet the declining 
cap. For instance, unlimited availability of offsets could lead 
utilities to build high-emitting coal plants instead of investing in 
efficiency, renewables, or plants equipped with carbon capture and 
storage.
    For these reasons, NRDC has proposed setting aside a portion of the 
allowances from within the cap to incentivize mitigation actions from 
sources, like agriculture, that are outside the cap. Since the 
allowances would come from within the cap, they do not run the risk of 
expanding actual emissions as a result of rewarding this activity. 
Another acceptable approach would be to allow only a limited quantity 
of offsets in the cap-and-trade design.
    The Lieberman/Warner bill takes both approaches. The bill includes 
a ``set aside'' for agricultural reductions which would provide 
allowances from within the cap, and the bill also limits domestic 
offsets from outside the cap to 15 percent of a facility's annual 
compliance obligation.
    NRDC believes that there are some additional changes needed in the 
offset provisions to remove offsets for forest management activities, 
where additionality fundamentally cannot be guaranteed. Moreover forest 
management activities focused on maximizing carbon storage could result 
in ecological damage to forests, which have many functions in addition 
to carbon storage. The authority of the Carbon Market Efficiency Board 
to expand the use of offsets should also be constrained. A number of 
other safeguards need to be strengthened. We will be glad to continue 
working with your staff regarding these provisions.

                        ALLOCATION OF ALLOWANCES

    The Lieberman/Warner bill recognizes that allowances can and should 
be used to achieve important public purposes, but the bill provides too 
many allowances for free to emitters in the early years of the program.
    The bill provides allowances for public purposes in two ways:
    (1) auctioned allowances, with the proceeds of the auction going 
for such purposes as climate-friendly technologies, low income energy 
consumers, wildlife adaptation, national security/global warming 
measures and worker training.
    (2) free allowances to electricity consumers, state and tribal 
governments, and U.S. farmers and foresters, for a range of designated 
public purposes.
    But the bill also initially gives 40 percent of the allowances for 
free to emitters in the electric and industrial sectors with no 
requirement that these allowances be used for public purposes. These 
free allowances to emitters continue at gradually reduced rates until 
2036 when they are terminated. The amount of allowances that are 
auctioned for public purposes grows from 24 percent in 2012 to 73 
percent in 2036.
    NRDC appreciates the substantial changes that have been made to 
ACSA since the bill outline was released in August. These changes 
include eliminating the perpetual free allocation to industrial 
emitters and removing free allowances to oil and coal companies.
    The current bill's allocation to electric power and industrial 
emitters, however, is still much higher than justified under ``hold-
harmless'' principles and will result in windfall profits to the 
shareholders of emitters. For example, an economic analysis by Larry 
Goulder of Stanford University suggests that in an economy-wide 
upstream cap and trade program, only 13% of the allowances will be 
needed to cover the costs that fossil-fuel providers would not be able 
to pass on to their customers. Similar analyses, with similar results, 
have been conducted by Resources for The Future and the Congressional 
Budget Office.
    As a result, NRDC believes that the bill should be improved 
substantially by reducing the starting percentage of free allowances to 
emitters and phasing them out faster--within 10-15 years of enactment. 
This would allow a greater percentage of the allowances to be devoted 
to public purposes initially and in later years. In particular, 
reducing the free allocations to emitters would allow for more 
resources to be directed to states, to low-income consumers in the 
United States, and to the most vulnerable among us both here and 
abroad.

                       INTERNATIONAL COOPERATION

    The bill includes a provision to encourage other nations to join in 
action to reduce greenhouse gas emissions, and to protect American 
businesses and workers from unfair competition if specific nations 
decline to cooperate. Under this provision, the United States would 
seek to negotiate for ``comparable emissions reductions'' from other 
emitting countries within 8 years of enactment. Countries failing to 
make such commitments would be required to submit greenhouse gas 
allowances for certain carbon intensive products. NRDC supports this 
provision, while bearing in mind that the U.S., as the world's greatest 
contributor to the burden of global warming pollution already in the 
atmosphere, needs to show leadership in meeting the global warming 
challenge.

                           ADAPTATION ISSUES

    The sad truth is that if we do our utmost to cut global warming 
pollution starting tomorrow, people and sensitive ecosystems we depend 
on will still suffer serious impacts due to the emissions that are 
already in the air and those ``in the pipeline.'' We must do what we 
can now to ensure that communities and natural ecosystems are best 
prepared to withstand and adapt to ongoing and expected change.
    The impacts of global warming will be felt to a much greater extent 
by vulnerable communities abroad, particularly those in the least 
developed countries that bear the smallest share of responsibility for 
increases in greenhouse gas concentrations.
    The average American is responsible for many times more emissions 
than an average citizen of most African countries. Providing assistance 
for international adaptation is not only the right thing to do, it is 
also in our national interest. Global warming is a destabilizing force 
that will act against our hopes for the advancement of human rights and 
democracy. It will elevate the risk of displacement, famine, and 
poverty--the kind of conditions in which violence, oppression, and 
radical ideologies can flourish. Providing support for adaptation will 
also help advance international negotiations toward an effective global 
agreement for the period beyond 2012.
    But our motive for providing help should not rest solely on whether 
these countries are a ``security'' threat, but also because this is the 
right thing to do, and because we have a crucial opportunity to 
ameliorate worldwide suffering by assisting these nations in adopting 
more sustainable energy and development paths.
    Chairman Boxer, and the other members of the Committee, the work 
that you and your staff have done on this bill marks an important 
milestone in the movement toward enactment of strong, bipartisan global 
warming legislation. We look forward to further progress as your 
legislation moves through the Environment and Public Works Committee, 
and we at NRDC stand ready to assist in anyway possible.
    Thank you for the opportunity to testify and I would be pleased to 
answer any questions that you may have.

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       Response by David Hawkins to an Additional Question from 
                           Senator Lautenberg

    Question. You state that free allowances should be phased out 
significantly faster--between 10-15 years of enactment. I also believe 
that we should move to full auction significantly earlier. What are the 
benefits from an earlier full auction date? How could we use the 
greater auction proceeds to minimize any economic dislocation?
    Response. NRDC believes pollution allowances are a public trust. 
They represent permission to use the atmosphere, which belongs to all 
of us, to ``dispose of'' global warming pollution. As such, they are 
not a private resource owned by historical emitters and such emitters 
do not have a permanent right to free allowances. The value of the 
allowances should be used for public purposes including promoting clean 
energy solutions, protecting the poor and other consumers, ensuring a 
just transition for workers in affected industries, and preventing 
human and ecosystem impacts both here and abroad, especially where they 
can lead to conflicts and threats to security.
    ACSA embraces the principle that these pollution allowances should 
be used for public purposes but it implements the principle too slowly. 
NRDC believes that over the first 25 years of the program the bill 
gives away more allowances to the biggest emitting firms than is needed 
to fully compensate such firms for the effects of their compliance 
obligations on the firms' economic values. The result is that there are 
not enough allocations available to fully meet public needs.
    As you indicate in your question, NRDC believes that the bill 
should be improved substantially by reducing the starting percentage of 
free allowances to emitters and phasing them out faster--within 10-15 
years of enactment.
    In assessing the merits of any allocation proposal, it is important 
to recognize that regardless of whether allowances are auctioned or 
given away for free, in either case, the resulting revenue stream can 
be directed toward public or private purposes. Moreover, while phasing 
out of free allocations as soon as possible is desirable, the total 
amount of allowances to be received over time by any given entity--and 
whether that amount will be used for appropriate purposes--is perhaps 
the most important consideration.
    The Lieberman Warner bill provides allowances for public purposes 
in two ways:
    (1) auctioned allowances, with the proceeds of the auction going 
for such purposes as climate-friendly technologies, low income energy 
consumers, wildlife adaptation, national security/global warming 
measures and worker training.
    (2) free allowances to electricity consumers, state and tribal 
governments, and U.S. farmers and foresters, for a range of designated 
public purposes.
    But the bill also initially gives 40 percent of the allowances for 
free to emitters in the electric and industrial sectors with no 
requirement that these allowances be used for public purposes. These 
free allowances to emitters continue at gradually reduced rates until 
2036 when they are terminated. The amount of allowances that are 
auctioned for public purposes grows from 24 percent in 2012 to 73 
percent in 2036.
    Although NRDC appreciates the substantial changes that have been 
made to ACSA since the bill outline was released in August, the current 
bill's allocation to electric power and industrial emitters, however, 
is still much higher than justified under ``hold-harmless'' principles 
and will result in windfall profits to the shareholders of emitters. 
For example, an economic analysis by Larry Goulder of Stanford 
University suggests that in an economy-wide upstream cap and trade 
program, only 13% of the allowances will be needed to cover the costs 
that fossil-fuel providers would not be able to pass on to their 
customers. Similar analyses, with similar results, have been conducted 
by Resources for The Future and the Congressional Budget Office.
    Thus, faster phase out of the free allowances that would reduce the 
overall number of allowances that emitters receive is desirable. A 
faster phase out of free allowances also recognizes that while 
companies may need time to transition to lower and zero carbon energy 
solutions, they should do so as quickly as possible. Continued 
allocation of free allowances based on historical emissions discourages 
innovation and adoption of new technologies.
    In addition to a faster phase out of free allowances to emitters, 
the initial number of free allowances to emitters should be reduced as 
well, to eliminate the possibility of windfall profits. By taking both 
of the steps above, the pool of allowances that can be either given for 
free or auctioned for public purposes can be substantially increased.
    In particular, more revenue can be made available in the auction 
pool for low income energy consumers and in the free allowance pool for 
electricity consumers, worker training and other public purposes. As 
you indicate, redirecting these revenues can have a substantial impact 
in terms of mitigating economic impacts and economic dislocation for 
those that can least afford such costs. Instead of providing windfall 
profits for a select group of shareholders, these funds can aid 
consumers and workers in adjusting to increased costs associated with 
the need to reduce emissions. This result should be the preferred 
policy outcome and under the current structure of the bill it can be 
achieved by a combination of a faster free allowance phaseout, and a 
substantial reduction in the overall amount of allowances that are 
allocated for free to emitters.

    Senator Lieberman [Presiding]. Thanks very much, Mr. 
Hawkins. We appreciate the testimony.
    Dr. David Greene is the next witness. Dr. Greene is a 
corporate fellow, Geography and Environmental Engineering, at 
the Oak Ridge National Laboratory. Thanks very much for coming, 
and we look forward to your testimony now.

  STATEMENT OF DAVID L. GREENE, CORPORATE FELLOW, ENGINEERING 
 SCIENCE AND TECHNOLOGY DIVISION, OAK RIDGE NATIONAL LABORATORY

    Mr. Greene. Thank you, Senator Lieberman.
    Thank you for inviting me to discuss this very important 
legislation and its relation to the mitigation of greenhouse 
gas emissions from transportation. Our transportation system 
produces more climate-changing carbon dioxide than any other 
nation's entire economy except for China. The transportation 
sector was responsible for 28 percent of total U.S. greenhouse 
gas emissions from our economy in 2005. Climate policy must 
effectively address the mitigation of emissions from 
transportation.
    A policy that sends an economy-wide price signal to reduce 
greenhouse gas emissions as the greenhouse gas cap and trade 
system of the America's Climate Security Act of 2007 will do is 
the essential cornerstone of a meaningful climate change 
strategy. But analyses such as by the Energy Information 
Administration have shown that carbon prices that are capable 
of cutting electric utilities, greenhouse gas emissions in half 
by 2030 would have a far smaller impact on the transportation 
sector. There are two principal reasons for this.
    One is the insensitivity of fuel economy to the price of 
fuel, and the second is the inter-dependencies among land use, 
transportation infrastructure investments and vehicle travel 
and the central role of governments in those processes. Fuel 
economy is relatively insensitive to the price of fuel, because 
the market for fuel economy is not efficient.
    A national survey of 1,000 U.S households this last May 
found that 39 percent never considered fuel economy at all in 
their vehicle purchase decisions. And of those who did, only 14 
percent mentioned taking economic factors, like annual fuel 
cost or the price of fuel into consideration. In-depth 
interviews of the car-buying histories of 57 California 
households by the University of California at Davis turned up 
none that had ever considered the value of fuel savings over 
the life of a vehicle or that use concepts like pay-back 
periods when considering fuel economy.
    But consumers are not irrational. The economic value of 
increased fuel economy to a car buyer is the difference between 
the present value of future fuel savings and the price that 
must be paid for it at time of purchase. But the value of 
future fuel savings is uncertain. The future price of fuel, the 
fuel economy that will be achieved in real world driving, 
annual miles of travel, the life of the vehicle, all of these 
factors and more are uncertain. From this perspective, 
increased fuel economy looks like a risky bet to a car buyer.
    And for the typical loss averse consumer, there is little 
reason to calculate the value of increased fuel economy, and as 
a consequence, no responsible automobile manufacturer would 
spend billions of dollars to retool and redesign its product 
lines, to provide fuel economy for which consumers are not 
willing to pay. This is why the world's major economies, the 
United States, the European Union, Japan, China, Canada, Korea, 
all have adopted fuel economy standards for light duty 
vehicles.
    Fortunately, fuel economy standards work. Past fuel economy 
standards raised the miles per gallon of U.S. light duty 
vehicles by 50 percent and are saving U.S. motorists 
approximately 60 billion gallons of fuel each year. Medium and 
heavy trucks and buses account for 20 percent of transportation 
greenhouse gas emissions. In the past, we have assumed that 
these markets function efficiently and there is no need for 
fuel economy standards. The Japanese government has directly 
challenged that assumption in setting weight-based standards 
for fuel economy of heavy trucks in March 2006. We should 
investigate that option as well.
    Creating an economy-wide price signal to reduce greenhouse 
gas emissions, as a cap and trade system will do, is the 
cornerstone of a comprehensive climate change strategy. 
However, an efficient response from transportation will be 
hindered by deficiencies in the market for fuel economy, 
together with the central role of land development policies and 
transportation infrastructure investments in driving demand for 
vehicle travel. Fuel economy policy is essential. Intelligent 
land use and infrastructure policies that enhance the 
attractiveness of walking, biking and public transit can also 
make an important and potentially critical difference by 2050.
    At present, it is not known how effective a cap and trade 
system can be in reducing the carbon content of transportation 
fuels. Especially in the early years, a low-carbon fuel 
standard may also be needed. Ultimately, significant 
technological advances will be required if transportation's 
greenhouse gas emissions are to be reduced by 50 to 80 percent 
over current levels by 2050.
    Thank you for the opportunity to present my views on this 
enormously important legislation.
    [The prepared statement of Mr. Greene follows:]

Statement of David L. Greene, Corporate Fellow, Engineering Science and 
           Technology Division, Oak Ridge National Laboratory

    Good afternoon. Thank you for inviting me to discuss the adequacy 
of greenhouse gas (GHG) cap-and-trade as a policy for mitigating GHG 
emissions from the transportation sector, and the need for additional 
policy measure for the transportation sector. The views I express today 
will be entirely my own and do not necessarily reflect the views of Oak 
Ridge National Laboratory or the Department of Energy.
    Our transportation system is the largest in the world. Each second, 
it burns 6,300 gallons of oil, producing more climate changing carbon 
dioxide emissions than any other nation's entire economy, except China 
(EIA, 2007, table H.1CO2). The transportation sector was 
responsible for 28% of total U.S. greenhouse gas emissions in 2005 
(USEPA, 2007a, table 2-16). Climate policy must effectively address the 
mitigation of emissions from transportation. Other policies will be 
needed in addition to a cap-and-trade system in order to make the 
reductions in GHG emissions that are likely to be necessary.

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    A policy that sends an economy-wide price signal to reduce 
greenhouse gas emissions, as the GHG cap-and-trade system of the 
America's Climate Security Act of 2007 will do, is the essential 
cornerstone of a meaningful climate change strategy. Analyses by the 
Department of Energy's Energy Information Administration (EIA, 2006), 
for example, estimate that such policies will bring about major 
reductions in GHG emissions from electric power generation (figure 2). 
Unfortunately, the same level of economic incentives that could cut 
electric utility GHG emissions in half by 2030 would have a much 
smaller impact on transportation's GHG emissions.

[GRAPHIC] [TIFF OMITTED] T3583.092

    A carbon price of $30 to $50 per ton of CO2 equivalent 
greenhouse gas emissions, such as analyzed in the EIA study, translates 
into roughly $0.25 to $0.50 per gallon of gasoline. This is not a 
trivial price signal and it will help reduce demand for fossil carbon 
fuels and encourage energy efficiency.\1\ However, recent statistical 
analyses (e.g., Small and Van Dender, 2007; Hughes et al., 2007) have 
shown that price signals of this magnitude will have constructive but 
insufficient impacts on vehicle travel and fuel consumption. It is 
important to understand why this is so, and to implement additional 
policies for transportation that can cost-effectively achieve the 
magnitude of reductions in transportation greenhouse gas emissions that 
are needed.
---------------------------------------------------------------------------
    \1\ The America's Climate Security Act of 2007 appropriately 
recognizes that steps must be taken to offset the regressive impact of 
carbon prices on lower income households.
---------------------------------------------------------------------------
    Fuel economy is relatively insensitive to the price of fuel because 
the market for fuel economy is not efficient. A recent national random 
sample survey of 1,000 U.S. households found that 39% did not consider 
fuel economy at all in their last vehicle purchase (Opinion Research, 
2007). Of those who did, only 14% mentioned taking economic factors, 
like annual fuel costs or gasoline prices into consideration. In depth 
interviews of the car buying histories of 57 California households 
(Turrentine and Kurani, 2005) turned up none that had ever considered 
the value of fuel savings over the life of a vehicle, or that used 
concepts like a payback period when considering fuel economy. When I 
served on the National Academy of Sciences Committee on the 
Effectiveness and Impact of Corporate Average Fuel Economy Standards 
(NAS, 2002), manufacturers told us they believed consumers would pay 
for only 2-4 years of fuel savings. Survey evidence backs them up 
(Opinion Research, 2004). In a 2004 survey, half the respondents were 
asked how much they would be willing to pay for a more fuel efficient 
new vehicle that would save them $400 per year in fuel. The other half 
were asked how much a vehicle would have to save them in fuel each year 
to justify paying $1,200 more for it. The payback periods implied by 
the answers from the two groups were strikingly similar. Consumers 
wanted to be paid back in 1.5 to 2.5 years (figure 3). The expected 
lifetime of a U.S. passenger car or light truck is 15 years, or more 
(Davis and Diegel, 2007, tables 3.8 and 3.9).

[GRAPHIC] [TIFF OMITTED] T3583.093

    Consumers are not irrational. The value of future fuel savings is 
highly uncertain, and consumers are in general loss-averse (Tversky and 
Kahneman, 1992). The economic value of increased fuel economy to a car 
buyer is the difference between the present value of future fuel 
savings and the price that must be paid for it at time of purchase. 
Using fuel economy cost data from the 2002 NAS study, figure 4 shows 
the expected fuel savings, increased vehicle cost and net present value 
for increasing the fuel economy of an average U.S. passenger car from 
28 to 46 miles per gallon. While the value of fuel savings increases to 
more than $2,000, the expected net value is much smaller, varying 
between $500 and ^$500. Between 32 mpg and 38 mpg, there is no more 
than a $100 difference in expected net value. But the value of future 
fuel savings is uncertain. The price of fuel, the fuel economy that 
will be achieved in real world driving, annual usage, the life of the 
vehicle, all of these factors and more are uncertain. From this 
perspective increased fuel economy looks like a risky bet to a car 
buyer. From the perspective of a typically loss-averse consumer, the 
expected $400 net benefit of increasing fuel economy from 28 to 35 mpg, 
because of uncertainty and loss aversion, turns out to have a value of 
^$30 (Greene, German and Delucchi, 2007). To the typical consumer, 
there is little reason to calculate the value of increased fuel 
economy, and no responsible automobile manufacturer would spend 
billions of dollars to retool and redesign its product lines to provide 
fuel economy for which consumers are not willing to pay.

[GRAPHIC] [TIFF OMITTED] T3583.094

    This is why the world's major economies, the European Union, Japan, 
China, Canada and the United States, even those with fuel prices 
substantially higher than the U.S., have all implemented fuel economy 
standards for light-duty vehicles (An et al., 2007). Like the markets 
for energy efficiency in other durable consumer goods such as 
refrigerators or air conditioners, the market for automotive fuel 
economy is not efficient. As in these other markets, consumers do not 
fully value the savings fuel economy improvements provide over the 
lifetime of a vehicle. Because car buyers are generally not willing to 
pay the full value of fuel economy improvements, manufacturers do not 
provide them.
    Fortunately, fuel economy standards work (Greene, 1998). Past fuel 
economy standards raised the fuel economy of U.S. light-duty vehicles 
by 50% (figure 4.) saving U.S. motorists approximately 60 billion 
gallons of fuel in 2005 (figure 5). Fuel economy standards are not the 
only policy that can correct the fuel economy market failure. A market-
based policy, called ``feebates'' also has great promise (Greene, et 
al., 2006). A feebate system would reward vehicles with greenhouse gas 
emissions below a target fuel consumption (gallons per mile) value and 
charge a fee to vehicles above it. The amount of the rebate or fee 
would depend on the amount by which the vehicle's fuel consumption 
deviated from the target level. The target itself can be a function of 
vehicle attributes, such as the NHTSA's footprint metric. A significant 
advantage of feebates over fuel economy standards is that they provide 
a continuing incentive to develop and implement advanced fuel economy 
technology.

[GRAPHIC] [TIFF OMITTED] T3583.095

    Medium and heavy trucks and buses account for 20% of 
transportation's greenhouse gas emissions (EPA, 2007, table 2-17). In 
the past, we have assumed that these markets do function efficiently 
and that there is no need for heavy vehicle fuel economy standards. The 
Japanese government, directly challenging that assumption, set weight-
based fuel economy standards for heavy trucks in March 2006 (Goto, 
2007). The standards call for an average 12% increase in new heavy 
truck fuel economy over the 2002 level by 2015. In my opinion, we 
should investigate this option, as well. Significant energy efficiency 
improvements are also possible in air travel, rail and shipping. 
According to the International Air Transport Association aircraft 
CO2 emissions could be reduced by 12% through improved air 
traffic management, and by 6% through operational improvements that 
could be made by airlines and airports (JITI, 2007). The Advisory 
Council for Aeronautics Research in Europe has set a goal of reducing 
the fuel consumption of new commercial aircraft by 50% by 2020 (JITI, 
2007).

               LAND USE AND TRANSPORTATION INFRASTRUCTURE

    Another important reason we should not expect a cap-and-trade 
policy alone to bring about an efficient reduction in transportation 
GHG emissions is the central role that local, state and national 
governments play in providing and operating transportation 
infrastructure and influencing development. The geographic distribution 
of people and places, especially the density of development, strongly 
influences the demand for transportation. The way settlements are 
designed--whether neighborhoods have sidewalks and bikepaths, whether 
homes are within walking distance of shops or public transportation--
influences both the amount of travel and the modes chosen. To have the 
greatest beneficial impact on travel in metropolitan areas, development 
policies should be coordinated with investments in public 
transportation. Changes in the spatial structure of the built 
environment take time but can pay large dividends. Based on a review of 
the literature, it appears that vehicle travel could be reduced by 
about 5% in 10 years and by 10% in 25 years, versus what it would 
otherwise have been (Greene and Schafer, 2003). Given more time, even 
greater impacts should be achievable.

                            LOW CARBON FUELS

    How strongly the cap-and-trade policy will affect the carbon 
content of transportation fuels is not yet clear. Without a doubt, the 
GHG permit price will provide an economic incentive to reduce the 
carbon content of transportation fuels. However, especially in the 
early years, permit prices may not be sufficient to cause significant 
reductions, nor will they reflect the need of the nation to reduce its 
dependence on petroleum.
    In 2006, the U.S. used 5.5 billion gallons of fuel ethanol, more 
than a three-fold increase over the year 2001. Still, ethanol supplied 
only 2.5% as much energy for transportation as gasoline. The Renewable 
Fuels Standard calls for a further increase in renewable fuel use to 
7.5 billion gallons by 2012, although the EPA projects that renewable 
fuel use will exceed 11 billion gallons in that year (EPA, 2007c). But 
the greenhouse gas impacts of renewable fuels vary greatly depending on 
precisely how they are produced and the feedstocks used (Farrell et 
al., 2006). Biofuels unquestionably have a role to play in reducing GHG 
emissions, as well as U.S. oil dependence. However, the best strategy 
for using biomass to power transportation vehicles is not yet clear. In 
view of that, a low carbon fuels standard appears to be a better option 
than a renewable fuels mandate. The advantage of a low carbon fuels 
standard is that it does not dictate to fuel suppliers how they should 
reduce the fossil carbon content of their fuels. Instead, it allows 
them to use their ingenuity to find the most economically efficient 
solution.

                        RESEARCH AND DEVELOPMENT

    In the future, much greater reductions in emissions could be 
achieved with advanced technologies. Researchers at the Massachusetts 
Institute of Technology's Sloan Automotive Laboratory have estimated 
that by 2030 advanced internal combustion engine vehicles with the same 
size and performance as model year 2005 vehicles could achieve 80% 
better fuel economy (Kasseris and Heywood, 2007). MIT researchers also 
estimate that advanced hybrids could achieve three times the miles per 
gallon of today's internal combustion engine vehicles (Kromer and 
Heywood, 2007) (Figure 7). Beyond 2030, when our electricity sector is 
substantially de-carbonized, plug in hybrid vehicles could further 
reduce GHG emissions from motor vehicles. If carbon capture and storage 
is successful, hydrogen fuel cell vehicles may someday drive motor 
vehicle GHG emissions to zero. None of these technologies is ready for 
commercialization today. Substantial investments in research and 
development are necessary for reductions in transportation's GHG 
emissions of 50% to 80% over current levels to be achievable by 2050.

[GRAPHIC] [TIFF OMITTED] T3583.097

                        CONCLUDING OBSERVATIONS

    Creating an economy-wide price signal to reduce greenhouse gas 
emissions, as a cap-and-trade system will do, is the cornerstone of a 
comprehensive climate change strategy. However, cap-and-trade is not a 
sufficient policy for the transportation sector. An efficient response 
from transportation will be hindered by deficiencies in the market for 
fuel economy, together with the central role of land development 
policies and transportation infrastructure investments in driving 
demand for transportation. Fuel economy policy is essential. 
Intelligent land use and infrastructure policies that enhance the 
attractiveness of walking, biking, and public transport can also make 
an important and potentially critical difference by 2050. At present, 
it is not known how effective a cap-and trade system can be in reducing 
the carbon content of transportation fuels. Especially in the early 
years, a low carbon fuel standard may be needed. Ultimately, 
significant technological advances will be required if transportation's 
GHG emissions are to be reduced by 50% to 80% over current levels by 
2050.
    Thank you for the opportunity to present my views on this 
enormously important legislation.
References
    1. An, F., D. Gordon, H. He, D. Kodjak and D. Rutherford, 2007. 
``Passenger Vehicle Greenhouse Gas and Fuel Economy Standards: A Global 
Update'', The International Council on Clean Transportation, 
Washington, D.C., July.
    2. Davis, S.C. and S.W. Diegel, 2007. Transportation Energy Data 
Book Edition 26, ORNL 6978, Oak Ridge National Laboratory, Oak Ridge, 
Tennessee.
    3. Energy Information Administration (EIA), 2007. International 
Energy Annual 2005, table H.1CO2, posted September 18, 2007 
at http://www.eia.doe.gov/pub/international/iealf/
tableh1CO2.xls, U.S. Department of Energy, Washington, D.C.
    4. Energy Information Administration, 2006. ``Energy Market Impacts 
of Alternative Greenhouse Gas Intensity Reduction Goals'', SR/OIAF/
2006-01, March 2006, Washington, D.C.
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and D.M. Kammen, 2006. ``Ethanol Can Contribute to Energy and 
Environmental Goals'', Science, vol. 311, pp. 506-508.
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Traffic Safety and Environment Laboratory, Japan, presented at the 
International Workshop: ``Fuel Efficiency Policies for Heavy Duty 
Vehicles'', International Energy Agency and International Transport 
Forum, Paris, June 21-22, 2007.
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The Case for Market Failure'', presented at the 11th Annual Asilomar 
Conference on Sustainable Transportation, Pacific Grove, California, 
available from the lead author, National Transporation Research Center, 
Oak Ridge National Laboratory, Oak Ridge, Tennessee.
    8. Greene, D.L., P.D. Patterson, M. Singh and J. Li, 2005. 
``Feebates, rebates and gas-guzzler taxes: a study of incentives for 
increased fuel economy'', Energy Policy, vol. 33, no. 6, pp. 757-776
    9. Greene, D.L. and A. Schafer, 2003. ``Reducing Greenhouse Gas 
Emissions from U.S. Transportation'', Pew Center on Global Climate 
Change, Arlington, Virginia.
    10. Greene, D.L., 1998. ``Why CAFE Worked'', Energy Policy, vol. 
26, no. 8, pp. 595-614.
    11. Hughes, J.E., C.R. Knittel and D. Sperling, 2007. ``Evidence of 
a Shift in the Short-run Price Elasticity of Gasoline Demand'', 
presented at the 86th Annual Meeting of the Transportation Research 
Board, National Research Council, January 21-25, Washington, D.C.
    12. Japan International Transport Institute (JITI), 2007. ``Issues 
Concerning the Reduction of Carbon Dioxide in International Aviation'', 
Washington, D.C., August.
    13. Kasseris, E.P. and J.B. Heywood, 2007. ``Comparative Analysis 
of Automotive Powertrain Choices for the Next 25 Years'', SAE Technical 
Paper Series, No. 2007-01-1605, Society of Automotive Engineers, 
Warrendale, PA.
    14. Kromer, M.A. and J.B. Heywood, 2007. ``Electric Powertrains: 
Opportunities and Challenges in the U.S. Light-Duty Vehicle Fleet'', 
Pub. No. LFEE 2007-02 RP, Sloan Automotive Laboratory, Massachusettes 
Institute of Technology, Cambridge, MA.
    15. National Research Council (NRC), 2002. Effectiveness and Impact 
of Corporate Average Fuel Economy (CAFE) Standards, National Academies 
Press, Washington, D.C.
    16. Opinion Research Corporation, 2007. ``CARAVAN ORC Study 716159 
for the National Renewable Energy Laboratory, Princeton, New Jersey, 
April 13, 2007.
    17. Opinion Research Corporation, 2004. ``CARAVAN ORC Study 713218 
for the National Renewable Energy Laboratory, Princeton, New Jersey, 
May 20, 2007.
    18. Small, K.A. and K. Van Dender, 2007. ``Fuel Efficiency and 
Motor Vehicle Travel: The Declining Rebound Effect'', The Energy 
Journal, vol. 28, no. 1, pp. 25-51.
    19. U.S. Environmental Protection Agency (EPA), 2007a. Inventory of 
U.S. Greenhouse Gas Emissions and Sinks: 1990-2005, Office of 
Atmospheric Programs, EPA 430-R-07-002, Washington, D.C., April.
    20. U.S. Environmental Protection Agency (EPA), 2007b. ``Light-Duty 
Automotive Technology and Fuel Economy Trends: 1975 through 2007'', 
EPA420-R-07-008, Office of Transportation and Air Quality, Ann Arbor, 
Michigan, September.
    21. U.S. Environmental Protection Agency (EPA), 2007c. ``Renewable 
Fuel Standard Program'', Office of Transportaton and Air Quality, 
http://www.epa.gov/otaq/renewablefuels/420f07019.htm
                                 ______
                                 
  Responses by David Green to Additional Questions from Senator Inhofe

    Question 1. You touched on this in your written testimony, but can 
you elaborate on why a low carbon fuels standard is a better option 
than a renewable fuels mandate. Isn't it true that a low carbon fuels 
standard allows fuel suppliers to find the most economically efficient 
solution rather than mandating that they use biofuels?
    Response. A low carbon fuels standard allows fuel suppliers to find 
the most economically efficient solution and also creates an incentive 
for innovation. The term ``carbon'' in ``low carbon fuels standard'' 
(LCFS) is shorthand for lifecycle global warming impact. Thus, the 
first advantage of the LCFS for addressing global climate change is 
that it directly targets the environmental impact of greenhouse gas 
emissions. Compliance with a renewable fuels mandate is not measured by 
the reduction in global warming impact but rather by the quantity of 
biofuel sold. Its greenhouse gas mitigation benefits therefore depend 
on the tendency of biofuels to have lower lifecycle, or well-to-wheel, 
greenhouse gas emissions than the petroleum fuels they replace. As the 
answer to question 2 clearly shows, the greenhouse gas impacts of 
biofuels depend strongly on the feedstocks from which, and production 
processes by which they are produced. As a result, the greenhouse gas 
mitigation benefits of a renewable fuels standard can range from a 
little to a lot.
    The second advantage of a LCFS is that it is a performance standard 
and does not mandate a particular technological solution. It requires 
only that lifecycle global warming impact be reduced; it does not 
specify how that must be accomplished. A renewable fuels standard 
limits the range of options available to fuel suppliers to renewable 
fuels. Renewable fuels could turn out to be the best option, but if 
this were the case then the result of the LCFS would be no different 
from the renewable fuels standard. However, the LCFS allows fuel 
suppliers the opportunity to invent or discover a lower cost 
alternative that accomplishes the same result. In terms of economic 
efficiency, the LCFS will achieve a given reduction in greenhouse gas 
emissions as efficiently, or more efficiently than the renewable fuels 
standard. By allowing the widest possible range of responses, the LCFS 
also creates a greater incentive to find innovative solutions.

    Question 2. Do renewable fuels have greenhouse gas emissions? Does 
this vary based on how they are produced and the feedstocks used? How 
so?
    Response. Renewable fuels can produce net lifecycle greenhouse gas 
emissions depending on the feedstock from which they are produced and 
the process used to convert the feedstock into liquid fuel. Different 
methods of cultivating biomass generate different amounts of greenhouse 
gases. Use of nitrogen fertilizer and tilling, harvesting and 
transporting biomass with machinery powered by petroleum fuel are 
significant sources of lifecycle greenhouse gas emissions in feedstock 
production. Use of fossil energy in conversion processes can also be a 
significant source of greenhouse gas emissions. The table shown below 
is taken from the technical analysis supporting California's low carbon 
fuels standard (Farrell & Sperling, 2007) and is based on what I 
believe to be the two most authoritative lifecycle greenhouse gas 
models for the United States. The estimates based on Argonne National 
Laboratories' GREET model indicate that ethanol produced from corn 
using the corn stover as a source of fuel in a dry milling process 
produces only a little more than half the lifecycle greenhouse gas 
emissions of California reformulated gasoline. On the other hand, if 
ethanol is produced from corn using coal for energy, the lifecycle 
emissions are more than 20% higher than California reformulated 
gasoline. The same model indicates negative greenhouse gas emissions 
for diesel produced via gasification of poplar trees produced in 
California and fuel synthesis via the Fischer-Tropsch process. There 
are sometimes important differences between the estimates produced by 
the two models. For example, the GREET model estimates a two thirds 
reduction in lifecycle greenhouse gas emissions from the production of 
biodiesel from soybeans, while the LEM model estimates more than a 
doubling of lifecycle greenhouse gas emissions. Such differences are 
attributable to differing assumptions, especially with respect to 
indirect impacts on land uses. There is still a great deal to be 
learned about the full lifecycle impacts of biofuel production, yet 
there is no doubt that renewable fuels can produce very significant 
greenhouse gas emissions and that the quantities produced are very 
sensitive to feedstocks and production methods.

[GRAPHIC] [TIFF OMITTED] T3583.101

    Question 3. Studies have shown that modest improvements to traffic 
flow would reduce carbon dioxide emissions by as much as 77 percent and 
conserve more than 40 billion tons of fuel over a 20-year period (stats 
from letter from transportation construction coalition). What does, or 
should this bill do to alleviate congestion on the highways?

    Response. I have not read the study on which these estimates are 
based but I am extremely skeptical that a modest improvement in traffic 
flow could reduce carbon emissions by anything close to 77%. On the 
other hand, 40 billion gallons of fuel over a 20-year period is an 
average of 2 billion gallons per year, on the order of 1% of total 
motor fuel use on U.S. highways (USDOT, FHWA, table VM-1, 2005). An 
impact on the order of 1% seems far more plausible to me as an 
assessment of the potential for congestion mitigation to reduce fuel 
use and thereby reduce greenhouse gas emissions. In my opinion, this 
bill should not concern itself with traffic congestion mitigation. 
Traffic congestion is a very significant problem for transportation and 
has serious economic impacts. However, in my opinion, it should be 
addressed directly via other policies such as improving traffic 
management, congestion pricing, investing in capacity expansion and 
alternative transport modes, land use planning and urban design.
    I hope that my responses have adequately and appropriately 
addressed your questions. Please accept my thanks for the important 
work you are doing and my very best wishes for a successful result.

                               REFERENCES

    1. Farrell, A.E. and D. Sperling, 2007. A Low-Carbon Fuel Standard 
for California, Part 1: Technical Analysis, UCD-ITS-RR-07-07, Institute 
of Transportation Studies, University of California, Davis, August 1.
    2. U.S. Department of Transportation, Federal Highway 
Administration, 2006. Highway Statistics 2005, FHWA-PL-06-009, 
Washington, DC.

    Senator Boxer. Thanks very much, Dr. Greene, for that 
thoughtful testimony. I appreciate it.
    Now we go to Robert Baugh, who is the executive director of 
the Industrial Union Council of the AFL-CIO. We are very 
grateful that you are here and welcome your testimony now.

   STATEMENT OF ROBERT C. BAUGH, EXECUTIVE DIRECTOR, AFL-CIO 
 INDUSTRIAL UNION COUNCIL AND CHAIR, AFL-CIO ENERGY TASK FORCE

    Mr. Baugh. Thank you, Senator, we appreciate the 
opportunity to testify before the Committee today.
    The AFL-CIO believes that taking action to address global 
warming and to achieve energy independence are mutually 
reinforcing goals for the Nation, and they are in the best 
interests of our economic, environmental and national security. 
We have participated actively in stakeholder discussions all 
the way through this process, and it led many of us to endorse 
another piece of legislation. When Senator Boxer empowered you 
and Senator Warner to move ahead, we actively and openly 
participated in the stakeholder process again around the 
creation of America's Climate Security Act. We share the belief 
in the Act that the legislation should achieve its purpose 
while preserving robust growth in the United States economy and 
avoiding the imposition of hardship on the United States 
citizens.
    I am here this morning to address five areas of the bill 
that we think could be improved to achieve that goal. First, 
the investment portfolio. We commend you, Senator Lieberman and 
Senator Warner, for the original draft of this legislation, 
which made the critical long-term commitments to technology 
development and deployment that are part of the key to solving 
our carbon footprint.
    Unfortunately, two pieces of the investment portfolio were 
severely undermined by the automobile and coal-related 
amendments adopted during the subcommittee markup. The AFL-CIO 
believes these amendments are counterproductive and actually 
undermine the technological transition this legislation is 
attempting to achieve. We encourage the Committee to return to 
the original language.
    Secondly, on the time lines and targets, we support 
realistic time lines and goals for the emissions reductions, 
but we are concerned that there continues to be a disconnect 
between the reduction targets and the actual development and 
deployment of new technology. This bill sets a 15 percent 
reduction of greenhouse gas emissions below 2005 levels by 
2020. This is prior to the anticipated commercial availability 
of a carbon capture and storage technologies. Similar 
deployment and developmental issues remain in the renewable 
side of the equation, too, to achieve these goals in such a 
short time period.
    And finally, this sets a standard 70 percent below the 2005 
levels by 2050. Previously, we had supported a 60 percent 
reduction, but tied to presidential reviews and the 
participation of the developing world in this process to solve 
this problem.
    On job creation, we believe that this legislation can serve 
a dual purpose: environmental protection and economic 
development. The legislation, though, needs to make this 
implicit idea in the bill very explicit. We urge the Committee 
to adopt language to direct the Climate Change Credit 
Corporation that the financial resources of the corporation 
shall be dedicated to domestic investments. We think the 
findings section of the bill and the purpose section of the 
bill should strengthen that and reflect the same idea that we 
are reinvesting these monies to recycle these dollars in the 
American economy.
    The cost control and market system. The AFL-CIO supports a 
limited market approach to cap and trade with price control 
mechanisms that prevent serious long-term damage to the 
economy. The Carbon Market Efficiency Board has a cost control 
mechanism, but frankly, we believe this works at cross purposes 
with the way the market system is actually being set up. The 
legislation's open and unlimited trading of allowances and the 
ability to bank them in perpetuity leaves the system open to 
predatory and speculative trading practices. The hoarding of 
allowances will fuel volatile pricing and a market will result 
in damaging increases in prices to consumers, industry and 
utilities.
    The cost control mechanism in S. 2191 may be triggered 
after 180 days. By that point, when people have to purchase 
allowances annually, the damage will have been done, it is too 
late. We think that the mechanism of borrowing against the 
future is not necessarily effective and we believe we should 
explore other tools to do that. We should not allow the banking 
of allowances in perpetuity. We should prohibit a wide open 
market system that allows speculators to play.
    We support the international provisions. We have been very 
clear on that. We think they can be strengthened. The 2020 date 
was arbitrary. And it can be moved back. Upon enactment of this 
bill, the President should engage in negotiations with the 
developing world about participation in this process. As we 
employ the regulations and open the market system, you can then 
actually take action and it should be triggered at that point.
    Finally, the offsets in international allowances portion, 
up to 30 percent of the allowances that a firm is supposed to 
be using can come from international allowances and offsets. We 
think this number is too high, and in fact, may act as a 
disincentive for making the investments in the transition and 
transformational technologies that need to be made. We suggest 
that the Committee look at this. These figures should be lower.
    And we have a second concern with offsets. It is very easy 
to pay, allow for offsets for a business activity that would 
occur as a natural course of doing business. In my longer 
testimony, I have used the forest products industry as an 
example. But we are very concerned about the legitimacy of 
offsets that actually do reduce greenhouse gases and not pay 
for activity that would happen as a normal course of business 
or as covered by law.
    We look forward to working with the Congress and with this 
Committee to achieve legislation that will result in a cleaner 
planet, greater energy efficiency and the revitalization of our 
manufacturing base. Thank you.
    [The prepared statement of Mr. Baugh follows:]

  Statement of Robert C. Baugh, Executive Director AFL-CIO Industrial 
           Union Council and Chair AFL-CIO Energy Task Force

    Chairman Boxer, on behalf of the 9 million members of the AFL-CIO, 
I want to thank you and the members of the Environment and Public Works 
Committee for the opportunity to testify this afternoon on America's 
Climate Security Act (S. 2191).
    America needs an energy policy for the twenty first century that 
will result in a cleaner planet, greater energy efficiency and the 
revitalization of our manufacturing base. It is an opportunity for our 
nation to prove that economic development and environmental progress 
can and should go hand-in-hand. We believe that taking action to 
address global warming and energy independence are mutually reinforcing 
goals that are in the best interest of the nation's economic, 
environmental and national security.
    The AFL-CIO has actively participated in various stakeholder 
meetings with members of both the House of Representatives and the 
Senate that have led to legislative proposals that the AFL-CIO and many 
of our affiliates have supported. We have also participated openly and 
honestly in the stakeholder meetings that resulted in S. 2191, 
America's Climate Security Act. It is our intention to continue working 
with the members of this committee to develop ``cap-and-trade'' 
legislation that addresses the environmental health of the planet while 
assuring that good paying jobs are not sacrificed to overseas 
competition.
    The AFL-CIO takes to heart the statement in S. 2191 that this 
legislation should achieve its purpose ``while preserving robust growth 
in the United States economy and avoiding the imposition of hardship on 
United States citizens.'' Today we wish to recognize the aspects of S. 
2191 that the AFL-CIO supports and to offer our thoughts on how to 
strengthen the legislation.

                          INVESTMENT PORTFOLIO

    We appreciate the fact that the original draft of S. 2191 
incorporated many of our investment recommendations such as the 
inclusion of bonus allowances to promote early technology deployment 
and the early auction of allowances for quick investment into research 
and development. We commend Senator Lieberman and Senator Warner for 
their original draft of S. 2191 which made critical long term 
commitments to technology development and deployment with an investment 
portfolio that includes renewable energy supplies, appliance 
efficiency, biomass, advanced coal and sequestration program, and the 
advanced technology vehicles manufacturing incentive program.
    Unfortunately, the latter two pieces of the investment portfolio 
were severely undermined by automobile and coal-related amendments 
adopted during the subcommittee markup. The AFL-CIO believes these 
amendments are counterproductive and actually undermine the 
technological transition this legislation is attempting to achieve. We 
encourage the committee to return to the original language

                         TIMELINES AND TARGETS

    The AFL-CIO supports realistic timelines and goals for emission 
reduction. We are concerned that there is a disconnect between the 
reduction targets and the actual development and deployment of new 
technology. S2191 set a 15 percent reduction of greenhouse gas 
emissions below 2005 levels by 2020. This is prior to the anticipated 
commercial availability of carbon capture and storage technologies. 
Similarly, renewable technologies have their own set of technology 
development and deployment issues that seriously call into question the 
ability to meet the reduction levels without drastic economic harm.
    S. 2191 also requires a 70 percent national emission reduction 
below 2005 levels by 2050. The AFL-CIO has supported a 60 percent or 
greater reduction by 2050 that was tied to a Presidential review of the 
participation of the developing nations like China, India, Brazil, etc 
in a global climate protection framework. We urge the Committee to also 
make this linkage and include five-year review requirement.

                              JOB CREATION

    We believe that S. 2191 can serve a dual purpose: environmental 
protection and economic development. The legislation needs to make 
explicit the implicit economic development goals embodied in the bill's 
investment strategy and its stated purpose of ``preserving robust 
growth.'' It is in the national interest to assure that the investment 
dollars generated by this legislation are reinvested in our domestic 
economy.
    We urge the Committee to adopt language to direct the Climate 
Change Credit Corporation that ``the financial resources of the 
corporation shall be dedicated to domestic investments. In addition, we 
suggest that ``domestic economic development'' be identified as a 
finding of Congress and that domestic investments in technology 
development, production and construction'' be identified as a purpose 
of the legislation.

                   COST CONTROL AND THE MARKET SYSTEM

    The AFL-CIO supports a limited market approach to cap and trade, 
with regulatory mechanisms that act as a price control to prevent any 
serious long-term damage to the economy. The Carbon Market Efficiency 
Board (CMEB) has a cost control mechanism, but we believe its market 
intervention tool and its open market system work at cross-purposes.
    The CMEB is empowered to take action after prolonged allowance 
price hikes of 180 or more days but that may be too late because firms 
are required to obtain and use allowances annually. In 180 days the 
irreparable economic damage will already have been done. Additionally, 
the intervention tool allowing the issuance of ``future'' allowances to 
drop prices seems to be of limited value given how this market seems to 
be structured.
    S. 2191's open and ``unlimited trading'' of allowances and the 
ability to bank them in perpetuity leaves the system open to predatory 
and speculative trading practices and the hoarding of allowances that 
will fuel volatile pricing in the market. This will have a detrimental 
pricing impact on the public, utilities sector, and energy-intensive 
industries.
    To address these concerns, the AFL-CIO recommends that the trading 
of allowances be regulated and restricted. Market participation should 
be limited to firms that intend to use the allowances. The banking of 
allowances be limited by setting a ``time certain'' by which they must 
be used or expire. These steps will help create a more certain less 
speculative trading environment. In addition, the CMEB market 
intervention timeline should be shortened and additional intervention 
tools considered.

