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



 
         HEARING ON TRADE ASPECTS OF CLIMATE CHANGE LEGISLATION

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON TRADE

                                 of the

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

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 24, 2009

                               __________

                           Serial No. 111-10

                               __________

         Printed for the use of the Committee on Ways and Means




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                      COMMITTEE ON WAYS AND MEANS
                           TRADE SUBCOMMITTEE

                  SANDER M. LEVIN, Michigan, Chairman

JOHN S. TANNER, Tennessee            KEVIN BRADY, Texas, Ranking Member
CHRIS VAN HOLLEN, Maryland           GEOFF DAVIS, Kentucky
JIM MCDERMOTT, Washington            DAVID G. REICHERT, Washington
RICHARD E. NEAL, Massachusetts       WALLY HERGER, California
LLOYD DOGGETT, Texas                 DEVIN NUNES, California
EARL POMEROY, North Dakota
BOB ETHERIDGE, North Carolina
LINDA T. SANCHEZ, California

             Janice Mays, Chief Counsel and Staff Director

                   Jon Traub, Minority Staff Director

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
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                            C O N T E N T S

                               __________
                                                                   Page

The advisory as of March 17, 2009 announcing the hearing.........     2

                               WITNESSES

John J. McMackin, The Energy-Intensive Manufacturers' Working 
  Group on Greenhouse Gas Regulation.............................     7
Leo W. Gerard, International President, United Steelworkers......    34
Dave Hamilton, Director of Global Warming and Energy Programs, 
  Sierra Club....................................................    40
Professor Joost H.B. Pauwelyn, Professor of International Law, 
  Graduate Institute of International and Development Studies, 
  Geneva, Switzerland............................................    50
Robert E. Clay, CEO and Chairman, Board of Directors of Pridgeon 
  & Clay, Inc....................................................    72

                       SUBMISSIONS FOR THE RECORD

Cargo Airline Association, Statement.............................   100
Jennifer Layke, Statement........................................   103
Terence P. Stewart and Elizabeth J. Drake, Statement.............   109


         HEARING ON TRADE ASPECTS OF CLIMATE CHANGE LEGISLATION

                              ----------                              


                        TUESDAY, MARCH 24, 2009

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 2:15 p.m., in 
room 1100, Longworth House Office Building, the Honorable 
Sander M. Levin (Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                         SUBCOMMITTEE ON TRADE

                                                CONTACT: (202) 225-6649
FOR IMMEDIATE RELEASE
March 17, 2009
TR-1

                  Chairman Levin Announces Hearing on
              Trade Aspects of Climate Change Legislation

    House Ways and Means Committee Trade Subcommittee Chairman Sander 
M. Levin today announced that the Committee on Ways and Means 
Subcommittee on Trade will continue the full Committee's work on 
climate change legislation by holding a hearing on the trade aspects of 
climate change legislation. The hearing will take place on Tuesday, 
March 24, 2009, in 1100 Longworth House Office Building, beginning at 
2:00 p.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 Subcommittee 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 playing field 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 scientific discussion of 
the goals that climate change legislation should seek to achieve over 
both the short term and the long term. In connection with the goals of 
climate change legislation, the witnesses suggested different 
approaches to meeting those goals (e.g., cap-and-trade, cap-and-invest, 
carbon tax) and discussed the need for international cooperation in 
order to achieve these goals. In addition, the Subcommittee on Income 
Security and Family Support also held a hearing on March 12, 2009, on 
protecting low- and moderate-income families while curbing global 
warming.
      
    In announcing this hearing, Chairman Levin said, ``Climate change 
legislation will be a priority for consideration by the Ways and Means 
Committee during the 111th Congress. As the Committee works on 
legislation to achieve our environmental goal of reducing carbon 
emissions, such legislation must contain provisions to ensure that U.S. 
businesses, farmers, and workers remain competitive until a global 
climate change agreement comes into effect. Moreover, we need to ensure 
that any actions undertaken by the United States are consistent with 
our international obligations.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on a discussion of the trade aspects of 
climate change legislation including how to minimize carbon leakage and 
maintain U.S. competitiveness.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
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    Chairman LEVIN. The Committee will come toward to order.
    We have had a chance to have an informal couple of minutes 
together and now we will start the formal hearing. I think you 
all know the rules. We will put all of your statements into the 
record, and we will ask you if you can to summarize your 
statement, however you want to handle it, in 5 minutes. The 
lights will work presumably, and we will also try to live 
within the 5-minute rule. We always want to have some 
meaningful back and forth; so I will try to act accordingly in 
terms of our questions and answers.
    This is the first of what will be, I think, a number of 
hearings on this vital issue, both in the Subcommittee and in 
the Full Committee. Indeed, there is a Full Committee hearing 
that is scheduled in just a few days, on Thursday, and that 
hearing will cover a broader swath of issues than we will 
today. But this is all a piece of an important and vital 
puzzle. In fact, my statement starts off with that strong 
thought or at least a thought strongly stated.
    The world cannot wait as sceptics ignore science and deny 
the existence and the severe economic, social, and 
environmental threats of climate change. We can no longer 
afford to live in such a state of denial. The problem is real 
and the time to act is now. The clear fact is that we can and 
must tackle both the environmental and the economic challenges 
facing our country and our world today.
    We need to find a solution to the climate change problem 
that preserves existing jobs while creating new green jobs. We 
do not want to pit the job of the steelworker against the job 
of the solar panel producer. I want to be able, and I think all 
of us do, to ensure that hardworking Americans are able to 
compete for both jobs.
    While some deny the environmental crisis we face, others 
seem to deny our current economic crisis and to deem concerns 
that climate change legislation, if not done properly, could 
make a bad situation perhaps even worse. I am basically an 
internationalist and I know that globalization is here to stay. 
Because climate change is an international problem, climate 
change legislation must have an international component. It 
simply will not work to take action at home to reduce our own 
emissions of greenhouse gases while ignoring what is happening 
in other countries. If we regulate emissions and other nations 
do not, we run the risk that our environmental objectives will 
be defeated as polluters and pollution will merely migrate from 
the U.S. to countries with less stringent regulations, also 
taking U.S. jobs with them. This is the so-called carbon and 
job leakage problem. Before Congress would pass legislation, I 
think clearly it must address this fundamental issue.
    Climate change legislation should not make products 
manufactured in the U.S. any more competitive or any less 
competitive than they were before the enactment of that 
legislation, and I emphasize this, but legislative passivity 
will not work. We need some positive mechanisms to address 
these problems.
    So as I said at the beginning, I hope the hearing will help 
us determine what that mechanism might be. Some believe the 
best way to address the carbon leakage issue is at the border, 
whether through import fees or permits. Others favor 
compensating the industries most affected by the increased cost 
and most vulnerable to international competition, either 
through free emission allowances or tax credits or rebates. 
Frankly, I think there is much work to be done before we are 
able to identify the right solution, whether it is on the 
table, a combination of proposals on the table, or something 
yet to be constructed.
    So I look forward to this hearing. It is, as I said, one in 
a series of hearings. We are here to learn, are we not? We are 
here to learn, to inquire, to exchange with you, perhaps to 
exchange with each other, but I don't think there is any more 
important issue today that faces this particular subcommittee.
    So it is my pleasure now to yield to you, Mr. Brady, our 
Ranking Member.
    Mr. BRADY. Mr. Chairman, thank you. You have commented that 
the globe is smaller and more interconnected than ever and I 
couldn't agree more. In this era of increased globalization, 
the prosperity of American families is intricately linked to 
the global market, and therefore, America's prosperity is 
intricately linked to international competitiveness. Millions 
of American jobs depend upon international trade. Last year 
international trade contributed more to U.S. economic growth 
than any other factor. Expanded trade cushioned the blow our 
economy took from the collapse of the housing and credit 
markets. Exports have supported American jobs as domestic 
demand has declined. So if we seek a return to prosperity, it 
is not enough to merely buy American; we must sell American, 
sell American products and services throughout the world. And 
because of the importance of international trade to our 
economy, we must pursue policies that enhance the international 
competitiveness of American workers.
    One way to do that is to pass expeditiously the three 
pending free trade agreements with Colombia, Panama, and South 
Korea. These agreements will add billions of dollars to U.S. 
exports and economic growth and support good-paying American 
jobs.
    Mr. Chairman, I am ready to work with you, Chairman Rangel, 
and the Administration to address any concerns about these 
agreements and bring them to the floor of the House for a vote. 
And as part of that effort, I would encourage you to schedule a 
hearing on the three pending trade agreements as soon as 
possible. The Trade Subcommittee has not held a hearing on the 
free trade agreements in over 2 years, and in contrast the 
Foreign Affairs Committee has already held three hearings on 
the agreements in this Congress alone.
    The topic of today's hearing, the impact of climate change 
legislation on U.S. competitiveness, is another issue that has 
garnered interest across the Congress. And while there are 
genuine and legitimate questions surrounding the science of 
global warming, and I urge Congress to consider them in-depth, 
for the sake of this hearing we will focus on the trade 
implications and impact on American jobs as a result of 
imposing a cap-and-trade system.
    I am very concerned about the impact the hundreds of 
billions of dollars in new energy taxes included in the 
President's budget will have on America's international 
competitiveness. These energy taxes will raise costs for every 
family and business in America. The EPA has estimated that 
energy taxes from cap and trade like those proposed by the 
President would damage virtually every sector of the American 
economy and would be particularly devastating for American 
manufacturing. The higher cost imposed on American businesses 
would make them uncompetitive with the imports they compete 
against here and make American exports uncompetitive in the 
international market. The President's new energy taxes would 
create the ultimate in an unlevel playing field that would 
result in scores, actually millions, of Americans losing their 
jobs.
    Energy Secretary Chu recently advocated establishing a 
carbon tariff against other countries, as have some Members of 
Congress. I have several concerns about these proposals. It 
appears that these tariffs or other charges on imports would 
further increase costs on American families and businesses, are 
unlikely to be effective in limiting the damage to import-
competing industries, do nothing to assist U.S. exports, and 
could possibly start a global trade war. As proposed, U.S. 
trade measures alone would cover only a fraction of global 
trade and carbon-intensive goods, have limited impact on 
overall industrial carbon dioxide emissions, and fail to 
recognize that global demand will see the most growth in 
foreign markets in the years ahead.
    Moreover, trade measures provide little leverage 
internationally given that the U.S. accounts for only 10 
percent of global demand in the five carbon-intensive 
industries, the important share of which accounts for less than 
3 percent, according to the recent report, Leveling the Carbon 
Playing Field, produced jointly by the Peterson Institute for 
International Economics and the World Resources Institute.
    These trade barriers also would conflict with longstanding 
American bipartisan policies in regard to developing countries. 
Many of the same countries that we provide with access to the 
U.S. market through our preference programs could be subject to 
the new tariffs. In effect, we would be lowering tariffs on one 
hand and raising them right back up on the other, more than 
offsetting any preference benefits and leaving workers worse 
off in these developing countries.
    Mr. Chairman, these are just some of the reasons why I am 
very concerned about the impact of climate change policies on 
America's international competitiveness. The Ways and Means 
Committee, and this Subcommittee in particular, must play a key 
role in this debate, and as such, I am anxious to hear from our 
witnesses today and to have a frank and honest discussion with 
you, Mr. Chairman, and other Members of the Committee because 
we must carefully consider the impact of the President's 
proposed energy taxes on America's international 
competitiveness.
    I yield back.
    Chairman LEVIN. Well, 5 minutes on the dot, Mr. Brady. You 
set an example.
    As you can see, this is a lively subject, so let's punch 
in. I think what I will do is just a say a word about each of 
you and then you will go down the row.
    Mr. John McMackin is with the Energy-Intensive 
Manufacturers' Working Group on Greenhouse Gas Regulation. Leo 
Gerard is the very distinguished International President of the 
United Steelworkers of America. David Hamilton is Director of 
Global Warming and Energy Programs for the well-known Sierra 
Club of this country. Professor Joost Pauwelyn is a Professor 
of International Law, the Graduate Institute of International 
and Development Studies, Geneva, Switzerland.
    When we said hello, I didn't ask if you came especially for 
this hearing, but you have come a long way and so therefore if 
we might give a special welcome to you, sir.
    Robert E. Clay is the CEO and chairman of the board of 
Directors of Pridgeon & Clay, Inc., which is in the great State 
of Michigan; so if I can put in that plug, and that is the last 
time I will do that for this hearing.
    So Mr. McMackin, if you will start with yourself and go 
down for 5 minutes, and then we will take over and have some 
back and forth. Thank you.

      STATEMENT OF JOHN J. McMACKIN, THE ENERGY-INTENSIVE 
   MANUFACTURERS' WORKING GROUP ON GREENHOUSE GAS REGULATION

    Mr. MCMACKIN. Thank you, Mr. Chairman, Mr. Brady, Members 
of the subcommittee. It is an honor to be here. The Energy-
Intensive Manufacturers' Working Group on Greenhouse Gas 
Regulation, on whose behalf I appear today, greatly appreciates 
this opportunity to testify on this difficult and critical 
issue. I am John McMackin, and in addition to being a partner 
in the law firm of Williams & Jensen, I am a director of Owens-
Illinois. O-I, the largest glass container manufacturer in the 
world is headquartered in Perrysburg, Ohio, and has facilities 
in 11 States.
    Our working group was formed early last year for a narrow 
but important purpose: to engage constructively with other 
stakeholders and Congress to attempt to solve what is often 
referred to as the ``carbon leakage problem'' but what is 
actually, as the chairman's comments indicated, a problem of 
the leakage both of carbon and of jobs.
    Leakage is a problem that primarily affects energy-
intensive industries that face foreign competition, the two 
factors that define our members. Our group is composed of 
companies in the U.S. industries that are widely and correctly 
seen as the most vulnerable to leakage: ferrous metals, iron 
and steel; nonferrous metals, aluminum and copper; cement, 
glass, including fiberglass, ceramics, chemicals, and paper. 
The companies include Alcoa, Corning, Dow, Holcim(US), NewPage 
Corporation, Nucor, Owens-Corning, Owens-Illinois, PPG, Rio 
Tinto, and U.S. Steel.
    Of the several solutions that have been advanced so far to 
deal with the leakage problem, our group's work is focused 
exclusively on one--and it is the one solution that focuses on 
the source, the U.S. factory and its costs as opposed to the 
border, which is where all of the other mechanisms are focused.
    There are various names for this solution, but we have 
taken to calling it an output-based rebate, which is the phrase 
first used to describe one of the prominent and promising 
versions that was featured in the Inslee-Doyle Carbon Leakage 
Prevention Act. Mr. Doggett included a version of this kind of 
relief in his bill, H.R. 6316, and we are very encouraged to 
learn that he is considering including in this year's version 
some of the key features of Inslee-Doyle as it has evolved.
    What is rebated to energy-intensive, trade-exposed 
manufacturers under these proposals is a significant portion of 
the cost of unilateral regulation, both the direct costs of 
allowances or of a carbon tax or carbon permit, et cetera, as 
well as the indirect cost that results from regulation-caused 
increases in the electricity that we consume. The rebate then 
relates to, reduces the cost of, all production of all 
qualifying sectors. It does not rely, that is, only on 
regulation of imports or exports.
    My principal goal in appearing today is to commend to you 
output-based rebates as you construct legislative responses to 
climate change. My written testimony addresses key features of 
such a provision in some detail. I note that output-based 
rebates work as well in a carbon tax or other revenue-type 
measure as they do in cap-and-trade bills and that they can fit 
well with other forms of relief, such as those focused on the 
borders, as Mr. Gerard's excellent testimony explains. Indeed, 
many of the bills to date have contained more than one of these 
provisions.
    The other basic category of relief, as the opening 
statements indicated, focuses on the border. It includes the 
kind of import measure referred to as ``border equalization'' 
that resulted from the work of the International Brotherhood of 
Electrical Workers and has appeared in many bills. And while 
the IBEW provision, like others operating in a cap-and-trade 
context, does not include export rebates, the category itself 
does, and under export rebates, which, as I understand it, are 
WTO compliant in some contexts such as VAT taxes, the cost of 
regulation is rebated to manufacturers of energy-intensive 
products being exported.
    I look forward to discussing with the Subcommittee some of 
the ways in which I see that an output-based rebate fills in 
some gaps that otherwise exist in border measures.
    Finally, I want to mention that another characteristic of 
our group's members is that we have union workforces and that 
we have worked hard and successfully with our unions over the 
last several decades spurred by foreign competition to become 
in the main the most productive producers in the world. It is a 
pleasure to be sitting on this panel beside Mr. Gerard and to 
be working alongside our labor colleagues as well as the 
environmental community to find a solution to this very 
pressing problem.
    [The statement of Mr. McMackin follows:]

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    Chairman LEVIN. Thank you very much.
    Mr. Gerard.

