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


 
               THE ROLE OF OFFSETS IN CLIMATE LEGISLATION

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON ENERGY AND ENVIRONMENT

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 5, 2009

                               __________

                            Serial No. 111-8


      Printed for the use of the Committee on Energy and Commerce

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                    COMMITTEE ON ENERGY AND COMMERCE

                 HENRY A. WAXMAN, California, Chairman

JOHN D. DINGELL, Michigan            JOE BARTON, Texas
  Chairman Emeritus                    Ranking Member
EDWARD J. MARKEY, Massachusetts      RALPH M. HALL, Texas
RICK BOUCHER, Virginia               FRED UPTON, Michigan
FRANK PALLONE, Jr., New Jersey       CLIFF STEARNS, Florida
BART GORDON, Tennessee               NATHAN DEAL, Georgia
BOBBY L. RUSH, Illinois              ED WHITFIELD, Kentucky
ANNA G. ESHOO, California            JOHN SHIMKUS, Illinois
BART STUPAK, Michigan                JOHN B. SHADEGG, Arizona
ELIOT L. ENGEL, New York             ROY BLUNT, Missouri
GENE GREEN, Texas                    STEVE BUYER, Indiana
DIANA DeGETTE, Colorado              GEORGE RADANOVICH, California
  Vice Chairman                      JOSEPH R. PITTS, Pennsylvania
LOIS CAPPS, California               MARY BONO MACK, California
MICHAEL F. DOYLE, Pennsylvania       GREG WALDEN, Oregon
JANE HARMAN, California              LEE TERRY, Nebraska
TOM ALLEN, Maine                     MIKE ROGERS, Michigan
JAN SCHAKOWSKY, Illinois             SUE WILKINS MYRICK, North Carolina
HILDA L. SOLIS, California           JOHN SULLIVAN, Oklahoma
CHARLES A. GONZALEZ, Texas           TIM MURPHY, Pennsylvania
JAY INSLEE, Washington               MICHAEL C. BURGESS, Texas
TAMMY BALDWIN, Wisconsin             MARSHA BLACKBURN, Tennessee
MIKE ROSS, Arkansas                  PHIL GINGREY, Georgia
ANTHONY D. WEINER, New York          STEVE SCALISE, Louisiana
JIM MATHESON, Utah                   PARKER GRIFFITH, Alabama
G.K. BUTTERFIELD, North Carolina     ROBERT E. LATTA, Ohio
CHARLIE MELANCON, Louisiana
JOHN BARROW, Georgia
BARON P. HILL, Indiana
DORIS O. MATSUI, California
DONNA CHRISTENSEN, Virgin Islands
KATHY CASTOR, Florida
JOHN P. SARBANES, Maryland
CHRISTOPHER MURPHY, Connecticut
ZACHARY T. SPACE, Ohio
JERRY McNERNEY, California
BETTY SUTTON, Ohio
BRUCE BRALEY, Iowa
PETER WELCH, Vermont

                                  (ii)
                 Subcommittee on Energy and Environment

               EDWARD J. MARKEY, Massachusetts, Chairman
MICHAEL F. DOYLE, Pennsylvania       DENNIS HASTERT, Illinois
G.K. BUTTERFIELD, North Carolina          Ranking Member
CHARLIE MELANCON, Louisiana          RALPH M. HALL, Texas
BARON HILL, Indiana                  FRED UPTON, Michigan
DORIS O. MATSUI, California          ED WHITFIELD, Kentucky
JERRY McNERNEY, California           JOHN SHIMKUS, Illinois
PETER WELCH, Vermont                 HEATHER WILSON, New Mexico
JOHN D. DINGELL, Michigan            JOHN B. SHADEGG, Arizona
RICK BOUCHER, Virginia               CHARLES W. ``CHIP'' PICKERING, 
FRANK PALLONE, New Jersey                Mississippi
ELIOT ENGEL, New York                STEVE BUYER, Indiana
GENE GREEN, Texas                    GREG WALDEN, Oregon
LOIS CAPPS, California               SUE WILKINS MYRICK, North Carolina
JANE HARMAN, California              JOHN SULLIVAN, Oklahoma
CHARLES A. GONZALEZ, Texas           MICHAEL C. BURGESS, Texas
TAMMY BALDWIN, Wisconsin
MIKE ROSS, Arkansas
JIM MATHESON, Utah
JOHN BARROW, Georgia
  


                             C O N T E N T S

                              ----------                              
                                                                   Page
Hon. Edward J. Markey, a Representative in Congress from the 
  Commonwealth of Massachussetts, opening statement..............     1
Hon. Fred Upton, a Representative in Congress from the State of 
  Michigan, opening statement....................................     2
Hon. John Shimkus, a Representative in Congress from the State of 
  Illinois, opening statement....................................     5
Hon. John D. Dingell, a Representative in Congress from the State 
  of Michigan, opening statement.................................     6
Hon. Joe Barton, a Representative in Congress from the State of 
  Texas, opening statement.......................................     7
    Prepared statement...........................................     9
Hon. Gene Green, a Representative in Congress from the State of 
  Texas, prepared statement......................................    13
Hon. Michael C. Burgess, a Representative in Congress from the 
  State of Texas, opening statement..............................    14
Hon. Tammy Baldwin, a Representative in Congress from the State 
  of Wisconsin, opening statement................................    14
Hon. Joseph R. Pitts, a Representative in Congress from the 
  Commonwealth of Pennsylvania, opening statement................    15
Hon. Rick Boucher, a Representative in Congress from the 
  Commonwealth of Virginia, opening statement....................    16
Hon. Steve Scalise, a Representative in Congress from the State 
  of Louisiana, opening statement................................    17
Hon. G.K. Butterfield, a Representative in Congress from the 
  State of North Carolina, opening statement.....................    17
Hon. Ralph M. Hall, a Representative in Congress from the State 
  of Texas, opening statement....................................    18
Hon. Jay Inslee, a Representative in Congress from the State of 
  Washington, opening statement..................................    18

                               Witnesses

John Stephenson, Director, Natural Resources and Environment, 
  Government Accountability Office...............................    19
    Prepared statement...........................................    22
Gary Gero, President, Climate Action Reserve.....................    44
    Prepared statement...........................................    46
Emily Figdor, Federal Global Warming Program Director, 
  Environment America............................................    59
    Prepared statement...........................................    61
Graeme Martin, Manager of Business Development, Environmental 
  Products, Shell Energy North America...........................    70
    Prepared statement...........................................    72
Stuart Eizenstat, on Behalf of The Forest Carbon Dialogue........    81
    Prepared statement...........................................    84
Michael Wara, Ph.D., Assistant Professor, Stanford Law School....    95
    Prepared statement...........................................    97


               THE ROLE OF OFFSETS IN CLIMATE LEGISLATION

                              ----------                              


                        THURSDAY, MARCH 5, 2009

                  House of Representatives,
            Subcommittee on Energy and Environment,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 9:34 a.m., in 
Room 2322, Rayburn House Office Building, Hon. Edward J. Markey 
[chairman of the subcommittee] presiding.
    Present: Representatives Markey, Inslee, Butterfield, 
Matsui, McNerney, Dingell, Boucher, Green, Capps, Gonzalez, 
Baldwin, Matheson, Barrow, Upton, Hall, Whitfield, Shimkus, 
Pitts, Sullivan, Burgess, Scalise and Barton.
    Staff Present: Matt Weiner, Legislative Clerk; Ben Hengst, 
Senior Policy Analyst; Melissa Bez, Professional Staff; Joel 
Beauvais, Counsel; Lindsay Vidal, Press Assistant; Peter 
Spencer, Minority Professional Staff; Andrea Spring, Minority 
Professional Staff; Amanda Mertens Campbell, Minority Counsel; 
Garrett Golding, Minority Legislative Analyst.