                        INTERNATIONAL PROVISIONS

    The AFL-CIO endorses S. 2191's inclusion of international language 
which will help preserve American jobs while taking an important step 
forward to engaging the developing world in seeking a solution to 
global warming. However, modest modifications to the international 
timeline and implementation process would strengthen this section.
    Implementation can and should take place far sooner than 2020. The 
bill should require the President to open negotiations immediately upon 
enactment. Once the regulations are in place and the cap and trade 
program is in operation for two to three years, then the international 
action can be implemented. This last step should be an administrative 
action, not something subject to presidential waiver.

                  OFFSETS AND INTERNATIONAL ALLOWANCES

    We are concerned about the use of offsets and international 
allowances; the ability to monitor their legitimacy; and ways in which 
they could undermine domestic investment in industry. Under S. 2191, 
for up to 30 percent of the annual allowances a firm must submit be 
comprised of offsets (15 percent) and internationally purchased 
allowances (15 percent). This could prove to be a disincentive to firm 
investments in transformational technology.
    The AFL-CIO believes that the S. 2191 should either limit the use 
of offsets and international allowances in combination, or simply to 
lower the amount available. We also have a related concern over the 
possibility of double dipping, whereby allowances are granted for 
offset activity that would have been done anyway as a course of law, 
tax policy and/or business practice. This does not add to greenhouse 
gas reduction and should be prohibited.
    We look forward to working with Congress to achieve an energy 
policy for the twenty-first century that will result in a cleaner 
planet, greater energy efficiency, and the revitalization of our 
manufacturing base.
    An appendix accompanies this testimony that provides additional 
information about our testimony.
                                 ______
                                 
  Appendix: AFL-CIO Recommendations for America's Climate Security Act

                        THE INVESTMENT PORTFOLIO

Advanced Technology Vehicles Manufacturing Incentive Program
    As previously indicated, the AFL-CIO strongly supports the thrust 
of the Advanced Technology Vehicles Manufacturing Incentive Program 
created under S. 2191. This program can help to accelerate the 
introduction of advanced technology vehicles, and thus to help our 
country make major strides in reducing greenhouse gas emissions and our 
dependence on foreign oil. At the same time, it can ensure that the 
vehicles of the future are built in this country, thereby creating tens 
of thousands of jobs for American workers.
    However, we believe the language in these provisions needs to be 
improved in several respects. First, the language in Section 4405(b)(1) 
should be modified to clarify that awards under the program can only be 
made to manufacturers and components suppliers for re-equipping or 
expanding a manufacturing facility ``in the United States'' to produce 
qualifying advanced technology vehicles and components. Obviously, we 
should not be providing funds to subsidize investment in manufacturing 
facilities in other countries.
    Second, during the Subcommittee markup, an amendment by Sen. 
Sanders was adopted by voice vote that requires all qualifying advanced 
technology vehicles to meet a 35 miles per gallon standard to be 
eligible for assistance under this program. Unfortunately, this 
amendment totally eviscerates the program. In order to make meaningful 
progress in reducing our dependence on foreign oil and greenhouse gas 
emissions, the auto industry needs to improve fuel economy across the 
entire spectrum of vehicles. It needs to put hybrid and advanced diesel 
technology into pickups, sports utility vehicles (SUVs), minivans, and 
larger passenger cars, as well as smaller vehicles like the Prius.
    Indeed, some of the greatest gains in reduced oil consumption and 
greenhouse gas emissions can come from improving the fuel economy of 
these bigger vehicles. However, because many of these vehicles would 
still be below the 35 miles per gallon level, even with the hybrid or 
diesel advanced technology, the Sanders amendment would effectively 
exclude them from being able to get any assistance under the 
manufacturing program. As a result, this would greatly reduce the 
effectiveness of the program in achieving the environmental goals, as 
well as its ability to generate jobs for American workers.
    It is also important to note that the Sanders amendment directly 
conflicts with the CAFE provisions that were approved earlier this year 
by the Senate in the energy legislation, and that were supported by 
environmental groups. Those CAFE provisions specified that the fleet of 
vehicles for the entire industry must meet a 35 miles per gallon 
standard, not that each and every vehicle must meet this standard. 
Indeed, under the reformed, attribute-based CAFE system approved by the 
Senate, it was expressly recognized that different sizes and types of 
vehicles would have to achieve different fuel economy levels, depending 
on their particular attributes. Unfortunately, the Sanders amendment 
departs from this approach, and instead imposes a rigid, one-size-fits-
all mandate on all vehicles.
    Finally, Section 4405(c)(1) specifies that the manufacturing 
incentive program only applies to facilities and equipment placed in 
service before January 1, 2016. In our judgment, this time period is 
far too restrictive, especially since the CAFE provisions previously 
approved by the Senate have a far longer time period, stretching to 
2020 and beyond.

Subcommittee Amendment: Coal Preference
    We are concerned about the amendment approved by the Subcommittee 
concerning preferences for ``low rank'' coals with a heat content less 
than 10,000 BTU/pound. There should be no distinction among coal types 
in allowance allocations to electric generating units, or the 
distribution of auction revenues as incentives to promote clean coal 
technologies. This sets up a regional preference for coal.
    This was a major flaw in the EPA's Clean Air Mercury Rule, which 
awarded extra allowances to low-rank western lignite and sub-bituminous 
coals, despite a growing body of evidence that controlling mercury from 
these coals costs substantially less than from eastern bituminous 
coals. While there are minor differences in the CO2 
emissions of coals of different rank, CO2 emissions can be 
captured by a variety of emerging control technologies potentially 
applicable to all coal types at both new and existing units.
    We believe that all coals should compete for incentives on a level 
playing field without regional preferences or exemptions. The bill 
should remain as originally drafted.

                         TIMELINES AND TARGETS

    Our most serious concern is the magnitude and timing of 2020 
reductions (15 percent below 2005) compared to Bingaman-Specter (2006 
levels). Reductions on the coal fired power generation will come from 
investments in increased efficiency in existing facilities, new IGCC 
(combined cycle technology that is only in the early developmental 
phase with a demonstration plant scheduled to be built in Ohio), and 
the development of carbon sequestration technology. Full development of 
these latter technologies will take a decade, and deployment to scale 
will take decades more.
    There is insufficient time to develop and demonstrate CCS 
technology at commercial scale. 2020 is effectively 5 years from now in 
terms of corporate planning for investments. Meeting 2006 levels by 
2020 is a major reduction given 1 percent population growth and 2-3 
percent GDP growth. The bill suggests that the annual reviews will 
allow adjustments of the targets, but experience with the Clean Air Act 
does not support this view.

                              JOB CREATION

Economic Development and Domestic Investment
    This legislation does have a dual purpose: environmental protection 
and economic development. The legislation needs to make explicit the 
implicit economic development goals embodied in the bill's investment 
strategy and its stated purpose of ``preserving robust growth.'' We 
believe that this is in the national interest, and it is the intent of 
Congress to assure that investment dollars generated by this 
legislation recirculate in our domestic economy. The legislation needs 
to say so.
    To fulfill its dual purpose, this legislation needs to promote 
domestic investment as an economic development strategy that runs from 
R&D to production and construction. The findings, purpose, and Climate 
Change Corp. sections need to be explicit about this intent. For 
example:
     Finding: ``The Congress finds prompt and decisive domestic 
climate change investments are an unprecedented economic development 
opportunity for the nation.
     Purpose: ``to accomplish that purpose by making climate 
change investments in domestic technology development, production, and 
construction.''
     Climate Change Credit Corporation: ``the financial 
resources of the corporation shall be dedicated to domestic investments 
so as to assure that the nation derives the maximum economic 
development return from those investments;

           Climate Change Credit Corporation domestic 
        investment program will be designed to capture intellectual 
        property, encourage industry development, and to retain and 
        create new jobs in production, construction and conservation of 
        energy.
           Existing facilities and populated areas shall be 
        considered a strategic priority for manufacturing-related 
        investments.
           Energy incentives and investments by the federal 
        government must not encourage off-shoring of manufacturing or 
        the sale of assets.
           The Climate Change Credit Corporation will report to 
        Congress on an annual basis about the domestic economic and 
        environmental impact of its investments.''

                    COST CONTROL AND MARKET SYSTEMS

Safety Valves and Market Intervention
    The AFL-CIO supported the cost control mechanism (the Technology 
Accelerator Payment) in the Bingaman-Specter bill because it provides 
pricing certainty for long-term investment decisions, assures a modest 
effect on fuel and electricity prices, and avoids short-term price 
spikes that can lead to fuel-switching. In this case, the legislation 
also sets a beginning price of $12 per ton that rises 5 percent a year 
above inflation. We are open to discussing alternative levels of a 
safety valve price.
    The proposed Carbon Market Efficiency Board (CMEB) also attempts to 
act as a cost control mechanism, but its open market system undermines 
this approach and its intervention tool is at best slow and of 
questionable value. The CMEB is empowered to act in cases where there 
are prolonged price hikes in allowances (180 or more days) that 
threaten economic damage to the nation. The CMEB will also have to 
determine what that ``sweet spot'' (price) is. With limited allowances 
that firms need to use annually, in 180 days the damage will already 
have been done. The issuance of ``future'' allowances to drop prices 
seems to be of dubious value and of real concern given how this market 
is structured.
    Allowance borrowing from the future is not likely to work due to 
uncertainty about future allowance prices. With a $10 current price, 
utilities would not borrow 10 years ahead unless there were certainties 
that prices would not be above $25 at that time (using a typical 
utility weighted average cost of capital of 9.5 per cent).

Cap and Trade and the Open Market
    We remain deeply troubled with a simple market-only approach. Today 
the so-called market has left the nation in a housing crisis and the 
world capital markets in turmoil. The nation is still dealing with the 
fallout of Enron and the deregulation of the utility industry, which 
will make any carbon emission legislation even more difficult to 
administer. We support a limited market approach, with regulatory 
mechanisms that act as a safety valve to prevent any serious long-term 
damage to the economy. If the point of a cap and trade system is to 
move firms and utilities to change domestic behavior, then we need to 
be sure this market mechanism does that.
    The open and ``unlimited trading'' of allowances means that anyone, 
not just firms that need to use them, can buy allowances from a limited 
and declining pool. In addition, purchasers are allowed to bank these 
allowances in perpetuity. This is not the stock market or a commodities 
market, nor should it be treated as such. The open access to 
allowances, and the banking of allowances, lend themselves to the kind 
of predatory and speculative behavior that leads to hoarding and to the 
creation of carbon billionaires. This would have a detrimental pricing 
impact on the public and the utilities and energy-intensive industries.
    Imagine a scenario in which a major nation with over a trillion 
dollars in accumulated trade surpluses decides to create a carbon 
allowance shortage on the U.S. market to make our domestic firms less 
competitive and push them out of business. Or imagine a major hedge 
fund trying to corner the carbon market and to extract royalties from 
domestic industry. With limited allowances, one would only have to 
capture a limited portion to have control. That is not the intent of 
this legislation. This needs to be regulated:

           The trading of allowances should be regulated and 
        should be done in such a way that it assures that allowances 
        that are sold are used. In other words, market participants 
        should be limited to firms that intend to use the allowances. 
        With a declining pool of allowances, available prices will rise 
        but not be artificially inflated by speculators.
           The banking of allowance for an unlimited time 
        raises the same concerns about hoarding and predatory behavior 
        that leads to price spikes and artificially elevated prices. If 
        the point is to use a diminishing allowance system to effect 
        real behavior change and to have a functioning market that 
        fairly sets prices, then allowances need to have a deadline by 
        which they must be used or expire.

                        INTERNATIONAL PROVISIONS

    The AFL-CIO welcomes the inclusion of the Bingaman-Specter 
provisions on international trade within ACSA, providing a means to 
impose emission offset requirements on imported goods from major 
international trading partners that have not taken comparable action to 
protect the global climate. However, the language needs refinement. 
Implementation can and should take place far sooner than 2020.
    The bill should require the President to open negotiations 
immediately upon passage. Once the regulations are in place and the cap 
and trade is in operation for two to three years, the international 
action can be implemented. This last step should be an administrative 
action, not something subject to presidential waiver.
    In addition, the timetable and goals should be tied to the 
international language in S. 2191. It is now even more apparent than it 
was when the Kyoto Accord was negotiated that taking unilateral steps 
is not enough to engage the developing world. The Committee should 
include the five-year review provision included in Section 501 of S. 
1766, with its requirement for presidential reviews and recommendations 
related to progress in international negotiations seeking commitments 
from major trading partners:
    Presidential Recommendations to Congress.--Subsection (b) provides 
that, during a period between April 15, 2017 and May 31, 2017, and 
every 5 years thereafter, the President shall submit to the House of 
Representatives and the Senate a report describing any recommendation 
of the President with respect to changes in the Act. The President 
shall make recommendations with respect to--
         Whether the U.S. should change the allowance amounts for 
        future allocation periods as necessary to ensure that the 
        United States is undertaking its equitable share of the 
        responsibility for reducing greenhouse gas emissions, and in 
        any case will reasonably lead the United States to reduce its 
        annual emissions to levels at least 60 percent below current 
        emission levels by 2050.

                  OFFSETS AND INTERNATIONAL ALLOWANCES

    We are concerned about the legitimate use of offsets and 
international allowances; the ability to monitor their legitimacy, 
especially in the international market; and ways in which they could 
undermine domestic investment in industry. This proposal allows for up 
to 30 percent of the annual allowances that a covered entity must 
submit to be comprised of offsets (15 percent) and internationally 
purchased allowances (15 percent).
    If the goal of this legislation is to change the behavior of 
domestic power producers and industry and to encourage the domestic 
investment needed to introduce new technology, this could prove to be a 
roadblock. One option is to limit their use in combination, or simply 
to lower the amount.
    The expanded forestry/agriculture allowances under S. 2191 raise a 
broader question over potential double dipping with later offset 
provisions in the bill. For example, Oregon and other states already 
provide tax incentives for tree planting. In addition, the wood 
products industry is under legal and business obligations to plant 
trees year round. Will the offset provisions doubly reward already-
existing behavior that has been backed by tax incentives or existing 
business imperatives? If a utility company helps underwrite a timber 
firm's required replanting of a logged area, could they then claim 
offset credits?
    This simple example shows how existing tax incentives and business 
requirements could be used to create offsets that do not provide real 
value added to the environment. Offsets should be the result of 
creating something new or in addition to what normally would have been 
done as a course of business. The ability to double dip should be 
prohibited.
                                 x_____
                                 
 Responses by Robert C. Baugh to Addition Questions from Senator Inhofe

    Question 1. Do you think the Carbon Market Efficiency Board can 
operate as a ``safety valve'' or cost control mechanism to protect the 
U.S. economy in time in the event of shocks to that economy created by 
the very system we have put in place?
    Response. As in prior legislation, the AFL-CIO strongly supports 
effective cost control mechanisms as a tool for avoiding shocks to the 
economy and proving pricing certainty for critical long-term private 
sector investment decisions. The cost control effectiveness of any 
oversight organization will be determined by its structure, governance 
and the tools it has to work with.
    The Carbon Market Efficiency Board (CMEB) is responsible for 
overseeing the market system and has been given limited market 
intervention tools. We believe the ``system'' and tools rather than 
reinforcing one another, actually work at cross-purposes. The 
legislation designs a trading system that provides open access to 
anyone and allows those buyers to bank their allowances in perpetuity. 
This is an open invitation to predatory behavior by speculators and 
hoarding of allowances that will drive price volatility.
    To combat the volatility, the CMEB is empowered to take action 
after prolonged allowance price hikes of 180 or more days, but that may 
be too late because firms are required to obtain and use allowances 
annually. In 180 days the irreparable economic damage will already have 
been done. Additionally, the intervention tool allowing the issuance of 
``future'' allowances to drop prices seems to be of limited value given 
how this market seems to be structured.
    To address these concerns, the AFL-CIO recommends that the trading 
of allowances be regulated and restricted. Market participation should 
be limited to firms that intend to use (not just buy and sell) the 
allowances. The banking of allowances should be limited by setting a 
``time certain'' by which they must be used or expire. These steps will 
help create a more certain less speculative trading environment. The 
CMEB market intervention timeline should be shortened and Congress 
should consider additional/stronger intervention tools.
    We are open to the consideration of any effective cost control 
mechanisms that will avoid serious shocks to the American economy. At 
the same time, we remain committed to an investment strategy in the 
transformational technologies needed to change our carbon footprint.

    Question 2. What are American workers and employers to do under 
this legislation when the technology that everyone is hoping for turns 
out not to be widely available on schedule but the stringent reduction 
requirements kick in.
    Response. The AFL-CIO supports realistic timelines and goals for 
emission reduction. As we testified before the committee, we are 
concerned that there is a disconnect between the reduction targets and 
the actual development and deployment of new technology. S. 2191 sets a 
15 percent reduction of greenhouse gas emissions below 2005 levels by 
2020. This is prior to the anticipated commercial availability of 
carbon capture and storage technologies. Similarly, renewable 
technologies have their own set of technology development and 
deployment issues that seriously call into question the ability to meet 
the reduction levels without drastic economic harm.
    The legislation does call for annual reviews of the standards that 
have been adopted, the status of efforts to meet the standards and the 
status of technology development and deployment needed to meet the 
timelines and empowers the EPA to change the standards. Unfortunately, 
that has not been our experience with the Clean Air Act. The reviews 
are important but not sufficient. We believe Congress should play a 
role in any review and/or revision process.
    In addition, American workers and employers must be engaged in this 
process. They should be represented on all the related agencies and 
organizations responsible for carrying out this legislation including 
the CMEB, Climate Change Corp., and EPA advisory bodies responsible for 
the reviews.
    In addition, S. 2191 also requires a 70 percent national emission 
reduction below 2005 levels by 2050. The AFL-CIO has supported a 60 
percent or greater reduction by 2050 that was tied to a Presidential 
review of the participation of the developing nations like China, 
India, Brazil, etc., in a global climate protection framework. We urge 
the Committee to also make this linkage and include five-year review 
requirement.

    Question 3. What do these same American workers do/what happens to 
them when China and India continue to do nothing to address their 
rapidly widening carbon footprints.
    Response. To put it bluntly, it is not in our national interest to 
see our efforts to reduce carbon emissions become yet another advantage 
that a developing nation uses to attract business. However, it is in 
our interest and the world's interest to have developing nations become 
part of the solution because the problem cannot be solved without them. 
Thus, the U.S. needs an approach that provides incentives for 
participation like the transfer of clean coal technology and penalties 
for non-participation such as a border adjust cost.
    The AFL-CIO endorses S. 2191's inclusion of international language, 
which will help preserve American jobs while taking an important step 
forward to engaging the developing world in seeking a solution to 
global warming. However, the international timeline and implementation 
process needs to be strengthened.
    Implementation can and should take place far sooner than 2020. The 
bill should require the President to open negotiations immediately upon 
enactment. Once the regulations are in place and the cap and trade 
program is in operation for two to three years, then the international 
action can be implemented. This last step should be an administrative 
action, not something subject to presidential waiver.
    S. 2191 also touches on the international impacts of climate change 
by providing some resources to help nations suffering the affects of 
global warming. These resources should also be made available to help 
transfer newer cleaner energy technology to the developing world.
    The AFL-CIO and Congress also have the opportunity to address this 
issue in international forums. In December, the AFL-CIO and a number of 
our affiliates will be participating in the UN sponsored meetings in 
Bali to discuss the post Kyoto protocols. The AFL-CIO has been working 
with the International Trade Union Confederation (ITUC) to adopt 
language that makes it clear that a unilateral approach is no longer 
viable and developing nations must become part of the solution. As part 
of the ITUC delegation we will also be supporting incentives for the 
adoption of clean coal and other technologies by developing nations.

    Senator Boxer. Thanks, Mr. Baugh. Thanks for your 
participation in the stakeholder process up until now. 
Obviously we welcome you as this goes forward. You got a lot 
into five minutes there. Thank you.
    Next we have Andrew Sharkey, president and CEO of the 
American Iron and Steel Institute. We welcome you and your 
testimony.

STATEMENT OF ANDREW G. SHARKEY III, PRESIDENT AND CEO, AMERICAN 
                    IRON AND STEEL INSTITUTE

    Mr. Sharkey. Thank you, Senator Lieberman. On behalf of the 
American Iron and Steel Institute, I express my gratitude to 
the members of the Committee for the opportunity to testify 
today.
    The American steel industry is part of the solution in this 
debate, not the problem. We are the most energy-efficient steel 
industry in the world and we have the data to prove it. We not 
only beat the Kyoto targets 11 years early, we are already 
doing on our own what S. 2191 seeks to do for the entire 
economy. Largely through recycling and investments in new 
technology, we have reduced energy use per ton of steel shipped 
by over 40 percent over the past 25 years. Reduction in carbon 
emissions per ton of steel shipped between 1990 and 2006 
exceeded 29 percent.
    If you will, this industry is laying golden eggs. Steel is 
the most recycled material. The entire domestic industry is 
using more scrap metal. The use of recyclable materials as a 
raw material feedstock in manufacturing processes can 
significantly reduce and even avoid, in some cases, greenhouse 
gas emissions. While our present processes are optimized, we 
are not standing still. The steel industry has embarked on an 
aggressive research and development program to advance the next 
generation of iron and steel making technologies that will 
dramatically reduce or eliminate CO2 emissions.
    Regarding steel in material, our products lead the way in 
reducing the greenhouse gas emissions of our customers. For 
example, through the design of automobiles using advanced high-
strength steels, which permit much lower vehicle weights and 
require much less fuel, all the while retaining vehicle safety. 
If you take only one thing away from this hearing, it should be 
the impact of climate change legislation on U.S. workers and 
manufacturers. I want to be as clear as possible on this point. 
If climate legislation fails to address the competitiveness 
vis-a-vis foreign products, it will have devastating 
consequences not only for the U.S. economy but also for the 
environment. Not only will we export American jobs but 
greenhouse gas emissions will rise. The carbon footprint of our 
major foreign competitors selling in the U.S. market is 
substantially higher than the domestics as a whole.
    It goes without saying that in a market open to imports 
such as ours, any legislation that undermines the 
competitiveness of U.S. mills will encourage steel production 
to leave this market in favor of markets with low environmental 
standards. Such an outcome will necessarily result in higher 
volumes of greenhouse gas emissions worldwide.
    To put it bluntly, the big winner in such a scenario will 
be countries like China and India and the big losers will be 
U.S. workers and the global environment. Some examples, our 
energy costs will rise under the bill beginning in 2012, costs 
that our foreign competitors do not face. Our allowance 
obligations commence in 2012, further driving our costs up. The 
bill does not impose allowance obligations on foreign 
manufacturers if at all until 2020, 8 years later. For a 
cyclical industry like steel, 8 years is an eternity.
    The bill's baselines for our foreign competitors invite 
gaming. The purchase of international allowances invites 
subsidies by foreign governments. And I would add under the 
international allowance mechanism in Title VI, any allowances 
that you give for free to American carbon-intensive industries 
must be subtracted from the allowance obligations of foreign 
manufacturers. That is true, apparently, even if you are trying 
to offset higher energy costs from cap and trade that the 
foreign manufacturers do not have.
    We are also very concerned that S. 2191 will encourage fuel 
switching from coal to natural gas, further escalating natural 
gas prices. Electricity price hikes will unquestionably follow, 
not just for us, but for the entire economy. Unfortunately, 
energy supply is woefully neglected in this bill and in the 
pending energy legislation.
    We believe that any competitiveness provision should one, 
apply simultaneously to domestic and foreign firms selling in 
the U.S. market; two, use the same baseline periods; three, not 
invite subsidies by foreign governments; and four, not enable 
the Administration to waive the requirements on foreign 
manufacturers.
    In short, the best way to deal with an industry facing 
foreign competitors would be to adopt an approach that requires 
everyone selling in this market, whether domestic or foreign, 
to live up to the best practices and highest standards in terms 
of carbon performance of their manufacturing operations, based 
on the particular manufacturing process that is employed. Such 
mandatory performance standards would be fair, equitable and 
have the immediate effect of actually lowering global emissions 
without creating market distortions. Such a policy would ensure 
that manufacturers in the United States and elsewhere would 
compete on even terms, because all producers active in this 
market, including us, would be subject to the same rules. This 
approach would give your bill a true global reach and not put 
the domestic steel industry at a competitive disadvantage.
    As our trade deficit shows, everyone wants to be in this 
market. Why not use that fact to encourage greener production 
abroad? Instead of a race to the bottom, in which manufacturers 
have the incentive to make the product in countries with the 
least restrictive standards, why not encourage a race to the 
top where manufacturers world-wide compete to meet our 
standards?
    Senator Lieberman, we certainly agree on one thing. We must 
find prudent means of addressing climate change. But we 
disagree on much of what is contained in S. 2191, we want to 
work with you and other members of this Committee to find 
reasonable and effective policies. We are not just saying no, 
we hope that you will regard our suggestions as constructive. 
Thank you.
    [The prepared statement of Mr. Sharkey follows:]

 Statement of Andrew G. Sharkey III, American Iron and Steel Institute

    On behalf of the American Iron and Steel Institute, I express my 
gratitude to Chairwoman Boxer, Ranking Member Inhofe and the Members of 
the Committee for the opportunity to testify today.
    The American steel industry is part of the solution in this debate, 
not the problem. We are the most energy efficient steel industry in the 
world and we have the data to prove it. We not only beat the Kyoto 
targets 11 years early, we are already doing on our own what S. 2129 
seeks to do for the entire economy. The domestic industry, largely 
through recycling and investments in new technology, has reduced energy 
use per ton of steel shipped by over 40% over the past 25 years. 
Reductions in carbon emissions per ton of steel shipped between 1990 
and 2006 exceeded 29% (a detailed chart appears below). If you will, 
relative to the rest of the economy, this industry is laying golden 
eggs.

[GRAPHIC] [TIFF OMITTED] T3583.102

    Steel is the most recycled material. The entire domestic industry 
is using more scrap metal, both mini-mills and integrated mills. I 
understand that Senator Carper may offer a recycling amendment to the 
bill. The use of recyclable materials as raw material feedstock in 
manufacturing processes can significantly reduce, and even avoid in 
some cases, greenhouse gas emissions. The proposed amendment, which is 
purely voluntary and market based, allows manufacturers eligibility for 
offsets when implementing a variety of activities including increasing 
the use of recycled materials, manufacturing of products that can be 
increasingly recycled, eliminate or reduce substances that impede 
recycling, employ other recycling practices that increase recycling or 
any combination of these activities. Our industry commends Senator 
Carper for recognizing the important positive contributions that 
recycling provides for the environment. The recycling issue must be 
part of any approach to the reduction of GHG.
    While our present processes are optimized, we are not standing 
still--the U.S. steel industry, in collaboration with the rest of the 
global steel industry, has embarked on aggressive research and 
development programs to develop the next generation of iron and 
steelmaking technologies that will drastically reduce or eliminate 
CO2 emissions.
    We continue to work to make strides but one reality needs to be 
taken into account--steel is an alloy of iron and carbon. That is, 
carbon is necessary in the current steelmaking process technologies and 
unless we undo the laws of physics, it is a reality that must be taken 
into account.
    The steel industry has and is developing new types of steel 
products that lead the way in reducing the greenhouse gas emissions of 
our customers, for example, through the design of automobiles using 
advanced high strength steels which permit much lower vehicle weights 
and require much less fuel, all while maintaining vehicle safety. Use 
of some steel products results in more efficient buildings and 
infrastructure and is integral in pressure vessels for electrical power 
generation and energy transportation. Fighting global warming will 
require significant amounts of new steel products.
    If you take only one thing away from this hearing, it should be the 
impact of climate change legislation on U.S. workers and manufacturers. 
I want to be as clear as possible on this point: if climate legislation 
fails to address the competitiveness issues vis-a-vis foreign products, 
it will have devastating consequences not only for the U.S. economy, 
but also for the environment. Not only will we export American jobs, 
greenhouse gas emissions will rise. The carbon footprint of our major 
foreign competitors selling in the U.S. market is substantially higher 
than that of the domestics as a whole.
    It goes without saying that in a market open to imports (such as 
ours) any legislation that undermines the competitiveness of U.S. mills 
will encourage steel production to leave this market in favor of 
markets with lower environmental standards. Such an outcome will 
necessarily result in higher volumes of greenhouse gas emissions 
worldwide. In other words, any climate change legislation that does not 
adequately account for competitiveness issues will have precisely the 
opposite effect from that intended by its supporters. To put it 
bluntly, the big winner in such a scenario would be countries like 
China and India--and the big losers would be U.S. workers and the 
global environment.
    Looking specifically at S. 2129, energy costs will rise under the 
bill beginning in 2012, costs that our foreign competitors do not face. 
Our allowance obligations commence in 2012 further driving our costs 
up. The bill does not impose allowance obligations on foreign 
manufacturers, if at all, until 2020, eight years later. For a cyclical 
industry like steel, eight years is an eternity. The bill's baselines 
for our foreign competitors invite gaming. The purchase of 
international allowances invites subsidies by foreign governments. And 
I would add, under the international allowance mechanism in Title VI, 
any allowances that you give for free to American carbon intensive 
industries must be subtracted from the allowance obligations of foreign 
manufacturers. That is true, apparently even if you are trying to 
offset higher energy costs from cap and trade that the foreign 
manufacturers do not have.
    We believe that any competitiveness provision should (1) apply 
simultaneously to domestic and foreign firms selling in the U.S. 
market; (2) use the same baseline periods; (3) not invite subsidies by 
foreign governments; and (4) not enable the Administration to waive the 
requirements on foreign manufacturers.
    In short, the best way to deal with an industry facing foreign 
competitors would be to adopt an approach that requires everyone 
selling in this market--whether domestic or foreign--to live up to the 
best practices and highest standards in terms of the carbon performance 
of their manufacturing operations, based on the particular 
manufacturing process that is employed. Such mandatory performance 
standards would be fair, equitable, and would have the immediate effect 
of actually lowering global emissions without creating market 
distortions. Such a policy would ensure that manufacturers in the 
United States and elsewhere would compete on even terms, because all 
producers active in this market, including us, would be subject to the 
same rules. This approach would give your bill a true global reach and 
not put the domestic steel industry at a competitive disadvantage. And 
as our trade deficit shows, everyone wants to be in this market. Why 
not use that fact to encourage greener production abroad? Instead of a 
``race to the bottom'' in which manufacturers have an incentive to make 
the product in countries with the least restrictive standards, why not 
encourage a ``race to the top'' where manufacturers worldwide compete 
to meet our standards?
    We still have grave doubts generally about how well cap and trade 
can address climate change. Cap and trade worked reasonably well on the 
acid rain problem. The climate change issue is quite different. With 
climate change we have major technological gaps, the need for global 
reach, the presence of foreign competitors, and no guaranteed ability 
for regulatory cost pass-through.
    More specifically, S. 2129 rewards states with extra allowances if 
they impose more stringent cap and trade requirements than the federal 
scheme. I shudder to think how American industry can cope with a 
federal cap and trade program and a multitude of conflicting, more 
stringent state programs. Recall that the states, under the U.S. 
Constitution and our trade laws, have no mechanism to achieve global 
reach, to avoid giving foreign manufacturers who sell in our markets a 
competitive advantage over domestic firms.
    Finally, we are very concerned that S. 2191 will encourage fuel 
switching from coal to natural gas, further escalating natural gas 
prices. This scenario is already occurring, just in anticipation of 
legislation. Electricity price hikes will unquestionably follow, not 
just for us, but for the entire economy. The technologies we need are 
not in place, and won't be for many years. Unfortunately, energy supply 
is woefully neglected in this bill, and in the pending energy 
legislation. Obviously, if U.S. energy costs continue upwards unabated, 
this will only increase the likelihood that foreign manufacturers, who 
have access to affordable energy, will capture U.S. jobs and domestic 
market share, and consequently increase greenhouse gas emissions.
    Madam Chairman, we certainly agree on one thing. We must find 
prudent means of addressing climate change. While we disagree on much 
of what is contained in S. 2192, we want to work with you and the other 
members of this committee to find reasonable and effective policies. We 
are not just saying ``no.'' We hope you will regard our suggestions as 
constructive.
                                 ______
                                 
       Response of Andrew Sharkey to an Additional Question from 
                             Senator Inhofe

    Question. Is there anything else that you would like to add into 
the record?
    Response. We in the steel industry recognize that recycling is an 
important aspect of reducing carbon emissions, reducing energy 
consumption, and preserving natural resources. Every steel producer 
uses scrap material (recycling) as a vital feedstock to lower the cost 
of producing steel. 2006 figures from the Steel Recycling Institute 
indicate that U.S. steel producers consumed approximately 70 million 
tons of scrap to produce just over 100 million tons of steel. Seventy 
percent of steel produced in the United States is eventually recycled. 
On average, a ton of steel will be recycled eight times in the course 
of fifty years. Our recyclability, coupled with our durability, is a 
key reason our GHG profile, on a life cycle basis, is low.
    We support actions that increase recycling, and appreciate the 
efforts of the Recycling Roundtable to develop language that will 
induce additional recycling in our economy. We applaud you for 
recognizing the positive contributions that recycling provides for the 
environment. The recycling issue must be part of any approach to the 
reduction of GHG.
    At the same time we want to ensure that the Congress, through this 
legislation, recognizes that steel is the most recycled commodity in 
the world today, and that the domestic steel industry, through the use 
of recycling, has already reduced its carbon footprint and continues to 
supply a basic building block of the economy with the minimum amount of 
energy consumption and carbon emissions possible.
    We also believe the maturity of steel recycling demonstrates the 
drawbacks of imposing emissions caps on an industry which is leading 
the world in global steel emissions reductions.
    We want to work with you, the Committee and the Congress to ensure 
that the domestic steel industry is not disadvantaged, and in fact is 
enhanced as the most carbon conservative steel industry in the global 
economy, through this amendment and by exploring other possibilities.

    Senator Lieberman. Thank you, Mr. Sharkey. That is exactly 
the way I heard your testimony. I appreciate it very much. We 
do look forward to engaging with you in more detail.
    I do want to say, going back to the first part of your 
testimony, that the iron and steel industry really has done 
exactly what you said it has done. It is a great and I hope 
encouraging model of the way the market drives, in necessity, 
in a way, drives innovation to the point where you have done 
exactly some of the things that we are hoping and intending 
that this Climate Security Act do for a lot of the rest of 
America's economy. So we have a lot of work to do together.
    Our final witness on the panel is Donald R. Rowlett, 
Director of Regulatory Policy and Compliance for the OG&E 
Energy Corporation. Good afternoon, and thank you for being 
here.

 STATEMENT OF DONALD R. ROWLETT, DIRECTOR OF REGULATORY POLICY 
            AND COMPLIANCE, OG&E ENERGY CORPORATION

    Mr. Rowlett. Thank you, Senator Lieberman, members of the 
Committee. My name is Donald Rowlett, I am Director of 
Regulatory Policy and Compliance for OG&E Energy Corporation, 
which is an electric utility and natural gas pipeline 
headquartered in Oklahoma City.
    Senator Inhofe, I would like to offer the appreciate of 
OG&E and particularly everybody in Oklahoma for the bipartisan 
leadership that you and Chairman Boxer showed in moving the 
long-overdue and very important Water Resource Development bill 
into enactment last week.
    OG&E is a medium-sized utility serving approximately 
780,000 customers in Oklahoma and western Arkansas. Our fossil 
fuel generation mix is about 60 percent natural gas-fired and 
about 40 percent coal. We currently have wind power capacity of 
170 megawatts, or roughly 3 percent of our total generation. 
Recently we announced a major initiative to quadruple the wind 
generation capacity to around 800 megawatts.
    I would like to say that all utilities are not alike. They 
vary in terms of size, weather demands, financial resources, 
generation mix, renewable resources and of course, their State 
and regulatory and political environments in which they 
operate. These differences explain why utilities, especially 
those with nuclear generation, may have substantially different 
perspectives to S. 2191 than we have.
    We can not yet sufficiently determine the economic impact 
of S. 2191 on our customers or on our operations. With the 
stakes so high, a credible economic assessment is needed at 
this time and certainly before enactment. We were pleased to 
hear from Senator Warner that this is being undertaken as we 
speak.
    While still tentative, our best analysis thus far produces 
a sobering picture of the challenges presented by the bill for 
both OG&E and its customers. The distribution of free 
allowances under Section 3901 is crucially important to our 
ability to transition during the early years of the 
legislation's cap and trade program. S. 2191 does not appear to 
provide enough allowances to mitigate what we believe will be 
the economic cost of this program and the compulsion to engage 
in significant fuel switching to natural gas.
    Conservatively, we estimate OG&E's share of the free 
allowance pool will only be about 36 percent of the allowances 
needed by OG&E in 2012. Whatever the market cost will be for 
additional allowances that OG&E will need to buy, this cost 
will be significant. If the additional allowances are priced at 
$30 when OG&E needs to purchase them in 2012, it will cost us 
nearly $500 million. This is almost a third of our 2006 gross 
revenues of approximately $1.6 billion. It is unclear how OG&E 
will recover these costs, since assumptions about retail rates 
and the customer's ability to pay them are all uncertain at 
this time.
    But the bill will require OG&E to do more than simply buy 
allowances. Our options are limited but do not likely include 
building new nuclear generation or even coal generation of any 
kind, including clean coal plants. Wind is not a suitable 
replacement for baseload generation needs. Perhaps domestic 
agricultural offsets might be available.
    For sure, though, we will be faced with a compelling 
incentive to switch a significant amount of our coal-based 
generation to natural gas. If we took the drastic step of 
replacing all of our current generation with natural gas, it 
would raise the average bill for a typical retail customer over 
40 percent. We believe that the incentive to switch fuels from 
coal to natural gas would be equally compelling to most other 
coal-burning utilities, because it is a strategy that utilities 
can rely on, they can quantify and it offers them the greatest 
level of control.
    Switching to natural gas raises the prospect of stranding 
our investment in our coal plants, thus creating stranded 
costs. We think the bill could provide accommodations through 
allowances or other compensations for that outcome. S. 2191 
unfairly discriminates against cooperatively-owned utilities, 
against investor-owned utilities. Under Section 3903, co-ops 
get all allowances necessary to cover their 2006 CO2 
equivalent emissions, whereas what remains in the free pool 
after the co-ops are fully satisfied gets distributed pro rata 
to everyone else.
    This political accommodation is unfair. Finally, we cannot 
bear the cost of compliance any more than cooperatives. Co-ops 
burn coal, just like we do. Our need for allowance relief is no 
different than theirs. All utilities should be treated the same 
with regard to distribution of free allowances.
    S. 2191 overly restricts the use of domestic offsets to 15 
percent of the utilities' annual obligation and too severely 
limits allowances for carbon capture and sequestration 
development to prevent fuel switching. Allowances for CCS 
should not decline over the time frame after 2017, since we 
don't expect CCS to be available until 2020. Nor should 
allowances for CCS projects be limited to 10 years or be 
subject to pro-ration among worthy projects.
    In our judgment, the Carbon Market Efficiency Board is less 
desirable than a safety valve to protect the economy from 
extreme adverse impacts. We also suggest that the Committee 
evaluate whether it might be more effective and efficient to 
impose carbon tax initially and delay implementation of a cap 
and trade regime.
    I would like to thank you for the opportunity to present 
our comments today.
    [The prepared statement of Mr. Rowlett follows:]

   Statement of Donald R. Rowlett, Director of Regulatory Policy and 
                      Compliance OGE Energy Corp.

    My name is Donald R. Rowlett. I am the Director of Regulatory 
Policy and Compliance for OGE Energy Corp., which is an electric 
utility and natural gas pipeline company headquartered in Oklahoma 
City. Our electric utility, which is called OG&E, serves approximately 
780,000 customers in Oklahoma and western Arkansas. Our fossil fuel 
generation mix is approximately 60% natural gas-fired, 40% coal-fired, 
and we currently have wind power capacity of 170 megawatts or roughly 
3% of our total generation.
    My company and I appreciate the opportunity to come before you 
today to provide our perspective and recommendations regarding what 
perhaps may be the most important environmental and economic 
legislation the Congress has ever considered--America's Climate 
Security Act of 2007 (S. 2191). I characterize S. 2191 in that historic 
manner because, consistent with its stated purpose in attempting to 
avoid catastrophic global environmental disaster, the bill's 
implications may very well result in the most far-reaching re-
engineering of modern society ever attempted by Congress. The sheer 
complexity and enormity of that undertaking underscores the need to 
take special care to avoid approaches that would wreak serious and 
broad damage to the nation's economy, a goal which we believe everyone 
shares.

 I. OG&E'S EXPERIENCE PROVIDING LOW COST, RELIABLE AND ENVIRONMENTALLY 
       RESPONSIBLE ELECTRICITY INFORMS OUR PERSPECTIVE ON S. 2191

    All utilities are not alike. They vary in many important ways: in 
terms of size, weather demands, financial resources, generation mix, 
renewable resources, and of course their state regulatory and political 
environment in which they operate. OG&E is a medium sized investor 
owned utility and lacks the resources that many of the much larger 
utilities that have appeared before this Committee possess. These 
differences can explain why larger utilities, especially those with 
nuclear generation, may have a substantially different perspective on 
S. 2192 than OG&E does. To understand our specific views on S. 2191 
more fully, it may be helpful to the Committee to first have a sense of 
OG&E's individual persona as a utility and our particular experience 
and perspective in providing low cost, reliable and environmentally 
responsible electric service to our customer.
    As a regulated utility, OG&E bears the responsibility of its 
``obligation to serve'' all electricity customers in its service area 
and we take this obligation extremely seriously. This obligation to 
serve carries with it the requirement to provide reliable electric 
power at the lowest reasonable cost to our customers. But beyond that 
obligation to serve, OGE strongly believes that it is incumbent on us 
as a good corporate citizen to produce reliable and low cost power for 
our customers in an environmentally responsible manner. Our company's 
response in adopting cleaner sources of power generation is therefore 
motivated not necessarily by a legal compulsion but by a belief that it 
is simply the right thing to do. Producing electricity with fewer 
emissions is a prudent, rational and worthy objective unto itself, 
independent of global climate change concerns. Our customers want their 
electricity to be inexpensive and reliable, but also as cleanly 
generated as we can make it. It makes good business sense to respond to 
our customers in that regard. It also makes good business sense in our 
line of work to diversify our generation mix to reduce dependency on 
any one fuel choice option.
OG&E and Wind Power
    I can report firsthand to you from Oklahoma that the interest in 
environmentally friendly energy and energy related consumer behavior 
certainly exists in our state. In the western part of our state wind 
farms seem to be popping up everywhere. Oklahoma has gone from 
virtually no wind power just a few years ago to being ranked 6th 
nationally in existing installed wind power generation capacity today. 
And, more is on the way. On October 30, 2007, OGE Energy announced 
that, in response to market demand, OG&E plans to quadruple its wind 
power generation capacity. We also announced plans to build new 
transmission lines running between western and central Oklahoma to 
allow renewable power being developed in sparsely populated western 
Oklahoma to reach customers where it can be used. Under this expanded 
renewable energy initiative, OG&E could increase its wind power 
capacity from its current 170 megawatts to about 770 megawatts, and 
move Oklahoma up the ranking of states in terms of wind generation from 
its current sixth ranking to as high as third. And I might emphasize 
that all of this is happening without state or federal mandates.
    As proud as we are of this wind initiative, we certainly recognize 
that it is very aggressive for a utility our size. Building this wind 
generation capacity and the transmission lines needed to make it useful 
is very expensive and creates difficult operational issues involving 
dispatch and reliability which increase in scale to the extent even 
more wind capacity might be added to address obligations created by S. 
2191.

OG&E and Efficiency
    In addition to wind power, we are renewing our interest and focus 
on demand side management (``DSM'') programs aimed at reducing energy 
use.. Through programs like time of use rates, weatherization programs, 
highly efficient lighting and appliance incentive programs, commercial 
and industrial load curtailment programs and consumer education we are 
already reducing our system's demand for power by approximately 200 
megawatts. With additional customer education, better technology such 
as smart meters, and other programs, we believe that there is another 
100 or so megawatts of additional energy savings to be obtained.
    OG&E is envied in the industry as a low cost utility and we have 
some of the lowest electricity rates in the nation. What is important 
for the Committee to understand though is that as a very low cost 
electricity provider, it is far more difficult for OG&E to use 
efficiency to shift demand for power--meaning, for us to lower the 
volume of electricity our customers use--than it is for high cost 
utilities.

OG&E and Clean Coal
    OG&E's low electricity rates are primarily attributable to the 
favorable cost implications of our coal burning generation. Often 70% 
of our baseload generation will be from our coal generation, with 
natural gas largely used for the balance of baseload generation and for 
peaking demand. We use low sulfur Powder River Basin coal which has 
kept both our emissions and our electricity rates to our customers low, 
which in turn has contributed very significantly to Oklahoma's economic 
viability and competitiveness, as well as our enviable standard of 
living enjoyed by our citizens.
    Obviously, a primary purpose of S. 2191 is to make coal a 
significantly more expensive fuel to mitigate its traditional use and 
thereby mitigate its uncontrolled greenhouse gas emissions. We note 
that S. 2191 also has provisions to spur development of clean coal 
technologies, including carbon capture and sequestration (CCS) 
technology, that will allow the nation to continue to use ``clean'' 
coal for electric generation. OG&E strongly supports the development of 
such clean coal initiatives. But our very recent experience in 
responsibly trying to get state regulatory approval for the cleanest of 
existing state of the art clean coal technologies--an ultra-super 
critical coal plant--provides a very cautionary tale that makes us 
question the ability to construct any new coal plant in Oklahoma for 
the foreseeable future even if it is the cleanest available coal 
technology. I believe the Committee would benefit from an understanding 
of our recent experience in that regard.
    Along with our sister utilities in the state, Public Service 
Company of Oklahoma and the Oklahoma Municipal Power Authority, we are 
experiencing the need for more baseload generating capacity in the 2012 
timeframe. We partnered with those two utilities to propose building 
one 950 megawatt ultra-super critical coal-fired power plant together 
rather than each of us individually building, smaller, less efficient 
plants scattered across the state. An ultra-super critical plant 
represents the very latest in proven state-of-the-art technology and 
offers major efficiency and environmental performance advantages over 
older technology and even compared to modern super critical coal 
plants. With the addition of this plant, we projected OG&E's carbon 
footprint could be as much as 3% lower than today. This would be 
accomplished by being able to reduce the use of our less efficient coal 
plants and through increased use of wind power.
    In reaching the decision of what type of plant to build, we quickly 
discounted wind power because it is not suitable for base load 
generation. We also discounted nuclear because our need for power is in 
2012 which would be impossible to meet with the timeframes associated 
with nuclear plant construction. In addition the financial costs and 
regulatory risks associated with building new nuclear plants exceed the 
resource profile that OG&E can afford. We have no appreciable untapped 
hydro power to speak of in Oklahoma and it was apparent we could not 
conserve our way out of the need for base load power. So that left gas 
and coal as our effective options.
    Both those fossil fuel options come with pros and cons. Natural gas 
is certainly a cleaner burning fuel, but comes with higher prices and 
enormous price volatility. We have low electric rates in Oklahoma but 
because the summers are so hot and so long, electric bills can be quite 
high since our customers tend to use a lot of electricity for air 
conditioning. By the same token, just 2 winters ago we were in 
emergency meetings trying to determine how we could supplement the 
funding of public and private low income assistance programs that were 
not going to be able to meet the projected heating needs of those 
customers that winter due to gas prices that had spiked over $10. 
During this time I appeared before the Oklahoma Corporation Commission 
in a hearing it convened to understand the reasons for these high 
prices and to find out what utility companies were doing to mitigate 
these costs. Consequently, summer or winter, we very much understand 
from our customers and our state regulator how much importance they 
attach to the price of their power.
    In recent years, we in Oklahoma, like many other states, have had 
our share of manufacturing plant closings. Just in the Oklahoma City 
area alone we have had a large tire plant and an automobile plant 
close, taking with them in excess of 4,000 jobs. In each case, we were 
called upon by many, including the Governor of our state, to see if 
there was anything we could do to lower the energy costs of these 
plants. We did as much as we could at the time, but were unable to do 
enough on our own to convince the manufacturers to preserve the local 
plants and the associated jobs. In every one of our state regulatory 
proceedings our industrial customers constantly remind the regulators 
that they compete in a global marketplace and any cost disadvantage may 
be the difference between staying in Oklahoma or not. So given the high 
price and high volatility of generating electricity by natural gas, you 
can understand why that is a significantly disfavored option from the 
perspective of its impact on customers.
    Coal on the other hand is both abundant domestically and 
significantly cheaper than natural gas--even with the uncertainties of 
future environmental regulation factored in--and it still handily beats 
the price of natural gas by many multiples. Clearly, however, the 
downside to coal is the environmental cost concern. Consequently, in 
proposing to build an ultra-super critical coal plant, we believed we 
had combined a very significant emission reduction strategy with $5.5 
billion in demonstrable cost savings for consumers--a tremendous value 
proposition for both Oklahoma's environment and economy.
    After an extensive and thorough public review and comment process 
at the Oklahoma Corporation Commission, last August an administrative 
law judge issued a lengthy and detailed recommendation strongly in 
favor of approval of our proposed ultra super critical plant, citing 
the $5.5 billion in customer savings compared to deployment of a gas-
fired base load alternative. Nonetheless, in September our application 
was denied in a 2-1 vote by the Oklahoma Corporation Commissioners. The 
Commission's majority cited concerns about process, the evidence of the 
need for the power, and cost recovery. Of special interest to this 
Committee, environmental concerns per se were not identified as reasons 
for denial of the application.