  STATEMENT OF LEO W. GERARD, INTERNATIONAL PRESIDENT, UNITED 
                          STEELWORKERS

    Mr. GERARD. I thank you, Mr. Chairman. I said he was really 
fast. On my watch he took 3\1/2\ minutes. I hope I can get his 
1\1/2\ minutes because I am not near that fast.
    Let me thank you, Mr. Chairman, for holding in hearing. As 
you said, my name is Leo Gerard. I am the International 
President of the United Steelworkers Union. We have 850,000 
members in North America, and our name actually belies the 
members we represent. We are the dominant union in the paper 
sector, in box making, in glass, in ceramics, in cement, in 
chemicals, aluminum, tires and rubber. We are an important but 
not dominant union in auto and auto parts, and obviously we are 
the dominant union in the steel industry.
    The one thing all these industries have in common is they 
are pretty much all energy-intensive industries and that they 
all rely on current science to make the best products they can 
make. And our concern, and we are here today to express our 
concern, and let me say that we are not Johnny-come-latelys to 
the global warming debate. We held our first anti-pollution 
conferences in the early 1960s. We produced a document in 1990 
called Our Children's World, and in 1990 we said the global 
climate change was going to be the most important issue facing 
our generation. We reissued a newer paper in 1996, called 
Securing our Children's World. Both of these are easily 
accessible, and we would be happy to provide them to you. And 
part of our concern clearly is that we have to address the 
issue of global warming, but we have to do it in a way that 
will return America's leadership and reassert our leadership on 
cutting-edge technology.
    We can only do that if we move forward in a way that 
creates jobs, doesn't cost us jobs, and we believe that we 
can't end up having some kind of a system that doesn't deal 
with the issue of carbon leakage, and that system could only be 
answered if we have a program that doesn't squander jobs 
through the law of unintended but not unforeseen consequences 
of having a carbon-costing system that doesn't recognize that 
the issue is called global warming. It is not called Michigan 
warming or Chicago warming or Pittsburgh warming or Texas 
warming; it is global warming.
    So to us one of the fundamental issues, if we are going to 
be serious about the issue of global warming, is that we have 
to first and foremost understand that it is an issue that works 
around trade and that we were, as I said, one of the first 
unions to support comprehensive climate change. We were one of 
the first unions to support comprehensive climate change 
legislation with our support of the Bingaman-Specter bill. We 
are also founding members of something called the Apollo 
Alliance that a lot of you have heard about, and we are 
founding members of the Blue-Green Alliance with our friends 
from the Sierra Club.
    When we formed that alliance, there was Carl Pope and I at 
a press conference and no one else showed up. Our alliance has 
now grown to represent more than 4 million people from both the 
environmental and the labor community, which brings us to a 
clear understanding that we have to deal with climate change 
and we have to do it in a way that protects jobs and advances 
the agenda.
    I will be limited to the 5 minutes. So while we are still 
undertaking the enormous and critical task of crafting climate 
change legislation, it is very clear to us that Congress must 
ensure that the desired emissions reductions are achieved in a 
structured and responsible way. The legislation must not only 
strive to reduce emissions to the level that best science 
believes is necessary, but it must also do so in a way that 
minimizes costs to businesses and consumers as much as 
possible. It must address the need to provide incentives to 
build the next generation of clean energy products here in 
America and need to ensure that domestic exporters are not 
unfairly disadvantaged in the global marketplace.
    Many will say that our economy is based on exports, but I 
remind those that say that that America last year had a $700 
billion trade deficit and we have lost close to 4 million jobs 
to rotten trade deals and we are carrying a $600 billion export 
of our financial resources as we service a $6 trillion 
accumulated trade debt. I don't want to stray, but I felt it 
was important to make that point.
    As I said, we represent energy-intensive industries, and 
steel and cement are two examples where the science and the 
technology do not exist to remove carbon from that process. If 
you are going to make steel or you are going to make cement, 
you are going to make carbon. And the reason I raise that is 
that we just released a study yesterday with the Alliance for 
American Manufacturing, that again is here and we will be glad 
to make available to you, that points out that for every ton of 
steel that we produce and the same ton of steel produced in 
China produces three times as many units of carbon. So that if 
we don't deal with the issue of carbon leakage and we don't 
deal with the issue of using the best and current science and 
we don't deal with the issue of how we can create an 
environment with those companies that at this point don't have 
the technology or the science to overcome that, what we will do 
is cost ourselves both jobs and we will make the climate worse.
    In our work with the Sierra Club we are very cognizant that 
our objective has to be to tackle the issue of global warming 
and that whether that is the issue of illegal logging done by 
China so that they can destroy the world's forests that are, in 
fact, carbon sinks, yet export their products to America after 
not meeting those challenges, those are huge, huge challenges 
that we need to take on.
    I won't spend a lot of time rehashing the issue of carbon 
leakage. I think we are making it real clear. In industries 
like steel, glass, chemicals, rubber, and paper, this threat is 
particularly acute because they are commodity-based industries 
in which even a small difference in energy costs can have a 
huge effect. Finding a way to mitigate the competitive 
disadvantage that we would have that would be placed on these 
industries is an imperative if we are to continue the recovery 
from the current recession and achieve a goal of stopping and 
reversing climate change.
    As I said, this is a global problem. This is a problem that 
if we try to do it ourselves, we will end up making the climate 
circumstances worse and we will cost more American jobs.
    The fact of the matter is that there are a number of 
vehicles that are being discussed right now and options to 
combating leakage. We are pleased that there appears to be a 
growing consensus forming around the idea that something must 
be done to address this leakage problem in formulating climate 
change policy. A variety of solutions have been proposed, many 
of which fall into the broad categories of various allocation 
schemes.
    The various proposals to address the leakage issue take 
different paths to the same goal, which is the elimination of 
cost disadvantage that a carbon-costing program will impose on 
domestic producers. Many of the programs that focus on reducing 
the cost of domestic producers as much as possible usually 
accomplish this by providing free allowances or rebates to 
manufacturers that are at risk of leakage. Previous climate 
efforts such as the 2008 Lieberman-Warner bill have included 
provisions that reserve a certain percentage of the total 
universe of allowances to be distributed to energy-intensive 
industries free of charge.
    I think that if I run through all of these options I will 
actually run out of time. I will be happy to save that.
    Chairman LEVIN. I think there will be some questions. Mr. 
McMackin was good enough to yield to you some time. That may be 
a first, by the way.
    Mr. GERARD. Let me just say that for us this is a very 
simple issue. A, we believe that we have to do something about 
climate change. B, we have to use the best science available. 
C, we have to recognize it is called global climate change. D, 
we have to make sure that in doing so we don't create carbon 
leakage. E, we have to make absolutely sure that we don't put 
another nail in the coffin of America's manufacturing sector.
    We view this as a complicated process, and we will 
certainly be willing to work with anyone and everyone that is 
willing to help us get to that solution. So thanks for your 
time, Mr. Chairman.
    [The statement of Mr. Gerard follows:]

      Statement of Leo W. Gerard, International President, United 
                              Steelworkers

    Good afternoon. On behalf of the 850,000 active members of the 
United Steelworkers (USW), I would like to thank Chairman Levin for 
holding this hearing on the challenges to the competitiveness of 
domestic manufacturers and workers posed by the adoption of 
comprehensive climate change legislation. I am Leo Gerard, the 
International President of the USW. As you know, the members of the 
United Steelworkers produce more than just steel. They supply almost 
every sector of the economy, including the North American auto 
industry, and produce a wide array of products, including paper, glass, 
ceramics, cement, chemicals, aluminum, tires and rubber. Our members 
produce these energy-intensive products in facilities that are as 
efficient as any in the world. They are ready to answer the call to 
produce the next generation of clean energy products and parts, and 
reassert America's leadership on the cutting edge of new technology. 
But they can only answer that call if their jobs are not unnecessarily 
squandered to the law of unintended, but not unforeseen, consequences. 
Amid this economic collapse, this country cannot afford to lose any 
more jobs.
    For decades, the USW has been a leader in the labor movement on the 
environment. In 1990, we published ``Our Children's World'' stating our 
union's environmental policy and the need to address climate change, 
and in 2006 we reaffirmed our union's commitment to environmental 
responsibility through the publication of ``Securing Our Children's 
World.'' \1\ We were one of the first industrial unions to support 
comprehensive climate change legislation, with our support for the 
Bingaman-Specter bill. That bill proceeded from recommendations made by 
the National Commission on Energy Policy, on which I serve as a 
commissioner. USW is also a founding member of the Blue-Green Alliance, 
which brings together unions and environmental groups to plan a new way 
forward for America through the promotion of policy solutions that spur 
growth and investment in green technologies and products produced here 
in America.
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    \1\ Available on USW's website through the following links; http://
legacy.usw.org/uswa/program/content/1592.php and http://legacy.usw.org/
usw/program/content/Environment-SOCW.php.
---------------------------------------------------------------------------
    The Steelworkers are as convinced today as we were in 1990 that 
climate change is the most important environmental issue of our 
lifetime. It is the challenge of our time to transform the way this 
nation operates in order to bring this problem under control before it 
is too late. Still, in undertaking the enormous and critical task of 
crafting comprehensive climate change legislation, Congress must ensure 
that the desired emissions reductions are achieved in a structured, 
responsible way. The legislation must not only strive to reduce 
emissions to the level that the best science believes is necessary, but 
it must do so in a way that minimizes costs to businesses and consumers 
as much as possible. In doing so, attention must be paid to the need to 
provide incentives to build the next generation of clean energy 
products here in America, and the need to ensure that domestic 
exporters are not unfairly disadvantaged in the global marketplace. It 
must take into account that, for some products like steel and cement, 
some emissions are an unavoidable part of the manufacturing process, 
and that currently neither science nor technology exists to mitigate 
them. And it must ensure, as much as possible, that the jobs that exist 
here today in energy-intensive manufacturing are not lost, nor the 
production of those products offshored unnecessarily by neglecting the 
very real and potentially disastrous problem of carbon leakage. If 
leakage is not addressed in the development of a climate change regime, 
any policy runs a significant risk of not only costing American jobs 
but actually exacerbating, instead of mitigating, the problem of global 
warming.

Carbon Leakage
    The phenomenon by which emissions reductions in one country lead to 
increased emissions in another is known as carbon leakage. The reason 
this happens is that if one country puts a price on carbon emissions, 
that additional cost provides an incentive to the company to move its 
production and, therefore, its emissions, to a country where that 
additional cost does not exist. All policy proposals to address climate 
change, including cap-and-trade, arise from the idea that if a price is 
put on carbon, it will provide an incentive to emit less carbon. This 
theory is sound, as long as the cost cannot simply be evaded by 
companies moving production overseas or by downstream producers and 
consumers avoiding the cost by purchasing imported materials from 
nations that do not share the U.S.'s commitment to climate change 
abatement.
    This threat of leakage is particularly acute among manufacturers of 
energy-intensive primary products like the ones made by members of the 
Steelworkers. In commodity-based industries like steel, glass, 
chemicals, rubber, and paper, even small differences in production 
costs can devastate an industry if they are not managed effectively. 
Finding a way to mitigate the competitive disadvantage that will be 
placed on these industries is not only an imperative, if we are to 
continue the recovery from the current recession, but it is an 
imperative if we are to actually achieve the goal of stopping climate 
change.
    Greenhouse gas emissions and the resulting climate change are a 
global problem, and it makes no difference whether the emissions occur 
here in the U.S. or abroad. In fact, the shifting of these emissions to 
countries that do not share our commitment to addressing the problem of 
climate change is almost certain to make the overall problem worse. The 
reason for this is quite simple: American industry and American workers 
are among the best in the world, and they produce energy-intensive 
goods with some of the lowest emissions in the world. The same cannot 
be said of many of our competitors. The Alliance for American 
Manufacturing, a unique labor-management joint venture between the 
Steelworkers and several of our major employers, released a report 
yesterday on the pollution levels in the Chinese steel industry, and 
the findings are quite stark.\2\ For example, while the American steel 
industry has become 25 percent less energy intensive over the past 20 
years, the Chinese steel industry now emits as much carbon as the rest 
of the global steel industry combined. The production of a ton of steel 
in China generates more than three times the carbon emissions of a ton 
of steel produced in the United States. This is largely because the 
domestic industry is increasingly state-of-the-art and efficient, while 
the Chinese steel industry has a heavier reliance on older, dirtier 
production methods and uses higher-sulfur coal to power those 
processes. The Chinese Government looks the other way while this goes 
on, and is lax in enforcing the few environmental laws and regulations 
it does ostensibly have in place.
---------------------------------------------------------------------------
    \2\ Available on Alliance for American Manufacturing's website 
through the link http://www.americanmanufacturing.org/assessment-of-
china.
---------------------------------------------------------------------------
    Any climate change policy that does not seek to prevent the 
unnecessary offshoring of production from state-of-the-art American 
industries to less efficient, more carbon-intensive industries overseas 
will both cost American jobs and, perversely, will actually make the 
problem of global climate change worse.
Options for Combating Leakage
    The USW is pleased that a growing consensus is forming around the 
idea that something must be done to address the leakage problem in 
formulating climate change policy. The question that follows is exactly 
what that something should be. A variety of solutions have been 
proposed, many of which fall into the broad categories of allocation 
schemes and trade mechanisms.

Allocations
    Because leakage is caused by the fact that the domestic industry 
will be bearing increased costs of production due to the requirement to 
pay an imposed cost of carbon, many proposed solutions center around 
the concept of mitigating those costs. These ideas are structured as 
allocations of allowances to industries that are at risk of leakage, 
which means energy-intensive and trade-exposed industries. The European 
cap-and-trade program relies exclusively on allocations to combat 
leakage.
    Previous domestic efforts, such as the 2008 Lieberman-Warner bill, 
have included provisions that reserve a certain percentage of the total 
universe of allowances to be distributed to energy-intensive industries 
free of charge. This structure is less than ideal because the 
allocation of no-strings allowances provide little incentive to 
companies to avoid offshoring. The potential for a company to take its 
free allowances, sell them on the allowance market, and use the 
windfall profits to build factories in India, Mexico, Brazil or China 
is a serious concern. In addition, even those companies that use the 
allocations as intended still face a long-term leakage threat. Most 
allocation proposals decrease the percentage of the cap reserved for 
allocations over time, which would allow foreign competitors to wait 
out their domestic counterparts until the supply of free allowances 
runs out. Even those proposals that maintain a consistent percentage of 
the cap for allocations face the same problem, as the cap will get 
smaller and smaller, as will the total number of available allowances 
the consistent percentage represents.
    While allocations are critical for the survival of energy-intensive 
manufacturers, they must be structured to provide an incentive to 
maintain or increase domestic production, and must eliminate the 
potential for windfall profits, particularly profits which can be used 
to facilitate offshoring.

Trade Mechanisms
    Where allocation schemes seek to even out the cost differential 
between domestic and international products by reducing the effective 
cost to domestic producers, trade mechanisms do the opposite. An 
effective trade mechanism would eliminate the cost differential by 
requiring that any import that enters our market face the same cost as 
domestic counterparts for those emissions not covered by an allocation 
scheme.
    The most prominent of these proposals is the international reserve 
allowance program in the Lieberman-Warner bill. Between the 
introduction of the bill and the version improved by Senator Boxer, the 
international reserve allowance program was refined and improved a 
great deal, but more work needs to be done before it can fully address 
leakage concerns. A workable trade mechanism must give consideration to 
downstream products and exports. It must require that all products 
consumed in the U.S. demonstrate the same commitment to combating 
climate change, no matter where they are produced. And it must be put 
in place as quickly as possible, to limit the amount of time that 
domestic producers face cost disadvantages because of the requirements 
of the domestic program. If it is not possible to begin both programs 
at the same time, then steps must be taken to prevent unnecessary harm 
to domestic industries until such time as the trade mechanism can be 
activated.
    Access to our consumer market is the most powerful incentive the 
U.S. has to encourage other nations to commit to reduce climate change. 
It must be used in a strong and effective manner.

Hybrid Approach
    The shortcomings of both the allocation approach and the trade 
approach are similar. Namely, this is a global economy that faces a 
global crisis, and there are limits to what any one country, even the 
United States, can do alone. The U.S. should, therefore, attempt to 
forge a global solution to the issue of how to deal with energy 
intensive manufacturers. This should take the form of global sectoral 
agreements within the larger global climate treaty being negotiated by 
the U.N. Framework Convention on Climate Change. Only by setting up a 
system where all products must bear a carbon cost commensurate with its 
carbon emissions, no matter where they are produced, can the playing 
field ever be truly leveled and allow us to confront this global 
problem.
    With that as the long-term goal, the short-term goal should be to 
craft a hybrid approach of allocations and trade measures that 
increases the potential that such agreements can be reached, while 
still addressing the leakage and competitiveness questions and ensuring 
that industry has sufficient incentive and confidence to maintain 
domestic production here, while continuing to improve its operations, 
until such agreements can be reached.
    In this hybrid approach, allocations could be awarded to energy 
intensive manufacturers commensurate with their output and their carbon 
emissions. If allocations diminish over time or are insufficient to 
eliminate the leakage problem, they can be combined with appropriate 
border adjustments to equalize costs for domestic and foreign goods 
consumed in the United States based on their associated emissions. A 
phased-in, hybrid approach could provide the space for both the 
negotiation of an international agreement--which should start upon 
passage of the legislation--and providing sufficient notice to the rest 
of the world of the eventual imposition of a meaningful trade 
mechanism, while preventing domestic producers from facing unnecessary 
competitive pressures during that time. In addition, the hybrid 
approach can be designed to address the problems of downstream products 
and exports by ensuring that costs to inputs are minimized, and thus 
downstream products do not see an additional cost disadvantage. 
Similarly, if exported goods do not face a disadvantageous cost 
differential abroad, their competitiveness in global markets should not 
be harmed.
    After the negotiation period is over, a variable border adjustment 
will be imposed on imports. This adjustment will be imposed on imports 
that enjoy a cost advantage over domestic products because of lack of 
action on climate change. It will be based on the carbon intensity of 
these products and the net cost borne by domestic manufacturers of 
those same products.
    It is a simple concept. The right to sell goods to consumers in our 
market brings with it the responsibility to confront the costs 
associated with addressing climate change.
    If the output-based rebates are working as intended and meeting the 
competitiveness needs of energy-intensive manufacturers, the border tax 
adjustment will lay dormant. Similarly, if sectoral agreements are 
forged and work as intended, this will be a tax that no one has to pay. 
That is the goal, and the border tax adjustment is envisioned to be a 
last resort, put into use only if and when the allocations are 
insufficient, or the sectoral agreement is not enforced.

An Alternative Approach
    Hybrid approaches, allocation schemes, and trade mechanisms that 
could face WTO challenges are all quite complicated ways to address the 
questions of leakage and competitiveness. The questions themselves 
largely stem from the fact that the architecture of a cap-and-trade 
system is focused on the production of goods, but the global economy is 
focused on the consumption of goods. An alternative approach for 
energy-intensive manufacturers would be to create a separate emissions 
regime for these industries in which the inefficient allowance-based 
system is replaced with a simpler and more effective system in which 
emissions fees are assessed on all carbon-intensive goods consumed in 
the U.S. if their associated carbon emissions exceed a determined 
industry standard.
    The potential benefit of such a system would be that the leakage 
problem would be effectively eliminated, because the focus would be 
shifted to ensuring that all products consumed in the U.S., regardless 
of where they are made, demonstrate the U.S.'s commitment to addressing 
climate change. Domestic manufacturers would face incentives to reduce 
emissions in order to bring emissions under the standard and avoid the 
tax. At the same time, they would not face unnecessary competitiveness 
concerns because equivalent costs can be assessed at the border on 
imports and rebated on exports, in much the same way as a value-added 
tax. In addition, the transparency of these fees would help industry 
attract the necessary capital to make improvements, because future 
costs could be more easily determined using an established fee rate 
than in attempting to divine the price of a volatile market in carbon 
allowances.