           OPENING STATEMENT OF HON. EDWARD J. MARKEY

    Mr. Markey. Good morning.
    The basic concepts behind carbon offsets is quite simple. 
If you could achieve global warming pollution reductions 
outside of an emissions cap at a lower cost than can be 
achieved than under the cap, then you can get credit for doing 
so. The theory is that you save money, and the atmosphere 
doesn't know the difference.
    That is the theory, but in practice offsets turn out to be 
one of the more challenging aspects of designing effective 
climate legislation. On the one hand, offsets have the 
potential to meaningfully reduce compliance costs. Unlike price 
caps they can do that while achieving needed emissions 
reductions. As a result, offsets can act as a bridge, allowing 
us to take on tougher near-term emission reduction targets than 
might otherwise be possible. That can give us time to develop 
the low-carbon technologies that we need. Offsets can also 
provide an opportunity for key stakeholders.
    Outside the energy and industrial sectors like farmers and 
foresters to get in the game on climate change. They can help 
fund activities like tropical forest conservation that have 
environmental benefits going beyond climate change. And 
finally, a properly designed offset problem can provide a 
powerful lever to get major developing countries to take action 
on climate change.
    For all these reasons offsets play a key role in the 
blueprint for legislative action recently put forward by the 
U.S. Climate Action Partnership, which, as you all know, 
includes a range of leading U.S. businesses and environmental 
organizations.
    Offsets are a part of every existing cap-and-trade system. 
They are also a part of virtually every piece of proposed 
climate legislation, including my iCAP bill that I introduced 
last year.
    Having said all that, offsets raise a number of real 
concerns that must be addressed. The first is the risk that 
some offsets could turn out to be hot air. Several of our 
witnesses today have testified that this has happened under the 
Kyoto Protocol's clean development mechanism. It surely is 
happening in the unregulated voluntary carbon market, as I 
learned last Congress when I heard the first congressional 
hearing on that market in the Select Committee on Energy 
Independence and Global Warming.
    If offsets fail to deliver real reductions in global 
warming pollution, they will compromise the emissions cap. That 
is unacceptable given the urgency of the climate crisis. There 
should be no debate that if we are to include offsets in 
climate legislation, they must be subject to conservative 
science-based standards. Rigorous monitoring and verification 
requirements must also be applied.
    We should be every bit as concerned with offset quality as 
we are with enforcement of pollution controls. For that reason 
I strongly support the concept of an independent science 
advisory committee to oversee the development, implementation 
and periodic updating of an offsets program.
    Offset quality isn't the only thing at stake here. If we 
rely too heavily on offsets, we will not drive the technology 
transformation that we need. Necessity is the mother of 
invention. If we dull the incentive for innovation, we will not 
get the deep cuts in emissions that science tells us we need. 
We will also miss a crucial opportunity. If we don't spark a 
clean energy revolution here in America, we will be left behind 
in the global competition for the clean-tech market.
    For all these reasons we need to strike a balance between 
strong targets and timetables for emission reductions and an 
appropriate but limited role for offsets in helping to meet 
them. These are complex issues, but I believe that they can be 
addressed in a way that strikes the right balance. We have an 
outstanding panel here this morning to help us to do just that. 
We welcome them here today.
    Mr. Markey. And let me turn and recognize the Ranking 
Member of the subcommittee, the gentleman from Michigan Mr. 
Upton.

              OPENING STATEMENT OF HON. FRED UPTON

    Mr. Upton. Well, thank you, Mr. Chairman. I, too, want to 
thank our witnesses for joining us this morning.
    Cap-and-trade plans that we have seen so far rely to 
varying degrees on carbon assets, both international as well as 
domestic. For example, USCAP, who testified before the 
committee a month ago, is calling for a 1.5 billion metric ton 
of domestic and 1.5 billion metric tons of international 
offsets. The theory behind those offsets is that they decrease 
emissions from uncapped sectors, allowing greater emissions 
from capped sectors. In theory this is a zero-sum game.
    In 2008, the offset market in developing countries derived 
from the U.N. Framework on Climate Change was over $12 billion, 
and these offsets have been subject to criticism on the grounds 
that projects have not achieved real emission reductions. The 
role of offsets in climate change legislation could mean a 
multibillion-dollar windfall for China and other countries that 
won't necessarily be subject themselves to a cap on carbon. In 
exchange for those billions, there may not be any real emission 
reductions.
    It defies reality that we are even considering spending 
money on offsets to offshore countries as our own economy is 
certainly hemorrhaging, particularly in Michigan. We should be 
investing in our own infrastructure here at home.
    Last year Congress got a taste of what the carbon offset 
market was all about. The CAO of the House cut an $89,000 check 
out of the taxpayers' checkbook to buy carbon credits, and some 
of that money went to farmers in North Dakota for tilling 
practices that apparently they were already using. According to 
the Center for American Progress, a group that strongly 
supports climate legislation, it didn't change much behavior 
that wasn't going to happen anyway. It just demonstrated why 
offsets are controversial and possibly pointless. That is a 
waste of taxpayer money.
    In conclusion, there are a number of problems with carbon 
offset markets both in the U.S. and abroad that need to be 
examined and addressed. If we are relying on offsets, we must 
ensure that the money spent on offsets is having a real 
tangible and verifiable environmental benefit that would not 
have otherwise occurred. Seeing the issues that we have had 
with our voluntary domestic carbon market, I can only imagine 
how these issues will be compounded when the value of potential 
offsets increases and we are relying on verifying offsets in 
the developing world.
    I look forward to the testimony today, and I yield back.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the lady from California Mrs. Capps for an opening 
statement.
    Mrs. Capps. Thank you, Mr. Chairman, but in the interest of 
more question time, I will pass.
    Mr. Markey. The Chair recognizes the gentleman from Utah 
Mr. Matheson.
    Mr. Matheson. I will waive as well.
    Mr. Markey. The Chair recognizes the gentleman from Georgia 
Mr. Barrow.
    Mr. Barrow. I will waive.
    Mr. Markey. The Chair recognizes the gentlelady from 
California Ms. Matsui.
    Ms. Matsui. Thank you, Mr. Chairman. I am very pleased to 
be here today, and thank you for your continued focus on 
climate change and your efforts to craft a comprehensive bill.
    I would like to also thank today's participants and 
panelists. We all appreciate your time and expertise on these 
matters. And I will only take a minute so you can get to your 
important testimony.
    I am glad that we are here to explore the concept of 
offsets. I feel that this idea has merit and could be an 
effective tool in order to reduce harmful greenhouse gas 
emissions; however, I look forward to hearing the true facts 
today. While offsets could be a way for our Nation and our 
planet to reduce emissions, I want to make sure that any offset 
provisions truly work. I want to make sure that we are actually 
helping our planet and not simply moving the goalposts.
    In California we have made it very clear that all offsets 
must be real, permanent, quantifiable, verifiable, enforceable 
and additional. These should be Federal requirements as well. I 
strongly believe that offset projects must have rigorous 
scientific backing and actually provide a quantifiable benefit 
to the planet. I hope our witnesses today can help us all 
understand how offsets can help and potentially hurt our 
legislative efforts.
    With that, once again, Mr. Chairman, thank you for 
highlighting this important issue. I yield back.
    Mr. Markey. The gentlelady's time is expired.
    The Chair recognizes the gentleman from Illinois Mr. 
Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman.
    First, a question. Do you know when the cameras in this 
committee room will get fixed? I have never known you to be 
camera shy. This hearing and these climate change hearings are 
too important for the cameras in this committee room not to 
work so that the public in this country can see the debate on 
these issues on climate change. And this is not the first 
hearing we have had where the cameras have not worked. Can you 
tell us when the committee leadership might get around to 
fixing these cameras?
    Mr. Markey. Well, honestly I did not know that the cameras 
weren't working.
    Mr. Shimkus. I knew you didn't know. But if you look right 
there, they are turned facing each other.
    Mr. Markey. I can see that right now, and it looks like 
they are very interested in each other. The good news is that 
there is an audiocast.
    Mr. Shimkus. That is not the same.
    Mr. Markey. I agree that is not the same. Let us just agree 
on this, okay. Especially in a carbon offset hearing this is 
very important, because the interest in this is about as high 
as watching grass grow. And literally that is what this is 
about; it is about where we can watch grass gross and trees 
grow.
    Mr. Shimkus. After you hear my opening statement, you will 
have a different opinion.
    Mr. Markey. Honestly, you have drawn my attention to it. 
After 22 years as the Ranking Member on the Telecommunications 
Committee, I have a high, high interest in ensuring that there 
is full video coverage transmitted around the world, and 
hopefully into the cosmos, so it can be preserved forever and 
circulating for eons, this hearing. And I promise you that I 
will do my best to find a television technician to be able to 
fix this camera problem which I did not know existed. And I am 
glad that you brought it to my attention, and we will do it as 
quickly as possible.
    Mr. Shimkus. Thank you, Mr. Chairman.
    This was a debate on policy. My time is out, but can I----
    Mr. Markey. I can grant you an opening statement offset, 
okay, for the inquiry which you made. And the Chair is willing 
to recognize the gentleman for 2 minutes.

