[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



 
                     ADDRESSING PRICE VOLATILITY IN

                       CLIMATE CHANGE LEGISLATION

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


                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 26, 2009

                               __________

                           Serial No. 111-11

                               __________

         Printed for the use of the Committee on Ways and Means




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                      COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California       DAVE CAMP, Michigan
SANDER M. LEVIN, Michigan            WALLY HERGER, California
JIM MCDERMOTT, Washington            SAM JOHNSON, Texas
JOHN LEWIS, Georgia                  KEVIN BRADY, Texas
RICHARD E. NEAL, Massachusetts       PAUL RYAN, Wisconsin
JOHN S. TANNER, Tennessee            ERIC CANTOR, Virginia
XAVIER BECERRA, California           JOHN LINDER, Georgia
LLOYD DOGGETT, Texas                 DEVIN NUNES, California
EARL POMEROY, North Dakota           PATRICK J. TIBERI, Ohio
MIKE THOMPSON, California            GINNY BROWN-WAITE, Florida
JOHN B. LARSON, Connecticut          GEOFF DAVIS, Kentucky
EARL BLUMENAUER, Oregon              DAVID G. REICHERT, Washington
RON KIND, Wisconsin                  CHARLES W. BOUSTANY, JR., 
BILL PASCRELL, JR., New Jersey       Louisiana
SHELLEY BERKLEY, Nevada              DEAN HELLER, Nevada
JOSEPH CROWLEY, New York             PETER J. ROSKAM, Illinois
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama
DANNY K. DAVIS, Illinois
BOB ETHERIDGE, North Carolina
LINDA T. SANCHEZ, California
BRIAN HIGGINS, New York
JOHN A. YARMUTH, Kentucky

             Janice Mays, Chief Counsel and Staff Director

                   Jon Traub, Minority Staff Director

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hearing records of the Committee on Ways and Means are also published 
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                            C O N T E N T S

                               __________

                                                                   Page

Advisory of March 19, 2009, announcing the hearing...............     2

                               WITNESSES

Dr. Douglas Elmendorf, Director, Congressional Budget Office.....     8

                                 ______

Dr. Daniel Lashof, Director, Climate Center, Natural Resources 
  Defense Council................................................    25
Dr. Dallas Burtraw, Senior Fellow, Resources for the Future......    37
Dr. William Whitesell, Director of Policy Research, Center for 
  Clean Air Policy...............................................    50
Michelle Chan, Program Director, Green Investments, Friends of 
  the Earth--United States, San Francisco, California............    64
Dr. Gilbert Metcalf, Professor of Economics, Tufts University, 
  Medford, Massachusetts.........................................    74
Dr. Margo Thorning, Senior Vice President and Chief Economist, 
  American Council for Capital Formation.........................    89

                       SUBMISSIONS FOR THE RECORD

Joyce Dillard, Statement.........................................   144
Terence P. Stewart and Elizabeth J. Drake, Statement.............   145


                     ADDRESSING PRICE VOLATILITY IN
                       CLIMATE CHANGE LEGISLATION

                              ----------                              


                        THURSDAY, MARCH 26, 2009

                     U.S. House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 10:16 a.m., in 
room 1100, Longworth House Office Building, Hon. Charles B. 
Rangel (Chairman of the Committee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
March 19, 2009
FC-5

                  Chairman Rangel Announces Hearing on

                     Addressing Price Volatility in

                       Climate Change Legislation

    House Ways and Means Committee Chairman Charles B. Rangel today 
announced that the Committee on Ways and Means will continue its series 
of hearings on climate change. The next hearing will take place on 
Thursday, March 26, 2009, in 1100 Longworth House Office Building, 
beginning at 10:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing. A list of invited 
witnesses will follow.
      

BACKGROUND:

      
    During the 110th Congress, the Committee on Ways and Means began a 
series of hearings on climate change. In the first hearing, the 
Committee heard testimony that human greenhouse gas emissions are 
having an adverse impact on our planet's climate. In the second 
hearing, the Committee heard testimony from numerous witnesses 
recommending that Congress implement revenue measures (e.g., auction-
based cap-and-trade proposals or carbon taxes) that would reduce human 
greenhouse gas emissions. In connection with the development of these 
revenue measures, witnesses at this hearing also encouraged the 
Committee to (1) promote a comprehensive global effort to address 
climate change and to ensure a level regulatory playingfield for U.S. 
manufacturers, (2) mitigate higher energy costs borne by consumers, (3) 
maximize the impact that climate change legislation will have on 
growing the U.S. economy, and (4) maintain the competitiveness of U.S. 
businesses, farmers and workers.
      
    During the 111th Congress, the Committee continued this series of 
hearings by holding a hearing on the scientific objectives of climate 
change legislation. This hearing provided a discussion of the goals 
that climate change legislation should seek to achieve from a 
scientific perspective over both the short term and the long term. 
Furthermore, the Subcommittee on Income Security and Family Support 
held a hearing on protecting low- and moderate-income families while 
curbing global warming, and the Subcommittee on Trade has announced a 
hearing on the trade aspects of climate change legislation.
      
    In announcing this hearing, Chairman Rangel said, ``As we develop 
climate change legislation, we must ensure that the program is 
structured to achieve specific environmental goals at the lowest 
possible cost to the economy and consumers.''


FOCUS OF THE HEARING:

      
    The hearing will focus on a discussion of the ways that climate 
change legislation can be designed to reduce or eliminate price 
volatility while still achieving specific science-based environmental 
objectives.

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noted above.

                                 

    Chairman RANGEL. The Committee and the hearing will come to 
order. I want to thank our invited guests for lending us their 
expertise as we move forward with this historic mission.
    The CBO director, Douglas Elmendorf, will give his 
testimony, as traditionally done, singly on the panel. But 
before we go into questions, the additional panel members will 
join him, and he is willing to remain in his seat and be a part 
of the six-witness panels as they give their testimony.
    I think it is safe to say that we are embarking on waters 
that have been uncharted and that, indeed, this is a historic 
move on this Committee's part, the House, and hopefully the 
country. It is not that well known as to the dangers and 
increase of cost of making certain we have climate control. I 
think in our initial panels, it was abundantly clear that gas 
emissions is having a severe, dangerous, adverse effect on our 
planet.
    We have had hearings where the scientific objectives of 
climate control has been heard. I think that there is very 
little controversy in terms of the accepted scientific 
directions in which we curb global warming.
    We have had our Trade Committee look into the costs of 
bringing some equity in terms of the costs and commitment of 
foreign countries with their imports, as well as given 
incentives to American companies that export.
    Now we get to a part as to how can people depend on the 
costs or the method of climate control, whether or not there is 
going to be a new commodity market, how the private sector can 
have some degree of confidence that we are not going to be 
changing the rules, whether we create a derivative market, and 
what is the impact of the different directions that we take. 
Whether we call it cap and trade or carbon tax, ultimately we 
know that it is going to be a tremendous expense in doing what 
we believe has to be done.
    So I yield now to David Camp to get his views, and look 
forward to hearing the witnesses.
    Mr. CAMP. Well, thank you very much, Mr. Chairman. I look 
forward to our witnesses as well, and want to welcome them to 
the Committee.
    The issue of price volatility and climate change 
legislation is a critical issue for the Committee to consider. 
I am pleased the full Committee and the relevant Subcommittees 
are taking the appropriate time to study the complex issues of 
cap and tax.
    Many of our witnesses today will get into great detail 
about the varying methods to deal with volatility. But there is 
a larger issue I would like to raise, and that is the certain 
impact on American families, especially the increase in 
electricity rates they will face under the President's 
proposal.
    At this time, I would like to submit for the record a 
state-by-state analysis of annual increases in electricity 
costs that would occur under a 100 percent auction, as the 
President has called for to meet the President's target carbon 
emissions reductions.
    Chairman RANGEL. Without objection.
    The information referred to follows:

    [GRAPHIC] [TIFF OMITTED] 51119A.010
    
    [GRAPHIC] [TIFF OMITTED] 51119A.011
    

                                 
    Mr. CAMP. In my home state of Michigan, electricity price 
increases total $6.7 billion, $668 for every man, woman, and 
child, $2,676 for a family of four. Those are staggering costs 
for a family to pay, especially in these already difficult 
economic times.
    We have price information for every state and broken down 
for every Member of the Committee so you can see the impact on 
your constituents. Let me just say in almost every case, these 
increases in electricity rates alone would exceed the full Make 
Work Pay benefit.
    I know some will say this analysis doesn't take into 
account everything. You are right. This doesn't even begin to 
consider price fluctuations in other utilities, let alone goods 
and services. This is simply the impact of cap and tax on 
electricity prices alone.
    No one--I repeat, no one--is arguing against reducing 
carbon emissions. Each of us in this room, including those from 
coal states, has long advocated for the greater use of clean, 
renewable energy sources.
    In fact, with the help of this Committee and when 
Republicans were in charge of Congress, we implemented clean 
renewable energy bonds; tax credits for production of wind, 
solar, and advanced nuclear power; energy-efficient new homes 
tax credit; energy-efficient appliance tax credit; alternative 
motor vehicle fuel tax credit, one I worked very hard on; 
alternative fuel vehicle refueling property tax credit; tax 
credits for biodiesel and renewable diesel used as fuel; tax 
credit for residential energy-efficient property. We also 
continue to support the environmental goods and services 
negotiations in the WTO, which would further slow emissions 
without penalizing American workers.
    These incentives are making a difference. If you look at 
the latest scientific data available, U.S. emissions have been 
relatively flat and even decreased in 2006, the last year for 
which data is available. That was despite a booming economy in 
those years.
    So, my question today is this: When carrots work, why is 
the Committee so readily resorting to the stick? The severe 
costs and penalties of the cap and tax system will cause 
hardships for American families and eliminate American jobs, as 
Dr. Margo Thorning, the senior vice president and chief 
economist with the American Council for Capital Formation, will 
testify.
    Mr. Chairman, I will repeat and I have said in the past, 
and something every expert agrees to, unilateral action by the 
U.S. will not impact climate change, but it will put millions 
of Americans out of work. This is not a solution, let alone one 
this Committee should endorse.
    With that, I yield back the balance of my time. Thank you.
    Chairman RANGEL. Dr. Elmendorf, we appreciate especially, 
and we agree with you, the great work that is done by the 
Congressional Budget Office. We thank you for taking time out 
to share your professional views with us.
    As you know, unfortunately, we limit the witnesses to 5 
minutes. But certainly we want you to rest assured that we 
would want to get as much from you as we can during that 
limited time. Then after you conclude your testimony, we would 
ask you to remain with the rest of the panel.
    You can proceed. You know the method of the lights and the 
5 minutes as best as anyone else. Thank you so much for being 
with us.

STATEMENT OF DOUGLAS ELMENDORF, DIRECTOR, CONGRESSIONAL BUDGET 
                             OFFICE

    Mr. ELMENDORF. Thank you, Chairman Rangel, Ranking Member 
Camp, and Members of the Committee. I appreciate the invitation 
to talk with you today about ways to reduce the economic cost 
of a cap and trade program for greenhouse gas emissions by 
increasing flexibility in the timing of the emission 
reductions. Analysts have developed a number of options for 
increasing timing flexibility, and my testimony reviews the 
advantages and disadvantages of some leading options.
    Accumulating evidence about the pace and potential extent 
of global warming has heightened policy-makers' interest in 
cost-effective ways to achieve substantial reductions in 
emissions of greenhouse gases. Although the potential damage 
from climate change is large, the potential cost of avoiding 
change is large as well.
    Many analysts agree that putting a price on carbon 
emissions rather than dictating specific technologies or 
changes in behavior would lead households and firms to reduce 
emissions where and how it was least costly to do so. Allowing 
flexibility about when emissions were reduced would lower costs 
further because changes in weather, fuel markets, and other 
factors lead the costs of the emissions reduction to vary 
substantially from year to year.
    Moreover, this flexibility in timing can be achieved 
without lowering the benefits of emission reduction because 
climate change depends not on the amount of greenhouse gases 
released in a given year, but on the buildup in the atmosphere 
over decades.
    Let me make five points about incorporating flexibility in 
the timing of emission reductions. First, permitting firms to 
bank allowances--that is, save allowances for the future--has 
helped lower compliance costs in existing cap and trade 
programs. However, the cost savings from banking are limited by 
firms' difficulty in distinguishing between temporary and 
permanent factors affecting allowance prices.
    Indeed, existing cap and trade programs that use banking 
still experience volatility in allowance prices that appears to 
be greater than can be explained by changes in expectations 
about future compliance costs.
    The first figure shows allowance prices in the acid rain 
program where prices varied from less than $75 to more than 
$200 in roughly 3 years. Similarly, allowance prices in the 
European Union's emission trading scheme have varied 
considerably over time, even though banking and some limited 
borrowing are allowed. This figure shows that prices started 
2008 at less than $20, rose to over $28, dropped to roughly $16 
by the end of last year, and continue to fall in the beginning 
of this year.
    My second point is that permitting firms to borrow future 
allowances, as well as to bank them, could further lower 
compliance costs. However, existing cap and trade programs 
typically preclude borrowing, in part because of concerns that 
firms that borrow allowances might be unable to pay them back 
later.
    The third key point is that permitting firms to purchase 
allowances from a public reserve pool composed of allowances 
that were borrowed from future years or that supplemented the 
initial supply could partially substitute for borrowing by 
individual firms.
    The reserve pool could help reduce costs by giving firms 
the opportunity to exceed annual caps in years when the cost of 
complying was temporarily high. Its effectiveness in realizing 
cost savings would depend on the size of the pool and the 
threshold price at which firms could purchase the reserve 
allowances.
    Fourth, setting a floor and ceiling for the price of 
allowances would also lower a firm's compliance costs, but it 
would not ensure a particular level of emissions in the end.
    Fifth, a so-called managed price approach could allow for 
substantial cost savings by eliminating short-term volatility 
in the price of allowances, while accommodating longer-term 
shifts in prices that would be necessary to keep emissions 
within a long-term cap. In the managed price arrangement, firms 
could purchase allowances from the government each year at a 
price specified by regulators. The policy would be similar to a 
tax in that respect.
    However, the policy is like a cap and trade program in 
other key respects. Policy-makers could choose to distribute 
some allowances for free. They could allow firms to comply by 
purchasing offsets or credits for emissions reductions made in 
sectors not covered by the cap. Cumulative emissions over a 
period of several decades would be capped.
    To implement this approach, regulators would establish a 
path of rising prices for allowances, with a goal of complying 
with the cumulative cap that legislators had set. That path 
would be adjusted periodically if new information indicated 
that future compliance costs were going to be higher or lower 
than anticipated, or progress in meeting the cumulative cap was 
less than expected.
    In conclusion, let me emphasize the main theme of my 
testimony. The more flexibility that is granted regarding the 
timing of emission reductions, the less short-term volatility 
in the price of emissions and the lower the cost of meeting any 
given emissions target. Thank you.
    [The prepared statement of Mr. Elmendorf follows:]
  Statement of Dr. Douglas Elmendorf, Director, Congressional Budget 
                                 Office
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    Chairman RANGEL. Witnesses to join the good doctor. Dr. 
Dallas Burtraw has done outstanding work on this subject, 
including the European union. Dr. Lashof is an old friend of 
the Committee who has done work on limits of carbon dioxide, 
and has testified before the Congress many times.
    Dr. William Whitesell, director of policy research, Center 
for Clean Air Policy. Devoted himself to consulting and writing 
on these issues. Dr. Chan, who is the program manager of the 
green investment projects in Friends of the Earth, who has had 
decades of work in this area.
    Dr. Gilbert Metcalf, professor of economics at Tufts 
University, who has spent quite a time researching this 
important issue and will share with us the different provisions 
of funding and protecting the consumer. Of course, an old 
friend, Dr. Margo Thorning, who is senior vice president and 
chief economist of the American Council for Capital Formation.
    We know that 5 minutes is a very limited time in which you 
can help us. But because you have spent so much time in this 
subject, we hope you understand that the closer we get to some 
degree of harmony in both the scientific approach of the 
control of carbon dioxide and the more complex question of how 
we protect the consumer, that we will be calling you back in a 
less formal way to share the legislation and to get a critique 
from it so that before we go to the House, we will again have 
the benefit of not just talking about the subject but getting 
your specific understanding of the direction in which we have 
decided to go.
    So if I could call now on Dr. Lashof, it would be 
appreciated if you start off this panel.

 STATEMENT OF DANIEL LASHOF, DIRECTOR, CLIMATE CENTER, NATURAL 
                   RESOURCES DEFENSE COUNCIL

    Mr. LASHOF. Thank you very much, Mr. Chairman. I appreciate 
the opportunity to address this Committee, Mr. Chairman, and 
Members of the Committee.
    The atmosphere is too big to fail. A bailout will not 
restore our coastlines. We cannot replace the natural capital 
that nourishes our heartline. The good news is that we still 
have an opportunity to avoid a meltdown of our climate system.
    Repowering America with clean energy is the work of a 
generation, millions of good jobs, building real and 
sustainable growth, not a bubble economy. We need to begin 
cutting the atmospheric deficit now and steadily reduce 
emissions of global warming and pollution by 80 percent or more 
by the middle of this century.
    As the President has said, in order to accomplish that, we 
need to make clean energy the profitable kind of energy. The 
best way to do that, in my view, is to establish a firm cap on 
global warming pollution that declines each year.
    The cap is the cornerstone of the policy that we need to 
reduce emissions. But it is important to emphasize that it is 
not the entire strategy. We should compliment the cap with 
specific measures that are targeted at unleashing profitable 
energy efficiency opportunities, and a robust program to 
promote continuous innovation that can reduce the costs of 
advanced technologies that will be needed to get us across the 
finish line of the emission reductions that we need.
    A comprehensive cap and robust, complimentary efficiency 
policies are the most important elements of cost containment. 
They are not always thought of as cost containment, but I think 
they are critical.
    Another key provision, as we have just heard, is allowing 
the banking of allowances. I will just spend a minute on that. 
This is the European Union's emission trading system price 
history. You can see in the yellow curve, in their pilot phase 
they did not allow banking. That resulted in extreme price 
volatility and a collapse of allowance prices because they 
couldn't save allowances from the pilot phase into the future 
phase.
    In the current period, allowance prices have fallen about 
50 percent in the last 6 months due to the economic downturn. 
But that type of price reduction is not necessarily 
problematic. In fact, it is beneficial. As we have seen with 
other commodity prices that fall during an economic downturn, 
this actually provides a form of economic stimulus. So having 
some price responsiveness in the system is actually beneficial 
for consumers and for the economy. Banking allows that without 
prices collapse.
    Let me spend the rest of my time focusing on the proposal 
included in my testimony for strategic offset and allowance 
reserve, not because I think this is necessarily the most 
important mechanism, but because it is perhaps the least 
understood.
    The idea here is to create a pool of allowances and offsets 
that are available to be released into the market if prices 
exceed a certain threshold. There are a couple of questions 
that have to be answered. What should the price threshold be, 
and how big does this pool need to be?
    In this example, rather than predetermining what the 
threshold should be, the first 3 years the price threshold is 
set based on a forecast, and it is twice the expected amount. 
But after that, a rolling average of actual prices is used, and 
the threshold is set at twice that level.
    In this example--and these allowance prices are really just 
an example--I basically synthesized them with a random 
component plus a systemic component.
    The price stays below the threshold in most years. But, for 
example, in 2019, it approaches the price threshold. The idea 
would be to have an auction with a reserve price in this case 
of $29 a ton. Bidders could purchase additional allowances or 
offsets at that price, and that would put downward pressure on 
prices and tend to keep the price of allowances from exceeding 
that price threshold in that year.
    The last point I want to make is on how big does this have 
to be to be effective in reducing extreme price volatility. 
What I have done is to look at the actual variations in U.S. 
greenhouse gas emissions since 1990, when data became 
available, compared with just a linear trend drawn through that 
data.
    What I have found is that there are variations from year to 
year based on whether, in economic conditions, they have not 
exceeded 200 million tons in any 1 year during that period. 
That suggests to me that if we allow some cushion, perhaps 
double that number, and allow up to 400 million tons of 
allowances to be purchased in the strategic offset and 
allowance auction, that that should be sufficient to limit 
price volatility.
    So, Mr. Chairman, let me just finish where I began. Getting 
the details of climate legislation right is very important, and 
I appreciate the opportunity to discuss these suggestions that 
I have. The bottom line is our atmosphere is too big to fail. 
Delaying action to address the threat of global warming is not 
a viable option. Thank you.
    [The prepared statement of Dr. Lashof follows:]
   Statement of Dr. Daniel Lashof, Director, Climate Center, Natural 
                       Resources Defense Council
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    Chairman RANGEL. Thank you.
    I would like to hear from Dr. Dallas Burtraw, Senior 
Follow, Resources for the Future.