Conclusion
    Addressing the potentially catastrophic issues posed by climate 
change is the challenge of our generation, and meeting that challenge 
will require the mobilization of everyone in the world behind a common 
purpose. America can and must lead this effort, not only by taking a 
bold stand to limit greenhouse gas emissions, but by harnessing this 
nation's greatest resource, the ingenuity and creativity of the 
American people. We must make a national commitment to rebuild America 
clean and green with products built here, to develop new forms of 
clean, renewable energy and provide incentives to further their 
deployment. We must bring our power grid and energy infrastructure into 
the 21st century and train the American workforce to use these new 
technologies. We must create a revolution in our transportation sector, 
rebuilding the American auto industry to produce the best and cleanest 
vehicles in the world, and connect America's cities and neighborhoods 
with world class transit systems. And, of course, we must limit 
greenhouse gas emissions consistent with what the best science tells 
us.
    In creating a program to achieve these emissions reductions, we 
must make the development of manufacturing a centerpiece of that 
program. The products made by our members and millions of other hard-
working Americans are quite literally the building blocks of all these 
new technologies. If the U.S. is to build windmills, we will need steel 
and aluminum. If we are to build solar panels, we will need glass. And 
if we are to build the next generation of industrial scrubbers to 
filter out these emissions, the ceramics industry cannot be ignored.
    When the world transitioned to an industrial economy, America led 
the way by developing and producing the best products in the world. 
Now, as the world transitions again to a green economy, the time has 
come for America to lead again. This change will not come easily, and 
it is a heavy load to bear. But I am here to tell you today that 
American workers are ready and willing to help bear that burden and 
help lead America into a new, green future.
    Thank you again, Mr. Chairman, for holding this hearing. The United 
Steelworkers and I look forward to working with you and the committee 
to renovate our economy to meet these challenges.

                                 

    Chairman LEVIN. Thank you very much.
    Mr. Hamilton, if you will take over.

  STATEMENT OF DAVE HAMILTON, DIRECTOR OF GLOBAL WARNING AND 
                  ENERGY PROGRAMS, SIERRA CLUB

    Mr. HAMILTON. Thank you very much, Mr. Chairman. My name is 
David Hamilton, and I am the Director of Global Warming and 
Energy Programs at the Sierra Club, and we thank you for this 
opportunity to address this Subcommittee and talk about the 
critical issue of carbon leakage and how energy-intensive, 
export-driven companies fit into a carbon control program.
    I think the one thing that we are all going to stress here 
is that a carbon control program that includes a lot of leakage 
is not doable politically. It is not going to work. It is not--
you will simply export emissions so you don't reach your 
environmental goal, and you will lose jobs so you will lose on 
your economic goal.
    Mr. Chairman, I would like to acknowledge you for your work 
on the May 10 agreement and connecting the importance of 
environment and workers in the context of trade agreements. I 
want to acknowledge President Gerard and the fact that the 
Sierra Club has been working closely with the Steelworkers for 
many years now and we formed the Blue-Green Alliance together. 
The Sierra Club goes back to working on NAFTA and other trade 
issues to really try to break through on the importance of 
environmental considerations in the context of trade.
    I believe that we are standing at a particularly unique and 
difficult moment in history where we have to look over the 
landscape of a very difficult economy to solve an incredibly 
difficult environmental problem in global warming. We believe 
that there is opportunity with this adversity and that we are 
headed for--you know, to turn our ship in the direction of a 
green economy and new industries and new exports, and that 
result is a way that we can, in fact, prosper over the long 
haul while really taking on carbon emissions in a way that 
allows us to live on the planet for the foreseeable future.
    As I said, leakage is an environmental problem if emissions 
are simply exported. Any plan that simply moves jobs overseas 
is going to fail. We support ambitious targets for reducing 
carbon emissions 80 percent by 2050, and any program like that 
is likely to result in cost increases for energy-intensive 
industries. We have to make sure that those costs are dealt 
with in a way that doesn't simply make our manufacturing 
landscape increasingly barren.
    We believe that the best protection against leakage is a 
strong global agreement to reduce carbon emissions under the 
United Nations Framework Convention on Climate Change. That 
agreement should include sectorial sub-agreements that cover 
the various energy-intensive industries. That could be aligning 
emissions targets. It could be agreeing to share its standards 
or harmonizing policies. We don't believe that we get a global 
deal unless the U.S. makes a firm commitment to reducing its 
own emissions, and until such a global agreement can be reached 
there must be a domestic apparatus to make sure that in the 
short term between U.S. commitment and a global deal that we 
don't see the kind of leakage that we are trying to avoid here.
    A couple--I think we are all going to cover the 
alternatives a little bit. I will try to run through some of 
the advantages and disadvantages there of both financial 
adjustments and potential border correction mechanisms. One 
idea under a cap is to give additional free allowances to 
energy-intensive manufacturers to try to mitigate the extra 
cost that they will be under. We believe this must be 
structured to reward retention of domestic employment and to 
reward increased energy efficiency and emissions reductions. I 
think we view free allowances in this context as the same as 
free allowances in other contexts, which is we don't want to 
see windfall profits because we don't want to see those free 
allowances ultimately fund the next factory in Asia.
    There is discussion of output-based rebates. This is a very 
fine tool as described by Congressmen Inslee and Doyle in their 
legislation last year. This potentially solves a lot of 
problems, but it is also potentially very complicated, and the 
information that you need from companies is information they 
aren't always anxious to be forthcoming with, but we agree that 
this is a promising area to work for.
    Border mechanisms, you know, people have talked about a tax 
on energy-intensive goods that would simply be levied at the 
border for goods coming into this country. The advantage is 
that it is simple. It is doable. One thing we are apprehensive 
about is that you would have to take these industries out from 
under the cap and then either compensate the emissions they 
were supposed to get with other regulated entities under the 
cap or somehow get emissions out of that sector in another way.
    And we talked about the IBEW proposal, which is a border 
adjustment under the cap where companies trying to sell goods 
into this country would have to buy allowances and present 
allowances under our carbon cap.
    We believe that all of these have the tools to work. They 
have the tools to be WTO compliant. But, again, we believe that 
a combination is workable but that fundamentally the key to 
this problem is a global agreement that has sectorial 
agreements for specific energy-intensive industries and we 
aren't going to get that deal unless we actually make a 
commitment in this country. And if we move forward and show 
progress, we think that the possibility is strong for action in 
Copenhagen and hope that you will contribute to action in that 
direction.
    Thanks very much.
    [The statement of Mr. Hamilton follows:]

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    Chairman LEVIN. Thank you very much.
    Mr. Pauwelyn.

 STATEMENT OF JOOST H.B. PAUWELYN, PROFESSOR OF INTERNATIONAL 
  LAW, GRADUATE INSTITUTE OF INTERNATIONAL AND DEVELOPMENTAL 
                  STUDIES, GENEVA SWITZERLAND

    Mr. PAUWELYN. Thank you, Mr. Chairman, Members of the 
Subcommittee. I am very pleased to participate in today's 
hearing.
    I understand that your core question today is this: How can 
the U.S. adopt climate change legislation and limit both carbon 
and job leakage? What I hope to add to the discussion is how 
any of this could be done in line with U.S. obligations under 
the World Trade Organization.
    As Mr. Chairman said, I am Joost Pauwelyn and I am a 
Professor of International Law formerly at Duke Law School and 
now in Geneva, Switzerland, and I have worked for the WTO from 
1996 to 2002. I am currently also a senior adviser with the law 
firm of King & Spalding.
    Now, my core message to you today is this: First, the WTO 
allows its members to adopt climate change legislation and to 
deal with carbon and job leakage. People should stop using the 
WTO as an excuse to block climate change legislation.
    Second, that WTO rules are flexible enough does not mean 
that tackling carbon and job leakage will be easy. It will not. 
I would focus on getting the data and economic incentives 
right, on cost effectiveness, on technical and administrative 
feasibility, and really WTO rules come in at the edges not as 
negative make-or-break rules but as positive controls; namely, 
to prevent discrimination and economic protectionism, two 
wasteful practices that would in any event not help the 
environment nor American jobs.
    Now, let me try to explain my point at its most basic 
level. First, carbon leakage is an environmental concern. The 
WTO has an explicit exception that says that the environment 
trumps trade. So you have the right to tackle carbon leakage 
for as long as you do so to protect the environment, not to 
protect U.S. import-competing industries.
    Second, job leakage is a fairness issue. It is about carbon 
equivalence. American jobs risk shifting overseas if U.S. 
companies must pay a carbon cost that imports do not have to 
pay. Now, here the WTO has a principle called national 
treatment, and this means that the U.S. can impose the national 
U.S. treatment of products also on like imported products. So, 
again, WTO members have the right to impose a carbon cost on 
domestic products, also on imports. The only prohibition is 
that you cannot impose a higher cost on imports. You cannot 
discriminate.
    The following example should make my point of national 
treatment clear. If after this hearing I go and buy a few toys 
to bring home to my children and these toys happen to be made 
in China, would you not find it absolutely normal that these 
toys are, first, subject to the same U.S. safety regulations as 
applied to U.S.-made toys and, secondly, when I pay at the 
counter I will have to pay the same U.S. sales tax for my 
Chinese toys that would otherwise apply to U.S. toys? Now, when 
it comes to climate legislation and carbon pricing, the same 
principle applies. Imports can be made subject to the same 
burden that applies to U.S. products. That is what the WTO 
says.
    Let me say a few words about the different alternatives 
available. As most people have said already, clearly the first 
best solution is to find an international agreement where all 
major emitters cut their carbon emissions, albeit at a variable 
scale. We must, however, prepare, and this is not just the U.S. 
but also Europe, for the world of second bests; namely, what do 
we do if countries like China, India, and Brazil do not cut 
their emissions?
    Two options are available, in my view. First, the U.S. 
could soften the impact of climate change legislation on its 
own energy-intensive industries. Second, the U.S. could impose 
whatever burden it imposes on domestic carbon-intensive 
products, also on imports.
    Just a few words on what the WTO would think about this. 
First, free allowances, softening the impact on U.S. carbon-
intensive industries, can be designed in line with WTO rules. 
They can be designed so that the WTO does not look at them as 
subsidies that would somehow distort trade. One can design a 
scheme so as to avoid the label of financial contribution as 
well as that of benefit, the WTO requirements for there to be a 
subsidy in the first place. The contribution is not specific, 
and there is very likely no serious prejudice to other WTO 
members. All of these are conditions for a subsidy to be 
actionable.
    Secondly, the second alternative, imposing a burden also on 
imports by, for example, obliging imports to buy emission 
allowances, again I am convinced one can do this, one can 
design this in line with WTO nondiscrimination principles. You 
just have to make sure that the same burden applies on the 
imports as is imposed on U.S. products and you have to make 
sure that the same burden applies on imports from one country 
as opposed to imports from another. Very importantly, that does 
not mean that you have to impose the same burden on all 
imports. If a country is in a different situation, you can 
treat it differently. So Europe could come in without credits. 
Chinese imports, if they do not cut their emissions, may be 
subject to allowance requirements.
    So in conclusion, I am convinced that WTO consistent 
measures can be designed to address carbon and job leakage. The 
WTO is a positive control at the edges. It is not a make-or-
break negative force.
    Thank you.
    [The statement of Mr. Pauwelyn follows:]

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    Chairman LEVIN. Thank you very much. And the Director 
General of WTO is in town; so I think our hearing is in that 
respect very, very timely indeed. Very timely because there is 
an effort to continue our negotiations, and this issue may well 
be one that wasn't considered--was it 6 years when I was at 
Doha? I forget. Long ago.
    Mr. Clay.

    STATEMENT OF ROBERT E. CLAY, CEO AND CHAIRMAN, BOARD OF 
               DIRECTORS OF PRIDGEON & CLAY, INC

    Mr. CLAY. Thank you, Chairman Levin and Ranking Member 
Brady and other Members of the Subcommittee, for inviting me to 
testify. My name is Bob Clay, and I am CEO and Chairman of 
Pridgeon & Clay, Incorporated. We manufacture metal parts and 
assemblies primarily focused on exhaust and chassis systems for 
the automotive industry. So this is going to be more of a 
ground level look at this issue.
    My father started Pridgeon & Clay in a converted garage in 
Grand Rapids, Michigan, when he returned from serving in World 
War II and built the company over the next four decades before 
he retired. My brother and I bought the company in 1990. In 
June of 2008, my company employed 700 people in Grand Rapids 
and over 150 people in Franklin, Indiana. Due to the current 
economic climate in the automotive industry, we have laid off a 
combined total of nearly 400 people. While some will return as 
our industry recovers, many will not, and it is important that 
Congress not take actions that would further threaten our 
remaining jobs.
    I believe that addressing environmental concerns is 
critical to our future, but I am concerned that while the 
current climate change proposals are well-intentioned, they 
risk jeopardizing the 60 years of hard work that went into 
building our company and especially the future of our employees 
and their families.
    Pridgeon & Clay, like many other companies in the 
automotive industry, depends on our ability to supply our 
customers internationally. We have thrived because we have 
followed our customers to other countries and by doing so we 
have created additional jobs in our U.S. facilities.
    Over 8 years ago, we opened a facility in Hungary to supply 
parts to the European operations of our customers. Last year we 
formed a joint venture in Mexico, again to follow our customers 
and serve them in markets where their businesses are growing.
    Some of our exports will necessarily move to our plant in 
Mexico. However, there is a component of our exports that we 
can continue to competitively manufacture and ship from our 
U.S. plants, and I fear that a cap-and-trade system will 
increase our manufacturing and transportation costs to the 
point that our remaining export business will be endangered.
    Our international expansion has never been an effort to 
produce low-cost products in other countries to be exported 
back to the U.S. In fact, last year we exported roughly $30 
million worth of parts from the U.S. to foreign markets. The 
reality is that if our U.S. operations in Michigan and Indiana 
are not globally competitive, then it will be difficult to 
continue to grow in the U.S.
    Pridgeon & Clay is a highly automated, efficient company, 
but we are also energy intensive. Our primary input is 
stainless steel, which is an energy-intensive product. Our 
stamping presses have large electric motors. Many of our parts 
are welded and some are heat treated. Even a slight increase in 
energy prices could make us vulnerable to competition from 
abroad. And the fact that a cap-and-trade system will increase 
costs for consumers of energy is beyond dispute. If the U.S. is 
not joined in a cap-and-trade system by the rest of the world, 
especially low-cost countries like China and India, then more 
U.S. manufacturing jobs will be lost. That is bad for U.S. 
consumers, bad for U.S. workers and their families, and bad for 
the U.S. economy.
    Even Energy Secretary Chu recently noted that the concern 
about cap and trade in today's economic climate is that a lot 
of money might flow to developing countries in a way that might 
not be completely politically sellable. Secretary Chu is 
speaking about a political issue, and I don't care about the 
political aspects of this issue, but I do care very deeply 
about the jobs of my employees in Michigan and Indiana, and 
those jobs are very clearly threatened by the cap and trade 
unless it is universally applied.
    I also want to discuss the proposal to impose a tariff or 
carbon tax on imported goods from companies that do not have 
similar climate change policies. That would seem to make sense, 
but this type of proposal could actually make things worse for 
companies such as ours because it would increase the cost of 
raw materials we use to manufacture our products, costs we 
typically cannot pass along.
    Steel accounts for 60 percent of our costs, and even though 
we purchase virtually all of our steel domestically, placing a 
tariff on these imports will increase the price of all steel, 
imported and domestic, and will compound our problems under a 
cap-and-trade system because we will be paying a higher cost 
both for energy and our raw materials. This is a formula that 
will drive manufacturing overseas and limit environmental 
benefits of a cap-and-trade system because emissions will be 
relocated rather than reduced.
    We are committed to our employees and to helping Congress 
and our country work through the current economic crisis. 
However, our ability to continue to manufacture products in the 
U.S. is imperiled by policies that increase the cost of energy, 
transportation, and delivery and raw materials.
    I ask that you keep in mind the millions of manufacturing 
jobs lost these past several years and the millions more at 
stake.
    Once again, thank you for inviting me to testify and for 
considering my input on these complex and important matters.
    [The statement of Mr. Clay follows:]

             Statement of Robert E. Clay, CEO and Chairman,
               Board of Directors of Pridgeon & Clay, Inc