             OPENING STATEMENT OF HON. JOHN SHIMKUS

    Mr. Shimkus. Thank you, Mr. Chairman, and I appreciate 
that. But no one is assuring my mine workers an offset on their 
jobs. And we can laugh all we want, but as we have shown, 1,000 
mine workers lost their job the last time this House passed an 
air quality bill. One thousand. Peabody number 10, Kincaid, 
Illinois. Just check the records.
    So we can joke all we want, but a climate change cap-and-
trade provision is going to be deadly to the fossil fuel 
industry in this country, and that needs to be exposed 
publicly, and it needs to use a full capacity of C-SPAN to do 
that. And I wouldn't want to say there was an intentional use 
of not having C-SPAN coverage, but I will tell you it is unique 
that someone who has been so versed in using new media, that 
this is now, I think, the second climate change hearing where 
we haven't had coverage.
    So, I mean, all kidding aside, I am taking this debate very 
seriously because I have seen the job loss and job dislocation. 
And I want to highlight this is part of the hypocrisy index 
that we are seeing coming from this congressional leadership 
and this administration. First they want to cut the deficit in 
half first term, and they add $1.5 trillion to the national 
debt in 6 weeks. Then they don't want to accept, and the 
President will not sign, bills that have earmarks; however, he 
is probably going to sign this omnibus bill that has 9,000 
earmarks. I think there is some hypocrisy.
    Finally, as it relates to this provision and this bill, the 
President promises 95 percent tax cut for all Americans, but 
climate change in his budget will create a tax increase on 
average citizens on average of $700 a year to $1,200 a year. 
Now, that dwarfs to the $400 tax cut that we just have gotten 
in the stimulus bill. So there is a hypocrisy here.
    As I said last year on this debate, the congressional 
Majority that attacks NYMEX, a trading floor for distortion of 
the cost of energy, are now going to empower a new exchange on 
climate and carbon to do this. So I think this is very serious. 
Again, I would challenge you to get your leadership to get this 
on C-SPAN so we can fully inform the public.
    I yield back my time.
    Mr. Markey. I thank the gentleman.
    Just a little historical background on the whole issue of 
C-SPAN. This was an issue that was raised by Albert Gore and 
myself and others back in 1978 and 1979 with Speaker O'Neill, 
who had an initial reluctance to broadcast these hearings. But 
having been pressed by a small number of us that really wanted 
to see televised congressional deliberations, he acceded to 
that request. It took 3 years for the Senate to finally accept 
that as well, and they did so because of the amount of 
attention which the House received from the public coverage of 
the hearing. So since I was one of the initiators of the 
coverage, and the senior Members at that time were not 
interested in it, I can promise you that it is my intention, 
and I am sure Chairman Waxman's intention as well, that 
whatever technical problem exists be corrected as soon as 
possible. And we will do that. And I can give the gentleman my 
word on that.
    Mr. Shimkus. Thank you, Mr. Chairman.
    Mr. Markey. Let me turn then and recognize the gentleman 
from Texas Mr. Green.
    Mr. Green. Mr. Dingell.
    Mr. Markey. I am sorry, I did not see Mr. Dingell. The 
Chair recognizes the gentleman from Michigan Mr. Dingell.

           OPENING STATEMENT OF HON. JOHN D. DINGELL

    Mr. Dingell. Well, I thank both of my colleagues, and I 
thank my friend from Texas, who is always a gentleman and 
gracious in all ways.
    Mr. Chairman, thank you for holding this important hearing. 
I commend you for building a strong record and for making a 
strong case for swift and well-thought-out action on climate 
change.
    It is crucial that we find a way to reduce greenhouse gas 
emissions to avoid dangerous harm to this planet. It is also 
crucial that we do so in a way that protects our economy, a 
very difficult task, but one which is doable with proper effort 
by this committee and by proper leadership from you and your 
colleagues here.
    I have heard from industry that allowing some use of 
offsets is the best way to control the cost of a climate change 
program. With this statement I agree. I would note that EPA's 
analysis of the Lieberman-Warner bill bears this out. It 
projected that the use of offsets could decrease allowance 
prices by up to sevenfold if offsets were allowed and properly 
used.
    Last year when my good friend Mr. Boucher and I put forward 
a draft comprehensive cap-and-trade bill, we included in the 
draft an offset program that would allow offsets to be used for 
up to 5 percent of each entity's compliance at the start of the 
program, increasing to up to 35 percent after 2025. I would 
note that this bill is available to this subcommittee as it 
goes about its business, and I would note that this bill, or 
the suggested draft, contains matters which are approved by 
both environmentalists and by industry. And indeed the draft is 
one which makes great good sense from the viewpoints of both 
sides.
    Other groups, including USCAP, a coalition of industry and 
environmental groups have called for the greater use of 
offsets, particularly in the early part of the cap-and-trade 
program, to keep allowance prices at levels necessary to avoid 
economic harm to our economy and to our industries. I welcome 
and encourage this debate, and I urge this committee to 
consider the views of USCAP and others who believe that offsets 
are a useful and necessary tool. And in encouraging this 
debate, I do so because when Mr. Boucher and I introduced our 
draft, this is exactly the kind of feedback that we hoped to 
get.
    It is also essential that the use of offsets maintains the 
integrity of emissions reductions. That is why our discussion 
draft would require that offsets be vigorously verified for 
quality and regularly assessed to ensure that they are 
quantifiable, permanent and enforceable. I urge the committee 
to keep this thought in mind, because there is a fine 
possibility here for rascality and misbehavior.
    I will also note that in the prepared testimony today by 
our witness from GAO, Mr. John Stephenson, the Director of 
Natural Resources and Environment, the GAO encourages Congress 
to establish, one, clear rules for offset compliance; two, 
procedures to account and compensate for uncertainty; three, a 
standardized registry for tracking the creation and ownership 
of offsets; and four, procedures for amending the offset rules 
as new information becomes available.
    The draft submitted by Mr. Boucher and I achieved all of 
these recommendations because we had great apprehensions about 
this. And I encourage members of this committee to explore the 
carbon offset program that we have set forward when considering 
cap-and-trade legislation in this Congress. I look forward to 
hearing from our witness today as we explore this important 
issue in more depth.
    Thank you Mr. Chairman.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from Texas Mr. Barton.