 STATEMENT OF DALLAS BURTRAW, SENIOR FELLOW, RESOURCES FOR THE 
                             FUTURE

    Mr. BURTRAW. Thank you. I am with Resources for the Future. 
RFF does not take stands on specific issues, and the view I 
express today are my own.
    The main point I want to communicate today is the 
opportunity for cost management through the introduction of a 
price collar or a symmetric safety valve around the price and 
allowance trading program. The price collar would set a price 
ceiling and a price floor for trading emission allowances.
    We have heard about a one-sided safety valve previously 
which would place a ceiling on the price of emission 
allowances, and it has been criticized for two reasons. One is 
that if it was triggered, it would lead to the introduction of 
additional emission allowances into the market, and lead to 
emissions that exceeded the emissions target.
    Second, the possibility that that might occur means that 
the return to investment in innovation and new technologies 
would be less than it otherwise would be because investors 
would anticipate that maybe their investments would be 
undermined through the introduction of additional emission 
allowances. Both of these criticisms have merit, and both of 
them can be overcome with a symmetric approach to a safety 
valve because it recovers expected emissions and expected 
returns on investment.
    The floor price is simple to administer through a reserve 
price in an auction, and a reserve price is a standard feature 
of good auction design. A symmetric safety valve also 
contributes in a serious manner to guarding against market 
manipulation and speculation by limiting the range within which 
prices can fluctuate in the market.
    But most importantly, the symmetric safety valve reduces 
price volatility, and that is important for investment in new 
technology. A volatile price erodes the incentive to invest 
because it raises the hurdle rate on new investment. 
Consequently, volatility actually ends up raising the cost of 
climate policy because it leads to lower levels of investment, 
slowing the pace of technological change.
    We already saw this slide of the degree of price volatility 
in the E.U. emissions trading program. The spot price in phase 
1 rose to 30 Euros before collapsing. The price in phase 2 has 
fluctuated substantially from a peak of around 30 Euros to a 
recent low of 8 Euros.
    The next slide indicates the role of a systemic safety 
valve situated at plus or minus 30 percent of the expected 
price path. The last cost path should rise at the interest 
rate, which I illustrate is 7 percent per year. Many of the 
peaks and valleys could be limited with a loose safety valve. 
The safety valve could be tightened further, here indicating a 
price collar that is plus or minus 15 percent around the 
expected price path.
    In the limit, of course, the safety valve converges to a 
single price that provides the greatest possible stability in 
prices. Whether a loose price collar is chosen or a single 
price is chosen, it is very important that the program be able 
to self-correct. A symmetric safety valve provides some measure 
of this because it allows the program to automatically adjust 
in a predictable way when costs deviate from expectations.
    The importance of this is evidenced in the SO2 trading 
program, where the optimistic EPA forecasts from 1990 
anticipated that to achieve the emissions target under the 
Clean Air Act would require a price of about $885 in 2010. 
Various factors, including emissions trading and banking, 
contributed to the outcome that allowance price today has now 
fallen to just $65 per ton.
    Low cost is good news, but one would think that 
congressional intent to purchase benefits, environmental and 
public health benefits, at $885 per ton would lead us to want 
to take advantage of a bargain sale when the price turned out 
to be much less. However, the quantity target left our feet in 
cement. A symmetric safety valve would have harvested billions 
of dollars in net economic benefits that have been left 
unrealized.
    With either a quantity cap or a price approach, it is 
important that the program be flexible to new information. A 
price collar helps achieve this with a decision rule that is 
transparent to the investment community and to the public.
    Thank you for the opportunity to testify today.
    [The prepared statement of Mr. Burtraw follows:]
   Statement of Dr. Dallas Burtraw, Senior Fellow, Resources for the 
                                 Future
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    Chairman RANGEL. Thank you.
    Dr. William Whitesell, director of policy research, Center 
for Clean Air Policy.

 STATEMENT OF WILLIAM WHITESELL, DIRECTOR OF POLICY RESEARCH, 
                  CENTER FOR CLEAN AIR POLICY

    Mr. WHITESELL. Thank you, Mr. Chairman, Ranking Member 
Camp, and Members of the Committee. I appreciate the 
opportunity to testify today. I am an economist with 20 years 
experience at the Federal Reserve Board before recently 
becoming director of policy research at the Center for Clean 
Air Policy.
    CCAP, as we are called, has helped design climate and air 
quality policies at the international, national, and local 
levels since 1985, including cap and trade for acid rain and 
for the European carbon program. We convene discussions among 
climate negotiators from over 30 countries, and also sponsor 
other dialogs, including one with U.S. corporations, 
environmental groups, and government representatives to address 
national climate policies.
    CCAP strongly favors the passage of cap and trade 
legislation to control greenhouse gas emissions. I would like 
to emphasize three messages today.
    First, price volatility is a key risk in the early years of 
a new climate program. Second, a carbon tax is the surest way 
to fix prices, while cap and trade is the surest way to meet 
environmental goals. Third, the safe markets approach to cap 
and trade, which I will discuss, would make prices predictable 
while still ensuring environmental goals.
    A new cap and trade program creates a new market for 
mission allowances, which are a commodity that could be subject 
to the booms and busts in prices we have seen in many markets 
recently, including general commodity prices, as shown on the 
chart, and also prices in the European carbon market, as you 
have seen in many charts today, including this one.
    Such price swings would be especially harmful as a new 
carbon market takes shape in the United States. Uncertain 
prices will cause some firms to mistakenly invest in projects 
to reduce emissions that are too costly, while other firms will 
fail to invest in low-cost projects that should go forward. The 
overall cost of reducing emissions will therefore be higher 
than necessary.
    In addition, fears of and the reality of market 
manipulation could undermine support for the program. A carbon 
tax would avoid price volatility by eliminating the market. 
Regulated firms would merely pay the Treasury for their 
emissions.
    However, with a carbon tax or other fixed price approach, 
we may not reduce emissions enough. Even if legislation 
specifies a rising tax over time, the level of the tax or its 
rate of increase may be too low to reduce climate risks to 
respectable levels.
    We believe the safe markets approach to cap and trade is a 
better way to address price volatility. It makes carbon prices 
as predictable as possible, while still achieving a hard 2020 
emission cap and ensuring cumulative emission reductions.
    Before 2020, it acts as training wheels for a new carbon 
market, eliminating opportunities for market manipulation and 
thereby allowing companies and regulators time to gain 
experience with the market. We were very pleased to work with 
Representatives Doggett and Cooper on the Safe Markets 
Development Act, which reflects these concepts.
    Under this approach, an independent board manages carbon 
prices prior to 2020 with procedures similar to those used by 
the Federal Reserve to manage interest rates. The board 
announces a multi-year forecast for allowance prices, and 
before each year sets a target for the average market price 
that year.
    The board keeps prices close to the target by adjusting the 
number of allowances sold in auctions. Emissions may differ 
from expectations in a year as the board makes sure that firms 
get all the allowances they need at roughly the target price. 
This is okay because the emissions of carbon dioxide in a 
single year, unlike a traditional air pollutant, do not cause 
local health risks.
    Stable prices, along with limits of allowance banking or 
hoarding of allowances, eliminates opportunities for gaming of 
the system and excess speculation, as those behaviors would 
fail to move prices. At year end, the board would compare 
actual emissions with expectations, revise its forecasts if 
needed, and report to Congress on its decisions and program 
results.
    The next chart shows an example. The board's initial 
forecast of rising allowance prices is the solid blue line. 
That price path is designed to achieve the gradual reductions 
in emissions indicated by the lower black line with square 
markers.
    Actual emissions might come in above or below expectations 
in the first year. In the example shown the round dot, they 
exceed expectations. If emissions were higher than expected 
because of temporary factors like unusual weather, the board 
would not change its forecasts.
    The chart assumes a worst-case scenario, where the excess 
emissions are caused--are likely to persist in future years. 
The board therefore revises up its price forecast, as shown by 
the dashed blue line. The revised path for expected emissions 
is the dashed red line with triangle markers.
    This annual revision in prices helps to keep cumulative 
emissions on track better than if prices were fixed or a price 
ceiling were used. While excess emissions are made up after 
2020, the risk of large borrowings from the future is much 
lower than in the case of an allowance reserve. The safe 
markets approach allows a traditional cap and trade program to 
begin in 2020, or the features of the early years to be 
continued.
    In sum, we believe this approach combines the best features 
of cap and trade and carbon taxes. It provides a high level of 
environmental integrity along with predictable carbon prices. 
It eliminates incentives for manipulation and excess 
speculation, creating confidence in a new carbon market. Thank 
you.
    [The prepared statement of Mr. Whitesell follows:]
Statement of Dr. William Whitesell, Director of Policy Research, Center 
                          for Clean Air Policy
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    Chairman RANGEL. Thank you, Doctor.
    Michelle Chan, program director for the green investments, 
Friends of the Earth United States, from California.

      STATEMENT OF MICHELLE CHAN, PROGRAM DIRECTOR, GREEN 
     INVESTMENTS, FRIENDS OF THE EARTH--UNITED STATES, SAN 
                     FRANCISCO, CALIFORNIA

    Ms. CHAN. Thank you Chairman Rangel and Ranking Member Camp 
and Members of the Committee for inviting me today. My name is 
Michelle Chan, I am with Friends of the Earth, and my testimony 
today will focus on four lessons learned from the current 
financial crisis and how we might think about how they could 
apply to a cap and trade system.
    So, lesson one: Avoid speculative bubbles. By 2020, the 
U.S. carbon markets are expected to be a $2 trillion business 
and the biggest derivatives market in the world. That is 
because most carbon trading is not done by companies needing to 
comply with carbon caps. Instead, they are done by financial 
speculators.
    So, if you look at this chart, which you have seen now for 
the fifth time this morning, but I would like to point out 
something different. It is the grey line on the bottom, which 
shows trading volumes. You can see that even though carbon 
prices have softened recently, that trading volumes continue to 
skyrocket. A lot of this churn comes from speculators. In the 
long term, I believe that a market that is dominated by 
speculators will run the risk of creating an asset bubble.
    This brings us to lesson two: Bubbles encourage excessive 
risk-taking like, for example, making home loans to people with 
no income because it seems like housing prices will go up and 
up with no end.
    So, the same thing could happen in carbon. Most cap and 
trade proposals, as you know, include two types of carbon 
commodities. The first is allowances, which the government 
creates, and the second are offset credits, which are earned by 
companies that are not subject to carbon caps.
    So, an example of this would be: a pulverized coal-fired 
power plant in India makes its operations marginally more 
efficient, and then it sells those credits into the U.S. or the 
E.U. markets. This is where the issue of subprime carbon comes 
in.
    Now, we have just released a new report in which we explain 
how a carbon bubble could actually create a temptation for 
carbon offset developers to over-promise to their investors--
for example, selling carbon credits based on projects that 
don't exist, or simply just don't create the greenhouse gas 
reductions that they are supposed to. So if that happened, 
those derivatives would collapse in value and the investors 
holding those derivatives would be, well, holding the bag.
    Which brings us to our third lesson: Financial innovation, 
if unchecked, can get out of hand. Now, we all saw in the 
mortgage debacle that financial engineers created increasingly 
exotic and complex financial instruments because it seemed like 
there was an unlimited demand from investors to sop up all of 
these mortgage-backed securities. With a $2 trillion carbon 
market, you can bet that Wall Street is going to not just sell 
plain old carbon derivatives. They are going to get creative.
    So, for example, last year a big Swiss bank actually put 
together a $200 million deal in which they bundled together 
offset projects which were in various stages of completion, 
right, not finished yet, from three different developing 
countries. They sliced them into tranches, and they sold them 
as securities into the secondary markets.
    Now, if this looks familiar, it is because it is the exact 
same structure that we saw with mortgage-backed securities. So, 
if some of the offset projects were to fail, then we would see 
that they could collapse in value and they could contaminate 
the tranches of securities that were sold and spread subprime 
carbon risk to the broader economy. Of course, it would also be 
an environmental failure as well.
    So that leads us to lesson four, which is that we all know 
Wall Street is not well regulated, especially derivatives. So, 
for example, we now see that there was a really long value 
chain between mortgage brokers and investment banks and credit 
default swappers like AIG.
    We had a patchwork of different rules and regulators that 
were responsible at different parts of the chain, but actually 
nobody was responsible for looking out at the entire chain, at 
the entire system. Nobody had the responsibility for responding 
to the risks that were building up in the system.
    Now, the carbon value chain also is going to be pretty long 
and complex. So, in the blue, we have offset project markets. 
In the yellow, we have the primary carbon trading markets, 
which have both credits from offsets as well as allowances. 
Then we will have a secondary market, which will have carbon 
derivatives and financial products based off of those carbon 
derivatives.
    I would say that unless Wall Street cleans up--unless 
Congress cleans up Wall Street and introduces new and robust 
systems for actually governing Wall Street, that it seems 
imprudent to create a really large and complex derivatives 
market and foist it upon an untested regulatory regime.
    So, what are our options? I mean, we can create the system, 
and we can try to curb the most excessive behaviors through 
rules like margin limits and anti-speculation and antifraud 
rules. That is absolutely necessary.
    But it may just be better to design a system that is more 
simple in the first place. So, for example, here is what would 
occur under a system proposed by Mr. Doggett--or, sorry, excuse 
me, by Mr. McDermott. This slide, as you can tell, does not 
allow for carbon offsets. So, subprime carbon wouldn't buildup 
in the system. There isn't a space for the proliferation of 
exotic financial products and so, of course, it is more 
manageable from a regulatory standpoint.
    This hybrid approach has both a cap on emissions, which 
gives us environmental certainty, and it also has us setting a 
stable price for carbon, which prevents this boom/bust cycle 
that other testifiers have talked about, where the boom stage 
sets the stage for excessive risk-taking and pushing up prices 
and making life more expensive for consumers and companies; and 
in the bust, you have tanking carbon prices, which pull the rug 
out from underneath those who have invested in breakthrough 
technologies and those holding carbon securities.
    So, in closing, we commend Representative McDermott for his 
hybrid approach that he presents in H.R. 1683. We also thank 
the Committee for the opportunity to testify today.
    [The prepared statement of Ms. Chan follows:]
    House Committee on Ways and Means
   Statement of Michelle Chan, Program Director, Green Investments, 
     Friends of the Earth--United States, San Francisco, California
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    Chairman RANGEL. Thank you so much, Ms. Chan.
    Dr. Gilbert Metcalf, the professor of economics at Tufts.

  STATEMENT OF GILBERT METCALF, PROFESSOR OF ECONOMICS, TUFTS 
               UNIVERSITY, MEDFORD, MASSACHUSETTS

    Mr. METCALF. Chairman Rangel, Congressman Camp, and Members 
of the Committee, thank you for the invitation to testify this 
morning.
    Price volatility is of considerable concern to the business 
community and to the public. It will be very important for 
Congress to design a program to limit emissions in a way that 
minimizes unexpected price shocks to which firms and consumers 
cannot easily adjust.
    My testimony makes the following key points about these 
issues. First, policy should distinguish between short-run 
price uncertainty, which the policy should try to minimize, and 
long-run uncertainty. Second, a carbon tax provides the 
greatest certainty over the future carbon price.
    Third, hybrid policies can bridge the difference between 
the desire for price certainty and emissions certainty, and I 
will describe in a moment a proposal for a hybrid tax system. 
Finally, cost containment mechanisms and cap and trade systems 
may have unintended outcomes.
    As we have seen already today, price volatility for cap and 
trade systems is well-known. This is the graph you have seen 
already for the European Union emission trading scheme. Prices 
vary over the past 3 years by a factor of four, ranging from 8 
to over 32 Euros. The permanent price volatility experienced in 
the E.U. program is not unique. We have also seen this in 
domestic cap and trade programs, as I discuss in my written 
testimony.
    Concern about volatility has led to a number of cost 
containment proposals for cap and trade systems. One approach 
we have heard about today is a safety valve provision, with a 
price floor combined with a ceiling, as described by Dr. 
Burtraw. If one is going to take the cap and trade approach, 
the safety valve has much to commend. It is transparent, and it 
puts clear limits on the up side and down side price movement.
    One problem with a traditional safety valve approach is 
that anticipation of future government policy tightening to 
reduce emissions creates an arbitrage opportunity. Permits can 
potentially be purchased today at the safety valve price and 
banked for use in future high permit price years in a way that 
loosens aggregate caps.
    One way to address this concern is to limit the number of 
permits that may be purchased at the safety valve price. This 
is the approach that a strategic allowance reserve policy 
takes.
    But this also raises its own issues. Many of the cap and 
trade policies currently under consideration call for extremely 
sharp reductions in emissions by the middle of the century. 
Various analyses of these policies, including work I have done 
with colleagues at MIT, suggest that allowance banking will be 
sizeable in the early phase of the program. Making more permits 
available in the present through an allowance reserve that 
borrows against future allocations may simply lead to further 
banking. In other words, the reserve may be ineffective at 
damping price volatility.
    I would like to suggest an alternative approach whereby a 
carbon tax is designed to meet emission targets during a 
control period, while minimizing price uncertainty. I call this 
the responsive emissions autonomous carbon tax, or REACT. It 
works as follows.
    An initial tax and standard growth rate for the tax is set. 
Benchmark targets for cumulative emissions are set for the 
control period, which might run, say, from 2012 to 2050. The 
law would require that the targets be met at 5-year intervals, 
for example, some target intervals.
    If cumulative emissions exceed the target in the benchmark 
years, the growth rate of the tax would increase from its 
standard growth rate to a higher catch-up rate until cumulative 
emissions fall below the target again.
    This graph illustrates the price path of a carbon tax 
designed to limit emissions between 2012 and 2050 to 250 
billion metric tons of carbon dioxide. This is consistent with 
a moderate control regime. Emissions respond to price, but have 
some amount of randomness to represent short-run weather events 
and other random shocks.
    I assume the fixed rate carbon tax grows at a 4 percent 
annual rate plus inflation. The REACT rate has a standard 
growth rate of 4 percent plus inflation, and a catch-up rate of 
10 percent real.
    A fixed rate carbon tax that would achieve these cumulative 
emission targets leads to excess emissions equal to 4 percent 
of the target, given the randomness I have assumed for 
emissions with this particular simulation. REACT, on the other 
hand, ensures the cumulative target is met. While there are a 
few instances of the tax rate increasing at an annual rate of 
10 percent, it predominately grows at a 4 percent rate.
    While this graph is simply illustrative of a possible price 
path, it demonstrates the smoother and more predictable price 
path for emissions as compared to the price path that I showed 
for the European Union emission trading scheme.
    The advantages of REACT are, first, that short-run price 
volatility is eliminated. Long-run price uncertainty is 
reduced. It is a transparent mechanism for price changes. 
Emission targets over the control period are maintained. The 
approach I am taking in REACT is similar in spirit to the 
approach proposed in Congressman Larson's H.B. 1337 and 
Congressman McDermott's H.B. 1683.
    Summing up, policy should focus on eliminating short-run 
price volatility. A carbon tax provides the greatest certainty 
over future carbon prices. REACT is a tax-based approach that 
ensures long-run emission targets are met.
    Thank you for the opportunity to testify today.
    [The prepared statement of Dr. Metcalf follows:]
    Statement of Dr. Gilbert Metcalf, Professor of Economics, Tufts 
                   University, Medford, Massachusetts
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    Chairman RANGEL. Thank you, Doctor.
    Our last witness on this panel is Dr. Margo Thorning, who 
is the senior vice president and chief economist for the 
American Council for Capital Formation. We thank you for being 
with us.