             II. OGE'S VIEWS AND RECOMMENDATIONS ON S. 2191

A. We cannot yet sufficiently determine the economic impact of S. 2191 
        on our customers or our operations
    In our view, as serious as this legislation is for the entire 
nation, we would assume that before the Committee would turn to marking 
up S. 2191 it would be able to articulate in a reasonably confident way 
the macro-economic impact of the bill and understand how the 
constituencies in each Senator's state would be affected by the bill. 
But we understand that such economic analysis has yet to be done. The 
many witnesses at prior hearings, both supporting and criticizing the 
legislation, have made a compelling case that the costs of a cap and 
trade regime such as that contained in S. 2191 will be enormous. We 
would observe that Section 2605 of the bill requires the Congressional 
Budget Office to estimate the price range at which emission allowances 
will trade during the two year period of the initial greenhouse gas 
emission market and the impact of allowance trading on the U.S. economy 
no later than July 14, 2014, which is two years after the 
implementation of the bill's allowance regime in 2012. It appears to us 
that this kind of analysis is needed now even more than in 2014. Given 
the unprecedented stakes for this legislation in terms of environmental 
and economic impacts, we urge the Committee to demand a credible 
``macro-economic'' assessment at the earliest moment and certainly 
before enactment.
    But we are also in need of more information to perform a detailed 
assessment of the bill's ``micro-economic'' impact on our own OG&E 
operations, our credible range of compliance options, and the 
consequent impact on our customers. We would draw the Committee's 
attention to Section 3901 et seq., which provides for distribution of 
``free'' allowances to ``incumbent utilities''. Section 3903 uses 
several variables including an upfront reservation of a portion of the 
``free'' pool for ``new entrants'' and rural cooperatively-owned 
utilities that reduces the overall number of such allowances available 
to the balance of the utility sector, which includes us, on a pro-rated 
basis. We cannot estimate the number of allowances that will be 
reserved for new entrants and the co-ops, and therefore cannot 
determine what is left to be prorated among the rest of the power 
sector. But even then we cannot determine how much of that residuum of 
the ``free'' allowances that we might receive on a pro-rated basis 
since to do so requires that we know the ratio of our CO2 
equivalents emissions during the 3 years prior to the bill's enactment 
to the annual average of the aggregate quantity of CO2 
equivalents from all of the nation's covered power plants during those 
same three years. While we can estimate our OG&E CO2 
equivalents over any three years from our recent actual experience, it 
is necessary to know what the national emissions denominator is in that 
ratio, and different data bases can give different answers that can 
materially change the result. Without knowing what are the values that 
the Committee is using for those variables no utility can determine 
with even reasonable accuracy the number of allowances that it may 
actually stand to receive under that section. And therefore we cannot 
confidently deduce the number of allowances that we will need to secure 
through the auction process or by purchase from groups favored with 
allowances that they receive from other provisions under the bill or 
through offsets. We would note that, as recommended in Subsection J 
below, a carbon tax provides far greater certainty as to the carbon 
price signal and allows for more reliable estimations of costs and 
compliance options.
    We presume that the Committee is working with a set of assumed 
values for those variables and for the purpose of being able to work 
along with the Committee on an equal factual footing, regardless of 
whether there is consensus on the particular values the Committee might 
be assuming, we would urge that the Committee publish its assumptions 
in that regard so that estimates and comparisons can all be made by all 
interested parties on an ``apples to apples'' basis. In similar vein, 
we do not know what dollar value the Committee is assuming for 
allowances in the auction market in any particular year or even in the 
first year (2012), or the estimated value that allowances will demand 
when sold by sponsors of offsets. In our view, no Senator on the 
Committee can expect to understand the actual impact of the bill on 
their respective state's constituents without such information. By the 
same token, no utility can fairly evaluate compliance options and the 
cost thereof without such information. Certainly, the residential, 
commercial and industrial electric customers, and the public utility 
commissions in each state will want to know such information. So, we 
would recommend that such information be made available immediately and 
that the Committee allow the affected public a suitable period of time 
to reflect on that and similar information before a full Committee 
markup so that any further legislative action is properly informed.
    Notwithstanding the limitation on our ability to estimate with the 
desired degree of accuracy the cost and compliance implications of S. 
2191, our best analysis thus far produces a sobering conceptualization 
of the challenge presented by the bill for both OG&E and our customers. 
We estimate that OG&E's CO2 emissions represent 
approximately 0.9 percent of the total annual average CO2 
emissions of the electric power industry in the United States. Thus, 
under Section 3903's allocation methodology for ``incumbent'' utilities 
such as us, OG&E would receive approximately 9.5 million allowances in 
2012. These credits are only about thirty-six (36) percent of the 
allowances needed by OG&E in 2012. OG&E would still need approximately 
16.5 million additional allowances in 2012. This is a conservative 
estimate, as it is unclear how many allowances will be available to 
investor-owned utilities when all other allocations are made for ``new 
entrants'', ``cooperatively owned utilities'' and others before 
investor-owned utilities (IOUs) such as us receive their shares of the 
``free'' allowance pool in 2012.
    While it not clear what the market costs will be for the allowances 
that OG&E will need (i.e., possibly 16.5 million allowances in 2012), 
OG&E believes that these costs will be significant. For example, if 
allowances are priced at $30 when OG&E needs to purchase them in 2012 
and we opt to buy them, OG&E will have to spend nearly $500 million 
that year. (This illustration's cost is scalable in accord with one's 
assumption of the allowance price.) It is unclear how OG&E will recover 
these costs since assumptions about retail rates and customers' ability 
to pay are all unknowns at this time.
    Since the purpose of S. 2191 is to provide incentives for companies 
to change their operations to reduce greenhouse gas emissions rather 
than simply buy allowances to cover an unchanged emission rate, OG&E 
would likely have to do more to comply than simply buy allowances. For 
example, OG&E could retire all of its coal-fired generating units and 
switch to 100 percent natural gas generation. If OG&E pursued this 
option, OG&E would face the following costs:
     $2 billion in capital cost to construct the gas-fired 
generation. Note: This option is not possible for 2012.
     An increase of over $1.1 billion in fuel costs per year. 
This is more than double OG&E's current annual fuel costs.
     Even if OG&E eliminated coal from its generation 
portfolio, OG&E would still need to buy 7.8 million allowances which 
could cost $234 million in 2012 (if allowances are priced at $30 per 
allowance).
     OG&E could mitigate part of the increase in fuel costs and 
the cost of purchasing allowances if it installed significant amounts 
of additional wind generation. However, OG&E believes that 1000 MW of 
wind generation would only reduce the increased fuel costs and 
allowance costs by forty to fifty percent. The capital cost associated 
with 1000 MW of additional wind generation would be approximately $2 
billion.
     It is unclear who would pay for the very significant 
stranded costs associated with the retired coal-fired generating units.
    Employing this full switch from coal to natural gas would increase 
the average monthly bill for a 1000 kWh OG&E customer by approximately 
forty percent--representing an increase of $40 over the current $100 
per month bill. And as noted above, even after this fuel cost impact, 
OG&E would still need to spend perhaps hundreds of millions of dollars 
on allowances in order to comply. The costs of these allowances would 
also presumably be passed on to OG&E's customers, if permitted by our 
state regulator, thus making the estimated $40 per month price increase 
to customers from full fuel switching very conservative and not all-
inclusive.

B. S. 2191 fails to provide coal-based generation with sufficient 
        transition support needed to protect customers from adverse 
        cost and reliability impacts:
    We understand the bill's objective of injecting a so-called ``price 
signal'' into the utility market to induce changes for cleaner 
electricity generation. However, OG&E is the type of utility that will 
be seriously challenged in the early years of S. 2191's regime because 
we do not sense that it provides adequate transitional support for us 
to protect our customers from adverse cost and reliability impacts.
    The objective of reducing national CO2 emissions by 15% 
compared to 2005 levels by 2020 will be very aggressive for us 
primarily due to two factors: first, our high use of coal-based 
generation and second, the few lower-emission alternatives available to 
us in what we view as the initial, transitional term of the bill, i.e. 
2012 through 2020.\1\
---------------------------------------------------------------------------
    \1\ While we appreciate that S. 2191 projects a 65% emissions 
reduction from 1990 levels by 2050, we view whatever may occur beyond 
the general 2020 timeframe to be sufficiently uncertain and speculative 
that it is unrealistic to predict with much confidence what our 
situation will be then, especially if we cannot successfully navigate 
the early transition years leading up to 2020.
---------------------------------------------------------------------------
    Nuclear generation opportunities have much longer lead times than 
S. 2191's implementation date of 2012 would allow. As suggested in the 
narrative in Section I above, based on the Oklahoma Corporation 
Commission's decision not to allow construction of an ultra-super 
critical coal plant that would have saved Oklahoma rate payers $5.5 
billion compared to a gas plant, we have serious doubts about the 
ability to build any new coal plant in Oklahoma in the near future. 
Beyond Oklahoma, we observe that other clean coal plants are also 
encountering significant difficulty in being approved by state 
regulators, with their difficulties often largely attributable to the 
opposition of environmentalists and the advocacy by natural gas sellers 
who see economic opportunity for themselves in the demise of any new 
coal plant. We also note efforts to push EPA to prevent by regulation 
the construction of any new coal plants that are not equipped with CCS 
technology. The needed CCS technology that will allow the cleaner, 
continued use of coal is a decade or more away, and perhaps will not be 
commercially available until 2025. Renewable resources such as wind, 
solar and geothermal are not reliable for base load purposes.
    We therefore view the distribution of what are referred to 
colloquially as ``free'' allowances under Section 3901 et seq. to be 
critically important to our ability to transition during the early 
years of the legislation's cap and trade regime. If anything, we view 
the current provisions of Section 3903 as likely not providing enough 
allowances to mitigate what we believe will be the economic cost of 
this program and to relieve the compulsion to engage in significant 
fuel switching to natural gas.
    In addition, while there are certainly advocates of auctioning all 
the allowances who will criticize the number of allowances distributed 
through Section 3903 as excessive or as a ``windfall'', we strongly 
disagree. We envision no realistic scenario where we do not need to 
continue to rely substantially on our coal generation fleet during the 
transition period to meet base load demand, notwithstanding the 
pressure for increased use of wind and natural gas generation. Any 
``free'' allowances will mitigate the suite of new increased cost 
factors we will encounter from (i) our continued use of coal and 
increased use of more wind and natural gas generation and (ii) the 
expense of buying needed additional allowances through auction or 
offset projects.

C. S. 2191 unfairly discriminates between co-operatively owned 
        utilities and investor-owned utilities
    Section 3903 differentiates in its distribution of ``free'' 
allowances between co-operatively owned utilities and the balance of 
the electric power sector. Under Section 3903, co-ops get a 
distribution of allowances to cover all of their 2006 CO2 
equivalent emissions, whereas what remains in the ``free'' pool after 
the co-ops are fully satisfied gets distributed pro-rata to the rest of 
the utility sector based on their ratio of emissions to the total 
national emissions of the utility sector. To us this appears to be a 
political accommodation that is unjustified and unfair. If there truly 
is an impending environmental catastrophe the ownership structure of 
the source of the green house gases does not change the impact on the 
environment. From a financial perspective, we are not necessarily 
better situated to absorb the cost of compliance any more than a co-
operative is. Moreover, most of the co-operative utilities have a 
generation mix that tilts heavily toward coal-burning just like ours 
does. Our need for allowance relief is no different than theirs. S. 
2191 should treat all utilities the same with regard to the 
distribution of Section 3903 allowances.

D. S. 2191 overly restricts the use of domestic offsets:
    Section 2402 generally restricts the amount of allowances that a 
utility can use from domestic offsets to 15% of its annual obligation. 
A utility of OG&E's size and resource capability likely will not be 
engaging in international offset activity, ergo what is available from 
domestic offsets is of far more interest and potential usefulness. 
While it remains to be seen how expensive and available such offset 
projects may be, it is not lost on us that Oklahoma is an agricultural 
state where presumably agricultural offset opportunities as envisioned 
by the bill may exist for us. We believe that a ton of CO2 
equivalent offset is the same as a ton of CO2 reduction at 
our own plants. While we cannot realistically determine so now, 
potentially offsets could provide a cost-effective tool for us, 
especially in the transition period before clean coal technology is 
both commercially available and politically acceptable to state 
regulators. We would recommend significantly increasing the percentage 
of offset-based allowances that a utility could use during the period 
prior to 2020, or, even better, completely eliminating any limit on the 
use of verifiable domestic offsets.

E. In the absence of available alternatives in the immediate future, S. 
        2191 will compel massive fuel switching from coal to natural 
        gas by utilities:
    Even without being able to quantify the cost of possibly 
alternative compliance strategies, it is evident beyond any doubt that 
S. 2191 will compel coal-burning utilities to engage in massive fuel 
switching to natural gas. The dramatic mismatch between the allowances 
that will be distributed to utilities under Section 3901 et seq. 
compared to their historic emission profiles, and the absence of new 
alternative technology such as clean coal/CCS to accomplish compliance 
while still using coal, will drive utilities into the allowance auction 
market and to the offset allowance market, the cost of neither of which 
can be reliably estimated initially or controlled over time. In the 
absence of new coal plants and other good, reliable technological 
choices for the indefinite future, and given the onset of the cap and 
trade regime in 2012--just four short years from now--no serious coal-
burning utility company's board of directors, knowing that state 
utility regulators are watching and need to approve every significant 
resource supply decision, will passively leave their company's or their 
customers' fate to the unknown and uncontrollable allowance auction 
market. Instead they will be compelled to adopt a compliance policy 
that has elements over which they exercise the maximum amount of 
control. We assume this is exactly the behavior the bill is intended to 
motivate. And for OG&E and other utilities that meet our profile, by 
far the most accessible and dependable such policy option is to switch 
from burning coal to burning natural gas. The Committee must recognize 
in its legislative deliberations this stark and unavoidable reality; to 
do otherwise is not to anchor the legislation in reality.
    Not surprisingly, the EU's recent experience shows that such fuel 
switching apparently accounts for the bulk of emission reductions in 
the EU cap and trade regime. Too many credible and expert witnesses 
before this Committee have warned about the similar overwhelming and 
compelling incentive our U.S. coal burning utilities will experience to 
switch from coal to natural gas. They have warned that utilities, with 
their laudable obligation to serve their customers, will do all that is 
necessary to serve their customers reliably, economically and with 
environmental responsibility. Even if the utilities themselves did not 
feel compelled to do so, their state regulatory commissions would 
certainly insist on it. Moreover, assuming the usual ability to pass-
through the cost of fuel used to generate electricity, utilities will 
have the economic incentive to do what will be universally viewed as 
the ``right thing'' for their customers. And no one should expect 
otherwise. Nor should anyone expect that increasing utilities' 
incentive to switch to natural gas will have anything other than a 
dramatic upward pressure on the price of natural gas, the supply of 
which is not increasing sufficiently to meet this demand.
    While an increased price for natural gas is most certainly good 
news for many in Oklahoma's robust natural gas production industry, it 
imposes predictable and unavoidable adverse consequences on everyone 
else who either uses electricity or natural gas. Numerous experts have 
already testified that, with the supply of natural gas effectively not 
increasing, the massive increase in demand for natural gas represented 
in coal burning utilities switching away from coal-burning will 
significantly increase the price of natural gas all across this 
country. The adverse impact of the increased costs of natural gas to 
residential, commercial and industrial customers will be enormous. This 
will result in major economic challenges for residential, commercial 
and industrial users of natural gas in every state in the Union. For 
example, hospitals and other health care facilities are large energy 
consumers. These significant increases will place even greater cost 
burdens on an already overwhelming health care dilemma. But the bottom 
line is that utilities will get the natural gas they need to generate 
cleaner electricity for their customers and in so doing other gas users 
will either have to pay the higher price or do without natural gas, 
which raises a host of issues about demand destruction, job loss and 
other adverse economic consequences that have already been well 
established in prior testimony before the Committee by a spectrum of 
witnesses extending from the AFL-CIO to the Industrial Energy Consumers 
of America.

F. S. 2191 does not address the issue of stranded costs that may be 
        caused by compliance with the bill's cap and trade obligations
    If we are correct that significant fuel switching to natural gas 
will occur, leaving coal-burning facilities idled, we have a very big 
question as to who will deal with the stranded costs associated with 
those idled coal plants. The bill is silent in that regard, but we are 
confident that state utility commissions and electric customers will be 
very concerned with those stranded costs. This issue is an enormous 
concern. It would appear to us that in the event of such stranded costs 
the bill should accommodate the impact it causes by providing 
allowances or other compensation to the adversely affected utilities.

G. Load Serving Entities should be permitted to apply Section 3501 
        allowances against their cap and trade obligation
    OG&E qualifies as a ``load serving entity'' under Section 4(18). 
Section 3501 distributes allowances to load serving entities, including 
utilities like OG&E, for the purpose of defraying the cost impact of 
the cap and trade regime on low and middle income electricity 
customers. The provision appears to require the load serving entity 
(perhaps envisioning entities having no electric generation-related 
emission obligations) to sell these distributed allowances for cash, 
and then use that revenue to reduce the rates that their low- and 
middle-income customers pay. In our view, while the distribution of 
allowances to load serving entities is justified in recognition of 
their obligation to serve customers, requiring utilities that both 
generate electricity and qualify as load serving entities such as OG&E 
to sell those allowances for cash rather than simply to apply them 
directly to meet their basic allowance obligation is inefficient. Load 
serving/generating utilities are going to need every allowance they can 
acquire to meet those basic obligations and in so applying their share 
of the load serving entity allowance distribution in that manner they 
will directly benefit all their customers, including their low and 
middle income customers.

H. S. 2191 too severely limits allowances for carbon capture and 
        sequestration development
    If one is concerned about the impacts of fuel switching in the 
transition period before 2020 as we are, you can understand why we 
prioritize the expeditious development of clean coal technologies 
including carbon capture and sequestration that will facilitate the 
continued use of coal or the resumption of the use of coal if there is 
switching to natural gas. The entire cap and trade regime envisioned by 
S. 2191 benefits by the most rapid implementation of clean coal 
technologies and CCS by reducing pressure to switch fuels to natural 
gas.
    However, Section 3601 only allocates 4% of the allowances to CCS 
development projects. In our view this is well below the value of CCS 
development to the goal of cutting CO2 emissions and well 
below the amount of interest coal burning utilities and their customers 
have in expeditiously incorporating CCS into their existing and 
possibly future coal-generation fleets.
    It is also counter-productive that the allowances for CCS decline 
over time after 2017 (see Section 3603) when in our view they should 
increase since we do not expect CCS to be available until well beyond 
the 2020-2025 timeframe. Nor is it good policy to limit the allowances 
for CCS projects to 10 years (see Section 3604) or limit and prorate 
the pool of CCS allowances (see Section 3605). In addition, Section 
3602(2) seems to limit allowances to geological sequestration, thus 
excluding other types of sequestration opportunities which can offer 
similarly favorable and beneficial results. If CCS is so critical to 
allowing an emission free use of coal, which will provide low cost 
electricity and mitigate fuel switching, we view allocating more 
allowances to incentivize that objective to be a far greater national 
priority than S. 2191 currently does.

I. The Carbon Market Efficiency Board is less desirable than a ``Safety 
        Valve'' to protect the economy from extreme adverse economic 
        impact
    We are aware of the vibrant difference of opinion between advocates 
of the safety valve limit on the price of an allowance and the 
advocates of the Carbon Market Efficiency Board approach. Between those 
two options, OG&E supports the notion of the safety valve as a more 
effective and efficient means of preventing undesirable economic 
adversity. The safety valve provides far more predictability and legal 
certainty to affected parties. The powers of the Carbon Board are 
inherently restricted--ultimately the Board cannot increase the number 
of allowances--and any relief it grants in terms of increasing 
allowances in a year must be effectively ``made up'' by similar 
reductions in available allowances in future years. The Board is placed 
in a very rigid constraint and we simply do not agree that that level 
of inflexibility is either wise or needed.

J. A Carbon Tax may well be more efficient and effective in the early 
        years of any global climate control regime:
    While we cannot sufficiently quantify the compliance options and 
their costs as we need to do, we are impressed that the cap and trade 
regime in S. 2191 imposes substantial energy cost, but also significant 
transactional costs in the early years. The bill appears intended to 
drive utilities and industrial entities into a frenzy of activity 
including but not limited to amassing information, recordkeeping, 
reporting, negotiating for fuels and technologies, finding available 
and affordable allowances--all requiring lawyers and accountants, 
reminiscent of the overhead impressed on American business in Sarbanes-
Oxley. We have observed that most economists who have opined on the 
matter emphasize that imposition of a carbon tax has far greater 
transactional efficiencies and operational attributes than any cap and 
trade regime. A carbon tax needs no bureaucracy to monitor and 
administer it in the way a cap and trade regime does; plus a carbon tax 
can be readily adjusted up or down to ease economic adversity or 
provide enhanced incentive to reduce emissions. In addition, a carbon 
tax permits more confidence and predictability in making the 
significant investment decisions that utilities like OG&E are going to 
be faced with.
    For all these reasons, it may be more efficient and effective in 
sending a price signal to change behavior that will produce 
environmental/climate benefits to impose a carbon tax than a cap and 
trade regime with its transactional costs and economic dislocations. We 
would suggest that the Committee evaluate whether it would be more 
effective and efficient to amend S. 2191 to initially impose a carbon 
tax and delay implementation of any cap and trade regime to a date when 
the technologies such as clean coal and CCS are actually politically 
and commercially available so that coal remains a vibrant contributor 
to the solution and not a reason to drive natural gas markets out of 
control.

                               CONCLUSION

    OGE Energy Corp. wants to thank the Committee for allowing us to 
present our views. We respect the earnest desire of the Committee 
members to wrestle with the global climate issue in a responsible 
manner and would hope that the Committee members understand that OGE 
Energy has a tradition and overriding sense of obligation to do the 
right thing for our customers.
                                 ______
                                 
     Response by Donald R. Rowlett to an Additional Question from 
                             Senator Cardin

    Question. What guideline should govern the Carbon Market Efficiency 
Board's intervention in the allowance market to mitigate price 
volatility?
    Response. Assuming Congress adopts the Carbon Market Efficiency 
Board approach in a global climate regime,\1\ it is imperative that the 
Board have wide discretion to intervene in the allowance market to 
mitigate undue price volatility. As currently drafted, S. 2191 
inadequately arms the Board with tools to limit destructive economic 
impacts in a timely manner. That said, we view this question as 
assuming the existing provisions of S. 2191 are enacted and that the 
question is asking for insights into appropriate guidelines that should 
govern the Board's intervention in the allowance market in order to 
mitigate price volatility.
---------------------------------------------------------------------------
    \1\ OGE Energy believes that the Carbon Board is not the preferred 
technique to prevent adverse economic impact from the cap and trade 
regime in S. 2191. As we testified on November 13, a carbon tax that 
establishes a pre-determined price for carbon, which can be both 
adjusted and designed to alleviate the cost impact on low and middle 
income taxpayers, is a better approach. Even without a carbon tax 
though, a safety valve price for allowances in a cap and trade regime 
will provide more predictability in the market for affected entities 
which is critical to making the investments and establishing compliance 
strategies needed to achieve the emission reduction goals of S. 2191.
---------------------------------------------------------------------------
    As an initial comment, volatility is not in itself something that 
the Board should manage with the idea of completely eliminating 
volatility. Generally, volatility is the reflection of an imbalance in 
the supply and demand situation for a commodity--including GHG emission 
allowances--and expecting the Board to over manage the market to 
eliminate volatility and enforce equilibrium is unrealistic, and 
potentially is destructive in itself in that it can introduce 
artificial constraints on the market which only further enhance 
volatility or produce a wide array of undesirable behaviors and 
unintended consequences. The Board must be able to analytically 
segregate volatility that is acceptable from volatility that is not, 
which means it must develop a valid model of the parameters of making 
such threshold distinctions.
    There are ranges of volatility that, as is the case in all 
commodities, are controllable through various normal business tools 
such as hedging on commodity futures markets, and the informed use of 
derivatives or insurance products. So volatility per se is not 
necessarily a concern that will always rise to a need for Board action. 
What is of concern is undue volatility that has destructive impacts 
that cannot be mitigated by reasonable business practices or are the 
result of manipulations of the market. Thus, the Board's guidelines 
must reflect an understanding of what levels of carbon allowance price 
volatility businesses should reasonably be expected to handle through 
available financial market risk control mechanisms (such as the use of 
futures, derivatives etc.) in order to be able to assess when the Board 
itself has an obligation to step in to take action.
    From our perspective as a regulated utility that will likely rely 
heavily on the purchase of allowances in the market due primarily to 
our continued use of coal and natural gas based generation, a major 
concern we see with volatility involves the inability to reasonably 
predict allowance prices so that investment and compliance decisions 
can be made reliably. If the price of an allowance proves 
unpredictable, it will induce risk that, if not reasonably hedged, will 
definitely deter the kind of economic decision making by utilities and 
other affected industries that S. 2191 seeks. Another aspect of concern 
of volatility though involves the spiking of the cost of allowances, 
especially if such high prices are sustained over a period of time or 
are caused by manipulation. Note that high prices of allowances can 
cause tremendous adverse economic impact on us, our customers and 
everyone in the economy regardless of whether such prices are caused by 
manipulation or simply by too small a supply of allowances in the 
market in the face of a given level of demand, or even the combination 
of general economic factors independent from the cap and trade regime 
which create the environment in which the cap and trade regime is 
operating. The fact is the Board needs to have the tools to respond to 
sustained, high prices as well as to respond to undue volatility in 
prices since the ruinous impact of each can be the same. We suggest the 
Board should consider the following as guidelines governing its 
intervention in the allowance market:
    A. The Board should be actively monitoring on a daily basis within 
each region of the country:
     The amount of fuel switching actually being undertaken by 
utilities moving from coal-based generation toward natural-gas based 
generation, and the consequent price supply/demand impact of such fuel-
switching on utilities, the industrial and commercial sector, and 
residential sector.
     The actual (vs. predicted) commercial availability of 
advanced technologies to coal-based utilities to mitigate switching to 
natural gas-based generation.
     Unemployment levels and other indicators of regional 
economic dislocation to workers and employers attributable both to the 
domestic cap and trade regime and to other factors that materially 
contribute to the overall economic environment within which the cap and 
trade regime operates.
     The impact of the global climate regime as a demonstrated 
reason for U.S. manufacturers to shift operations and/or employment 
overseas to reduce cost.
     A reduction in U.S. GDP of .25% (one-quarter of a percent) 
in any fiscal quarter or over two successive fiscal quarters 
attributable to implications of the global climate regime compared to a 
reasonable baseline.
     Evidence that the allowance market is being manipulated or 
that attempts are being made to manipulate the allowance market.
    B. The Board should establish as part of its intervention 
guidelines a set of ``volatility ranges'' for daily, weekly and monthly 
allowance trading where any exceeding of the upper level of the 
respective range will trigger the Board's immediate analysis and 
consideration of causative factors, and where the Board concludes 
responsive action is necessary, an analysis of appropriate actions to 
mitigate the volatility. The Board should establish this ``volatility 
range'' analytical tool in advance and should establish a guideline of 
being able to respond with appropriate action within 48 hours of a 
determination that such action is warranted. The objective must be to 
act expeditiously to mitigate, or perhaps even to prevent, adverse 
impacts in the economy from volatility.
    C. The Board's intervention guidelines should be premised on 
establishing a close and ongoing working relationship with the 
Commodity Futures Trading Commission which has the expertise among 
federal agencies in monitoring, policing and overseeing commodity 
futures markets in this country. We expect carbon allowances to trade 
on futures exchanges and the CFTC already has the regulatory regime to 
collect trading information on a very timely and useful basis from 
market participants and to monitor for manipulations of the markets. 
The Board should not try to replicate that expertise of the CFTC, but 
rather should use that agency's expertise efficiently and effectively. 
Of note, the CFTC has emergency authority to deal expeditiously with 
excessive speculation in the markets and to take emergency action to 
prevent serious economic harm and threats implicating systemic risk to 
the economy. CFTC can also issue cease and desist orders to prevent 
activity that is in violation of its statutory mandates or to prevent 
harm to the economy within the ambit of its jurisdictional mission. The 
CFTC should be viewed as a valuable asset at the disposal of the Board. 
The Board should enter into a Memorandum of Understanding with the CFTC 
to cover its cooperative activity and to be able to make referrals to 
the CFTC for detailed investigation in cases where the Board has 
evidence of or merely suspects manipulation in the allowance trading 
market.
    D. Speed: The Board cannot analyze the situation to the point where 
action that is needed to mitigate--or perhaps even prevent--adverse 
economic impacts is delayed. The Board must be in position to assess 
market conditions and act if necessary within 48 hours, allowing itself 
time thereafter to take further action that modifies the initial action 
(i.e. more or additional intervention or reversing the initial action).
    E. Bias toward increasing allowances: Where the concern is the 
spiking of allowances that threatens increased costs and related 
adverse economic impact, the Board's bias of action should be toward 
first increasing the availability of allowances in the market, not such 
alternatives as adjusting the ability to bank allowances or the 
interest rate on borrowed allowances etc. This broad based action 
parallels the value that the Federal Reserve's interest rate adjustment 
activity achieves. Just as the Fed's interest rates affect the whole 
financial market, adjustment of the number of allowances in the trading 
market will impact the entire allowance market--not just some 
identifiable subset of the allowance market. There intentionally will 
be only one, national allowance market, not a set of regional allowance 
markets. So broad, national action of the nature of the Fed's interest 
rate adjustment are what will be needed and should be developed as the 
primary tool used by the Board.