              OPENING STATEMENT OF HON. JOE BARTON

    Mr. Barton. Thank you, Mr. Chairman, and thank our 
witnesses for being here today. This is an important hearing, 
the role of offsets in climate change legislation. I am not 
sure we need climate change legislation, as you well know, Mr. 
Chairman, but if we do need it, offsets might be something we 
could do theoretically if they work, which I don't think they 
do in Europe. And that is what we are going to talk about.
    The European Union has been trying something called the 
Emissions Trading Scheme and their corresponding Clean 
Development Mechanism, and from what I can tell it has cost 
them jobs, and I think it has cost them credibility. Their sale 
of these credits seems to be almost impossible to verify, and 
they don't seem to actually be resulting in reducing emissions.
    Last December the Government Accountability Office released 
a report about their ETS and CDM, international carbon offset 
scheme. I also, several years ago, along with Mr. Whitfield of 
Kentucky, asked the GAO to examine how well the ETS and the CDM 
actually controlled greenhouse gases and whether available 
information substantiates the net benefits of the program. Our 
intention and request in the GAO's assessment of their lessons 
from the international experience is that their experiences 
should apply to upcoming congressional deliberation of these 
carbon energy-rationing schemes. That is the purpose of your 
hearing today, and again I commend you for that.
    What the GAO found is they could not substantiate--I want 
to repeat, could not substantiate--either emissions reductions 
or clear economic benefits, and that the negative economic 
effects could occur if the EU further reduced emissions 
allowances. This GAO report, in my mind, raises serious doubts 
about the effectiveness of any carbon emissions reduction 
scheme. If nothing else, the failure of the ETS and the CDM 
show that the Federal Government shouldn't have spent taxpayer 
dollars on uncertain and unverified benefits.
    The GAO found that the CDM's impact on emissions reductions 
and sustainable development has been limited, and that it is, 
and I quote, nearly impossible, end quote, to ensure that 
international offset projects are additional to what would 
happen anyway absent the offset subsidy.
    The use of carbon offsets in a cap-and-trade system can 
undermine the system's integrity because it is simply not 
possible to ensure that these credits represent a real, 
measurable and long-term reduction in emissions.
    In a companion report the GAO found that there was wide 
variability in the quality of the offsets. The incomplete and 
conflicting data on the use of the offsets and the multitude of 
quality assurance mechanisms severely limited the market's 
transparency.
    Just as an aside, Mr. Chairman, I am sure you know that the 
congressional purchase of offsets that Speaker Pelosi initiated 
several years ago has been suspended for the very reason that 
they can't guarantee that the offsets are really what they 
appear to be. What the American people need to know right now 
is not another murky financial market to lose their hard-earned 
dollars. Indeed, it would be more than ironic if we in the 
Congress this year have a hand in creating a derivatives market 
for carbon offsets on the heels of what I consider to be a 
total meltdown that we have just seen in the world of financial 
derivatives.
    Aside from the financial concerns, if the goal of a cap-
and-trade tax plan is to reduce greenhouse gas emissions, the 
GAO found the use of offsets could actually undermine 
achievement of emission reduction goals and delay technological 
development. In the European Union with its costly cap-and-
trade tax scheme and offsets market, it decreased the 
CO2 emissions on paper by 0.3 of 1 percent. In 
contrast, here in the United States, where we don't do any of 
that, our CO2 emissions have been reduced by double 
the amount of 0.6 of 1 percent.
    Since the GAO report appeared on the scene, I have heard a 
lot of backpedaling and sugarcoating from proponents of the 
cap-and-trade regime, Europeans and Americans alike. All of a 
sudden they say this ETS/CDM scheme is just a pilot program, or 
it is just a dress rehearsal. Proponents claim that now that 
the EU countries have learned their lessons, they really will 
get reductions in CO2, and they really will have 
something to show their citizens after they spend all their 
money on the past offsets and allowance program.
    This PR campaign to greenwash the failure of the ETS and 
CDM further underscores concerns that we should have about not 
following Europe's course as it creates a potential economic 
disaster for its citizens. I guess, Mr. Chairman, you could say 
I am undecided about the benefits of this particular scheme, 
and I do really appreciate you holding a hearing on it.
    Mr. Markey. I thank the gentleman. I thank the gentleman 
for keeping an open mind on this issue. Thank you.
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    Mr. Markey. The Chair recognizes the gentleman from Texas 
Mr. Green.

              OPENING STATEMENT OF HON. GENE GREEN

    Mr. Green. Thank you, Mr. Chairman. And I appreciate you 
not only having this hearing, but our series of hearings on 
climate change and the solutions we have.
    Today's hearing reflects on the critical role that cost 
containment mechanisms must play in any congressional efforts 
to reduce greenhouse gas emissions. Many governmental and 
private-sector studies have concluded that efforts to reduce 
carbon emissions will have substantial costs to our economy. 
President Obama's 2009 budget, for example, assumes a cap-and-
trade program that reduces greenhouse gases 83 percent below 
2005 levels will generate $645 billion to the Treasury over 10 
years. Any cap-and-trade program must include an honest 
discussion on how to reduce the regulatory cost of compliance 
for both businesses and consumers while protecting the 
environmental integrity of the program.
    Most legislative proposals permit regulated entities to 
purchase carbon offsets or greenhouse gas emission reductions 
in one place to make up for the emissions elsewhere in lieu of 
reducing on-site emissions or purchasing additional emission 
allowances. Carbon offsets are currently utilized under the 
European Union's trading scheme, ETS, through the Clean 
Development Mechanism, CDM, and Kyoto program, permitting 
nations with binding emission limits and active emission 
reduction projects in developing countries without emission 
limits. The use experience of CDM provides a valuable insight 
into potential benefits and limits of carbon offsets with any 
U.S. climate program.
    Most experts agree that carbon offsets to be effective must 
be additional, quantifiable, real and permanent. Disagreement 
lies in what defines these key terms and ensure that offsets 
aren't simply phantom reductions that can be gained by savvy 
entities or carbon market players. Congress must also pay 
careful attention on how to best structure the carbon offset 
approval and management process, establish offset limits and 
price volatility mechanisms, and encourage developing countries 
to transition from offsets to binding emission targets.
    I look forward to our testimony today. I guess my concern 
is, coming from Houston, Texas, and the home of what used to be 
Enron, we watched a transmission and energy company turn into a 
trading company. And as my colleague from Texas mentioned, we 
are seeing the trading in financial services, actually the tail 
wagging your dog, in the same thing we could see this. And we 
have to get it right. I don't want 5 or 10 years from now a 
committee in Congress sitting there and saying, Okay, who voted 
for the 2009 bill, similar to what we did to the 1999 bill, to 
free up the flexibility that we are seeing in the financial 
industry and see all the problems it is wreaking havoc on.
    So, Mr. Chairman, I appreciate it. We need to learn from 
the misexperience of the European example and see if we can 
make it work. And I yield back my time.
    Mr. Markey. The gentleman's time is expired. The Chair 
recognizes the gentleman from Texas Mr. Burgess.

          OPENING STATEMENT OF HON. MICHAEL C. BURGESS

    Mr. Burgess. I thank the Chairman.
    You know, a simple trip to the search engine of choice on 
the Internet and typing in the phrase ``carbon offset fraud'' 
will give you tens of thousands of Web sites, news stories, 
YouTube clips, all discussing the idea that carbon offset 
programs are indeed, as Chairman Dingell alluded to, a fertile 
field for dishonest minds. So I am interested to hear from our 
witnesses today and hear what they have to say about including 
the carbon offset programs in the committee's cap-and-trade 
legislation.
    Now, according to the August 2008 report from the General 
Accountability Office, which has been referenced several times 
this morning, over 600 organizations develop, market or sell 
offsets in the United States with a wide range of prices, 
transaction types and projects. One thing that remains constant 
among the 600 organizations is the lack of the ability to 
verify the validity and effectiveness of these offset plans. In 
fact, we are still trying to verify the validity of the carbon 
indulgences purchased by the House of Representatives in 
November of 2007.
    I understand that the offsets have to be, as has been 
earlier pointed out, real surplus, quantifiable, verifiable and 
enforceable to be credible, but I frankly cannot understand why 
they also need to be international. How are international 
carbon offsets useful when the carbon producing sources are 
local? In my area, the Dallas-Fort Worth area of Texas, we have 
some of the most significant traffic congestion in the world, 
and as a consequence are brushing up against nonattainment for 
air quality standards several days a year. We work on these 
issues locally in order to improve air quality for the people 
who live and work in the area, but we certainly don't throw a 
tarp over grass clippings in a Third World country to excuse 
the emissions that we create from sitting in traffic on 
Interstate Highway 35 through the center of my district. I am 
going to maintain a healthy skepticism of any legislation or 
company that advocates for an international carbon offset 
program.
    Mr. Chairman, in just the brief time I have remaining, I 
would just like to add my concern to that of Mr. Shimkus. We 
are fixing to pass one of the largest tax increases on the 
middle class and lower levels of earning in this country, and I 
think it is only appropriate the American people be able to see 
what we are doing under the cover of darkness.
    I yield back.
    Mr. Markey. The gentleman's time is expired. The Chair 
recognizes the gentleman from Texas Mr. Gonzalez.
    Mr. Gonzalez. Waive opening.
    Mr. Markey. The Chair recognizes the gentlelady from 
Wisconsin Ms. Baldwin.