 STATEMENT OF MARGO THORNING, SENIOR VICE PRESIDENT AND CHIEF 
       ECONOMIST, AMERICAN COUNCIL FOR CAPITAL FORMATION

    Ms. THORNING. Thank you, Chairman Rangel, Ranking Member 
Camp, Members of the Committee, for allowing me to appear 
before you today.
    I would like to focus on two key issues: First, what is the 
impact of a cap and trade system on energy price volatility and 
on energy prices, GDP, job growth? Second, what is the impact 
of the U.S. achieving targets similar to some of the 
legislation that has been proposed, including the Lieberman-
Warner bill, the Administration's proposal, and others out 
there?
    I would like to talk first very briefly about the work 
that--the impact of a cap and trade system on GDP and job 
growth. As you can see in table 1 of my testimony, there is a 
range of results presented, from the ACCF/NAM, from MIT, from 
Charles Rivers, from EPA, from EIA.
    The range of results shows significant impact on GDP from 
imposing the Lieberman-Warner bill, which is a similar target 
to the Administration bill. GDP falls by a range of .2 percent 
by 2020 to 1.5 percent. By 2030, the range is significantly 
higher, .3 to as much as 2.7 percent. There are jobs lost 
ranging from 270,000 in 2020 up to 3.2 million, according to 
one set of estimates. By 2030, the job losses are even larger.
    The allowance prices, which are also shown in table 1, vary 
from about $31 a ton of CO2 to approximately $73 a 
ton of CO2 in 2020. By 2030, the cost of a payment 
to emit a ton of carbon ranges from $62 to $271. So, the impact 
of the cap and trade system is to increase unemployment 
relative to the baseline, to reduce GDP, and to significantly 
impact price volatility.
    I would like to show one slide from my testimony. The 
results from the NAM/ACCF study, which we released last year 
looking at Lieberman-Warner, shows significant impact on energy 
prices for gasoline, residential electricity, industrial 
electricity, and natural gas prices. These price increases 
occur because companies have to pay for the right to emit a ton 
of CO2.
    The model we used was the National Energy Modeling System, 
EIA's model, with constraints as to how quickly we could build 
new nuclear generation capacity. Our high-cost case assumed 10 
gigawatts, 10 new nuclear plants by 2030, the low-cost case 25 
new nuclear plants by 2030.
    We assumed carbon capture and storage for coal and natural 
gas became available at rates of between 50 and 25 gigawatts, 
depending on high--or low-cost case. We assumed growth in 
renewables, and assumed carbon capture and storage did begin to 
be available.
    So, we built in reasonable assumptions, and when we do that 
and constrain nuclear, constrain carbon capture to what experts 
think is doable rather than, you know, what people might like 
to see, we see that gasoline prices by 2020 could be 20 percent 
higher than the baseline case under the--or as much as 70 
percent higher under the high-cost case.
    Residential electricity prices rise by as much as 28 to 33 
percent. If we look at the high-cost case, which may prevail if 
we can't build the nuclear and capture the carbon, we will see 
industrial electricity prices rising by as much as 49 percent 
by 2020 and 185 percent by 2030.
    Natural gas prices for the industrial sector might be as 
high as 244 percent higher by 2030 because, of course, electric 
generating plants will have to switch to natural gas to try to 
meet the carbon reduction targets.
    So, the impact of this type legislation is almost certain 
to increase price volatility for energy, with negative 
consequences for economic growth, for jobs. The unfortunate 
consequence of this type of legislation is that if the U.S. 
goes it alone, according to the Administration's own estimates, 
there will be virtually no difference in global concentrations 
of GHGs by the end of this century.
    This chart is taken from the new CEA report. The red line 
shows the referenced case for GHG emissions in the atmosphere, 
concentrations in the atmosphere. The blue line shows the 
reductions that would be made if the U.S. achieved targets 
similar to the Lieberman-Warner bill, or some of the other 
emission reduction proposals out there.
    So, the bottom line is there will be significant economic, 
negative economic consequences of the U.S. embarking on this 
path. If we go it alone, without China and India participating 
to reduce emissions, we will suffer economic loss and there 
will be no environmental benefit. Thank you.
    [The prepared statement of Dr. Thorning follows:]
   Statement of Dr. Margo Thorning, Senior Vice President and Chief 
           Economist, American Council for Capital Formation
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    Chairman RANGEL. Thank you, Doctor.
    How many of you believe that cap and trade is the most 
efficient way to go in terms of reducing emissions?
    [Show of hands.]
    Chairman RANGEL. Of the three of you, do any of you 
violently oppose a carbon tax?
    Mr. ELMENDORF. CBO, just to--as you know, Mr. Chairman, CBO 
does not make policy recommendations, so I am not for or 
against any particular policy. On the matter of efficiency, I 
think analysts widely agree that a carbon tax is an efficient 
way to reduce carbon emissions.
    A cap and trade system is certainly more efficient than a 
command and control approach, maybe less efficient than a tax. 
It depends importantly on the sorts of mechanisms that we have 
been talking about today that can help to reduce the short-term 
price volatility in the cap and trade system.
    Chairman RANGEL. I appreciate that. I think that most 
Members of Congress, like knowing Americans, believe that we 
have to do something. We have to do it fast. But they also 
acknowledge it is going to be a tremendous cost on the consumer 
in terms of the increase that is going to be passed on to them.
    So we have Members going in two different directions. A lot 
of us are concerned with what protection can we give the 
consumer, and believe that the tax system is the most efficient 
way to cushion the additional costs.
    But I am concerned with those people that favor the tax and 
trade even though, as far as I am concerned, I would want the 
most efficient way and have that proven to me as to what would 
be wrong.
    In terms of the common objective we want, if the carbon tax 
was the method that we decided on, where would you see the 
shortfall in terms of accomplishing our common mission?
    Mr. WHITESELL. Mr. Chairman, perhaps I could speak to that. 
I am an economist, and so I know the economic agreements for a 
tax. It is basically based on the idea that if emission 
reduction costs are uncertain, you want to set a price close to 
where you think the damage costs are from the emission of 
CO2. So you get as much reduction in emissions as 
needed to reach those damage costs.
    So, that is a reason why a tax has advantages over a cap 
and trade. However, with the climate, we are not dealing with 
risks that are symmetric around possible outcomes. There is a 
huge risk that if we don't do enough, we could be facing 
tipping points in the climate and a potential catastrophe.
    So, because of the fact that the risks are not balanced on 
either side, that is an added reason to focus on emission goals 
and make sure that cumulative emissions are within what 
scientists are arguing are necessary to reduce climate risks to 
acceptable levels. So, that is the reason for a cap.
    So I think that is a reason to kind of combine the best 
approach, the best features, of a tax with the emission caps 
that would reduce climate risks to acceptable levels.
    Chairman RANGEL. Well, it doesn't seem, from what you say, 
that you are violently opposed to using the tax system in part 
in terms of being able to cushion the additional costs to the 
consumer.
    Mr. WHITESELL. Yes. I think that the price stability of a 
tax is very helpful because it will allow us to get reductions 
that we need. However, I think you can get that price stability 
while still giving attention to cumulative emission goals, and 
I think that the approach in the Doggett-Cooper bill actually 
achieves that.
    Chairman RANGEL. Okay.
    Mr. LASHOF. If I could, I think in any policy designed to 
deal with global warming, we certainly have to pay attention to 
consumers. But I want to focus on energy efficiency as a 
critical component of a comprehensive policy because if we get 
that right, consumer energy costs can actually go down as we 
are reducing pollution.
    The reason for that is even though prices per kilowatt hour 
of electricity may go up as power companies are forced to pay 
for putting pollution into the atmosphere, if consumers are 
able to use electricity more efficiently so they are using 
fewer kilowatt hours, what they care about is their bills. Our 
analysis suggests that consumer bills can go down while we are 
driving down pollution.
    So, whatever mechanism is required to make clean energy the 
profitable kind, we need to be sure that we are investing in 
energy efficiency technologies that will help consumers drive 
their bills down, and I think that is a critical component.
    The other component of it is whether----
    Chairman RANGEL. Before you go to the other one, are you 
talking about an immediate moving toward penalizing those who 
don't stay within the cap, that there will not be an increase 
initially to the consumer, that efficiency would drive the 
electricity costs down?
    Mr. LASHOF. No. I am talking about getting incentives right 
so that utility companies have a profit motive to actually help 
their consumers be more efficient in how they use electricity. 
I am talking about building codes that are effective and 
enforced.
    Chairman RANGEL. I am asking how long. We have 2-year 
contracts in here in the Congress, and I just want to know how 
long would it take for a consumer-voter to recognize that 
efficiency is going to drive down his or her electricity costs.
    We are anxious to make certain that they don't feel--they 
feel at least paying this possible. Are you suggesting that 
they don't have to feel any in the short run?
    Mr. LASHOF. Well, I am suggesting that we should, as we 
have with the economic recovery bill, start investing in 
efficiency right now----
    Chairman RANGEL. Assuming we do all of that, are you 
suggesting that if we do everything that you are suggesting we 
do, that initially the consumer electricity costs would not be 
increased or indeed may be driven down?
    Mr. LASHOF. Monthly bills could be driven down. Now, I do 
believe that we--the second part of it, particularly for low 
income consumers, we need to have particular provisions. That 
is where the Tax Code certainly comes in to ensure that their 
costs are managed.
    Chairman RANGEL. Okay. Mr. Camp.
    Mr. CAMP. Thank you, Mr. Chairman.
    Dr. Elmendorf, I just want to talk about a couple 
fundamental principles. In the short run, would a climate 
change policy that places a price on carbon, whether it's cap 
and tax or straight carbon tax, would that mean higher energy 
prices across the entire economy?
    Mr. ELMENDORF. Yes. I don't know what you mean by the short 
run, but at any point in which we are putting a price of carbon 
emissions, that would be passed through to the cost that 
consumers face in energy products, but also all other products 
that are made using fossil fuels.
    Mr. CAMP. Thank you. Are there any goods and services that 
would not rise in price in response to that policy?
    Mr. ELMENDORF. I don't know if there are any goods that use 
no energy in their production. It seems to me unlikely.
    Mr. CAMP. Dr. Elmendorf, two weeks ago, CBO testified that 
a 15 percent reduction in greenhouse gas emissions from 1998 
levels would cost the average household about $1600 per year. 
That seems like a far less ambitious target than the 
President's desire to get emissions 83 percent below 2005 
levels.
    So, accordingly, wouldn't the $1600 per household per year 
cost likely understate the true cost to families of the 
policies in the President's budget?
    Mr. ELMENDORF. I think there are two answers. One is about 
the time scale. The change that we talked about in our 
testimony a few weeks ago was the 15 percent reduction in the 
fairly--in the near or medium term. The reduction that people 
discuss on the order of 70, 80 percent in the emissions are in 
the order of 40 years from now. So, the time scale of that 
process is quite different.
    I think the second comment is that the cost to households 
depends very critically on what is done with the revenue that 
is raised from a carbon tax or from auctioning cap and trade 
allowances. As you know, our testimony discussed the ways in 
which that revenue might be used in different ways to affect 
the efficiency and distribution in the economy.
    Mr. CAMP. But when CBO estimates the impact of imposing, 
say, a cap and tax system on the economy, isn't it true that 
when CBO scores those proposals, that it assumes the increases 
in energy taxes--that the increase in energy taxes act as a 
drag on the economy and thereby reduce other income and payroll 
receipts?
    Mr. ELMENDORF. Yes. An indirect tax--sales taxes, other 
sorts of indirect taxes--and the carbon tax, so the price of 
cap and trade allowances would fit in that category, that kind 
of revenue then reduces the incomes that people have and the 
taxes they pay to the government. That is part of what we 
estimate when we estimate the effects of these bills.
    Mr. CAMP. Isn't it also correct to say that while the exact 
amount of this offsetting loss and other revenues depends on 
the design of the specific policy, and the CBO in January noted 
that traditionally there is a 25 percent offset, meaning that 
for every dollar of revenue generated by cap and tax, other tax 
receipts fall by 25 cents?
    Mr. ELMENDORF. Yes.
    Mr. CAMP. So, that the net extra burden is not the amount 
of the tax or the price of the allowances. It is less than 
that.
    Mr. ELMENDORF. I think that 25-percent reduction in payroll 
and income tax receipts, that reflects CBO's view that policies 
like cap and tax will result in a slowing of the economy, and 
therefore more unemployment and slower wage growth.
    The unemployment is more complicated. The estimates that 
people make suggest that an ambitious cap and trade plan of the 
sort that Senator Lieberman and Warner talked about and that we 
have estimated might reduce the level of GDP by 1 to 3 percent, 
about 20 years from now by 2 to 5 percent, or 2 to 6 percent 40 
years from now.
    Unemployment effects are more likely to be transitional 
issues. It is the shift of the economy from a fossil fuel-
centered production toward other forms of energy that then 
creates some new jobs and costs some jobs. It is that 
transition that tends to affect unemployment. In the long run, 
I don't think the effects on unemployment would be----
    Mr. CAMP. Well, and just quickly, going back to this 25 
percent offset issue one more time, we have heard about a 
number of proposals that attempt to mitigate the damage to 
American families from cap and tax by returning revenue raised 
via other programs, like energy stamps.
    Isn't it true that if we were to return every dollar raised 
from cap and tax, the reduction in income and payroll tax 
receipts would mean the proposal would add to the deficit?
    Mr. ELMENDORF. If you returned every net dollar the 
government gains from a carbon tax or selling cap and trade 
allowances, then that would have a net zero effect on 
household----
    Mr. CAMP. No. I am talking about making families whole.
    Mr. ELMENDORF. A net zero effect on----
    Mr. CAMP. I am talking about making families and employers 
whole.
    Mr. ELMENDORF. But that is what I am saying, too. I am 
saying that if you collect a dollar for carbon tax, the offset 
that we discuss is that with the dollar less that firms or 
households have, they will pay less in tax on that. So, in 
fact, you have collected a dollar in the carbon tax, but you as 
the government have collected 25 cents less through some other 
tax.
    So, the government has collected a net of only 75 more 
cents. Those 75 cents can be returned to households and firms 
and make them whole and leave the government whole.
    Mr. CAMP. Your testimony today is that this is budget-
neutral? This would be budget-neutral?
    Mr. ELMENDORF. I am not sure what ``this'' is. So, a 
specific proposal could do different things, and we would----
    Mr. CAMP. Let's say cap and tax.
    Mr. ELMENDORF [continuing]. The proposal.
    Mr. CAMP. In my question I referred to cap and tax.
    Mr. ELMENDORF. But there are lots of different cap and 
taxes. What I am trying to follow through on is your, I think, 
hypothetical case in which the government collects the dollar 
of revenue directly through a carbon tax, but it collects 25 
cents less in revenue because households and firms have less 
income.
    So, the government has collected a net of only 75 cents for 
that apparent dollar, and that 75 cents could then be recycled 
to households and firms that would be then in a neutral 
position.
    Mr. CAMP. I see I am out of time. But I would just say that 
if you raise a trillion and you give back a trillion, it is not 
revenue-neutral because you haven't raised a trillion dollars. 
But I see my time is expired, and I thank you, Mr. Chairman.
    Chairman RANGEL. Thank you. Let me share with the panel: 
Assume the bells will ring, and it is my understanding that we 
will have several votes, including a motion to recommit, that 
would cause us not to be able to get back for an hour.
    Certainly I would not want the panelists to remain here 
unless I knew that there were Members that would be coming back 
here when that is over. I think they tend to adjourn. That 
would be at 12:30, approximately.
    So, could I get by show of hands how many Members would be 
coming back in an hour?
    [Show of hands.]
    Chairman RANGEL. So, we will continue the way we are, and I 
hope that--and I apologize to the panel that it will be a break 
while we go to the floor and vote. But there is clear interest 
in Members that are here and Members that probably would be 
returning later.
    So I would like to yield to Mr. Stark, who many, many years 
ago, when George Washington's hair was black, he started in 
this down here in the Congress. I yield to you for 5 minutes.
    Mr. STARK. Thanks, Dad.
    [Laughter.]
    Mr. STARK. It was that many years ago that I guess I 
introduced the first carbon tax. I guess I would ask: Is there 
anybody on the panel where the carbon tax wouldn't be your 
second choice? Wouldn't be your second choice?
    Ms. THORNING. It would be my first.
    Mr. STARK. First choice? Okay. I go back and I think, for 
instance, gas taxes. This Committee collects an awful lot of 
gasoline taxes, which eventually get spent by the states to 
build roads, pretty much. I don't see any reason why we 
couldn't change that to a cap and trade, and let the states 
swap their right to tax gasoline, and California could buy from 
Nevada, who doesn't really need any roads any more because 
everybody flies to Las Vegas.
    When we had the Superfund--Dr. Elmendorf, you probably 
weren't even out of high school then--but was there any major--
--
    Mr. ELMENDORF. Thanks, Dad.
    [Laughter.]
    Mr. STARK. Was there any major change in the economy or 
employment when the Superfund went in or when it went out?
    Mr. ELMENDORF. Well, changes in where the government spends 
money and collects money affect those sectors of the economy. 
Jobs are created where money is spent, and jobs are lost where 
money is no longer spent.
    Mr. STARK. Wouldn't it be your understanding that at the 
rate the government is now spending money, that any carbon tax 
would get spent, if it hasn't already been spent a dozen times 
over----
    Mr. ELMENDORF. I don't think I want to speculate on the 
actions of the Committee.
    Mr. STARK [continuing]. So that while there is an issue, I 
guess, about--and I don't know if anybody here would deny that 
consumers would pay eventually, whether it is cap and trade or 
tax--but the issue that somehow we have avoided is what is the 
cost to the country or to consumers if we do nothing.
    We haven't heard a lot of testimony from the panel there. 
There is some disagreement, I guess, as to how important it is 
that we stop global warming, and there is a question of whether 
the United States by itself makes any difference unless we can 
encourage the rest of the free world, or the rest of the world 
to follow suit.
    I guess my question, Dr. Elmendorf, would be: What would be 
the economic pressure, if any, on the rest of the world to 
follow suit if we enacted any kind of a program, whether it be 
cap and trade or taxes? Would there be anything besides just 
moral suasion on the rest of the world to indeed follow suit?
    Mr. ELMENDORF. I think the crucial part of economic 
pressure can be how we treated imported goods. If we force 
imported goods that come from countries without compatible 
carbon prices to pay an extra duty on admission to this 
country, that puts economic pressure on other countries to 
raise carbon prices.
    The issue, as you know, is whether those sorts of border 
adjustments are consistent with WTO rules. I am not a lawyer. I 
am told there is uncertainty about that issue.
    Mr. STARK. The risk of retaliation, I suppose, from those 
countries who would----
    Mr. ELMENDORF. Yes. There are provisions of the WTO 
Agreement that seem--that in some people's judgment provides 
the opportunity for the sort of border adjustment that people 
are discussing. There are other interpretations that this 
particular thing that people would try to do, if we did the cap 
and trade system with border adjustments, would not pass muster 
with those rules.
    Mr. STARK. Thank you. I want to thank the panel for their 
patience and their efforts to help us understand what is the 
best way to go forward. Thank you all very much.
    Chairman RANGEL. An update on the floor situation. It may 
be a little less than an hour, but we will say that Members 
will return as soon as the last vote.
    I would like to yield to Mr. Herger.
    Mr. HERGER. Mr. Chairman, Mr. Nunes needs to be leaving on 
an airplane. Would it be possible to----
    Chairman RANGEL. It is your time. You can do what you want.
    Mr. HERGER. Could I exchange with him and then have my 
question in his time slot?
    Chairman RANGEL. Of course you could.
    Mr. HERGER. Good. So, I will yield, too.
    Mr. NUNES. Thank you, Mr. Herger. Thank you, Mr. Chairman, 
for obliging me so I can make my flight. I appreciate it.
    I will be very quick with the panel. I want to get you all 
on the record. I just have some very simple questions that I 
would like to have answered, and it is ABC type of questions. 
So I will just start on the left. We will just go all the way 
to the right.
    But the first question is that in your professional 
opinion--I don't need scientific data or anything--but to take 
more carbon out of the air, would it be better off to, A, build 
200 nuclear reactors, B, institute a cap and trade or carbon 
tax, or C, you don't know? We will just start here with Dr. 
Lashof.
    Mr. LASHOF. I would say to institute a carbon cap, 
depending on the level of the cap, but because it is 
comprehensive.
    Mr. NUNES. Thank you, Doctor. Dr. Burtraw?
    Mr. BURTRAW. Not understanding the level of the cap that 
you speak of, I would agree that a cap would be better.
    Mr. WHITESELL. A price on carbon through either means would 
provide incentives for a lot of adjustments to be made, 
including nuclear power to be used more.
    Mr. NUNES. Thank you.
    Mr. ELMENDORF. I agree with the other statements from the 
panelists.
    Mr. NUNES. B. All right.
    Ms. CHAN. As well.
    Mr. NUNES. B.
    Mr. METCALF. I would agree with that.
    Ms. THORNING. I would suggest that it might be more 
efficient to try to build the nuclear plants as fast as 
possible because they would have a meaningful impact on slowing 
emission growth.
    Mr. NUNES. Thank you. The second question I have is yes or 
no. But should we put a carbon tax and/or a cap and trade 
scheme on animal agriculture? Yes or no?
    Mr. LASHOF. I believe that concentrated animal feeding 
operations that would otherwise meet the emissions threshold 
for a large stationary source, say, 10,000 tons of carbon 
dioxide equivalent, could be regulated.
    Mr. NUNES. So, you mean a larger sized farm? Is that----
    Mr. LASHOF. We are talking about large factory farms should 
be treated as factories.
    Mr. NUNES. Okay.
    Mr. BURTRAW. No, sir, I don't. I believe that they could be 
subjected successfully to some direct regulation, or qualify 
for offsets, bringing valuable revenue into the agricultural 
sector from a cap and trade program in the rest of the economy.
    Mr. NUNES. Thank you.
    Mr. WHITESELL. I agree that larger farms, where you can 
measure the emissions, could perhaps be brought into a cap and 
trade system. But for smaller units, it is easier to measure 
the capture of greenhouse gases rather than the emissions that 
occur without special projects, and there are ways of handling 
that through an offset mechanism associated with a cap and 
trade system.
    Mr. ELMENDORF. As you know, Congressman, I don't make 
policy recommendations.
    Mr. NUNES. Thank you, Dr. Elmendorf.
    Ms. CHAN. Friends of the Earth would agree that CAFOs, 
concentrated animal feeding operations, should be subject to a 
cap.
    Mr. METCALF. I think certain elements of agriculture can be 
brought into the system. We are not going to be able to get all 
elements. The way to proceed is to look at where we can 
measure, monitor, and verify easily, whether under a tax or cap 
and trade. Those systems should be brought in, and they would 
tend to be the large feed lots and some other applications.
    Mr. NUNES. Thank you.
    Ms. THORNING. I doubt that the costs of such a program 
would be worth the benefits, particularly in light of my slide 
showing that if the U.S. cannot get China and India and other 
countries to participate, what we do here will have virtually 
no impact.
    Mr. NUNES. Thank you. Mr. Chairman, I would like to thank 
the panel, and I would like to thank your kindness for letting 
me jump in front of Mr. Herger.
    Chairman RANGEL. Thank you. Have a good flight.
    The Committee will adjourn until the last vote. I hope that 
the panelists would be able to stay with us. I apologize for 
this delay.
    [Recess.]
    Chairman RANGEL. First, thank our witnesses for your 
patience in coming back and for understanding our legislative 