    I would like to thank Chairman Levin, Ranking Member Brady, and the 
other Members of the Subcommittee for inviting me to testify today. My 
name is Bob Clay, and I am President and CEO of Pridgeon & Clay, a 
middle market independent supplier of metal parts and assemblies, 
primarily focused on exhaust systems and catalytic converters for the 
automotive and light truck industry. I am here because as the costs of 
manufacturing in America continue to increase, my company and employees 
become less globally competitive. I am concerned that certain proposals 
to address the important issue of climate change will increase our 
costs and reduce our ability to compete internationally in an 
increasingly difficult economic climate.
    My connection to Pridgeon & Clay is more than economic. My father 
started the company in a converted garage in Grand Rapids, Michigan in 
1948 and built the company over the next four decades, before he 
retired. In June of 2008 my company employed over 700 people in Grand 
Rapids and over 150 in Franklin, Indiana. Due to the current economic 
climate in the automotive industry we have laid off a combined total of 
nearly 400 people. While some will return as our industry recovers, 
many may not, and it is important that Congress not take actions that 
would further threaten our remaining jobs.
    I believe that addressing environmental concerns is critical to our 
future but would like to clarify that although this hearing is about 
the trade aspects of climate change, my company views this as a debate 
not just about climate change, but really about jobs and our global 
competitiveness. I am concerned that while the current climate change 
proposals are well intentioned, they risk jeopardizing the 60 years of 
hard work that went into building our company, and especially the 
future of our employees in the U.S.
    Pridgeon & Clay, like many other companies in the automotive 
industry, depends upon our ability to supply our customers 
internationally--and to compete on an international basis--in order to 
thrive and support our employees. A significant part of our growth has 
been because we have followed our customers to other countries, and by 
doing so, we have created additional jobs in our U.S. facilities. Over 
ten years ago we opened a facility in Hungary to supply parts to the 
European operations of our customers. Last year, we formed a joint 
venture in Mexico, again to follow our customers and serve them in 
foreign markets where their businesses are growing.
    Our international expansion has not been an effort to produce low 
cost products in other countries to be exported back to the U.S. In 
fact, last year we exported roughly $30 million worth of parts from the 
U.S. to foreign markets. However, the reality is that if our U.S. 
operations in Michigan and Indiana are not globally competitive--
especially due to high regulatory costs in the U.S. that we do not 
experience in other countries--then it will be difficult to continue to 
grow in the U.S.
    Pridgeon & Clay is a highly automated, efficient company, but we 
are also energy intensive, so even a slight increase in operating costs 
related to energy costs could cause us to lose a contract with a 
customer. If our costs increase we are vulnerable to competition from 
abroad.
    The climate change policy debate is occurring in the middle of an 
economic climate that is already pushing U.S. manufacturers to the 
breaking point. We currently face an array of tough challenges: tight 
consumer spending, difficulty gaining access to credit, the collapse of 
car and light truck sales causing problems for automakers and our other 
customers, and pro-manufacturing policies being developed by other 
countries around the globe who are actively seeking to increase their 
own manufacturing base.
    The U.S. simply cannot afford to place additional burdens on 
companies who are doing everything they can to continue to operate in 
the U.S. unless our trading partners, and especially the low cost 
manufacturing countries, are prepared do so as well. Many of our 
largest customers have moved operations to Mexico. To maintain the 
business and continue to serve those customers, companies like ours 
have no choice but to follow our customers. There is a component of our 
exports that we can continue to competitively manufacture and ship from 
our U.S. plants. However, I fear that implementation of a cap and trade 
system, and the related tariff that has been proposed on imported goods 
from countries who have not implemented a similar cap and trade system, 
will increase our manufacturing and transportation costs to the point 
that our remaining export business will be vulnerable.
    Our first concern about the creation of a cap and trade system for 
carbon dioxide is based upon the costs associated with such a program, 
and the impact that those costs will have on our company's ability to 
compete internationally. The fact that a cap and trade system will 
increase costs for consumers of energy is beyond dispute. Even if you 
disregard the indirect costs associated with such a system, the $650 
billion estimate for revenues from the sale of allowances under the 
system are costs that will be passed on to consumers of energy--
especially in energy intensive sectors such as manufacturing.
    As I mentioned, Pridgeon & Clay is a fairly energy intensive 
business. Our primary input is stainless steel, which is an energy 
intensive product. Our stamping presses have large electric motors and 
pumps, we have large air compressors, many of our parts are welded, 
some are heat treated and most require cleaning to remove oils and 
lubricants.
    If the U.S. is not joined by the rest of the world--especially by 
low cost countries--in a cap and trade system, then additional costs in 
the U.S. will require manufacturers in the U.S. to choose between 
increasing the costs of their goods, reducing overhead by taking steps 
such as laying off employees, or finding alternative locations for 
their manufacturing operations. All of these options are bad for U.S. 
consumers, bad for U.S. workers, and bad for the U.S. economy.
    It is also important for us to discuss the tariff proposal that has 
been proposed. This would impose a tariff, or ``carbon tax,'' on 
imported goods from countries that do not have climate change policies 
similar to the one under consideration in the U.S. This would seem to 
make sense, but this type of proposal could actually make things worse 
for companies such as ours, because it would increase the cost of the 
raw materials we use to manufacture our products--costs we cannot 
typically pass along. Our company has found that domestic steel output 
is, at times, too low to satisfy overall demand for steel by U.S. 
manufacturers, and as a result we sometimes have to import steel from 
other countries. Placing a tariff on these inputs, which often amount 
to 60 percent of our costs, will compound our problems under a cap and 
trade system because we will be paying a higher cost for our energy and 
a higher cost for our imported raw materials. This is a formula that 
will further drive manufacturing overseas, limit any environmental 
benefits of a cap and trade system because emissions will be relocated 
rather than reduced, and threaten the ability for our company to remain 
economically viable in the U.S.
    Products manufactured in the U.S. must be able to compete against 
foreign products. If foreign producers are able to avoid the additional 
costs associated with a cap and trade system, then we will be 
uncompetitive. This concern has even been echoed by supporters of the 
cap and trade system, such as the Obama Administration's Secretary of 
Energy, Dr. Steven Chu, who recently noted that, ``The concern about 
cap-and-trade in today's economic climate--is that a lot of money might 
flow to developing countries in a way that might not be completely 
politically sellable.'' \1\ Secretary Chu is speaking about a political 
issue. I don't care about the political aspects of this issue--but I do 
care, very deeply, about the jobs of my employees in Michigan and 
Indiana, and those jobs are very clearly threatened by cap and trade 
unless it is universally applied throughout the world, especially in 
low cost countries.
---------------------------------------------------------------------------
    \1\ John Broder and Matthew Wald, Big Science Role Is Seen in 
Global Warming
Cure, N.Y. Times, Feb. 11, 2009. Available at: http://www.nytimes.com/
2009/02/12/us/politics/12chu.html?_r=2
---------------------------------------------------------------------------
    We are committed to our employees and to helping Congress and our 
country work through the current economic crisis. However, our ability 
to continue to manufacture products in the U.S. is imperiled by 
policies that increase the cost of energy, transportation and delivery, 
and our raw materials. We appreciate the need to address pressing 
environmental problems, but believe that the cap and trade and tariff 
options currently being discussed put at risk what remains of the U.S. 
manufacturing sector. I ask that you keep in mind the millions of 
manufacturing jobs lost these past several years and the millions more 
at stake, especially those of us in Michigan Indiana.
    Once again, thank you for inviting me to testify and for 
considering our input on these complex and important matters.

                                 