    Senator Lieberman. Thank you, Mr. Rowlett, very helpful 
testimony.
    We are going to do a five minute round of questions for 
each of the Senators. In Chairman Boxer's absence, I will 
begin.
    Mr. Hawkins, I would like to start with you. The National 
Resources Defense Council is a member of the U.S. Climate 
Action Partnership, correct?
    Mr. Hawkins. That is correct.
    Senator Lieberman. The Climate Action Partnership was 
announced earlier this year, was it January?
    Mr. Hawkins. It was early February.
    Senator Lieberman. Early February. I think that when we 
look back, we are going to see that announcement as a tipping 
point toward actually getting something done on climate change 
by the U.S. Because it was quite a remarkable coalition of 
environmental groups, such as your own, and significant 
representation from American business, particularly industries 
that are emitters of greenhouse gases, who are essentially 
saying, okay, we feel a responsibility to be part of a 
solution. And they set out a series of standards, if you will, 
for what Climate Action Partnership would find to be an 
acceptable climate change bill. That is specifically in 
reduction of emissions by different dates, 2012, 2022, et 
cetera, there were ranges.
    This morning, in your testimony, you have presented your 
own estimates of what America's Climate Security Act would 
achieve by the various dates. I must say, I am pleased as I 
hear them and read them, because your numbers certainly 
indicate that in the first two periods, which are critically 
important, 2012 and 2022, this legislation would actually 
achieve more emissions reductions than the U.S. CAP recommends 
for those years and that the emissions reductions achieved by 
our bill in 2027 and 2050 fall within the range recommended by 
U.S. CAP.
    So let me ask you first the bottom line question, can you 
say that on behalf of NRDC that at least when it comes to 
emissions reductions this bill passes the test? And if that is 
the standard that a Senator applies, then one should vote aye 
on December 5th.
    Mr. Hawkins. Thank you, Senator Lieberman. First, let me 
correct what I told you about the announcement date. It was the 
last week of January of this year, the date before the State of 
the Union, as I recall.
    With respect to your question on emission targets, I will 
speak for NRDC. NRDC is a member of U.S. CAP, but I am not here 
today representing U.S. CAP. NRDC views the emission pathway in 
this bill as a very good start on what we need to do. The 
emission reductions in the early years are strong. It is not 
possible to say they are stronger than what we need. We have 
waited far too long to get started.
    Toward the end of the period, we think the emission 
reductions will need to be stronger than they are in the bill, 
which is one of the reasons that we support the scientific 
review process to allow that to be adjusted. But from the 
standpoint of emission reductions, we think this bill merits 
support and merits an affirmative vote in this Committee.
    Senator Boxer. Thanks so much, Mr. Hawkins.
    Mr. Baugh, let me ask you this question. As I heard your 
testimony, I was interested that you said that some of the 
things we did as part of the process on the subcommittee to 
come to a meeting of minds and also to get the four votes to 
get it out of the subcommittee you felt took it too far in one 
or another direction. In particular, I was interested in your 
comment on timeliness and targets and the qualifying criteria 
for the technology, for some of the technology subsidies.
    As you know, there are members of this Committee who would 
like the bill to move further in that direction before it is 
reported out of this Committee. Are there any areas in which 
you believe that further movement of that sort would be 
particularly unwise from the AFL-CIO point of view?
    Mr. Baugh. We have concerns about the phase-out, but I 
think moving it even faster creates greater problems. I think 
it comes from both the investment side of moving to 
transformational technology----
    Senator Lieberman. Just clarify what you mean by the phase-
out.
    Mr. Baugh. One of the points that I understand has been 
made is that there is the phase-out period for the free 
allocations that go to industry.
    Senator Lieberman. Correct.
    Mr. Baugh. I think we need to understand that some would 
like to have a system that is purely auctioned and no free 
allocations, which in essence would say to all of 
manufacturing, you are going to have to go buy allowances and 
you are going to have to invest in these transformational 
technologies. I think the idea here is that those allowances 
are let to businesses, and as the gentleman at the end said, 
they don't cover the full spectrum. It is a limited pool that 
declines over time.
    But I think it is important to do that, so that these 
allowances are available for doing business. They are going to 
have to purchase more allowances and make investments in 
transformational technologies. And they are rewarded to some 
degree when in fact they do this and cut their carbon 
emissions.
    So I think this is an extremely important point that this 
phase-out is a tough thing to stand against. We certainly 
wouldn't want to see it further tightened. We had concerns 
about it to begin with. I would share with the Committee, we 
actually have four studies coming back in the next month that 
we worked with the National Commission on Energy Policy to take 
a look at what is the impact of cap and trade on energy-
intensive industries. We looked at four sectors, and we will 
share that with the Committee as soon as we have it.
    Senator Lieberman. We would appreciate that.
    My time is up, but I think what you said is significant. 
This is a balance, so this law would make some very serious 
demands on businesses, and they would have to spend a lot of 
money to comply with it, and of course, we are worried about 
the employment. One of the ways you cut back costs is by 
cutting back employees. And it was with that in mind that we 
created the allowances, the so-called free allowances. But we 
phased them out over time.
    I think it is significant that AFL-CIO is saying today 
through you that any shortening of that phase-out period you 
think would be unwise.
    Mr. Baugh. We think it is damaging.
    Senator Lieberman. Thank you.
    Senator Inhofe.
    Senator Inhofe. Thank you, Mr. Chairman.
    First of all, let me thank Senator Boxer, who was kind 
enough to extend the opening of this to 11 o'clock to 
accommodate my schedule, then Northwest was an hour late due to 
mechanical problems. So I would like to ask that my opening 
statement be made a part of the record.
    Senator Lieberman. Without objection.
    Senator Inhofe. Mr. Hawkins, last week when we had Mr. 
Pershing here from the World Resources Institute, I asked him 
whether or not his organization would support nuclear power and 
he equivocated. I would like to ask you the same question, 
since it is going to be necessary in order to level off and 
then bring them down, in my opinion. Do you support nuclear 
power without a caveat, without equivocation?
    Mr. Hawkins. I would like to break the answer into two 
parts.
    Senator Inhofe. I am sorry, for the record, then, why don't 
you answer in two parts. But right now, do you have a yes or no 
answer?
    Mr. Hawkins. We don't support diversion of additional 
subsidies to nuclear power. We have no objection to nuclear 
power being an active participant in a greenhouse gas 
protection program.
    Senator Inhofe. Mr. Baugh, I have been troubled a little 
bit, I have talked to a lot of union members from various 
unions about the loss of jobs. Just a short answer, what is the 
impact of having requirements apply to plants that employ 
Americans starting in 2012 if China and India continue to do 
nothing to address their rapidly increasing carbon footprints? 
First of all, you are not naive enough to think that they are 
going to reduce theirs, are you?
    Mr. Baugh. No, Senator, I am not. And that is why we have 
supported the international language in this legislation. We 
would like to see the time lines moved up for its 
implementation.
    The second half of that is, we think the investment side of 
this portfolio, that it is invested domestically in American 
firms so that we capture the technology, that we make it here, 
that we deploy it here and have it available for export, is 
part of the balancing at of how we address the jobs issue that 
is contained in this legislation. There is a huge opportunity 
for the Nation to do that.
    Senator Inhofe. Okay, I do appreciate your comment that you 
don't believe that China and India and the developing nations 
are going to be doing this.
    Mr. Sharkey, if we adopted unilateral mandates, is there 
anything we can do in legislation to ensure that steel imports 
incur the same climate control costs as U.S.-manufactured steel 
products and exports?
    Mr. Sharkey. I would just come back to reiterate our 
testimony, there are four things that would need to be done at 
a minimum. One is to make sure that we have simultaneous start 
dates, not 2012 and then eight years later for foreign 
manufacturers. Have the same baseline period, make sure that we 
don't have government-subsidized the allowances. And frankly, 
when you are dealing with China, of the largest 20 steel 
producers in China, 91 percent are government-owned or 
government-controlled. The subsidy issue is huge.
    Then the fourth thing is obviously we can't have it be 
discretionary, they would have to be binding.
    Senator Inhofe. All right, thank you.
    Mr. Rowlett, I appreciate your being here today. I am sorry 
I was late, but I did hear your testimony. If this bill 
increases the demand for natural gas used for electric 
generation, what effect would this have? You talked about it, 
you gave a percentage of increase. I want to make sure that 
people paid attention to you. Why don't you repeat that part of 
your testimony. As I came in, I heard you say something 
reflecting the increase in the prices on residential natural 
gas heating bills.
    Mr. Rowlett. We looked at one of the more credible 
alternatives for us to meet the requirements of the cap and 
trade program, to be switching from coal generation to natural 
gas. That would have an impact of increasing a typical 
customer's bill by 40 percent if we switched all the coal to 
natural gas. That typical customer would use about 1,100 
megawatts, which is a very small family user. It is not a large 
home.
    Senator Inhofe. How would that disproportionately affect 
the poorer people, as opposed to the middle income people?
    Mr. Rowlett. Because their energy use is a much higher 
percentage of their costs----
    Senator Inhofe. Of their expendable income, yes.
    All right. The bill currently contains aggressive initial 
emissions reductions from targets in 2012 and 2020. Now, 
wouldn't it be true that if you had a less aggressive reduction 
requirement in the early years it would give time for 
technology to catch up a little bit and perhaps be able to make 
this workable, or more workable than I think it will be?
    Mr. Rowlett. That is one of our concerns, is that in the 
initial years, there is no commercially available or credible 
technology that is available to offset these costs, which 
pushes us more toward the side of fuel switching.
    Senator Inhofe. Let me give you the auction question here. 
Can you elaborate on why being regulated can cause you to face 
significant problems if you are forced to operate under an 
auction approach for allocating emissions allowances, 
particularly given that State utility regulators need to 
approve every significant resource decision?
    Mr. Rowlett. Before we choose any kind of resource, we have 
to go before our State regulators. Any kind of cost we incur, 
we have to get past the muster of the State regulators. So 
nothing is automatic. Everything has to go through our State 
regulatory commissions to determine how cost recovery will 
occur.
    Senator Inhofe. All right. Thank you. My time expired, Mr. 
Chairman. Thank you very much.
    Senator Lieberman. Thank you very much, Senator Inhofe. The 
collegial courtesy continues unabated here today and threatens 
to go out of control.
    [Laughter.]
    Senator Lieberman. Senator Carper is yielding his seniority 
in the direction of Senator Klobuchar to ask the next round of 
questions.
    Senator Klobuchar. Thank you very much, Senators, for doing 
that.
    I had some questions, first of all, for Dr. Greene 
regarding the CAFE standards and what you think the effect 
would be on meeting the goals of the Climate Security Act if 
the Senate failed to or the Congress failed to pass an increase 
to the gas mileage standards.
    Mr. Greene. I think increasing the fuel economy standards 
is the single most important policy for the transportation 
sector. And I think not just for light duty vehicles, but we 
should look strongly at whether we want to have fuel economy 
standards for heavy duty vehicles, as the Japanese do. Fuel 
economy standards have proven to be very effective at 
increasing the fuel economy of new cars and as the fleet turns 
over, increasing the fuel economy of vehicles in the fleet and 
reducing our energy use and petroleum use by vehicles.
    I think that one of the things we have not touched on 
really today is the importance of that in terms of our oil 
dependence and in terms of its positive impacts on the world 
oil market in reducing oil prices. If we can have an impact on 
world oil prices, reducing the cost of a barrel of oil by $10, 
that is equivalent to 25 cents a gallon, just as a $25 ton of 
carbon price would be.
    Senator Klobuchar. You also talked about how aircraft 
CO2 emissions could be reduced by 12 percent through 
improved aircraft management and by 6 percent through 
operational improvements that could be made by airlines and 
airports. Could you elaborate on that?
    Mr. Greene. These are estimates made by the airline 
organizations, ICAO and others, as to what could be achieved in 
terms of better flight planning. It requires things like 
reducing air traffic congestion, which we would all love to do 
for other reasons and greenhouse gas emissions as well. So 
there are a variety of steps in terms of the way flights are 
planned, flown and managed once they are in the air that can 
reduce the circuity of the travel and reduce the fuel burn 
rates of the aircraft while they are in travel.
    Senator Klobuchar. Then I have some questions just to 
follow up on what Mr. Baugh was saying. I guess I would start 
with you, Mr. Hawkins, about the effect that this could have, 
which of course we are all concerned about, on the economy and 
workers. We want to make sure that we have done this in a way 
that doesn't hurt our economy and some of the predictions that 
have been made, that I don't agree with. But I would like to 
know what Europe, having done cap and trade, what effect the 
cap and trade they have in place has had on their economy. And 
I would ask the same thing of you. I will start with Mr. 
Hawkins.
    Mr. Hawkins. First, I would say that the European trading 
system is very much an initial trial run. It has had some bumpy 
spots with respect to price fluctuations. The Europeans 
recognized that. Fortunately, we recognize it, too, and the 
authors of this bill recognize it and have lots of provisions 
to prevent those kinds of things from happening.
    But we have not seen harm to the European economy as a 
result of this initial run. We think that given the provisions 
in S. 2191, we will not see harm to the U.S. economy. To the 
contrary, we will see economic opportunity created by the 
technologies that are stimulated under this bill. That will 
create jobs, it will not threaten jobs.
    Senator Klobuchar. Mr. Baugh.
    Mr. Baugh. We have seen, the European system has created a 
lot of carbon billionaires. They made some big mistakes in the 
way they structured their system to begin with.
    Senator Klobuchar. Correct.
    Mr. Baugh. It is having an impact. We are going to be 
participating in the Bali meetings with trade unions from 
around the world, and we will be discussing this.
    But I think that we do have concerns about the impact on 
jobs in this Country. We have a particular sensitivity toward 
energy-intensive industries. We need to look hard at how the 
cap and trade works. That's why we help commission these 
studies. And we want to share them with the Committee. We have 
to look hard about how that impacts those industries.
    Secondarily is the investment side of the portfolio and how 
is that used to generate the jobs in this Country. You should 
be assured in the State of Minnesota that if Minnesota is going 
to make the choice and invest in renewable technologies that 
they are made here, they are made in your State, they are made 
in the region, they are made in the Country and we capture that 
ability. That is why I keep coming back to our point in the 
legislation. Make it a provision of legislation. These are 
domestic investments. We are trying to generate new industry 
and economic opportunity for our people as we make a 
transition.
    Senator Klobuchar. Then just one last question. Mr. 
Sharkey, I share Senator Lieberman's views of the good work 
that you have done. Coming from an iron ore State, I appreciate 
what you have been doing. You talked about that the steel 
industry is developing new types of steel products that can 
lead the way to reducing greenhouse gas emissions. Can you talk 
a little bit about that and elaborate on that, what the 
products are, what the time line is?
    Mr. Sharkey. They are both products and processes. In terms 
of products, I think the critical one I would cite would be the 
new generation of advanced high strength steels, which is the 
fastest-growing automotive material. We are working very 
closely with our car company partners to get this in the next 
generation of vehicles, because it really helps them meet their 
fuel efficiency goals, basically affordability goals, and also 
their safety goals.
    In terms of processes, the projects that we have underway 
are not only here in North America, but they are underway 
globally. We call them CO2 breakthrough projects. 
Basically, these are longer term research projects, I don't 
want to hold out the prospect that we are going to have the 
results of these in the next 3 to 5 years. These are 15 to 20-
year time lines. But basically, these would be processes that 
would fundamentally look to eliminate CO2 from the 
production process. That is the challenge we have made for 
ourselves.
    I think we can get there. But again, it is going to take 
capital to get there. And I would only stress that probably the 
single most important thing in terms of deploying these new 
technologies, we need a steel sector that has strong financial 
performance, that generates the capital to put into the new 
technology.
    Senator Klobuchar. Thank you.
    Senator Lieberman. Thanks very much, Senator Klobuchar.
    Senator Voinovich, you are next.
    Senator Voinovich. Thank you.
    Mr. Sharkey, I have been in this business a long time. I 
remember the voluntary restraint agreements that we tried to 
get through to protect our steel industry. Then when I came to 
the Senate, the 201 investigation so we could protect our steel 
industry, I think back to my days as a State legislator, when 
we pushed the steel industry to clean up the air and water. I 
woke up one day and found out that the rest of the steel 
industry around the world was modernizing and we needed the 
money to modernize. Finally we got Japanese investment in here 
so we could modernize.
    So I am really concerned about the steel jobs that we have 
here in this Country and I am sure that Mr. Baugh is concerned 
about the same thing. I am concerned about the issue of fuel 
switching. I believe in my State of Ohio, our recession started 
in 2001 when gas prices spiked and we saw a dramatic impact on 
manufacturing jobs in our State and around the Country. If you 
believe fuel switching is going to occur, and Anne Smith 
testified that she thought as much as 65 percent higher by 
2015, 125 percent by 2050, that was a witness we had last week, 
would there be any domestic industry remaining, and what would 
it mean to American consumers?
    Mr. Sharkey or Mr. Baugh. The point is that there is a 
substantial testimony and evidence that some very smart people 
believe that as a result of this legislation, we are going to 
genuinely have fuel switching in this Country. The question is, 
if that does occur, what is going to happen to our jobs and to 
our steel industry?
    Mr. Sharkey. Just very briefly, energy represents 20 
percent of our production costs. So you think about that, you 
understand the magnitude of how important it is. Anything that 
raises our cost of energy makes us less competitive. 
Fundamentally, what will happen is that companies will make 
decisions about where their investment goes based on their 
competitiveness. We are already basically seeing that in the 
EU. I think it is very unlikely you will see a new steel plant 
in the EU. They are going to put them in Brazil, they are going 
to put them everywhere because of the burden that we see in the 
EU right now.
    So it is a very important issue for the steel industry. We 
think that fundamentally, wholesale fuel switching to get more 
gas-fired, natural gas power plants is a big problem for the 
industry. This legislation unfortunately doesn't address that.
    Senator Voinovich. Mr. Baugh, do you think that the Carbon 
Market Efficiency Board can readily operate as a safety valve 
or cost control mechanism to protect the U.S. economy in the 
event of shocks to that economy created by the system that we 
would be putting in place with this legislation?
    Mr. Baugh. Senator, as currently structured, I do not 
believe so. My testimony was directed toward that. It is a 
system that has weak tools. It takes too long to implement them 
when there are prolonged price hikes, 180 days. It has an open 
market system. Anybody can compete.
    Let me give you an example of the volatility. The State of 
Illinois is actually doing carbon market trading. I just talked 
to the Electrical Workers from there two weeks ago at an energy 
conference. The number one bidder for allowances was a utility, 
the number two bidder was a utility. The number three bidder 
was Goldman Sachs.
    If you want speculatory behavior, speculation, if you want 
predatory behavior, we are going to create it. I think that is 
why we would argue for a much more restricted market system 
that would operate to avoid hoarding, to avoid predatory action 
and to say that you can bank allowances, but in perpetuity, 
that again can lead to other forms of bad behavior. I think we 
have questions about the effectiveness of that.
    Senator Voinovich. Thank you.
    Senator Lieberman. Thank you. It is my pleasure now to call 
on the Chairwoman herself, Senator Barbara Boxer.
    Senator Boxer. Thanks so much. I am sorry I had to run out 
for a couple of minutes.
    The gloom and doom presented to try and stop this bill for 
members is simply belied by the facts. Mr. Hawkins pointed out 
he didn't see any harm. But I want to tell you about a meeting 
I had with David Miliband, Britain's Foreign Secretary. He is 
the former Environment Minister. He told us that since 1990, 
Great Britain has reduced its greenhouse gas emissions by 15 
percent and its economy has grown by over 40 percent. So people 
can lob grenades on this point and try to scare folks, but it 
is just not true.
    All you have to do is look at my State, which is now 
starting down the path, it is the most exciting place in 
America to be. I would urge my colleagues who are so nervous 
about this, I don't blame you, change is hard, we all know 
that. But if we do nothing, it is very dangerous. Come to my 
State, just see what is happening in the venture capital 
community. There is a coming together of folks from the 
business community, there is a coming together with the 
environment community, with Republicans, with Democrats, with 
Independents, with students, everybody focused on this.
    The investments, I say to my friends Senator Lieberman and 
Senator Warner, who I know is listening to every word, the 
excitement because of your work and the signal it sends, the 
optimistic signal it sends. So I would argue every step of the 
way, those who are predicting gloom and doom. You sound just 
like the folks who predicted gloom and doom when we passed the 
Clean Air Act, the Safe Drinking Water Act, all the landmark 
laws. I am going to go back and actually get some of the nay-
sayers' comments. And you will find you fight right, oh, we are 
rushing this, we haven't really looked at this. The fact is, 
when you do the right thing for the American people, by 
stepping up to the plate and addressing a threat like this, it 
has its rewards. And not to do it is, in my view, very, very 
dangerous.
    Now, I wanted to ask Mr. Rowlett about his support of the 
carbon tax instead of the cap and trade. Is that correct? Is 
that what your position is?
    Mr. Rowlett. We have asked the Committee to consider a 
carbon tax in lieu of a cap and trade program, particularly 
during the transition period. It gives a better opportunity for 
the technologies to develop that would be necessary to operate 
under the cap and trade.
    Senator Boxer. Well, I think a carbon tax is what would hit 
lower income people the hardest. Right now, the way the 
Lieberman-Warner bill is written, it provides that low-income 
consumers will receive assistance from auction revenue in order 
to offset the costs. So I would posit that a carbon tax is the 
worst thing you can do. First of all, it is dead on arrival. I 
don't know too many colleagues that want new taxes. And 
secondly, I think it would be much more harmful to low-income 
people than what we have here.
    And then I would say, Mr. Sharkey, I understand your 
concerns about foreign competition for the steel industry. You 
look at my record, I have stood there and said, I want to do 
what is right for the American economy and I am sure you would 
see that in my voting record.
    Now, this bill addresses international competition by 
providing special allowances and resources to U.S. energy-
intensive industries like steel. Are you recommending we delete 
these provisions?
    Mr. Sharkey. We are simply indicating that we don't think 
they go far enough. We recognize the effort to address this 
particular problem, but we think the language that is currently 
in the bill is flawed and will not provide the necessary 
protection from competitors bringing product into this 
particular marketplace that is produced with a lower 
environmental standard.
    Senator Boxer. And so you have looked at the language that 
the Senators have really taken from the Jeff Bingaman approach?
    Mr. Sharkey. Yes.
    Senator Boxer. And you don't think it goes far enough?
    Mr. Sharkey. That is correct, ma'am.
    Senator Boxer. Well, let me say, this last summer, I went 
to meet with people who run the markets, the new carbon 
markets. I met with a lot of industry people. One of the 
amazing giants of industry there who is involved with steel and 
concrete and all this, they are really embracing this. They had 
concern at first. But they are embracing this. Because you 
know, if you look ahead, again, the cost of doing nothing. Now, 
I know industry in America and I used to be a stockbroker, so I 
watched very carefully what industry does to make sure profits 
are up and the rest.
    One of the major criticisms we have always seen is that 
there is not enough long-term thinking. I would just suggest to 
you that there is this train coming down the road called 
unfettered global warming. If we don't step up to the plate and 
address it, and I think what our colleagues have done here is 
to really take an approach that considers everyone. I think, 
when you hear some of the criticism of the bill, some say, give 
too much to steel, give too much to coal. Others say, don't 
give enough to steel, don't give enough to coal. Something, you 
have hit that balance, it seems to me, when you get that.
    From my view, I would do 100 percent auction first thing 
out of the box. And I will support those amendments when they 
come on the Floor of the Senate. Everyone knows where I am at 
on this. But to do nothing, again to make the perfect the enemy 
of the good I think is a big mistake. I would just urge you to 
stay at the table with us. I would hate to see you away from 
the table, because this is going to happen eventually, because 
it has to happen.
    And I want to thank you, Senator Lieberman. That would be 
all I have to say.
    Senator Lieberman. Thank you very much for what you did 
say.
    Senator Barrasso.
    Senator Barrasso. Thank you, Mr. Chairman.
    Mr. Baugh, in your testimony on page 6, you said you were 
concerned about an amendment that I did in conjunction with 
Senator Baucus. It is an amendment that defined the terms low-
rank coal in the bill. In your testimony you state you believe 
the amendment would undermine the technology transition that 
this legislation is attempting to achieve.
    In expressing concerns about my amendment, you stated in 
your amendment that there should be no distinction among coal 
types, such as higher rank or lower rank. I just wanted to know 
if you realize that in the underlying bill, it already made 
that distinction among coal types by setting aside allowances 
and that the amendment merely put a definition on what was 
called low-rank coal?
    Mr. Baugh. I would have to go back and look. I was 
responding to our colleagues from the United Mine Workers and 
others who raised that issue with us. They believed that it 
created a preference for western coal. We just said we didn't 
believe there should be preferences.
    Senator Barrasso. Well, there has been a lot of praise for 
the Lieberman-Warner bill. Are you saying that the Lieberman-
Warner bill was not correct initially in ensuring utilization 
of lower-ranked coal by promoting a small fraction of 
assistance to projects that used that coal? Because that is in 
the original bill.
    Mr. Baugh. Senator, I will have to go back and look. 
Honestly, I can't answer that question because I don't know for 
sure.
    May I clarify something, though? The bigger issue that was 
in there that I was implying that the transformation need for 
investments is in particular directed at the auto provision 
that was put into the bill that said you can't invest in 
anything other than an automobile that goes more than 35 miles 
per gallon. Frankly, when you talk about making research and 
development investments, whether it is hydrogen or hybrids or 
other things, you are investing in raising the energy 
efficiency of the fleet.
    You can't sort these things out this way. That is not how 
the industry works. We just think that that was a mistake, that 
it really should go back to the original language. We really do 
want to raise the level of the entire fleet. To do that, we 
have to make investments into these transformational 
technologies.
    Senator Barrasso. Mr. Hawkins, the target date on the bill 
is 2050. How much cooler do you think the planet will be if we 
pass this legislation but yet China and India don't follow suit 
with a similar cap and trade approach?
    Mr. Hawkins. Senator, if the United States passes this 
legislation, I am confident that China and India and other 
countries will engage much faster. And the contrary position, 
if the United States hesitates and does not pass legislation 
like this, we can be assured that China and India will not 
engage, and we will indeed be in a heap of trouble.
    Senator Barrasso. That sounds rather speculative. It is 
just a confidence you have in India and China's commitment to 
make that change in spite of what impact it may have on their 
own economies?
    Mr. Hawkins. It is a confidence that I have in the respect 
that the United States has in the world community and countries 
pay attention to what the United States does and they pay 
attention to what the United States does not do. For the last 
10 years, I have been going to China a couple of times a year 
and meeting with business leaders and political leaders as 
well. Every time we bring up advanced technology and ask the 
Chinese what they are doing about it, the first question they 
ask is, what is the United States doing about it.
    So the more that we can say that the United States is doing 
the more opportunities we have to engage them. This is not 
speculation. This is a method that works. We cleaned up cars in 
the 1970s. The Chinese then acted to clean up their cars. We 
took lead out of gasoline in the 1970s and 1980s. The Chinese 
have taken lead out of gasoline. They are now putting scrubbers 
on power plants, after we put scrubbers on power plants.
    Senator Barrasso. Mr. Hawkins, I have limited time to ask 
questions.
    So the answer is, you don't know if the planet will be 
cooler or not cooler if we do all this and China and India do 
not follow suit, which was the initial question?
    Mr. Hawkins. I am confident that if we take this action, 
the planet will be much cooler and the climate will be 
protected to a degree that we cannot count on if we fail to 
act.
    Senator Barrasso. Could you talk a little bit about jobs? I 
am very concerned about the Wyoming economy. How many jobs do 
you predict would be lost in our State if this does take place? 
Because you had talked about jobs increasing rather than 
decreasing.
    Mr. Hawkins. Yes. We think, jobs are created when goods and 
services that people value are created. The world is going to 
value clean energy solutions. Renewable energies from your 
State are going to enjoy a thriving business. With coal 
technologies that capture carbon, which are going to be 
incented by this bill, again you will have a market for 
technologies. There will be industries as companies like Rio 
Tinto have observed. They will get paid for taking carbon out 
of the ground and they will get paid for putting carbon back 
into the ground. This is a job creation program.
    Senator Barrasso. And of course, that company has just 
announced it is going to sell all its North American assets.
    Thank you, Mr. Chairman.
    Senator Lieberman. But before they did, they announced that 
they were going to be members of the U.S. Climate Action 
Partnership.
    [Laughter.]
    Senator Lieberman. Senator Carper.
    Senator Carper. Thanks, Mr. Chairman. Again, to our 
witnesses, thanks so much for your testimony and your responses 
here today.
    I have a couple of questions for Mr. Sharkey and one for 
Mr. Hawkins. Let me just start with Mr. Sharkey. In an earlier 
version of your testimony, you talked a little bit about the 
very fine job that the industry you represent has done with 
respect to recycling. We applaud you for that and want to make 
sure that it continues. You mentioned in your testimony, your 
earlier testimony, you said, I understand that Senator Carper 
may offer a recycling amendment to the bill. That is correct. 
Then you go on to say the use of recycling materials as raw 
materials, feedstock, in the manufacturing process can 
significantly reduce and even avoid in some cases greenhouse 
gas emissions. I would say amen.
    In crafting an amendment that we are probably going to 
offer on recycling, and my colleagues that I will be asking to 
support, give us some idea what you think might be 
constructive.
    Mr. Sharkey. We will need to take that under advisement and 
we will be back to you very shortly.
    Senator Carper. If you could respond for the record, I 
would appreciate that.
    A second one, if you would, I think in your testimony you 
discussed the reductions in CO2 emissions per ton of 
steel that your industry has achieved I think since 1990. In 
your opinions, are there some policies that we could include in 
this legislation that are discussing today that would reward 
the progress that your industry has already achieved?
    Mr. Sharkey. Obviously we would pay very close attention to 
credit for early action and whatever timeframe might be set for 
that. I think that would be an important issue.
    I think support for new technology deployment is very 
important. We currently have a public-private partnership with 
the Department of Energy, working on many of these 
technologies. But frankly, the United States is way behind what 
is occurring in Japan, Korea, the EU, where there are very 
aggressive support programs to develop this new technology.
    Senator Carper. All right, thank you.
    And one for Mr. Hawkins, if I could. Mr. Sharkey expressed 
earlier some concerns over I think the allowance obligations 
that the industrial sector will face in, I believe it is 2012. 
I would just ask, and this may not be a fair question, but I 
will ask it anyway, and if you can answer it, fine. If not, 
just come back to me on the record. But what will those 
obligations be? And what are the 2005 industrial emissions 
compared to the amount of allowances that will be given for 
free? Just think about that. What allowances are going to be 
given for free and what actually do they emit for 
CO2 in 2005?
    Mr. Hawkins. The bill provides that 20 percent of the total 
allowance pool is available for free initially to the 
industrial sector. Another 20 percent is available to the 
electric power production sector. I can get you the figures on 
what the industrial emissions were in 2005. I don't have those 
figures broken out separately for the industrial and the power 
production sector. The total covered emissions in 2005 for all 
covered sources are on the order of 6 billion tons of carbon 
dioxide per year.
    Senator Carper. Somehow, I am thinking in the back of my 
mind that the allowances may actually be greater, the ones that 
are for free, might actually be greater than the level of 
emissions in 2005. I don't know if it is just with respect to 
one sector of the industrial economy or more. But if that is 
the case, that is an interesting point. We will get to the 
bottom of that, if you can answer for the record, I would 
appreciate it.
    Mr. Hawkins. I would be happy to do that. If they aren't 
greater, they are certainly a very high fraction of their total 
obligation. And when combined with offset provisions and 
others, we think that the argument that the industrial sector 
will have difficulty in meeting these targets is not well-
founded.
    Senator Carper. Does anybody else have a thought on this 
point before we move on? No?
    Okay, Mr. Chairman, thanks so much.
    Senator Lieberman. Senator Carper, thank you very much.
    Senator Alexander.
    Senator Alexander. Thank you, Mr. Chairman.
    Dr. Greene, I want to make sure I understood your comments 
correctly. The Senate in its Energy Bill passed higher CAFE 
standards, 35 miles per hour average, by 2020. Did I understand 
you to say that would be the single most important policy that 
the Congress could take in the transportation sector for 
reducing our dependence on oil?
    Mr. Greene. That and reducing greenhouse gas emissions.
    Senator Alexander. So in both cases, that would be the 
single most important policy within the transportation sector?
    Mr. Greene. In my opinion, yes.
    Senator Alexander. In order to reduce greenhouse gases and 
reduce our dependence on oil. You also mentioned some figures, 
and I was trying to follow them. Did you say that the change in 
a $10 price in the barrel of oil was equal to about 25 cents in 
a gallon of gas?
    Mr. Greene. Yes.
    Senator Alexander. So if the price of oil went from $90 to 
$100 in the last couple of weeks, that basically will 
eventually raise the price at the pump a quarter? Is that 
right?
    Mr. Greene. Yes.
    Senator Alexander. What did you say, you said something 
about $25 a ton. Does the cost of $25 a ton of carbon cost 
about a quarter on a gallon of gas, or did I misunderstand you 
there?
    Mr. Greene. No, that is correct.
    Senator Alexander. I would like to ask you about the idea 
of a low-carbon fuel standard. How would you define what we 
mean by a low-carbon fuel standard?
    Mr. Greene. Well, one sets a limit for the quantity of 
carbon that can be emitted from burning, say, all of 
transportation fuels in the United States.
    Senator Alexander. So you would basically say to the oil 
companies or to the seller of gasoline that in the blend that 
you mix you have to have a steadily decreasing amount of 
carbon?
    Mr. Greene. Probably to the refiners, yes.
    Senator Alexander. You would say it to the refiners?
    Mr. Greene. Probably. You could do it in different ways.
    Senator Alexander. But probably to the refiners.
    Mr. Greene. Yes.
    Senator Alexander. Now, compared to a so-called upstream 
tax on the economy, which includes fuel, it seems to me that 
the possibility that we put an upstream tax on fuel, economy-
wide tax that also includes fuel, that we might raise the cost, 
that the companies or refiners might just simply pass that tax 
along to the customer at the pump, and it wouldn't have the 
effect of changing behavior, while a low-carbon fuel standard 
should have the effect of actually reducing the amount of 
carbon in the air. Is that a valid comment?
    Mr. Greene. I don't know of a study that looks at the 
effect of the carbon tax on eventual carbon content of fuels. 
So how sensitive is the transportation fuel industry to a tax 
on carbon I don't think we really understand yet. But clearly, 
the low-carbon fuel standard sets a performance standard. I 
think the reason California has gone ahead with a low-carbon 
fuel standard is their belief that it is a method of pulling 
technology along.
    Senator Alexander. If I may ask, I have one other question 
I want to ask Mr. Rowlett, if you had an effective low-carbon 
fuel standard, a steadily-decreasing requirement in the 
transportation sector for fuels, why would you also need a so-
called upstream tax on fuels? Why wouldn't the low-carbon fuel 
standard, properly administered, be sufficient?
    Mr. Greene. I think this is the same question as, should 
there be a tax on carbon or should there be a carbon cap and 
trade system, on the sense that the low-carbon fuel standard 
essentially sets a performance goal and says, this is how much 
carbon you can emit and what that costs remains to be seen.
    Then the carbon cap and trade system in this case would put 
a price on the carbon and how much reduction in carbon that 
price would achieve remains to be seen.
    Senator Alexander. Thank you, Dr. Greene.
    Mr. Rowlett, I understood you to say that while you are 
quadrupling your investment in wind that it is not an 
alternative to your baseload requirements.
    Mr. Rowlett. Exactly.
    Senator Alexander. Do you then use it as a reliable 
alternative during peak periods?
    Mr. Rowlett. It is not dependable at all during peak 
periods.
    Senator Alexander. Well, if you don't use it for baseload 
or peak periods, why are you investing in it?
    Mr. Rowlett. We are investing in it to lower our carbon 
footprint.
    Senator Alexander. So you mean you can't use it, but 
regulations are requiring you to build wind turbines?
    Mr. Rowlett. We can use it when the wind is available. And 
it offsets----
    Senator Alexander. But it is not a baseload and it is not 
peaking?
    Mr. Rowlett. Absolutely.
    Senator Alexander. What other use do you have for 
electricity, if it's not baseload or peaking?
    Mr. Rowlett. Well, to provide for needs when it is not 
baseload and it is not peaking.
    Senator Alexander. When would that be?
    Mr. Rowlett. It is whenever the wind is available. When the 
wind is blowing and it is generating electricity, it offsets 
coal or----
    Senator Alexander. But your testimony is you don't use it 
in your utility for baseload and you can't use it for peaking?
    Mr. Rowlett. Right.
    Senator Alexander. But you do it because you are required 
to lower your carbon footprint?
    Mr. Rowlett. Well, in our case we don't have an RPS 
standard. We are doing it, we are trying to take some proactive 
actions to reduce our carbon footprint without it ever being a 
mandate. That is sort of the bargain that we have reached with 
our local and State legislators.
    Senator Alexander. Thank you very much, Mr. Chairman.
    Senator Lieberman. Thank you, Senator Alexander.
    And now for the climax of the hearing, Senator Whitehouse. 
You don't have to mention Long Island Sound.
    Senator Whitehouse. Can I mention Narragansett Bay?
    Senator Lieberman. Yes, you can.
    [Laughter.]
    Senator Whitehouse. Mr. Baugh, I wanted to follow up with 
you because your testimony addresses most directly the concern 
about integrity of the allowance marketplace. First of all, you 
have the concern about offsets and about monitoring their 
legitimacy, particularly when it gets to overseas, potentially 
duplicative credits. Beyond that concern, do you have any 
recommendations on what we should set up institutionally to 
protect against that concern? How would you see us evaluating 
the legitimacy of offsets and claims and protect against the 
counterfeit carbon savings problem?
    Mr. Baugh. In all honesty, Senator, we haven't thought this 
through, to give you a straight-up answer on that. We think it 
needs to be done. We recognize it is a problem. We are more 
than willing to sit down with everyone and work through this, 
so that the legitimacy of the overseas issues are addressed and 
taken care of. We think the 33 percent total ability to offset 
from domestic and international is a lot. And we worry that, is 
that a disincentive to manufacturers and those to make the 
transitional investments we need to have made in the domestic 
economy.
    The other piece of that is this issue of the offsets that 
are here domestically, there have been some things that were 
put into the bill to address this. But I am concerned about 
paying for behavior that is going to happen anyway. We don't 
want to do that.
    Senator Whitehouse. Well, I look forward to working with 
you as well. I feel about it the same way you do, we have a big 
problem, and I am looking around for people who have thought 
ahead through the switches a couple of steps. I am not finding 
much there.
    The other is the question of how you regulate the allowance 
trading itself. We have seen in American history numerous 
examples of markets gone bad, silver markets, stock market 
scams, all sorts of things. Here there is going to be an awful 
lot of money flowing. In my view, the regulation of it is very 
minimal.
    You have proposed restrictions on the timing, of how long 
allowances can be held, and the access, who can trade in those.
    Mr. Baugh. I think very simply, I think this can act as 
sort of a natural regulatory mechanism, in a sense, that if the 
access to the market is limited to the people who have to use 
allowances to begin with, and remember, it is a declining pool, 
it is a diminishing pool to begin with, they have to buy them 
anyway, but limit it to the people who actually have to use 
them. Goldman Sachs should not be buying allowances. That leads 
to all kinds of bad outcomes for people. Artificially high 
prices, which people are worried about on this Committee, and 
the banking issue I think is problematic from that point of 
view. There may be legitimate reasons to allow certain forms of 
banking. But again, when does banking become hoarding and lead 
to behavior you really don't want to use?
    I think the idea of the carbon market board and the trading 
system is, people have to buy these because they have to use 
them. It should be done in such a way that it is also 
encouraging the investment of their resources into the 
transitional technology at the same time. That is why we oppose 
this idea of just this wide open market system. We think it is 
very problematic and will have huge price outcomes, bad ones, 
for the American public and American industry.
    Senator Whitehouse. Do you think someone needs to oversee 
the board?
    Mr. Baugh. Oh, absolutely. I know the suggestion is that it 
is like a Federal reserve. That may be. I think Congress has a 
role here.
    Senator Whitehouse. Maybe more like the stock market, which 
has a pretty active SEC requirement.
    Mr. Baugh. Well, I don't know if we need to go the SEC and 
our criticisms of that. But it is a problem, that is like the 
foxes guarding the henhouse there. I don't think we want that, 
either.
    Senator Whitehouse. You do think there needs to be some 
entity of some kind?
    Mr. Baugh. I think there needs to be some entity of some 
kind. Senator, we share your concerns that you raised in your 
opening statement.
    Senator Whitehouse. Are you convinced that the governance 
of this board is adequate?
    Mr. Baugh. I think it is a start. I think it should be 
broadly based. We think labor should be represented on it. We 
said as much in our earlier testimony.
    Senator Whitehouse. And I wonder about the accountability 
of it and the openness of it, the transparency of it, just in 
terms of things like open meetings requirements, open records 
requirements, Administrative Procedures Act requirements.
    Mr. Baugh. As a public body, that should be a given. I 
think this issue of transparency, that the public sees, that 
industry sees the people that are participating, everybody 
understands what is happening here.
    My last comment would be, people don't want to talk about 
taxes, but in fact, the cap and trade program is in effect a 
tax.
    Senator Whitehouse. It sure is.
    Mr. Baugh. It will raise revenue just like you could raise 
tax revenue. You can choose to use some of that revenue to 
offset the impacts on the low-income people, just like the cap 
and trade proposal does. Nobody is fooling each other: this 
will raise the cost of energy. The question is, how do we do it 
in a way that does not have negative impacts on our industrial 
base of this Country, that is done in such a way that the 
consumers don't get hit very hard about this, and that we make 
this transition, and that the investments that we are going to 
put out there should be made.
    There are allowances allowed for the line agencies, right, 
for the transmission agencies. Well, make it clear on the 
record that if they are going to get allowances, they don't 
generate or produce carbon. If they are going to do that, then 
they have to make that, take that money, that resources and 
invest in high-efficiency energy with technologies that are 
there. It can make a big step toward some of the energy 
efficiency needs we have.
    I guess I am saying, there are a number of ways we need to 
be more direct in the legislation to look out for the interests 
of the Nation, to assure that these jobs are created here, that 
we keep the jobs we have, and that we get the rest of the world 
to play.
    Senator Whitehouse. Thank you very much.
    My time has expired. I thank the Chair.
    Senator Lieberman. Thanks, Senator Whitehouse. Those were 
very interesting questions and answers. I will just say real 
briefly that Senator Warner and I, Senator Warner was 
particularly focused, in the construction of the bill, on 
maintaining the integrity of the systems. I will say to you 
that the Carbon Market Efficiency Board, as we have conceived 
it thus far in the bill, plays a role much more akin to the 
Federal Reserve Board than to the SEC. It could be that, well, 
you probably know, check me, on the acid rain system, they are 
subject to regulation by the CFTC, or the SEC?
    Mr. Hawkins. Actually, the acid rain, sulfur dioxide 
trading program has many of the features that concern Senator 
Whitehouse but don't have the problems that he is worried 
about. There is free and open trading. There is unlimited 
banking. Anyone can hold allowances. We have not seen the 
problems develop that Mr. Baugh and Senator Whitehouse have 
indicated.
    Senator Lieberman. But remind me, is that trading system 
subject to oversight by the Commodities Futures Trading 
Corporation?
    Mr. Hawkins. Individual trading firms like the Chicago 
Board of Trade are subject to the standard, whatever they are 
subject to with respect to any other commodities. But the acid 
rain permit system itself is operated by EPA. EPA issues the 
permits, the certificates. They are traded. They have to be 
turned into EPA every year. And as I say, the problem with 
hoarding, the problem of stock speculation, simply hasn't 
occurred.
    Senator Lieberman. This is something we want to continue to 
work on, because it may be that we want to give some enumerated 
oversight to some existing regulatory entity like the SEC or 
CFTC. But as you said, these markets presumably will occur on 
one of the existing exchanges. And those exchanges are subject 
to review by existing regulatory groups.
    But this is an open question. I would love to continue 
working on it with you.
    The second is that you are right, that this business of the 
allowances and the auctions, the auctions are going to raise a 
very significant amount of money. To me, that says two things. 
One, we want to make sure that to the best of our ability, we 
create a system in which the Climate Change Credit Corporation, 
which will collect and distribute this considerable amount of 
money, sets up systems to make sure that, to the best of 
anybody's ability, that it is spent well. Our intention here is 
to both reduce some of the price impacts of our system, but 
also, and this is most significant, to re-invest the money 
collected as a result of the auctions in technologies that will 
drive exactly what happened in the iron and steel sector of our 
economy, hopefully creating more jobs, certainly protecting 
jobs.
    I will tell you that we have phrased the allocation of the 
auction proceeds in terms of percentages. But there are groups 
outside who have now tried to convert that, in a reasonable 
basis, to actual dollars. It is an enormous amount of money. 
And I want to say in a positive sense, if we do everything we 
can to guarantee the integrity of it, and it is intended to 
achieve public purpose, in fashioning a system to deal with the 
global challenge of global warming, we have within our grasp 
the opportunity to create what a lot of people have been saying 
we needed to do for a long time, whatever your metaphor is, 
whether it is a Manhattan Project or a moon shoot, to make 
America energy independent. And incidentally, to also help to 
clean up other forms of air pollution that affect people's 
health.
    So there is a real opportunity here, and as others have 
said, a lot of money will be on the table. But we have to be, 
Senator Warner and I want to make very sure that we do 
everything we can to not only ensure the integrity of the 
system when that money is on the table, but that it is used as 
a kind of vast venture capital pool to really unleash the most 
aggressive entrepreneurial, innovative talents that history 
shows us are there in the American economy.
    You have given us a lot of time and I thank the witnesses. 
This has been a very interesting hearing, as the last one was. 
I think in both the question and the comments of the members of 
the Committee and the exchanges with the witnesses, we are 
going to a level of practical detail about the bill, which is 
very encouraging. It is not that everybody agrees, and not that 
everybody says yes, I support the bill. But I don't hear 
anybody much any more saying this is not a problem. I think 
everybody is pretty much saying we have a problem here, now 
what is the most sensible, effective way to solve it. These 
hearings and your testimony today has really helped us to do 
that.
    So I appreciate it very much. The hearing record will stay 
open for an additional week for statements that other Committee 
members may want to ask the witnesses, or if you or others want 
to file additional statements for the record.
    With that, I thank you again and adjourn the hearing.
    [Whereupon, at 1:30 p.m., the committee was adjourned.]
    [Additional statements submitted for the record follow.]

    
    
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            AMERICA'S CLIMATE SECURITY ACT OF 2007, S. 2191

                              ----------                              


                       TUESDAY, NOVEMBER 15, 2007

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

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

    Senator Boxer. Good morning. The hearing will come to 
order.
    We are very happy to be here again to talk about a very 
important subject that my colleagues wanted to have more 
hearings on. We are hoping they do come.
    I note Senator Voinovich is here, and that is very good, 
Senator, I think that much of you.
    But let me just say, instead of going through my usual 
opening of these hearings, which is that we have to act, we 
must act, and praising Senators Lieberman and Warner for all 
their work and all my colleagues for their help and the outside 
groups, what I want to do for my opening statement, which is 5 
minutes, is to call our attention to an article today in the 
New York Times: Governors Join in Creating Regional Pacts on 
Climate Change. There are three really wonderful photographs of 
my Governor, Governor Schwarzenegger, talking about the threat 
of greenhouse gases. We all know that Arnold Schwarzenegger is 
a Republican. Utah Governor John Huntsman said western 
Governors are setting ambitious targets. He is in this article. 
And he is a Republican. And Democratic Governor Brian 
Schweitzer, a Democrat, of Montana, saying, do something, 
anything, move.
    And I can't tell you how excited I am about this, because 
there is going to be a big advertising campaign. Now, I am not 
under-estimating the fact that the other side will have one as 
well. But I want to talk about this one. Beginning Monday, 
three western Governors will appear in a nationwide television 
advertising campaign sponsored by an environmental group trying 
to generate public and political support for climate change 
legislation now before the Senate. The 30-second ad features 
Arnold Schwarzenegger, Republican, of California, John 
Huntsman, Republican, of Utah, and Brian Schweitzer, Democrat, 
of Montana, standing in casual clothes in scenic spots, talking 
about the threat posed by greenhouse gas emissions.
    The Nation's Governors are acting, but Congress is not, 
they say. Now it is their turn, says Arnold Schwarzenegger. And 
indeed, I couldn't agree more. This is the moment, and we are 
poised to do landmark legislation. I know that I sometimes 
reiterate and my kids tell me that all the time, but I think 
some things are worth repeating, and that is that we have a 
window here to act, and we need to act. I truly believe that 
our generation is going to be judged by whether or not we do 
the right thing at this moment.
    Senator Warner, who I understand will be here in a little 
while, when he comes, if it is okay with my colleagues, we will 
stop what we are doing and listen to him, because he has that 
problem of not being able to sit for long periods of time. And 
Senator Lieberman, this amazing breakthrough that they 
achieved, the many hearings that we have held and all the 
groups that have come to the table, this is not an easy thing 
to do. But I am convinced we can and must act.
    With that, here we are at another hearing. I am very happy 
to see three of my Republican friends here. I hope colleagues 
on both sides will come throughout the morning. That is about 
what I have to say. I have made copies of this article for 
Senators, if you are interested in reading the entire thing. I 
will place this in the record, without objection.
    We are going to go in order of arrival, which I have here 
as Senator Barrasso.

STATEMENT OF HON. JOHN BARRASSO, U.S. SENATOR FROM THE STATE OF 
                            WYOMING

    Senator Barrasso. Thank you, Madam Chairman. Thank you 
again for the hearing.
    As I have stated throughout this debate on this 
legislation, we must adapt, we must make changes to address the 
effects of global warming. This past weekend, flying home to 
Wyoming as I do every weekend, there is a special energy 
section of the Financial Times. And in it, they said, Big Hopes 
Pinned on Carbon Capture. I would just like to read a couple of 
paragraphs from here. It says, ``Coal is abundant and 
relatively cheap. China and India have huge coal reserves and 
are using it to fuel their rapid economic development.'' Then 
it says, ``Asking developing countries not to exploit their 
coal reserves is unrealistic, say many energy analysts. The 
answer is finding a way to burn coal that limits its carbon 
emissions, hence the current interest in so-called clean coal 
technology. Clean coal technology includes equipment to make 
coal-fired power plants more efficient, such as super-critical 
boilers. But the most exciting prospect is so-called carbon 
capture and storage, which involves capturing the carbon 
dioxide before it is released into the atmosphere, turning it 
into a liquid and storing it.''
    Then it goes on, and I have a chart to show exactly this 
quote. This is from Lord Oxbow. It says, ``Lord Oxbow, former 
chairman of Shell, said in an energy debate last month that 
clean coal technology was the world's best hope for tackling 
climate change.'' Clean coal technology, the world's best hope 
for tackling climate change. He said coal would continued to be 
burned, and while renewables and nuclear could play a part in 
reducing emissions, carbon capture was the only technology for 
managing climate change that we cannot do without. The only 
technology for managing climate change that we cannot do 
without.
    Madam Chairman, the World Energy Congress met this past 
week in Rome. There is a story out in the Associated Press 
today, dateline actually yesterday, it says, ``China and India 
are under pressure to reduce their carbon emissions by energy 
executives and Government representatives. The energy 
executives and Government representatives agreed yesterday that 
the two blooming economics will be sticking with coal, whether 
the rest of the world likes it or not.''
    And then they quote the Secretary of the Indian Ministry of 
Power: ``India and China need cleaner coal technology. That is 
the technology they are going to use for generating power, 
whether the rest of the world likes it or not.'' And we heard 
here in testimony the other day that, well, if we develop the 
technology and put on these restraints that may affect our 
economy negatively, that China and India would just follow suit 
because of our leadership in the world. I am not convinced, and 
this comment out of the World Energy Congress by the Indian 
Ministry of Power says they are continuing to use coal, whether 
the rest of the world likes it or not. So Madam Chairman, I 
think that we need to work and put the effort into the 
technology, which then we can get spread around the world, so 
we can continue to use the sources of energy which are 
certainly important in the west, coal, but also which are going 
to continue to be used for the next half century in China and 
India.
    Thank you, Madam Chairman.
    Senator Boxer. Senator Barrasso, I just think you made the 
case for the Lieberman-Warner bill. The Lieberman-Warner bill 
has many provisions designed to assure that coal will continue 
to play a large role in our energy portfolio, clean coal. And 
this bill devotes tens of billions of dollars to clean coal. It 
is really a Manhattan Project for coal.
    So I hope that in your conversations with Senator Warner 
and Senator Lieberman, you will give them the opportunity to go 
through this and show you why what you said is thoroughly 
consistent with the bill that they have written.
    Senator Barrasso. As long as there are guidelines that are 
such that we can continue to move toward credible numbers, 
rather than put a number so high that people wave a surrender 
flag.
    Senator Boxer. Well, you know, everybody wants it done 
exactly the way they want it done. But I just need to tell you 
that everything that you said about coal is reflected in this 
bill. In many ways, so much so that other people are critical 
of it, they say it is too much. But it is all right. I think 
what you said is key. I think again, it gives me hope that you 
can come on board with this bill, hopefully.
    Senator Carper.

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

    Senator Carper. I have no comments, other than to say 
welcome, we are delighted to have you here. We have had a 
chance to say our piece for the last couple of weeks, and today 
we would love to hear you say yours. Thank you for joining us 
and to help us shape this legislation.
    Senator Boxer. Thank you, Senator.
    Senator Voinovich.

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

    Senator Voinovich. I thought this was good, what Senator 
Barrasso said. We want to accomplish the same thing.
    Senator Boxer. Good.
    Senator Voinovich. The question is how do we get there.
    Senator Boxer. Good.
    Senator Voinovich. On this final hearing before markup, I 
want to again express my concern with the lack of time to 
respond to the legislative text or receive an EIA or EPA 
analysis of what must be the most significant legislation ever 
to appear before this Committee, rivaling the Clean Air Act and 
the Clean Water Act and other environmental statutes combined. 
We have to understand that this is the most significant 
legislation that we have ever considered in this Committee 
probably in its history.
    The bill will place a massive bureaucratic intrusion into 
the American lives, it will have a profound impact on 
businesses, communities and families. Madam Chairman, you seem 
ready to disregard the modeling data presented by Charles River 
Associates during last week's hearing, preferring analyses 
conducted by environmental organizations instead. But this is 
the only comprehensive analysis of the proposal we have. And 
while we may not like the story that emerges from the data, 
there is no credible reason to disregard its results.
    The analysis presented by Anne Smith, who is a highly 
regarded economist, presented a devastating critique of this 
policy proposal, estimating that by 2020, the policy would 
result in the loss of as many as 3.4 million American jobs, an 
annual decrease in disposal income by as much as $2,500 and 
annual losses in GDP of $1 trillion. It is important to note 
that these projections are national averages.
    In reality, the impacts will be far greater for States in 
the Midwest, Great Plains and Southeast who depend on coal for 
much of their electricity. In fact, Duke Energy, a major 
electricity provider in Ohio, released data indicating that 
customers in their service area could suffer a 53 percent 
increase in electricity bills when this policy becomes 
effective in 2012. Duke Energy, as many of you know, is a U.S. 
CAP company, many of whom are now coming out against this 
policy proposal as demonstrated by a November 14th letter from 
the International Climate Change Partnership.
    Madam Chairman, I would ask that this letter be inserted in 
the hearing record.
    Senator Boxer. Without objection.
    Senator Voinovich. I see nothing that would dispute the 
modeling results presented by Ms. Smith. In fact, they are 
consistent with what many expected from this proposal. Senator 
Lieberman himself confirmed this policy was more aggressive and 
costly than S. 280, and the numbers bear this out.
    I urge my colleagues to take a hard look at Ms. Smith's 
analysis. Indeed, we are staring down the barrel of a gun. But 
the gun has two barrels. One may be climate change, but the 
other is our competitive position in the global marketplace. 
While there is little question that this policy will hurt our 
economy, it is far from clear that the bill will do anything to 
avert climate change. In fact, we look to EPA's analysis of 
previous bills, some even more stringent than this proposal, 
and the evidence suggests that it will not.
    I agree with the Chairman's statement of Tuesday that we 
shouldn't let the perfect be the enemy of the good. But this 
problem is not so simple. The evidence suggests that this bill 
is neither perfect nor good. Proponents of this legislation 
like to point to the economic impacts of previous environmental 
initiatives as evidence that compliance costs won't be as dire 
as predicted.
    And maybe the impacts won't be as hard-hitting in States 
that use little or no coal for electricity or have no 
manufacturing base. But in States like Ohio, we are all too 
familiar with the results. Natural gas prices are up 300 
percent since 2001. And we have seen the exodus of 
manufacturing jobs to overseas markets, stemming largely from 
poorly-calibrated environmental policies.
    Moreover, solving the problem is not as simple as forcing 
companies to install end of pipe technologies, because the 
technologies don't exist. Senator Barrasso made a good point 
with the Financial Times. Solving this problem will require 
technological revolution and a wholesale transformation of our 
economy centered on the way we use and produce energy.
    I will be the first to agree that there has been a void in 
the debate concerning the appropriate policy in terms of 
climate change. But there are alternative policies now under 
consideration that are less intrusive, less costly and that 
will achieve greater reductions in emissions faster than what 
we are considering today. Policy approaches that better 
stimulate actual innovation and transformative technologies, 
better avoid administrative complications, and this will be a 
gigantic administrative undertaking by the EPA to put this 
legislation into place, better address the challenge of a 
newly-industrialized world, and that better address avoidance 
behavior and that limit opportunities to game the system.
    I urge my colleagues to slow this process down, so that a 
reasonable policy to address climate change can be developed. 
It makes no sense for us to empower a gigantic bureaucracy with 
control over nearly every aspect of the American economy and 
indeed, our lives, for little or no environmental benefit. 
There are alternatives that should be and must be considered 
before moving forward with this proposal.
    And Madam Chairman, I hope that we consider those 
alternative proposals before we hit the Floor, and if we don't, 
then we will discuss them next year when this bill does hit the 
Floor of the United States Senate.
    [The prepared statement of Senator Voinovich follows:]
     Statement of Hon. George V. Voinovich, U.S. Senator from the 
                             State of Ohio
    Madam Chairman,
    On what is the final hearing scheduled for S. 2191 before mark-up, 
I again want to express my concern with the lack of time to respond to 
the legislative text, or receive an EIA or EPA analysis, of what may be 
the most significant legislation ever to appear before this committee--
rivaling the Clean Air Act, Clean Water Act and other environmental 
statutes combined.
    This bill contemplates a massive bureaucratic intrusion into 
Americans lives that will have a profound impact on businesses, 
communities and families. Madam Chairman, you seemed ready to disregard 
the modeling data presented by Charles River Associates during last 
week's hearing--preferring analyses conducted by environmental 
organizations instead. But this is the only comprehensive analysis of 
the proposal we have. And while we may not like the story that emerges 
from the data, there is no credible reason to disregard its results.
    The analysis presented by Anne Smith, who is a highly regarded 
economist, presented a devastating critique of this policy proposal, 
estimating that by 2020 the policy would result in the loss of as many 
as 3.4 million American jobs; an annual decrease in disposable income 
by as much as $2500; and annual losses in GDP of $1 trillion. 
Naturally, the prices of electricity, natural gas, gasoline and other 
necessities skyrocket under this proposal.
    It is important to note that these projections are national 
averages. In reality, the impacts will be far greater for states in the 
Midwest, Great Plains and Southeast who depend on coal for much of 
their electricity. In fact, today Duke Energy, a major electricity 
provider in Ohio and a U.S. Cap company I might add, released data 
indicating that customers in their service area could suffer a 53 
percent increase in electricity bills when this policy becomes 
effective in 2012.
    I have seen nothing that would dispute the modeling results 
presented by Ms. Smith. In fact, they are consistent with what many 
expected from this proposal. Senator Lieberman confirmed in last week's 
hearing that this was a more aggressive and costly policy than S280, 
and the numbers bear this out this prediction.
    I urge my colleagues to take a hard look at Ms. Smith's analysis. 
Indeed we are staring down the barrel of a gun, as many of our 
environmental friends like to point out. But the gun has two barrels--
one may be climate change, but the other is our competitive position in 
the world market place. And while there is little question that this 
policy will hurt our economy, it is far from clear that the bill will 
do anything to avert climate change. In fact, if we look to EPA's 
analyses of previous bills--some even more stringent than this 
proposal--the evidence suggests that it will not.
    I agree with the Chairman's statement of Tuesday that we shouldn't 
let the perfect be the enemy of the good. But this problem is not so 
simple: the evidence suggests that this bill is neither perfect, nor 
good.
    Proponents of this legislation like to point to the economic 
impacts of previous environmental initiatives as evidence that 
compliance costs won't be as dire as predicted. And maybe the impacts 
won't be as hard hitting in states that use little or no coal for 
electricity or that have no manufacturing base. But in states like 
Ohio, we're all too familiar with the results: natural gas prices are 
up 300 percent, and we've seen an exodus of manufacturing jobs to 
overseas markets, stemming largely from poorly calibrated environmental 
policies.
    Moreover, Carbon dioxide is more ubiquitous and more difficult to 
control than the criteria air pollutants subject to caps under current 
Clean Air Act programs. Solving this problem is not as simple as 
forcing companies to install end of pipe technologies because the 
technologies don't exist. Solving this problem will require 
technological revolution and a wholesale transformation of our economy, 
centered on the way we use and produce energy.
    I will be the first to agree that there has been a void in the 
debate concerning the appropriate policy address climate change, 
leaving many to believe that cap and trade is the only policy option to 
address this problem. But there are alternative policies now under 
consideration that are less intrusive, less costly and that will 
achieve greater reductions in emissions faster than what we now 
consider. Policy approaches that: better stimulate actual innovation in 
transformative technologies; better avoid administrative complications, 
better address the challenge of the newly industrializing world; and 
that better address avoidance behavior and that limit opportunities to 
``game the system.''
    I urge my colleagues to slow this process down so that a reasonable 
policy to address climate change can be developed. It makes no sense 
for us to empower a giant bureaucracy with control of nearly every 
aspect of the American economy, and indeed our lives, for little or no 
environmental benefit. There are alternatives that should and must be 
considered before moving forward with this proposal.
    Thank you.

    Senator Boxer. Thank you, Senator.
    Senator I wanted you to know yesterday our staff walked 
your staff through a modeling that used the EIA data, the same 
computer modeling. So they have been briefed on this and I want 
to make sure that you get a copy of it. So the Department of 
Energy, we use the same computer modeling the Clean Air Task 
Force did, and we came up with a model here which we shared 
with your staff. We have also joined, Senator Lieberman has, in 
asking EPA to do a model. So we are very much looking forward, 
because this model came out really well in terms of economic 
growth. But I just wanted to make sure you knew your staff was 
briefed on this.
    Senator Voinovich. May I point out, Madam Chairman, that 
the Clean Air Task Force is an environmental organization.
    Senator Boxer. Yes, I know that.
    Senator Voinovich. And I want to say this, I want to 
publicly thank you for the fact that you and your staff have 
requested an impact statement of this legislation by the EPA 
and by the Energy Information Agency. Thank you very much.
    Senator Boxer. You are very, very welcome. This is true 
that the Energy Department will, however, use the same 
computer. So I just, hopefully that will come out the same way.
    Now, we are just going to go down in order of arrival, but 
I have to ask if my wonderful Ranking Member will give his 
opening statement, and then we will go down the rest.