process in causing this. Again, I would say that the closer we 
get to resolving this, I hope you don't mind if we call you 
back in informal session to try to make certain that we have a 
bill which is going to be successful in the House and Senate.
    I would like to call on my dear friend from Michigan, who 
has quite a few emission problems in his hometown, besides 
other problems. Mr. Levin.
    Mr. LEVIN. Thank you, Mr. Chairman. We all join in thanking 
the witnesses. I said to several of you, your schedule has to 
assume we don't really have one. So thank you.
    There are so many important details that need to be 
thrashed out, and it is tempting to focus in on them. But I 
thought instead, for my turn, I would ask questions, question a 
little more broadly, because I think the only hope of having 
any bipartisan approach to this is if there is acknowledgment 
of two things:
    No. 1, that there is a climate crisis in the world, and if 
that isn't acknowledged, there is no hope, I think, of having 
an approach that cuts across some of the lines; and secondly, 
that there is a way to put together a plan that addresses the 
issues of the economic impact on manufacturing, on the economic 
impact on consumers, and also the issue of competitiveness.
    Let me zero in on an issue that has been raised here, and 
that is the impact on consumers. Maybe I will start with you, 
Dr. Elmendorf, and others will comment if you can if there is 
time.
    Whether one takes a cap and trade approach or a carbon tax 
approach or some combination, the agreement has been given that 
there will be kind of automatic impacts on the consumer, and 
that their costs will automatically increase dramatically.
    So, I would like to ask you your judgment. Isn't there a 
way to address that issue, for example, to take revenues that 
would come and make sure part or many of them would be 
returned? Address this issue of the potential impact on the 
consumer and ways that might be addressed, if there are any, 
to--ways to address that issue.
    Mr. ELMENDORF. Yes, sir. An increase in the price of carbon 
emissions would be passed through to the prices of goods that 
households buy, and in that way, would affect households' 
ability to buy what they have been buying before. They would 
need to have more money or buy less.
    But the revenue that the government would collect if it 
sold allowances in the cap and trade system or had a carbon tax 
can be used to offset the burden that households face, at least 
in the aggregate.
    I think the harder issues are how one directs that money, 
if one wants to direct it; what mechanisms are used, and in 
part can be through proposals that have been raised for using 
the earned income tax credit or other tax means. There are 
government programs that adjust automatically with higher 
prices, so Social Security benefits would rise with higher 
prices. So, there are some things that would happen 
automatically, others that would have to be constructed 
separately.
    The other distributional effect worth noting is that there 
are people in particular industries that will be particularly 
hurt. That is different from the sort of rich versus poor 
distributional analysis that is often done, but also, I think, 
quite important, and those are people in particular industries 
or particular parts of the country.
    Mr. LEVIN. There are ways to address those issues as well?
    Mr. ELMENDORF. Yes. So, again, if the allowances are sold 
and the government collects revenue, or if it uses a tax, then 
it can use those revenues to compensate people who are being 
hurt.
    Again, it would need to develop a mechanism for directing 
money to people in particular industries, so one idea that has 
been proposed is to provide a subsidy for industries that 
continue to operate, and thus continue to employ people in 
those businesses. That is one mechanism that could be used.
    Mr. LEVIN. I think--yes, Ms. Chan. I have just a few 
seconds. Because I think if we simply raise red flags, any hope 
of a bipartisan approach will end. Yes, Ms. Chan.
    Ms. CHAN. I would just like to add very briefly that a 
couple of weeks ago, Friends of the Earth submitted some 
written testimony for another hearing, along with a couple of 
other organizations such as the National Community Action Fund 
and Public Citizen. It was focusing on how lower and middle 
income consumers could be protected.
    I would note also that this Committee has some really 
unique jurisdiction in their ability to use tax policy to keep 
consumers whole, such as the earned income tax credit, maybe 
electronic debit transfer systems, and things like that. So, 
there are some things that we might be able to submit for the 
record here.
    Mr. LEVIN. My time is up. Thank you.
    Chairman RANGEL. Thank you.
    I recognize Mr. Herger.
    Mr. HERGER. Thank you, Mr. Chairman.
    Dr. Burtraw, 2 weeks ago in your testimony before the 
Income Security Subcommittee, you stated that we would need to 
devote 3 to 4 percent of allowances to offset the decline in 
international competitiveness of U.S. manufacturers. Is that 
correct?
    Mr. BURTRAW. Yes, sir. What I was saying was that that 
amount of allowance value, according to some, would be 
sufficient to keep those industries that are exposed to unfair 
import and export competition to provide a subsidy to 
production onshore to make sure they keep jobs onshore. That 
does not reduce or remove all of the possibility for leakage, 
but it does protect jobs.
    Mr. HERGER. Now, on Tuesday, one of the witnesses invited 
by Congressman Levin stated that we would need at least 13 
percent of allowances to offset some of the decline in 
international competitiveness for only some industries.
    Based on just the increase in energy prices projected by 
EPA's analysis under the Lieberman-Warner bill, which would 
impose a less severe reduction in emissions than what the 
President has proposed, we have statistics that show that 52 
different sectors of the economy would see declines in exports 
of at least half a billion dollars each.
    Many of these sectors are not covered by the plan described 
on Tuesday, and presumably are not covered under your plan. I 
want to list some of the sectors that would see significant 
declines in both exports and employment, and I would like you 
to give me a yes or no as to whether you think these sectors 
will suffer a decline in international competitiveness.
    Automotive stamping and parts?
    Mr. BURTRAW. Sir, I would defer to my colleagues on that, 
and be happy to send information to you about that and 
correspond with your staff further. But I don't claim this is 
my own personal area of expertise. I am sorry.
    Mr. HERGER. Okay. Is there anyone who would like to comment 
on automotive stamping and parts? Would you have----
    Mr. ELMENDORF. Congressman, I am sorry. I don't think the 
Congressional Budget Office has done analysis on an industry 
basis. As a general matter, if there are not appropriate border 
adjustments made, then the industries that tend to be more 
carbon energy-intensive will be hurt worse. But I also don't 
have specifics on that to offer you right now.
    Mr. HERGER. Okay. Well, what would you think on automotive 
stamping and parts?
    Mr. BURTRAW. I would think that that's possible. Yes, sir.
    Mr. HERGER. How about fruits?
    Mr. BURTRAW. Fruits is a subcategory of food. If it is 
processed fruits or fresh fruits, I don't really have the 
information to be able to answer that.
    Mr. HERGER. Car and tractor engines. You are nodding your 
head yes?
    Mr. BURTRAW. Yes. I think that that could be an exposed 
industry that we should be concerned about.
    Mr. HERGER. Semiconductors.
    Mr. BURTRAW. I don't know.
    Mr. HERGER. Paint.
    Mr. BURTRAW. I have heard that mentioned before, but I 
don't know, sir. I can't speak with expertise. It could be an 
important one.
    Mr. HERGER. It could be. Soybeans.
    Mr. BURTRAW. I don't know.
    Mr. HERGER. Textiles and fibers.
    Mr. BURTRAW. I don't know.
    Mr. HERGER. Tools and dies.
    Mr. BURTRAW. I would imagine that would be, but I am 
guessing, sir.
    Mr. HERGER. Now, we used energy prices that assume slow 
growth in nuclear power and clean coal, which are consistent 
with the positions of two of your colleagues at the witness 
table today that oppose nuclear and clean coal. The estimates 
do not include the impact of allowances on cost.
    Let me turn and--but these are just some--and this is the 
point of the question--these are just some of the sectors that 
we would see significant declines in exports. I think many 
would say that the answer would be yes to each of those. I am 
very concerned that folks are rushing toward a policy without 
understanding the full ramification of its impacts.
    Director Elmendorf, has the CBO estimated how many 
allowances would be necessary to offset the decline in the 
international competitiveness of U.S. manufacturers?
    Mr. ELMENDORF. No, we have not. I think you raise an 
important issue, Congressman, and I think we need to do more 
work on the distribution of economic effects of this sort of 
legislation.
    Mr. HERGER. Well, I appreciate your saying that. I would 
like to urge you and ask you to do this analysis. I think it is 
crucial to our economy, to jobs, particularly now when we are 
in a down time. I really believe that Congress needs this 
information.
    Thank you very much. Thank you, Mr. Chairman.
    Chairman RANGEL. I would like to join with Mr. Herger in 
making that request because it is so important no matter which 
solution people are seeking that we have to know the number of 
people and the nature of the impact.
    I want to thank Dr. McDermott, as I recognize him, for the 
hard work that he has put in this over the years. I hope your 
day has come.
    Dr. MCDERMOTT. Thank you, Mr. Chairman.
    Dr. Thorning, I want to pose a hypothetical for you and 
then let you respond to it. We need to have energy independence 
from Middle East oil. We need to deal with climate effects. So, 
change is going to happen. Let's assume that. Business is going 
to have to respond to one of these proposals made by various 
people up here.
    I would like to hear your choice as to which one you think 
would be best for the economy. Since you are the only one that 
is directly representing business--we have got a lot of people 
who are peripherally business, but you are the business 
person--which one of these plans?
    Do you want cap and trade, or do you want a cap with a 
fixed price and a guideline decline over the next 40 years? 
What is it you want? Since you have to take something. This is 
hypothetical.
    Ms. THORNING. Well, I think what--the long-term solution to 
reducing greenhouse gas emissions is going to depend on 
technology. It is going to depend on more use of nuclear power. 
It is going to depend on capturing and storing carbon.
    So, I think we need to continue the large government 
programs and private programs that are underway to develop 
these technologies. I think, as I said in my testimony, because 
whatever the U.S. does will have almost no impact on a couple 
of----
    Dr. MCDERMOTT. Please, don't go into the rest of the world. 
It is going to happen here in the United States. The solar and 
the wind and the coal and the geothermal and all these energy 
proposals, what is the best one for them economically?
    Ms. THORNING. The least bad proposal, I think, would be a 
tax on emissions. But as I said, we will incur substantial 
costs with no environmental benefit from trying to hit near-
term targets.
    Dr. MCDERMOTT. I take your point. I know that part of your 
argument. I want to know--because I think the business 
community is divided. I think that there are some industries 
who don't want anything to happen, and there are other green 
energy kinds of industries who want to be able to predict the 
price and then put a plan in place to develop, over 3 or 4 or 5 
years, a plan.
    I would like to hear Ms. Chan talk about that.
    Ms. CHAN. Well, I would agree with Dr. Thorning in that we 
will need some breakthrough technologies to come our way. That 
is going to take investment. It is going to take investment in 
R&D, capital investments, infrastructure investments. These 
investments are going to perhaps be significant for some 
industries.
    That is actually why it is helpful to have a stable and 
predictable price path, because you can do the business 
planning for that. If you had very volatile carbon prices, 
there would be a bit of an uncertainty for a company that 
wanted to make investments, in breakthrough R&D, for example, 
and then find out by the time they are paying back their 
bankers that they could have just really done it cheaper by 
just buying relatively inexpensive offsets or allowances right 
off the market.
    So, I think that because we really will need these 
breakthroughs in cleaner technologies to transition to a low 
carbon economy, that the clear price signals that are offered, 
for example, by your bill, by Mr. Doggett's bill as well, 
provide that kind of stable path that allows companies to 
actually plan.
    Dr. MCDERMOTT. Mr. Lashof, I want to add a little because I 
see you would like to answer. Let me ask a further question for 
you.
    What does a carbon-trading scheme, with all the inherent 
potential problems of derivatives and all the rest, what does 
that add to--rather than doing a tax? Why do that? Because you 
are just struggling, I think, to find stability in a cap and 
trade system, which is never going to get to zero. You are 
always going to have some fluctuations, whether you bring the 
lines together or however you do it. I would like to hear your 
answer.
    Mr. LASHOF. Well, I think the primary advantage that we see 
from a cap is providing greater certainty about achieving the 
emission reductions. Then the trading part----
    Dr. MCDERMOTT. But my--let me just stop you. The bill that 
we put in has a cap that declines over the next 40 years, to 
2050. So, we have already a cap in the bill.
    Mr. LASHOF. Right. No, and I----
    Dr. MCDERMOTT. That's what you want. You want a cap.
    Mr. LASHOF. I appreciate the--you know, I think a lot of 
thoughtful and interesting proposals that you and Mr. Doggett 
have put out, and I think there--and we are sort of converging 
here between--you know, I think all of us have talked about 
various versions of hybrids.
    I think when you do that, though, you have to have some 
ability to adjust the price in order to make sure that you 
actually achieve those emission reductions. So, in that sense, 
it also becomes a little bit more like a cap and trade. So, I 
wanted to address----
    Dr. MCDERMOTT. Would you trust the Secretary of Treasury 
and the Secretary of Energy and the head of EPA more than the 
derivative traders on Wall Street to set the price? If you gave 
the change capacity to those department chairmen in the 
government versus the traders?
    Mr. LASHOF. Well, I would--you know, what I proposed and 
what many businesses that are members of the U.S. Climate 
Action Partnership have called for is a cap. I trust EPA to 
address the environmental problem, which is limiting emissions. 
The price would be set not on the derivatives market but in the 
actual market for allowances.
    I think it is very important to regulate the derivatives 
market to ensure that any derivatives related to carbon 
allowances are traded on an exchange, and that it is 
transparent. I certainly agree that an unregulated derivatives 
market in this area, as in other areas, is a problem. But I 
think that can be addressed through proper market oversight 
rather than moving away from the cap mechanism.
    Dr. MCDERMOTT. With just one bit of--more question, where 
have you seen a regulated derivative market?
    Mr. LASHOF. Well, I think that----
    Dr. MCDERMOTT. I think you called it a well-regulated 
derivative market.
    Mr. LASHOF. The Commodities Futures Trading Corporation 
has, I think, moved in that direction, in some commodities. I 
am not saying that--I am sure that can be improved on.
    Dr. MCDERMOTT. Thank you, Mr. Chairman.
    Chairman RANGEL. Thank you. We have to follow up in that 
area.
    Who was it? Oh, yes. Mr. Reichert of Washington may 
inquire.
    Mr. REICHERT. Thank you, Mr. Chairman. Thank you for 
hanging around while we had to go vote, and appreciate your 
presence here today. I know some of these questions might seem 
repetitive, but we are all trying to understand a very 
complicated issue. I think it also gives the citizens across 
the country who happen to be watching, who might catch this 
hearing at another time, to hear the answers more than once.
    We have heard that the United States must show leadership 
in the international climate change debate by imposing 
emissions reductions without requiring other countries to do 
the same. But concerns have also been raised that unilateral 
action by the United States won't reduce global greenhouse gas 
levels. Even this week, the president, Mr. Gerard, of the Steel 
Workers Union expressed some concern over maybe the possibility 
that China and India won't participate in this effort.
    If the United States acts and others don't, U.S. employers 
and workers could be disadvantaged in the international 
markets. My question is: What happens if the United States goes 
first, then other countries don't follow our lead?
    Mr. ELMENDORF. Well, I think it is important to note that 
we have not gone first. In fact, the European Union has already 
started the process. So, we are in a sense playing catch-up.
    Mr. REICHERT. What about India and China, though? What if 
we go before India and China?
    Mr. ELMENDORF. So, I think it is very important to do two 
things in legislation. The first is to make sure that you 
include in the legislation a GATT legal form of border tax 
adjustment that allows you to put a tax on the carbon-intensive 
products--paper, cement, steel, glass. There are a number that 
are critical.
    What is interesting is that in fact, if you look at some of 
these carbon-intensive products, they actually--many of them 
don't come from China. They actually come from Canada, from the 
E.U., from other countries that either have or will have a 
carbon price.
    But I think it is still important to do that, and it is 
important to do that in a GATT legal way. I think that is one 
reason why the tax-based approach is something that you really 
do want to be looking at because there is this uncertainty 
about the legality, but it may be easier to do with the tax.
    The second piece is that you may want to revisit--I think a 
necessary condition to get China and India on board with a 
policy is that the United States has to act. They are simply 
not going to do anything unless we act. Then if we do, then we 
have to use the moral suasion that we have by having a policy 
in place to lobby for their involvement.
    Mr. REICHERT. Are you calling these safety valves? Is that 
what those two things would be defined as? If India and China 
don't work, is that the two issues you just mentioned?
    Mr. ELMENDORF. So, we have--the two issues are that we have 
taxes on carbon-intensive products in the imports of fossil 
fuels at the border to level the playing field between domestic 
production and imports. I think that is a very important piece.
    Then we go from there in terms of bringing China and India 
into a system within the next 10 to 15----
    Mr. REICHERT. Dr. Thorning, real quick.
    Ms. THORNING. Yes. I would just like to point out that the 
European Union's record is not very good. The E.U. 15 emissions 
have increased .8 percent since 2000. E.U. 27, all the 27 
countries, have increased 1.5 percent over the 2000-2006 
period. So, while the European Union has an emission trading 
system in place, it is not being enforced.
    Second, if we impose a border tax adjustment on imported 
goods from countries like China, who are funding a large 
portion of our deficits, I don't think that is going to be 
helpful in terms of their being willing to continue to buy our 
debt. So, I think that border tax adjustment that people are 
looking at to try to save our manufacturing and energy-
intensive jobs is probably not going to work.
    Mr. REICHERT. Was there some--yes, sir?
    Mr. WHITESELL. So, the border tax adjustment is something 
that applies to a particular foreign country that does not have 
a comparable carbon program. It may be better for the U.S. to 
put in place an output-based rebate along the lines of the 
Inslee-Doyle proposal for the first several years of our carbon 
policy, which would protect our industries irrespective of the 
direction of the competition that they face in future years.
    After other countries, to a large extent, have implemented 
a comparable climate policy and there are few remaining 
holdouts, then you could apply a border tax adjustment 
specifically against a few countries.
    The advantage of taking a sector-based approach to the 
application of output-based rebates would also be a way of 
encouraging developing countries to take a more sector-based 
approach to trying to solve their emissions problems as well.
    That might be a better way of creating an incentive 
structure through international negotiations and some 
technological and financing help from rich countries, rather 
than simply relying on the fact that you are putting a small 
tax on a very small share of their exports.
    For example, China exports like only about 1 percent of its 
steel production, I believe. If we put a small tax on steel, 
then--or cement is another case. That would not have much of an 
incentive effect on getting China to the table in terms of 
climate policies.
    Mr. REICHERT. I thank the witnesses for their answers, and 
thank you, Mr. Chairman.
    Chairman RANGEL. Thank you.
    The chair recognizes my friend Richard Neal.
    Mr. NEAL. Thank you very much, Mr. Chairman.
    Dr. Elmendorf, this is fairly confusing to people even who 
pay attention to it. Price volatility, short-term consequences, 
how do you design a climate change program to account for what 
might be short-term or volatile changes in price?
    Mr. ELMENDORF. The price volatility in the short term 
arises in cases where there is a cap on emissions over a short 
time period, and then shifts in the cost of achieving that 
emissions cap. That can come from changes in the weather.
    Mr. NEAL. Right.
    Mr. ELMENDORF. It can come from economic conditions, or so 
on. So, the ways to reduce volatility, and thus the ways to 
reduce the cost of meeting any long-term emissions target, is 
to provide flexibility in the timing of when emissions 
reductions are achieved.
    The sorts of ideas we have all been talking about today in 
terms of price ceilings and floors, banking and borrowing, and 
managed price approaches are all different ways of trying to 
limit variability in the year, but allow over time for some 
level of confidence about the level of emissions reductions 
that occur.
    These different approaches make some different tradeoffs in 
how much emissions uncertainty they are willing to tolerate and 
how much price volatility they are willing to tolerate.
    Mr. NEAL. What does that mean to the consumer?
    Mr. ELMENDORF. Well, if prices are less volatile in the 
short run, then that reduces the dislocations in the economy. 
We have all seen, as the price of gasoline doubled and then 
fell sharply again, that causes distortions in people's 
behavior.
    It hinders advanced planning by households and firms. It 
causes abrupt shifts in the things people do and the products 
they buy and who they buy them from, and so on. All those 
things make a cap and trade program more costly for any given 
level of emissions, or which is to say if you keep the prices 
more stable, you can get the same level of emissions at a lower 
overall cost.
    Mr. NEAL. Are there any others that wish to comment?
    [No response.]
    Mr. NEAL. Thank you, Mr. Chairman.
    Chairman RANGEL. The chair recognizes Mr. Doggett for--and 
also for the hard work he has put in this subject over the 
years.
    Mr. DOGGETT. Thank you, Mr. Chairman, and thank you for 
convening this hearing. You know, it is obvious that some 
people can just not envision the tremendous economic benefits 
of moving to a clean energy economy. ``Just say no'' or its 
companion, ``Just say higher taxes,'' or its cousin, ``Just say 
higher energy cost,'' is not a policy. It is a state of denial. 
That is what we have seen here this morning.
    Fortunately--and the attacks on the Lieberman-Warner bill, 
Warner is Senator John Warner, the former Chairman of the Armed 
Services Committee, who recognized this is a serious national 
security challenge, and that just relying on the goodwill of 
polluters at home and abroad will not solve this program, is 
not a solution.
    Dr. Lashof, I agree with you that there is something of a 
convergence here this morning. We have at least six people who 
have come to testify, all of whom are about trying to construct 
a solution. There are an almost endless number of problems with 
this whole issue, but we can't abandon a solution. We need to 
try to figure out how to resolve each of these problems.
    I happen to think, and that is why I filed the safe market 
legislation, that Dr. Whitesell has with his work identified a 
mid-ground, a position that tries to get the benefits of 
limited price volatility with maximum emission reduction.
    Let me just ask you, Ms. Chan, in that regard: Doesn't the 
safe market approach that Congressman Cooper and I have filed 
meet all of the objectives that you have set forth that you 
want to see addressed here?
    Ms. CHAN. I think it does. Friends of the Earth obviously 
cares about the environmental certainty. So to the extent that 
your bill provides for that, that is our first concern.
    Then on top of that, with the report that we released on 
subprime carbon, we are also pointing to the need to avoid the 
kind of market and regulatory train wreck that we are still 
sort of digging ourselves out of, especially when we don't have 
a really set and tested regulatory regime to handle what Wall 
Street will take and make into a very, very complex market.
    So, I think that the benefits of price stability are not 
just in terms of being able to provide companies with the 
ability to plan and to make the breakthrough technology 
investments that they need to, but it also ends up really 
addressing the ``subprime carbon,'' the financial--the runaway 
financial innovation questions which we raised in our report as 
well.
    So, I would definitely say that your bill helps get us 
there to a good hybrid approach, as well as Mr. McDermott's 
bill.
    Mr. DOGGETT. Thank you. Dr. Elmendorf, you have noted the 