    Chairman LEVIN. Thank you very, very much.
    So let's go. We have a very, very well-attended hearing and 
we are all so concerned about this and you can see by the 
number of us that are here.
    Until we got to Mr. Clay, I think there was rather broad 
agreement, perhaps not on the details but on the need to move 
and as we move to be sensitive to the impact on American 
manufacturing and to find a way either through an international 
agreement or, in the lack of an international agreement, to 
find a way to handle it domestically.
    So, Mr. Clay, I think your concern about manufacturing is 
very widely shared. I don't think there is any disagreement on 
that. And I do think what we need to do is to look at your 
processes and your product and really see if there isn't a way 
to both meet the objective of moving on this environmental 
issue, which you acknowledge; right? I mean some witnesses, a 
few, have come here and denied there is such a thing as global 
warming. You don't deny that?
    Mr. CLAY. No, I don't.
    Chairman LEVIN. Okay. So the question becomes then how do 
we put together action with a sensitivity to the work that you 
are doing and your employees. Do you export a lot of what you 
produce?
    Mr. CLAY. It would be about 10 percent of what we produce.
    Chairman LEVIN. So the vast majority of what you produce 
you don't export, you sell here?
    Mr. CLAY. Correct.
    Chairman LEVIN. So if a system is derived so that all of 
the inputs that you receive from other places are subject to 
the same structure, that doesn't then place you at a domestic 
disadvantage in terms of domestic competition; right? This is 
in terms of inputs.
    Mr. CLAY. Not necessarily.
    Chairman LEVIN. If they are all treated the same way for 
every manufacturer in your position, then you are not at a 
disadvantage in terms of your competition with other 
manufacturers who compete in the domestic workplace?
    Mr. CLAY. This is true. There is one concern that I have, 
though, and my concern is not raising our costs as a company 
but also not raising the overall cost of the system because if 
the overall cost is increased, then that will serve a function 
of driving the businesses overseas, people that we supply, 
bringing the larger assemblies in.
    Chairman LEVIN. But in terms of your overseas production, 
do you export any of that back to the U.S.?
    Mr. CLAY. No, we do not.
    Chairman LEVIN. You don't.
    Mr. CLAY. No.
    Chairman LEVIN. So what you are saying is that if there is 
an increase in cost here, it will make it more difficult for 
you to compete. If you don't bring most of it back then your 
competition overseas is under the same rules as yours?
    Mr. CLAY. We supply companies that make more complex 
assemblies. If the overall cost of that assembly increases in 
the United States, I believe there is a good chance that could 
move to a different part of the world.
    Chairman LEVIN. But the competition there would be under 
the same rules. If they don't have any particular rules 
relating to emissions, and we very much want an international 
agreement, still, the playing field in terms of your overseas 
operations are more or less the same as everybody else who is 
competing in that country who is not bringing the product back 
to the United States.
    And I will tell you I do this not to challenge as much as 
to try to urge that as we talk about this issue that we are 
really careful about generalizations and about conclusions 
because there is a deep determination here for us to accomplish 
both, I think, in this institution. At least most of us. We 
can't stand still on global warming. We also want to maintain 
the manufacturing base. So, therefore, as we try to put those 
two things together, we have to really be careful that we 
disaggregate and not draw conclusions that really are not 
correct. And if we look at the dynamics of your operations here 
and overseas, it seems to me very feasible that you can 
accomplish both objectives, and including without your moving 
your operations overseas in order to bring it back here.
    I have used up my 5 minutes.
    Mr. Brady.
    Mr. BRADY. Thank you, Mr. Chairman. Thank you for yielding. 
I would like to thank the witnesses for appearing here today. I 
would like to especially thank Mr. Clay, who is the sole 
witness in pursuit of what we hope to create, which is more 
American jobs.
    I would point out that America is a very open market. We 
let a lot of countries sell here, but when we try to sell our 
products around the world we often find it stymied. Free trade 
agreements have created two-way trade where, for example--where 
we sell more products and services. For example, in Central 
America we have turned in that trade agreement a $1 billion 
deficit into nearly a $7 billion trade surplus in just about 2 
years.
    I would also point out, I think, the example of Chinese 
steel is a great example of how complicated this issue is. If 
you look closely below the surface, America relies on many 
mills, electric arc furnaces, a lot of recycling. China relies 
on integrated mills with blasts and basic oxygen furnaces 
because they don't yet have a scrap steel sector. We have a 
temporary advantage at best. And those who think we will 
leverage China, I think, one, China will argue accurately that 
their per capita carbon dioxide emissions are \1/3\ those of 
the United States, and they--because so little of Chinese steel 
makes it to America, less than 1 percent of what they produce, 
and most likely after the economy picks up they will return to 
being a net importer of steel. Very unlikely that any trade 
barriers we erect here or cost will leverage China into an 
international agreement. The point being it will drive up the 
cost of steel for Mr. Clay and have no impact overseas against 
competitors.
    I would like--because it is a complicated issue, I would 
like to submit for the record this analysis done by the 
Brookings Institute that seriously questions whether the border 
measures Mr. Pauwelyn describes could be compliant with our WTO 
obligations.
    Chairman LEVIN. Without objection.
    [The information follows:]
    [Not available at the time of printing.]
    Mr. BRADY. Maintaining the competitiveness of U.S. 
exporters like Mr. Clay and others is critical to promoting 
economic growth. We can't just buy American; we have to sell 
American.
    Last year the EPA estimated how much energy prices could 
increase under the Lieberman-Warner cap-and-trade bill, a 
proposal that called for less severe emissions cuts than those 
outlined in the President's budget. We asked the staff at the 
U.S. International Trade Commission to model the impact of 
these very conservative energy price hikes on U.S. exports. 
This analysis shows that exports of over half a billion dollars 
would see a decline of U.S. exports of $162 billion. Included 
in these sectors are automotive stampings and imports, products 
produced by workers at Mr. Clay's company.
    I would like to submit this analysis for the record, Mr. 
Chairman.
    If Congress moves hastily to impose risky new cap-and-trade 
energy taxes, America stands to lose a stunning $162 billion in 
export sales. That is a drastic 30-percent loss of American-
made products and services. And despite some proponents' claims 
that few industries would be affected, this analysis, based on 
data from the EPA, clearly shows that American exporters in 
these 52 key economic sectors across the spectrum of 
manufacturing, agriculture, and services would experience 
severe losses in exports as a result of higher coal, oil, and 
natural gas prices, another reason Congress should avoid a rush 
to legislation that could significantly damage the U.S. economy 
and threaten the jobs of many hardworking Americans.
    And I would submit this for the record as well.
    Chairman LEVIN. Without objection, it is in the record.
    [The information follows:]
    [Not available at the time of printing.]
    Mr. BRADY. Mr. Clay, let us assume the President's new 
energy tax should become law. Congress imposes new trade 
restrictions on raw materials like steel and aluminum and other 
critical raw materials. You explained this creates a double 
whammy because you would have to deal with the energy taxes and 
your input costs would increase. Let us further assume that 
China does not follow the U.S. lead, does not impose higher 
energy taxes on its economy, which is likely.
    In such a scenario, what would be the impact on the 
competitiveness of your business and your workers?
    Mr. CLAY. It would make our business very vulnerable to 
shipments from overseas, and it would make our workers 
vulnerable to losing their jobs.
    Mr. BRADY. Well, I think this analysis is key in that it 
shows that at a time when we have a very fragile economy, 
considering drastic changes that could cut 30 percent of our 
export sales around the world would have a real impact on 
businesses like yours, not just in manufacturing but in ag and 
services across the spectrum in America. Another reason I think 
it is wise, Mr. Chairman, to have hearings like this so we can 
explore all of these issues in-depth.
    And I would yield back.
    Chairman LEVIN. Thank you. So what we will do now is follow 
the rule. We will take people as they came in.
    Mr. GERARD. Mr. Chairman?
    Chairman LEVIN. Yes.
    Mr. GERARD. I am very uncomfortable sitting here and 
listening to this. I wouldn't want this to go much further 
without clearing up the record.
    Chairman LEVIN. Let me suggest this, Mr. Gerard. Let me try 
to follow the rules, and my guess is somebody will yield to 
you.
    Mr. GERARD. I am not that good at the rules, but I will 
follow them.
    Chairman LEVIN. Okay. [3:11 p.m.]
    Chairman LEVIN. So we will go with our usual order. Those 
who were here at the drop of the gavel will be first. And since 
there are, I think, nine or ten Democrats and five Republicans, 
we will follow the rule of two for one. We will not do that 
when the numbers are basically even.
    So now Mr. McDermott is next.
    Mr. MCDERMOTT. Mr. Gerard, I will give you 2 minutes to 
clear the record.
    Mr. GERARD. Thank you.
    I just want to make sure that Mr. Brady understands that 
America's steel industry is not a mini mill industry. There are 
29 blast furnaces. Currently, only nine are working because of 
the economic collapse in our sector.
    I want you to know that Chinese steel is being dumped into 
America in record proportions. And, in fact, on one important 
commodity that you might have some familiarity with, oil 
country tubular goods, China has put as much steel into our 
market in the last 6 months as the whole market can withstand.
    So I will give it to you as an example. If there are 5 
million tons of demand, China has put 5 million tons into our 
market. Since our economic collapse in November of 2008 to now, 
China has increased this dumping into our market in almost 
every commodity. So that it is not that China is being neutral 
about this; and, in fact, what they have done is try to take 
over our market.
    Mr. BRADY. Who is the largest exporter of steel into 
America--excuse me. Of Canada?
    Mr. MCDERMOTT. I am reclaiming my time.
    Mr. GERARD. You are using my time; and in fact I want to 
make sure that you understand that you are inaccurate in your 
information. And that if we are going to deal with the issue of 
climate change, the fact of the matter is that China produces 
three times the unit of carbon for every ton of steel they 
produce; and this is called global warming. It is not Chicago 
warming or Texas warming. It is global warming. And as long as 
we are making it hospitable for China to dump their steel into 
our market or as long as we are making it hospitable for China 
to move their steel around the world, we are making the issue 
of global warming worse, not better.
    And the fact of the matter is that global warming is a real 
issue. Our union recognized it in 1990; and, in 1990, we said 
we had to start doing something about it. And we can do that in 
a way that finds real solutions, not solutions to opening up 
our market to China so they can keep dumping their unsafe, 
environmentally fraudulent products into our market. And I 
resent you pretending that is not what they are doing.
    So for our members----
    Mr. MCDERMOTT. I reclaim my time.
    I want to open up another issue, because, obviously, the 
question will ultimately be decided, whether or not we do 
something. People who don't want to do anything because it is 
going to create a problem are for another day.
    I want to hear from--Mr. Pauwelyn, how does the United 
States go to Copenhagen, having done nothing? Explain to me 
what our position will be, pro and con? Maybe it is better to 
go with nothing or maybe it is better to have passed a bill. Or 
give us our position in the world if we don't deal with this, 
including the leakage--people say we can go do that under WTO. 
Tell us what happens at Copenhagen with nothing.
    Mr. PAUWELYN. Thank you.
    As you may know, in Europe, we have been having the very 
discussion you are having now for years. And that the issue 
was----
    Mr. MCDERMOTT. We have had a hiatus of 8 years here.
    Mr. PAUWELYN. Yeah. So the problem has been, for Europe, 
what do we do with U.S. exports that have not paid any price 
for carbon. Of course, now the situation is changing; and the 
U.S. seems willing to do something.
    Now, when it comes to the alternative of going to 
Copenhagen without anything or having legislation in place, my 
hope would be that the U.S. would take the lead on this global 
issue and lead by example. And my ultimate hope would be that 
whatever border measure is in the bill would eventually not 
have to be used, would not have to be implemented, and that it 
would act as a stick, carrot for China, Brazil to come to the 
table and cut their own emissions.
    I strongly hope that this will be the case, that we will 
never have to use the instrument of trade which is, I admit to 
Mr. Brady, that it is a harsh instrument, that we will never 
have to use this. But we could use it as a stick in legislation 
with the hope that an international deal is made.
    Mr. MCDERMOTT. So it is possible that, if we do nothing, 
that the Europeans might decide to impose a border tax or 
whatever mechanism you want to call it or what word you want to 
use it, just say anything coming into Europe pays an additional 
$5 or $10 for coal?
    Mr. PAUWELYN. The European Commission has made it clear 
that they are also looking into carbon leakage, job leakage; 
and they will first identify those industries that will get 
free allowances allocated. And if the problem persists, they 
will also think about border measures. And, yes, that could be 
China but also the U.S. if the U.S. does not cut emissions.
    Mr. MCDERMOTT. Thank you.
    I yield back the balance of my time.
    Chairman LEVIN. Mr. Doggett.
    Mr. DOGGETT. Thank you, Mr. Chairman.
    And thank you for your very constructive comments. They 
suggest the challenges that we face in constructing a solution, 
but they don't take the approach of just excuses for inaction.
    To those who are concerned about a rush to legislate, as I 
think the last comments just indicated, we have had 8 years of 
the United States being the major obstacle to resolving the 
climate change issue; and I am sure it will take the world a 
little bit of time to adjust to the notion that we are doing a 
complete turnabout and are now willing to provide some 
leadership to deal with this critical problem.
    I am very pleased that this hearing is focusing on this 
issue. I don't believe that the Sierra Club and the 
Steelworkers have been very frequent visitors, if ever, before 
this Subcommittee. And if we were to build a new trade policy 
that recognizes that we must be concerned with the effect of 
trade on workers and on the environment, it will be through 
collaboration, not by focusing all of our attention on the 
leftovers from an outmoded trade policy of the past.
    Specifically with reference to climate change and how we 
move forward, Mr. McMackin, it seemed to me that the industries 
that you represent, if we get it wrong, they are going to be 
disadvantaged perhaps more than any other industries in the 
industry because you do rely on energy significantly in your 
production. And let me just ask you from that perspective, and 
I believe your testimony is to this effect, but are you 
convinced that, as challenging as it may be to work out the 
details, that there is a way to maintain a level playing field 
for American industry both for importers and for exporters?
    Mr. MCMACKIN. Mr. Doggett, I think that there is. And as an 
example of the progress we are making in fashioning that, last 
year when this subcommittee had a hearing, the gap in some of 
the proposals, that was pointed out where it wouldn't help 
export markets.
    Since then, there are provisions--for instance, I know 
there is one in Mr. McDermott's bill and I think it is in Mr. 
Larson's bill--that would aid export markets by providing for 
export rebates. Your bill which goes at the fundamental problem 
by having what amounts to one of our output-based rebates or 
allocation grants would also solve the problem in export 
markets by removing the extra cost at the source by in effect 
rebating a lot of that cost to the manufacturers. So, yes, I 
think we can get there; and we are making good progress.
    Mr. DOGGETT. I think this is very helpful testimony to have 
an international expert on trade laws. Because, among the many 
excuses, the mythology that those who want to be as inactive in 
the future as this country has been for the last 8 year, has 
been the claim that we cannot do anything to assure the 
competitiveness of our industry without violating the WTO. And 
you pointed out constructively in your testimony that the same 
issues have already been considered in Europe.
    I think we can learn from the experience of the European 
countries with cap and trade and on these issues; and in that 
regard, Mr. Hamilton, I appreciate the fact that you were here 
in this room with a majority of the Democrats on this Committee 
last year when we introduced the climate matters bill, 1616, 
that Mr. McMackin referred to. And is it your belief that we 
would be better served by seeking a way of addressing these 
competitiveness issues by focusing on an approach other than 
just giving away permits to pollute, giving away allowances?
    Mr. HAMILTON. Mr. Doggett, as I said in my testimony, I 
believe that there are ways to kind of combine and structure 
these alternatives so that there are a couple of different ways 
you can make it work.
    I think I talked about the--what we saw as a drawback of 
free allocations, which is you don't know what happens to it 
necessarily. If companies are in fact able to raise prices on 
the perception that they are now under a regulatory system, 
then you run the risk of windfall profits. If they are really 
trade challenged and price constricted, that is much less of a 
risk. So it really--a lot of these things vary industry to 
industry and become very tailored. And I think, you know, an 
output-based rebate is a more tailored instrument to deal with 
that.
    But, you know, again we have been talking about mixing and 
matching; and then there are different strengths to different 
mechanisms.
    Mr. DOGGETT. You also mentioned in your testimony that you 
thought the essential solution is a global agreement. But you 
would agree that to say no action in the United States until 
others act is just a way of giving a veto power to the most 
regressive country that refuses to act, someone that would, 
say, adopt the policy the United States has followed for the 
last 8 years.
    Mr. HAMILTON. You know, I really cut out all that bit about 
science and all the reasons from the melting of the permafrost 
and the acidification of the oceans and all the things that the 
Sierra Club usually talks about. But we are really in a race 
against time to effectively address climate change.
    I think most--both the IPPC and Dr. Hanson and others 
emphasize the fact that we don't have a long time to wait for 
the stars to be in complete alignment before we do something. 
And if we are to actually endeavor to lead on the international 
stage, you know, we have some ground to make up.
    Mr. DOGGETT. As we lead--since my time is running out, as 
we lead, we want to cooperate. We want to avoid ever having to 
use the trade tools as you testified. But you believe, do you 
not, Mr. Hamilton that we need to have as a part of our new cap 
and trade, cap and invest law provisions that will provide 
disincentives to countries that do not join us in addressing 
this problem of carbon pollution?
    Mr. HAMILTON. Yes. We believe very clearly that no action 
to prevent leakage should not be an option.
    Chairman LEVIN. Thank you so much, Mr. Doggett.
    Mr. Davis, you are next. And the clock did not start. It 
was totally unintentional when Mr. Doggett--so, Mr. Davis, you 
will have an extra 45 seconds, or one of you will. You are 
next.
    Mr. DAVIS of Kentucky. Thank you, Mr. Chairman.
    Since we are talking about manufacturing, I have one 
question here. Just raise your hand. How many of you have 
actually run a manufacturing business who is in this panel 
today?
    Were you a plant manager, Mr. Gerard, or the union----
    Mr. GERARD. No, I ran the union; 850,000 members in two 
countries.
    Mr. DAVIS of Kentucky. That wasn't what I asked. I reclaim 
my time. Thank you. We are going to operate by our rules while 
we are here.
    I do find it somewhat ironic when we deal with a 
manufacturing trade issue that we only have one manufacturing 
executive here. I grew up around the steel and the coal 
industry. I understand it, having watched the plant closing. 
And I think the obsession with the past 8 years is somewhat 
misguided intellectually when we are talking about generational 
impacts that go back to the 1950s. Legitimate environmental 
questions to ask, legitimate trade questions to ask of how we 
maintain competitiveness of jobs. And I think the false 
adversarial nature is a mistake.
    Our Ohio Valley has four mills. Of those four mills, every 
one of them, including bargaining unit members, have told me 
that these compliance standards will cause them to probably 
lose their jobs. You know, as our Democratic floor leader in 
Kentucky says, what are you going to say to the Caterpillar V-8 
operator in a mine who just had his job legislated away in the 
coal industry? That can't be replaced effectively with 
anything.
    And millions of jobs depend on trade: 42 percent of jobs in 
our country. Twenty percent of our jobs in Kentucky are 
dependent on international trade. It is a competitiveness issue 
with American workers throughout.
    And I am concerned about the impact of these energy taxes. 
This is not an investment. This is a fee. When we talk about an 
investment, it is where we have the placement actually of money 
into the private sector and you have got to have that uniform 
playing field.
    One thing that I would question is the border measures to 
me don't make sense from a simple equilibrium standpoint in 
commerce. I am just a simple manufacturing guy by background, 
trained as an engineer and was in the Army before that. My 
viewing of chemistry and physics is based on an industrial and 
a practical level. And we are not here, as the chairman said, 
to talk about global warming and the scientific perceptions of 
that, which there are certainly many viewpoints.
    But, more important, China is the top CO2 
producer in the world, followed by India and Brazil. Per capita 
is a different ratio. But we only consume 1 percent of their 
production. It would seem to me on simple metrics--and plenty 
of economists have seen this--it would be cheaper for them not 
to comply and pay a tariff for products into the United States 
knowing that they could stand one on one with that cost.
    Mr. McMackin, you have talked about how the Inslee-Doyle 
provision reduces compliance costs faced by some manufacturers. 
How significant are the cost increases manufacturers would 
continue to face even under Inslee-Doyle provisions?
    Mr. MCMACKIN. There will be some, Congressman. At this 
point, Inslee-Doyle, for instance, would not cover cost 
increases in our nonfuel inputs like soda ash in the glass 
business.
    The other category that is left out is the increase, for 
instance, in natural gas that would be caused by the increase 
in the demand for natural gas precisely because it is carbon 
efficient. Those are two areas where some increment of the cost 
would not be----
    Mr. DAVIS of Kentucky. Just reclaiming my time. So you are 
saying--but there is going to be a huge impact on the 
competitiveness of our workers, because we have also passed 
separate legislation to increase tax on American energy 
production. Assuming that we try to use some of our resources, 
it would seem to me that is going to be counterproductive at 
the end of the day.
    Mr. MCMACKIN. Congressman, what I am saying is it hangs in 
the balance with respect to energy intensive foreign-trade 
exposed industries. If we continue to work and design a 
provision that gets us to the point where the costs are minimal 
of unilateral legislation, then I think we can avoid the job 
loss.
    Mr. DAVIS of Kentucky. Reclaiming my time. Mr. Hamilton in 
fact in his opening statement said that 80-percent reduction 
goals would, in fact, have, quote, massive increases in energy 
costs. I don't see how you can deal with this just from a 
standpoint of working families, working poor, those on fixed 
incomes to have what under Warner-Lieberman was estimated a 
$1,300 per family unit increase in bottom-line energy costs. 
How we can offset that and remain competitive?
    But in your testimony you argued that efforts to minimize 
the impact of the President's energy taxes should be limited to 
5 sectors. Now we have analysis that shows that there is dozens 
of sectors that would be impacted.
    And I have a question for Mr. Clay. Just in closing, do you 
believe it is appropriate for your firm to be excluded from any 
assistance in this?
    Mr. CLAY. No, I don't think it is appropriate. If there is 
going to be rebates and assistance for that, then I think we 
should be included. But we currently are not, to my 
understanding. I would rather keep the whole situation more 
simple and not have to deal with this issue and not have to 
deal with the rebates either.
    Mr. DAVIS of Kentucky. Okay. Thank you.
    Just reclaiming my time, I think the one thing that Mr. 
Pauwelyn from Switzerland pointed out, unless everybody plays 
on this field, looking at the amount of the connectedness of 
the international supply chain, we are going to have a huge 
consequence for this. And not many of us in this body have 
walked the floors of a factory and actually had to deal with 
manufacturing cost, purchasing cost, the integration of 
products from across the world. As we continue to explore this, 
I think it is important that we maintain balance.
    There are legitimate questions to be asked, but the thing 
that I would say in closing is we can't rule out the job 
impacts on ordinary working people that could be profound in 
the heartland of the country.
    And, secondly, Mr. Brady's comments are absolutely correct 
on the proportions of the imports of steel in the United 
States. Canada is first, followed by the EU as major partners. 
And when we look at these percentages of consumption, let us 
not create something that we actually can't live with and would 
legislate more jobs out of the country.
    I yield back.
    Chairman LEVIN. Mr. Etheridge.
    Mr. ETHERIDGE. Thank you, Mr. Chairman; and let me thank 
each of you for being here.
    As someone who was involved in manufacturing, buying 
materials, all of it was steel, selling it to the finished 
consumer, I know a little bit about what it means where you buy 
it, what impact it has.
    Mr. Gerard, you represent a group of manufacturers whose 
management has a great awareness of what this will do, I am 
sure. And I think it would affect those industries. I would 
like to know how you think it would, because I represent a 
State that has a major agribusiness sector, a large 
manufacturing base, and a growing high-tech manufacturing base. 
So taking a close look----
    Let me give you three of those and let me just ask you, if 
you would, to give me your thoughts very quickly so I can get 
to another question on some of these others.
    One of those would be right adjacent to my district really, 
the Tarheel slaughtering plant, the largest pork slaughtering 
plant in the country, or one of the largest. The other one is 
one of the largest tire manufacturing plants in Fayettevile, 
North Carolina. The third one would be a number of 
pharmaceutical manufacturing facilities, and they are a little 
different.
    I would be interested in your thinking. Because I think, 
given your background, you would have a good understanding of 
all three of these industries because you represent people 
involved in it.
    Mr. GERARD. Thank you very much.
    Unfortunately, I don't know very much about slaughtering. 
But let me just say that our union has had a position for quite 
some time that on this issue we need to have a global 
arrangement. And that, as I said in my comments, we represent 
primarily but not unilaterally--or not only--but we represent 
primarily energy intensive industries and we actually believe 
that the right way to that path----
    Mr. ETHERIDGE. And these three would be.
    Mr. GERARD. These three would be.
    And the right path in a global arrangement is to have 
sectoral agreements for those energy intensive industries. 
Because each one has a different dynamic.
    And along the lines of what has already been discussed, we 
need to have output-based rebates; and those output-based 
rebates need to be backed up with trade mechanisms so that if 
people don't live up to the output-based mechanism there is a 
trade mechanism to fall back on.
    And then, finally, if none of that works, you have a border 
adjustment mechanism; and the border adjustment mechanism, as 
several have said, is the stick that we use to bring people 
into compliance.
    And what I am extremely concerned about is that I am going 
to be okay, my kids are probably going to be okay, but my 
grandkids aren't, and we can't continue to ignore the issue of 
global climate change. I am very aggressive about saying that 
it is not Texas-based climate change. It is not North Carolina. 
It is not Michigan. It is not Pittsburgh or Chicago. It is 
global-based climate change.
    So we need to be the leaders in the global negotiations, 
and we need to set the framework. And the fundamental of that 
framework has to be that we don't disadvantage our American 
manufacturing in favor of those that are already unfairly 
trading with us.
    There is no point in me hashing back and forth with our 
Republican friends. But I will just remind them that we have 
got an accumulated trade debt of $6 trillion and we service it 
every year by spending about $400 billion. I would rather use 
that on the economy and America. I would rather use that to 
solve global warming.
    Thank you very much.
    Mr. ETHERIDGE. Thank you, sir.
    Mr. McMackin, I understand that from your approach in your 
testimony in determining the industries that would receive 
compensation, whether free admission, allowances or through tax 
credits or rebates, that identifies a certain universe of 
industries that are both energy intensive and trade sensitive. 
What about those trade-sensitive industries that may be less 
energy intensive? I would be interested in knowing--aren't they 
susceptible also to imports from unregulated producers and the 
carbon leakage that comes with that? I would be interested in 
your comments.
    Mr. MCMACKIN. Congressman, yes, they may. So in the 
proposal----
    Mr. ETHERIDGE. How we deal with it.
    Mr. MCMACKIN. In the proposal we are developing, we have 
tried, in addition, to expand the list of industries that would 
be eligible for the rebate; and we are up now from the 8 or 12 
that always get listed to our study identified 45 sub-
industries. Then I think we ought to have a provision that 
says, in addition, any industry should be able on an individual 
basis to show that it also is subject to leakage. Even if, as 
you say, it is not quite as energy intensive as others, but it 
is very trade intensive, then it ought to be eligible for some 
of this cost mitigation as well.
    Mr. ETHERIDGE. Thank you, Mr. Chairman. I yield back.
    Chairman LEVIN. Now I think under our procedure Ms. Sanchez 
is next, and we will see if some of our colleagues who were 
here before come back. If not, we will go to your side anyway.
    Ms. SANCHEZ. Mr. Chairman, I believe Mr. Larson was here 
before I was.
    Chairman LEVIN. But he is not on the Subcommittee. And I 
say that a bit painfully because Mr. Larson is a sponsor of 
some important legislation.
    Ms. SANCHEZ. Yes, he is.
    Chairman LEVIN. But we have a rule, and we need to follow 
them. And I am not quite sure how we are going to work that 
out. So why don't you take your turn.
    Ms. SANCHEZ. I will, Mr. Chairman.
    Chairman LEVIN. Thank you for your consideration.
    Ms. SANCHEZ. I was trying to help a brother out.
    Mr. Clay, in your written testimony, you express some very 
understandable concerns about the potential pitfalls of 
imposing a cap-and-trade system to combat global warming in 
what is admittedly a very challenging economy right now; and 
you predict that U.S. manufacturers may relocate offshore if 
the U.S. puts into place a cap-and-trade system. And I was just 
interested in knowing, your company has operations in Hungary 
and Poland; is that correct?
    Mr. CLAY. That is correct.
    Ms. SANCHEZ. Are those operations in Hungary and Poland 
subject to the cap-and-trade system that is imposed by the 
European Union?
    Mr. CLAY. I don't know the answer to that.
    Ms. SANCHEZ. Okay. I am just curious to know. Because if, 
in fact, they are subject to the cap-and-trade system that the 
European Union uses and your argument is that cap and trade 
will threaten the viability of manufacturing, I am wondering 
how those operations remain in effect if they are following 
that system.
    Mr. CLAY. We locate in those areas to supply those areas. 
So it is not an issue--the same issue that we have here. Back 
in Michigan, we have an issue of competing globally and 
competing in trying to save our jobs from moving overseas.
    Ms. SANCHEZ. I understand that. My concern is that there 
sort of seems to have been created this artificial divide 
between let us not do anything and let us admit that global 
warming is a problem but, you know, heaven forbid we should 
really try to address that with some thoughtful proposals 
because it may hurt our competitiveness.
    And I don't think there is a single Member up here that 
isn't concerned about job loss and U.S. competitiveness in a 
global economy. But, by the same token, I don't think we can 
throw our hands up in the air and say this is too difficult to 
tackle and therefore it is easier just to do nothing and we 
will remain more competitive if we don't have to deal with 
this.
    I think globally we need to really look toward being a 
leader and working with, you know, other countries in terms of 
bringing the standards up, rather than trying to leave the 
world without standards or trying to loosen those standards.
    Mr. Gerard, I was interested your written testimony because 
you explain some of the potential benefits and pitfalls of 
output-based rebates, border adjustments and hybrid schemes; 
and then you discuss a scenario that would function something 
similar to a value-added tax. I was wondering if you could 
explain that proposal a little bit more for us.
    Mr. GERARD. Well, the process that we are really looking at 
from our point of view is trying to develop a series of options 
so that as we move into the global negotiations that the United 
States takes a lead and has the kinds of options that I just 
referred to a minute ago as--for lack of a better word--a 
ladder of which America will lead on. So that at the bottom of 
that ladder it would be the kind of border adjustment mechanism 
that you just referred to that would be like a value-added tax. 
And I think the professor would agree that that is allowable 
under the WTO.
    Ms. SANCHEZ. Professor, do you dispute that assessment?
    Mr. PAUWELYN. No, that is correct.
    Mr. GERARD. So if you create that kind of a ladder, then 
what we can do with that is, A, deal with the issue of global 
warming; B, protect American jobs; and, C, force--if that is 
the right terminology--other countries to meet the acceptable 
global standard.
    The one thing that I can tell you that I worry about 
substantially is that an unregulated market in carbon credits 
will end up creating a bunch of carbon billionaires. We have 
already seen what unregulated financial markets have done to 
us. So as we move down this path we think having that ladder of 
options and America leading the way on that can lead us that 
way. And if we end up with what would be the equivalent of 
value-added tax as the stick as well as some carrot, then we 
believe we can get there and protect American jobs. If we try 
to ignore those options, then I think we will get left behind. 
If we just say no, as some want to do, then I think we will be 
subject to getting penalized by somebody.
    Ms. SANCHEZ. Final question, which is for all of the 
panelists; and I would like to see this by a show of hands. Do 
you believe--any of you believe that the status quo is 
acceptable going forward?
    No takers.
    Okay, with that, I yield back the balance of my time.
    Chairman LEVIN. I want to be sure what the order is, 
because I made a mistake and Ms. Sanchez was not here at the 
drop of the hat. So it is Mr. Reichert, Mr. Herger, Mr. Nunes, 
Mr. Van Hollen, Mr. Tanner, Mr. Larson, Mr. Kind, Mr. Davis. 
And if someone who was here at the drop of the gavel comes 
back, we will change that. Okay. So we all understand.
    So, Mr. Reichert, you are next. Thank you.
    Mr. REICHERT. Thank you, Mr. Chairman.
    I guess I can't help but make a comment or two first about 
sort of the tone of this hearing. I was a law enforcement 
officer for 33 years, so I feel like I need to bring some peace 
to this proceeding.
    I am very encouraged by the chairman's comments about a 
bipartisan effort. We are all wanting to get answers here, and 
this is really why we are here.
    Mr. Gerard, we just have--we are all Americans coming at 
this very a different place in trying to find common ground 
where we can make America successful. I come from Washington 
State, the Evergreen State. But we also are very dependent on 
trade. One out of every three jobs in Washington State depends 
on trade. So both of these issues are very, very important to 
us.
    I don't think you will find anyone on this panel that is 
against protecting, creating, promoting American jobs and 
protecting our environment, reducing harmful emissions. And I 
remember back in 1962 when I was just in the 7th grade, my 
science teacher took us on a little excursion, an affair in the 
small town of Kent, put us back in the back of a pickup truck 
wearing gas masks. That was about air pollution back then. She 
was way ahead of our time.
    We have been dealing with this--this didn't just happen in 
the last 4 years or the last 8 years or the last 10 years. This 
country and the people in it have been dealing with this issue 
and trying to figure out what to do for a number of years.
    But we have heard a lot about the United States and we know 
that we must show some leadership in this international climate 
change debate. So we want to get to the bottom of what we 
should be doing.
    What happens if the United States takes the lead and others 
don't follow? That is what we are concerned about. All of us 
here are concerned about that; and I know you are, too. Should 
there be an economy wide safety valve such that if several 
years into this program it's clear that China and India are not 
participating, should we reconsider our program?
    Mr. GERARD. If you are putting that to me, I think that, 
clearly, already China has proven that it is an unreliable 
trade partner. The commitments that they made through PNTR to 
get into the WTO are--the ones that they have violated or 
ignored are too numerous to mention right now. And clearly I 
think that the ladder of options that I tried to outline 
earlier should be readily available, including we have given 
away to China the most valuable thing that we have, and that is 
access to our market.
    And if they are going to play through currency 
manipulation, through lack of already weak environmental laws, 
lack of enforcement and other we could go through--we presented 
a report not very long ago where they got $27 billion of aid 
for the steel industry in China, aid that is not available to 
our steel industry, we are told, to compete with. Clearly, if 
they don't meet those standards, we have an option of 
terminating that agreement.
    So I think that the greater the carrots and the greater the 
sticks, the greater the chance that America has to bring about 
the kind of change that is needed in those countries. And I 
appreciate your comments that you are a protectionist as well 
and want to protect American jobs. That is important that we 
recognize that. And I would be the first to say that I believe 
we can do both, help clean up the environment over time while 
we protect American jobs.
    Mr. REICHERT. And I think that all of us here today believe 
that we can do both. We just have to figure out a way to 
protect the environment, protect American jobs at the same 
time. All of you on the panel have said that, too; and we agree 
with that.
    Mr. GERARD. I appreciate your comments.
    Mr. REICHERT. We do know that if the United States doesn't, 
though, get some help and there isn't an international 
agreement, we won't reduce global greenhouse gases.
    So, Mr. Chairman, I would like to enter into the record a 
chart that has been prepared by the EPA that shows the global 
emission levels would continue to decline rapidly if the United 
States imposes emissions and limits but other major emitters 
like China and India do not.
    [The information follows:]