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

    Senator Inhofe. I will, and I thank you for that.
    We have a problem that Senator Warner and I both have, and 
that is that we are having our U.S. Army hearing in the Senate 
Armed Services Committee, it is required attendance. Kind of 
like this is, Madam Chairman.
    Senator Boxer. Yes, I know.
    Senator Inhofe. I found the legislative hearings conducted 
over the last week to be really informative. I am sure it has 
been the case for other members of the Committee. As we begin 
the process of digesting this testimony, I would like to share 
what I think are common themes of all the hearings. This will 
be very, very costly. I think we understand that. The impacts 
will be severe and the bill will have significant impacts on 
energy markets.
    There remain some fringe elements who still claim that this 
bill will create jobs instead of destroy them. But most of the 
people are acknowledging that this bill will cost a great deal 
of money. Indeed, I appreciate the acknowledgement by one of 
the sponsors of this bill, Senator Lieberman, who was quite 
candid that this bill would cost hundreds of billions of 
dollars. We have heard testimony from perhaps the premier 
econometric modeling firms in the Country that found the 
impacts of this bill would be substantial, with the national 
costs escalating up to between $800 billion and $1 trillion a 
year. The Midwest and South will see the most dramatic 
increases. If we are lucky, the Northeast and California will 
see dramatic increase in the LNG imports. If we are not, the 
economic consequences of the bill will be even worse.
    A November 6th Washington Post article put it succinctly 
when it stated that the current global warming proposals will 
``require a wholesale transformation of our Nation's economy 
and society.'' The fact is that many U.S. businesses are at the 
margin and industries such as iron and steel, concrete, 
fertilizer, manufactured goods would be forced overseas. We 
have found several witnesses that were very emphatic as to that 
kind of effect it would have on America.
    So what I would like to do, Madam Chairman, is I will be 
going back and forth between the two committees, I would like 
to put the rest of my statement into the record.
    [The prepared statement of Senator Inhofe follows:]

       Statement of Hon. James M. Inhofe, U.S. Senator from the 
                           State of Oklahoma

    Madame Chairman, I have found the legislative hearings conducted 
over the last week to be quite informative, as I'm sure has been the 
case for other Members of the Committee. As we begin the process of 
digesting the testimony, I would like to share what I think are the 
common themes of all these hearings: this will be very, very costly; 
the impacts will be severe; and the bill will have significant impacts 
on energy markets.
    There remain some fringe elements who still claim that this bill 
will create jobs instead of destroy them. But most people are 
acknowledging that this bill will cost a great deal of money. Indeed, I 
appreciate the acknowledgment by one of the sponsors of this bill, 
Senator Lieberman, who was quite candid that this bill will cost 
hundreds of billions of dollars. We have heard testimony from perhaps 
the premier econometric modeling firms in the country that found the 
impacts of this bill would be substantial--with national costs 
escalating to between $800 billion to $1 trillion per year and costs of 
up to $2700 annually or more than $200 per month to the average family. 
Within just a few years, up to 2.3 million people will be put out of 
work by this bill and the cost of gasoline, natural gas and electricity 
will skyrocket, with electricity prices climbing 36-65 percent.
    The Midwest and the South will see the most dramatic increases. If 
we're lucky, the Northeast and California will see dramatic increases 
in LNG imports. If we're not, the economic consequences of this bill 
would be even worse.
    A November 6 Washington Post article put it succinctly when it 
stated that the current global warming proposals ``will require a 
wholesale transformation of the nation's economy and society.''
    The fact is that many U.S. businesses are at the margin, and 
industries such as iron and steel, concrete, fertilizer, and 
manufactured goods would be forced overseas where the carbon footprint 
would only grow. I would also add that if the costs to provide concrete 
increases dramatically, it will drive up the costs of highway projects. 
Moreover, no one has any idea how we will make up the over 30% energy 
shortfall by 2020.
    Much has been made about the California experience, but it is 
important to remember they are still in the planning phase, and not 
only have they not decided how to make their reductions yet, but they 
haven't started reducing yet either.
    The fact is that this bill is not ready for prime time. It appears 
structured to fail. While they have yet to oppose it officially, it is 
clear from the positions taken by organized labor that it has serious 
concerns with this bill and what that will mean to America's workers. 
In closing, I would ask my colleagues who are thinking of voting for 
this bill one question: for all the pain and disruption this bill will 
cause to our nation's families, what are we buying?
    From EPA's October 1st analysis, it is clear that our unilateral 
actions of this magnitude will still do nothing to avert increasing 
concentrations of greenhouse gases--instead of being slightly above 700 
parts per million at the end of the century, we will be at slightly 
under 700 parts per million--300 parts per million above today's 
levels. If there is to be any opportunity to reduce global 
concentrations, it will have to come from the emerging nations that 
will be responsible for increasing those concentrations. This bill 
fails to do that.
    It was true ten years ago when we passed Byrd-Hagel, and it is true 
today--we should not pass a law if it harms the American economy or if 
developing countries are not part of the equation. This bill fails on 
both those fronts and should be rejected.

    Senator Boxer. Yes, sir, absolutely will do. And we will go 
back to our time of arrival, and that would be Senator Vitter.

STATEMENT OF HON. DAVID VITTER, U.S. SENATOR FROM THE STATE OF 
                           LOUISIANA

    Senator Vitter. Thank you, Madam Chair. I continue to have 
very serious concerns about the bill, and I will mention just a 
few.
    First of all, I want to agree with Senator Voinovich, 
associate myself with all of his comments about the absolute 
need for more time to understand the precise impacts of this 
specific bill. I don't think we have had that. Just as a for 
instance, every day I heard from Louisiana constituents about 
energy prices, about prices at the pump, about the price of 
natural gas, and that impact, about all energy prices. I would 
like to see a clear, rigorous analysis, a clear consensus 
opinion on what this bill does to energy prices, gasoline 
prices at the pump, natural gas prices. I haven't seen that 
clear, rigorous consensus analysis.
    I think that is a pretty minimal request to consider and 
vote on this bill and amendments to this bill, particularly 
when every day, all of us are deluged with calls about energy 
prices, what is going to be the impact. That is just one 
example. We need more time for that rigorous analysis.
    I know there are models out there, all sorts of other 
things. Most of them are based on general discussion and not 
the specifics of this bill, which we need to look at.
    Secondly, I also want to agree with Senator Barrasso. I 
just have a fundamental disagreement, I guess, with some 
people's notions of international negotiations and negotiating 
strategy. Everyone agrees that no U.S. legislation will have 
any impact on the problem if there isn't dramatic change in 
countries like China and India. Everybody agrees with that. I 
think it is a pretty fundamental question whether the right way 
to achieve that is just going off on our own and causing 
enormous costs to our economy and giving them a huge additional 
competitive advantage in terms of their economy and hoping they 
follow when they will be doing quite well economically because 
of our actions, even better competitively than now, or whether 
in fact that would be throwing all the leverage we have in 
international discussion away.
    Seems to me the huge leverage we have on this topic in the 
international arena is the ability to tie our actions with 
requirements of other countries and other peoples, and we would 
basically be throwing that out the window. I don't know what 
leverage we would have left. So there is just a fundamental 
issue and disagreement there.
    With that, Madam Chairman, I will end and look forward to 
the testimony of all our witnesses and I thank them all for 
being here.
    [The prepared statement of Senator Vitter follows:]

    Statement of Hon. David Vitter, U.S. Senator from the State of 
                               Louisiana

    Madame Chairman, thank you for agreeing to hold this hearing today 
on S. 2191, America's Climate Security Act.
    This bill has been the focus of attention for thousands of my 
constituents. I've met people and industries who have come out of the 
woodwork to express their grave concern with this bill.
    The more time I spend focusing on this bill, the more I'm concerned 
about two things the proponents of this legislation tout.
    The Environment: supporters of this bill claim that this 
legislation will improve the environment and reduce greenhouse gas 
concentrations in the environment. Those sound like laudable goals; 
however, will that be the outcome? Imposing mandatory reductions in 
greenhouse gas emissions will increase the cost of doing business in 
the United States. There is no question. The bill's sponsors have 
admitted this fact.
    Keep in mind that the United States already has some of the most 
stringent environmental and labor standards. The United States is 
already in the world one of the most expensive places to do business. 
So, what happens when U.S. manufacturers decide that due to this 
additional regulation--that the majority of other nations do not have 
to deal with--to move their operations to China, Mexico or India? How 
stringent are the environmental standards in these countries? How can 
our labor unions compete?
    What is the net effect on the environment? I can tell you that the 
greenhouse gas emissions per kilo-watt hour in the United States is 
much lower than that of those other nations such as China and India. 
This bill has just increased pollution, lost American jobs and left an 
abandoned factory in the United States.
    The Economy: How does the economy respond to this bill? Well, as 
all of these American manufacturers move to China, Mexico or India, our 
unemployment increases, our tax base decreases, our economy slumps. It 
is very simple, increasing the cost of doing business and regulation in 
an already expensive business climate, decreases employment 
opportunities, income and economic activity. The United States will 
lose its leverage and global competitiveness unless we have these other 
nations at the table.
    The proponents of this bill will argue that this bill will benefit 
the economy and environment. To those claims I respond, then let the 
Energy Information Administration and others fully evaluate the bill. 
We need a clear analysis of how this bill will impact energy prices, 
natural gas prices, prices at the gas pump and how it will impact 
ratepayers and consumers. Driving blind like what is being proposed in 
this bill could have dire consequences. I want to thank our witnesses 
today and look forward to hearing from you.

    Senator Boxer. Senator, thank you very much.
    I am compiling the list of hearings we have had on global 
warming since January and the hearings we have had on this bill 
and the briefings we have had on this bill and the daily 
briefings staff has given. Look, I have been here for 25 years 
in the Congress. I wasn't born yesterday, that is obvious. The 
fact is, I know when there is a sincere call for more 
information and when it is just delay.
    You could just see it, because every time we have a 
hearing, every comment from the other side, who all want, they 
want more time, it is the same comment all the time. It is, 
this is the worst thing since sliced bread, this is the worst 
thing, this is horrible. Now, either we are going to have a do 
something committee, or a do nothing committee. If I felt that 
we couldn't move on anything, if I felt that we couldn't do any 
good, I would just hand over the gavel. I would hand it back--
well, no, not that direction, hand it in this direction.
    [Laughter.]
    Senator Boxer. I knew that would get your attention. But 
the bottom line is, we need to do something. The people want us 
to do something and they want us to do something good. And they 
want us to do something relevant.
    When you have three Governors chastising the Congress, they 
all have credibility, two Republicans, one Democrat. They are 
saying, Congress, do something. We have the States acting. We 
have the cities acting. We have the world acting. We have 
individuals acting. And for us to be so late to this issue is a 
real stain, I think, on this Congress.
    So I have done everything that I can do to give you the 
time, give you the information. We are going to take every 
amendment that you may offer in the markup, we will stay here 
through the night, into the morning and days and we will get it 
done.
    But I will just say now, because there is this constant ask 
for more time, I would be so bold as to say we could take 
another year and I don't think I would pick up another vote 
from the people who do not really want to move on this. And I 
think then that is a sham.
    So the bottom line is, I would say to any of you who feel 
you need more information, I will sit with you one on one and 
give you every piece of information. This model that was done 
is an up to date model. And it is done with the Department of 
Energy's computer model program. We will give you everything 
that you need. Then if you feel that it is still not a good 
idea to vote for that legislation, I totally understand and 
respect that point of view.
    But let's not make a false argument that we need more time, 
because we all know around here what that means. That means 
doing nothing. And I would rather take this as far as we can. 
If we don't have it at the end of the day, we don't have it at 
the end of the day. But I feel I need to move this now, because 
the window is closing. And I feel very, very strongly about 
that.
    Senator Cardin.

  STATEMENT OF HON. BENJAMIN L. CARDIN, U.S. SENATOR FROM THE 
                       STATE OF MARYLAND

    Senator Cardin. Thank you, Madam Chair. I agree with your 
comments. I have only been a Senator since January, but I can 
tell you, we have been talking about this legislation and this 
issue since my arrival in the United States Senate. I have been 
in the Congress for 20 years. And we have been talking about 
this issue during my 20 years in the U.S. Congress. So this is 
not a new subject. And there has been a great deal of debate 
within the Congress as to what to do about the problems of 
global climate change.
    Legislation was introduced earlier in this Congress by many 
members. And I applaud the efforts, as I have said before, of 
Senator Lieberman and Senator Warner and the Chairman of our 
Committee, for bringing together a bill that we can move 
forward. It won't be a perfect bill, but it will be a credible 
bill. I think that is our challenge, to be a player not only in 
the United States on global climate change, but to be an 
international leader, so that we can do what we need to do as a 
responsible player internationally.s
    So I applaud your efforts, Madam Chair, and I hope we will 
be able to move a bill shortly. I thank you for having another 
hearing with experts who I think can add to the record of our 
Committee, which is very, very important.
    Just yesterday, the President's science advisor, Dr. John 
Marburger, testified before the Senate Commerce Committee on 
the state of climate science. In his testimony, Dr. Marburger 
acknowledged that climate change is occurring and that there is 
a level of urgency to begin reducing greenhouse gas emissions. 
It is refreshing and timely to hear a representative of the 
Administration make these statements as we consider America's 
Climate Security Act of 2007.
    As I have noted in the past, this legislation provides a 
solid framework to address the most compelling environmental 
energy independent and national security issues facing our 
Nation. I believe that there are particular ways that this 
legislation can be strengthened. I talked to my colleagues 
about that. I believe we need to tighten the emission caps and 
be more rapid transition to full auction of emission 
allowances. In addition, as I said at Tuesday's hearing, we 
need to be more fully engaged in providing solutions to the 
transportation sector.
    We also need to include provisions in this legislation to 
enhance the scientific community's ability to monitor the 
evolving state of our climate system. Let me just focus on this 
area for one moment. The transportation sector is responsible 
for 28 percent of the total U.S. greenhouse gas emissions. Any 
effective climate policy must address the mitigation of 
emissions from this sector. We indirectly consider emissions 
from this sector in terms of fuel, but we could do more.
    We will hear today from Washington State King County 
Executive Ron Sims. I look forward to Mr. Sims' testimony on 
the use of new fuel technologies, particularly biofuels, and 
how his county has purchased hybrid vehicles as part of their 
fleet. These are examples of the sort of direction we should be 
heading nationally to reduce our carbon emissions in the 
transportation sector.
    Madam Chair, I want to mention one additional point that I 
think is important, and that is for years, we have been 
degrading the ability of our Nation to use scientific 
information to help us in these areas. There have been funding 
cuts to NASA and NOAA's capabilities to monitor Earth climate 
systems, particularly satellite platforms. This legislation 
that we are considering requires reviews by the National 
Academy of Sciences to assess the effectiveness of the law in 
reducing greenhouse emissions and how the climate has been 
impacted by these efforts. But we don't provide any resources 
to conduct this vital science.
    I hope that we will look at strengthening the capacity to 
monitor the state of global climate, including atmosphere and 
oceans. These science observations are vital to our 
understanding of climate change decades out. They will also 
serve much shorter term needs, including daily weather 
predictions and the associated issuance of timely warnings to 
protect lives and property.
    I have heard my colleagues talk that we want to make 
science- based judgments, so let's give capacity to our 
agencies to provide that information to us. Climate change will 
likely lead to more high-impact weather events like stronger 
hurricanes and heat waves. An enhanced environmental monitoring 
system is essential for us to provide the information necessary 
for emergency managers and longer term decision makers to deal 
with the impacts of these changes.
    Madam Chair, I look forward to hearing from our witnesses 
today and the continuation of our efforts to try to produce the 
best possible bill to further the policy of our Country to deal 
with global climate change. Thank you, Madam Chair.
    [The prepared statement of Senator Cardin follows:]

      Statement of Hon. Benjamin L. Cardin, U.S. Senator from the 
                           State of Maryland

    Madame Chairman, thank you.
    Just yesterday, the President's science advisor Dr. John Marburger 
testified before the Senate Committee on Commerce, Science, and 
Transportation on the state of climate science. In his testimony, Dr. 
Marburger acknowledged that:
    (1) climate change is occurring and
    (2) that there is a level of urgency to begin reducing greenhouse 
gas emissions
    It is refreshing and timely to hear a representative of the 
Administration make these statements as we consider America's Climate 
Security Act of 2007.
    As I have noted in the past, this legislation provides a solid 
framework to address the most compelling environmental, energy 
independence and national security issue facing our nation.
    I believe that there are particular ways that this legislation 
could be strengthened.
    Among them are: tightening of the emission caps, a more rapid 
transition to full auction of emission allowances, inclusion of the 
transportation sector more fully, and including provisions in this 
legislation to enhance the scientific and decision making communities' 
ability to monitor the evolving state of our climate system.
    I'll focus on these last two areas for strengthening ACSA in my 
remaining time.
    As we learned on Tuesday from Dr. David Greene of the Oak Ridge 
National Laboratory, in 2005, the transportation sector was responsible 
for 28% of total U.S. greenhouse gas emissions. Any effective climate 
policy must address the mitigation of emissions from this sector. While 
we indirectly consider emissions from this sector in terms of fuel, we 
can do more.
    As Dr. Greene stated on Tuesday, we should be considering how we 
develop are pubic areas so as to make public transportation more 
desirable. We should be making improvements to our transportation 
infrastructure by encouraging the use of low-carbon fuels and moving 
toward greater mass transit vehicle fuel economy. We should be 
encouraging more people to use public transportation. The rising costs 
of fuel and the desire of some mass transit systems to consider 
upgrades of their vehicles to those that are more fuel efficient add 
further urgency to this issue. People want safe, reliable mass transit 
without burdensome costs.
    We can and should be able to meet this need.
    We'll hear today from Washington State's King County Executive, Mr. 
Ron Sims, who has taken a leadership role in promoting increased 
ridership of public transportation systems in King County and thereby 
reducing traffic congestion. I look forward to hearing more about King 
County's use of new fuel technologies, particularly biofuels and how 
his county has purchased hybrid vehicles as part of their fleet. These 
are examples of the sorts of directions we should be heading nationally 
to reduce our carbon emissions in the transportation sector.
    Madame Chairman, I believe that an additional issue that ACSA could 
address is the degradation of our climate monitoring system. There have 
been funding cuts in NASA's and NOAA's capabilities to monitor the 
Earth's climate system--particularly satellite platforms. Given that 
ACSA requires a periodic review by the National Academy of Sciences of 
how effective ACSA has been in reducing greenhouse emissions and how 
the climate has been impacted by these efforts, provisions should be 
included in this bill to upgrade and maintain an effective system to 
monitor the state of the global climate including the atmosphere and 
oceans. Additionally, funding should be available to not only take 
these observations, but to ensure that the data provided from these 
observations is put to greatest use in operational weather and climate 
prediction.
    A suite of observations ranging from surface- based measurements to 
satellites are required to assess the state of Earth's climate systems 
so that we can not only reduce uncertainties in our climate 
projections, but also enhance our abilities to better to understand 
what will be necessary to mitigate and adapt to changing conditions.
    These observations are not only vital to our understanding of 
climatic changes decades out, but are also important for much shorter-
term needs including daily weather prediction and the associated 
issuance of timely warnings to protect lives and property. Climate 
scientists project that climate changes will be potentially associated 
with increasing variability in weather, including perhaps more high-
impact weather events like stronger hurricanes and heat waves. An 
enhanced global environmental monitoring system is essential for us to 
provide the information necessary for emergency managers and longer-
term decision makers to deal with the impacts of these phenomena.
    Further strengthening this bill in the areas of climate monitoring 
and more fully engaging the transportation sector in emissions 
reductions by promoting public transportation systems are among a 
number issues of considerable interest to me.
    I look forward to hearing from all of today's witnesses, and 
working to not only strengthen this already strong bill, but also move 
it quickly and thoughtfully through the full Committee and on to the 
floor of the Senate.
    Thank you to Madame Chairman.

    Senator Boxer. Thank you, Senator Cardin.
    Senator Isakson.
    Senator Isakson. Madam Chair, in the interest of expediting 
the testimony, I will yield back my time.
    Senator Boxer. That was nice.
    Senator Bond.

 STATEMENT OF HON. CHRISTOPHER S. BOND, U.S. SENATOR FROM THE 
                       STATE OF MISSOURI

    Senator Bond. Thank you very much, Madam Chair.
    Senator Boxer. It is always good to see you, sir.
    Senator Bond. I apologize for the delay. I had to appear on 
the Floor. But I didn't want to pass up the opportunity to join 
with you and the members of the Committee as we talk about this 
very, very important subject.
    I do want to associate myself with the very significant 
remarks of my colleague from Louisiana, Senator Vitter, who I 
had an opportunity to hear when I arrived. But Madam Chair, I 
am not pushing for delay. I am not pushing for more time. I 
know what we have in this bill. I would agree with you, we need 
to do something.
    But for heaven's sakes, let's not do harm. Carbon caps have 
not worked and they are not going to work, and they are going 
to impose tremendous hardships on many sectors of our economy, 
and probably do very little in the overall world-wide problems.
    Now, I will lay out some of the things that I think we 
should do now, we should have done earlier and that we could 
agree on. But I think it is important today to describe how 
carbon auctions are unfairly expensive for millions of 
consumers. Some may wonder how this bill will cost families and 
workers up to $1 trillion per year, according to one estimate, 
and at least hundreds of billions of dollars according to the 
bill's sponsors. Energy prices will rise, because families and 
workers will pay multiple times for what they pay once for now. 
Consumers will first pay higher power costs from the production 
costs from higher natural gas prices. Then they will pay for 
expensive new carbon controls or alternative energy sources, 
such as wind.
    Then this bill will force them to pay still more for the 
cost of auctioned carbon allowances. Producers are forced to 
buy at auction the carbon allowances they need to operate. They 
will then pass those costs on to customers. Families and 
workers will end up paying $50 billion more a year, rising to 
$150 billion per year by 2030. Consumers did not suffer this 
auction surcharge under the successful acid rain cap and trade 
program, which I co-sponsored with Senator Byrd. Its 
SO2 allowances were allocated to generators at no 
cost.
    However, environmental groups concerned with how European 
companies earn windfall profits in its failed carbon trading 
scheme suggest auctions as the answer. It is a bad idea. 
Nevertheless, a report by a Clean Air Watch by the head of the 
National Wildlife Foundation claims that we must institute a 
multi-billion carbon auction to avoid corporate windfall 
profits. That report, as do those of many environmental groups, 
insist that no-cost allocations create windfall profits. They 
cite in their footnotes a CBO study from April 2007 which seems 
to agree, at least until one reads further, its footnote 
reveals that an exception to the ability to reap windfall 
profits is where consumer rates are set by regulators.
    What is the meaning of this footnote to a footnote? It 
admits the reality that windfall profits are prohibited by law 
in the 36 States with regulated power markets. A State which 
regulates its power markets, caps profits that generators may 
collect. Additional profits must be refunded back to consumers. 
Windfall profits are prohibited by law. That means 36 States in 
the United States do not share Europe's windfall profit 
problem.
    And yet, the nationwide carbon auction in this bill will 
require families and workers in the Midwest, South and Mountain 
West to pay billions extra for a problem they did not create. 
States in New England, Montana, California and others made the 
decision to deregulate their power markets. It was their choice 
to make themselves vulnerable to windfall profits. But we 
should not punish families and workers in the Midwest, Mountain 
West and South to solve the problems of 14 States.
    Those 36 States together add up to over 130 million 
Americans who will suffer needlessly and thus unfairly under 
carbon auctions. Amendments to require auctions for all 100 
percent of allowances would also hurt millions of Americans. I 
too oppose Government-sponsored windfall profits, but we should 
find a way to do so without punishing 130 million in 36 States 
and the best way to do it is to oppose carbon caps totally.
    Some will say that the auctions are an effective way to 
collect money. That is true, if you want the highest price 
regardless of fairness. Others will say auctions are needed to 
raise funds to pay for environmental mitigation, a scheme to 
rob Peter to pay Paul.
    We need to pour more money into clean energy technology. I 
support environmental mitigation, I supported it in the WRDA 
bill. We can cut carbon emissions by aggressive achievable CAFE 
standards, a clean portfolio stand for wind, solar, nuclear and 
hydro, biofuels and a Marshall Plan for clean energy 
technology. This, Madam Chair, this is the clean energy future 
with the widest support, and I urge you to embrace it. I thank 
the Chair.
    [The prepared statement of Senator Bond follows:]

     Statement of Hon. Christopher S. Bond, U.S. Senator from the 
                           State of Missouri

    Madame Chairman, thank you for holding this hearing on the carbon 
cap and trade bill we are considering. Today, I want to describe how 
its carbon auctions are unfairly expensive for millions of consumers.
    Some may wonder how this bill will cost families and workers up to 
$1 trillion dollars per year according to one estimate, and at least 
``hundreds of billions of dollars'' according to the bill's sponsors.
    Energy prices will rise because families and workers will pay 
multiple times for what they pay once for now. Consumers will first pay 
for higher power production costs from higher natural gas prices. Then 
they will pay for expensive new carbon controls or alternative energy 
sources such as wind.
    Then, this bill will force them to pay still more for the cost of 
auctioned carbon allowances. Producers are forced to buy at auction the 
carbon allowances they need to operate. They will then pass those costs 
on to consumers. Families and workers will end up paying $50 billion 
more a year, rising to $150 billion per year by 2030.
    Consumers did not suffer this auction surcharge under the 
successful acid rain cap and trade program. Its SO2 
allowances were allocated to generators at no cost. However, 
environmental groups concerned with how European companies earned 
windfall profits in its failed carbon trading scheme suggest auctions 
as the answer.
    A report by Clean Air Watch with a forward by the head of the 
National Wildlife Federation claims that we must institute a multi-
billion dollar carbon auction to avoid corporate windfall profits.
    That report, as do many environmental groups, insists that no-cost 
allocations create windfall profits. They cite in their footnotes a CBO 
study from April, 2007. The CBO study seems to agree--at least until 
one reads further. Its footnote reveals that an exception to the 
ability of reap windfall profits is where consumer rates are set by 
regulators.
    What is the meaning of this footnote to a footnote? It admits the 
reality that windfall profits are prohibited by law in the 36 states 
with regulated power markets. A state that regulates its power markets 
caps profits that generators may collect. Additional profits must be 
refunded back to consumers. Windfall profits are prevented by law.
    That means 36 states in the U.S. do not share Europe's windfall 
profit problem. And yet, the nationwide carbon auction in this bill 
will require families and workers in the Midwest, South, and Mountain 
West to pay billions extra for a problem they did not create.
    States in New England, Montana, California and others made the 
decision to deregulate their power markets. It was their choice to make 
themselves vulnerable to windfall profits. But we should not punish 
families and workers in the Midwest, Mountain West and South to solve 
the problem of 14 states.
    Those 36 states together add up to over 130 million Americans who 
would suffer needlessly, and thus unfairly, under carbon auctions. 
Amendments to require auctions for all 100% of allowances would also 
hurt millions of Americans.
    I too oppose government sponsored windfall profits, but we should 
find a way to do so without punishing 130 million people in 36 states.
    Some will still say that auctions are the most effective way to 
collect money. That is true if you want the highest price regardless of 
fairness. Others will say that auctions are needed to raise funds to 
pay for environmental mitigation, clean technology and low-income 
protection programs. That may get us closest to the real motives of 
this bill--a scheme to ``rob Peter to pay Paul.''
    I agree that we need to pour billions into clean energy technology. 
We need to spend more on environmental mitigation. I supported spending 
billions more for environmental mitigation in the WRDA bill.
    We can also cut carbon emissions, but we should do it without 
cutting family budgets or worker payrolls. I support aggressive but 
achievable CAFE standards, a clean portfolio standard for wind, solar, 
nuclear, and hydro, biofuels and a Marshall Plan for clean energy 
technology. This is the clean energy future with widest support. I urge 
us to embrace it. Thank you.

    Senator Boxer. Senator Bond, thank you. I am going to put 
into the record that page that deals with electricity prices. 
This is the modeling that was done based on the Department of 
Energy's computer model. And it shows, because of energy 
efficiency and so on, that at the end of the day, the average 
price, typical residential bill, will go down eventually by 
2030.
    I also think it would be a good time, since Senator Bond 
brings up a number of these issues, and he has been very sure-
footed on his concern for consumers, I think it is important to 
know that the religious community has been very involved with 
us in trying to draft provisions to protect the vulnerable 
people that you talk about, Senator.
    I would ask unanimous consent to place into the record a 
letter where they have discussed, and I think some of them are 
here now, and the groups are the National Association of 
Evangelicals, the National Council of Churches, the United 
States Conference of Catholic Bishops and the Union for 
Reformed Judaism. They have gotten together and they have taken 
those concerns that you have eloquently stated since we have 
started this debate, and they have laid out some principles 
that they are looking for in the bill.
    If I might finish, and then I will allow you to respond. I 
think what is important to note is that Senators Lieberman and 
Warner have been meeting with a lot of stakeholders. I just 
wanted you to know, Senator Bond, that your concern for 
consumers is their concern, and the vulnerable people, and that 
we are working with them. We have made some progress on this, 
but we have a way to go. I hope you will work with us as we try 
to strengthen these provisions in the bill.
    Senator Bond. Madam Chair, I thank you. You have been most 
kind in hearing my concerns. We would like also to be able to 
put in the record some of the footnotes and questions which I 
mentioned. I turn to the religious community for my spiritual 
guidance. They know far more about theology and spiritual 
matters than I do. But I trust our economics better. They got 
into theology, not economy. We are going to continue to work 
with what I think are the overwhelming economic concerns of 
consumers.
    Senator Boxer. Right. I would just point out, if I might 
respond, that their concerns have nothing to do with theology. 
Their concerns emanate from a deep feeling that they don't want 
people to suffer needlessly, nor do you, nor do I. I just want 
you to know that we welcome everybody to the table. We 
certainly welcome them to the table, as well as all the other 
voices.
    Senator Inhofe, did you want to say something?
    Senator Inhofe. Madam Chairman, I have a unanimous consent 
request to include in the record from three groups with major 
concerns: the American Chemistry Council, the Fertilizer 
Institute and the International Brotherhood of Boiler Makers.
    [The referenced material follows on page 427.]
    Senator Inhofe. Then I would say also, in reference to what 
you refer to as the religious community, if you really want to 
pursue this, then I would be requesting that we have a hearing. 
Because I can assure you that this would be a subject that 
would be of great interest to a lot of people.
    Senator Boxer. Yes. We did have a hearing from the 
religious community----
    Senator Inhofe. No, I am talking about just on----
    Senator Boxer.----and we did have your witnesses at that 
hearing. We can give you the transcripts.
    All right. We are going to get to the panel now. I am just 
very pleased that you are all here for this last hearing before 
the mark-up. Fred Krupp, President of Environmental Defense, we 
welcome you, sir.

   STATEMENT OF FRED KRUPP, PRESIDENT, ENVIRONMENTAL DEFENSE

    Mr. Krupp. Thank you, Madam Chair. It is an honor to be 
here with you today as the Committee deliberates America's 
Climate Security Act. It is indeed a front row seat in history.
    Across the globe, countries and corporations are changing, 
adapting to a new world of energy and innovation to meet the 
crisis of climate change. With America's Climate Security Act, 
the United States can now join this movement toward a cleaner, 
more stable and more prosperous future.
    Discussion and debate on the issue of climate change has 
finally come to the halls of Congress, and the members of this 
Committee deserve great credit for bringing us to this point. 
But the scientific realities of global warming mean that only 
action, fast, decisive bold action will be a satisfactory 
outcome. If the members of this Committee remember one thing 
from my testimony today, it should be this: we must pass 
comprehensive climate change legislation now. Our economy, our 
environment and our national interest compel it.
    Consider this. If the legislation is enacted and takes 
effect in 2012, the emissions cap would result in an annual 
reduction of emissions just under 2 percent per year for 
covered sources arriving at a reduction of 15 percent below 
current levels by 2020. But what happens if we delay the 
legislation by just two years? Just two years of delay, holding 
everything else constant, has major consequences. As you can 
see in the diagram behind me, in order to result in the same 
amount of cumulative emissions by 2020, and with the climate 
change, it is the cumulative emissions that matter, a two year 
delay will require that emissions fall by 4.3 percent every 
year. We would be demanding over twice the rate of reduction if 
we delay two years.
    Instead of a reduction of 15 percent in the annual 
emissions for the year 2020, two years of delay means 2020 
emissions have to be reduced by 23 percent just to get to the 
same place. The worst thing we can do for our economy and our 
environment is to do nothing at all. But the second worst thing 
we can do is delay. And as this chart shows, even by just two 
years.
    We believe that this legislation not only provides the 
fastest route to reduced emissions, but has the right framework 
to address the challenge of climate change in a way that makes 
sense for the environment, entrepreneurs and the economy. The 
Act sets strong, early targets which would jump start the 
entrepreneurial energy we need to employ current technology and 
develop even better technology. In addition to safeguarding the 
environment, the Act protects our economy. First, it uses the 
time proven mechanism, cap and trade, that allows regulated 
entities access to the lowest cost emissions reductions.
    Among the other important cost containment options is the 
ability by companies to purchase offsets from American farmers 
or earn credits by reducing international forest destruction. 
The bill's authors have wisely recognized that we cannot solve 
climate change alone, and the Act includes an innovative system 
of carrots and sticks to prompt action from major emitting 
developing economies.
    One carrot is the opportunity to participate in the U.S. 
greenhouse gas emissions market. If emitters in other countries 
would like to sell allowances they earn in their home countries 
into the United States emissions market, then those countries 
will have to meet the practices and standards called for by 
this Act. A stick would prompt action to ensure that the 
emissions reductions of the America's Climate Security Act are 
not undone by emissions associated with imported products 
manufactured in major emitting uncapped nations.
    The bill has recognized that our domestic greenhouse gas 
reduction program will move forward in a world grappling with 
the realities of globalization and its impact on the United 
States. This approach makes economic and environmental sense. 
In order to avoid the consequences of delay I spoke of earlier, 
it is imperative for this legislation to reach the Floor as 
soon as possible. That includes preserving the delicate 
political balance that Chairman Boxer spoke of in a previous 
hearing, while adding new support in Committee and on the 
Floor.
    There are improvements to the legislation that we would 
support as the bill moves through the legislative process. For 
instance, we have steadily supported Senator Carper's efforts 
to not only reduce emissions of greenhouse gases but also 
mercury, SOx and NOx. But I also have to say, we see time 
running out now on this Congress. Therefore, we strongly 
support moving the bill out of Committee in its current form, 
even if the Committee has not yet resolved some of these 
issues.
    We will oppose amendments that would weaken the targets and 
time lines or any price cap, the so-called safety valve. A 
safety valve would mean abandoning the cap.
    Thank you for the opportunity to offer our thoughts. I 
don't think there is a higher priority for Congress as a whole 
than speedy adoption of effective and efficient measures to 
address this crisis.
    [The prepared statement of Mr. Krupp follows:]

             Statement by Fred Krupp, Environmental Defense

    I am honored to be here with you today as this Committee 
deliberates America's Climate Security Act. There is no more important 
legislation that this Committee will ever consider than comprehensive 
climate change policy.
    Environmental Defense is a leading national nonprofit organization 
representing more than 500,000 members. Since 1967, we have linked 
science, economics and law to create innovative, equitable and cost-
effective solutions to society's most urgent environmental problems. 
Environmental Defense is dedicated to protecting the environmental 
rights of all people, including future generations. Among these rights 
are clean air, clean water, healthy food and flourishing ecosystems. We 
are guided by scientific evaluation of environmental problems, and the 
solutions we advocate will be based on science, even when it leads in 
unfamiliar directions.
    America's Climate Security Act contains all of the essential 
elements needed in legislation for the U.S. to begin to tackle the 
problem of global climate change. If the members of this committee 
remember one thing from my testimony today--it should be this--we must 
pass comprehensive climate legislation now. Our economy, our 
environment, and our morality compels it--and if I am back here three 
years from now--still calling on this Committee to pass legislation--
then all who are in this room today will have failed. We would have 
lessened our chances of preventing the most dangerous consequences of 
climate change and we would have raised the costs to the economy of 
meeting the challenge.
    In my testimony today, I want to make 5 points: (1) why time is of 
the essence, (2) that America's Climate Security Act has the right 
framework to tackle climate change, (3) that we have the technology we 
need to get started, (4) that the carrots and sticks in America's 
Climate Security Act will prompt international action, and finally, (5) 
I will comment on a couple of amendments that I believe are worth 
special notice.
    1. There is no time for delay.
    If the legislation is enacted and takes effect in 2012, the 
emissions caps would result in an annual reduction of emissions of just 
under 2% per year and, for covered sources, arrive at a reduction of 
15% below current levels by 2020. But what happens if we delay enacting 
legislation by two years? Just two years of delay--holding everything 
else constant--has major consequences. As you can see in the diagram 
behind me, in order to result in the same amount of cumulative 
emissions by 2020 (and with climate change, it is the cumulative 
emissions that matter), a two-year delay will require that emissions 
fall by 4.3% every year--over twice as quickly! Instead of a reduction 
of 15% in the annual emissions for the year 2020, two years of delay 
means 2020 emissions have to be reduced by 23%--just to get to the same 
place. The worst thing we can do for our economy and our environment is 
to do nothing at all, the second worst thing we can do is to delay--and 
as this chart shows, even by just two years.\1\
---------------------------------------------------------------------------
    \1\ The data used to derive this chart is the national allowance 
account for the years 2012-2020 from the introduced version of S. 2191. 
The emissions growth from 2005 to 2013 is assumed to be 1.1% (which is 
and average of the 2004 and 2005 rate http://www.epa.gov/climatechange/
emissions/downloads06/07ES.pdf)

[GRAPHIC] [TIFF OMITTED] T3583.177


    2. America's Climate Security Act has the right framework to 
address the challenge of climate change in a way that makes sense for 
the environment, entrepreneurs, and the economy.
    The Act sets strong early targets. As I have mentioned earlier, 
these targets are important to the environment and the economy. 
Aggressive early year targets increase our ability to avoid a greater 
than 2 increase in warming and the consequences that would bring. The 
early targets will jump start the entrepreneurial energy we need to 
deploy current technology and develop even better technology. The Act 
contains long-term targets that provide assurance to our grandchildren 
and our financial markets that we will stay committed to the task.
    A recent report by the University of Maryland reviewed data and 
studies on the economic impacts of climate change and the costs of 
inaction. The review finds that economic impacts of climate change will 
``occur throughout the country, [and] economic impacts will be unevenly 
distributed across regions and within the economy and society.'' Just 
to highlight one finding of the report, it ``found that negative 
climate impacts will outweigh benefits for most sectors that provide 
essential goods and services to society.'' The review finds that

        New York State's agricultural yield may be reduced by as much 
        as 40%, resulting in $1.2 billion in annual damages. Expected 
        water shortages in California's Central Valley are likely to 
        affect the agricultural sector in the area. Agriculture around 
        the San Antonio Texas Edwards Aquifer region is likely to 
        suffer a similar fate. The regional impact may reach losses of 
        $3.6-6.5 billion by 2030 and $6.75-10.13 billion by 2090. Even 
        those farms and regions that temporarily benefit from altered 
        environmental conditions (e.g., carbon fertilization and 
        extended growing season) risk economic losses if temperatures 
        exceed those preferred by the crops they currently produce. 
        Climate change will also trigger increases in energy demand for 
        cooling and will outpace declines in heating requirements. For 
        example, electricity demand in Massachusetts may increase by 
        40% in 2030 because of climate change alone, most of which will 
        occur in summer months and require significant investment in 
        peak load capacity and energy efficiency measures. Nationwide, 
        the required investment may exceed $300 billion by the middle 
        of this century. Given the long lead times of capacity 
        expansion in the energy sector, little time remains to act on 
        anticipated warming trends.\2\
---------------------------------------------------------------------------
    \2\ M. Ruthe, D. Coehlo, D. Karetnikov, ``The U.S. Economic Impacts 
of Climate Change and the Costs of Inaction'' A review and Assessment 
by the Center for Integrative Environmental Research (CIER) at the 
University of Maryland, October 2007.) http://www.cier.umd.edu/
climateadaptation/index.html.

    In addition to safeguarding the environment, the Act protects the 
economy in many ways. First, it uses the time-proven mechanism, cap-
and-trade, that allows regulated entities access to the lowest cost 
emissions reductions possible. Cap-and-trade provides a whole range of 
cost management mechanisms that allow companies a wide choice in 
---------------------------------------------------------------------------
managing their compliance with emissions limits. Companies can

      make emissions reductions at their own facilities,
       purchase allowances from other facilities whose cost of 
reductions are even lower (so much so that they can ``over-comply'' and 
sell their excess allowances to others), and
      optimize plant development schedules and maintenance and 
can ``bank'' and ``borrow'' emissions allowances to fit into those 
schedules.

    As experts have written ``enhanced environmental performance can be 
attributed to the increased flexibility associated with emissions 
trading. Where emission reduction requirements are phased in and firms 
can bank emission reductions--as was the case in the Lead Trading, Acid 
Rain, ABT, and Northeast NOx Budget Programs--the achievement of the 
required emission reduction has been accelerated.''\3\ (See Attachment 
1 for more information on cap and trade programs.)
---------------------------------------------------------------------------
    \3\ Ellerman, et al. (2003), p. 34)
---------------------------------------------------------------------------
    Companies can also purchase offsets from American farmers. They can 
earn credits by reducing international forest destruction. The ability 
to sell excess allowances creates an incentive for inventors and 
entrepreneurs to develop and deploy new technologies. All of these 
processes work together to allow us to meet our challenge at the lowest 
possible cost.
    3. Some question whether we have the technology to meet the 
emission requirements of the Act. It is natural to ask: How will we get 
there?-- How can we accomplish the deep reductions in global warming 
pollution that science tells us we must achieve, and that this bill 
would require?
    The good news is that we know how to cut emissions today, with 
proven technologies.
     Energy efficiency.--Based on programs already in place at 
the state level, the National Action Plan for Energy Efficiency has 
estimated that by 2025 we will be able to reduce carbon dioxide 
emissions by over 400 million tons a year simply by using energy more 
wisely. [And in many cases, conserving energy ends up saving consumers 
money.]\4\
---------------------------------------------------------------------------
    \4\ National Action Plan for Energy Efficiency. July 2006. Chapter 
1, p. 1 8 http://www.epa.gov/solar/pdf/napee/napee--report.pdf.
---------------------------------------------------------------------------
     Farms and forests.--The U.S. EPA estimates that activities 
such as improved forest management, agricultural soil carbon 
sequestration, and methane and nitrous oxide mitigation could cut 
emissions by 620 million metric tons a year by 2015 at a cost of under 
$15 per ton--and that figure would double at prices of $30 a ton. (See 
Attachment 2 for a summary of EPA's findings.)\5\
---------------------------------------------------------------------------
    \5\ Environmental Protection Agency, ``Greenhouse Gas Mitigation 
Potential in U.S. Forestry and Agriculture.'' November 2005,--Appendix 
4.A
---------------------------------------------------------------------------
    Just putting those numbers together yields over one billion tons of 
reductions a year. This is more than a third of the way (or more 
precisely 35%) to the abatement required in the year 2025.
    And that is just the tip of the iceberg. The next generation of 
coal-fired power plants will have ``carbon capture and sequestration'' 
technology available to them. While that may sound far off, in fact all 
of the components have been tested and are in place. Gasification 
technology has been available for decades. And oil and gas companies 
are already--pumping CO2 into geologic reservoirs as part of 
enhanced oil recovery. The only reason we have not deployed these 
technologies widely for electric power generation is that there has 
been no financial incentive to do so. Placing a cap on carbon will 
change all that.
    I could list all of technologies available today from wind power--
which is exploding across the Plains and the West--to more efficient 
vehicles like the hybrid diesel vehicles being built in Ohio--to low 
carbon fuels being developed in Tennessee and other states--to the 
substitution of chemical processes at plants in Delaware--to methane 
management for farms all across America. The list goes on and on. And 
putting a cap on carbon will bring even more technologies to market.
    4. America's Climate Security Act has a system of carrots and 
sticks to prompt action from major emitting developing countries.
    The first carrot is the opportunity for participation in the U.S. 
greenhouse gas emissions market. If emitters in other countries would 
like to sell allowances that they earn in their home countries into the 
United States emissions market, then those countries will have to meet 
the practices and standards called for in this Act. Another important 
carrot is the International Forest Carbon provision. Every year, the 
cutting and burning of the world's tropical forests causes 20% of 
greenhouse gas pollution world-wide, irrevocably destroying the richest 
repositories of biological diversity on the planet, and impoverishing 
the hundreds of millions of people who depend on forests for their 
livelihoods--all because the forest is worth less alive than it is 
dead. This Congress can change all of this and, for the first time, 
give living forest economic value for tropical nations and forest 
peoples, by allowing tropical countries that make real, verifiable 
reductions of their national deforestation emissions to sell those 
reductions in our carbon market.
    A stick is present in what is commonly referred to as the Bingaman-
Specter provision because it mirrors what is in the Low Carbon Economy 
Act of 2007 (S. 1766). This provision would prompt action to ensure 
that the emission reductions of ACSA are not undone by emissions 
associated with imported products manufactured in major emitting 
uncapped nations. The bill's authors recognize that our domestic 
greenhouse gas reduction program will move forward in a world grappling 
with the realities of globalization and its impacts on the U.S. As the 
USCAP Call for Action states: ``[C]are should be taken that policies do 
not merely push emissions from U.S. facilities to overseas plants, 
ultimately there must be an international program for addressing 
climate change and its impacts. U.S. action to implement mandatory 
measures and incentives for reducing emissions should not be contingent 
on simultaneous action by other countries. Rather, we believe that U.S. 
leadership is essential for establishing an equitable and effective 
international policy framework for robust action by all major emitting 
countries.''
    Recognizing that poorer nations might not be able to cap and cut 
emissions as quickly as the United States, but that we cannot address 
the global warming problem effectively unless all major emitting 
nations do cut emissions, the bill first calls for new international 
agreements engaging all major emitting nations in cutting their 
emissions. If negotiation of these new agreements proves unsuccessful, 
the bill would, after a certain time period, level the environmental 
and competitiveness playing field by requiring that imports of products 
produced in uncapped nations submit emissions allowances sufficient to 
cover the emissions incurred by the production of those products 
abroad.
    As part of a comprehensive framework, a combination of these kinds 
of carrots and sticks makes sense. However, if we want nations with 
less capacity, fewer resources, and more problems to take serious 
action to cut GHG emissions, then we as a nation must act forcefully 
and without equivocation. Let's show them how to do it credibly and 
effectively and set a reasonable timeframe for their comparable action.
    5. We strongly support moving the bill forward in its current form 
and will oppose amendments that would weaken the bill.
    As the bill moves forward to Senate floor and through the 
legislative process, there are issues that we hope Senators will 
continue to work on:
    (1) The best science we have today indicates that we will need to 
make economy-wide emissions reductions of 80% by 2050. The bill's 
science review (sometimes called ``lookback'') provisions, can be 
amended to ensure that new scientific information generated in the 
future is not only evaluated but also leads directly to action with 
minimal delay. The EPA should be given the authority to take additional 
actions if the science reviews mandated by the bill demonstrate that 
the bill's emissions targets will not be met.
    (2) Senator Whitehouse has discussed an amendment to establish an 
Ocean Trust as part of the adaptation assistance provisions in the 
bill. Elevated CO2 levels are projected to profoundly impact 
the health of the oceans, which provides about 20% of the world's 
protein, and the coasts, where over half the U.S. population now lives. 
The bill amendment will help our fisheries and oceans adapt to ocean 
acidification, increasing water temperatures, and rising sea levels, by 
establishing a dedicated funding mechanism for on-the-ground efforts to 
protect and restore ocean and coastal ecosystems. Establishing such an 
oceans trust was a priority recommendation of the U.S. Commission on 
Ocean Policy created by Congress--and I thank Senator Whitehouse for 
his efforts here.
    (3) International-adaptation provisions should not be limited 
solely to national-security considerations and resources provided 
international adaptation should be increased. Currently, ACSA would 
provide international adaptation funding only where such expenditures 
are deemed ``necessary to enhance the national security of the United 
States,'' specifically to ``assist in avoiding the politically 
destabilizing impacts of climate change in volatile regions of the 
world.'' While national security is one appropriate consideration in 
this context, it is not the only one. Many of the world's poorest 
peoples will be adversely affected by climate change that is, to a 
significant degree, of America's making.
    We will oppose amendments that would:
    (1) Weaken the targets and timelines of the bill.
    (2) Include any price cap (or so-called ``safety-valve''). A 
safety-valve set at any price would gut the environmental targets in 
the bill and would prevent investors from making the commitments needed 
to develop and deploy needed technology.
    (3) Further restrict the use of offsets. We believe high-quality 
offsets can play an important role in reducing emissions quickly, 
providing new revenue streams for farmers, and lowering costs for 
regulated entities and yield important environmental benefits.