            OPENING STATEMENT OF HON. TAMMY BALDWIN

    Ms. Baldwin. Thank you, Mr. Chairman.
    Today's hearing brings us to the core of one of the issues 
we will be tackling in a cap-and-trade bill. Offsets are 
important to a greenhouse gas reduction program, both because 
of the cost-containment benefits and the environmental benefits 
that occur even beyond those of emissions reductions. Given my 
State's significant industrial base, along with our wealth of 
forested and agricultural lands, Wisconsin has a substantial 
interest in a successful offset program.
    Offsets have the ability to lower our compliance costs, 
provide investments in the resources of our State and region, 
and ensure that we meet greenhouse gas emissions targets. 
Specifically we must give serious consideration to investments 
and offsets projects such as those that capture methane from 
landfills, invest in agricultural conservation, implement 
energy-efficiency technologies, and protect or plant trees 
through various forestry projects.
    With regard to the potential for increasing carbon 
sequestration through forestry and agricultural practices, 
earlier indications suggest that by extending rotations in 
Wisconsin's forests and continuous no-till of cultivated 
cropland, Wisconsin could provide about 16 million metric tons 
of additional carbon sequestration with a price of carbon at 
$20 per ton of CO2. This amount would account for 
approximately 13 percent of Wisconsin's total emissions and 
could vary depending on many factors. Plus there are additional 
benefits that can be achieved through use of offsets: clean 
water, air quality improvement, watershed stabilization, 
biodiversity and wildlife habitat protection, and preservation 
of agricultural land and farming, to name just a few.
    Let me conclude by saying that while an offset program is 
important, it can only be truly successful if emissions 
reductions are real, verifiable, additional, permanent and 
enforceable. I look forward to hearing how we can design a 
system that meets all of these criteria.
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
    Mr. Markey. The gentlelady's time is expired. The Chair 
recognizes the gentleman from Pennsylvania Mr. Pitts.

           OPENING STATEMENT OF HON. JOSEPH R. PITTS

    Mr. Pitts. Thank you, Mr. Chairman. I would like to thank 
you for convening this hearing today on such an important 
issue.
    Like all of us, I believe we should work to decrease the 
amount of greenhouse gas emissions into our atmosphere. Many of 
us are concerned, however, about the economic impact of 
legislation that could be passed to curb emissions, like a cap-
and-trade bill. We are also concerned about the role of offsets 
that may be included in a possible cap-and-trade bill.
    On September 18, 2008, Mr. Orszag, the present President 
Obama's OMB Director, testified that, quote, decreasing 
emissions would also impose cost on the economy. Much of those 
costs will be passed along to consumers in the form of higher 
prices for energy and energy-intensive goods, end quote.
    I do not believe that we should pass a cap-and-trade bill 
that will harm our already damaged economy and those least able 
to withstand more economic pressure, regular Americans who are 
struggling to make ends meet during this recession.
    In regard to offsets, there have been widespread reports 
that organizations are paying for reductions that do not 
actually take place. In addition, some offsets result in a 
reduction in emissions that would have taken place regardless 
of someone paying vast sums of money for the offset to occur. 
Former director of global warming for the Sierra Club, Dan 
Becker, has been quoted saying, quote, on the one hand, there 
is potential benefit of educating people through offsets. On 
the other hand, if people view offsets like papal indulgences 
that allow you to continue to pollute, then it is probably not 
a good idea, end quote.
    Therefore, as this committee considers climate change 
legislation, I believe it would be prudent for us to not only 
consider the economic impact of climate change legislation, but 
also each component's effectiveness.
    I look forward to hearing our witnesses today, and I thank 
you, and yield back.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from Virginia Mr. Boucher.

             OPENING STATEMENT OF HON. RICK BOUCHER

    Mr. Boucher. Thank you very much, Mr. Chairman. And I want 
to thank our witnesses for taking part in our conversation 
today.
    It is possible to create a program that reduces greenhouse 
gas emissions substantially and at the same time is not 
economically disruptive, but those two goals can only 
simultaneously be met if there is a sufficient availability of 
offsets operating outside the cap. Nowhere is that reality 
better illustrated than in the context of utilities that 
consume fossil fuels.
    Fifty-one percent of electricity in the United States is 
coal-fired, and the technology to enable coal to be combusted 
without emitting carbon dioxide is still under development. And 
even if we accelerate the funding for the development of that 
technology, which I will be urging that we do as part of our 
cap-and-trade measure, it is estimated that the technology will 
not be fully deployed until about 2025.
    If we require large reductions in emissions in the time 
between the effective date of the measure and that 2025 date, 
the utilities that are consuming coal, about half of all 
utilities today, would default to the next least expensive 
fuel, and that fuel is natural gas, a fuel that is already in 
short supply in this country. And if we had half of electric 
utilities defaulting to natural gas, there would be a 
tremendous spike to natural gas prices, and that would cause 
deep economic pain across the entire economy. At the present 
time 58 percent of American homes are heated with natural gas, 
and the range of industries from chemicals to agriculture and 
others are heavily natural-gas-dependent. True economic 
dislocation would occur.
    The answer is to have a generous availability of offsets. 
And the legislation, which I joined with Chairman Dingell last 
fall in publishing on our committee's Web site, contains that 
reasonable offset availability.
    I was pleased to note that the blueprint put forward by the 
USCAP group, and I know we will be hearing about that from our 
witnesses today, also contains an appropriate availability of 
offsets. As I recall their numbers, it is 1.5 billion tons both 
domestically and internationally on an annual basis. That would 
make sure that we can take carbon dioxide reductions in the 
near time, and that in doing so, we do not have national 
economic disruption.
    Thank you, Mr. Chairman. I yield back my time.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from Louisiana Mr. Scalise.

            OPENING STATEMENT OF HON. STEVE SCALISE

    Mr. Scalise. Thank you, Mr. Chairman.
    I look forward to hearing from our panel as we discuss the 
role of climate change and offsets. I think the GAO report 
raises some serious concerns. Other reports have raised serious 
concerns about questions about cost-effectiveness and integrity 
of the European Union's Emissions Trading Scheme, as well as 
international carbon offset schemes. I am sure to those who 
stand to profit from the trading of offsets and the lucrative 
fees that would go along with it, the idea of some of these 
emissions trading exchanges might sound very interesting to 
them, but I think we also have to look at the other side and 
the cost that goes along with it.
    To many of us the term ``cap and trade'' is nothing more 
than a code word for a tax increase on energy use. And I think 
if you look in the President's executive budget that was 
submitted last week, over $640 billion in new taxes are 
expected to be created from a cap-and-trade scheme. And what 
does this mean to our economy? What does this mean to our job 
market at a time when we surely don't want to be hurting our 
economy and sending more jobs overseas?
    I think all of these issues need to be considered in the 
broader context of, number one, the effectiveness of studying 
the European model, and I am sure we are going to be hearing a 
lot about that, but also the adverse effects on our economy, as 
well as to every consumer in this country that may think they 
are not going to be paying higher taxes when they realize that 
that $640 billion in new taxes is going to be hitting those 
very middle-class people and lower-middle-class people, people 
at the bottom of the rung, who can least afford to pay it. So I 
think we need to consider all of these in the broader context 
as we are discussing this issue, and look forward to hearing 
the rest of the panel discuss those as well.
    Yield back.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from North Carolina Mr. Butterfield.

           OPENING STATEMENT OF HON. G.K. BUTTERFIELD

    Mr. Butterfield. Thank you very much, Mr. Chairman, for 
convening this important hearing today, and I certainly thank 
the six witnesses for their anticipated testimony.
    Mr. Chairman, I agree with my colleagues that it is 
appropriate for us to begin to have this conversation and to 
develop a generous system of offsets that would be real, that 
would be verifiable, permanent, efficient and effectively 
monitored. My desire to support this concept stems not only 
from a desire to provide cost-containment measures in the bill, 
but also to provide an economic opportunity for districts like 
mine, which I refer to as an offset-rich district, in 
northeastern North Carolina.
    Methane digestion on large livestock operations could be a 
credible and useful offset in not only removing a harmful gas 
from the air, but also using methane for electricity on the 
farm and eventually on the grid. There are nearly 350,000 hogs 
and pigs being raised in my district, and this represents a 
clear, clear opportunity for these farmers to become part of 
the green solution.
    North Carolina has extensive forestry resources with nearly 
60 percent of our State's 33 million acres considered to be 
forestland. Including foresting provisions into an offset 
regime will be duly beneficial. It will have two benefits, 
because the potential includes not only reducing deforestation 
emissions, but also the potential for increased sequestration 
through aforestation, reforestation and forest management. And 
so this is an important conversation, and I thank you, Mr. 
Chairman, for your leadership on this incredibly important 
issue.
    I yield back.
    Mr. Markey. I thank the gentleman.
    The Chair recognizes the gentleman from Texas Mr. Hall.