tension between trying to get price certainty and no market 
manipulation, and trying to get emission certainty. There is a 
certain tension there.
    But doesn't the safe markets approach achieve most of what 
one would seek on the price side, while assuring some emissions 
certainty?
    Mr. ELMENDORF. Well, as you say, Congressman, there is 
often a tradeoff there. I think the safe markets approach picks 
a particular time horizon over which to achieve this 
uncertainty--achieve the certainty of emissions.
    Relative to a longer time horizon, your plan achieves 
certainty more quickly, but would generate somewhat more price 
volatility as a result. I think you are right that your plan 
balances those various considerations in a particular way.
    Mr. DOGGETT. You have pointed out, and this is true of a 
number of questions including those that Chairman Rangel has 
asked, it is possible to design a system where the net cost to 
the consumer, whether it is a consumer in Harlem or a consumer 
in Austin, Texas, is zero. It all depends on how you collect 
the revenue and how you redistribute it. It is difficult to do 
that, but it is possible to do that.
    Mr. ELMENDORF. So, I think the--I want to be clear about 
this--the money that is raised through selling allowances or 
having a carbon tax can be--your question of legislation--
redistributed.
    Mr. DOGGETT. Right.
    Mr. ELMENDORF. Two cautions, though. The consumer in Harlem 
and the consumer in Austin, Texas have different lifestyles.
    Mr. DOGGETT. Right.
    Mr. ELMENDORF. They buy different goods in different 
proportions. So, holding harmless every individual person, 
regardless of where they work and what they do, is a much more 
challenging task than what I described in terms of the 
aggregate distribution.
    Mr. DOGGETT. Is a challenge. It requires people coming 
together, as you are today, trying to figure out how to solve 
the problem instead of how to deny it.
    Mr. ELMENDORF. The second caution is that imposing a price 
on carbon emissions would, in the estimate of all analysts that 
I have seen, reduce GDP as it is measured to some extent over 
time because we would be spending resources on limiting carbon 
emissions and not doing other things.
    Mr. DOGGETT. Just two final points, Mr. Chairman, if I 
might.
    We have got a chart here that has been passed out about 
what the cost is of addressing this problem. What we don't have 
is a chart on the cost per state of not addressing it. I 
believe that these witnesses will concede--will be the first, 
in fact, to say--that the cost of inaction, the economic cost, 
can be disastrous for our economy.
    Finally, as to Dr. Lashof's position, my only disagreement 
with this U.S. Climate Action Network is the solving the 
problem through giving away allowances. I don't think that has 
worked in Europe. I think that it is contrary to the objectives 
that we have here.
    We would be much better off using the tax system in trying 
to get these moneys back into the hands of people most directly 
affected rather than trying to give away allowances to 
utilities and hoping they pass along some of the benefits to 
the consumer. Thank you.
    Chairman RANGEL. You should all know in the course of your 
studies that the proponents of the cap and trade have not been 
very effective in explaining how they would prepare or cushion 
the consumer. I am not saying they are not thinking about it, 
but it is not as clear as those that believe that the Internal 
Revenue Service should be used for this purpose. You can 
wrestle with that and come back with some answers.
    Mr. Boustany.
    Mr. BOUSTANY. Thank you, Mr. Chairman.
    Dr. Elmendorf, does CBO have a definition of green job? 
What is a green job?
    Mr. ELMENDORF. We don't have a definition of that.
    Mr. BOUSTANY. Shouldn't we have a definition, an 
operational definition, if we are going to look at the economic 
impacts of this type of program, particularly as we start to 
look at job loss in certain sectors?
    Mr. ELMENDORF. Well, as I said to Congressman Herger, I 
think that we need to do more analysis at CBO of the economic 
effects of a cap and trade system or a carbon tax. We have done 
some work in that area, and as you know, we testified several 
weeks ago about distributional impacts across broad pieces of 
the income distribution.
    But in terms of more specific analysis about the sorts of 
jobs that might be lost and the sorts of jobs that might be 
gained and where that would occur, that is not an analysis that 
we have done. But we will try to proceed in that direction.
    Mr. BOUSTANY. I would hope so because I think it is a 
critical issue as we go forward on this.
    Dr. Thorning, in your testimony you showed us some 
information about the increase in the prices of natural gas and 
some of the other energy areas that would occur substantially 
if we moved forward with something like this.
    Do those projections take into account President Obama's 
budget provision to increase oil and gas taxes by $31 billion?
    Ms. THORNING. No, they do not. This analysis was prepared 
last year on the Lieberman-Warner bill. But clearly, anything 
that we do that raises taxes on U.S. industry, particularly oil 
and gas, will mean we are going to get less oil and gas 
production. That will put increased pressure on prices. So, 
those would be incremental to the numbers we are showing.
    Mr. BOUSTANY. If we look back historically and we look at 
what the impact was on the windfall profits tax on the oil and 
gas industry, the domestic oil and gas industry, what ended up 
happening was we shipped a lot of jobs overseas and became more 
dependent, in effect, on foreign oil.
    Ms. THORNING. Yes.
    Mr. BOUSTANY. Is it your opinion, if we move forward with 
this type of proposal, that we will indeed increase our 
dependence on foreign oil at a time when we don't have other 
options or transition strategy going forward to the next energy 
economy?
    Ms. THORNING. Yes, I think that would be the case. I think 
there was a CBO report dealing with that windfall profits tax 
issue that suggested we did lose domestic production. If we 
impose carbon taxes or cap and trade on domestic production, 
refineries will have to bear increased costs, which will mean--
I believe we are importing about 15 percent of our refined 
product right now.
    We will certainly tend to import refined product from 
countries who do not have caps on emissions, so we will see 
leakage, not only of the jobs, but of the carbon emissions, and 
have less energy security.
    Mr. BOUSTANY. In the absence of a transition strategy 
which--it looks like the two promising areas, in my mind, as 
somebody who has studied the energy markets, would be that 
natural gas is a transitioned fuel, as would be increasing our 
nuclear capacity.
    If we deny building out nuclear capacity, we run up the 
cost of natural gas. What are we doing to our economy?
    Ms. THORNING. Well, you can look at the chlorine industry 
and the ammonia industry, which I mention in my testimony. We 
have lost large chunks of jobs in those industries because of 
high natural gas prices over the last decade. The aluminum 
industry has also been impacted.
    So, we have some real-world examples of what high energy 
prices do to segments of U.S. industry. I think certainly the 
cap and trade or the tax on emissions would have similar 
impacts.
    Mr. BOUSTANY. Thank you.
    Dr. Elmendorf, I think it is safe to say that without the 
analysis on employment and unemployment in all these different 
sectors, we don't really have a full understanding of how 
pervasive the impact would be in creating levels of 
unemployment in certain sectors, that we might--maybe on 
service we are not considering it at this time.
    Obviously, the oil and gas industry, the domestic oil and 
gas industry, would be severely impacted by something like 
this. But there are other areas that are, you know, second, 
third degree removed from the oil and gas industry, but yet 
depend on these products.
    So this analysis, I think, is extremely important if we go 
forward. Wouldn't you agree?
    Mr. ELMENDORF. So, I think it is important for us to do. 
The uncertainty surrounding every aspect of climate change is 
very large. That is one of the themes of CBO's work in this 
area. The uncertainty about economic effects is important. 
Uncertainty about the effects of further greenhouse gas 
emissions on temperature and then on other aspects of the 
climate is also very important.
    I think the challenge that you and your colleagues face is 
in acting under a certain amount of uncertainty. We and 
obviously other people at this table are doing our best to 
learn about the economic effects, and scientists are doing 
their best to learn about the physical effects. But we don't 
know the answers yet.
    Mr. BOUSTANY. One final question. I know there are specific 
proposals out there that have been introduced as legislation. 
Have you modeled job loss based on those proposals?
    Mr. ELMENDORF. I don't believe we have modeled job loss.
    Mr. BOUSTANY. Okay. Do you plan to?
    Mr. ELMENDORF. We have estimated a number of other aspects 
of the proposals. I don't think we have done job loss. As I 
say, that is an area that we think we need to move into. It is 
very challenging. I don't know at what point we would have 
estimates that we would be comfortable with.
    Mr. BOUSTANY. Thank you. I yield back.
    Chairman RANGEL. Thank you.
    Does my friend Mr. Blumenauer have any thoughts on this 
subject?
    Mr. BLUMENAUER. A few thoughts and observations, and maybe 
even a question, Mr. Chairman.
    Chairman RANGEL. You are recognized.
    Mr. BLUMENAUER. Thank you very much, and I appreciate your 
forbearance and our witnesses' sticking with us on a dreary 
afternoon.
    One of the things that I think is important, I want to be 
sure that we are precise about terminology when people are 
talking about holding harmless because the whole point of 
having a fee on carbon pollution is to change behaviors.
    If we come up with a lot of elaborate procedures that end 
up putting everybody exactly where they were before we started, 
we have got a lot of administrative costs and hoops and bells 
and whistles, but we haven't dealt with the notion of 
discouraging industrial practices and personal behaviors that 
are slowly cooking the planet.
    So, it is absolutely certain that we can take the resources 
or the regulatory scheme or whatever it is and make sure that 
this money somehow--and I spent 10 hours yesterday in the 
Budget Committee hearing every other Republican friend of mine 
across the aisle assume that somehow all this money is 
generated and it disappears, that it isn't spent to revitalize 
the economy, that it's not spent to help people who may have 
higher utility rates but lower utility bills because of what we 
incent and the practice as we go forward.
    I hope, Mr. Chairman, that we can be sensitive, absolutely 
sensitive, to the impacts on some people who are locked into 
certain practices in rural America, or some industries that are 
going to require time to transition. But the whole point of 
this is to not keep everybody where they were when we started 
because then we haven't accomplished anything for saving the 
planet.
    The second observation I would make, and I hope we have a 
chance with CBO and some of our other experts, to deal with the 
costs that people are bearing now. It isn't the imagination of 
people in Alaska that has permafrost no longer perma, roads 
buckling, villages washing away, the costs of drought, amazing 
costs that the city of Las Vegas--I am sorry our friend Shelley 
is not here to talk about not only are they the No. 1 in this 
and the No. 1 in this and the No. 1--they are having probably 
the most serious water problems in America as the water level 
of Lake Mead goes down and down and down, below the intakes.
    So, being able to understands costs and consequences 
because I am deeply troubled the traditional way that we model. 
The most productive man in America is a rich businessman who is 
in a critical auto accident and is in intensive care and is 
going through a divorce because we measure all sorts of 
economic activity rather than value that is added.
    We are going to need your help to be able to craft this as 
we go forward. I am not going to ask speculative questions 
based on a bill that hasn't yet been designed about what the 
costs and consequences are. But I wonder if you might be able 
to help us with a little research.
    We don't need it now, but I heard my friend Mr. Nunes talk 
about the value, you know, of 200 nuclear plants. I am 
wondering if any of you has access to research you can benefit 
about the carbon footprint of constructing 200 nuclear power 
plants--the concrete, a ton of carbon for every ton of carbon; 
the carbon that is expended to mine and process uranium. If we 
can have your help to look at the big picture, it would be 
helpful.
    I am concerned that we are moving in a situation here where 
we are not looking at both the costs and the consequences. I am 
hopeful that we can work with you to be able to deal with the 
notion of certainty.
    I would like to conclude on this point, and if I haven't 
exhausted my time and your patience, because there will be 
regulation of carbon. It is happening around the world. 
Businesses are moving in this direction. The EPA just decided 
that unlike 8 years of the Bush Administration, getting slapped 
not once but twice by this Supreme Court for ignoring the law, 
that they are going to obey the law with carbon as a pollution.
    So, it is going to happen. It may happen in a regulatory 
fashion. It may happen in the cap and trade or a tax. In terms 
of certainty, do we get more certainty if carbon is regulated 
via administrative regulation, or the give and take of a 
legislation process like we hopefully can do in Congress?
    Mr. ELMENDORF. I was just going to say, very briefly, that 
CBO will be releasing shortly a review of the extensive 
literature on the consequences of climate change. I think that 
would address at least some of the issues you just raised, 
Congressman.
    Mr. BLUMENAUER. Super. Thanks, Mr. Chairman.
    Chairman RANGEL. Thank you.
    The chair recognizes Mr. Brady of Texas.
    Mr. BRADY. Thank you, Mr. Chairman. Just as an aside, I 
know that sort of throwing around claims like denial and do-
nothing probably poll well. But I would just caution this 
Committee against such frivolous charges on such a serious 
subject. It seems to me that this is a complicated one, and it 
deserves legitimate questioning.
    I mean, just in the last--the hearing today and the hearing 
Tuesday we had on this, which I really appreciate you holding, 
Mr. Chairman, you know, we have discussed different opinions on 
everything from cap and trade versus carbon tax versus a hybrid 
free versus auction emission allowances, and direct versus 
indirect emissions, core versus downstream industries, price 
caps, borrowing allowances, banking allowances, tax credits, 
offsets, exemptions, non-carbon costs, border taxes, tariffs, 
and sanctions, determining carbon intensity by process, feed 
stocks, firm versus national levels, questions of 
compatibility, leveraging, and leakage. This is a complicated 
issue.
    I would encourage Members to keep an open mind, but to ask 
questions. Because we have already seen as a Congress the 
impact of us not questioning sophisticated modeling of 
financial risk. We have already seen the impact of that. I 
think we would be remiss in not fully examining the modeling 
and science that goes into an issue that has such a direct 
impact on this economy.
    I want to raise that issue. This week, analysis was done 
using the Lieberman-Warner bill EPA numbers modeled by the 
International Trade Commission. Chairman, what it shows is that 
if the Lieberman-Warner bill were enacted, or some version of 
it, that it would have a devastating impact on our U.S. 
exports, the American-made products and services here in the 
United States.
    On the screen right now is the result of this analysis, and 
what it shows is they just took a look at the top 52 sectors in 
manufacturing and agriculture and services in America. It shows 
that we would lose $162 billion in lost sales overseas from our 
American-made products. It is a 31 percent decline in exports.
    Those are a lot of U.S. jobs, and something we need to be 
concerned about as we deal with this issue. It is important we 
not rush to legislation. It is important we look at this whole 
issue very carefully, which again is why I appreciate Chairman 
Rangel holding these hearings. It is important to talk about of 
these.
    On the pricing issue today, so far we have heard at least 
four, and as of this morning five, ways to spend the money to 
keep American competitiveness as a result of auctions off these 
allowances. They are used to lower electric utility costs to 
finance transition to renewable energy, to offset the cost to 
core industries and carbon-intensive industries in America, and 
tax relief.
    As of this morning, Senator Harry Reid said that we ought 
to use the cap and trade dollars as a down payment for health 
care reform. So, now have promised these dollars to at least 
five different sectors. That is sort of how Washington works.
    My question, though, to Dr. Thorning is: If we divert--you 
know, in addition to electric costs, which are going to hurt 
our U.S. exports, but if Congress imposes these costs, 
increases these taxes, and then diverts those dollars to other 
issues, doesn't that exacerbate our competitiveness with other 
countries, especially if we fail to convince China and India to 
go along with us?
    Ms. THORNING. Well, clearly energy costs are an important 
aspect of U.S. competitiveness. In fact, if you look at EIA 
data over the, say, 10 years, each 1 percent increase in gross 
domestic product is accompanied by a .3 percent increase in 
energy use.
    So, in order to increase GDP, we are going to have to use 
more energy. If we force quicker uptake of renewables than is 
technologically cost-effective, we are going to be increasing 
energy prices. That will obviously hinder competitiveness.
    So, I think we need to--another thing we need to remember 
is that the capital stock is long-lived. Refrigerators last 15 
to 20 years. So, do washing machines. So, do drill presses. 
Electric utility plants last 50, 60, even 100 years. So, the 
capital stock in the U.S. turns over very slowly, and it is 
going to take time to adjust in a cost-effective way to higher 
energy prices.
    So, the proposals that we are seeing discussed now will 
sharply increase energy prices and obviously render us less 
competitive. I think a host of other studies show the 
significant impact on leakage of jobs and imports--exports.
    Mr. BRADY. Thank you very much. Thank you, Chairman.
    Chairman RANGEL. I want to thank Bob Etheridge and Mr. 
Davis for their patience. You are recognized for 5 minutes.
    Mr. ETHERIDGE. Thank you, Mr. Chairman. Let me thank each 
of you for coming.
    I am going to ask a little different question because I 
think we are in an area that is so complicated. It has been my 
experience through the years of working with folks and being in 
education that on complicated issues, that people don't 
understand, and if they don't understand it pretty quickly, 
they tend to be opposed to it until they have a better 
understanding. That is our first inclination. If you ask people 
do they want clean air, oh, of course we do. You start getting 
into the technicals of how we get there, that is the huge 
challenge.
    Let me ask a little different question, and I hope each of 
you--I will try to do it quickly so each of you have a chance 
to touch on because each of you mentioned in one way or another 
the potential of market manipulation, depending on how we do 
it, and the proposed mechanisms that we would have to put in 
place to limit volatility if we go whatever route we go.
    I am concerned about a larger question of oversight. 
Whoever wants to share their thoughts on this I would welcome 
because let me tell you why I say this. Last year I worked on 
legislation that sought to put some control mechanisms back 
into CFTC, and to try to rein in at that point what I thought 
everyone would agree was excessive speculation, maybe even a 
bit of manipulation, in the energy futures market.
    Then it started to bleed over into the commodity markets. 
Not only did we see what amounted to a doubling of our energy 
cost to the consumer, but we also saw corn prices and all the 
commodity prices go up within a year, which in turn doubled 
feed prices, causing agriculture to have problems, made a 
difference at the consumers' table, and you know the rest of 
the story.
    My question is: How can we be recollection that we will be 
able to manage such a new and unfamiliar market and keep it 
from being manipulated, not just in this country but on a 
worldwide scale?
    I think that is a huge issue that maybe not just this 
Committee but others have to look at, assuming we go and 
finally--what can Congress do to make sure that there is 
appropriate oversight of a market to prevent the abuse? Are 
there new regulatory schemes we might need to look at, CFTC, 
SEC, et cetera, et cetera? Because if somebody is doing 
something, we have got to figure out how to make sure it is 
done right.
    Mr. WHITESELL. So, perhaps I could speak up on that one. We 
do have existing regulation of commodity markets, and it has 
come across a number of loopholes. Congress has made efforts to 
try to close those loopholes.
    Mr. ETHERIDGE. Oh, I know. I introduced legislation that 
didn't pass last year. It just got halfway through.
    Mr. WHITESELL. Uh-huh. There will undoubtedly be--with 
whatever kind of regulatory structure we put in place for the 
new carbon markets, the inventiveness of financial markets will 
undoubtedly come up with potential loopholes in that 
regulation, too.
    So, I think that we should have--we should think as 
carefully as we can about what kind of regulatory structure we 
need. But I think that Congress should have some help in 
providing the oversight function for the regulation of these 
markets, so that I think that it is useful to have an 
independent board of some kind that actually oversees the 
regulators of the markets, and itself----
    Mr. ETHERIDGE. Do you really believe the public trusts the 
market right now?
    Mr. WHITESELL. I believe the public has a lot of skepticism 
about the markets, and rightly so. So, that is why I think in 
addition to providing the best regulatory structure possible, 
we also want to structure a new a new climate program so that 
the incentives for this kind of behavior are removed to the 
extent possible so we don't need to rely exclusively on the 
regulators after the fact to go and police these markets and 
make sure that doesn't happen.
    Mr. ETHERIDGE. Anyone else want to comment?
    Mr. METCALF. Mr. Etheridge, you have identified an 
important issue here. I think this is one of the reasons why 
price-based approaches avoid this problem. It also speaks to 
the importance of trying to do this as far upstream as 
possible, which means that there are fewer entities that we 
need to actually regulate and monitor.
    It also means that we can address the issue that, for 
example, for refineries, that we are applying the carbon price 
not only on domestic oil but on imported problem. It addresses 
that problem, too.
    Ms. CHAN. I would just like to add that I think that the 
question of regulatory capacity is a serious one, obviously. 
There are a couple of ways we could go about it. We could rely 
on sort of the plain vanilla financial regulators to cover this 
new market--CFTC, FERC, SEC, you know, and try to figure it all 
out between those.
    We could introduce or we could actually design these 
markets in a way that, as Bill had mentioned, are more stable 
in the first place, and eliminate the basic incentive for 
speculation, which is, you know, making prices more stable 
would cut out a lot of the pure speculators that are just in it 
for arbitrage, and would be more tempted to manipulate the 
markets, to resort to fraud, and those things like that.
    The really unique opportunity that we have here, and this 
is so much unlike the energy markets or unlike commodities, 
other commodities, is that we are creating this market from 
scratch. We can create it in whatever way we see fit. We don't 
need to actually create it based on the same completely 
liberalized financial model that we have just seen, I mean, 
what it produces for us, for example in mortgages.
    So, we have an amazing opportunity here to actually design 
it, not only for its own market stability but also for 
environmental effectiveness. So I think that some of the bills 
that have come out of this Committee take a really good stab at 
doing that.
    Mr. ETHERIDGE. Thank you, Mr. Chairman. I yield back.
    Chairman RANGEL. Thank you.
    Mr. Davis, you are recognized for 5 minutes.
    Mr. DAVIS OF ILLINOIS. Well, thank you very much, Mr. 
Chairman.
    Dr. Thorning, I appreciate the analysis that you have 
included in your testimony. I would like to ask you: How much 
of a problem do you think global warming really is?
    Ms. THORNING. Well, I think global warming is an issue that 
we all need to take seriously. But based on work of--for 
example, the Copenhagen Consensus convened 10 Nobel prize 
winners and looked at the world's worst economic and 
environmental problems.
    They concluded that lack of clean water for the developing 
world is a particularly urgent problem. World Bank data show 5 
million children die every year from lack of sanitation and 
clean water around the world.
    The International Energy Agency data show that over a 
million women and children die every year because they cook 
over dung fires, and they breathe in and have respiratory 
infections, and so premature death. So, there are many 
environmental problems that need the world's attention.
    Mr. DAVIS OF ILLINOIS. Well, let me ask if you think that 
greenhouse gas emissions are contributing significantly to this 
problem.
    Dr. THORNING. I don't think they are contributing 
significantly to the burning of dung fires and the women and 
children dying from that. I think that is poverty. Poverty is 
the worst problem in the world, and climate change can better 
be addressed by promoting strong economic growth so that people 
have the wherewithal to adapt to change in climate.
    So, I think we need to focus on an array of issues, and 
shouldn't devote an unduly large amount of society's resources 