    [GRAPHIC] [TIFF OMITTED] T1949A.053
    

    Mr. REICHERT. Mr. McMackin, you have recommended that the 
allowance rebate program remain in place until there is a 
successful international agreement. I would like to hear from 
the witness, does a successful international agreement require 
that China, India, and all other major emitting countries 
reduce their emissions? Are there steps we should take to gain 
their participation? That is the big question, I think.
    Mr. MCMACKIN. Congressman, for my part, the way we 
recommend designing the provision, the cost mitigation would 
remain in effect until the cost imposed on other countries' 
energy intensive, foreign trade intensive goods are the same. 
And to the extent the difference narrows, perhaps the aid would 
narrow, but it would stay in effect until there is a level 
playing field.
    Mr. PAUWELYN. I think it is realistic to expect, though, 
that there will be a principle of common but differentiated 
responsibilities. This is something the U.S. has already agreed 
to as a party to the U.N. Climate Change Convention, the idea 
being that developing countries will have to commit less than 
developed countries. So we have to be realistic at that level. 
So it is a question of comparable action, not exactly 
necessarily the same by everyone. But, yes, I would think 
China, India, Brazil all would have to cut as well.
    Mr. REICHERT. Mr. Chairman, thank you.
    Chairman LEVIN. Okay. You are next.
    Mr. HERGER. Thank you, Mr. Chairman.
    Mr. Clay, I was doing a little bit of checking here; and I 
believe the reason that you weren't able to answer 
Representative Sanchez's question about the impact, the EU cap-
and-trade system on your Hungary and Poland facilities is 
because you don't face it there. The EU caps don't cap 
emissions on your sector. And since all the allowances are 
given away for free, that means there is no climate impact and 
no competitiveness impact. So the EU is not a good example of 
what the President is proposing.
    Mr. McMackin, you have identified 40 sectors in the economy 
that you think should qualify for free allowances in cap-and-
tax scheme. We have analysis that shows over 50 sectors will 
experience a decline in exports of at least half a billion 
dollars each. Many of the companies and workers in these 
sectors aren't among the 40 you have identified, such as car 
manufacturers, textile products, farm machinery and specialty 
crop farmers. What about the workers in these firms? Should 
Congress ignore the negative impact the President's energy 
taxes will have on these businesses and their workers?
    Mr. MCMACKIN. Mr. Herger, I understand. What our proposal 
would do is identify those most exposed to leakage, and we 
would do it by saying they should presumptively qualify for aid 
by virtue of meeting thresholds of energy intensiveness and 
foreign competition exposure. But other industries that are 
also exposed to leakage should have the ability to go in and 
demonstrate that and should also receive cost mitigation 
assistance, I believe.
    Mr. HERGER. So you would say that would be far more, 
obviously, than the 40, since they have already identified 50 
and most of them are already ones you didn't even identify. So, 
therefore, there is undoubtedly many other sectors out there 
that are going to be damaged pretty seriously that you are not 
even aware of right now.
    Mr. MCMACKIN. Congressman, I honestly don't know the answer 
to that. I know that there is some disagreement in the 
literature. What we focused on is sort of where the consensus 
is of the ones that clearly will be exposed to leakage.
    Mr. HERGER. Okay. The concern of many of us is that there 
is so much damage that all of this experimental programs that 
you are proposing would do, much of which is not done in the 
EU, as exemplified by Ms. Sanchez's question that she assumed 
this was being affected by Mr. Clay's companies, and it wasn't. 
We really don't have a clue of the damage this is going to do 
to the American workers, to the American economy, and how many 
people it will put out of work with what we are throwing out 
here right now.
    We hear a lot about the so-called green jobs that are 
supposed to replace the millions of jobs that would be lost 
because of the President's proposed energy taxes. However, the 
union group, Change to Win, recently released a report that 
shows that many of these, quote, green jobs aren't nearly as 
good as the manufacturing jobs that would be lost.
    The report also states that, quote, green jobs are not 
automatically good jobs, closed quote.
    The report also states that, to make green jobs good jobs, 
the Government must intervene in the workplace.
    Can the witnesses tell me how much intervention, Government 
intervention is necessary and how much that intervention would 
cost American taxpayers?
    Mr. GERARD. I have never seen the study you are talking 
about, so I don't know anything about it.
    Mr. HERGER. I can certainly make it available to you.
    Mr. GERARD. I would love to see it.
    Mr. HERGER. But anyone want to answer my question?
    Mr. HAMILTON. Well, the point of the study was to say 
that----
    Mr. HERGER. You are familiar with the study?
    Mr. HAMILTON. Yeah. In fact, we co-released it with Change 
to Win. It is basically saying that just because a job is green 
doesn't mean that it shouldn't have adequate working 
conditions, adequate wages, and a quality of work that, you 
know----
    Mr. HERGER. That those that it is replacing already have?
    Mr. HAMILTON. I think one thing I will say about--I don't 
actually know which scenario is from EPA that you are using and 
that Mr. Brady was using. But I believe there are 11 of them. 
There are a number of scenarios. And as to what the costs will 
be. But not all of the EPA scenarios depict the kind of 
manufacturing impact that you are talking about.
    Mr. HERGER. Not all of them but many of them?
    Mr. HAMILTON. Well, they kind of have a range from, you 
know, worst case to plausible case. And I think, you know, what 
we found in our working with the Energy and Commerce Committee 
and others is that EPA has not done a good job at modeling the 
positive impacts of energy efficiency improvements on the 
economy in the context of a carbon control program.
    And, you know, the best safety valve, the best cost control 
measure we can work with is lowering energy demand so that 
prices are going to come down and all of these impacts are as 
low as possible.
    Mr. NUNES. Thank you, Mr. Chairman.
    Mr. Gerard, the Steel Workers Union--obviously, I think 
they do a lot of work or have historically done a lot of work 
when it comes to building nuclear reactors, historically. It 
takes a lot of steel to build a nuclear reactor.
    Mr. GERARD. Sure, it takes a lot of steel and cement and 
everything else, yeah.
    Mr. NUNES. So as we look--if the Americans here in the U.S. 
were to develop a policy that went out to build 200 new nuclear 
reactors across the country, would that create a lot of jobs 
for the steelworkers?
    Mr. GERARD. I think if we create wind farms and solar farms 
and we find other ways to do things, we will also create a lot 
of jobs. We have a lot of members that work in the nuclear 
industry, and we don't attempt to pick one industry over the 
other.
    Mr. NUNES. Fair enough.
    Mr. GERARD. We have--just as a result of attracting a 
windmill manufacturer to Pennsylvania, we just created close to 
600 jobs in two different plate mills that hadn't been working 
at all. We call those green jobs. So we haven't tried----
    Mr. NUNES. Aren't nuclear jobs green jobs?
    Mr. GERARD. I am not sure they are green jobs. We have the 
standards that were just referred to. If they are good, family 
supporting jobs and pay decent wages and benefits and have 
great working conditions, they would certainly be considered 
that way.
    Mr. NUNES. So what would take more CO2 out of 
the air, building 200 nuclear reactors, building solar panels 
and windmills or the cap-and-trade scheme that----
    Mr. GERARD. I don't know. I am not technically qualified to 
answer that. I don't know that.
    Mr. NUNES. Well, I think it is--I would like for you to 
look into that at some point and get back to the Committee.
    Mr. GERARD. You give me the information you're working 
from, I'll be glad to
    Mr. NUNES. I will be glad to submit you the question of 
what I asked. Thank you, Mr. Gerard.
    Mr. GERARD. You are welcome.
    Mr. NUNES. Mr. Hamilton, the Sierra Club supports regulated 
animal agriculture. And there has been a lot of proposals put 
out that have been across the board, but looking at dollars per 
cow, dollars per pig, et cetera, et cetera, are you aware that 
there is some folks that say that there were more American 
bison roaming the plains 300 years ago than there are cattle in 
the United States?
    Mr. HAMILTON. I am very sorry. I am the Director of Global 
Warming and Energy Programs, and I would be happy to----
    Mr. NUNES. But you do think that cattle are contributing to 
global warming?
    Mr. HAMILTON. There are manure management--there are both 
methane and carbon emissions from the ag sector, for sure.
    Mr. NUNES. That your group wants to regulate?
    Mr. HAMILTON. Yeah. I think the reasons that we are talking 
about regulating animal agriculture are different than the 
climate change reasons.
    Mr. NUNES. Well, they all--I guess the--I think you know 
the argument I am making here, which is, you know, I would 
assume that the Sierra Club thinks it is a bad thing that 
perhaps as many as 100 million bison were wiped off the plains 
of the United States. Now it is down to just a few thousand 
bison.
    Mr. HAMILTON. I think so.
    Mr. NUNES. You would probably like to see tens of millions 
roaming the plains again?
    Mr. HAMILTON. The question really hasn't come up. I am 
sorry. I don't--you know, we care about wildlife. We care about 
pollution. We care about----
    Mr. NUNES. If we were to bring back tens of millions of 
bison, how would we regulate them?
    Mr. HAMILTON. I don't know offhand. I am sorry.
    Mr. NUNES. You know why I am asking this is because if you 
look at regulating animal agriculture and at the same time you 
look at the number of bison that used to roam the plains, you 
know, to me it is going to be very difficult to regulate animal 
agriculture. And I would hope that the Sierra Club would look 
at what is best for the economy, what is best for American 
agriculture, and what is best for the environment as we move 
forward.
    Mr. HAMILTON. Traditionally, our concerns about agriculture 
are focused on water pollution and, you know, basically runoff 
and other things from farms. But I am happy to hook you up with 
the experts in the Sierra Club that deal with that issue.
    Mr. NUNES. I appreciate that.
    Thank you, Mr. Chairman.
    Chairman LEVIN. Mr. Nunes, you have a deal. You two will 
get together. Thank you very much.
    Mr. Van Hollen.
    Mr. VAN HOLLEN. Thank you, Mr. Chairman. I thank all of you 
gentlemen for your testimony.
    I think and hope that this Committee can work together on a 
bipartisan basis to meet the challenge we face, which is to 
address the issue of global climate change in a responsible way 
that does not put our domestic manufacturers at a competitive 
disadvantage either with respect to their exports, because what 
we do here will increase the costs of inputs, especially in 
energy intensive industries and make it harder in the export 
market and also here in the domestic market with respect to 
products coming here.
    I want to just focus for a minute on the domestic market 
and products coming into the United States. Assuming that we 
put in place here something that deals with the--provides 
rebates for companies so we can deal with the export situation. 
Let us assume--I think it we all agree that it would be great 
if we could have an international regime where everyone was 
playing by the same rules. Then we wouldn't have to worry about 
figuring out at the border exactly, you know, what inputs were 
put into a particular export coming into the United States. But 
let us assume that we don't get there right away, and we need 
to move ahead and at the same time protect domestic 
manufacturing. Here is my question.
    Let us take China, for example. Let us say China was 
exporting steel to the United States, and we had a situation 
where at the border we are trying to compensate for the 
additional costs that U.S.-manufactured steel is incurring. 
Would you recommend a system where you sort of figure out the 
average cost of steel from China or would we be able, based on 
what you know, to take into account what a particular Chinese 
manufacturer was doing?
    Because, to the extent that you are able to do that, we 
could obviously send an incentive for the Chinese manufacturer 
to be reducing their use of carbon-based fuels. And, after all, 
our objective here, the whole purpose we are talking about here 
is to try and reduce global warming, right? It is all one big 
roof.
    We are trying to reduce carbon emissions whether from China 
or the United States. And if we were able to do that on a 
company basis, you would be able to essentially send an 
incentive to manufacturers, regardless of where they were in 
the world, that wanted to export into the U.S. market to use 
the least-carbon-intensive inputs in their manufacturing.
    My question, is that--given what you know about the 
international trade regime, is that a practical thing to do 
right now? Or would it require us to put in place a lot more 
mechanisms to--this is an open question.
    Mr. GERARD. I think that it is a very difficult question, 
if I give you a straight-up answer. But China doesn't know how 
many steel mills China has. China's steel production in the 
last 8 years went from production that was equal to the 
production we had in the United States, roughly at about 120 to 
125 million tons, that now they are producing close to 500 
million tons. As our capacity has been rationalized downward 
and imports have forced that downward, China's production has 
grown. And just this last week it came out that China is now, 
even after this economic global collapse, has now went back and 
is almost at the same tons time produced as it was last year at 
this time.
    One of the problems we have is that China doesn't even know 
where all that raw steel is produced. So there is certainly at 
this point in time an average--an ability to put an average 
cost on products. Because there is a range of products.
    You take oil country tubular goods as an example. We can do 
that. But then we would have to dig down deeper to see if those 
oil country tubular goods are being done with the oldest mills, 
whether they are made in the newest mills. So even going to the 
average cost would give us a real step in the right direction. 
But to say that it would be easy would be disingenuous on my 
part, it would be hard.
    Mr. MCMACKIN. Mr. Van Hollen, can I just up the ante a 
little bit in thinking about the domestic procedures? Within 
the provision we have been working on for allocating these free 
allowances or rebating allowance value, there is an efficiency 
standard; and it is sector averaged such that there would be a 
great incentive to try and do better than the average and the 
ones below would want to catch up and it continually improves 
as you try to press your advantage or try to catch up. I think 
it is one of the real advantages of our provision. It creates 
that same incentive you are talking about for domestic 
producers.
    Mr. GERARD. If I can also add, because he has been sitting 
here all afternoon, is Representative Larson's bill has a bill 
that is an economy wide carbon tax bill. And it is simpler. It 
is easier to enforce. It has fewer WTO complications. And it 
works similar to a VAT that I think Ms. Sanchez asked me about. 
So there are all kinds of options available that we can deal 
with this.
    Mr. PAUWELYN. If I may just add to this, from a trade law 
perspective, what you are saying is absolutely crucial, to 
allow individual Chinese manufacturers to show that they have 
emitted less than the average; and I have not seen this 
possibility in any of the bills on the table so far.
    Mr. VAN HOLLEN. Right. And that would be WTO compliance.
    Mr. PAUWELYN. Yes. Because the U.S. lost a case involving 
gasoline standards just on that issue. It gave individual 
baselines to U.S. refineries, but it only gave an average 
baseline to foreign refiners. And the WTO was saying this is 
discrimination. You have to give them at least the option to 
submit individual data.
    Mr. VAN HOLLEN. To demonstrate that they were----
    Mr. PAUWELYN. Right.
    Mr. VAN HOLLEN. Thank you very much. I appreciate it.
    Thank you all.
    Mr. GERARD. That would be useful. Then they would have to 
come clean with us, too.
    Chairman LEVIN. It is useful to have this discussion, and 
it is getting late.
    And as I said, Mr. Lamy is here; and there are negotiations 
going on in the WTO. So what now exists can always be changed.
    All right. I think the two remaining, most-patient people, 
Mr. Larson, Mr. Davis, I think--I thought so. So I thought Mr. 
Davis was here right at the beginning. So, Mr. Davis, you are 
next. And then, Mr. Larson, you will--without respect to 
seniority or other position, you will wrap this up for us.
    Mr. Davis, it is a pleasure; and thank you for your 
patience.
    Mr. DAVIS of Alabama. Thank you, Mr. Chairman, for letting 
two non-Subcommittee Members make our way to the dance today; 
and I think my caucus chairman for not exerting either 
seniority or rank or privilege or any of those wonderful 
things.
    Let me, if I can, pick up on Mr. Doggett's line of 
questions; and I want to pose this first to you, Mr. Gerard, 
and then come back to everyone else on the panel.
    Mr. Doggett was raising the concern that if the United 
States failed to act in a unilateral way in terms of enacting 
some kind of cap-and-trade regime or significant carbon 
emission standards, carbon tax, what have you, that that would 
obviously should not be an excuse, the fact that there is no 
successor to Kyoto, the fact that there is no prospect of an 
immediate international regime.
    Let me maybe test that proposition a little bit. Some have 
raised the concern, which sounds plausible to me, that if the 
United States were to enact a unilateral regime that could 
actually be a disincentive to China, to India, to other 
developing countries to create a successor to Kyoto. Would you 
comment on that, Mr. Gerard?
    Mr. GERARD. My experience and my instincts would tell me 
that if we acted unilaterally without the kind of mechanisms we 
have talked about today that there would be absolutely no 
reason for places like China or India to do anything. They 
currently have access to our market, and they currently violate 
almost every rule there is.
    I think the only way that we can have a meaningful global 
arrangement is with the combination of carrots and sticks. I 
think we need to negotiate globally. I think we need to have 
sectoral arrangements that would be done by an energy intensive 
sector. Then I think we need that ladder of tools I talked 
about earlier. And I think that way China and India will have 
to take action.
    I am very, very sensitive that one of the most valuable 
things on Earth is access to this market; and when we give it 
away for free, we also give away our jobs.
    Mr. DAVIS of Alabama. Is there anyone on the panel who has 
a different point of view on this issue in terms of what the 
incentive would be for us to signal out to the Chinese and the 
Indians if the U.S. were to go first and to enact a regime? 
Does anyone think that would somehow incentivize the Chinese 
and the Indians to come to the table?
    Mr. MCMACKIN. Mr. Davis, if I could just emphasize that it 
does seem logical to me that if we unilaterally disarm, giving, 
say, the Chinese a greater cost advantage than they have, they 
may slow down to enjoy that increased advantage. But, as Mr. 
Gerard said, if we from the get-go include provisions that deny 
them that advantage over our trade-exposed industries, we will 
have denied them the incentive to drag their feet.
    Mr. DAVIS of Alabama. Does anyone have a different point of 
view who is on the panel?
    Mr. HAMILTON. I would just add, if you look at the 
countries that are participating in the Kyoto Agreement in the 
U.N. Framework Convention, add them to the U.S. and I believe 
Australia and you have got roughly 80 percent of China's 
exports. So I think, even if we act, we are not acting alone, 
because the Framework Convention continues to move forward and 
that at that point we may need to think about what other 
measures are necessary to persuade China that it would be a 
good thing to do.
    Mr. DAVIS of Alabama. Go ahead, sir.
    Mr. PAUWELYN. I think the crucial thing is one of timing. 
You are right that China and India would be upset if there is a 
border measure in the bill you would adopt. But none of the 
bills on the table now would impose that border measure as of 
the beginning. It would be phased in after 5 or 10 years even. 
And that is exactly what Europe is also considering.
    Mr. DAVIS of Alabama. Let me slip in another question since 
my time is about to run out.
    I haven't heard--and I apologize if I have just missed them 
because of other things I have had to do. But I haven't heard a 
lot of estimates about job loss, even under the proposals, Mr. 
McMackin, you pointed out. Give me some comparisons, if you 
will, about potential job loss if we did, as I suppose our 
colleagues on the other side of the aisle want to do, which was 
virtually nothing in terms of cap and trade.
    I guess you have got three scenarios: doing nothing, status 
quo, and if we were to have a very aggressive cap-and-trade 
regime of the kind, frankly, the Democratic Caucus would 
advocate and if we were to have a cap-and-trade regime that has 
the kinds of allowances for leakage that you and Mr. Gerard 
talk about. Can you compare the last two in terms of potential 
job loss?
    Mr. MCMACKIN. Just very quickly, that Mr. Morganstern of 
Resources for the Future testified last week in Energy and 
Commerce that he thought the job loss, the leakage could be as 
much as 40 percent for the most exposed industries over the 
long term.
    I guess the thrust of my group's provision is if we negate 
or at least substantially mitigate the cost that would cause 
that job loss, we could essentially save all of that leakage.
    Mr. DAVIS of Alabama. Mr. Gerard, do you have any follow-up 
to that?
    Mr. GERARD. The only thing I would add to that is 
supporting his argument and combining that with the President's 
position on creating renewable energy sector. We could end up 
being job positive.
    Mr. DAVIS of Alabama. If I can get one final indulgence. 
Does anyone on the Committee dispute the numbers about 40 
percent job losses for the most leveraged industries under 
leakage?
    Mr. PAUWELYN. This is actually what could happen to the 
cement industry which my firm has been representing. As 
Chairman Levin was saying, you need to look industry per 
industry. And the numbers are very different. So it means you 
have to have a ladder, you have to have a combination, and take 
this very seriously. There is no silver bullet here.
    Chairman LEVIN. All right. I think, Mr. Davis, your 
questions have been so cogent, it is really important that you 
were able to be with us and stay.
    This is the practice. All the Members of the Committee are 
going to be welcome, both Republicans and Democrats, for all of 
these hearings.
    So our Caucus Chair, you get the last crack at this; and 
thank you for finding the time to join us.
    Mr. LARSON. Thank you, Mr. Chairman; and I thank the fellow 
Members on the Subcommittee. This has been an extraordinary 
panel, and I want to thank them for their participation as 
well.
    It seems to me that the science is pretty clear, and it 
seems to me that all the panelists acknowledge that we have an 
environmental problem that we face. And depending upon who you 
listen to, whether or not we are going to reach a tipping point 
that will be catastrophic--and that is everyone from scientists 
to our own military leaders--that is not what this hearing is 
about.
    I am pleased that this hearing is focused on something that 
I think everyone can agree on. Is there anyone on the panel who 
doesn't believe that a solution--and my colleague from Alabama 
I think articulated it very well. We are either going with some 
form of cap-and-trade system, some form of carbon tax, or we 
are doing nothing. But in all three cases, you are talking 
about taxes.
    If we do nothing, we are talking about the situation that 
we are currently in that is volatile, as we have seen just this 
past year. Where we subject ourselves to once again paying the 
taxes and seeing the dollars flow overseas to Saudi Arabia, to 
the OPEC cartel, to re-emergent Russia and even to our neighbor 
in Canada or Venezuela, we are going to be paying taxes, higher 
taxes, one way or the other.
    Is there anyone on the panel that would disagree that this 
issue, if we are to combat it forthrightly and level with the 
American people, that it had doesn't concern taxation?
    Thank you.
    I think some of my colleagues on the other side, they 
recognize that this is a tax. But they--you know, that is a 
terrible word in governing. So nobody likes to say it and--
because it carries with it incredible consequences.
    So the question becomes, in facing global catastrophe and 
leveling with the American people, whether or not the Congress 
of the United States is going to have the temerity to say up 
front, yes, what we are dealing with is a tax. But here is what 
we are going to do in terms of making sure from an import/
export position in terms of impacted industries like Mr. Clay's 
but also coal miners throughout this country, steelworkers, 
that we are going to provide by recognizing that we are going 
to tax polluters up front and then pass on the savings, pass on 
those taxes in a revenue-neutral manner to those industries, 
those individuals, and those communities that are impacted so 
that we can both combat climate change and global warming but 
also the need for energy independence by making the kind of 
investments that both preserve the environment and provide us 
an opportunity to make sure we are safeguarding our workforce, 
in fact, enhancing their opportunity to perform.
    I think it is a matter of leveling with the American people 
and getting beyond the nonsense. This is about taxing, and this 
is going to be about stepping up to the plate. Call it cap and 
trade, call it a carbon tax, call it--we are going to pretend 
we are going to do nothing, but we are just going to watch the 
taxes go up automatically because of what we are going to have 
to pay in terms of what we are currently paying now to other 
nations because we don't have a plan that can engage the 
country in a meaningful and significant way.
    Mr. LARSON [continuing]. So I would ask whether or not the 
panelists feel that a marketplace solution or a direct 
governmental solution in terms of tax and passing that on is a 
better way to go.
    Mr. GERARD. I have to admit that in the last 6 or 8 months 
I have become very, very apprehensive of the term ``market-
based solutions'' when we see what has happened in the so-
called market.
    Let me say that from the point of view of our union and as 
both citizens and representatives, I think it is very important 
that we don't damage energy-intensive industries or export-
intensive industries as we work our way through this problem. 
And I actually believe that if we do the costing of carbon 
right and we take the right steps to make sure it doesn't do 
damage to our own industries, combined with the President's 
campaign on renewable energy, I absolutely believe that over 
the next 5, 8, 10, 12, 20 years we can be job positive, and we 
need transition programs and we need to make absolutely sure--I 
will take two industries that we represent the majority of the 
people in those industries: cement and steel. There currently 
is no scientific way to make cement or steel without creating 
carbon because of the process of making it. If we don't protect 
those industries, we will always need steel and cement, and if 
we are getting it from China or some other place that doesn't 
have the same kind of standards we do, we will end up putting 
more nails in our manufacturing coffin and making ourselves 
just as reliable or just as reliant, I should say, on those 
governments as we are now on Middle East oil.
    So I think it is a very, very important process that you 
have engaged in and that the chairman has engaged in and that 
we are engaged in in finding a way to cost carbon that doesn't 
create a domestic disadvantage for our producers, yet at the 
same time marrying that to the Administration's effort to 
create renewable energy. If we do that, we will be way ahead of 
the game, and I applaud you for the work you have done.
    Mr. PAUWELYN. Just very quickly, I do see a big difference, 
though. Taxes and death are certain but paying the price for 
carbon is not a necessity. The whole idea is that if you price 
carbon people will move away into greener energy, creating 
green jobs. So you can actually avoid the tax and you can 
create green jobs without the Government having to spend money, 
going back to an earlier question. But, yes, it imposes a cost 
but you can avoid it by shifting, producing less carbon.
    Mr. LARSON. Do you seriously believe that the companies 
that you impose the tax on are not going to pass those on to 
the consumer?
    Mr. PAUWELYN. Again that will depend on industry by 
industry.
    Mr. LARSON. That is what I mean about leveling with the 
people. They want the truth from their elected representatives 
about what will happen, notwithstanding that that would ever 
happen in the marketplace that they would pass a cost along 
ultimately to the consumer.
    Chairman LEVIN. All right. This is so interesting we could 
go on.
    Mr. BRADY. For hours.
    Chairman LEVIN. I won't say thank you. It is our job. But 
we have been here for a number of hours. A most illuminating 
hearing. There will be more, and thank you to all of you who 
came here to testify and be here throughout.
    We now stand, I will say, adjourned though it is really 
recessed because we will be back at this subject.
    Thank you, Mr. Brady. Thank you.
    [Whereupon, at 4:17 p.m., the Subcommittee was adjourned.]
    [Submissions for the Record follow:]
                 Statement of Cargo Airline Association
    Mr. Chairman and Members of the Subcommittee: My name is Steve 
Alterman and I am the president of the Cargo Airline Association (``the 
Association''), the nationwide voice of the all-cargo air carrier 
industry.\1\ I also have the honor of serving as the current Chairman 
of the FAA's Environmental Subcommittee of the Agency's Research, 
Engineering and Development Advisory Committee (REDAC). As a key 
segment of the air transportation industry, the all-cargo carriers 
recognize the growing importance of addressing our industry's 
contribution to global climate change. At the same time, especially in 
a time of global economic uncertainty, any environmental legislation 
must take care not to impair our ability to compete in the worldwide 
marketplace.
---------------------------------------------------------------------------
    \1\ U.S. air carrier members of the Cargo Airline Association are 
ABX Air, Atlas Air, Capital Cargo, FedEx Express, Kalitta Air and UPS 
Airlines.
---------------------------------------------------------------------------
Background
    The nation's aviation community plays a pivotal role in maintaining 
United States leadership in world trade. Indeed, the industry 
represents approximately 5.6 percent of the U.S. Gross Domestic Product 
(GDP); contributes over $1.2 trillion annually to the U.S. economy and 
is responsible for approximately 11 million jobs.\2\ In addition to 
these economic facts, the industry has been in the forefront of 
addressing environmental issues associated with our operations. To a 
large extent, of course, the environmental record of the entire 
aviation community is a result of a search for greater fuel efficiency 
in an era of generally rising fuel prices. Nevertheless, the 
environmental benefits of this quest for fuel efficiency cannot be 
overlooked. For example:
---------------------------------------------------------------------------
    \2\ FAA, The Economic Impact of Civil Aviation on the U.S. Economy 
(October 2008). This
report is available at: http://www.faa.gov/about/office_org/
headquarters_offices/ato/media/2008_
Economic_Impact_Report_web.pdf