            OPENING STATEMENT OF HON. RALPH M. HALL

    Mr. Hall. I thank you, Mr. Chairman. And as we listen to 
these six folks here to give us their opinion and suggestions, 
I won't waste a lot of their time, because I will get right to 
the point on the role of offsets as a cost-control mechanism 
under the cap-and-trade regulatory scheme. I won't go into what 
it does to our economy; the energy needs, accumulation of debt, 
or, as the gentleman just spoke there, of new taxes. But 
Chairman Barton, former Chairman Barton, pretty well spoke my 
feelings on it. He said he had a questionable--at best he was 
questionable. Dr. Burgess said he had a lack of optimism.
    I will just be plain about it. As I listen to this and how 
offsets is going to be sold on emissions trading exchanges and 
all that, I say, Mr. Chairman, to you, my friend, and a guy I 
admire and respect and differ with, I say the same thing that a 
loan officer from Prudential told me one time when I asked for 
a loan from one of my companies: I listen to your outrageous 
proposals with an open mind. That gets about as plain as I can 
say it, and I yield back my time.
    Mr. Markey. I thank the gentleman very much. My goal is for 
us to make that loan possible, though. Just so you know, I am 
going to be working on that.
    And the Chair recognizes the gentleman from Washington 
State Mr. Inslee.

              OPENING STATEMENT OF HON. JAY INSLEE

    Mr. Inslee. Just two points. First, we are now starting a 
serious discussion of a cap-and-trade bill, and I think we will 
hear a lot of my friends across the aisle simultaneously 
talking about their desire to cut CO2 emissions and 
their abject refusal to embrace a cap-and-trade bill. And I 
just hope that during this debate, those who do express a 
desire to deal with this issue will come forward with ideas 
about how to deal with it. You can't be something with nothing. 
We are putting forth a cap-and-trade bill which is an honest 
attempt to deal with this issue, and I hope that we can welcome 
positive ideas from the other side of the aisle.
    The second point I would hope that our panelists could 
answer today is a fundamental question I have about offsets. If 
a polluting industry in the United States buys an offset to 
engage in a contract an owner in a Brazilian forest not to cut 
down 100 acres of trees, to use the sequestration asset of 
those trees, how can we be assured that his neighbor or his 
other 100 acres just don't get cut down so we get no additional 
benefit? The only way I could see that this would actually be 
credible is if, in fact, we buy down the quota, if you will, of 
Brazil, where we essentially reduced the otherwise allowed 
CO2 emissions, or a total deforestation acreage 
provision wherein we, in fact, get additional protection. I 
don't see any other way to do it, and I hope the panelists will 
address that issue. Thank you.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from Kentucky Mr. Whitfield.
    Mr. Whitfield. Mr. Chairman, I will waive opening 
statement.
    Mr. Markey. The Chair recognizes the gentleman from 
Oklahoma Mr. Sullivan.
    Mr. Sullivan. I waive opening statement.
    Mr. Markey. The Chair does not observe any other Members 
seeking recognition for the purpose of making an opening 
statement. We will turn to our witnesses.
    Our first witness this morning is Mr. John Stephenson. He 
is the Director of Natural Resources and Environment at the 
United States Government Accountability Office. He has assisted 
Congress immensely over the years in various GAO 
investigations, including his recent reports on the voluntary 
carbon offset market and the Kyoto Protocol's Clean Development 
Mechanism. Thank you for joining us.
    Mr. Stephenson, whenever you are ready, please begin.

STATEMENTS OF JOHN STEPHENSON, DIRECTOR, NATURAL RESOURCES AND 
   ENVIRONMENT, GOVERNMENT ACCOUNTABILITY OFFICE; GARY GERO, 
PRESIDENT, CLIMATE ACTION RESERVE; EMILY FIGDOR, FEDERAL GLOBAL 
 WARMING PROGRAM DIRECTOR, ENVIRONMENT AMERICA; GRAEME MARTIN, 
MANAGER OF BUSINESS DEVELOPMENT, ENVIRONMENTAL PRODUCTS, SHELL 
ENERGY NORTH AMERICA; STUART EIZENSTAT, ON BEHALF OF THE FOREST 
CARBON DIALOGUE; AND MICHAEL WARA, Ph.D., ASSISTANT PROFESSOR, 
                      STANFORD LAW SCHOOL

                  STATEMENT OF JOHN STEPHENSON

    Mr. Stephenson. Thank you, Mr. Chairman, and Mr. Upton and 
other members of the subcommittee. I am here today to talk 
about the potential role of carbon offsets in climate change 
legislation. My testimony is drawn from two of our recently 
issued reports: one, Lessons Learned from Voluntary Carbon 
Offset Markets in the U.S.; and the other, The European Union's 
Mandatory Market Implemented under Kyoto Protocol's Clean 
Development Mechanism.
    Mr. Dingell and Mr. Barton have already done a good job of 
summarizing those two reports, but I am going to do my take on 
it anyway. The existing U.S. market is considered voluntary 
because we do not yet have national limits or a cap on 
greenhouse gas emissions. The CDM, on the other hand, is a 
program that allows EU countries under the Kyoto Protocol to 
partially meet their emissions targets by investing in offset 
projects in developing countries like China.
    Our reports identify challenges with ensuring the 
credibility of offsets in both markets and matters for the 
Congress to consider as it moves forward in developing climate 
change legislation.
    Carbon offsets are reductions of a greenhouse gas from an 
activity in one place to compensate for emissions occurring 
elsewhere. Because the cost of creating an offset can be less 
than that of requiring regulated industries to make reductions 
themselves, carbon offset can be a useful cost-containment 
mechanism in a mandatory emissions-reduction program. For 
example, a regulated coal-burning power plant might choose to 
invest in projects to reduce carbon emissions off site rather 
than make reductions itself or trade with another entity. 
However, the use of offsets, whether for voluntary or 
compliance purposes, presents numerous challenges.
    First, carbon assets are difficult to characterize and 
evaluate since they can involve different activities, 
definitions, greenhouse gases, quality assurance practices and 
time frames. We found that this is particularly true in the 
voluntary offset market in the U.S., which is not regulated, 
lacks transparency and provides offset purchasers with limited 
evidence of a project's quality and integrity.
    Second, ensuring the credibility of offsets is challenging 
because there is no reliable way to determine whether the 
underlying project is additional to a business-as-usual 
scenario. In other words, it is difficult, if not impossible, 
to know whether a project might have gone forward anyway. 
Because all offset projects involve estimating reductions in 
the future relative to projections of a business-as-usual 
condition, all estimates and projections are inherently 
uncertain.
    Third, offsets involve environmental and economic 
tradeoffs. For example, offsets could lower the cost of the 
future U.S. cap-and-trade program, but could also undermine its 
effectiveness if the offsets do not represent real reductions. 
Our work has raised questions about the credibility of offsets 
in the voluntary market and identified cases where CDM offsets 
lack credibility. In the case of the CDM, offsets have provided 
cost containment for entities regulated by the EU cap-and-trade 
program by enabling them to use offsets for partial compliance 
with the program. However, the CDM's effects on emissions are 
uncertain because of challenges in ensuring the credibility of 
offsets. In addition, the project approval processes are 
lengthy and resource-intensive, which significantly limits the 
program scale and cost-effectiveness.
    Nonetheless, an international offset program like the CDM 
can provide incentives for developing countries to participate 
in global efforts to reduce emissions. In fact, developing 
countries may not have signed Kyoto without the CDM. This is 
important because any meaningful effort to limit the harmful 
effects of climate change will require substantial 
international cooperation.
    To the extent that the Congress chooses to develop a 
program that limits greenhouse gas emissions, allowing the use 
of carbon assets for compliance, it may wish to establish, one, 
clear rules about the types of offset projects that regulated 
entities can use for compliance, as well as standardized 
quality-assurance mechanisms for these allowable project types; 
two, procedures to account and compensate for the inherent 
uncertainty associated with offset projects such as discounting 
or overall limits to the use of carbon for compliance. A 
standardized registry for tracking the creation and ownership 
of offsets will also be needed; and lastly, procedures for 
amending the offset rules, quality-assurance mechanisms and 
registry based on experience and the availability of new 
information over time.
    The fact that the EU, even with extensive quality-assurance 
procedures, had credibility problems with some CDM offsets 
illustrates the potential for offsets to undermine the 
integrity of a cap-and-trade system. Given these challenges, it 
may be useful to consider the merits of offsets relative to 
other cost-containment mechanisms as we go forward.
    Mr. Chairman, that concludes my statement. I will be happy 
to answer questions at the appropriate time.
    Mr. Markey. Thank you, Mr. Stephenson, very much.
    [The prepared statement of Mr. Stephenson follows:]

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    Mr. Markey. Our next witness is Gary Gero. He is the 
president of the Climate Action Reserve. His organization is a 
recognized leader in the development of offset protocols and 
standards, and he is an expert in this field.
    So we welcome you, sir. Whenever you are ready, please 
begin.