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  Responses by Fred Krupp to Additional Questions from Senator Inhofe
    Question 1. I assume you are familiar with the EU cap and trade 
regime. While most of the EU countries will not meet their target, 
Great Britain made significant reductions. Isn't it true, however, that 
GB will only meet its target because it switched from coal to natural 
gas, and that over the last 9 years since that shift, its emissions 
have climbed again?
    Response. It is important to note that the United Nations reported 
this week that the EU as a whole is likely to meet its -8% Kyoto 
commitment. (See press release here: http://unfccc.int/files/press/
news--room/press--releases--and--advisories/application/pdf/20071120--
emissions--of--industrialized--countries--english.pdf.) The time period 
you refer to was a pilot phase, a learning opportunity for the EU, who 
has not had the benefit of our acid rain program to gain experience. 
That phase is over, and lessons have been learned.
    It is correct that the bulk of the recent emissions reductions in 
the United Kingdom (UK) during the initial period of the EU-ETS pilot 
phase are due to fuel switching. This shift in the UK seems to have 
slowed down. It is also correct that UK emissions have increased in 
recent years. Robust economic growth, combined with increasing natural 
gas prices and relatively low coal prices, led to an annual increase of 
C02 emissions of 3% during the current pilot phase of the EU 
Emissions Trading System (ETS), which runs from 2005-2007. It is 
important to note this current ETS pilot phase lasts only 3 years, 
affording little time for emitters to introduce major capital stock 
changes to harvest significant C02 emission reductions. The 
next EU-ETS phases of 2008-2012 (5 years) and 2013-2020 (8 years) give 
more time for a wide variety of C02 emission reduction 
investments to be made.
    The U.S. can benefit from the UK experience. For industries with 
long lead times for investment and building capital stock, the sooner 
Congress sets the rules for 5, 10, 15 and 20 years from now, the sooner 
these industries can invest in the needed technology, such as carbon 
capture and storage. Delaying action could inadvertently lead to the 
level of fuel switching that Senator Inhofe so correctly wishes to 
avoid happening in the future.

    Question 2. China is now the leading emitter of Carbon Dioxide. 
Many argue that the industrialized countries benefited, and their 
economies benefited, from their excessive emissions from many years, 
and they should repay those past excesses. Do you agree with that?
    Response. No, Environmental Defense does not agree with that. 
Environmental Defense is most concerned with what our actions will be 
going forward--both domestically and internationally--to have the best 
chances of avoiding dangerous consequences of climate change. It is 
unreasonable to expect that all nations will achieve the same percent 
reduction in greenhouse gases. There are many justifications why 
developed and developing nations may have different rates of 
reductions, including:
     most of the GHG in the atmosphere today are from the 
developed nations,
     and the per capita emissions from the developed nations 
are on average about three times larger than those of the developing 
nations, and
     developing nations are much more dependent on increasing 
energy production to provide an acceptable standard of living for their 
peoples.

    Question 3. Mr. Krupp, I, as well as many of my colleagues were 
concerned with the attacks directed at TXU after they announced plans 
to invest in coal. Those attacks, I believe, weakened the value of 
their stock making them a prime target for a takeover. Were you or 
anyone in your organization involved in any discussions with KKR during 
the takeover of TXU, especially regarding any advice on alternatives to 
the cancelled coal plants?
    Response. When we were informed of the proposal by TXU to build 11 
new powerplants, we began to investigate the proposal. We found that 
TXU was planning to build such plants without utilizing available 
technology to capture and store the greenhouse gas emissions from such 
plants. Because of that, and the impact the plants would have on air 
quality in the Dallas-Ft. Worth region (which has yet to achieve 
federal health standards for air quality), we opposed the proposal. We 
then initiated discussions with TXU, offering TXU ideas (including the 
use of cleaner coal technologies such as IGCC, ultrasupercritical, and 
carbon capture and storage) on how to meet electricity needs without 
increasing emissions. We had no contact with KKR about TXU until after 
they had reached an agreement on the price for the acquisition of the 
company in February 2007. Since February of 2007, we have had 
discussions with KKR and the new TXU management about power 
alternatives that would be more profitable in the long term for TXU and 
less environmentally harmful than conventional coal plants.
    The best thing that we all can do to help the financial outlook of 
electric utilities and coal-fired generation is pass comprehensive 
climate change legislation. Right now, utilities and regulatory 
commissions are caught in a bind--they expect future regulation but the 
rules of the road have not been established. This uncertainty plays 
havoc with planning, investment and regulatory approval. This situation 
is one of the reasons that the National Association of Regulatory 
Utility Commissioners adopted a resolution this month in support of 
federal climate legislation. In the resolution, NARUC states: ``the 
existence of uncertainty about the nature and extent to which 
[greenhouse gas] emissions will be subject to future federal regulation 
makes it difficult for State regulators, regulated utilities, and 
others to appropriately plan for needed investments in electric 
transmission and generation infrastructure.''
                                 ______
                                 
  Response by Fred Krupp to an Additional Question from Senator Vitter

    Question. One compliance strategy could be switching from coal to 
natural gas. If fuel switching occurs significantly during the initial 
phase of [the] program and natural gas prices increase dramatically, 
how would residential natural gas customers cope?
    Response. One of the advantages of a cap-and-trade system to reduce 
greenhouse gas emissions is that it allows a wide variety of emission 
reduction technologies to be deployed. A catalyst to the development of 
those technologies is a predictable long-term emissions path. Under 
such a program, we would expect to see a range of market responses to a 
cap on carbon emissions. In the early years, energy efficiency and 
offsets are but two strategies that are far more cost effective than 
increased combustion of natural gas. Other cost management 
characteristics of a cap-and-trade system are the ability to bank and 
borrow allowances. As adopted by the subcommittee, America's Climate 
Security Act also contains additional cost management provisions 
originated by Senators Landrieu, Graham, Lincoln and Alexander. Beyond 
these provisions, there are other provisions in ACSA targeted to low 
income home energy assistance that we support.

    Senator Boxer. Thank you so much, Mr. Krupp. And thanks to 
your organization. I think you have been a very positive part 
of our discussions. Thank you.
    Mr. Krupp. Thank you, Senator.
    Senator Boxer. Our next speaker is Hon. Eileen Claussen, 
President, Pew Center on Global Climate Change. Welcome.

  STATEMENT OF HON. EILEEN CLAUSSEN, PRESIDENT, PEW CENTER ON 
                     GLOBAL CLIMATE CHANGE

    Ms. Claussen. Thank you, Senator Boxer, Ranking Member 
Inhofe and members of the Committee. Thank you for the 
opportunity to testify on the most cost-effective means of 
reducing U.S. greenhouse gas emissions.
    The Pew Center strongly supports reporting the America's 
Climate Security Act of 2007 from the Committee on the schedule 
that you have announced, and looks forward to working with you 
and the rest of the Congress as the bill goes through the 
legislative process.
    Senators, the bad news is that climate change poses real 
risks to our Nation's security, economy and environment, and 
that these risks will grow dramatically if we do not begin to 
reduce our greenhouse gases now. The good news is that the 
market-based mechanisms found in the ASCA will allow us to 
address this problem cost effectively and in a way that 
enhances U.S. competitiveness.
    Through the cap and trade program created by the bill, 
Congress can set the overall greenhouse gas reduction goals and 
let the emitters decide for themselves how to achieve the 
environmental goals of the program, at least cost. This does 
not mean that achieving our climate security goals will be cost 
free, just that the costs can be kept as low as possible and 
far lower than the costs of not acting.
    We favor the economy-wide approach taken by the bill. 
Certainly sector by sector approaches can work, but the most 
cost-effective approach for the economy as a whole is to bring 
power plants, factories and transportation together in one 
market. An economy-wide trading program will draw key 
technologies into the marketplace when they are ready, diminish 
the burden on any one sector, reduce the cost to the economy as 
a whole and provide the broadest incentives possible for early 
emission reductions and technology innovation.
    As a result, America's Climate Security Act will enhance 
U.S. competitiveness. Given what the peer-reviewed science 
tells us about climate change, we must move quickly to an 
economy in which our greenhouse gas footprint shrinks, even as 
our standard of living increases. This will require a profound 
world-wide technological revolution. The United States should 
be leading that revolution, but we currently are not. An 
appropriate price on greenhouse gas emissions, combined with 
incentives, will push technology into the marketplace and 
ensure that we meet our environmental goals at the lowest 
possible costs.
    I would like to mention briefly three other important 
issues before I conclude: how to deal with transportation, the 
use of allowance allocation as a tool, and the need for cost 
certainty and reliability. First, transportation. 
Transportation emissions account for roughly one quarter of 
total U.S. emission and are growing rapidly. Reversing that 
trend is essential and can only be done by increasing vehicle 
efficiency, reducing vehicle miles traveled and reducing the 
carbon footprint of transportation fuels. The bill would 
include transportation fuels in the cap and trade program, 
providing a price signal that would promote all three.
    Second, allowance allocation. While the use of a well-
designed cap and trade program ensures the lowest overall cost, 
many important sectors of the economy will face real transition 
costs that can and should be dealt with through the allowance 
allocation process. Allocation has no effect on the greenhouse 
gas reductions mandated by the cap.
    Given this, we should use the allocation process to address 
the legitimate transition costs some sectors will face as we 
move to a low greenhouse gas economy. Take coal-based 
electricity, for example. Coal is cheap and plentiful, and the 
United States is going to use it for the foreseeable future. 
And even if we did not, as was pointed out, China and India 
would. So rapid deployment of climate-friendly technologies is 
essential.
    The best hope seems to lie with carbon capture and 
sequestration, which will likely take at least a decade to 
deploy widely. While we need not wait until then to begin cost-
effective deductions, it would be appropriate to allocate 
initially a significant amount of allowances to this sector to 
help with the transition. As the need for transition assistance 
diminishes, the allocation of free allowances should phase out, 
which the bill does as well.
    Finally, cost containment. Some stakeholders fear that in 
the early years of the program, the market price of an 
allowance might be volatile, might swing too high too rapidly. 
Similarly, concerns have been raised about market liquidity, 
hoarding of allowances, manipulation of the market and 
exceptionally high costs. ACSA includes powerful cost 
containment mechanisms, including banking, borrowing and the 
use of offsets. In addition, the bill draws from the excellent 
work of Senators Warner, Landrieu, Graham and Lincoln in 
establishing a Carbon Market Efficiency Board which can step in 
should unexpected problems arise.
    We look forward to working with the authors of the bill, 
Chairman Boxer and others as the bill moves forward to refine 
measures to provide additional assurances of a smoothly 
functioning market, so long as they do not undermine the 
integrity of the greenhouse gas emissions cap.
    In conclusion, the America's Climate Security Act of 2007 
is an excellent foundation. We applaud the Committee's work to 
date and urge the Committee to report the bill. Thank you.
    [The prepared statement of Ms. Claussen follows:]

   Statement of Eileen Claussen, Pew Center on Global Climate Change

    Chairman Boxer, Ranking Member Inhofe, and members of the 
committee, thank you for the opportunity to testify on the most cost-
effective means of reducing U.S. greenhouse gas emissions. My name is 
Eileen Claussen, and I am the President of the Pew Center on Global 
Climate Change.
    The Pew Center on Global Climate Change is a non-profit, non-
partisan and independent organization dedicated to providing credible 
information, straight answers and innovative solutions in the effort to 
address global climate change. Forty-five major companies in the Pew 
Center's Business Environmental Leadership Council (BELC), most 
included in the Fortune 500, work with the Center in these efforts.\1\
---------------------------------------------------------------------------
    \1\ For more on the Pew Center, see www.pewclimate.org.
---------------------------------------------------------------------------
    The Pew Center strongly supports reporting the America's Climate 
Security Act of 2007 from the committee on the schedule that you have 
announced, and looks forward to working with you and the rest of the 
Congress as the bill goes through the process. I would like to discuss 
several reasons for recommending that you move forward with this bill.

CAP-AND-TRADE IS THE MOST COST-EFFECTIVE WAY OF REDUCING GREENHOUSE GAS 
                               EMISSIONS

    Senators, the bad news is that climate change poses real risks to 
our nation's security, economy and environment, and that these risks 
will grow dramatically if we do not begin to reduce our greenhouse gas 
emissions now.\2\ The good news is that the market-based mechanisms 
found in the America's Climate Security Act of 2007 will allow us to 
address this problem cost effectively and in a way that enhances U.S. 
competitiveness.
---------------------------------------------------------------------------
    \2\ For more on the science of climate change and the threat to our 
environment and economy, see the Pew Center's extensive body of reports 
available at www.pewclimate.org/global-warming-in-depth and the most 
recent findings of the Intergovernmental Panel on Climate Change at 
http://www.ipcc.ch/
---------------------------------------------------------------------------
    Unlike most emissions this committee deals with, greenhouse gas 
emissions are essentially fungible. Greenhouse gases mix quickly 
throughout the atmosphere, which means that wherever you can reduce a 
ton of greenhouse gas emissions--whether from a car, a factory, or a 
power plant; whether in Los Angeles, London, or Lagos--the benefit to 
the climate is the same.
    In most of our other environmental laws, Congress directs EPA to 
dictate how much of a given pollutant a facility can emit or which 
pollution control technology to use. We do not have to take that 
approach with greenhouse gas emissions. Instead, by using a cap-and-
trade program, Congress can set the overall greenhouse gas reduction 
goals and let the emitters decide for themselves how to achieve the 
environmental goals of the program at least cost. When we used a 
market-driven approach in the acid rain program, it provided the best 
environmental result at the lowest overall cost to our economy.\3\ This 
does not mean that achieving our climate security goals will be cost-
free, just that the cost can be kept as low as possible--and far less 
than the cost of not acting.
---------------------------------------------------------------------------
    \3\For more on our experience with emissions trading programs and 
on the design of a greenhouse gas reduction program, see Ellerman, 
Denny A., Emissions Trading in the U.S.: Experience, Lessons, and 
Considerations for Greenhouse Gases, Pew Center on Global Climate 
Change, May 2003, and Nordhaus, R., Designing a Greenhouse Gas 
Reduction Program for the U.S., Pew Center on Global Climate Change, 
May 2003. 
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  AN ECONOMY-WIDE PROGRAM WILL BE MORE COST-EFFECTIVE THAN SECTOR-BY-
                            SECTOR PROGRAMS

    The Pew Center supports the proposal to apply the cap-and-trade 
program to all large sources of greenhouse gas emissions 
simultaneously. Congress has seen several proposals to cap and trade 
emissions from power plants only. Similarly, Congress has seen several 
proposals that address the transportation sector only, for example, by 
reducing the carbon footprint of transportation fuels. Certainly, such 
a sector-by-sector approach can work, but it will be more expensive and 
slower than an economy-wide approach.\4\
---------------------------------------------------------------------------
    \4\ The benefits of a wider trading program have been repeatedly 
demonstrated in all of the credible economic models--including the 
large number which participate in Stanford's Energy Modeling Forum. See 
www.stanford.edu/group/EMF/
---------------------------------------------------------------------------
    The most cost-effective approach is to bring power plants, 
factories and transportation together in one market, where all can 
benefit from the efficiencies and technological breakthroughs available 
in any sector at a given time. With an economy-wide program, we do not 
have to await the deployment of a single solution--such as carbon 
capture and sequestration, for example--to begin cost-effective 
reductions. The Pew Center's research with leading companies 
demonstrates that there are numerous cost-effective and even cost-
saving reductions available now from off-the-shelf technologies and 
fuels.\5\ This is especially true in reducing non-CO2 
emissions from industrial processes, increasing industrial and building 
energy efficiency, increasing the use of low-carbon fuels, and 
improving vehicle efficiency.\6\ In the medium and longer term, steeper 
reductions will be made possible through deployment of more advanced 
technologies, such as highly efficient vehicles, improved nuclear power 
plants, renewable energy combined with enhanced electricity storage 
capacity, and carbon capture and storage (CCS). An economy wide trading 
program will draw these technologies into the marketplace when they are 
ready, reducing the burden on any one sector, reducing the cost to the 
economy as a whole, and providing the broadest incentive possible for 
early emission reductions and technology innovation.
---------------------------------------------------------------------------
    \5\ For more on the Pew Center's work with companies on strategies 
to address climate changes, see http://www. pewclimate.org/
companies--leading--the--way--
belc
    \6\ For example, 37 of the 45 companies in the Pew Center's 
Business Environmental Leadership Council have set voluntary targets, 
22 have achieved those targets, and all have done so from a combination 
of efficiency improvements and process changes. DuPont, for example, 
has reduced its emissions 65% through a combination of energy 
efficiency and process change and has saved over $2 billion. See also 
the proceedings from a workshop co-sponsored by the Pew Center on 
Global Climate Change and the National Commission on Energy Policy, The 
10-50 Solution: Technologies and Policies for a Low-Carbon Future, 
found at http://www. pewclimate.org/global-warming-in-depth/workshops 
and--conferences/tenfifty/proceedings.cfm and Reilly, John 
M., Multi-gas Contributors to Global Climate Change: Climate Impacts 
and Mitigation Costs of Non-CO2 Gases, Pew Center on Global 
Climate Change, February 2003.
---------------------------------------------------------------------------
    The America's Climate Security Act uses other important measures to 
lower the cost of greenhouse gas reductions as well. The bill allows 
companies to offset some of their emissions with reductions from 
sources not covered by the program. Allowing the use of offsets 
motivates emission reductions throughout the economy from sources too 
small or dispersed to be specifically targeted by the program. 
Companies would also be allowed to use credits from the markets of 
other countries, thus making use of the global fungibility of 
greenhouse gases and expanding the scope of the program. Again, the 
larger the program, the lower the cost. We see opportunities to 
increase the use of these measures even beyond what is already in the 
bill.

       A GREENHOUSE GAS CAP-AND-TRADE PROGRAM WILL ENHANCE U.S. 
                            COMPETITIVENESS

    The America's Climate Security Act will enhance U.S. 
competitiveness. Given what the peer-reviewed science tells us about 
climate change, we must move quickly from our current economy to one in 
which our greenhouse gas footprint shrinks even as our standard of 
living increases. That will require a profound worldwide technological 
revolution. The United States can and should be leading that 
revolution, and positioning itself to reap the economic benefits 
associated with decreased dependence on foreign oil and increased 
export potential of low carbon technology. We currently are not 
leading, however, and federal R&D subsidies alone will not change that. 
An appropriate price on greenhouse gas emissions, in combination with 
``technology push'' policies, will.
    Some have asserted a false dichotomy between the need for mandatory 
climate policy on the one hand and support for climate-friendly 
technology on the other. In fact, a well-designed mandatory climate 
policy that leverages the power of the market is essential for driving 
deployment of climate-friendly technology. When combined with subsidies 
for specific technologies, it is the most cost-effective method of 
driving deployment. Government would have to spend roughly ten times 
the amount in incentives alone in order to achieve the same 
environmental result as a price signal coupled with incentives.\7\ The 
America's Climate Security Act wisely combines mandatory greenhouse gas 
constraints and technology subsidies.
---------------------------------------------------------------------------
    \7\ For more on the benefits of combining R&D and a carbon 
constraint, see Goulder, L., Induced Technological Change and Climate 
Policy, Pew Center on Global Climate Change, October 2004.
---------------------------------------------------------------------------
    I would like to mention three other important issues before I 
conclude: how to deal with transportation, the use of allowance 
allocation as a tool, and the need for cost certainty and reliability.

           REDUCING EMISSIONS FROM THE TRANSPORTATION SECTOR

    Transportation emissions account for roughly one-quarter of total 
U.S. emissions and are growing rapidly. Reversing that trend is 
essential, and can only be done by (1) increasing vehicle efficiency, 
(2) reducing vehicle miles traveled (VMT), and (3) reducing the carbon 
footprint of transportation fuels. The America's Climate Security Act 
would include transportation fuels in the cap-and-trade program, 
providing a price signal that would promote all three--especially if 
complemented by the other measures currently being proposed by the 
White House and Congress to increase vehicle efficiency and promote low 
carbon fuels, and with VMT-reduction measures, such as those in the 
Transportation Equity Act.\8\
---------------------------------------------------------------------------
    \8\ For more on policies to reduce emissions in the transportation 
sector, see Green, David L., Reducing Greenhouse Gas Emissions from 
U.S. Transportation, Pew Center on Global Climate Change, May 2003.
---------------------------------------------------------------------------
             USING THE ALLOCATION PROCESS TO AID TRANSITION

    While the use of a well-designed cap-and-trade program ensures the 
lowest overall cost, many important sectors of the economy will face 
real transition costs that can and should be dealt with through the 
allowance allocation process. Allocation, contrary to the impression 
some stakeholders may be creating, has no effect on the greenhouse gas 
reductions mandated by the cap. Given this, we should use the 
allocation process, in the early years of the program, to address the 
legitimate transition costs some sectors will face as we move to a low-
greenhouse gas economy.
    Take coal-based electricity, for example. Coal is cheap and 
plentiful, and the United States is going to use it for the foreseeable 
future. Even if we did not, China and India would, so rapid development 
and deployment of climate-friendly technologies is essential. The best 
hope, at the moment, lies with carbon capture and sequestration, which 
most experts believe will take at least a decade to deploy throughout 
the power sector. While we need not wait until then to begin cost-
effective reductions, it would be appropriate to allocate initially a 
significant amount of allowances to this sector to help with 
transition.\9\ The bill does this and also appropriately uses bonus 
allowances and a clean coal technology program funded out of auction 
proceeds to accelerate CCS deployment and speed and smooth the 
transition. There is is a similar need for transition assistance in 
other sectors of the economy, most particularly energy-intensive 
industries that face significant foreign competition. As the need for 
transition assistance diminishes, the allocation of free allowances 
should phase out, which the bill does as well.
---------------------------------------------------------------------------
    \9\ For more on the policy and technology options to deal with GHG 
emissions from coal see the Pew Center's new Coal Initiative series 
found at http://www.pewclimate.org/white_papers/coal_initiative
---------------------------------------------------------------------------
    In addition, the bill includes provisions to mitigate any effect 
the program may have in increasing energy prices, especially for low- 
and middle-income Americans. A significant percentage of the proceeds 
from the auction have been dedicated to help these consumers and to 
help states assist their residents.\10\
---------------------------------------------------------------------------
    \10\ For more on on community adjustment and worker transition to 
climate change policy, see Greenwald, Judith M.; Roberts, Brandon; 
Reamer, Andrew D.; Community Adjustment to Climate Change Policy, Pew 
Center on Global Climate Change, December 2001, and Barrett, Jim, 
Worker Transition and Global Climate Change, Pew Center on Global 
Climate Change, December 2001.
---------------------------------------------------------------------------
            ADDRESSING PRICE VOLATILITY AND COST CONTAINMENT

    Some stakeholders fear that, in the early years of the program, the 
market price of an allowance might be volatile and might swing too high 
too rapidly. Similarly, concerns have been raised about market 
liquidity, hoarding of allowances, and manipulations of the market.
    In addition to the cap-and-trade itself, which provides for 
flexibility in meeting the environmental target, this legislation 
includes powerful cost containment mechanisms, including banking and 
borrowing. Allowing firms the ability to bank excess allowances or 
credits for future use helps firms manage the normal swings of the 
market. Allowing firms access to offset credits further lessens the 
danger of supply shortages, which in part create this price volatility. 
The bill also draws from the excellent work of Senators Warner, 
Landrieu, Graham and Lincoln and the Nicholas Institute at Duke 
University in establishing a Carbon Market Efficiency Board, which can 
gauge market activity and step in should unexpected problems arise. We 
look forward to working with the authors of this bill, Chairman Boxer, 
and others as the bill moves forward to refine measures to provide 
additional assurances of a smoothly functioning market, so long as they 
do not undermine the integrity of the greenhouse gas emissions cap.

                               CONCLUSION

    In conclusion, the America's Climate Security Act of 2007 is an 
excellent foundation for an environmentally effective, cost-effective 
greenhouse gas reduction program. Continuing to move it through the 
legislative process will engage important stakeholders whose 
contributions will improve the bill. We applaud the committee's work to 
date, and urge the committee to report the bill.

   Responses by Eileen Claussen to Additional Questions from Senator 
                                 Inhofe

    Question 1. Do you support not allowing any more coal plants to be 
built until the future date when carbon capture and storage technology 
is available?
    Response. The Pew Center supports a greenhouse gas (GHG) emissions 
cap-and-trade program which increases in stringency over time, as well 
as a large-scale carbon capture and storage (CCS) demonstration 
program. In the early years of the program, coal plants could be 
constructed, but these facilities would need to purchase GHG emission 
allowances or offset their emissions. These new plants could be CCS 
demonstration sites and would be eligible for CCS incentives such as 
bonus allowances.

    Question 2. In your written testimony, you say that ``we should use 
the allocation process, in the early years of the program, to address 
the legitimate transition costs some sectors will face as we move to a 
low-greenhouse gas economy.'' Are you saying you support reducing the 
number of ``free'' allowances further than provided in S. 2191?
    Response. The Pew Center believes there are sound policy reasons 
for providing covered entities with a high level of free allowances 
initially to account for their transition costs--even at levels higher 
than in the current version of S. 2191--and phasing them out over a 
reasonable period of time.
                                 ______
                                 
   Responses by Eileen Claussen to Additional Questions from Senator 
                                 Vitter

    Question 1. You suggest that an economy-wide approach to emissions 
reductions is preferable and more efficient because it provides 
flexibility and diversity of reduction sources. If this is true, why 
stop at just domestic industries? This bill does very little in terms 
of reducing global emissions. Would it not be even more efficient to 
have emission sources from all nations on the table?
    Response. The Pew Center believes that to address global climate 
change all major greenhouse gas (GHG) emitting nations must enter into 
binding agreements that require mitigation commitments of them. The Pew 
Center also supports, however, the statement of the U.S.-ratified U.N. 
Framework Convention on Climate Change (UNFCCC) that nations hold 
``common, but differentiated responsibilities'' in addressing climate 
change. In other words, the commitments which we may expect of a 
developing country might be different from those expected of the United 
States or any other developed country. While we hope ultimately to see 
an international emissions trading system implemented under such 
agreements, we do not anticipate that it would initially cover 
developing countries. Industrial GHG emissions in such countries could 
instead be addressed through sector-specific policies and measures or 
through international sectoral agreements.
    If the U.S. is willing to make a commitment to reduce its 
emissions--as the leading contributor to current concentrations--it 
will be in a better position to work with other countries to do the 
same. Enactment and implementation of S. 2191, while on its own will 
not completely solve the global warming problem, would (a) send a price 
signal throughout the U.S. economy that would turn our unrivaled 
innovative capacity towards the problem of reducing GHG emissions while 
increasing standards of living, and (b) allow the United States to 
credibly begin negotiations with the other emitting nations in securing 
agreements that bind them to mitigation commitments, both of which will 
be essential in reducing global emissions to the necessary level. 
Without enactment of mandatory U.S. GHG reductions, neither of these 
essential steps will be possible.

    Question 2. Considering that this bill will have virtually zero 
impact on greenhouse gas concentrations in our atmosphere, doesn't 
working within the UN Framework Convention on Climate Change make more 
sense and allow the U.S. to compete on a level playing field rather 
than taking unilateral action on a emissions regime that may or may not 
comport with future international programs?
    Response. The Pew Center does not agree that the proposed 70% cut 
in emissions below 2005 levels will have a negligible impact on 
atmospheric concentrations of greenhouse gases, especially when 
compared to business-as-usual emissions. Further, the Center supports 
the rapid enactment of a U.S. domestic program to reduce GHG emissions 
precisely so that the United States can credibly negotiate with the 
other major emitting nations to secure mitigation commitments under the 
UNFCCC that will allow the United States to compete on a level playing 
field.

    Question 3. This bill does not include providing any allowances to 
refiners for the petroleum transportation fuels that they produce. How 
would refiners comply with this bill in 2012 to cover the greenhouse 
gas emissions from petroleum transportation fuels?
    Response. The Pew Center would not object to providing some free 
allowances to refineries for the transportation fuels they produce. 
That said, however, refiners could certainly comply with the current 
version of the bill by purchasing allowances on behalf of their 
customers either through the auction or from other covered entities. 
Economic analysis suggests that this sector can pass on the costs of 
purchasing allowances to their customers more readily than other 
sectors of the economy.

    Question 4. This bill explicitly does not preclude or abrogate the 
right of a state to adopt or enforce a standard, cap, limitation, or 
prohibition relating to greenhouse gas emissions. We could end up with 
a national cap-and-trade program and different state controls. 
Shouldn't states be preempted to prevent duplicative and possibly 
conflicting environmental controls?
    Response. In order to solve the climate change problem, action will 
be needed by all levels of government. For example, land use planning 
and building codes have an important influence on greenhouse gas 
emissions, and these policies are primarily the responsibility of local 
governments. Electric utility regulation also strongly influences 
greenhouse gas emissions and the costs to consumers of greenhouse gas 
reductions, and that is the purview of state public utility 
commissions. The federal government has a key role to play in ensuring 
that our nation overall takes the most efficient and effective 
approaches to reducing greenhouse gas emissions, and that the costs and 
benefits of the program are fairly distributed nationally. The federal 
government also has a key role to play in ensuring that the United 
States participates in global efforts to address climate change.

    Senator Boxer. Thank you so much. We really appreciate 
that.
    Ron Sims, we are very happy to have you here. You are King 
County Executive, State of Washington. Welcome, sir.

    STATEMENT OF RON SIMS, COUNTY EXECUTIVE OF KING COUNTY, 
                           WASHINGTON

    Mr. Sims. Madam Chairman, Senator Inhofe--I am nervous, and 
I can't believe this after being in office for 22 years.
    [Laughter.]
    Mr. Sims. Members of the distinguished Committee, I want to 
thank you for inviting me to testify today about the importance 
of investments, particularly in public transportation and other 
strategies to reduce driving in order to cut emissions of 
greenhouse gases.
    I am the King County Executive and I am proud to serve as 
its elected leader of the 14th largest regional government in 
the United States. I am also Board Member of the Center for 
Clean Air Policy, a leading think tank crafting cost-effective 
climate policy solutions. King County stretches from the Puget 
Sound shores to the snow-crested peaks of the Cascade 
Mountains. It is the best place in the world to live. In 
between are 2,000 square miles containing vibrant urban 
centers, four major river systems, 760 lakes, 3,000 miles of 
streams and 1,000 square miles of forest. It is a wonderful 
community and home to 1.8 million people and businesses such as 
Boeing, Microsoft, Amazon.com and Starbucks.
    With regard to transportation, King County also owns and 
operates Metro Transit, one of the ten largest bus transit 
systems in North America, with an annual ridership of over 100 
million. Recently King County secured designation as a U.S. 
Department of Transportation Urban Partnership, which provides 
significant Federal funding to pursue a range of congestion 
pricing measures, reduction measures, including major new 
transit improvements as well as new technologies and incentives 
for changing commuting behaviors.
    King County was also the first county and transit agency to 
join the Chicago Climate Exchange in part to help ensure that 
regional transit agencies have a voice during the creation of 
national cap and trade rules and legislation. Our region is 
growing extremely fast, both in our economy and our population. 
But our global warming challenges are also fast-growing. There 
will be two and a half million more people in the Puget Sound 
by 2050. So I think about how much decisions today as an 
elected official will shape what the region looks like then and 
whether those people, including my children and my 
grandchildren, will enjoy the well-being and prosperity that I 
have enjoyed.
    That is why I am proud to speak before you today on the 
critical issues of America's response to global warming. King 
County appreciates the comprehensive approach of this bill. We 
support creating a market cap that sends a consistent economy-
wide carbon price signal to all sectors. As Congress now 
examines how to reduce the emissions of greenhouses through 
national legislation, I urge you to consider that capping 
carbon emissions and promoting investments in clean energy and 
fuels alone will not solve this national and global crisis.
    In King County, as in so many regions in the United States, 
especially the west coast, greenhouse gas emissions from the 
transportation sector are the single biggest source of global 
warming pollution. Additionally, the single largest contributor 
to transportation pollution are cars driving on our roads and 
our highways. Simply put, we cannot solve the problem of 
greenhouse gas emissions unless we create ways for people to 
drive less.
    Not surprisingly, King County, as the regional transit 
agency, is confronted each day with the challenges of moving 
people out of their cars and into cleaner transportation 
alternatives. Therefore, a critical step in addressing the 
vehicle miles traveled problem lies in assuring that the scope 
of this legislation fully recognizes and rewards those 
governments and institutions that are implementing policies 
right now to increase transportation choices and reduce the 
need for driving. Examples of such policies include smart 
growth planning, expanded transit, bolstering alternatives 
modes, such as biking, walking, tele-commuting and promoting 
density and transit-oriented development.
    The research shows that if one solo commuter of a household 
switches from driving to transit for their commute to work, he 
or she can reduce their carbon footprint by 10 percent, the 
equivalent of more than 4,800 pounds of CO2 for an 
average commuter each year. If that same commuter rides transit 
to work and their household gives up a second car, that family 
can reduce their carbon emission of up to 30 percent.
    The comprehensive approach you are now taking also should 
provide incentives for those communities that are not currently 
engaged in those strategies. These include direct allocation of 
allowances to localities and regions engaged in policies to 
make significant investments in public transit, such as 
allowances or revenues, will make it easier for refiners to 
meet their greenhouse goals.
    This can be done. In King County, we are either doing or 
promoting each of these policies. And we have gone one step 
further. We have said in response to our own environmental 
policy act that we are going to look at carbon emissions as one 
of the standards. Rewarding local governments engaged in 
comprehensive approaches that address all sectors of the 
economy and all three legs of that stool of transportation will 
be an essential element in the national fight against global 
warming.
    Madam Chairman, Senator Inhofe and members of this 
Committee, thank you again for the opportunity to speak with 
you today to advocate for Federal Government action on global 
warming. I look forward to continuing to work with you to pass 
this very important and critical legislation. Thank you.
    [The prepared statement of Mr. Sims follows:]

   Statement of Ron Sims, County Executive of King County, Washington

    Madam Chairman, Senator Inhofe, and members of the Committee, thank 
you for inviting me to testify today about the importance of investment 
in public transportation and other strategies to reduce driving in 
order to cut the emission of greenhouse gases.
    I am King County Executive Ron Sims, and I am proud to serve as the 
elected leader of the nation's fourteenth largest county government in 
the country. I am also a board member of the Center for Clean Air 
Policy, a leading think tank crafting cost-effective climate policy 
solutions. King County stretches from the Puget Sound shores to the 
snow-crested peaks of the Cascade Mountains. Between are 2,000 square 
miles with vibrant urban centers, four major river systems, 760 lakes, 
3,000 miles of streams, and 1,000 square miles of forest. Our county is 
home to 1.8 million people.
    With regard to transportation, King County also owns and operates 
Metro Transit, one of the ten largest bus transit systems in the 
nation, with an annual ridership of more than 100 million. Recently, 
King County was a lead in securing designation as a U.S. Department of 
Transportation ``Urban Partnership,'' which provides significant 
federal funding to pursue a range of congestion reduction measures, 
including major new transit improvements, as well as technologies and 
incentives for changing commuting behaviors. King County was also the 
first county to join the Chicago Climate Exchange in part to help 
ensure that regional transit agencies have a voice during the creation 
of national cap and trade rules and legislation.
    My region is growing extremely fast, both in our economy and our 
population. And our global warming problem also is fast-growing. I know 
that I will not be in the Puget Sound region in 2050, but 2.5 million 
people will live there. And I think about how my decisions as an 
elected official today will shape what our region looks like then, and 
whether those people--including my children and grandchildren--will 
enjoy well being and prosperity. That is why I am pleased to speak 
before you today on the critical issue of America's response to global 
warming.
    King County appreciates the comprehensive approach of S. 2191. We 
support creating a market cap that sends a consistent economy-wide 
carbon price signal to all sectors. As Congress now examines how to 
reduce the emission of greenhouse gases through national legislation, I 
urge you to consider that capping carbon emissions and promoting 
investment in clean energy and fuels alone will not solve this national 
crisis. It is my hope that you take this opportunity to build on the 
existing provisions in S. 2191 to prioritize and ensure investments 
will be made in policies designed to reduce vehicle miles traveled 
(VMT). That may require being more explicit about the types of VMT 
reduction activities eligible for funding beyond transit (which is 
already specifically noted in the bill), increasing available funding 
dedicated to those purposes, and considering funding VMT reductions 
from both the allowance and auction sources.
    In King County and so many regions in the United States, especially 
on the west coast, greenhouse gas emissions from the transportation 
sector are the single biggest source of global warming pollution. 
Additionally, the single biggest factor in the amount of transportation 
pollution is the number of vehicle miles traveled. Not surprisingly 
King County, as the regional transit agency, is confronted each day 
with the challenge of moving people out of their cars and into cleaner 
transportation alternatives.
    Nationally, the transportation sector is responsible for 33 percent 
of CO2 emissions, and those emissions are projected to 
increase rapidly. Passenger vehicles (cars and light trucks) are 
responsible for more than three-fifths of transportation sector 
CO2 emissions. With the significant reductions in 
CO2 emissions needed to protect the climate (e.g., 60 to 80 
percent below 1990 levels), the continuing growth of emissions from 
transportation will undoubtedly put more pressure on other sectors 
(including refining, manufacturing and electricity) to reduce their 
emissions.
    The transportation sector's CO2 emissions are a function 
of vehicle fuel efficiency, fuel carbon content, and VMT (vehicle miles 
traveled), factors we refer to as a ``three-legged stool'' (Figure 1). 
Energy and climate policy initiatives at the federal and state levels 
(including S. 2191) have focused almost exclusively on technological 
advances in vehicles and fuels, the first two legs. Yet, there is a 
growing recognition that managing VMT has to be part of the solution--
this third leg is needed to support the stool and should complement 
vehicle technology and fuels policy.

[GRAPHIC] [TIFF OMITTED] T3583.186


    In fact, expected growth in our driving habits will overwhelm 
planned reductions in CO2 emissions from even the most 
aggressive proposed improvements in vehicle and fuel efficiency. As 
discussed below, an analysis by the Center for Clean Air Policy (CCAP) 
finds that current policy proposals on vehicle technology and fuels 
would leave passenger vehicle CO2 emissions well above 1990 
levels in 2030, significantly off-course for meeting the bill's 2050 
target. Reduction in travel demand will be an important element of 
effective climate policy.
    According to forecasts of the U.S. Department of Energy's Energy 
Information Administration (EIA) VMT already is expected to increase by 
59 percent from 2005 to 2030 (the red line in Figure 2), outpacing 
projected population growth of 23 percent. This growth in VMT is due in 
large part to sprawling development patterns that require Americans to 
drive long distances as well as limited transportation alternatives 
(transit, walk, bike). Over this time period, the EIA projects fuel 
economy for new passenger vehicles to increase by 16 percent (from 25 
to 29 mpg) and the fuel economy of the full stock of vehicles (the 
green line in Figure 2) to increase by 13 percent, as more efficient 
vehicles penetrate the fleet. CO2 emissions would increase 
by 40 percent over the same time frame (the dark blue line in Figure 
2). In this case, transportation CO2 emissions in 2030 would 
be 75 percent above 1990 levels (the turquoise line in Figure 2).

[GRAPHIC] [TIFF OMITTED] T3583.187


    The more important question is what would happen to CO2 
growth even if we implemented CAFE increases and a low carbon fuel 
standard. In June 2007, the U.S. Senate passed new CAFE standards that 
would increase new passenger vehicle fuel economy (cars and light 
trucks combined) to 35 mpg by 2020. California is implementing a low 
carbon standard for transportation fuels that calls for a 10 percent 
reduction in fuel carbon intensity by 2020. If California's low carbon 
fuel standard were applied at the national level (the purple line in 
Figure 3), in conjunction with the Senate's CAFE standard of 35 mpg by 
2020 (the green line in Figure 3), passenger vehicle CO2 
emissions in 2030 would be 12 percent above 2005 levels, or 40 percent 
above 1990 levels. In other words, projected growth of VMT would still 
overwhelm the CO2 savings from vehicle and fuel 
regulations.\1\
---------------------------------------------------------------------------
    \1\ In this scenario, VMT growth increases by 2 percentage points 
(61 percent growth by 2030) due to the ``rebound effect'' whereby 
driving increases as fuel economy increases (10 percent short-run 
elasticity).




    Clearly, lowering transportation CO2 emissions to 60 to 
80 percent below 1990 levels by 2050 would require even greater 
improvements in vehicles, fuels and, almost certainly, reductions in 
VMT per capita.
    Therefore, a critical first step in addressing the VMT problem lies 
in assuring that the scope of this legislation fully recognizes and 
rewards those governments and institutions that are implementing 
polices right now to increase transportation choices and reduce the 
need for driving. Examples of such policies include, rewarding those 
communities engaged in regional smart growth planning, expanding 
transit networks, bolstering alternative transportation modes (bike, 
walk), and promoting infill and transit-oriented development around 
compact mixed use communities.
    The comprehensive approach you are taking now also should provide 
incentives for those communities that are not currently engaged in 
regional smart growth planning to adopt these strategies to slow growth 
in VMT. As the recent legal settlement in California surrounding the 
land use practices of San Bernardino County exemplifies, local land use 
decisions can and must be part of the solution to achieve the 
greenhouse gas reduction goals articulated in this legislation. Now is 
the time to seize upon the opportunity to craft incentives and develop 
resources that will enable local governments to find effective 
solutions to VMT growth.
    There are a number of options for providing such incentives to the 
transportation sector beyond the price signal sent by a cap on refiners 
in this bill. These include direct allocation of allowances to 
localities and regions engaged in policies to reduce VMT such as making 
significant investment in public transit, or use of auction revenues 
through a competitive process to communities that reduce VMT. Such use 
of allowances or revenues to reduce VMT will also make it easier for 
refiners to meet their GHG target.
    The research shows that if one solo commuter of a household 
switches from driving to transit for their commute to work, he or she 
can reduce their household carbon footprint by 10 percent, the 
equivalent of more than 4,800 pounds of CO2 for an average 
commute each year. If the same commuter rides transit to work and their 
household can give up a second car, a family can reduce its total 
carbon emissions up to 30 percent.
    According to a new report, compact development alone could reduce 
VMT by 20-40% as compared to typical suburban development.\2\ Shifting 
60 percent of new growth to compact patterns could reduce 
transportation CO2 emissions by 85 MMTCO2 in 
2030. This is equivalent to the savings from a 28 percent increase in 
CAFE standards (to 32 mpg) or half the GHG savings from the Senate's 35 
mpg CAFE bill. These savings do not include strategic investments in 
transit or pricing policies such as congestion pricing, pay-as-you-
drive insurance, commute trip reduction and alternative work schedule 
programs, which could potentially double these savings.
---------------------------------------------------------------------------
    \2\ R. Ewing, Keith Bartholomew, S. Winkelman, J. Walters, and D. 
Chen, Growing Cooler: The Evidence on Urban Development and Climate 
Change, Urban Land Institute, in press. Final draft available here: 
http://www.ccap.org/transportation/smart.htm.
---------------------------------------------------------------------------
    In King County we are either doing or promoting each of those local 
policy options. And we have gone even one step further, requiring 
through our State Environmental Policy Act that new projects being 
built where the County is the local government authority account for 
greenhouse gas emissions prior to being approved. Rewarding local 
governments engaged in comprehensive approaches that address all 
sectors of the economy and all three legs of the transportation stool 
will be an essential element in the national fight against global 
warming.
    Madam Chairman, Senator Inhofe, and members of the Committee, thank 
you again for the opportunity to speak with you today and play a role 
in advocating for meaningful federal government action on global 
warming. We look forward to working with you in the future on the 
important issue of VMT and climate change.
                                 ______
                                 
   Responses by Ron Sims to Additional Questions from Senator Vitter

    Question 1. You suggest that an economy-wide approach to emissions 
reductions is preferable and more efficient because it provides 
flexibility and diversity of reduction sources. If this is true, why 
stop at just domestic industries? This bill does very little in terms 
of reducing global emissions. Would it not be even more efficient to 
have emission sources from all nations on the table?
    Response. No, this domestic economy-wide bill positions the United 
States to have a significant impact on greenhouse gas concentrations in 
our atmosphere. Furthermore, it is not dependent on but remains 
consistent with development of a future international treaty to reduce 
global greenhouse gas emissions, which I strongly support.
    The United States has an unrivaled capacity to innovate and invest 
in new emissions reduction strategies at the local and regional level, 
with important co-benefits. In King County, for instance, our research 
has shown that compact development not only reduces our greenhouse gas 
emissions but also improves our air quality and public health, by 
making our communities more appealing for alternative transportation 
choices, such as walking, biking and riding public transit. Other local 
and regional strategies to reduce vehicle miles traveled (e.g., 
congestion pricing, pay-as-you-drive insurance, commute trip reduction 
and alternative work schedule programs) are also very important to 
reducing greenhouse gas emissions, increasing our workforce 
productivity, and improving our public health. These strategies are 
best recognized and rewarded by a domestic, economy-wide approach.
    In turn, we leaders of large urban regions such as King County can 
position our business communities and regions to be important world 
exporters of related green expertise, in areas ranging from walkable 
community design and transit-oriented development to clean technologies 
and fuels.
    Economy-wide national climate policy should recognize and reward 
local and regional strategies to expand policies such as these, which 
we already know to be effective in reducing greenhouse gas emissions.