          Emissions from aircraft now account for less than 3 
        percent of the total U.S. Greenhouse Gas emissions.\3\
---------------------------------------------------------------------------
    \3\ This figure includes all segments of U.S. aviation, including 
commercial aviation, general aviation and the military. See, Inventory 
of Greenhouse Emissions and Sinks: 1990-2006, U.S. Environmental 
Protection Agency (April 15, 2008).
---------------------------------------------------------------------------
          Over the past 40 years, fuel efficiency has improved 
        by over 70 percent \4\ and, compared to 2000, in 2007 the U.S. 
        commercial airlines consumed 3 percent less fuel while 
        transporting over 20 percent more passengers and cargo.
---------------------------------------------------------------------------
    \4\ International Civil Aviation Organization, Environmental Report 
2007, page 107.

Addressing the Future
    While these accomplishments are significant, we recognize that more 
must be done to meet the environmental challenges of the future. Many 
of the necessary improvements will come from advances in technology and 
the implementation of FAA airspace modernization initiatives. This 
process requires the cooperation of all parties to the aviation 
environmental debate--industry, Congress and the Administration. 
Accordingly, an FAA Reauthorization bill in this Congress becomes an 
environmental imperative. The substantive provisions of all versions of 
FAA Reauthorization contain significant environmental initiatives that 
require both authorization and funding--including a joint industry/
Government initiative to develop, test and certify alternative aviation 
fuels that may well be the most promising way of addressing aviation 
emissions in the future. In addition, FAA Reauthorization will help to 
advance the move toward the airspace system of the future. This system 
will permit more direct flight paths, more efficient landing 
trajectories and better use of movements on the airport surface. In 
turn, all of these results will save fuel and reduce emissions that 
contribute to global warming. In the longer term, a new generation of 
aircraft and aircraft engines being developed by industry and NASA will 
further help reduce aviation's environmental footprint.
``Cap and Trade'' and its Impact on Trade
    How does all this activity impact world trade and the ability of 
the U.S. aviation sector to remain competitive? Simply stated, the 
entire aviation industry is extremely capital intensive and any move to 
impose significant additional costs on an industry already suffering in 
today's economy will reduce the industry's ability to make the 
investments necessary to service customers around the world. 
Unfortunately, some of the initiatives now being advanced for dealing 
with global climate change will have this negative effect. 
Specifically, elements in both Congress and the Administration have 
proposed a cap and trade regime that potentially will have a severe 
dampening effect on aviation's global competitiveness. While details in 
these proposals may differ slightly, they all appear to impose an 
``upstream'' tax on aviation, with the industry forced to buy carbon 
credits from fuel producers who will pay the fees directly (or in a 
secondary market that will undoubtedly emerge). At least for aviation, 
this method of attempting to deal with global climate change is 
extremely problematical. Some of the obvious downsides of such a cap 
and trade system are:

          As noted above, such a system will, in effect, impose 
        a significant additional tax burden on an already heavily taxed 
        industry.
          These taxes will inhibit the ability of the industry 
        to make the capital expenditures necessary to take advantage of 
        a modernized airspace system--a system that will provide 
        significant environmental benefits.
          As we understand the current proposals, they will 
        potentially funnel monies collected to a variety of programs--
        none of which have any relation to aviation or modernization of 
        the aviation system.
          The bureaucracy necessary to administer any cap and 
        trade program will siphon off a significant portion of any 
        funds collected.
          A cap and trade system is subject to market 
        manipulation.\5\
---------------------------------------------------------------------------
    \5\ See, for example, op ed piece by Rep. Peter DeFazio in the 
January 27, 2009, edition of the Oregonian.

Potential Alternatives to ``Cap and Trade''
    Faced with these facts and potential pitfalls, is there another way 
for aviation to meet its environmental responsibilities, while, at the 
same time, remaining competitive in the world marketplace? We believe 
that there is. Rather than being subjected to a cap and trade system, a 
tailored revenue-neutral carbon tax for the commercial airline industry 
appears to make more sense.\6\ Under such a system, the commercial 
airline industry could be further directly taxed on its use of aviation 
fuel (the source of pollutants contributing to global climate 
change),\7\ with these levies offset by a corresponding decrease in the 
existing excise taxes paid by the airlines.\8\ Such a scheme would 
provide a powerful incentive to modernize aircraft fleets, while, at 
the same time, retain the same overall level of industry taxation.\9\ 
In addition, the funds collected could be used to assist in the effort 
to convert the nation's air traffic system into one based upon 
satellite technology rather than the existing reliance on decades-old 
ground-based radar. And, since such taxes would be collected at the 
pump, virtually 100 percent of the proceeds could be used on aviation 
programs that benefit the environment.\10\ As noted by the non-partisan 
Congressional Budget Office (CBO), ``A tax on emissions would be the 
most efficient incentive-based option for reducing emissions and could 
be relatively easy to implement.'' \11\
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    \6\ If a cap and trade system is enacted, however, with respect to 
aviation it should contain ``safety valve'' provisions to protect 
carriers if the price of oil escalates past a predetermined level and 
funds collected should be transferred to the Aviation Trust Fund for 
use in system modernization.
    \7\ Commercial airlines currently pay a fuel tax of 4.3 cents per 
gallon.
    \8\ The existing excise tax on air cargo is a 6.25 percent airway 
bill levy.
    \9\ We recognize that variations of the carbon tax possibility set 
forth herein have been suggested by various parties to the global 
climate change debate. Each of these other proposals should be analyzed 
for their merits and their impact on U.S. global competitiveness.
    \10\ Other, ancillary, issues that should be included in the 
discussion of aviation's place in the global warming debate include (1) 
the role of the International Civil Aviation Organization (ICAO) and 
its ongoing attempts to establish international standards for aircraft 
emissions that r5elate to climate change and (2) the need for any 
Federal action in this area to preempt any state and local action that 
would result in a patchwork quilt of regulations on an industry that 
operates nationwide.
    \11\ See, Policy Options for Reducing CO2 Emissions, Congressional 
Budget Office, February 2008.
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Conclusion
    The challenge of addressing global warming, while at the same time 
remaining competitive in the international marketplace, is perhaps one 
of the most difficult balancing acts that commercial airlines currently 
face. On the one hand, we must be able to meet the demands of 
businesses throughout the world. On the other hand, in planning to meet 
the requirements of our customers, there must be an environmental 
overlay on all corporate decision-making. On the Government side, we 
understand the reasons that legislation is being considered to ensure 
that global climate change is addressed--and addressed as expeditiously 
as possible. But that legislation must take care not to cripple an 
industry that is necessary for economic recovery and that has a long-
standing record of environmental sensitivity. To prevent bad 
break deg.
    We recognize that the suggestions made herein are broad overviews 
and that the details of any final plans to address global climate 
change will require difficult negotiations among both industry and 
Government representatives. For our part, we stand ready to engage in 
this necessary dialogue. If the Subcommittee, or its staff, wants to 
discuss these issues further, please do not hesitate to contact us.