                     STATEMENT OF GARY GERO

    Mr. Gero. Thank you. And good morning, Chairman Markey, 
honorable members of the committee. I thank you for the 
opportunity to be here today, and I thank you for your 
attention to this important topic.
    My name is Gary Gero. I am the president of the California 
Climate Action Registry, a 501(c)(3) nonprofit organization. 
The California Registry was created in 2001 by the State of 
California to provide regulatory quality greenhouse gas 
accounting standards and public registration of greenhouse gas 
emissions data. We were established specifically for the 
purpose of recognizing and encouraging early voluntary actions 
to address the serious threat of climate change. We are today a 
fully independent, national environmental nonprofit 
organization that is guided by a board of directors comprised 
of leaders from government, business and the environmental 
community.
    Since our beginning we have developed and become widely 
recognized for our expertise in rigorous and accurate 
greenhouse gas accounting. More recently we have applied this 
expertise to create and operate a greenhouse gas emission 
reduction credit or offsets registry. This offsets registry is 
known as the Climate Action Reserve, and to date more than 40 
emission-reduction projects from 18 U.S. States have been 
submitted to it. Additionally, the States of California and 
Pennsylvania have formally recognized our standards for 
quantifying early voluntary actions.
    The Climate Action Reserve provides several tests to ensure 
the environmental integrity of the offsets that we register. 
First, we develop and implement standardized, performance-based 
protocols to quantify a project's greenhouse gas emission 
reductions. These protocols are the accounting standards that 
we use to ensure that the emission reductions are real. And 
that they are accurate. Included in these are methods for 
demonstrating that a project would not have happened anyway; 
that is, that the project is surplus or additional. Our 
protocols also specify mechanisms for ensuring the permanence 
of sequestration offsets.
    Second, we actively manage an independent third-party 
verification program to ensure that our standards are being 
met. As you well know, strong rules are meaningless without 
strong enforcement. As part of this we work with the American 
National Standards Institute to train, accredit and assiduously 
oversee verifiers.
    Third, we will oversee a robust offset registration, 
serialization and tracking system to ensure ownership and 
prevent double counting. Indeed. We create a unique serial 
number for every ton of emission reduction so that ownership 
can be clearly established. These are elements of our program's 
contractual standards which are necessary to ensure that the 
offsets are enforceable.
    So I have described what we do, but let me take a second to 
say what we do not do, because I think that, too, can inform 
good program design.
    To avoid real or even perceived conflicts of interest, we 
do not fund or otherwise develop emission-reduction projects, 
nor do we serve as an exchange for offset credits or otherwise 
engage in financial transactions concerning such credits. 
Further, we are not an advocacy organization. As an 
environmental nonprofit organization, our public benefit 
mission is to ensure that when an emission reduction is 
reported, there is certainty that is has truly resulted in a 
benefit to the environment.
    Let me briefly describe the four guiding principles that 
are the core to our efforts and that are vital to ensuring the 
integrity of any offsets program. The first, clearly, is 
accuracy, which is to ensure that measurement estimation 
techniques and emission factors reflect best-available science.
    The second is conservativeness. Despite best efforts, or 
sometimes for reasons of practicality, there are times when 
there is some uncertainty with regard to the quantification of 
emission reductions. In such cases, the guiding principle that 
we rely on is conservativeness so that emission reductions are 
not overestimated.
    The third is transparency. Transparency ensures that 
outside observers have unhindered access to all aspects of our 
work so that they may gauge for themselves its accuracy and its 
credibility.
    And, finally, practicality. Notwithstanding our other 
guiding principles, the Reserve recognizes that, for a program 
to function effectively, it must not simply be an academic 
exercise. Instead, it must incorporate a commonsense approach 
and be practical. It is important that any offsets program only 
be as complex as is necessary to retain its rigor and its 
credibility, but no more so.
    So let me conclude with this. I believe that the experience 
of the Climate Action Reserve has clearly demonstrated that it 
is possible to design and implement an effective, credible, and 
practical offsets program.
    I thank you for the opportunity to be here today, and I am 
happy to answer any questions you may have.
    [The prepared statement of Mr. Gero follows:]

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    Mr. Markey. Thank you, Mr. Gero, very much.
    Our next witness is Ms. Emily Figdor, who is the director 
of the Federal Global Warming Program at Environmental America.
    We welcome you, Ms. Figdor. And whenever you are ready, 
please begin.

                   STATEMENT OF EMILY FIGDOR

    Ms. Figdor. Thanks so much for the opportunity to share my 
views regarding the role of carbon offsets in climate 
legislation.
    My name is Emily Figdor, and I am the director of the 
Federal Global Warming Program at Environment America. 
Environment America is a federation of State-based, citizen-
funded, environmental advocacy organizations with more than 
750,000 members and activists in all 50 States.
    Last week, President Obama issued a historic call for 
Congress to send him legislation that, quote, ``places a 
market-based cap on carbon pollution and drives the production 
of more renewable energy in America.'' The central objective of 
such legislation must be to reduce global warming emissions 
fast enough to avoid dangerous impacts, such as a massive rise 
in sea levels that would inundate coastal areas.
    To avoid what some climate scientists call ``the tipping 
point,'' our view is that the United States must cut its global 
warming emissions by at least 25 percent below 1990 levels by 
2020 and by at least 80 percent below 1990 levels by 2050.
    The number-one imperative of U.S. climate policy must be to 
achieve science-based cuts in pollution. Offsets, however, 
provide less certain reductions in emissions, thus jeopardizing 
our ability to achieve pollution reduction targets. This is 
because emission allowances and offsets are fundamentally 
different. An allowance represents a unit of emission. If a 
facility decides to emit carbon dioxide, it must hold an 
allowance. An offset, on the other hand, represents a unit of 
pollution not emitted. It is of equal value to an allowance 
only if it can be judged with certainty that the pollution 
would have been emitted but was not and that the emission 
reduction resulted from the incentive provided by the offset.
    To illustrate the difference, consider two people trying to 
lose weight. One person decides to meticulously count the 
calories of the foods he eats, with the goal of reducing his 
intake each day. The second person, however, counts the 
calories of the foods he thinks he would have eaten but did not 
because he was on a diet. You can imagine which of these two 
will be more likely to actually shed a few pounds.
    Or consider a situation in which rising natural resource 
prices bring an industrial facility abroad to the verge of 
shutdown, a step that would reduce emissions. A U.S. utility 
might agree to pay the factory owner if she shuts down the 
facility, thus generating offsets that the utility can use to 
expand its operations. The key question is, would the factory 
have shut down anyway? If the answer is yes, no additional 
emission reductions have been gained. Indeed, the offset 
program would result in an increase in overall emissions versus 
business as usual.
    Determining additionality requires crystal-ball gazing, and 
so is impossible to know with certainty. At the same time, the 
worthwhile goals promoted by many offset proponents--to protect 
tropical forests and sequester more carbon in plants and soils 
in the United States--can be achieved without jeopardizing the 
environmental integrity of the overall program.
    Specifically, Congress could set aside a small portion of 
auction revenue for these two purposes. Emission reductions 
from these set-aside programs would be in addition to those 
required by capped sectors under the cap-and-trade program. As 
a result, problems such as leakage and additionality would not 
jeopardize our pollution reduction goals.
    Because offsets deliver a less certain emission reduction, 
they should not be included in climate legislation. 
Nonetheless, if offsets are, in fact, considered, the levels of 
the caps on pollution must be stringent enough and the offsets 
limited enough to minimize the impact that lower-certainty 
emission reductions have on our ability to achieve pollution 
reduction targets.
    Offsets should be strictly limited to no more than 5 
percent of the allowances, as proposed by Representatives 
Dingell and Boucher in the early years of the offset program in 
their draft climate bill. Unlike in their bill, however, this 
percentage should not increase over time unless and until 
offsets can be proven to deliver equivalent emission reductions 
to actions taken within the bounds of a cap-and-trade program.
    To provide the highest-quality offsets possible, Congress 
should require EPA to consult an independent science advisory 
board in establishing and periodically reviewing domestic and 
international offset programs. In addition, due to the inherent 
problems in determining additionality, Congress should discount 
offset credits.
    Finally, if international offsets are permitted, national-
level accounting and administrative methods should be required. 
And there should be some conditionality on their use to enable 
the program to serve as a lever to encourage developing 
countries to substantially reduce their emissions below 
business as usual.
    In conclusion, the central objective of U.S. climate policy 
must be to reduce global warming emissions fast enough to avoid 
dangerous impacts. Because offsets provide less-certain 
reductions in emissions, they would jeopardize our ability to 
achieve pollution reduction targets and should not be included 
in climate legislation.
    Thank you.
    [The prepared statement of Ms. Figdor follows:]

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    Mr. Markey. Thank you, Ms. Figdor, very much.
    Our next witness is Mr. Graeme Martin. He is the manager of 
business development of environmental products for Shell Energy 
North America.
    We welcome you, sir. Whenever you are ready, please begin.