to addressing one problem. We have a host of issues that need 
attention.
    Mr. DAVIS OF ILLINOIS. Well, do you think that there would 
be significant long-term costs associated with this problem if 
we don't put forth some real effort?
    Dr. THORNING. Well, as I showed the chart from the 
President's economic report this year, even if the U.S. were to 
meet targets as President Obama is suggesting we meet, because 
global emissions are growing so much faster around the world in 
developing countries, our efforts will not result in any 
meaningful improvement in the environment.
    Therefore, I think we need to be cautious about putting our 
resources into programs that, when you look at the costs and 
the benefits, the costs far exceed the benefits. We need to 
continue to spend taxpayer money on R&D, which we are, on 
renewables, on carbon capture and storage so that we can burn 
our coal supplies, on nuclear generation, on renewable 
technologies. But we should not saddle our economy with a 
program that will be very costly and not materially improve the 
world's environment.
    Most scholars think that China and India are not going to 
be swayed by moral suasion. What they care about is jobs, 
economic growth, and relieving the abject poverty of their 
citizens. Energy is necessary for economic growth, and right 
now we don't have the technology to make the kind of switch 
that will enable us to quickly phase out CO2 
emissions.
    Mr. DAVIS OF ILLINOIS. Thank you very much.
    Dr. Elmendorf, let me ask you: Could you give us a real 
world example of how a managed price approach and a strategic 
allowance reserve and a cap and trade program would address 
extreme weather conditions in a short period of time? Say it is 
extremely hot in the summer, seriously cold in the winter, but 
averaged out over, say, a 5-year period, the climate change is 
not as great as either one of these extremes.
    Mr. ELMENDORF. So, Congressman, in a managed price 
approach, a regulator would set a path of prices that would be 
consistent in its estimation with the emissions cap that 
Congress had legislated. Then this regulator would sell 
allowances at that price in each of those years.
    If in certain years reducing emissions was more difficult 
because of weather conditions, then more emissions would be 
bought--more emission allowances would be bought at that price. 
If in other years it was easier to reduce emissions, then fewer 
allowances would be bought at that price.
    If the regulator has correctly assessed the average 
conditions, the average cost of reducing emissions, then over 
that period the emissions target would be met. If the regulator 
is wrong, as it undoubtedly would be to some extent, then it 
would make adjustments over time.
    So, prices would not be fixed forever. They would not be 
perfectly predictable. But the very large short-term volatility 
that we have seen in existing cap and trade programs that don't 
have this feature would be avoided.
    Mr. DAVIS OF ILLINOIS. Thank you very much.
    Mr. Chairman, could I have one additional question?
    Dr. MCDERMOTT [presiding]. Yes, you may.
    Mr. CAMP. Mr. Chairman, before we do that, I would ask 
unanimous consent to submit for the record an article and a 
slide referred to by Mr. Brady in his testimony.
    Dr. MCDERMOTT. Without objection, so ordered.
    The information referred to follows:
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    Dr. MCDERMOTT. Go ahead, Mr. Davis.
    Mr. DAVIS OF ILLINOIS. Thank you. Yes. I would just like to 
ask Dr. Lashof: If your testimony, you state that the cap and 
trade system that the NRDC supports would provide the highest 
possible level of certainty that our environmental goals will 
be achieved.
    Could you tell me why you believe that?
    Mr. LASHOF. Yes. Thank you, Mr. Davis. You know, I think 
that we have heard a lot about a lot of details and complicated 
aspects, and I want to come back to the beginning.
    This is a problem we have to address. When we talk about 
the costs of addressing it, we need to, as Mr. Doggett and 
others have reminded us, always ask, compared with what? 
Compared with what is an economy right now which is in serious 
trouble. We have an opportunity to put people to work actually 
building solutions to global warming.
    I think that the key to the certainty is providing a long-
term pathway for the emission reductions that have to be 
achieved. We can provide a lot of flexibility about how to 
achieve those emission reductions, and as we have heard Mr. 
McDermott's and Mr. Doggett's ideas, have a similar goal of 
achieving that long-term reductions.
    But I think that is the key. We need a strategic decision 
to essentially phase out emissions of global warming pollution, 
and we need to get on that pathway as soon as we can. That will 
put people to work right now and will build a sustainable 
economy.
    Mr. DAVIS OF ILLINOIS. So the sooner we start, the sooner 
we will ultimately get there?
    Mr. LASHOF. Absolutely. In fact, we have an opportunity to 
use what are slack resources in the economy right now, putting 
people back to work to get started right away.
    Mr. DAVIS OF ILLINOIS. Thank you all very much, and thank 
you, Mr. Chairman.
    Dr. MCDERMOTT. Mr. Davis of Kentucky will inquire.
    Mr. DAVIS OF KENTUCKY. Thank you, Mr. Chairman.
    Just listening to all this testimony today, earlier in the 
week, and just in the last couple of months on the Committee on 
Ways and Means, I am reminded of an experience I learned as a 
young Ranger in the Army, that after publishing a number of 
articles and doing a lot of academic research, I suddenly found 
that those who come up with the most complicated plans often 
are the ones who have never actually had to implement what they 
have developed.
    I spent many years in manufacturing, doing work in the 
energy industry. I am a big fan of alternatives. Provided a lot 
of support for the academic community on doing true, extensive 
alternative energy research to create jobs from the existing 
economy. I would like to build on the comments that Congressman 
Davis, my colleague from Chicago, made earlier.
    You know, we have forgotten one cost in this process, and 
having had to actually create jobs professionally, and live 
with the consequences of regulation, and see many of these 
across the country.
    The first thing I would point out is the rise in energy 
cost is a huge issue, and the human cost is profoundly beyond 
anything that has been talked about by any witnesses this 
morning.
    Just in the last--from the fall of 2007 to the spring of 
2008, the increase in energy prices drove 100 million people 
additionally in the world into daily malnutrition. That is a 
real number, and a real cost, and a real human cost, with 
implications vastly beyond economy into national security, 
stability of cultures, et cetera.
    Where I would like to take this in this area is, having 
been an implementer, if you will, of a number of these policies 
in dealing with environmental compliance, and also wanting to 
be a good steward of the environment, I would like to follow up 
on these comments about electricity costs domestically that 
will rise under this.
    When I look at--we talk about cap and trade, and we look at 
the costs relative to the states, the one thing that is 
forgotten is a premise in the analysis. States like Wyoming, 
Kentucky, Ohio, Illinois, Utah, that have huge, much larger per 
capita increases, actually also are exporting their electricity 
to California and New York, which benefit from this massively. 
Those are not being considered in the production numbers, you 
know.
    I want to stress that the analysis in the proposed energy 
tax that the President has put forth--and it is a tax--I think 
is very conservative, but it assumes a 30 percent reduction in 
emissions, the one that we were shown here today, versus the 83 
percent one the President wants. It assumes an allowance of $85 
per ton, consistent with the recommendations of the Stern 
Review and consistent with the tax called for in Congressman 
Larson's bill.
    In fact, if we adopt the policies recommended by some of 
the organizations represented here today, no new nuclear 
power--that actually does create jobs immediately--no clean 
coal, and limited to no offsets, the EPA has estimated that 
prices could cost more than $400 a ton. That means costs four 
times higher than the analysis shows.
    You know, when we look at this real world issue, I don't 
know how you tell the elderly person in Kentucky--and there is 
no way to possibly provide a tax offset to this--that a $3300 
increase for their household cost for energy is going to be 
sustainable on a small income.
    Dr. Elmendorf, Dr. Thorning, do you disagree with the EPA's 
analysis that if we don't expand nuclear power, if we don't 
develop clean coal, if we prohibit or limit offsets, that this 
allowance would be as high as it is?
    Mr. ELMENDORF. So, Congressman, I agree with the logic that 
the extent to which we limit alternative sources of energy from 
being used, that raises the cost of reducing our use of fossil 
fuels. I can't speak, I'm afraid, to the specific number that 
they use. I think it is----
    Mr. DAVIS OF KENTUCKY. Reclaiming my time, you are a very 
strong advocate against much of the counsel that was brought by 
the Committee earlier, and thoroughly forward in those comments 
at the beginning of the hearing.
    I think it does beg an answer, though, you know, from your 
organization because this cost is real. It is an unavoidable 
fact that individual working families can be effectively and 
whole communities can be legislated out of business as a result 
of this.
    Mr. ELMENDORF. I am not sure what you think I was an 
advocate for in my testimony. I think I was very careful not to 
advocate. But I did in response to several questions talk about 
the harm that we inflicted on people in particular industries 
and particular parts of the country.
    I have agreed with several people who think that we should 
be doing more analysis of that than we have done. So, I think I 
have been very clear in recognizing that, but----
    Mr. DAVIS OF KENTUCKY. So, you do agree with the EPA 
provision that it would drive these costs up without offsets in 
the use of clean coal?
    Mr. ELMENDORF. As I said, I agree with the logic that if 
one restricts alternative fuels, then that raises the cost of 
moving away from our current fossil fuel-based economy. But I 
cannot speak offhand to the specific numbers that you are 
citing.
    Mr. DAVIS OF KENTUCKY. How about you, Dr. Thorning?
    Ms. THORNING. Well, again, like Dr. Elmendorf, I haven't 
seen the new study. But if you look back at EPA's work last 
year on the Lieberman-Warner bill, they clearly show that 
without nuclear power, in their scenario No. 7, without a big 
ramp-up in nuclear, and without carbon capture and storage, the 
allowance costs would be substantially higher than under, you 
know, the more favorable assumption. So, I would tend to agree.
    Mr. DAVIS OF KENTUCKY. Okay. Thank you.
    Mr. Chairman, I just beg your indulgence for an additional 
moment for a follow-up question.
    Dr. MCDERMOTT. Go ahead.
    Mr. DAVIS OF KENTUCKY. Just open to the Committee: I am an 
engineer by background, coming from manufacturing. One of the 
things I would hear over and over from folks who actually have 
to carry out these programs is a request from the 
entrepreneurial community, particularly in research and 
development, to not impose command and control systems that 
pick winners and losers, which I believe much of these 
proposals inadvertently does.
    I think the intentions are all very good. They are very 
well-meant. I think we all have common concerns on wanting to 
be effective stewards of the environment.
    But just posing one point: When we look at the vast costs 
that could potentially be put out there, how would you feel--
and I would leave it open to anybody--about instead of talking 
through very complex schemes of cost and balance, maybe to 
simplify, but to get to the intent of the goal of, I think, 
most of the parties that are in the hearing room today about 
going to an end state simply to find output levels rather than 
talking about trading regimes and things like that, and allow 
all alternative fuels, regardless of the nature, as long as 
they can hit compliance with acceptable environment standards.
    Of course, the consensus would ultimately come through the 
Congress that we would agree that if the nuclear plant, the 
coal plant, people could burn any kind of as-yet-to-be-
discovered technology or develop that, wouldn't that make 
sense?
    Mr. LASHOF. Mr. Davis, if I could start.
    Mr. DAVIS OF KENTUCKY. Yes, go ahead.
    Mr. LASHOF. I mean, I think that that is the intent of the 
proposal that I have outlined, which is to provide an overall 
cap on global warming and pollution and allow the maximum 
flexibility for any teaching that can deliver electricity or 
transportation services that people want without exceeding 
those emission levels, to participate in the economy. So, I 
think that----
    Mr. DAVIS OF KENTUCKY. It is just the one reason that--if I 
could just reclaim my time for one second as we close up here. 
I appreciate everybody's patience with the votes and everything 
else going on here today. I would be interested sincerely in 
follow-up from those of you who are interested in sharing this 
with me.
    The reason that I bring this up is I think it does beg a 
place for alternatives because the one thing I hear over and 
over in looking at developing jobs in the private sector is the 
inability to comfortably plan some predictability for risk 
management on investment.
    This is worldwide in a global economy where we are dealing 
with a variety of challenges. Many countries are simply not 
going to play, and in fact could afford not to play because of 
their--you know, our relative impact on their economies.
    More to this point of how do you effectively make this kind 
of a transition? Why would nuclear or coal or some of these 
others not fit if we simply could set a SOX/NOX/mercury, some 
reasonable level for carbon emission, knowing that Earth has 
its own ability to generate that well--and this isn't disputing 
or refuting claims or assumptions, even.
    That is where I am just coming into this and trying to 
understand the need for this. If you want to set a foundation 
base, it would be some fairly simple boundaries, and the tech 
and academic and research communities could come up with a lot 
of things in a lot of different areas. There are a lot of 
different regions to create jobs based on the resources they 
have.
    Mr. LASHOF. I think you have identified the clarity of 
clear carbon pricing, that however we do it, that does then 
provide the incentive to come up with carbon capture and 
storage that gets--that doesn't get this price applied to it.
    Mr. DAVIS OF KENTUCKY. Well, and to that point, I 
understand the question is always storage and sequestration. 
But you can make stuff with CO2. You can use it for 
oilfield reclamation. You can use it for biomass feed stock, 
you know. Every aspect, you can open up new ones in terms of 
research and value-added usages that aren't necessarily, 
though, going to get reflected in this where the average 
consumer could bear a huge burden.
    We can continue this dialog at another time. I know that we 
are well past this. But I would be interested in follow-up 
communication with you on this as we address this because 
ultimately my concern is the huge cost that is going to be put 
on the working poor and working families.
    Thank you, Mr. Chairman. I yield back.
    Dr. MCDERMOTT. Thank you very much.
    As we close here, I would like to give you one last 
opportunity around a question I will pose, and that is: We have 
heard today the fear, and certainly it has been expressed in 
many different ways, any system is going to be so costly to the 
American economy that it sounds almost like it would be brought 
to its knees.
    Now, how is it that the Europeans were able to design a 
system and make some events--maybe not much, but they made 
some--that didn't bring the economy to its knees? I mean, I 
don't want to leave the last thing here is that this is the end 
of the American economy as we know it if we put a system in 
place one way or another.
    I would like to hear what you say. How did the Europeans do 
this?
    Mr. WHITESELL. Perhaps I could start this one off. I think 
if we avoid the kind of command and control approach that could 
result in substantial costs, and instead put a broad price on 
carbon, the American economy is very inventive and will adjust 
to the market price of carbon in ways that will probably result 
in more reductions in emissions than our models will forecast.
    That seems to have been the case with other kinds of cap 
and trade programs. The inventiveness of the economy is often 
under-rated, and its ability to respond to a reasonable price 
on carbon.
    In addition to that, we also need to take account of the 
client scientists' views about the levels of emissions that 
could pose substantial risk to the climate. So, we need to take 
account of both price as well as emission levels. I think a lot 
of the proposals we have put forward today are ways of taking 
account of both of those objectives.
    Dr. MCDERMOTT. Yes. Dr. Thorning?
    Ms. THORNING. Yes. I would just like to point out, as I 
show in figure 7 of my testimony, according to the European 
Environmental Agency, the E.U. is not on track under current 
measures to even hit the Kyoto target. My testimony from last 
week--which maybe I could submit for the record--I had charts 
that showed that the European GDP growth over the last decade 
has been slower than that in the U.S., and their unemployment 
rate has been substantially higher.
    So, not only are they not meeting their targets, as I 
mentioned earlier today, overall emissions are growing from 
2000 to 2006. GHG emissions, according to their own data, are 
growing.
    So, Europe is not making it. I think to try to base a 
system in the U.S. on what they are doing is to set us up for 
failure, too.
    Dr. MCDERMOTT. I wasn't saying we would set up the same 
system. I was saying we would set up American system. I think 
that that is perhaps a nuance you might want to think about.
    Yes.
    Mr. ELMENDORF. I would just conclude where I began, 
Congressman, which is that either a carbon tax or a cap and 
trade system provide great flexibility in where and how 
emission reductions are achieved. That is why they are so much 
more cost-efficient than a command and control system would be.
    But also allowing flexibility in when emission reductions 
are achieved through the sorts of mechanisms that have been 
discussed today can reduce the cost still further. Ultimately, 
it is a matter for you and your colleagues to decide whether 
those costs are worth bearing for the benefits of slowing 
climate change.
    Dr. MCDERMOTT. Yes? Dr. Lashof?
    Mr. LASHOF. Well, Dallas, too.
    Dr. MCDERMOTT. After you, my dear Alphonse.
    Mr. LASHOF. Well, thanks for that question. I would like to 
point out a couple of things about this.
    First of all, if we look at Dr. Thorning's testimony, in 
the worst case in her analysis she talks about--she presents it 
as a reduction in GDP. But look at it a little more carefully, 
it is a reduction relative to the baseline projection of growth 
in GDP. In the very worst case of her analysis, that was a 1.1 
percent reduction in 2020.
    Now, I think that is wildly exaggerated in the fact that if 
we do this right, we will expand our GDP relative to baseline. 
But let's assume it is true. What that means is that the 
projected growth in our economy between now and 2020, which is 
probably on the order of 50 percent, would be achieved three or 
4 months later than otherwise.
    So, nobody's analysis, even the opponents of moving forward 
in this direction, is saying this is the end of our economy as 
we know it, to answer your question.
    But beyond that, I think when you look at these scary 
numbers about cost, yes, if you assume that--you take 90 
percent of the compliance options off the table by imposing 
artificial constraints on the use of carbon capture and 
storage. You don't account for energy efficiency, and you say 
you can't build as much wind in the future as we actually built 
in the United States last year.
    You impose all of these constraints on your model. Then you 
can be sure that you can calculate very high costs. So, you can 
get any answer you want depending on how you torture the model.
    But I think a realistic assessment says that there are huge 
opportunities to put Americans to work building the solutions 
to climate change, and actually build a much more robust and 
resilient economy going forward as we address this problem.
    Dr. MCDERMOTT. Yes?
    Mr. BURTRAW. Mr. McDermott, I would just sum by saying 
that, yes, we are trying to build an American system here. We 
have learned from the Europeans. The European cap and trade 
program covers only 50 percent of the emissions on the 
continent, so the growth is occurring in the uncapped portion 
of their economy.
    That is why you hear most American proponents talking about 
any economy-wide approach, and you have heard a number of 
proposals here today that can seriously help manage and 
constrain the overall costs to the economy.
    Dr. MCDERMOTT. Ms. Chan?
    Ms. CHAN. I would again reiterate your point that we are 
going to be creating our own system. So we can create one, for 
example, in which we auction or sell all of the permits, and 
that will reduce some of the problems that we have seen in the 
E.U.
    We can design a system that covers a bigger part of the 
economy, and we can design one that actually closes down and 
shuts down the ability for Wall Street speculators to make 
havoc with potentially complex securities that will be built 
off of these markets. So, we can do it our own way.
    Dr. MCDERMOTT. Mr. Metcalf.
    Mr. METCALF. I would just caution one against looking at 
the European unemployment experience in trying to attribute to 
the cap and trade program. They have been struggling with high 
unemployment long before they were thinking about climate 
change.
    As others have said, we will do an American, a U.S.-based 
approach. It will be very different than the European approach. 
In a sense, the European approach is how not to do it. It was 
very limited coverage done in a very complex way. I think we 
can learn from that and do a much more streamlined, efficient, 
and comprehensive approach, which will also address many of the 
leakage problems that have been raised today.
    Dr. MCDERMOTT. Thank you all very much for your testimony. 
I want to say that your contribution to this is very important 
because you are educating a lot of people on this dais who do 
not understand all the nuances of what we are going to make 
decisions about.
    So you spent a lot of time here, and I want you to know it 
is appreciated by all of us. Thank you very much. By the 
American people, frankly. Thank you.
    [Whereupon, at 1:59 p.m., the hearing was adjourned.]
    [Submissions for the Record follow:]
                       Statement of Joyce Dillard
    We, voters, in the City of Los Angeles defeated a ballot measure 
called Proposition B Solar Energy and Job Creation Program. We voted 
against these popular issues of renewable energy and jobs because there 
is no long-range strategic planning for the anticipated costs, the 
validity of the applicable uses is questionable, and pre-determined 
deals omitted the public. Cap and Trade is the financial element of 
Renewable Energy. Missing is that long-term planning that is a State-
mandated issue such as the General Plan and its many Framework 
Elements. Required, consistent reporting is not occurring, leaving a 
void in execution of any such broad plans on Climate Change. Key is the 
watershed issue, yet watersheds are delegated to State and Regional 
Water Boards, the State Department of Water Resources and the City of 
Los Angeles' Department of Water and Power, a supplier; and the Bureau 
of Sanitation. Disadvantaged communities (DAC) are an item in the 
funding planning of State water propositions.
    Unfortunately, State law allows non-profit corporations as a voice. 
The Citizens are absent from the equation. Christopher Field, Carnegie 
Institution, Department of Global Ecology, Stanford University and 
contributor to Nobel Peace Prize winning IPCC, gave a talk at the UCLA 
Marshak Colloquium in February, 2008.We got his message. It is the 
maintenance of the ecosystem that counts in Climate Change. Destruction 
of the rain forests causes destruction of the climate. Cap and Trade is 
not the answer for the long-term. The recognition and incorporation of 
the Ecosystems, and Ecoregions (non-political regional jurisdictions), 
are key elements for our future. It is not only the Oceans, but the 
Forests that will maintain a balance. It is the fish, flora, fauna and 
wildlife. It is not only the United States, but China, Russia, India, 
Brazil, and Iraq that will maintain a balance. It is the atmosphere 
that counts, not the financial institutions. We are unique in Los 
Angeles as we are a City on oilfields with methane and other greenhouse 
gases. Yet, regulation is minimal and emissions inevitable. A 
construction worker at Belmont High School, now known as Roybal 
Learning Center, told an associate that this site was worse than the 
fields of Kuwait. Landfills, such as Sunshine Canyon, are surrounded by 
``cancer clusters.'' Methane issues have not been addressed. Public 
health is at risk. Disease costs are part of Climate Change. Real 
property is affected. That property gets devalued with greenhouse gas 
issues. Geothermal energy is up for discussion in Los Angeles as we 
address solar energy issues. Solar produces intermittent energy; 
geothermal produces baseline energy. Geothermal is deep into the earth, 
near earthquake fault, like the Salton Sea. California is known for 
earthquakes, so why is geothermal being addressed without the 
discussion of the damage caused by a quake.
    The insurance industry is not at the table in these discussions. 
Cap and Trade has no effect here. That issue needs to be tabled. We 
need long-term strategic planning in land use, water, renewable energy, 
transportation and economic development. One without other leaves a 
void. Regulation needs to be review and updated. Cost is an issue. 
Quality of life is an issue. Green Job Creation is the hidden hook, but 
based on closed-door deals. Transparency? Let the public in. It is 
their money and their lives.
    Joyce Dillard