Thank you very much.

The Cargo Airline Association

The Voice of the Air Cargo Industry

Identification of Witness:

Stephen A. Alterman
President
Cargo Airline Association
1220 19th Street, NW
Suite 400
Washington, DC 20036

[email protected]

                                 

                      Statement of Jennifer Layke,
          World Resources Institute Climate and Energy Program

    The World Resources Institute is a non-profit, non-partisan 
environmental think tank that goes beyond research to provide practical 
solutions to the world's most urgent environment and development 
challenges. We work in partnership with scientists, businesses, 
governments, and non-governmental organizations in more than fifty 
countries to provide information, tools and analysis to address 
problems like climate change, the degradation of ecosystems and their 
capacity to provide for human well-being.
    We welcome the opportunity to provide testimony on climate change 
policy and U.S. competitiveness--as well as to highlight that this as a 
major opportunity for the United States. In this testimony, we make 
three points, each of which will be expanded upon below:

          Business as usual is not an attractive option. 
        Warming is happening more rapidly than expected and the impacts 
        are becoming more severe. Sustained economic growth will depend 
        upon an adequate global response to climate change.
          The world has changed dramatically from the days of 
        the Kyoto Protocol. Major developing countries are ready to 
        take significant action on limiting emissions and the Bali 
        Action Plan provides a solid foundation for a new international 
        climate agreement that meets key U.S. interests.
          Although the form and stringency of national actions 
        will differ, U.S. policy design can effectively address the 
        trade concerns of domestic manufacturers.

The implications of a warming planet
    In February 2007, the Intergovernmental Panel on Climate Change 
(IPCC--the official science process sanctioned by the world's 
governments and participated in by the United States) released its 
latest report on climate change science. The report states that it is 
``unequivocal'' that Earth's climate is warming, and confirms that the 
current atmospheric concentration of carbon dioxide and methane, two 
important greenhouse gases (GHGs), ``exceeds by far the natural range 
over the last 650,000 years.'' Further, the IPCC concludes that it is 
now ``very likely'' (greater than 90 percent probability) that 
greenhouse gas emissions from human activities have caused ``most of 
the observed increase in globally averaged temperatures since the mid-
20th century.'' \1\
---------------------------------------------------------------------------
    \1\ Pachauri, R.K. and Reisinger, A. (Eds.), Climate Change 2007: 
Synthesis Report, IPCC, Geneva, Switzerland: 2007.
---------------------------------------------------------------------------
    Cheap, plentiful fossil fuels have enabled huge increases in human 
productivity and great improvements in human well being over the past 
200 years. However, this progress has also resulted in significant 
deforestation and created the buildup of carbon dioxide and other 
greenhouse gases (GHGs). The impacts of GHG emissions are accelerating, 
and unless we act very soon, warming will rise to very dangerous levels 
during our children's lifetimes.
    The impacts of warming have become increasingly evident even to 
non-scientific observers. Sea ice in the Arctic is shrinking, and 
Greenland's massive ice sheet is melting--far faster than predicted.\2\ 
Glaciers are rapidly shrinking from the Rockies to the Alps. Insect 
infestations linked to global warming have already had huge economic 
impacts on the timber industry.\3\
---------------------------------------------------------------------------
    \2\ Geophys. Res. Lett.35, L22502; 2008. and NASA ``Record Arctic 
Sea Ice Loss in 2007'' http://earthobservatory.nasa.gov/Newsroom/
NewImages/Images/arctic_ams_2007259.jpg.
    \3\ B.C. Ministry of Forests and Range, Forest Analysis and 
Inventory Branch. 2007. ``Timber Supply and the Mountain Pine Beetle 
Infestation in British Columbia: 2007 Update http://www.for.gov.bc.ca/
hfp/mountain_pine_beetle/Pine_Beetle_Update20070917.pdf
---------------------------------------------------------------------------
    It is clear that much of what we thought we knew a few years ago 
about the pace of climate change has been superseded. Continuing down 
this path will result in climate change impacts with significant 
economic challenges that make continued high-carbon growth patterns 
more costly than investments in low-carbon technologies. Economic 
estimates of the costs of inaction total between 5 and 20 percent of 
global GDP by 2100.\4\ In comparison, estimates of the cost of action 
seem small.\5\ The science and the economics tell us we have to act 
with extraordinary urgency. We must fundamentally re-think our energy 
infrastructure, address emissions from land use and forestry, and build 
a global platform to reduce GHG emissions.
---------------------------------------------------------------------------
    \4\ William R. Cline, ``The Stakes in Limiting Climate Change,'' 
Remarks at the Symposium on U.S. Climate Action: A Global Economic 
Perspective, sponsored by the Center for Global Development, Grantham 
Research Institute, Peterson Institute for International Economics, and 
the World Resources Institute, Washington, DC, March 3, 2009, available 
at www.petersoninstitute.org (accessed on March 9, 2009) or Nicholas 
Stern, 2007, The Economics of Climate Change, Cambridge: Cambridge 
University Press.
    \5\ In ``The economic crisis and the two great challenges of the 
21st century'', presented at ``Securing our common future: a conference 
on the future of international development'', March 2009, Sir Nicholas 
Stern estimates that the global cost of stabilization under 500 ppm 
would be between one and two percent of GDP.
---------------------------------------------------------------------------
    However, policymakers must respond to this challenge with the most 
economically efficient, environmentally effective policy mechanisms. 
Market-based regulations such as cap and trade will enable businesses 
to meet environmental goals at the lowest possible cost while 
guaranteeing the desired environmental outcome. Furthermore, cap and 
trade policies create incentives for innovation by providing a long-
term price signal and a market for new, low-carbon technologies and 
investments.
    Business will respond to a price signal and new markets by creating 
new business models that will enable them to compete in emerging low 
carbon markets. Domestic manufacturers will benefit from carbon 
constraints by creating the most efficient manufacturing facilities, 
and by serving domestic markets for clean goods and services.
    In the past 15 years, major markets and support for clean 
technologies in Japan and Germany have provided their businesses with 
needed investment signals. They now lead the world in renewable energy 
and efficient vehicle technologies. Their companies profit from strong 
regulatory environments at home and build competitive advantage abroad. 
In the U.S., loose or uncertain policy structures do not serve 
companies well, as other countries will build markets for the products 
and services that will be required in a low-carbon world. Such concerns 
have led many major companies to call for strong mandatory U.S. climate 
policy.
An international response?
    The importance of a concerted global effort is illustrated by 
Figure 1. China, the United States and Europe are responsible for 50 
percent of the worlds greenhouse gas emissions. And although Chinese 
emissions surpassed those of the United States in 2008, their per 
capita emissions remain at barely a quarter of U.S. emissions per 
person.
    Almost 80 percent of current global emissions are produced by 
fifteen countries (counting the European Union as a single country). Of 
these, nine are developing economies and two (Russia and Ukraine) are 
post-communist countries still wrestling with economic transition. 
Without a viable means of engaging these countries in the effort to cut 
emissions we cannot avoid catastrophic climate change.
Figure 1: Aggregate GHG emissions by country, 2005

[GRAPHIC] [TIFF OMITTED] T1949A.054


    International climate negotiations begun in 1992 under the United 
Nations Framework Convention on Climate Change emphasized that 
countries have common but differentiated responsibilities to mitigate 
greenhouse gas emissions. In the past, this has meant that their 
relative obligations may be staggered--dates and reduction levels may 
vary based on development levels and historic and current contributions 
to global emissions levels.
    For many years, developing countries were clear in their view that 
they expect a lead from rich countries before they take action on 
emissions. There are sound reasons for this stance. They are far poorer 
than developed countries; they have played a far smaller role in 
creating the climate problem; and their emissions per person generally 
remain much lower than those of developed countries (see Figure 2). In 
fact, 1.4 billion people in the development world live on less than 
$1.25 a day. Some 2.5 billion people rely on fuelwood, charcoal and 
animal dung to cook. This is over 80 percent of the population of Sub-
Saharan Africa and over half of the populations of India and China.
Figure 2: Emissions in tons carbon per person in selected countries 
        (2005, excludes land use)

        [GRAPHIC] [TIFF OMITTED] T1949A.055
        

    Since the Bali Action Plan (BAP) of 2007, however, many countries 
have not only focused the timing of their limits, they have also 
started to examine the types of ``nationally appropriate measures and 
actions'' (NAMAs) they could begin to implement today. With this in 
mind, major developing countries have now brought forward climate 
plans. A few interesting examples include:

          Brazil announced it would reduce its deforestation 
        rate over 50 percent from recent levels by 2017, avoiding an 
        estimated 4.8 billion tons of CO2 emissions. 
        Deforestation accounts for about two thirds of Brazilian GHG 
        emissions.

          China set a target of reducing national energy 
        intensity (energy use per unit GDP) by 20 percent in the five 
        years to 2010. It has reduced energy intensity by 1.6 percent 
        in 2006, 3.7 percent in 2007, and 4.3 percent in 2008. China 
        looks likely to be approximately on target to meet its goal. 
        Together, the industrial and building efficiency programs 
        supporting this goal are expected to yield 550 million metric 
        tons CO2 in GHG savings. Addition savings are 
        expected from measures in the transport sector. China also has 
        ambitious non-fossil plans, including wind, hydro, nuclear and 
        biomass, all of which are expected to save 640 million metric 
        tons CO2 by 2010.

          Mexico pledged to halve its greenhouse gas emissions 
        by 2050, employing a ``cap-and-trade'' policy like the one 
        recently considered by the U.S. Congress.

          South Africa has presented a detailed plan to peak 
        its national emissions by 2020.

    The NAMAs structure offers a significant step forward from the 
traditional Kyoto Protocol approach. It calls for policies and actions 
that can be measured, reported and verified. There is now a significant 
global effort to create robust reporting and verification structures 
which will help ensure global progress is clear, and that countries can 
be held accountable for the implementation of their national plans. 
These common metrics can help build trust, align international 
commitments with national development goals, and support data 
collection and dissemination.
Challenges of differentiated action
    Although individual nations are working to develop appropriate 
approaches to mitigation, the policies they adopt will vary in form and 
stringency. As a result, the costs they impose on manufacturers are 
unlikely to be uniform. American manufacturers fear that the imbalances 
created by aggressive climate policy in the U.S. could contribute 
significantly to the ``offshoring'' of jobs and relocation of industry 
to countries with lower standards and production costs.
    Individuals concerned with the environmental integrity of American 
climate policy have expressed similar concerns. If global supply chains 
shift manufacturing from countries with explicit emissions caps to 
countries without such policies, global emissions may not be reduced. 
This shift in emissions from one location to another is a process 
commonly referred to as emissions ``leakage.'' While U.S. climate 
policy would reduce domestic emissions, the net environmental 
effectiveness of the policy may be undermined if emission sources 
simply migrate to countries without absolute caps. In order to prevent 
this, environmentalists have frequently supported the international 
harmonization of environmental standards and enforcement to minimize 
the impact of imbalances in compliance costs across nations.
    The degree to which these concerns apply to a particular industry 
depends on three variables:

          1) Greenhouse gas intensity of production: The impact of 
        emissions fees and increased costs of energy on a given 
        industry is determined, in part, by how significant these costs 
        would be as a share of total production costs. In industries 
        such as transportation equipment and electronics manufacturing, 
        energy accounts for less than one percent of total production 
        costs. For such industries, transnational imbalances in wages, 
        health care costs and transportation costs dwarf the potential 
        difference in environmental compliance costs stemming from 
        climate policy.\6\ For relatively emissions intensive 
        industries like steel, cement and refining, a $10 allowance 
        price would imply a short term price increase of 2 to 4 percent 
        of total costs; nearly 10 times the impact seen by 
        transportation equipment and electronics manufacturers.\7\ It 
        is these highly exposed industries where targeted actions may 
        be required. Since detailed GHG accounting has not been 
        conducted for all industries, energy intensity of production 
        can serve as a rough proxy for this variable.
---------------------------------------------------------------------------
    \6\ Houser, et. al, Leveling the Carbon Playing Field, 
International Competition and U.S. Climate Policy Design, Peterson 
Institute for International Economics and World Resources Institute, 
Washington, DC: 2008.
    \7\ Ho, Mun, et al. Impact of Carbon Price Policies on U.S. 
Industry, Resources for the Future, Washington DC, 2008. and EU ETS 
impacts on profitability and trade: A sector by sector analysis. Carbon 
Trust, London, 2008.

          2) Potential for efficiency improvements or fuel switching: 
        The extent to which increased energy prices translate into 
        higher overall production costs depends on each industry's 
        ability to improve GHG efficiency of production through 
---------------------------------------------------------------------------
        technological improvements or fuel-switching.

          3) Product demand elasticity: The demand elasticity of a 
        given product dictates the ability of its manufacturer to 
        change prices while maintaining profitability. As a result, 
        product demand elasticity can indicate the degree to which 
        industry is able to pass through compliance costs not mitigated 
        through efficiency improvements or fuel switching. Although 
        reliable demand elasticity data is difficult to find for all 
        industries, trade intensity can serve as a proxy by indicating 
        the availability of substitutes.

Figure 3: Industry exposure to climate costs

[GRAPHIC] [TIFF OMITTED] T1949A.056


    At the most aggregate level, these metrics indicate that the most 
exposed products would include paper and pulp, chemicals, nonferrous 
and ferrous metals and nonmetallic mineral products such as glass and 
cement (see Figure 3). Petroleum refining, some mining, and certain 
types of textile manufacturing could also be included in the list. 
Initial observations in Europe and preliminary modeling of American 
policies have come to similar conclusions and indicate that, in the 
absence of mechanisms to address compliance costs, these sectors would 
face pressure to relocate to nations with less stringent climate 
policies.\8\
---------------------------------------------------------------------------
    \8\ Ho, Mun, et al. Impact of Carbon Price Policies on U.S. 
Industry, Resources for the Future, Washington DC, 2008. and EU ETS 
impacts on profitability and trade: A sector by sector analysis. Carbon 
Trust, London, 2008.
---------------------------------------------------------------------------
    Since these exposed industries are a discrete portion of the 
economy, targeted policies hold the potential to offset the impact of 
differentiated national approaches to climate policy. WRI's analysis 
offers three policy options or scenarios to address U.S. 
competitiveness concerns:

          1) Cost containment_aims to reduce the pressure on carbon 
        intensive industries by limiting the cost of complying with 
        climate legislation. The most direct methods proposed have 
        sought to use allowance allocations to reimburse exposed 
        sectors for both the direct and indirect costs of climate 
        policy.\9\ Although such policies could shield industries from 
        newfound competitiveness concerns, they must be carefully 
        structured to maintain incentives for continued production and 
        emissions mitigation as well as avoid overcompensating firms.
---------------------------------------------------------------------------
    \9\ Emission Migration Prevention with Long-term Output Yields Act, 
H.R. 1759, introduced by Representatives Inslee and Doyle in the 111th 
session of the United States House of Representatives.

          2) Trade measures do not limit costs on the covered companies 
        but seek to indirectly apply similar costs to competing 
        companies in other countries through the treatment of traded 
        goods at the border. Although this policy mechanism found 
        widespread support in legislation during the 110th Congress, it 
        is unclear whether these policies would provide the necessary 
        level of protection for all manufacturers.\10\ For example, 
        border price adjustments of imports of primary goods would 
        negatively impact downstream manufacturers such as the 
        automobile industry by increasing costs of raw materials. 
        Furthermore, these policies would do little to protect 
        important export markets, as adjustments would only apply to 
        the U.S. market. Finally, trade measures may damage important 
        international negotiations to create a multilateral agreement 
        to address climate change.\11\
---------------------------------------------------------------------------
    \10\ ``Lieberman-Warner Climate Security Act'', S. 3036, Introduced 
by Senator Boxer in the 110th session of the United States Senate.
    \11\ Forsythe, Michael. ``China's Xie Calls U.S. Tariff Threat on 
Climate `Protectionism' '', Bloomberg, March 18, 2009.

          3) Coordinated international actions seek to reduce the 
        pressure on carbon-intensive industries by encouraging major 
        trading partners to impose similar costs or policies. Commonly 
        cited international mechanisms to address competitiveness and 
        leakage concerns include sectoral agreements and the successful 
        negotiation of a global climate agreement under the UNFCCC that 
        would include mandatory action by developing countries. 
        Although China's official negotiating position in climate 
        debates has focused on ensuring that developed countries make 
        reduction commitments, China's support for the Bali Action 
        Plan, and its National Climate Change platform indicates that 
        the Chinese may be willing to make commitments to regulate 
        specific, heavily polluting industries. Nevertheless, perfect 
        coordination of national actions is unlikely in the immediate 
        future, so the U.S. is likely to consider the first two 
        approaches as China phases in its emissions requirements.\12\
---------------------------------------------------------------------------
    \12\ Houser, et. al, Leveling the Carbon Playing Field, 
International Competition and U.S. Climate Policy Design, Peterson 
Institute for International Economics and World Resources Institute, 
Washington, DC: 2008.

---------------------------------------------------------------------------
Figure 4: Leveling mechanisms

[GRAPHIC] [TIFF OMITTED] T1949A.057


    Careful application of cost containment mechanisms and trade 
measures should enable the domestic policy process to advance in 
parallel to international negotiations. This combination of domestic 
mechanisms and international coordination will allow the U.S. to pursue 
aggressive mitigation targets while protecting domestic employment and 
industry.

                                 

         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 17, 2009, announcing 
an opportunity for the submission of public comments for the record 
regarding the trade aspects of climate change legislation, including 
how to minimize carbon leakage and maintain U.S. competitiveness. 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 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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
I. 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.
---------------------------------------------------------------------------
    \2\ See, e.g., Lieberman-Warner Climate Security Act of 2008, S. 
2191, 110th Cong.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.

    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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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).

    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.
---------------------------------------------------------------------------
    \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.

    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 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\
---------------------------------------------------------------------------
    \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).

    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.
---------------------------------------------------------------------------
    \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).

    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\
---------------------------------------------------------------------------
    \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.

    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\
---------------------------------------------------------------------------
    \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).

    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.
---------------------------------------------------------------------------
    \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).

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).
---------------------------------------------------------------------------
          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).

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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.

IV. 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.

                                 