    Question 2. Considering that this bill will have virtually zero 
impact on greenhouse gas concentrations in our atmosphere, doesn't 
working within the UN Framework Convention on Climate Change make more 
sense and allow the U.S. to compete on a level playing field rather 
than taking unilateral action on a emissions regime that may or may not 
comport with future international programs?
    Response. No, this bill positions the United States to have 
significant impact on greenhouse gas concentrations in our atmosphere. 
Please see response to Q1.

    Question 3. This bill does not include providing any allowances to 
refiners for the petroleum transport ration fuels that they produce. 
How would refiners comply with this bill in 2012 to cover the 
greenhouse gas emissions from petroleum transportation fuels?
    Response. The Executive prefers to defer to those panelists with 
expertise in this area.

    Question 4. This bill explicitly does not preclude or abrogate the 
right of a state to adopt or enforce a standard, cap, limitation or 
prohibition relating to greenhouse gas emissions. We could end up with 
a national cap-and-trade program and different state controls. 
Shouldn't states be preempted to prevent duplicative and possibly 
conflicting environmental controls?
    No, state and local governments should not be pre-empted on a de 
facto basis. If federal policies are more stringent than state and 
local requirements, a good argument could be made for preemption, as 
long as such a measure is consistent with science, legislative and 
legal history.

    Senator Boxer. Thank you very much, County Executive Sims, 
for your statement. We thank you for coming such a big distance 
to help us shed some light on the bill. Thank you.
    Our next speaker is Kevin Book, Senior Analyst and Vice 
President, Friedman Billings Ramsey and Company, Inc.

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

    Mr. Book. Thank you, Madam Chairman, Ranking Member Inhofe 
and distinguished members of this Committee for the opportunity 
to contribute to the vital work you are doing to safeguard 
climate security.
    The views I will present today are my own and do not 
necessarily represent those of my employer. My name is Kevin 
Book, I am an energy research analyst for Investment Bank, FPR 
Capital Markets Corporation, which is headquartered in 
Arlington, Virginia. I serve the Wall Street institutional 
investors who manage the assets of individuals, private trusts, 
charitable organizations, pension funds and other capital 
sources very likely to play central roles in the implementation 
of the national policy goals that will be established by this 
Committee. I consider it an honor to have the privilege of 
service to this whole Committee, to offer my observations about 
this matter.
    My wife this morning said, if you really want to be of 
service, try to translate this time from economist to English. 
So my best effort follows.
    My overarching point is the need to balance action with 
caution. The world is indeed looking to this Nation and all 
developed economies for leadership. All year, even as oil 
prices have risen and the U.S. dollar has fallen, the leaders 
of developed economies have debated, as this Committee has, how 
to apportion responsibility for greenhouse gas emissions.
    By contrast, the leaders of emerging economies have 
continued to comb the world in a no-holds barred pursuit of the 
cheapest fossil energy sources, primarily oil and coal. This is 
because billions of impoverished men and women world-wide 
regard hydrocarbon fuels as the shortest path to basic 
amenities. For fast-growing populations in China, India and in 
the oil-producing States of the Middle East, the freedom to 
make environmental responsibility a national priority remains a 
far-distant dream. Thus, our Nation must demonstrate not only a 
commitment to environmental stewardship but also that needed 
controls retain sound economic fundamentals before the 
developing world would be likely to consider enacting controls 
of its own. That is the core challenge, wealth, energy demand 
and environmental externalities all tend to rise and fall 
together. At the extreme, nothing cleans the air like an 
economic slowdown.
    Inventions born of necessity may be ingenious, but it is 
far better to have them born of rich capital markets and a 
stable society. Basically, innovation and profligacy often live 
in the same zip code, if not under the same roof. Better 
technologies will require more wealth for investment, not less.
    The irony here, the fossil energy linked to climate change 
also fuels economic growth, social freedom and the engines of 
Western innovation. Thus a small first step is less likely to 
be a mis-step.
    Let me give you a couple of recent economic data points. 
Home loan defaults during the third quarter of 2007 rose to a 
decade high of approximately 0.85 percent of residential 
mortgage debt. This same third quarter was the epicenter of 
sub-prime mortgage rate increase. Further defaults may lie 
ahead in the not too distant future, particularly given high 
energy prices.
    As my written testimony discusses at length, Sates with 
lower average incomes tend to also have coal-fired power and to 
drive longer distances. Nobody wants to see this happen, but 
consumption patterns underlying the emissions from some sectors 
of our economy may potentially shift during the next six months 
because of these economic factors.
    In light of that, a sequenced approach may actually give 
the U.S. economy a chance to respond before introducing 
systemic risk. I am saying essentially, change one thing, watch 
the results and if it is okay, keep going. I am not saying pick 
one thing over any other, I am just offering that as a 
suggestion.
    As I suggested during my February 2007 testimony, the power 
generation sector is already regulated under the acid rain 
program, which is very successful and could be a starting 
point. But markets, as they say, have their ups and downs. 
Taxation may be a more efficient and flexible way to set a 
carbon price. Because even though markets are efficient 
distribution pricing mechanisms for commerce, they can inject 
unanticipated volatility into regulation. Because scarcity can 
distort price when commercial buyers, whose businesses cannot 
operate without the commodity in question, are forced to bid 
against non-commercial traders who generate profits, as they 
should, through scarcity and who may be reluctant to sell. 
Price can move down in this context as fast as it moves up. But 
volatility can make it difficult for commercial buyers to 
efficiently deploy capital.
    So to ensure stability, commercial buyers often purchase 
options to buy or sell in the future. But options do not reduce 
CO2 levels in the atmosphere. And the costs of 
hedging are not available necessarily for investment in cleaner 
energy. Neither are the frictional transaction costs associated 
with markets, which includes service fees associated with 
brokerage and the fees of moving in and out of a proxy currency 
like a carbon allowance. Again, in sort of the English my wife 
asked for, the more complicated a system becomes, the more you 
are going to need skilled intermediaries to get you through it. 
The more you spend on commissions and payments to those 
intermediaries, the less you are going to have available to 
spend on new technologies.
    One final point. However one sets price, visibility and 
direct accountability into how the proceeds are spent is vital. 
The Crude Oil Windfall Profits Tax Act and the Synthetic Fuels 
Corporation it was intended to finance might have survived 
longer had Congress stuck with President Carter's original 
design, which was the allocation of proceeds to a separate 
account devoted to energy security investments. At the end of 
this process, the retention of the separate accounts and the 
laudable reporting requirements already established in the 
America's Climate Security Act of 2007 are likely to go further 
toward the program goals than putting the money into the 
general fund.
    Madam Chairman, that concludes my prepared testimony. I 
look forward to answering any questions you might have.
    [The prepared statement of Mr. Book follows:]

 Statement of Kevin Book, Senior Vice President, Energy Policy, Oil & 
           Alternative Energy FBR Capital Markets Corporation

    Thank you, Madam Chairman, Ranking Member Inhofe and distinguished 
members of this Committee, for the opportunity to contribute to the 
vital work you are doing to safeguard climate security. The views I 
will present today are my own, and do not necessarily represent those 
of my employer.

                        WALL STREET IS WATCHING

    As an energy research analyst for an investment bank, I serve the 
Wall Street institutional investors who manage the assets of 
individuals, private trusts, charitable organizations, pension funds 
and other capital sources likely to play essential roles in the 
implementation of national policy goals that will be established by 
this Committee.
    This year, from my perspective, the stewards of U.S. and 
international financial assets appear to be taking an unprecedented 
interest in how you, the stewards of U.S. environmental policy, will 
structure a national regulatory framework to reduce anthropogenic 
greenhouse gas (GHG) emissions. Given the diverse set of views 
expressed by the Members of this Committee, I doubt any of you will be 
surprised that I have encountered a broad range of investor 
perspectives. Some investors have shared their optimism for a cleaner, 
more efficient energy future and, quite frankly, their curiosity about 
how the America's Climate Security Act of 2007 (ACSA) and similar 
legislation might allow them to participate in capital formation and 
value creation. Others have shared their concerns that efforts to 
internalize the cost of GHG emissions could seriously disrupt one or 
several economic sectors, particularly power generation, heavy industry 
and fossil energy production. In essence, investors at both ideological 
extremes are wrestling with the policy challenge that has long 
confronted governments hoping to attenuate the effects of global 
climate change: wealth, energy demand and externalities all tend to 
rise and fall together.
    Three energy crises, two recessions and one very successful Clean 
Air Act during the last four decades of U.S. history suggest that, 
while well-considered policies may motivate stakeholders to diminish 
the externalities associated with their energy use and increase the 
energy efficiency of their domestic output, nothing cleans the air 
better or faster than an economic slowdown. Of course, every Congress 
during the decade since the Byrd-Hagel Resolution has rightly rejected 
economic contraction as a climate policy lever, because the short-term 
social costs and political consequences are obvious. While slowdowns 
caused by natural disasters and other external events may soon be 
followed by recoveries, an imprecise rebalancing of the economy-energy-
environment relationship could potentially deter necessary investment 
and lead to longer-lasting economic underperformance. Because it is not 
just Wall Street, but the entire world, that is watching U.S. steps 
towards climate change regulation, a misstep could bring undesirable 
global consequences.
    Inventions born of necessity may be ingenious, but they are likely 
to be undercapitalized. By contrast, innovation and profligacy often 
live in the same zip code, if not necessarily under the same roof. New 
technologies to address global climate change are going to require more 
investment dollars, not less. Stable economies encourage wealthy 
enterprises to invest in research and development towards new 
transformational technologies, as well as evolutionary improvements to 
existing processes. This may explain past U.S. leadership in energy and 
environmental technologies: not just because laws established new 
pollution controls, but also because, once rules were in place, the 
nation's rare, if not unique, combination of efficient markets, open 
society and economic prowess enabled new pollution control technologies 
to emerge from corporate laboratories and basement inventors alike.
    It is possible that plain old Yankee ingenuity might really be a 
lucky accident, but I believe it comes from a synergy among related and 
supporting industries that form what Harvard business scholar Michael 
Porter would call our ``national advantage''. This means that policies 
that raise the operating costs of industrial innovators enough to cause 
a recession could deprive the U.S. and the world of emissions control 
technologies made possible, ironically, by the same wealth and 
stability that inure energy end-users to the price signals that 
encourage conservation.

             THE PRICE-SENSITIVE CONSUMER AND PRICE SIGNALS

    Relying solely on scientific data reported here through U.S. and 
international governmental channels, and having no academic background 
in the natural sciences that would lead me to reach any other 
conclusion, I am inclined to share the consensus view that U.S. 
policymakers should act quickly to lead the world towards an effective 
strategy to minimize the long-term risks associated with global climate 
change.
    I would submit, however, that recent economic data associated with 
the collapse of the sub-prime mortgage sector may reasonably raise the 
question whether the present moment in time calls for an economy-wide 
system of regulation, given that the consumption patterns underlying 
the emissions from some sectors of our economy may potentially shift 
during the next 6-12 months. Home loan defaults rose during the third 
quarter of 2007 to a decade high of approximately 0.85% of residential 
mortgage debt. The third quarter also represented the epicenter of 
``resets'' (interest rate increases) for sub-prime adjustable rate 
mortgages, suggesting that further defaults may lie ahead in the not-
too-distant future, particularly given the lagging, but significant 
price increases associated with record nominal high oil prices.
    If there is to be a shift in driving behavior and aggregate energy 
use patterns, it might be easiest to see on the road. According to a 
study released in October 2006 by the Institute for Transportation 
Studies at the University of California, Davis, short-run price 
elasticity of gasoline demand was an order of magnitude less during the 
2001-2006 timeframe (^0.034 to ^0.077) than it was during the 1975-1980 
timeframe (^0.21 ^0.34). Many of my clients and colleagues have 
hypothesized that this difference reflects the newfound wealth many 
urban drivers attained by refinancing their homes, as well as a new 
inflexibility derived from home ownership in suburbs and rural areas. 
In effect, one major reason why U.S. households did not demonstrate 
price-responsiveness in recent years may have been that they were 
``driving their homes''.
    The possibility that consumption behaviors could change in response 
to fiscal strictures underscores the precariousness of the current 
economic situation, particularly as consumer responsiveness to price 
signals occurs at the margin. That implies that any effort to trigger 
conservation or environmental stewardship, even if price hikes are 
mediated through larger enterprises before they reach consumers, will 
affect the poorest Americans first. The regressive effect may be 
enhanced by the fact that, consumers at the lowest income levels may 
have less working capital with which to avail themselves of 
conservation behaviors like efficiency improvements to their homes and 
purchasing higher fuel economy cars.
    The distribution of income and natural resources throughout the 
United States has set up regional economic advantages for certain power 
generation fuels, a fact reinforced by the graphic in Figure 1, below, 
which depicts the primary power generation fuel on a statewide average 
basis.

[GRAPHIC] [TIFF OMITTED] T3583.189


    It is no secret that coal-fired generation enables lower average 
power generation prices, but it may not be clear how closely correlated 
the primary generation fuel is to average income distribution. Table 1 
presents the ten highest and ten lowest statewide average levels of 
disposable personal income (DPI), as estimated by the Bureau of 
Economic Advisors, as well as those states' primary power generation 
fuels and average power prices using July 2007 (latest) EIA data. 
Because coal-fired generation, on a national average basis, is 
approximately twice as carbon-inefficient per kilowatt-hour (kWh) 
generated, at any carbon price whatsoever, statewide averages imply 
significantly disparate consumer wealth effects. Eight out of the ten 
poorest states on an average DPI basis rely primarily on coal-fired 
power. Eight out of the ten richest states on an average DPI basis rely 
primarily on carbon-efficient nuclear power or natural gas. The 
practical effect of a significant carbon surcharge to coal-fired 
generation would probably provoke a fairly dramatic shift to natural 
gas-fired generation where it is available, as this Committee has heard 
many times during the year. Thus, even without a surcharge imposed 
directly on coal-fired power, the poorest states would be likely to 
face higher average residential power prices one way or another.

[GRAPHIC] [TIFF OMITTED] T3583.190


    Table 2 addresses transportation fuels needs. Examining the vehicle 
miles traveled per disposable personal income dollar standardizes 
consumer wealth exposure to existing driving behaviors. Applying a 
standard fuel economy (mathematically, any number will do, but I used a 
national light-duty average of 20.5 miles per gallon for this 
calculation) and latest available gasoline prices creates a percentage 
of average disposable income allocated to driving behaviors at current 
gasoline prices. Last, Table 2 incorporates a pro-rata surcharge of 
$0.34/gallon for carbon, which reflects the $39 per metric ton carbon 
market premium when the European Emissions Trading Scheme peaked in 
April 2006, adjusted for currency effects at the time, applied to the 
gasoline-powered fleet on a national average basis. This presents 
potentially stark regional effects under an economy-wide cap-and-trade 
scheme.

[GRAPHIC] [TIFF OMITTED] T3583.191


    These data enhance my already profound appreciation for the 
enormity and complexity of the task ahead for this Committee and the 
whole U.S. Congress in structuring an economy-wide GHG emissions 
reduction strategy. These also suggest that the most prudent approach 
may be to outline a phased strategy to regulate emissions from the 
whole economy on a sector-by-sector, sequential basis.

                  THE UNITED STATES AS A GLOBAL LEADER

    As I suggested during my February 2007 testimony before this 
Committee, the power generation sector could represent a natural 
starting point for sequenced controls as it is already regulated under 
the existing framework of the Acid Rain program. In light of uncertain 
economic conditions, a sequenced approach might also give the U.S. 
economy a chance to respond to changing price dynamics across regions 
and industrial sectors before injecting further systemic risk. This 
could be an alternative to the two-year economic review anticipated by 
ACSA. A rush out of the gate to sudden economic consequences could 
potentially undermine the Act's stated goal of providing leadership to 
the developing world.
    After all, there is a natural reason why the U.S. and the developed 
economies of the world must lead the global climate change debate: 
developing economies have explicitly refused to pay. In fact, the 
energy use patterns of the developing world make it less likely that 
the Kyoto Protocol will result in much more than a wealth transfer out 
of OECD economies, and certainly not an abatement of global climate 
change. All year, even as oil prices have risen and the U.S. dollar has 
fallen, the leaders of developed economies have debated how to 
apportion responsibility for GHG emissions across industrial sectors 
and national boundaries. By contrast, the leaders of emerging economies 
have continued to comb the world in a no-holds-barred pursuit of the 
cheapest fossil energy sources, primarily oil and coal. Wealthy, oil-
consuming nations turn to environmental stewardship to incrementally 
improve an already-high quality of life, while billions of impoverished 
men and women worldwide regard hydrocarbon fuels as the shortest path 
to basic amenities. For the fast-growing populations of China and 
India, but also the oil producing states of the Middle East, the 
freedom to make environmental responsibility a national priority 
remains a far-distant dream.
    The bottom line is that the U.S. must be able to demonstrate not 
only its commitment to environmental stewardship, but its ability to 
undertake needed controls while retaining sound economic fundamentals 
before the developing world will be likely to consider enacting 
controls of its own.

                      THE VICISSITUDES OF MARKETS

    It is in this context that I would suggest that setting carbon 
price through taxation rather than market pricing may improve prospects 
that U.S. climate security policies will be both effective and 
commercially viable. While markets tend to be efficient distribution 
and pricing mechanisms for commerce, they also possess characteristics 
that can inject unanticipated volatility into regulation, particularly 
when the governance structure encourages noncommercial traders to enter 
the market to provide necessary liquidity.
    The challenges arrive under conditions of scarcity, a predicament 
best exemplified by the current price of crude oil. No fundamental 
analysis or rational assessment of currency and risk effects can 
account for $95 crude, and my models suggest an upper-bound risk and 
currency-effect-adjusted price should be no higher than $80 per barrel, 
particularly with troubling economic indicators overhanging demand. But 
refineries are still buying oil at a premium due to market dynamics, 
not fundamentals. Commodity markets frequently distort price under 
conditions of scarcity because commercial buyers, whose businesses 
cannot operate without the commodity in question, are forced to bid up 
for it at the same time that noncommercial traders, who generate 
profits through scarcity, may be reluctant to sell. Ultimately these 
pricing dynamics normalize, sometimes with startling downward pressure 
on price, but the volatility can make it difficult for commercial 
buyers to efficiently deploy investment capital. Over the long term, 
all businesses can respond to price changes, but short-term price 
volatility ultimately forces commercial buyers to look for ways to 
ensure price stability, usually by purchasing the option to buy or sell 
at a range of prices in the future.
    Commercial enterprises pay for these options as a cost of doing 
business, but the costs of managing potentially volatile carbon prices 
might well undermine the public interest goal of reducing emissions at 
the lowest economic cost to regulated entities and ratepayers. An 
emissions option is not an emissions reduction and it provides revenue 
to its seller whether or not the buyer exercises it; unlike an 
allowance or an offset, the option itself does nothing to reduce the 
carbon dioxide levels in the Earth's atmosphere. Nor can emitters 
devote the cost of hedging to needed investment in next-generation 
technologies. Even when emitters can achieve financial gains through 
hedging activities, they still bear the ``frictional'' costs of 
commissions and service fees, and businesses that can generate returns 
on capital through financial engineering are unlikely to undertake 
investments in sustainable energy production.
    The challenges facing the Kyoto Protocol, where 65% of today's 
global GHG emissions are not governed by mandatory caps, derive in part 
from its market pricing architecture. The use of emissions credits as a 
proxy currency requires emitters who would be governed by the caps to 
value that currency, which is not the case for China, India, Australia 
or the United States. As unappealing as carbon taxation may seem from a 
political standpoint, one of its greatest virtues may stem from the 
fact that taxes can be assessed in any reference currency or exchange-
adjusted foreign denomination at the moment of any intra- or 
international commercial transaction. Governments may also tailor tax 
regimes to respond to economic conditions faster than they can retire 
allowances, offsets or any carbon proxy currency.

           SEPARATE ACCOUNTING MAY IMPROVE PROGRAM DURABILITY

    This is not to say that carbon taxation does not also present 
risks. For example, it might be best to avoid any structure that 
permits climate-related taxation without accountability for financial 
and environmental yield, and ACSA's performance reporting structure 
certainly addresses part of this requirement. Accountability for the 
use of proceeds may also help to ensure optimal outcomes.
    The history of the Crude Oil Windfall Profits Tax Act and the 
Synthetic Fuels Corporation it was intended to finance may have 
continued far longer, or been subject to early modification that could 
have improved the financial durability of the program, had Congress 
stuck with President Carter's original design: the allocation of 
proceeds to a separate account devoted to energy security investments. 
Whether the pricing mechanism for U.S. carbon standards operates 
through full auction, phased auction or direct taxation, it may be 
worthwhile to consider structuring a set-aside account in addition to 
the laudable reporting requirements already established.
    Madam Chairman, this concludes my prepared testimony. I will look 
forward to answering any questions you or other Committee members may 
have.
                                 ______
                                 
  Responses by Kevin Book to Additional Questions from Senator Inhofe

    Question 1. What do you think would be the impact on the economy of 
the Lieberman-Warner bill after it is implemented, say in 2014, if the 
U.S. economy dives into a recession? Would it worsen a recession?
    Response. Senator Inhofe, even since the testimony I offered before 
the Committee, several potential signals of economic hardship have 
continued to surface. The November 26, 2007 Wall Street Journal 
suggests that Citigroup, one of the nation's leading financial 
institutions, may face as much as $41 billion in subprime mortgage 
exposure. Reverberations have shown up within financial sectors outside 
of home lending, including bond insurance and student loans.
    As I stated in my testimony, economic growth is proportional to 
environmental consequence. Prosperous economies emit more greenhouse 
(and other) gases, although they tend to demonstrate diminishing 
marginal emissions per unit of economic growth, and OECD economies are 
far more energy efficient than developing nations. On the other hand, 
any mechanism that assigns a cost to currently costless energy-related 
externalities is likely to slow economic growth if the regulated 
economy does not have adequate time to retool. America's energy and 
industrial infrastructure was, in many cases, built to last: useful 
capital life often exceeds 30 or even 50 years. While this has proven 
to be a source of enduring competitive advantage, it also creates risk 
when the rules of the game change.
    One consequence of any economy-wide greenhouse gas regulation could 
be factor cost inflation at every link of the U.S. industrial value 
chain. In general, the most GHG-emitting industries are also the most 
fundamental to economic recovery (because fossil fuels produce output 
at lowest economic cost), most notably manufacturing, homebuilding and 
construction. If the economy were in a sustained recession, the 
traditional engines of economic growth--consumer spending and business 
investment--could be further constrained by small, but potentially 
cumulative and disruptive surcharges on all economic activity. Without 
mechanisms to alleviate these financial risks, any mandatory limit on 
emissions would be likely to prolong a recession and could even 
discourage the necessary research and development spending that might 
yield new, higher-efficiency energy production technologies and 
innovative climate change mitigation practices.

    Question 2. If we moved to full auction as a way to allocate 
allowances, is that approach closer to straightforward taxation than 
the bill as currently written?
    Response. Auctioning emissions allowances on an annual basis to all 
industrial and non-commercial bidders would eliminate the perceptions 
of ``unfairness'' or ``windfall gains'' associated with government 
allocations to one or several industrial sectors, but the price of 
carbon set by an open-ended auction process in the absence of any 
control mechanism could easily result in prices that far exceed the 
targets that could be established under a well-defined system of 
taxation. This could have the effect of penalizing fuels and processes 
that are (a) the most carbon-inefficient per unit of output; (b) the 
least able to switch quickly or to source at effective cost the working 
capital necessary to effectuate change. A likely result would be a 
premium for more highly carbon-efficient or more readily adaptable 
fuels or processes, but no conventional or alternative fuels are 
sufficient to sustain even a portion of American primary energy demand 
currently satisfied by coal and oil. This raises the specter of 
uncontrolled fuel switching that could further provoke price inflation. 
A tax would designate a specific surcharge for a given fuel or process, 
and government-defined deductions could minimize the transitional costs 
to less adaptable industrial sectors or processes characterized by 
higher capital intensity.

    Question 3. Would you contrast some of the economic impact 
differences between a tax-based program and S. 2191, a cap-and-trade 
program without a fixed safety valve mechanism?
    Response. The idea of a ``safety valve'' price for GHG emissions 
offers price certainty for emitters, but EIA forecasts of likely 
behavior under a market-based carbon pricing with a designated maximum 
price suggest that most emitters will opt to pay the safety valve price 
in the long run. This raises a few obvious but important points.
    First, to extend the metaphor, if an industrial process perpetually 
triggers its safety valve, it suggests that the process itself may be 
fundamentally unsafe. There is nothing valve-like about a valve that is 
always on; it is better known as a conduit.
    Second, creating a safety valve at a price point that exceeds 
emitters' economic tolerances offers no safety, because it will be out 
of reach. Conversely, setting the price below likely market-clearing 
prices for carbon undermines the purported value of establishing a 
market as a price-setting mechanism. Regulatory efficiency may be 
improved by choosing a single, transparent pricing mechanism rather 
than trying to circumscribe a market or add flexibility to a tax.
    Third, the idea of creating an entity charged with carbon market 
oversight responsibility similar to the monetary policy role played by 
the Federal Reserve Board of Governors creates a new source of bias, 
namely the risk that emitters may see through an overly-transparent 
carbon policy and ignore price signals in anticipation of future events 
or, alternatively, make inefficient economic choices as a result of 
misreading a more inscrutable, Greenspan-like ``Carbon Fed.''
    In my view, the best-cost, most transparent implementation would 
make use of the existing taxation (and tax rebating) powers of the 
Federal Government.
                                 ______
                                 
  Responses by Kevin Book to Additional Questions from Senator Vitter

    Question 1. I share your conclusion that this bill will cause a 
massive demand for natural gas in the United States. My state is 
responsible for providing over 20 percent of the natural gas we consume 
in America. You would think that my representation of a top natural gas 
producing state would be supportive of increasing demand of a ``state 
product''. In most cases I would; however, in the case of natural gas 
we are already in a supply crunch. Do you have an assessment of natural 
gas prices resulting from this bill?
    Response. Senator Vitter, I do not have forward-looking gas price 
projections based on the specifics of S. 2191, but the experience of 
the sulfur dioxide credit market in the wake of Hurricane Katrina 
illustrates how fuel-based climate change surcharges could motivate 
flexible electric generators to choose natural gas as the marginal 
source of power until the price of natural gas rises to set a new 
``floor'' on the cost of generation. After Katrina struck, sulfur 
credits rose on speculation that impaired natural gas production in the 
Gulf of Mexico would drive generators to coal; despite the abundance of 
spare import capacity for LNG and the strong price signals generated by 
the rise in natural gas prices, natural gas could not come to our 
shores or your coastline overnight, and the entire ``Btu complex'' 
faced upward pressure until gas supplies normalized.
    The nation's increasing reliance on natural gas as a home heating 
fuel, industrial feedstock and marginal power generation source 
diminishes the flexibility of current energy use patterns. Ultimately, 
this forces tough questions regarding natural gas access and the build-
out of re-gasification facilities on the U.S. coastline. Imposing any 
surcharge on coal at the same time as natural gas, as S. 2191 would do, 
would likely raise the floor price for the entire Btu complex in much 
the same fashion, crowding out the most price sensitive industrial and 
residential consumers.

    Question 2. You cite the regressive nature of this bill in your 
testimony--the poorest Americans will be the first hit and the hardest 
hit with the compliance cost of the proposed bill. Have you done an 
analysis on environmental stewardship when families and companies are 
forced into tighter margins? For example, would this cause them to be 
better or worse stewards of the environment?
    Response. The Organization for Economic Cooperation and Development 
(OECD) reported in September 2007 on the per capita environmental 
expenditures by emerging economies within the former Soviet Union and 
Eastern Europe as compared to their wealthier European and former 
Soviet neighbors. OECD's data showed that wealthier economies devoted 
between 1.2% and 1.6% of GDP to environmental funds, more than twice 
the spending exhibited by less-developed, neighboring states.
    At the core of this macroeconomic phenomenon lies the same logic 
that defines household discretionary spending habits: mandatory outlays 
towards national security and economic stability are likely to take 
precedence over spending on environmental stewardship. Moreover, 
cleaner infrastructure comes at additional cost. In the consumer 
sector, better-performing goods often derive their efficiency from 
better design, longer product cycles and higher development costs that 
require firms to recapture greater outlays through premium pricing. An 
easy example is the ``rich man's rebate'' for well-engineered gas-
electric hybrid automobiles. The cost of engineering cleaner cars 
requires automakers to demand higher sticker prices to justify the 
magnitude and risk of greater spending, but ultimately the high price 
sets a barrier to entry that locks out the price-sensitive consumers 
who would derive the greatest proportional economic benefits from 
owning a hybrid, even with federal subsidies.

    Senator Boxer. Thank you very much, sir. We really 
appreciate it.
    Our last speaker is Christopher Berendt, Director, 
Environmental Markets and Policy, Pace Global Energy Services. 
Welcome, sir.

  STATEMENT OF CHRISTOPHER BERENDT, DIRECTOR OF ENVIRONMENTAL 
                    MARKETS AND POLICY, PACE

    Mr. Berendt. Good morning. On behalf of Pace, a global 
energy and carbon management consultancy, I wish to thank Madam 
Chair, the Ranking Member and the Committee for this 
opportunity to testify.
    The Nation's need for new power generation is colliding 
with the uncertainty created by the Supreme Court's decision in 
Massachusetts v. EPA. The need for an intelligent, 
comprehensive national energy policy has never been greater. 
Without a clear Federal response to the global climate change 
issue, the United States is now running headlong into decreased 
energy security, higher prices for the U.S. consumer and more 
CO2 emissions on a global basis.
    Under the Supreme Court's decision, CO2 is now 
deemed a pollutant, thereby creating a regulatory void all the 
way down to the local level. The impact of this void was 
evidenced this year by the TXU agreement to cancel coal plant 
investment, and more recently in Kansas, where for the first 
time CO2 emissions were cited as the reason for 
rejecting an air permit, bringing an end to the Holcomb plant 
expansion.
    Our clients are increasingly telling us that they cannot 
build any coal plants, no matter how clean the technology, and 
that the only generation options in the near term are 
renewables and natural gas, forsaking our most abundant 
domestic energy resource. While renewables will be an important 
part of a diverse portfolio approach to generation, alone they 
will not be able to meet the 120,000 megawatts of incremental 
generation capacity required over the next ten years. Further, 
there is no clear road map for increased nuclear generation 
within the same time period.
    Therefore, should this carbon uncertainty persist, the 
near-term options for electricity generation in the United 
States will likely remain highly reliant on natural gas. We at 
Pace have estimated that if natural gas-fired generation is 
tapped to fill the entire gap left by coal, our Nation will 
require substantial incremental natural gas supply, about 6 
percent above current projections by 2017. Contrast that the 
last six years when gas demand was flat and prices nearly 
tripled.
    Further, the United States has become a natural gas 
importer in recent years. While most of these imports used to 
come from Canada, future imports of liquified natural gas are 
expected to come from less stable overseas supplies. Pace 
expects that an increase in natural gas demand of 6 percent by 
2017 could increase imports by 33 percent. That increase will 
come from foreign sources of LNG. This would expose our economy 
to greater prospects of natural gas price volatility and less 
certainty of supply.
    With these concerns in mind, I would like to offer the 
following comments about carbon market mechanisms. Should this 
Committee choose to enact a market mechanism to clarify the 
carbon price signal, it is important to ensure that U.S. carbon 
markets will have the functionality and liquidity to establish 
a forward curve for carbon and encourage investments in new 
low-carbon technologies, especially clean coal, with carbon 
capture and sequestration.
    Stimulating the creation of a vibrant offset market is also 
important. Innovation in carbon offsets may be one of the cost-
effective means of making a real difference, especially if the 
non-covered and covered entities that deploy select low-carbon 
technologies are allowed to generate offsets. The creation of a 
consolidated national carbon market is a must to avoid State by 
State vagaries.
    The present new build environment does not have clear 
carbon price signals nor the incentives required to develop 
high capital cost clean energy technologies. Until these issues 
are dealt with, new technologies will not be able to be 
deployed and natural gas imports will be required to meet a 
large share with 120,000 megawatts of new generating capacity 
needed over the next ten years. This could negatively impact 
our energy security and the economics of power generation for 
the U.S. consumer.
    The Supreme Court in its decision has created a situation 
of stark uncertainty for the U.S. power generators and a likely 
over-reliance on natural gas. Should this Committee chose to 
implement market-based mechanisms, the resulting carbon price 
signals must be clear and provide long-term price transparency 
so that we can retain the U.S. tradition of advanced technology 
development and adoption.
    Thank you.
    [The prepared statement of Mr. Berendt follows:]

Statement of Christopher Berendt, Director of Environmental Markets and 
                              Policy, Pace

    Good morning, my name is Christopher Berendt. I am the Director of 
Environmental Markets & Policy for Pace, which is a global energy & 
carbon management consulting firm. Pace has experience in all types of 
energy throughout the entire energy value chain from exploration, 
production & generation, to the transmission and distribution to the 
individual U.S. energy consumer. Pace's clients include energy 
companies, electric utilities, financial institutions, energy project 
developers, and energy-intensive industrial companies.
    My company and I appreciate the opportunity to come before this 
committee to provide our perspectives and recommendations regarding 
this important environmental and economic legislation--America's 
Climate Security Act of 2007 (S. 2191).
    The Nation's need for new power generation is colliding with the 
uncertainty created by the Supreme Court's decision in Mass v. EPA. 
Without a clear federal response to the global climate change issue the 
U.S. is now running headlong into decreased energy security, higher 
prices for the U.S. consumer, and more carbon dioxide, CO2, 
emissions on a global basis.
    Under the Supreme Court's April decision, CO2 is now 
deemed a ``pollutant'' by the highest court in the land, thereby 
creating a regulatory void all the way down to the local level. The 
impact of this void is evidenced this year by the TXU agreement to 
cancel coal plant investment and more recently in Kansas where for the 
first time CO2 emissions were cited as the reason for 
rejecting an air permit bringing an end to the Holcomb plant expansion.
    Our clients increasingly advise us that they cannot build any coal 
plants, no matter how clean the technology, and that the only 
generation options in the near-term are renewables and natural gas.
    While renewables will be an important part of a diverse portfolio 
approach to generation, alone, they will not be able to meet the 
120,000 MW of incremental generation capacity needed over the next 10 
years, even under the most optimistic expectations. Further, there is 
no clear roadmap for increased nuclear generation within this same time 
period.
    Therefore, should this carbon uncertainty persist, the near-term 
options for electricity generation in the U.S. will likely be highly 
reliant on natural gas. We at Pace have estimated that if natural gas-
fired generation is tapped to fill the entire gap left by coal--our 
nation will require substantial incremental natural gas supply, about 
6% above current projections by 2017.
    The U.S. has become a natural gas importer in recent years. While 
most of these imports have come from Canada, growth in deliveries of 
liquefied natural gas, or LNG, in the past two years have become 
important. Pace expects that an increase in natural gas demand of 6% by 
2017 could increase imports by 33% and that increase will come from 
foreign sources of LNG. This would expose our economy to the prospects 
of greater natural gas price volatility.
    With that in mind, I would like to offer the following comments 
about carbon market mechanisms.
    Should this Committee choose to enact a market mechanism to clarify 
the carbon price signal, it is important to ensure the U.S. carbon 
markets will have the functionality and liquidity to establish a 
forward curve for carbon and encourage the financial community to 
outlay capital for the development of new clean energy technologies.
    Stimulating the creation of a vibrant offset market is also 
important. Innovation in carbon offsets may be the most cost-effective 
means of making a real difference, especially if both non-covered and 
covered entities that deploy advanced low carbon technologies are 
allowed to generate offsets. Further, a healthy supply side market 
mechanism for carbon is also one of the best ways to control price.
    The creation of a consolidated national carbon market is a ``must'' 
such that generators are not forced to deal with state-by-state 
vagaries. A national market will provide a more efficient design versus 
balkanized efforts at the state and regional levels.
    The present new build environment does not have clear carbon price 
signals nor the incentives required to develop high capital cost, clean 
energy technologies. Until these issues are dealt with, new 
technologies will not be able to be deployed and natural gas imports 
will be required to meet a large share of the 120,000 MW of new 
generating capacity needed over the next ten years--this could 
negatively impact our energy security and the economics of power 
generation for the U.S. consumer.
    The Supreme Court decision has created a situation of stark 
uncertainty for U.S. power generators. We laud this Committee's efforts 
to utilize market based mechanisms to ensure that the energy markets 
operate efficiently and we retain the U.S. tradition of advanced 
technology development & adoption.
    Thank you.

    Senator Boxer. Thank you very much, Mr. Berendt. And thank 
you to the entire panel.
    What I will do, because Senators Alexander and Klobuchar 
weren't here, I am going to give you instead of five minutes 
seven minutes, so that you can do a little bit of your opening 
statement. Is that all right with both of you?
    Senator Alexander. Thank you, Madam Chair. I really came to 
listen to the witnesses, but thank you very much.
    Senator Boxer. OK, we are done with the witnesses and we 
are on to the questions.
    I am going to start with you, Mr. Book, because I was an 
economics major and a stock broker. I think the advice of your 
wife vis-a-vis turning economics language into English was very 
good and you did very well on that point. What I wanted to say 
is, I took away from your testimony some great encouragement 
for this bill. Because you said we need to balance, I wrote 
down action with caution. I hope you will take a look at the 
parts of the Lieberman-Warner bill that really heard what you 
are saying.
    One thing is, we have these transitional free allowances 
allocated to emitters. So we don't just say, you are on your 
own. That is one thing.
    Secondly, the availability of domestic offsets. Thirdly, a 
Carbon Market Efficiency Board that Senator Warner really was 
very involved in crafting with some Democratic colleagues who 
are not on this Committee, interestingly, and Senator Lieberman 
thought this was an excellent idea and put it in the bill. They 
put it in the bill. That Carbon Market Efficiency Board is the 
caution part of your statement. Because they will be looking 
every year to see if this thing is working. And they are 
authorized to loosen a year's cap by as much as 5 percent in 
the event of economic dislocation. And finally, we have 
constant look-backs by the National Academy of Sciences.
    So I really found your testimony to be very compelling. It 
underscored my support for this legislation. I think that we 
can in fact use some more caution and I think that we are 
working to make these look-backs even better. So I think that 
the words that you said today are very, very important.
    Mr. Krupp, in your testimony, you discuss how the 
Lieberman-Warner bill has a system of carrots and sticks to 
encourage international involvement on addressing this issue 
through the protection of tropical forests and the provisions 
requiring nations that wish to export goods to the United 
States to hold allowances for their emissions. Would you also 
agree that as the largest historical emitter of greenhouse 
gases, when the United States takes action it will help spur 
other nations, including China and India?
    One of the things that really has surprised me coming from 
the opponents of this legislation and coming from the opponents 
of doing anything is their statement, China and India should go 
first. I have never seen America sit back and wait for China 
and India to do anything. We are the ones who set the pace.
    So because Senator Warner has come, think upon your answer. 
I am going to turn the floor over to Senator Warner for his 
statement, and then I am going to turn to Senator Lieberman and 
then we will get back to the questions.
    Senator Warner. Madam Chairman, I am sorry to be a little 
late. We have another hearing of the Armed Services going on.
    I would like to just sequence in, following the 
distinguished Ranking Member perhaps, in my regular order. 
Thank you very much for the courtesy, though.
    Senator Boxer. Absolutely. Senator Lieberman, did you want 
to put an opening statement in?
    Senator Lieberman. I thank you, Madam Chair, and apologize 
also. I am just going to put a statement in the record. I am 
sorry to be here late. I thank those on the panel, some of whom 
I have seen quite a lot before in this pursuit. I just want to 
thank Fred Krupp and Eileen Claussen for the really pioneering 
work they have done, not only intellectually, but tactically 
and strategically, dare I elevate the term and say even 
politically, to get us to where we are now, which is in reach 
of doing something constructive about global warming together. 
Thank you.
    [The prepared statement of Senator Lieberman follows:]

       Statement of Hon. Joseph Lieberman, U.S. Senator from the 
                          State of Connecticut

    Thank you, Chairman Boxer.
    I thought I might describe where we now appear to be in this 
process from my perspective.
    At the subcommittee business meeting on November 1, the second 
highest ranking Republican on this committee and the second highest 
ranking Democrat, each of whom hails from a coal-producing state, voted 
in favor of a mandatory, economy-wide, cap-and-trade climate bill.
    On Tuesday of this week, the Natural Resources Defense Council 
testified that the emissions reductions mandated by that bill are 
stringent enough to warrant a ``yes'' vote from every member of this 
committee.
    If, on December 5, at least nine of the ten majority members of 
this committee join Senator Warner in voting in favor of the bill, 
then, for the first time in U.S. history, legislation mandating 
reductions in U.S. greenhouse gas emissions will be reported to the 
full Senate.
    We will have made history. We will have convinced any remaining 
doubters in the private sector that this legislation is coming, that it 
will be strong, and that they had better come to the table. We will 
have reassured the American public that this institution is capable of 
legislating on this surpassingly important topic. And we will have 
signaled to the rest of the world that the United States government is 
finally removing its head from the sand.
    So I believe that if, on December 5, at least nine of the ten 
majority members of this committee vote in favor of America's Climate 
Security Act, it will be a tremendous accomplishment and victory for 
all of us who want to protect our children and grandchildren from 
growing up in a world diminished by global warming.
    I do not believe I need to describe the disappointment we will 
cause if we, the advocates of strong climate legislation, stumble in 
this committee and fail to report the bill to the floor.
    Of course this bill can be improved. If, at full committee business 
meeting on December 5, improvements can be made that would help earn 
the support of additional members of this committee--without 
jettisoning the support of any of the four members who already voted in 
favor of it on November 1--then by all means those changes should be 
made. But I will do everything in my power to ensure that we do not 
forfeit any of the ``yes'' votes that we won on November 1.
    Chairman Boxer, I know that you share my views in this regard. You 
have been tremendously effective in using your power as chairman to 
strengthen this bill even as you perform the delicate balancing 
function necessary to move big legislation through a committee. We 
would not have gotten this far without your expert, guiding hand. And I 
know that, with you sitting in that chair, we will succeed in this 
committee.
    Thank you, Chairman Boxer.