                                 

         Statement of Terence P. Stewart and Elizabeth J. Drake
    The following comments are submitted in response to the Advisory 
from the Committee on Ways and Means, dated March 19, 2009, announcing 
an opportunity for the submission of public comments for the record 
regarding the ways that climate change legislation can be designed to 
reduce or eliminate price volatility while still achieving specific 
science-based environmental objectives. We attach hereto a paper we 
have written on criteria for a U.S. climate change initiative that is 
designed to meet the scientific objectives of reducing greenhouse gas 
emissions while avoiding excessive economic costs, price volatility, 
and unnecessary distortions to international trade.
    We appreciate the opportunity to provide these comments to the 
Committee, and thank the Committee for its attention to this vitally 
important issue.

A Consumption-Based Approach to Combating Climate Change

    By Terence P. Stewart and Elizabeth J. Drake \1\
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    \1\ The views expressed in these comments are those of the authors, 
and do not necessarily reflect the views of any clients of the firm.

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Introduction

    Recent debate over climate change policy in the U.S. Congress has 
focused primarily on programs that seek to regulate the production of 
greenhouse gas (GHG) emissions in the United States. For example, 
proposals for a cap-and-trade program to address climate change would 
require U.S. entities to obtain permits for the GHG emissions they 
produce, and permit such permits to be traded among entities.\2\ 
Consensus on such an approach remains elusive, as stakeholders debate 
the proper scope and ambition of such a program, the administrative 
burdens of the program, the costs it would impose and who would bear 
those costs, the extent to which producers in other countries would 
bear similar costs and how any cost differentials can be best 
addressed, the consistency of certain elements of the program with 
existing international trade obligations and on-going international 
climate negotiations, and whether the program would deliver the 
emissions reductions required to reach scientific and environmental 
objectives.
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    \2\ See, e.g., Lieberman-Warner Climate Security Act of 2008, S. 
2191, 110th Cong.
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    A number of the limitations and difficulties posed by current cap-
and-trade proposals stem from the program's focus on regulating GHG 
emissions associated with domestic production. Refocusing regulatory 
efforts on the emissions associated with domestic consumption, instead 
of production, can avoid many of these pitfalls. This assessment of the 
advantages and disadvantages of the different approaches is guided by 
three principles.

    1) Maximize Environmental Benefits: Regulating the emissions 
associated with domestic production captures only a portion of the 
nation's carbon footprint. In manufacturing, for example, the U.S. is a 
large net importer, and goods purchased from abroad equal nearly 30 
percent of all domestic production.\3\ A consumption-based approach 
would maximize the environmental impact of a climate change program by 
regulating emissions associated with goods consumed in the U.S., 
regardless of their origin. A consumption-based approach further 
maximizes environmental benefits by avoiding the creation of incentives 
to relocate carbon-intensive production to less-regulated environments. 
This will help ensure that domestic climate change policies do not 
distort international trade and that emissions regulations do not 
inadvertently raise global emissions levels instead of lowering them.
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    \3\ The U.S. imported $1.491 trillion in manufactured goods in 
2008. U.S. Census Bureau, U.S. Bureau of Economic Analysis, U.S. 
International Trade in Goods and Services: December 2008 (Feb. 11, 
2009) at Ex. 15. In 2008, U.S. manufacturers had $5.185 trillion in 
shipments. U.S. Census Bureau, Full Report on Manufacturers' Shipments, 
Inventories and Orders: December 2008 (Feb. 5, 2009) at Table 1. 
Imports were thus equal to 29 percent of domestic production for 2008.
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    2) Minimize Economic Costs: A production-based approach will impose 
a variety of costs on domestic entities, some of which may be volatile 
and unpredictable under a cap-and-trade system. Such costs may be 
particularly difficult for manufacturers to pass on to their customers 
in a recessionary environment, especially so if domestic manufacturers 
bear costs that are not borne by foreign producers. A consumption-based 
system, by contrast, is designed to increase the price of carbon-
intensive goods consumed in the U.S. in a transparent, predictable and 
uniform manner, regardless of the good's origin. This approach sends 
the appropriate signals to consumers and creates demand for less 
carbon-intensive goods, while avoiding imposing disproportionate costs 
on U.S. producers.
    3) Honor International Trade Rules and Principles: A system that 
seeks to impose costs on production may create WTO concerns, because 
efforts to impose similar costs on foreign producers (or rebate such 
costs for domestic producers or for export production) could be 
challenged as trade barriers or subsidies that would have to be 
justified under exceptions to WTO rules. In contrast, a system that 
regulates domestic consumption treats all domestically-consumed goods 
equally, no matter where they are produced, based only on their carbon-
intensity. While it is possible to fashion WTO-consistent approaches 
under either approach, there is a higher likelihood of limited or no 
conflict from a system that is based on consumption with equal 
treatment for domestic and imported goods alike.

    Based on the above principles, some of the advantages of targeting 
consumption instead of production in a climate change program are 
reviewed in more detail below, followed by suggestions for some 
possible elements of a consumption-based program.

II. The Advantages of Regulating Consumption Instead of Production

    In assessing various proposals for addressing climate change, it is 
helpful to understand production-based and consumption-based approaches 
that have been used to address other environmental problems. Cap-and-
trade systems regulating the GHG emissions associated with domestic 
production are primarily modeled on the acid rain program, which 
created tradable permits for domestic entities that emitted sulfur 
dioxide.\4\ The primary mechanism for regulating emissions associated 
with domestic consumption would be a carbon tax or GHG emissions fee. 
There are several precedents for such a fee, including the excise tax 
on ozone depleting chemicals (ODCs) and the Superfund tax.\5\ These 
precedents are discussed in more detail below.
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    \4\ See, e.g., U.S. Environmental Protection Agency, ``Cap and 
Trade: Acid Rain Program Basics,'' available on-line at http://
www.epa.gov/airmarkets/cap-trade/docs/arbasics.pdf.
    \5\ The ozone-depleting chemicals tax is codified at 26 U.S.C. 
Sec. Sec. 4681-4682. The superfund tax was codified at 26 U.S.C. 
Sec. 4661 et seq. See, e.g., J. Andrew Hoerner, The Role of Border Tax 
Adjustments in Environmental Taxation: Theory and U.S. Experience, 
Working Paper Presented at the International Workshop on Market Based 
Instruments and International Trade of the Institute for Environmental 
Studies, Amsterdam, the Netherlands (Mar. 19, 1998) at 9-12; Elizabeth 
Cook, ed., Ozone Protection in the United States: Elements of Success, 
World Resources Institute (Nov. 1996).
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    While there are potentially many advantages to addressing climate 
change by regulating consumption of carbon-intensive goods rather than 
their production, the focus below is on ten key areas in which a 
consumption-based approach better achieves the core goals of maximizing 
environmental benefits, minimizing economic costs, and honoring 
international trade obligations. Finally, while these comments focus 
primarily on the contrast between a production-based cap-and-trade 
system and a consumption-based emissions fee system, it is important to 
recognize that some sectors with sufficiently special circumstances may 
merit alternative approaches, and a multitude of approaches may be 
appropriate.