    Senator Boxer. Senator, thank you. So we will go back to 
the question, this whole notion of not doing anything until 
China and India act is something that I have always taken issue 
with as an American who has always seen America on the cutting 
edge of all these things, and as a Californian.
    So I wonder if you could respond. Do you think that when we 
act, it is going to help world-wide?
    Mr. Krupp. Yes, Madam Chairman, I don't think there is any 
question in my mind and from all the evidence that we have 
gathered, and we have been working in China now for 17 years, 
that our acting will inspire action by China, India and the 
other developing countries. This is the way it has always been 
on environmental policy. America has always gone first. In this 
case, we are behind every other developed nation with the 
exception of Australia. Every other developed nation has 
already done what you are deliberating about doing today.
    As a matter of fact, I talked about this chart in my 
testimony, about how a two year delay, just a two year delay 
means to achieve the same reductions by 2020, instead of having 
a 2 percent average reduction per year, you would need a 4 
percent. But in fact, this chart ignores the fact that the 
faster we act, the faster China will act. So the stakes of us 
acting now in this Congress are enormous. Not only will it ease 
the burden on the American economy if we act sooner, but it 
will also in the negotiating process lead the other countries 
to act faster.
    Senator Boxer. Mr. Krupp, just for the sake of Senator 
Lieberman, and I guess Senator Warner had to step out, for my 
last question, could you just repeat what you said, a delay in 
two years, what that means to trying to reach any kind of goal 
to avert catastrophic global warming? Repeat what you had said 
in your testimony.
    Mr. Krupp. Sure, and thank you, Senator Lieberman, for your 
kind remarks when you opened.
    In my testimony, the principal point of this chart is that 
to achieve a cumulative emissions budget in the United States 
between now and 2020, if we act now, as you have proposed in 
your legislation, we would need to average about a 2 percent 
reduction per year. But if we wait two years, and try to get 
down to the same level of total emissions cuts by 2020, we 
would need to instead of having 15 percent reduction level for 
covered sources, we would need to have a 23 percent level. We 
would be starting at a higher level because emissions will go 
up for the next couple of years while Congress delays. And then 
we would have to start from a higher level, cut to a lower 
level just to get the same emissions reductions. That will be 
harder for the economy.
    So I would say to all the Senators concerned about costs, 
there is enormous benefit in reducing the costs by acting 
early.
    Senator Boxer. Thank you.
    Senator Inhofe.
    Senator Inhofe. Thank you, Madam Chairman.
    Let me first of all compliment you, Mr. Berendt, in the way 
that you very succinctly articulated the problem in near-term 
when you talk about renewables and natural gas, and the fact 
that, I think you said by 2017, our imports could increase by 
33 percent. We know what countries we would be dependent upon, 
and that is something that concerns every member of the United 
States Senate.
    Mr. Krupp, let me just ask you one question that would be a 
yes or no. Would you support more LNG terminals in the States 
on the West Cost and upper East Coast, number one; and number 
two, new nuclear plants?
    Mr. Krupp. Under the right safeguards, we do need to 
increase our supply of natural gas. So I don't think it is a 
yes or no question, but yes, we have to do what we need to do 
to expand supply.
    As to the nuclear question, Senator, I think we have a 
number of concerns with nuclear power. We would support 
increased funding by Congress to resolve those concerns about 
waste security. I don't think any option that is a low-carbon 
option should be taken off the table.
    Senator Inhofe. All right, thank you very much.
    Ms. Claussen, do you generally agree with that?
    Ms. Claussen. Yes.
    Senator Inhofe. Good.
    Mr. Book, I have said that a tax is a more straightforward, 
a little more honest way to go. People realize what the cost is 
going to be, it can't be masqueraded as it can in a cap and 
trade. But you have said that taxation is more effective than a 
cap and trade, and some of the other members disagree with you. 
Why do you believe you are right in this statement?
    Mr. Book. Senator, I think it is more a question of first 
recognizing that the controls that have been erected seem to be 
somewhat redundant, given what we already have. There is 
already a Securities and Exchange Commission, there is already 
an IRS, there is already an EPA. Of course, if you don't let 
the whole world play and the market isn't a completely open 
market, then market dynamics don't always work the way you want 
them to work.
    So you can use a tax, because we have a tax system, and you 
can use tax deductions, because we have those, too, and get a 
lot of the same things done.
    Senator Inhofe. It has been discussed several times by 
other witnesses, not just in this hearing but in previous 
hearings, and I would ask the question, do you think that an 
aggressive, unilateral greenhouse gas reductions in the United 
States, without participation by China, India and other 
developing countries, would lead to lower global concentrations 
of greenhouse gases? In other words, as the job flight, in my 
opinion, goes to these countries where they have less controls, 
less technology, could this end up in increasing the amount of 
greenhouse gases?
    Mr. Book. I think that any aggressive stance taken that 
does not take into account the growth rate of the developing 
world is probably either a wealth transfer or a loss of value. 
That said, there is a value in showing that it can be done 
economically. And if we keep our own economy running smoothly, 
then we have a right to hold them accountable too, through 
duties and some of the trade recourse.
    Again, why recreate the wheel? We already have it.
    Senator Inhofe. All right. Mr. Book, in your written 
testimony you elaborated a little bit more on how the costs 
associated with S. 2191 would hurt disproportionately lower 
income people, but you didn't have time to get to that in your 
opening remarks. Do you want to elaborate on that?
    Mr. Book. It is just a consequence of America's natural 
resource distribution and the beautiful expanse of the Midwest, 
as well as the population concentrations in the coastal areas 
and their tendency to be innovation clusters that you have 
essentially the poorest people in America driving the longest 
distances using predominantly coal-fired power and living very 
frequently in the seasons that give them the greatest extreme 
temperature changes.
    That means that on a State-wide national average basis, 
some folks are going to suffer more than others.
    Senator Inhofe. And would you expect increased dependency 
on politically unstable regions to exacerbate the price 
volatility you highlighted in your testimony?
    Mr. Book. The instability in the oil market is a function 
of the fact that the oil market is very close to full capacity 
in the perception of traders. Anything scares them now. The 
greatest thing we can show the oil market for stability is that 
there is more oil. Of course, that is proving harder to do, 
given the political change.
    Senator Inhofe. It is, you are right.
    I want to thank all the witnesses for their excellent 
testimony. Thank you, Madam Chairman.
    Senator Boxer. Senator Inhofe, I know you need to go to 
another meeting. Before you leave, I just thought we could 
start a little interesting debate. Just think about what I am 
going to say.
    When you say you think a carbon tax is more honest, I just 
disagree. Because a carbon tax is something we, the 
politicians, would set. And cap and trade is the free market 
that picks the price. So it is interesting, as an old stock 
broker, I just believe in the free market, and I think the cap 
and trade that Senators Lieberman and Warner have come up with 
is the fair way, whereas a tax is, you know, Government in a 
little smoke-filled room deciding what the price of carbon is. 
So maybe you should think about it and we could have a good 
debate.
    Senator Inhofe. Well, let me respond to that.
    Senator Boxer. Please.
    Senator Inhofe. I think back during the time that we were 
looking at Kyoto, when the Wharton Econometrics Survey first 
came in with the estimates of that, it was $300 billion a year. 
They translated that into what it would cost a family of four, 
which was $2,700 a year. Now, CRA International, as we learned 
from our last witnesses in the last hearing we had, said that 
this number would be much greater on this bill, because it is a 
more aggressive reduction. That being the case, the statement I 
made is I think the tax approach is a more honest approach, 
because people would be in a position to know what they are 
paying and not have it masqueraded in something that is more 
difficult to translate into how it affects the people around 
the kitchen table.
    Senator Boxer. All right. It will be a very interesting 
switch, you supporting a tax and me supporting the free market.
    [Laughter.]
    Senator Inhofe. Let me also say I like your idea on 
switching the gavel.
    Senator Boxer. Oh, I know, I know.
    [Laughter.]
    Senator Boxer. I think I am moving it to this side right 
now. Thank you, Senator Inhofe.
    Now, in terms of who I am calling on next, I want to lay it 
out and see if people think it is fair. Senator Lieberman, do 
you mind if the other two----
    Senator Lieberman. Not at all.
    Senator Boxer. And on your side, could we go with Senator 
Warner? OK.
    Senator Warner. [Remarks made off microphone.]
    Senator Boxer. Senator Carper, go ahead, please.
    Senator Carper. Thank you, Madam Chair.
    My first question is of Eileen Claussen. I understand that 
you spoke at a forum in Washington early this week that focused 
on nuclear energy, is that correct?
    Ms. Claussen. Yes, with you.
    Senator Carper. I had to leave before you spoke. Could you 
give us a takeaway or two from your comments, please?
    Ms. Claussen. Yes. I believe that nuclear has to be a part 
of the solution to dealing with the climate issue. And I think 
the best thing for nuclear is for us, for the Congress to pass 
a cap and trade program to put a price on carbon, because that 
would make nuclear more competitive.
    That said, I also indicated that there are some problems 
that nuclear has to solve, particularly the issue of waste, and 
suggested that instead of the current station or possibly Yucca 
Mountain, there might be some interim solutions that actually 
could move us along the path here. I think that is something 
that the Congress should think about. But that is sort of the 
bottom line of what I said.
    Senator Carper. All right, thanks very much.
    Let me ask a question of Mr. Book if I could. Again, our 
thanks to each of you for being here. Madam Chair, you put 
together just a terrific panel, and we are grateful not just 
for your testimony today but for the work that you have done in 
helping us to craft this legislation and other pieces of 
legislation that some of us have been involved in. We are 
grateful for that.
    For Mr. Book, I believe one of the primary goals of climate 
legislation is to incentivize the deployment of new, clean 
forms of energy like renewables and like nuclear. Along with a 
couple of my colleagues, I am interested in maybe adding some 
provisions to this global warming bill, such as providing 
allocations to incentivize renewables and nuclear. My question 
is, put your economist hat back on again if your wife will let 
you and tell us what are some of your thoughts, and maybe some 
thoughts from the financial community on ways to incentivize 
renewables and new nuclear as we go through this legislative 
process?
    Mr. Book. Thank you, Senator. The world needs more BTUs, 
the British Thermal Unit, the common denominator of all of 
this. Nuclear power is one of those sources that can give and 
keep on giving at a low marginal cost.
    It has, however, a very high startup cost and it has 
increased as more of the world has started to want nuclear 
power for themselves. When I look at the incentives that this 
Congress has produced for nuclear power, they are considerable. 
There are loan guarantees, there are production tax credits, 
there are insurance policies. It is clear that letting the free 
market work isn't exactly what the policy stance has been, 
because these are designed to promote nuclear power.
    If as this panel, the fellow to my left has pointed out, we 
aren't going to build any more coal plants, we are going to 
need more nuclear. And if we are not going to solve our power 
generation needs by renewables, as sort of a small but 
essential tail to the problem in the near years, then probably 
whatever you can do to get it built is in the best national 
interest.
    Senator Carper. Thank you.
    Mr. Sims, have you ever run for State-wide office?
    Mr. Sims. Yes.
    Senator Carper. Did you ever run for the United States 
Senate?
    Mr. Sims. Yes, I did.
    Senator Carper. So if things had worked out a little 
differently, colleagues, he could be sitting over here----
    [Laughter.]
    Senator Carper. And maybe we could be sitting out there. 
When I was Governor, I used to get to testify on behalf of the 
National Governors Association, which I loved to do. You said 
earlier that you were nervous, but it didn't show. But I used 
to say to people that I would give good money just to have the 
chance to come down and testify about once a week. It never 
happened that often, but I always enjoyed doing it.
    I want to ask you some questions about transportation and 
the role that transportation plays in what we are trying to 
accomplish here. I think you mentioned in your testimony that 
even if California's low carbon fuel standard were implemented 
nationwide, and if our CAFE standards were raised to 35 miles 
per gallon, which I think we are going to do that, emissions 
from the transportation sector would still be about 40 percent 
above 1990 levels by 2030. And I have a three part question, I 
probably will not have time to ask all those parts, but let me 
just ask one part. If you want to answer that, great, if not, I 
will go to part two.
    Part one is, how can we ensure that investments in transit 
and in other policies that reduce greenhouse gas emissions from 
driving generate credits or funding under this bill?
    Mr. Sims. Within your bill, you have vehicle miles traveled 
reductions. What I am urging is that you in fact make those as 
bold a commitment as you have for your CAFE standards, as well 
as your alternative energy standards. Because if you look at 
all the data, if we don't reduce vehicle miles traveled and 
that continues to grow, our carbon emissions, we can't achieve 
our reductions if we still don't address the issues of vehicle 
miles traveled, which is what I would urge us to do and make 
those kinds of investments. We have done that in our county by 
buying hybrid buses, converting them to biofuel buses. We have 
had an incredible reduction, 27 percent reduction in fuels, 30 
percent reduction in carbon emissions. It is our key strategy 
to becoming a very viable economic community in this 21st 
century.
    But our goal is to, what I love about this bill is the 
market you can build. But I think having measurable, 
quantifiable results that we think we can achieve by vehicle 
miles reduced and the kinds of technologies you use in terms of 
public transportation are key. There need to be incentives. 
They just can't be left. That third leg of the stool, as we 
call it, just can't be ignored. Because what will happen in 10 
to 15 years is we will find out that all the other things we 
endeavored to do, the CAFE standards, alternative energy 
standards, didn't allow us to achieve our reductions as to 
vehicle miles traveled that is the key to being able to achieve 
our reduction goals.
    Senator Carper. I would just say to my colleagues, Madam 
Chair, I think Mr. Sims has said a great truth. I am hopeful 
that we will pass a strong CAFE bill, I hope it will include a 
35 mile per gallon standard by 2020 or thereabouts.
    But unless we also incentivize people to drive less, 
whether it is by transit, inter-city passenger rail, making 
sure that we have other options that are available to them, we 
are not going to be as successful as we otherwise would be. So 
I applaud you, and I know there is an effort in the Lieberman-
Warner bill that try to ensure that we do incentivize. People 
encourage people to get outside of our cars, trucks and vans, 
and have options other than those to get places we need to go. 
We need to make sure at the end of the day that the bill 
includes those provisions and maybe improves on them.
    Senator Boxer. Yes, I want to say, Senator, we look forward 
to having your input on this, as well as Senator Cardin is very 
interested in this, and working with us as well. I would say 
zero emission vehicles can't be forgotten, too, because that is 
a real possibility.
    Senator Warner, you have 7 minutes.
    Senator Warner. Thank you, Madam Chairman.
    I would like to follow on that important colloquy of our 
colleague from Delaware and Mr. Sims. You talked in your direct 
testimony, Mr. Sims, about the need to reduce vehicle miles 
traveled. This comes back to this time-honored sort of concept 
that we I think fortunately follow here in Congress. That is 
pretty much sort of a State issue, because it is the States 
that deal with the highway modernization and one thing and 
another to help work on this BMT issue.
    But I have drawn the colleagues, the Chair and the Senator 
from Delaware talk about incentives to individuals. Maybe we 
ought to put in some incentives to the States to step up and 
address this issue as part of their overall annual highway 
budget and review program. Again, observing States' rights.
    Mr. Sims. I would be overjoyed to have States have to make 
a commitment to reducing vehicle miles traveled. I also think 
there is a strong Federal role for that, because the tone will 
be set by the Federal Government. So it is the incentives that 
can be provided for congestion pricing, incentives provided 
through tele-commuting, as we have in the Urban Partnership 
Grants that just came out to many of our communities. But 
having the States do that would be an extraordinary step as 
well, and a very welcome one.
    Senator Warner. I agree with that.
    I also would like to, the question of nuclear power will 
eventually be addressed in the context of our Committee 
deliberations. I speak with some background in this area, 
having been a part of the Navy Department for many, many years. 
Today's domestic infrastructure to respond to what I perceive 
is to be the correct and laudable desire to move more and more 
into nuclear power, there is a choke point. And that is, the 
infrastructure today, the complexity of metallurgy alone, the 
craftsmanship, the ability to machine the extraordinarily 
complex components of the nuclear power systems, that 
infrastructure in America has simply dwindled over the years, 
as a consequence of our looking away from nuclear power as a 
resource.
    It is really there now to support the continued 
modernization and safety requirements of existing plants and 
the good old United States Navy, which has continuously never 
lost a heartbeat going forward in devising new nuclear power 
systems and ships, primarily submarines, carriers coming on. 
Even in this provision of a bill that we are working on in 
another hearing room, not distant from here, is for the next 
class of nuclear cruisers, possibly, some units to have nuclear 
power.
    But where is the infrastructure? What do we do to help that 
infrastructure recognize that they may be called upon, to use 
the word, surge in their ability to help meet domestic needs? 
Does anyone have a background that wishes to address that 
issue? Or I have made it all into a speech?
    [Laughter.]
    Senator Warner. Yes?
    Ms. Claussen. I will try, but my background is that my very 
first job after graduating was working with submarines, 
including nuclear submarines.
    Senator Warner. But you were under the tutelage of one of 
the most brilliant men I ever knew, Admiral Rickover, I 
presume?
    Ms. Claussen. Right.
    Senator Warner. That was a rare experience for both of us.
    Ms. Claussen. But that was a long time ago.
    Senator Warner. Well, I date back a few years myself.
    [Laughter.]
    Ms. Claussen. One of the things I can say is, Senator 
Carper and I were both speaking at the annual meeting of the 
American and European Nuclear Societies on Monday of this week. 
We both talked about climate change and how we see nuclear as 
part of the solution.
    There was a lot of discussion at that meeting about 
education and the need for increased education, the very point 
that you make about our infrastructure and our ability to 
respond. The only thing that strikes me is that if there is a 
demand for nuclear, we will actually figure out how to do all 
of that. And the best way to get that demand, I think, is to 
pass a bill like this that puts a price on carbon, so that we 
actually have nuclear playing a significant role and having 
that ability to move nuclear I think will mean that we start to 
rebuild what we once had in terms of infrastructure.
    Senator Warner. Well, it will take some time.
    To Ms. Claussen, I would like to address another question 
here. You have addressed pretty well the positive impacts of 
the cap and trade legislation and the prospect for creating new 
green collar jobs. Do you look upon that as a positive 
contribution to the American economy?
    Ms. Claussen. Yes, but, is the way I would like to put it. 
I think there is no question that as we move to a carbon-
constrained world, we will create a lot of jobs. But, and I 
think this is quite important, we also have to have a system 
that minimizes any job loss in existing employment. We also 
need to make sure that we take care of those who might be faced 
with a difficult situation.
    So I think that, for example, making sure that energy-
intensive industries, coal-burning power plants, are afforded 
some ability to make that transition as inexpensively as 
possible through the allocation process is very important. I 
think in the end, that will also mean that consumers in those 
areas might have increased energy costs, and we should, through 
the allocation process, try to deal with them.
    But I think on that, we will probably create more jobs than 
we lose. But that doesn't mean that there aren't some 
distributional effects that I think we need to deal with.
    Senator Warner. Well, I thank the panel. It has made a 
valuable contribution to this very, very important challenge to 
this Committee. I once again commend our Chairman and indeed, 
our Ranking Member and others. Clearly, my colleague from--yes?
    Senator Carper. Would you yield to me just for a moment? I 
would just say, Senator Voinovich is not here, but he and I 
convened a week or two ago a roundtable here, with the 
acquiescence of our Chair, where we had folks to come in from 
organized labor, John Sweeney was there, a number of folks from 
organized labor, different building and construction trades, 
folks from the nuclear industry were there, and we spent about 
two hours just focusing on how we were going to have the human 
resources to build these nuclear plants, to operate these 
nuclear plants. I hope as we go through this process and figure 
out what to do with some of the money we are going to incent 
things for that we consider incenting the education of people 
to build these plants and to operate these plants. Because 
frankly, the folks with those skills, whether they are 
electricians, whether they are pipefitters, plumbers, sheet 
metal workers, they are not there in great abundance these 
days, as you know.
    Senator Warner. You are quite right. The essence of all 
nuclear power is absolute quality control. That takes time.
    Senator Boxer. Well, Senator Warner, I just want to say how 
thrilled I am that you could sit for a little bit longer today 
as your leg heals.
    Senator Warner. I will be back with a clap of thunder after 
the Thanksgiving break. For the markup I will be here in full 
power.
    [Laughter.]
    Senator Boxer. I cannot wait for that. Believe me, we need 
you here for sure. Thank you so very much.
    Senator Klobuchar, I am giving you 7 minutes.
    Senator Klobuchar. Thank you very much. Thank you, Senator 
Warner and Senator Lieberman, for your good work on this bill. 
Thank you, Chairman, for holding this hearing.
    On Tuesday we talked a lot about the importance of other 
policies working in concert with this climate change bill, 
including electricity standards, which I have mentioned here 
many times. We have an aggressive one in Minnesota, of 25 
percent by 2025 and 30 percent for Excel Energy by 2025, for 
renewable electricity standards. And also the gas mileage 
standard that we are pushing to get through and successfully 
pass through the Senate.
    I am also glad as we continue the discussion of these 
compatible policies that Mr. Sims is here. We are aggressively 
pursuing--finally--in Minnesota some of the things you have 
been doing in Seattle with light rail. We have a very 
successful light rail line now out to the airport and the Mall 
of America, not to give a pitch for our mall during the holiday 
season.
    [Laughter.]
    Senator Klobuchar. The Mall of America--OK.
    Senator Boxer. Did you say the Hall of America?
    Senator Klobuchar. No, I would say the Mall----
    [Laughter.]
    Senator Klobuchar. I guess you have never been there, 
Senator Boxer.
    Senator Boxer. I will go with you.
    Senator Klobuchar. Very good.
    Then we also are pursuing a rail line to St. Cloud, where 
we have a lot of traffic on a major interstate. So I am looking 
forward to hearing more on these issues.
    I think one of the most important parts of this bill is as 
was earlier related in this discussion with Senator Inhofe and 
Senator Boxer, the Carbon Market Efficiency Board and the cap 
and trade. I believe that this provision helps prevent 
volatility and provides the underpinnings of a strong emissions 
trading market. At this moment, we have the opportunity to 
learn from the mistakes made in Europe. They had some, there is 
no doubt. We have met with some of the people involved in that 
and we can learn from their mistakes.
    Minnesota is also the home, in addition to the Mall of 
America, of Tom Friedman, who as you know has been doing a lot 
in this area and wrote a very good piece for the New York Times 
Magazine about the power of green. In that, he asked, how do 
our kids compete in a flatter world, how do they thrive in a 
warmer world and how do they survive in a more dangerous world. 
The answer to me which would make the most sense is to try to 
encourage these economic and technological opportunities to 
reduce our dependency on fossil fuels and to encourage the next 
great global industry.
    So I am curious, Ms. Claussen, to pursue some of the 
discussion, I think it was Senator Bond, before I got here, who 
talked about how you can't really make this comparison to the 
acid rain market. But we know that we had success with sulfur 
dioxide and the nitrogen oxide emission trading systems here in 
the United States. We also have the European system to look at.
    As more and more countries accept the need to address 
climate change emission trading I believe will play an 
increasingly significant role. This is because it not only 
creates incentives for firms to cut greenhouse gas emissions, 
but I think we also have to remember, as Senator Boxer reminded 
us, that it creates incentives to spur technology innovation 
that further reduce emissions. I have told our Committee 
members that I come from a State that believes in science. We 
brought the world everything from the Post-It note to the 
pacemaker. We really see this opportunity in our State with the 
technological know-how we have and the great universities and a 
lot of the companies that we have there, that there could be 
some opportunities for us, as there would be for the rest of 
the Country.
    So I guess my first questions would be of you, Ms. 
Claussen, along the lines of the issue raised by Senator Bond 
about, and the debate that we have had about whether or not the 
success of the past years of the acid rain program is 
applicable to America's Climate Security Act. Some argue it is 
inapplicable because that only involved one sector of our 
economy. The Pew Center is widely recognized as giving some 
unbiased advice, and I would like to hear what you say about 
that.
    Ms. Claussen. Thank you very much, Senator. Yes, I am a big 
believer in Minnesota's innovation and everything else. My son 
went to college there, and it was a great experience for him.
    But let me sort of try to answer your question this way. We 
learned a great deal in the course of putting the acid rain 
program into place about what is important in a cap and trade 
system. One of the things that is most important, and I think 
we learned this, is that you have to make sure that a ton is a 
ton. In other words, that everything you do is verifiable and 
that you know that it is real. Because otherwise, the gold 
standard of the program becomes debased. And then you don't 
have a good program.
    So I think it is very important that we make sure that what 
we do here has integrity. That is something we learned.
    I think we also can learn from some of the mistakes that 
were made in Europe. Europe did not have a very good data base 
that would tell them where the emissions were coming from and 
what those amounts were. So when they decided to make their 
initial allocations, they made ones that were too large, given 
what turned out to be the actual case. I think we did learn 
this in the acid rain program, too, you need a really good data 
base. You have to make sure that you have good numbers, and 
then you have to make sure that what you do makes some sense.
    So I actually think there are lots of lessons to be learned 
both from the acid rain program and from the European 
experience. I think Europe has learned a great deal from their 
phase of experimenting. And it looks like they are going to 
correct a lot of those mistakes. They are going to have targets 
that are much more stringent in the next phase, which is the 
real phase. Don't forget, the Kyoto targets don't actually take 
effect until 2008 to 2012. So what they were doing here was 
really going through a period of learning. From everything that 
we have learned from them, and you probably learned much of 
this when you were there, they actually have learned a great 
deal and I think they will have a system that works. If we also 
have a system that works, this will be so much better in terms 
of achieving environmental results and keeping the costs as low 
as possible.
    Senator Klobuchar. Have you done any research about how you 
would intertwine our program with these other countries' 
programs so we can trade internationally?
    Ms. Claussen. I think if we on a national level have a cap 
and trade program with a real cap we will in fact be able to do 
that. The best way to assure that is to have a global agreement 
that allows for that kind of trading. Don't forget, the United 
States is not a party to Kyoto. So while we can do some things 
between States and countries, and the International Climate 
Action Partnership, which was just announced, is going to try 
to see what can be done on an interim basis until we have a 
national law. I think once we have a national law and an 
international agreement, we will in fact be able to trade.
    So the job is not done when legislation is passed in the 
United States, because we do need a global agreement. But I 
don't think we will get that until we pass something here. So 
the urgency of actually getting a bill out of this Committee 
and through the Congress is, that is number one.
    Senator Klobuchar. So Mr. Krupp had talked about the need 
to move things along quickly, that we can't wait. I obviously 
agree with this, but I was thinking more in terms of after 
seeing Greenland the melting of the icebergs, what is going on 
in our own State. But you see it not only for getting quick 
action, it is also to urge other countries to act.
    Ms. Claussen. Yes. I spent a number of years negotiating 
internationally on behalf of the United States in earlier lives 
of mine. Nothing works better than to actually be able to say 
that we are doing something, and let's figure out a way to do 
it together.
    Now, I don't think it is all being nice. Sometimes it is 
important also to say, and you have to do something. But we 
aren't able to do that now, when we ourselves are not doing 
something. So the first step has to be that we do something 
here domestically.
    Senator Klobuchar. One last question. Mr. Sims, I had 
mentioned you were doing and how we have to view this not just 
as a burden on us but also an opportunity. Could you just go 
through quickly the economic gains from having this public 
transit that you have seen? I know that Senator Carper talked 
to you about how it fits in with the carbon system. But just 
the straight economic gains that you have seen from having your 
public transit system in Seattle.
    Mr. Sims. Senator, we have had a 14 percent increase in our 
ridership, 7 percent this last year. People are opting to use 
it because the buses are both cleaner, more efficient. We work 
with General Motors, we bought 274 buses. The demand is so 
great, we are buying 500 more. Because people are now beginning 
to rely on that bus system as a method of commuting. The 
interesting thing is Microsoft just put together its own bus 
system because we weren't moving fast enough, because they are 
growing very, very rapidly.
    So we hope over the next several years to be able to catch 
up, so we can have Microsoft believe that they can actually 
move more of their people on our bus system. So we are trying 
to catch up with the companies that are growing very rapidly 
and wishing to compete. It is very clear in our environment 
that public transportation is an absolute key to moving people 
throughout our county. We can't grow without it, we know we 
can't grow without it.
    All the data that we have available regarding our economic 
capacity in our region, the growth and where it should occur, 
is going to require us to have more substantial investments in 
public transportation. We are going to make them. We would 
again believe that we are no different than any other 
community, that public transportation works as it does, and we 
are trying to keep up with Minneapolis and St. Paul in 
Minnesota.
    But to us, we are having sustained growth now, as you know, 
in our region. We believe that can be maintained. But the key 
is the efficiency of the dollar spent. We are a very 
conservative county. We are AAA rated and we tend to be very 
conservative, looking at return on investments. We believe that 
public transportation is our best return on investment for 
moving people in a globally warmed world, but also in an area 
that is growing very rapidly. We can't build out, it is too 
costly.
    Senator Klobuchar. Thank you very much.
    Senator Boxer. Thank you, Senator.
    Senator Lieberman, I think it is very appropriate that you 
be the last questioner here.
    Senator Lieberman. Thank you very much, Senator Boxer. 
Thanks to the panel. I regret that I didn't hear the opening 
statements, but I did get to read them last night. And they are 
excellent. I mentioned my thanks previously to Fred Krupp and 
Eileen Claussen. Ron Sims, it is good to see you again. Thank 
you for your practical and productive leadership. Mr. Book, Mr. 
Berendt, thanks for your testimony.
    I thought I would start briefly, because we have heard so 
much, the very good exchange at these hearings, to say probably 
what is obvious, but two things. We are operating now in a 
context, thanks to a lot of people who are in the room, and 
thanks to the science, most of all, where John Warner says, 
when you ask him quickly, why did you decide to play a 
leadership role in this fight to do something about global 
warming, he says two things: science and my grandchildren. And 
that is exactly, that sums it up.
    The science has really put most members of Congress, it has 
ended a debate that went on for a long time here about global 
warming: is it real, is it caused by us, people. Now pretty 
much everybody agrees it is real. Now the question is, what to 
do about it. And the grandchildren part of it, of course, is 
another way and a most human and personal way, of saying, are 
we going to assume our responsibility here. I will go so far to 
say, because I think it is fitting, our moral responsibility. 
But certainly our practical responsibility to, as leaders, to 
avert a problem that could be disastrous for our grandchildren 
and those that follow them.
    So in that context, the bill that Senator Warner and I have 
put together, with a lot of help from a lot of people and a lot 
of input from a lot of people, has attempted to, I would say, 
to phrase it simplistically, do a couple of things. The first 
is to really do something to reduce greenhouse gas emissions in 
the United States. But to do it in a way that is not disruptive 
of our economy. In fact, we think it will ultimately have a 
positive effect, in addition to the fact that it is averting 
this potentially disastrous situation.
    So we have crafted a balance which doesn't please 
everybody. Or let's put it this way. It is not the idea of the 
perfect for everybody. Part of what we are struggling with now, 
Senator Warner and I, Chairman Boxer, is to keep people 
together for this without sort of walking away. Because that 
one additional thing they wanted to do to make it better is not 
in there. And because if I didn't feel this bill really made a 
difference, I couldn't make that case if it was enacted. But I 
think all the evidence is that it does.
    This leads me to ask you, Fred Krupp, this first question. 
I thought that part of what you said, as I came in, in answer 
to Senator Boxer's question, was very powerful and not really 
thought about enough in this debate, which is that we are not 
dealing here with a static situation, an environment, using the 
word broadly, a reality that is constant. This problem is 
getting worse every day. Therefore every day and every month 
and every year we wait to do something about it, it is not only 
harder, but it is more costly.
    And it is particularly harder, as you said, to do something 
quickly and early enough. It is very important to remember that 
particularly for people, I will be blunt, who will say, hey, 
let's wait until 2009, the political context will be different, 
we will have more people here, we will really want to pass a 
perfect bill. But who knows, really, who will be here in 2009. 
And if we can do it now, as best we can, of course we should do 
it now. Nobody thinks that we are not going to come back and 
look at this. In fact, our bill requires that we come back and 
look at it regularly in the years, in the 45 or so years to 
follow.
    My question to you, Fred, is this. Talk a little bit more 
about why the early goals for greenhouse gas reduction, the 
caps, for instance. In 2020, you focus a lot on that. Why is 
that so important as compared--I know everything is important 
longer term. But why is that so important? Why is the loss of 
two years here in terms of that 2020 goal so important?
    Mr. Krupp. First of all, Senator, the loss of two years of 
actions means that it is very, very hard to then recover those 
two years of cuts by 2020. And the atmosphere cares a lot about 
how soon these cuts are. If we want to avert the worst 
catastrophic damages, the sooner we make cuts, the better. So 
you would have to be living on another planet to believe that 
any different political situation in 2009 was going to so 
change the politics that we could achieve the same goal by 
2020, because inevitably, it is only going to be fair to 
provide industry with a certain number of years before they are 
required to begin to make cuts. So there is a huge atmospheric 
benefit from acting now.
    Second, the signal it sends internationally, when I go to 
China, the question I get asked and that our staff there every 
day gets asked is, America is a very smart country, America is 
a very wealthy country, you are so smart, you are so wealthy, 
you haven't taken a cap. How can you even discuss that with us? 
So the sooner we take a cap, the sooner we have every reason to 
believe in the moral standing to ask China to control its 
greenhouse gas emissions even more so than their attempts to 
date.
    Finally, Senator, the last thing that is so important, I 
spent the last year researching all the different technologies 
that I could find that would reduce greenhouse gases. I have 
interviewed dozens of people. I have talked to an Israeli 
engineer named Eli Gaul who worked for GE when the sulfur law, 
the Clean Air Act Amendments in 1990 were put in place. At the 
time, scrubbers didn't work too well. But as soon as there was 
a profit motive, GE figured out how, instead of having to have 
two scrubbers on every plant, because one kept clogging up, 
they made the scrubbers so efficient that that redundancy was 
no longer necessary, it became a profit center.
    As a result of this year-long survey of technologies and 
talking to entrepreneurs of all stripes, I can tell you there 
is a burst of entrepreneurial energy out there. But that 
doesn't really flower until we give them the certainty of a 
carbon cap. So doing this two years early will support a 
revolution in technology that John Dorr, perhaps the most 
famous venture capitalist in America says, could very well be 
way, way larger than the information technology revolution and 
the web.
    Senator Lieberman. That was a great answer. Thank you.
    My time is running out, but I want to ask a somewhat 
related question of Mr. Berendt. In your testimony, you said 
that the uncertainty created by Congressional inaction on 
climate change is creating problems for the development of new 
power infrastructure in the Country. Of course, this says to me 
that, based on what you said, that Congress should set up a 
carbon price signal--of course, I favor cap and trade--as soon 
as possible to avoid keeping power producers and the people 
they have to go to for money in limbo, and that to choose not 
to do so would actually expose the economy to what an economist 
might call inappropriate choices about power development, 
because they are made in the context of uncertainty, which soon 
may become a certain context and change the playing field.
    I think you followed that long question. I am over my time, 
so the quickest answer you can give, the better.
    [Laughter.]
    Mr. Berendt. That is correct, Senator.
    [Laughter.]
    Mr. Berendt. And I would simply add that to develop a 
forward curve for carbon requires a market that is liquid and 
functional, so that derivatives can begin to operate. 
Therefore, while it is very important that we help to recognize 
and engage the stilling that we are seeing right now current in 
the new build environment for high fixed cost technologies, it 
is very important that we move forward, and if we do decide to 
implement a market-based mechanism, that it is functional and 
liquid in how it operates so that it does send a clear price 
signal. So that when project developers go in front of the 
credit committees and investment banks, those investment banks 
can rely on the line items and the liability side of the column 
for the assets and avoidance of liability as created by the 
market.
    Senator Lieberman. Those are important points, I appreciate 
it. So I want to say, and I know you have different points of 
view on some things, but Mr. Krupp and you, Mr. Berendt, are 
saying to us that the sooner we send a signal of some clarity 
to both the power producing sector of our economy and the 
financing sector, the better we are going to be.
    Mr. Berendt. The one thing that all low-carbon advanced 
technologies have in common, whether it is clean coal, carbon 
capture and sequestration, renewable energy, nuclear energy, 
advanced energy efficiency, is that they all share a high fixed 
capital cost. It is very difficult to outlay that capital, 
especially on the time frame that the energy industry operates 
on, which tends to be a 30 year, without that clear pricing.
    Senator Lieberman. Yes. That is of course why we put 
various other forms of assistance to the power sector into our 
proposal to try to ease that very costly transition to acquire 
the fixed cost technologies.
    Thank you very much.
    Senator Boxer. Thank you, Senator.
    Senator Voinovich.
    Senator Voinovich. This last discussion has been really 
interesting. I have been on this Committee, I think since my 
ninth year or eighth year. You have this difference of opinion, 
you have your environmental groups, then you have your business 
groups. Ms. Claussen, you were talking about the fact that you 
thought this would enhance America's competitiveness. We had 
the AFL-CIO in here and said, we have some real problems with 
this in terms of what impact it is going to have on jobs. We 
have had, I mentioned Duke Energy today coming back and saying 
that the electric costs would go up 53 percent for their 
customers. So there are a lot of concerns about the impact this 
is going to have on our economy and our competitiveness.
    It appears to me that the thinking is that by going through 
cap and trade that somehow we are going to jump start the 
technology that we need to deal with this. I have always said 
that the technology should drive the cap and trade, not the cap 
and trade drive the technology. I think you believe that the 
cap and trade will drive the technology.
    I have also, Mr. Krupp, looked at and tried to make a list 
of all the technology available. I have had people come in and 
say, we have just the right thing. But you talk about being 
commercially viable, particularly for older power plants and 
putting them on, they come back and say, no, it is not 
commercially viable. We have some good ideas and we think we 
could do it, but it is going to take us, the Energy Department 
has this FutureGen project, and they are going to have those 
things built in 2012. But the whole idea of FutureGen is can we 
do NOx, SOx, mercury and take care of carbon. That is a 
question mark. In terms of sequestering, the Department of 
Energy has three outfits that are doing some experimentation 
and sequestering. The geology, does it migrate, getting into 
the questions of liability and the rest of it.
    For the life of me, I can't believe that there is some 
other way besides this gigantic new regime that we could go to 
that would get us to the goal that we have sooner than what we 
are doing here, and that is what is the Federal Government 
doing in terms of tax incentive, in terms of grants, perhaps 
maybe we need to collect a major new tax that wouldn't be that 
very much, but for the American people that would be earmarked 
to say, we are going to put this money into making sure that we 
are number one in terms of the technology we need to really 
reduce greenhouse gases, and by the way, once we do that, we 
are going to be able to say to these other countries, we have 
it, you guys have to do it and if you don't do it, then you are 
going to have to pay for it.
    What is your response to that? Is there some other way that 
we could get to the goal of reducing greenhouse gases quicker 
than going into this, I think, unbelievable new program that 
is, I mean, we talk about the acid rain provisions of the Clean 
Air Act, I know about them because I dealt with them when I was 
Governor. But I have to tell you, the acid rain provisions are 
like a wart on the back end of an elephant compared to this 
thing that we are talking about. Is there an easier way to do 
this?
    Ms. Claussen. You are asking me?
    Senator Voinovich. I am asking both of you.
    Mr. Krupp. Senator, I would just say a couple of things. 
First of all, I know that you care about this problem from our 
previous discussions. You were telling me how the water has 
warmed in the Gulf and you do have an appreciation of the 
problem, and I appreciate that. I want you to know that I 
completely share your concern about costs. I absolutely think 
we need to approach this in the least cost way.
    Is there another way? I have looked around the world at 
ways that countries have gone about solving air pollution 
problems, which this is, in essence. We are throwing something 
into the air that shouldn't be there. I have yet to find a 
single example of an air pollution problem being solved other 
than putting a mandatory limit on how much can be emitted.
    I am reminded, Senator, of what Jim Imholt of General 
Electric has said often, that to him this is kind of a chicken 
and egg problem. While he makes many technologies, GE does, 
that are low carbon, wind turbines, nuclear, carbon capture 
systems that would be associated with their IGCC technology, 
because of the capital cost problem that has been referred to 
earlier, no one is going to order these machines until there is 
this mandatory limit. That was one of the reasons that the 27 
companies that now are in U.S. CAP, including Jim Rogers in his 
most recent press statement, he continues to be a strong 
supporter of a mandatory cap, the same system. He has 
differences in some of the details in his proposal. But he 
supports the same mandatory cap system because it is the only 
way that gets you out of the chicken and egg problem that no 
one is going to order the technology and you won't go to scale 
and reduce the costs until there is a limit. It provides this 
massive influx of private capital into the technologies that 
need to go to scale and need to be deployed.
    The last thing I would say, Senator, is that you are 
absolutely right in your noting that this is a much bigger 
thing than sulfur dioxide. That is one of the reasons I am so 
optimistic, because by having this wide hunt in many sectors 
for low-cost technologies, we open up a myriad of opportunities 
for ingenuity. If there is one thing that America has always 
led the world in, it is American ingenuity, inventiveness. This 
hunt, this carbon cap that will create and inspire this hunt 
will be a wonderful thing for anyone who believes in the 
entrepreneurs that this Country has always been so proud of.
    Senator Voinovich. The reaction that you get, though, from 
a lot of people that you talk to, is that the fact of the 
matter is that we are going to see people trying, because of 
the status of where the technology, and it is not there yet, 
that they are going to move toward a lot more natural gas, 
which can exacerbate a problem. I have to tell you, every four 
months I have people come into my office and say, you have to 
do something about natural gas costs. And they are not kidding. 
One company, I will not mention it, had 22,000 employees in the 
United States, now they have 16. And he said, we are going to 
have a lot less unless you do something about your natural gas 
costs.
    So what I am concerned about is, in spite of the fact that 
we believe that the caps and people are going to do certain 
things, the issue is, is it going to result in the behavior 
that you think is going to occur, or are we just going to see a 
tremendous increase in the costs for everybody in this Country, 
and then a lot of people deciding, you know what? We are in a 
global marketplace, we are going to get the heck out of here, 
we will go to China or we will go to India. And the Chinese 
have said, pretty authoritatively, that they are not going to 
sign up on any kind of Kyoto protocol. That doesn't mean down 
the road we can't get them to do something. But I can tell you 
from dealing with the Chinese that I have seen on intellectual 
property, even the environmental thing, if it is jobs, and the 
environment or jobs and intellectual property, jobs trump the 
environment and jobs trump intellectual property. So that is 
going to be a big effort for us to get them into the net and 
say, you guys have to do what you are supposed to do.
    Mr. Krupp. There are many options, other than natural gas. 
The beauty of the way the bill was designed is it allows 
offsets to come from paying American farmers to sequester 
carbon in their soil, or even from tropical deforestation, from 
avoiding tropical deforestation.
    Senator Voinovich. I know, I hear what you say. But we 
probably have the expert, Dr. Loo, at Ohio State University, in 
sequestration. There is no question that we can do a whole lot 
better job in that area. But in terms of what it is going to 
contribute to reducing greenhouse gases is somewhat 
speculative.
    Ms. Claussen. I would like to try to answer your questions 
in a slightly different way. You asked whether we should do a 
cap or whether there isn't another way, a way with incentives. 
I think the issue is that you need both. I think one without 
the other does not work well.
    You raised the issue of the status of carbon capture and 
sequestration, and I agree with you, we actually think you need 
a much larger effort than the one in FutureGen to actually look 
at different geologies and different kinds of combustion 
technologies and make sure that you have a system that works.
    So then I think you asked the question about, in the early 
stages, before that technology is commercially available or 
will be deployed, what happens with the caps. And I think I 
would draw on the experience in the private sector already. We 
work with a large group, 45 companies, it includes Duke Energy 
and American Electric Power, but also a lot of energy-intensive 
manufacturers. Of these 45 companies, 37 have already set 
targets to reduce their emissions and 22 have already met those 
targets.
    The obvious question is, how have they done that, what is 
it that made them able to do it. And actually, some of these 
targets are very ambitious. Almost all of them have done it 
through efficiency improvements, things that are actually 
helpful in the bottom line. So from my perspective, one of the 
things that is really important in this bill, because it is 
economy-wide, it is not only the power sector, is that you 
actually will get reductions taking place across the economy in 
places where we can do it most cheaply.
    I don't think in the power sector it is necessarily going 
to be sort of the number one case. I think there will be some 
time here to actually get carbon capture and sequestration 
going, to get more nuclear bills, because I think we are going 
to need that, to get an improvement in the amount of renewables 
that we use. Because we need all of these technologies, it is 
not just one, we need all of them.
    So I just think you need both the carrots and the sticks, 
and they ought to work together, so that we can actually meet 
these kinds of objectives.
    Senator Lieberman [Presiding]. Thanks. Thanks, Senator 
Voinovich, and both of you for your answers.
    Senator Craig, thank you for your patience, and that is 
rewarded with an extra two minutes. You can have a seven minute 
round. You can even go over a little.
    Senator Craig. Well, I do appreciate that. I also recognize 
the tolerance of the posterior of those sitting.
    [Laughter.]
    Senator Craig. I will be brief. I do want to say, the 
reason for my early absence and I missed your testimony, as did 
Joe, we were down at the White House. Joe and I were 
celebrating arts and humanities with some awards that were 
going on down there, so we don't apologize. But I will read all 
of your testimony. I do want the record to show, especially for 
the benefit of the Chairman, that my presence here represents 
here a perfect attendance record and a full Republican 
complement, understanding her earlier comments during the 
hearing.
    Obviously, there was criticism brought by the Chairman and 
I don't question is, when CRA did an analysis. Now Clean Air 
Task Force has a modeling analysis. Because oftentimes this 
great debate does spiral around philosophical lines and out of 
those philosophies grow approaches toward policy, and that is 
not an unusual model, I think it is critically important for 
us, Senator Lieberman, and for your bill, to have an EIA, EPA, 
full analysis. Neutrality is critical if we are going to send 
this 90 percent of our economy on a journey that is without 
question valuable, but without question, very, very expensive.
    I don't disagree that there may be great new economies 
generated. But I also recognize that our whole philosophical 
drive as a Country today is toward cleanliness. You have spoken 
to it, as it relates to what companies are doing today. It 
isn't out of a fixed cap. It is out of a very new, real 
philosophy in this Country that if we are going to do it, it 
has to be clean. And we are doing that more and more and more.
    That is why nearly every economic unit of growth in our 
Country today is cleaner than any other country's, or nearly 
any other country's. And it is certainly much cleaner than it 
has been and much cleaner than China's and much cleaner than 
India's. I have always believed that technology will take us 
there, in a much more realistic way beyond philosophies and 
beyond command and controls of government. Reasonable 
approaches by government can in fact direct economies. We have 
seen that with CAFE standards. And I have broken my mold this 
year by asking for mandatory CAFE standards.
    I want to do what is real. I want to do what creates 
greater independence and greater wealth in this Country: 
independence in energy forms and wealth in ingenuity and 
creativity. So I think it is important for us, if we are going 
to get into a command and control policy in this Country that 
we must, before we go, have absolute certainty for the Craigs 
and the Voinovichs of this world and others that it is the 
right one. Because when you are talking about hundreds of 
billions of dollars out there in play and huge investments on 
the part of the consumer, we had better have it as close to 
right to begin with, because this is really not just an effort 
in, well, let's try this, because we have really studied it all 
and it is the only thing out there that can possibly work.
    Well, while you are studying, the world gets cleaner from 
our standpoint and technology takes us there, old and new. That 
is why I have always been a bit frustrated by this. I accept 
the science of warming, or the studies of that. But I also know 
that philosophy drives science sometimes more than it should. I 
am trying to sort that out right now.
    So I will read your testimony with due diligence, because 
we have a very important decision to make in this Congress, 
whether it be this year or next, as to where we go. I recognize 
our position as a world leader. I think on this issue we should 
lead.
    But in leading, we need to offer the rest of the world a 
place to go. And I thank you all very much.
    Thank you, Mr. Chairman.
    Senator Lieberman. Thank you, Senator Craig. I appreciate 
the statement. I think you know that Senator Warner and I have 
asked for an estimate by EIA and EPA of the proposal we have 
made. There are now, as you know, the Clean Air Task Force has 
taken our proposal and used the EIA model to project. So there 
is some basis for us going forward. But I think it is important 
that we have asked for that and we get it as soon as we can.
    Incidentally, on the whole question of the use of natural 
gas, the Clean Air Task Force does actually come to the 
conclusion that under our bill there will be less use of 
natural gas than if we don't pass it and not switching to 
natural gas. The reason is one, that we have included natural 
gas in the cap, but two, I think most significantly, that the 
Climate Change Credit Corporation, selling these, auctioning 
the credits, will have an enormous amount of money, and the 
language of the bill commits a very substantial amount of 
money, in fact, over $300 billion over the course of the life 
of the bill, to coal and how we can use this most abundant 
American natural energy resource in a way that is consistent 
with the purposes of the bill and a clean environment. In other 
words, carbon sequestration and carbon recapture and the rest. 
I think if you fit that in, that is a good perspective.
    Senator Craig. Mr. Chairman?
    Senator Lieberman. Yes.
    Senator Craig. My only reaction to that is that in the 
interim, whether it is 10 years or 20 years, as technology 
catches up, I think fuel switching will occur, it has to occur 
if we are going to meet baseloads out there, and if we are 
going to keep our economy vibrant. And that is gas. I don't 
think any of us dispute the fact that that is probably gas, and 
as quickly as we can bring nukes online and yes, there is 
without question, the Clean Air Task Force, I am pro-nuclear, 
so when they come out saying X number of reactors, I am saying, 
yes, that is good stuff.
    But I also look at the downstream reality of technology and 
the capability of producing them, and gearing this world up for 
what we want to do, because we are not the ones that are going 
to want to build them out there, as we know that. So that is a 
problem.
    But something rings in my ear as it relates to 
transportation that also puts a burden on gas in a way that we 
haven't anticipated until the day comes when we do high 
temperature gas reactors and we can start producing processed 
heat for the chemical industry and take gas out of the 
equation, and we can produce hydrogen by continuous operation 
of high temperature gas reactors, which we hope to do some day. 
That reality is the head engineer at GM says, come on, 
Congress, we are going to have an operating fuel cell vehicle 
in the market in 2009 or 2010. And they have three models out 
on the street today and they already have one in the market, a 
modified SUV. That hydrogen for that fuel cell comes from gas.
    If we head this economy toward gas and gas alone in the 
next decade, it is going to cost a heck of a lot more. Because 
nobody wants to site a terminal. We will put these huge LNG 
boats on the oceanfront. And those are the realities of what we 
are about here. We have to shape it in a way that doesn't 
create the crash. Because remember, $2.50 gas versus $3.00 gas 
and sustained above $3.00 for a family of four, commuting 26 
miles a day, is an $800 hit a year after taxes. That doesn't 
include their gas bill, that doesn't include their electric 
bill. That doesn't include anything else.
    What are we bumping up here? Two thousand, three thousand 
dollars a year for an average consumer? You and I might be able 
to afford that. There are a great deal many people in my State 
who can't. Those are the steps along the way that we must get 
right. And fuel switching, in the absence of new technologies, 
frustrates me a great deal, because I think we put a lot of 
burdens on it.
    Senator Lieberman. I appreciate the statement.
    As you can see, what has happened as we have gone along 
here in these hearings and considerations, every member of the 
Committee is grappling with this, the reality of the problem. 
There is a lot of good faith exchanges that are going on like 
this. Also, the conversations are now going beyond the sort of 
warring camps to what is the most practical, effective way to 
solve this problem, and getting more into details. I think we 
are all coming to understand both the immensity of the 
challenge, the urgency of the problem and how important it is 
for us to meet the challenges.
    These witnesses have been excellent. You have helped to 
educate us. You have answered the questions well. I can't thank 
you enough for your time and your contribution.
    The record of the hearing will be held open for a week if 
any of you want to submit additional testimony. Others may want 
to submit statements for the record, or members may want to ask 
additional questions.
    With that, the hearing is adjourned.
    [Whereupon, at 12:30 p.m., the committee was adjourned.]
    [Additional statements submitted for the record follow.]

         Statement of Hon. John Warner, U.S. Senator from the 
                        Commonwealth of Virginia

    Madam Chairman, I thank you for honoring the request from members 
of this committee for more time to examine the impacts of this bill. We 
have a great line up today, for the fourth hearing specifically on 
America's Climate Security Act. Overall, I must say that I have been 
quite pleased with the quality of the hearings we have had on this 
bill.
    In addition, I am pleased that my colleagues on the Committee are 
taking advantage of the member briefings, and our staffs continue to 
meet as well.
    I believe it is critical that we balance the sense of urgency 
global climate change poses with the responsibilities of this Committee 
to perform its legislative duties. We are doing that, Madam Chairman, 
and I look forward to continuing this process with a spirit of 
cooperation.
    I thank my colleagues and welcome today's witnesses.

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