    1) Scope: For environmental harms that are localized at the site of 
emissions, such as the incidence of acid rain near the site of sulfur 
dioxide emissions, a production-based approach to regulating emissions 
is likely to achieve the appropriate scope of coverage to produce the 
desired environmental results.\6\ By contrast, for environmental harms 
that are not so localized and that are instead global in nature, a 
consumption-based approach with a broader regulatory scope is more 
appropriate. Such an approach is particularly appropriate for nations 
that are large consumers of the goods that cause the harmful global 
impact of concern. For example, the use of ozone-depleting chemicals 
harmed the global environment regardless of where those chemicals were 
produced--thus, a consumption-based excise tax in the United States (a 
key consuming nation) was appropriately broad in scope. It drastically 
curtailed the use of ozone-depleting chemicals and effectively 
protected the ozone layer.\7\ Similarly, climate change is a global 
phenomenon--a ton of carbon dioxide emissions will do the exact same 
harm to the earth's environment regardless of where it is produced. 
Thus, a consumption-based approach matches the scope of the 
environmental problem to be addressed by regulating emissions 
associated with all carbon-intensive goods consumed, no matter where 
those goods might have been produced.
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    \6\ For a critique of the applicability of the acid rain model to 
climate change, see, e.g., Robert J. Shapiro, Addressing the Risks of 
Climate Change: The Environmental Effectiveness and Economic Efficiency 
of Emissions Caps and Tradable Permits, Compared to Carbon Taxes (Feb. 
2007) at 18-19, available on-line at http://www.sonecon.com/docs/
studies/climate_021407.pdf; Kenneth P. Green, Steven F. Hayward, and 
Kevin A. Hassett, ``Climate Change: Cap vs. Taxes,'' Environmental 
Policy Outlook, No. 2, American Enterprise Institute (June 2007).
    \7\ Elizabeth Cook, ed., Ozone Protection in the United States: 
Elements of Success, World Resources Institute (Nov. 1996).
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    2) Uniformity: A consumption-based approach has the additional 
advantage of automatically treating the emissions associated with a 
good exactly the same no matter where that good may originate from. 
Thus, the same science-based results are achieved, and environmental 
damage is prevented or mitigated to the exact same extent, for all 
goods subject to the same uniform, consumption-based regulation. A 
production-based approach, however, necessarily treats goods 
differently depending on where they are produced. This fails to 
recognize that, in the case of GHG emissions and climate change, the 
location of production is irrelevant from a scientific and 
environmental perspective. Attempts to correct for this differential 
treatment (by, for example, adding on ``competitiveness'' mechanisms to 
a cap-and-trade program) are extremely challenging because they force 
policy-makers to assess which other production locations should be 
regulated and how. The variety of complications that arise in trying to 
design such compensatory mechanisms only underscores how ill-suited an 
approach that differentiates treatment based on the site of production 
is to addressing the global problem of climate change.
    3) Equal Treatment: With a consumption-based approach, emissions 
are regulated for all goods consumed domestically, and goods not 
consumed domestically are not subject to the domestic regulation. For 
example, the Superfund tax and the ODC excise tax were assessed on the 
same basis for domestic goods sold in the U.S. and for imported goods 
sold in the U.S.\8\ In addition, the taxes were rebated on exports.\9\ 
Because all goods were taxed upon consumption, no additional mechanisms 
were needed to ensure equal treatment of domestic and foreign goods--
all domestic and foreign goods consumed domestically were taxed 
equally; all domestic and foreign goods not consumed domestically were 
equally exempt from the tax. A production-based approach, however, 
makes it much more difficult to achieve equal treatment. While some 
compensatory charges may be assessed on imported goods based on their 
own site of production, ensuring those charges treat domestic and 
foreign goods equally based on the environmental harm associated with 
that good's production has proven challenging.\10\ Rebating the costs 
of domestic regulation on exports is also problematic, and not only 
because of problems with WTO consistency. Because the costs imposed on 
production provide the only incentive to meet environmental goals under 
such an approach, eliminating those costs necessarily reduces the 
desired environmental impact.
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    \8\ 26 U.S.C. Sec. Sec. 4661(a) (Superfund); 26 U.S.C. Sec. 4681(a) 
(ODCs).
    \9\ 26 U.S.C. Sec. Sec. 4662(e) (Superfund); 26 U.S.C. 
Sec. 4682(d)(3)(A) (ODCs).
    \10\ See, e.g., the international reserve allowance program 
contained in the Lieberman-Warner Climate Security Act of 2008, S. 
2191, 110th Cong. Sec. 6006.
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    4) Coverage: Even if regulation of some upstream products can be 
roughly equalized under a production-based program, downstream 
producers are likely to suffer differential treatment based on their 
location. For example, even if foreign and domestic steel are regulated 
on a somewhat equivalent basis under a production-based approach, 
domestic automakers will bear more costs in purchasing that steel than 
will foreign automakers who can source steel produced under unregulated 
conditions. Thus, the differential treatment, and the failure to 
uniformly address environmental impacts, is simply pushed further down 
the production chain. A consumption-based approach can avoid this 
unfortunate result by covering all goods that entail harmful emissions. 
For example, the Superfund tax and ODC excise tax, in addition to 
taxing upstream products consumed domestically regardless of their 
origin, also taxed imports of downstream goods that used more than a de 
minimis amount of such upstream goods in their production process.\11\ 
The Superfund tax and ODC excise tax were not only assessed on imports 
that incorporated regulated chemicals, but it was also assessed on 
imports that entailed the use of such chemicals in their production 
process.\12\ The amount of regulated chemicals consumed in the 
production process was evaluated based on foreign manufacturer 
certifications or the predominant method of manufacture for the product 
in question.\13\
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    \11\ 26 U.S.C. Sec. 4672(a) (Superfund); 26 U.S.C. Sec. 4682(c) 
(ODCs).
    \12\ 26 U.S.C. Sec. 4671(b) (Superfund); 26 U.S.C. Sec. 4681(b)(2) 
(ODCs).
    \13\ Id. See also 26 C.F.R. Sec. 52.4682-3(e) (ODCs).
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    5) Efficiency: A consumption-based approach can also be 
significantly more efficient than production-based approaches. For 
example, the Congressional Budget Office estimates that a tax on the 
consumption of carbon could achieve the same GHG emissions reductions 
as a cap-and-trade program, and that the net economic benefits of the 
tax could be up to five times greater than the net benefits of a 
cap.\14\ Many economists agree that a carbon tax or emissions tax is 
significantly more efficient than a cap-and-trade program and would 
create much less of a drag on economic growth.\15\ In part this is due 
to the advantages of transparency and predictability discussed below. 
In addition, the United States already has a tried and true system for 
assessing and collecting taxes, whereas the creation of a cap-and-trade 
program would require the establishment of a new bureaucracy to oversee 
the distribution of emissions permits, a new trading market, and new 
rules and regulators to ensure the adequate functioning of that market.
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    \14\ Congressional Budget Office, Policy Options for Reducing 
CO2 Emissions (Feb. 2008) at ix.
    \15\ See, e.g., Robert Shapiro, Nam Pham and Arun Malik, Addressing 
Climate Change Without Impairing the U.S. Economy: The Economics and 
Environmental Science of Combining a Carbon-Based Tax and Tax Relief, 
The U.S. Climate Taskforce (June 2008); William D. Nordhaus, To Tax or 
Not to Tax: Alternative Approaches to Slowing Global Warming, 1 Review 
of Environmental Economics and Policy 26 (2007); Kenneth P. Green, 
Steven F. Hayward, and Kevin A. Hassett, ``Climate Change: Cap vs. 
Taxes,'' Environmental Policy Outlook, No. 2, American Enterprise 
Institute (June 2007); Gilbert E. Metcalf, ``A Green Employment Tax 
Swap: Using a Carbon Tax to Finance Payroll Tax Relief,'' Tax Reform, 
Energy and the Environment Policy Brief, Brookings Institution and 
World Resources Institute (June 2007); Richard N. Cooper, The Kyoto 
Protocol: A Flawed Concept, in Trade and Environment: Theory and Policy 
in the Context of EU Enlargement (John Maxwell and Rafael Reuveny, 
eds., 2005).
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    6) Transparency: The goal of a consumption-based approach is to 
increase the price of carbon-intensive goods, thus sending a clear 
signal to consumers and driving up demand for less carbon-intensive 
goods. Thus, the premium is on transparency. A consumption tax, for 
example, is set at a known level that clearly relays the same market 
signals to consumers, producers, and investors alike. The cost of GHG 
emissions--in terms of the environmental damage such emissions cause--
is no longer hidden, but is openly represented in the additional tax 
levied on goods that produce such emissions. A production-based 
approach lacks such transparency. Because the focus is on imposing 
costs on producers, the extent to which such costs may be passed on to 
consumers is unknown and will likely vary based on the market 
conditions such producers face and other regulations they may be 
subject to.\16\
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    \16\ For example, observers of the EU's Emissions Trading Scheme 
have noted that the regulatory environment for utilities enabled them 
to raise rates while emissions allowances were being allocated at no 
cost. See A. Denny Ellerman and Paul L. Joskow, The European Union's 
Emissions Trading System in Perspective, Pew Center on Global Climate 
Change (May 2008) at 24-31.
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    7) Predictability: Closely related to the greater transparency of 
consumption-based systems is the increased predictability they provide 
to market participants. For example, when a tax rate is set--either 
legislatively or administratively--it is public knowledge how much each 
excess ton of GHG emissions will cost, when that cost will be imposed, 
and, if the tax increases over time, when and how those costs will 
rise. Advance knowledge of these costs is extremely valuable in 
industries such as capital-intensive manufacturing, where firms must 
plan production schedules and solicit capital from investors to make 
that production possible. In addition, public certainty regarding the 
cost of excessive GHG emissions both now and in the future will 
stimulate entrepreneurs and investors to develop new abatement 
technologies and new energy sources as quickly as possible.\17\ By 
contrast, a production-based system that lacks a transparent cost 
structure introduces significant uncertainty that makes it difficult 
for capital-intensive industries to raise funds and plan production 
strategies. Such uncertainty also provides little initial incentive to 
ramp up development of new technologies and alternative fuel sources. 
The problem is particularly acute with a cap-and-trade system, where 
the price of excess emissions is set by a trading market open to 
speculators and financiers. Past experience demonstrates that allowance 
prices in such markets can be extremely volatile from month to month or 
even day to day.\18\
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    \17\ The ODC excise tax was considered to be a very successful 
means of spurring industry to develop and use alternative chemicals and 
technologies. See Elizabeth Cook, ed., Ozone Protection in the United 
States: Elements of Success, World Resources Institute (Nov. 1996) at 
50.
    \18\ Allowance prices have been highly volatile in the European 
Emissions Trading Scheme, the Acid Rain program, and other cap-and-
trade initiatives. See Gilbert E. Metcalf, Designing a Carbon Tax to 
Reduce U.S. Greenhouse Gas Emissions, NBER Working Paper 14375 (Oct. 
2008) at 25-28.
---------------------------------------------------------------------------
    8) Flexibility: A consumption-based system provides flexibility in 
two ways. First, by putting a price on emissions instead of a cap, the 
system allows producers to make technology improvements when it is most 
cost-effective to do so, instead of when the declining cap makes it 
cost-prohibitive not to do so.\19\ Second, the level at which a 
consumption-based tax is set can be adjusted as necessary to ensure 
that environmental and economic goals are being met and to allow 
policy-makers to adapt to advancements in scientific and environmental 
knowledge. In a tax system, such adjustments only require a re-setting 
of the rate--they do not require a complicated re-balancing of trade-
offs among sectors and producers.\20\ Once stakeholders have signed on 
to a production-based system, however, and received certain quantities 
of allowances relative to other actors with similar expectations for 
the future, adjusting the system to reflect economic developments, 
advancing scientific knowledge, or new environmental realities could be 
extremely difficult both as a practical matter and a political one.
---------------------------------------------------------------------------
    \19\ See Congressional Budget Office, Policy Options for Reducing 
CO2 Emissions (Feb. 2008) at viii-ix.
    \20\ Taxes were raised as needed under the ODC program to ensure 
environmental goals were being met. See Elizabeth Cook, ed., Ozone 
Protection in the United States: Elements of Success, World Resources 
Institute (Nov. 1996) at 42-43.
---------------------------------------------------------------------------
    9) Development: One of the thorniest issues in designing a 
production-based system for addressing climate change is how to 
regulate emissions produced in developing countries. International 
negotiations under the UN Framework Convention on Climate Change 
(UNFCCC) are based on the principle of common but differentiated 
responsibilities for developing countries, in recognition of the fact 
that such countries will need to achieve significant economic growth to 
emerge from poverty and that such growth will likely entail rising 
emissions levels rather than declining ones.\21\ Industries in 
developed countries who face competition from developing country 
producers are, however, justifiably concerned that such differentiated 
levels of emissions regulations will put them at a competitive 
disadvantage, leading to efforts to either mitigate the costs of 
developed country regulations or impose similar costs on developing 
country producers. A consumption-based approach avoids this dilemma by 
regulating goods based on their site of consumption, not their site of 
production. Thus, developing countries will be free to set their own 
national emissions reductions targets and design their own programs to 
meet those targets, consistent with their internationally-agreed rights 
and obligations. Only the goods such countries produce that are 
consumed in the U.S. would be subject to further regulation, and those 
goods would be treated like all other carbon-intensive goods consumed 
in the U.S. A consumption-based approach thus recognizes the need for 
wealthy nations to take full responsibility for their higher 
consumption levels and the emissions associated with that consumption, 
while providing the policy space for poorer countries to meet domestic 
emissions targets that reflect their development needs.
---------------------------------------------------------------------------
    \21\ Bali Action Plan, Decision 1/CP.13, FCCC/CP/2007/6/Add.1* 
(Dec. 2007) at para. 1(a).
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    10) WTO Consistency: Another important advantage of a consumption-
based approach is that it is more likely to be viewed internationally 
as consistent with international trade rules and principles. For 
example, GATT and WTO rules have long allowed indirect taxes (such as 
VAT taxes) to be adjusted at the border. Such taxes may be assessed on 
imports to the same extent they are charged on domestic goods without 
violating national treatment or other obligations, and such taxes may 
be rebated on exports without constituting a prohibited export 
subsidy.\22\ To the extent any refinements to WTO rules or the 
conclusion of a stand-alone agreement under the auspices of the UNFCCC 
is needed to provide greater certainty that similar charges can be 
assessed based on a good's carbon intensity, such adjustments are not 
likely to be major and would be consistent with long-standing WTO 
principles. By contrast, attempts to patch ``competitiveness'' 
mechanisms on to a production-based system are likely to draw more 
scrutiny under international trade rules. While there are likely to be 
WTO-consistent approaches to a cap-and-trade system which is structured 
to minimize ``leakage,'' many have written that such approaches could 
be challenged as disguised barriers to trade and/or export 
subsidies.\23\ Absent modification to the WTO rules to specifically 
authorize the types of leakage prevention approaches being considered, 
the disadvantage of a cap-and-trade system with leakage mechanisms is 
the uncertainty that will surround U.S. policy until a final WTO 
decision is rendered and the U.S. considers how to respond if the 
decision is negative. While countries can always agree to amend WTO 
rules or reach other international agreement to permit such 
competitiveness mechanisms, the more significantly these 
competitiveness mechanisms depart from current trade rules the more 
difficult it may be to reach consensus regarding needed changes to 
those rules.
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    \22\ See GATT Art. III:2 and Ad Note Art. XVI. For an example of 
the application of these principles to permit the border adjustability 
of an environmental tax, see GATT Panel Report, United States--Taxes on 
Petroleum and Certain Imported Substances, BISD 34S/136, adopted on 
June 17, 1987.
    \23\ See, e.g., Gary Clyde Hufbauer, Steve Charnovitz, and Jisun 
Kim, Global Warming and the World Trading System, Peterson Institute 
for International Economics (Mar. 2009).

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III. Elements of a Consumption-Based Approach

    Two elements of a consumption-based approach are discussed below: 
1) A fee on excess emissions associated with goods consumed in the 
United States; and 2) A program to spur consumer demand for more 
efficient vehicles. As noted above, the varying needs of different 
sectors may justify a variety of approaches for addressing climate 
change. These comments are intended to suggest some elements of a 
program, and not to exclude other approaches.

1) Excess Emissions Fee

    A key element of a consumption-based approach would be the 
imposition of a fee on each ton of excess emissions associated with 
goods consumed in the U.S., whether those goods are of domestic or 
foreign origin. There are strong arguments for imposing a uniform 
emissions fee that would apply to excess emissions from all sectors in 
the economy, including electricity generation. The fee would operate in 
a manner similar to value-added taxes, putting a price on excess 
emissions at each stage of the production process. The amount of those 
fees borne by manufactured goods could be adjusted at the border by 
rebating them on exports and assessing them on imports. This would 
ensure that manufacturers' costs related to both their direct and 
indirect emissions do not create a competitive disadvantage.
    However, an emissions fee could also be targeted specifically to 
manufacturing, while implementing a broader cap-and-trade program for 
other large emissions sources such as electricity generators and fuel 
suppliers. A separate program could be carved out specifically for 
manufacturing that would assess border-adjustable fees on industrial 
emissions, and manufacturers subject to the fees would be exempt from 
the requirements of the cap-and-trade program.\24\
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    \24\ Under such an approach, manufacturers may still bear 
additional costs in the form of higher energy prices that are not 
reflected in the tax. Additional steps would then need to be taken to 
alleviate any disadvantage imposed on manufacturers due to higher 
energy costs. Such steps may include credits for manufacturers to 
compensate for higher energy costs and/or a system that includes a 
proxy for costs associated with such indirect emissions in the import 
assessments described above.
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    An emissions fee would be assessed on manufacturers based on the 
tons of greenhouse gases they emit each year. By creating a cost for 
excess emissions, the fee would incentivize firms to adopt the most 
cost-effective emissions abatement technologies. An administratively 
determined fee rate would also provide more cost predictability to 
producers than a volatile market for emissions allowances, allowing 
producers in capital-intensive industries to plan ahead more 
effectively for investments in technology upgrades and emissions 
reductions. Any such fee should be structured to minimize costs to 
industry and maximize emissions reductions.

      First, producers emitting below a certain threshold each 
year would be exempt from the fee. The threshold could be set to only 
cover producers that account for a significant portion of emissions.
      Second, the fee could apply only to emissions that exceed 
a set quantity, and this level can decline over time. A floor below 
which no fees are assessed could be structured in a manner similar to a 
cap on emissions in a cap-and-trade program. Thus, producers who 
maintain emissions at current levels initially and gradually reduce 
them within the prescribed timeline would pay no fees.
      Third, the base rate of the fee per ton of excess 
emissions can rise gradually over time to increase the economic 
incentive to reduce emissions. Even if the fee rate needs to be 
adjusted later in time to ensure emissions targets are being met or to 
respond to new scientific or environmental developments, the fee still 
provides more predictability to manufacturers than a trading market for 
allowances.
      Fourth, proceeds from the fees can be recycled back to 
the industry in the form of tax credits or other assistance to reward 
firms that reduce emissions more quickly and/or to help finance the 
acquisition of emissions abatement technology, worker training, and 
other transition costs.

    A major advantage of the emissions fee is that it can apply equally 
to both domestically-produced and imported goods. The fee could also be 
rebated on exports, eliminating the competitive disadvantage U.S. goods 
would face abroad. To rebate the emissions fee on exports, producers 
that have any fee liability at the end of the year can report the 
portion of their emissions that were generated by production for export 
and deduct a proportional amount from the fees owed. Any such export 
deductions would be subject to verification. There are several methods 
that could be used to assess an emissions fee on imports.

      First, the fee would be assessed on all imports 
regardless of origin and based solely on the emissions associated with 
the imported good. The emissions fee would apply to any import that 
generates emissions above a de minimis level, including downstream 
products.
      Second, the base rate of the fee per ton of emissions 
associated with imports would be equal to the base rate of the fee per 
ton of domestic emissions. Thus, the amount of the fee would increase 
over time to strengthen the incentive for emissions reductions.
      Third, adjustments to the import assessment can be made 
to account for the fact that the fee is only assessed on U.S. emissions 
that exceed a certain level.
      Fourth, to determine the amount of emissions generated by 
imported products, regulators could establish a greenhouse gas 
intensity rate for foreign industries. The intensity rate could be 
further refined down to a product-specific basis depending on the 
sector and on administrative feasibility.\25\
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    \25\ As noted above, the import tax on ODCs is assessed on a ten-
digit HTS level according to a standard ODC weight for the product 
determined on the basis of the predominant method of manufacturing for 
that product. See 26 C.F.R. Sec. 52.4682-3(f)(6).
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      Finally, a process could be created whereby an importer 
could apply to demonstrate that the emissions generated by specific 
merchandise are lower than the standard intensity rate for the country 
of origin (resulting in a lower assessment).\26\ Similarly, other 
interested domestic parties should have the ability to apply to 
demonstrate that the actual emissions generated by specific merchandise 
are higher than the standard rate for the country of origin (resulting 
in a higher assessment).
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    \26\ This process could incorporate elements of the foreign 
manufacturer letters that importers are required to present in order to 
be exempt from taxes on imports of ODCs. See 26 C.F.R. Sec. 52.4682-
3(e).

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2) Creating Demand for More Efficient Vehicles

    Another element of a consumption-based approach would be a program 
to stimulate demand for new, more fuel-efficient cars or for the 
retrofitting of existing vehicles to make them more fuel efficient. 
Transportation is a significant source of GHG emissions in the United 
States.\27\ As of 2001, there were 20 million cars and 15 million 
trucks on the road that were 15 years old or older.\28\ While there are 
numerous ways to incentivize the production of more fuel-efficient 
cars, one way to do so would be to retrofit older and less efficient 
vehicles from the road and stimulate consumer demand for more efficient 
cars.
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    \27\ U.S. Department of Energy, Transportation Energy Data Book, 
Edition 27 (2008) at Table 11.5.
    \28\ Id. at Tables 3.7 and 3.8.
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    There are several approaches that could contribute to this goal. 
First, consistent with the emissions fee proposed above, a tax on 
gasoline that reflects carbon content and increases over time would 
lead consumers to demand more fuel-efficient cars. Second, vehicles 
themselves could be subject to a consumption or use tax based on their 
gas mileage. For existing cars already on the road, application of such 
a tax would encourage drivers to invest in retrofitting older cars or 
turning them in for more efficient vehicles. Third, current state-level 
exceptions to emissions testing requirements for older cars could be 
phased out over time to require all vehicles on the road to meet 
emissions standards. Finally, any of the approaches above could be 
combined with targeted assistance for drivers who lack the means to 
upgrade or exchange their current vehicles. Together, policies to 
stimulate and support demand for more efficient vehicles could 
dramatically alter the emissions profile of the transportation sector 
in the United States.

Conclusion

    The crisis of climate change demands solutions that address the 
global nature of the problem. Policies that focus on regulating the 
consumption of carbon-intensive goods rather than their production are 
much more likely to fulfill scientific objectives, improve 
environmental outcomes, maximize incentives for new technology 
development, and minimize economic costs, while honoring international 
trade rules and principles. Such consumption-based approaches have been 
used successfully in the past to address other global environmental 
challenges, such as the depletion of the ozone layer.
    Regulating consumption by putting a price on GHG emissions has 
numerous advantages over regulating production by capping the quantity 
of GHG emissions. A consumption-based approach would cover more of the 
U.S. carbon footprint, treat all goods uniformly based solely on their 
associated emissions, ensure equal treatment of domestic and foreign 
goods, and cover downstream products made with carbon-intensive inputs. 
In addition, consumption-based approaches are likely to be more 
efficient, transparent, predictable, and flexible, providing 
significant economic and environmental benefits. Finally, a 
consumption-based approach will permit developing countries to pursue 
common but differentiated emissions reduction commitments without 
putting developed country industries at an unfair disadvantage, all 
while honoring international trade rules and principles.
    Elements of a consumption-based approach to combating climate 
change could include a fee on excess emissions associated with goods 
consumed in the United States and programs to stimulate consumer demand 
for more efficient technologies and products.

                                 
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