                   STATEMENT OF GRAEME MARTIN

    Mr. Martin. Well, good morning, Chairman Markey and members 
of subcommittee. Thank you for the opportunity to be here 
today. It is a real honor.
    Mr. Markey. Could you move the microphone over just a 
little bit? Thank you.
    Mr. Martin. Shell was one of the first integrated oil 
companies to acknowledge the impacts of human activity on the 
climate, and we believe now is the time to act. The longer we 
delay, the more stringent the needed measures and the more 
expensive the compliance. And, in particular, Shell supports 
cap-and-trade as the surest way to reduce CO2.
    We are members of U.S. Climate Action Partnership, and we 
helped write the blueprint for legislative action. Shell and 
USCAP believe offsets are critical to managing the cost of a 
cap-and-trade program, especially in its early years. In 
Shell's trading experience, the more offsets you have, the 
lower the average cost of compliance. So, for this reason, 
USCAP's offset recommendations are integral to USCAP's support 
for the aggressive environmental targets referenced in the 
blueprint.
    The USCAP and Shell recommend a limit of 1.5 billion tons 
of domestic and 1.5 billion tons of international offsets, as 
we have already heard. We have an initial annual limit set at 2 
billion tons combined.
    We call for a carbon market board to set the annual limits 
on offsets. This board will use that authority to avoid 
economic harm from excessively high allowance prices or 
increases in the price of natural gas due to fuel-switching.
    In addition to cost containment, there are other compelling 
reasons to use offsets. First, offsets actually reduce 
emissions. The climate doesn't care where the CO2 is 
reduced; reductions from anywhere in the world have the same 
impact. And some other cost-containment measures may not 
actually deliver that environmental result.
    Second, offsets deliver an environmental value in addition 
to the CO2 reduction, including improving habitat 
water quality and biodiversity at the site where the offsets 
are created.
    Third, offsets drive the deployment of technology at its 
most reasonable cost. Affordable offsets help companies like 
ours in the early years invest in the climate technologies that 
they know they will need in the later years when the targets 
are much steeper. Shell believes that several key technologies 
at commercial scale are going to be needed to address climate 
change, including carbon capture and sequestration and 
cellulosic ethanol. And we have been working hard to develop 
these technologies.
    Fourth, offsets help prevent the so-called ``dash to gas.'' 
Without offsets, companies may be forced to switch from 
CO2-intensive fuels like coal to cleaner fuels like 
natural gas. And a move like this could sharply drive up the 
cost of natural gas, harming the economy, businesses, and 
consumers.
    Fifth, and finally, international offsets are an excellent 
tool to encourage developing countries to reduce their own 
CO2 emissions. We know it will be a long time before 
cap-and-trade covers all of the economy in all parts of the 
world, but we still need to introduce the emissions reduction 
into the developing world if we really want to tackle climate 
change. And quality offsets are a good way to encourage this.
    USCAP and Shell call for quality offsets developed to 
strict standards. When we recognize problems with the current 
international offset system, and we fully support reform of the 
clean development mechanism. We strongly believe the offsets 
should be environmentally additional, permanent, measurable, 
verifiable, and enforceable, as we have heard. Shell is working 
closely with organizations like the California Climate Action 
Registry to craft these world-class offset protocols.
    We support USCAP's call for the EPA to set a transparent 
process for crafting offset standards. We believe the EPA 
should certify these offsets. And we would like to see the U.S. 
engage assertively in international climate dialogues and lead 
the effort to reform the international offset program to U.S. 
standards. We strongly prefer to see one common, 
internationally accepted standard for all offsets.
    So, in summary, abundant quality offsets are key to 
achieving these stringent targets at the lowest possible cost 
of the economy. I thank you for your time and am happy to 
answer any questions.
    [The prepared statement of Mr. Martin follows:]

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    Mr. Markey. Great. Thank you, Mr. Martin, very much.
    Our next witness is Ambassador Stuart Eizenstat. He is a 
partner at the law firm of Covington & Burling and focuses on 
international trade and dispute resolution.
    He was the lead U.S. climate negotiator during the Clinton 
administration and has served in several roles in the Federal 
Government, including Ambassador to the European Union and 
Deputy Secretary of the Treasury. He is here today on behalf of 
the Forest Carbon Dialogue.
    We welcome you, Ambassador Eizenstat.

                 STATEMENT OF STUART EIZENSTAT

    Mr. Eizenstat. Thank you, Mr. Chairman, Mr. Upton. I am 
here today on behalf of the Forest Carbon Dialogue, which is a 
unique environmental corporate coalition dedicated to provide 
domestic and international forest carbon provisions in any U.S. 
climate legislation.
    We cannot solve climate change without forests. 
Deforestation contributes some----
    Mr. Markey. Mr. Ambassador, could you move the microphone 
in just a little bit closer?
    Mr. Eizenstat. Deforestation contributes some 20 percent of 
all greenhouse emissions, more than all the transportation 
modes in the world: more than cars, trucks, trains, and planes 
together. Deforestation accounts for the fact that Brazil and 
Indonesia are the fourth- and fifth-largest carbon dioxide 
emitters. Forests also have the potential to address cost-
effectively up to half of all human-caused emissions.
    The use of forest credits in climate change legislation 
would accomplish two goals at the same time. First, they would 
provide American-regulated corporations and entities a cost-
effective way to meet emission targets. The greatest threat to 
passage of cap-and-trade legislation, as shown by the Senate 
debate last year, is concern about cost, particularly now in a 
time of economic weakness. Offsets addresses that.
    The second benefit, one I saw clearly at Kyoto, is it can 
tangibly encourage developing countries to take actions to deal 
with climate change and break the China-led phalanx of united 
opposition to action on climate change by getting the 
developing world engaged in this process and creating, at the 
same time, a more level playing field for U.S. industry.
    There are also multiple co-benefits to a robust forest 
provision in legislation. Biodiversity and environmental 
protection is one. Tropical forests are home to half of the 
world's species, who will be protected. They help restore 
degraded lands and watersheds. They reduce soil erosion and 
provide clean water and avert draughts and crop failures.
    Second, they contribute to sustainable development. Eighty 
percent of the world's rural poor in developing countries 
depend for their livelihood on forests. Cutting them down at 
the rate we are doing, which is one football field per second, 
means that the rural poor will be deprived of a place to live.
    And that is why the third benefit is a security benefit. 
U.S. military experts, in a recent report, indicated that 
fragile societies will become even more unstable, and a new 
mass movement of ``eco-migrants'' will occur, bringing vast 
human and economic cost to our doorstep. Forests can help avoid 
that.
    There have been path-breaking economic analyses recently by 
Sir Nicholas Stern and by the Eliasch report for the U.K. 
Government, by McKinsey, and by the Lawrence Berkeley 
Laboratory, all setting forth in detail the critical role 
forests and land use can play in cost-effective ways to deal 
with climate change.
    They also document that the incentives to cut forests are 
so great, they are so tremendous--cut them, plant soybeans, and 
export them--that you have to create robust incentives to avoid 
that incentive to cut. Once they are gone, they are gone 
forever. This is not like Weyerhaeuser replacing its forests on 
a regular basis with seedlings.
    The costs are anywhere from $5 billion to 10 billion, 
according to the Stern report, to the 2008 Eliasch report, 
which says $20 billion to $30 billion. You cannot create those 
kinds of incentives by foreign assistance alone. You need 
market mechanisms to mobilize the power and discipline of 
markets to offset the tremendous pressures to cut.
    Now, there is a new world out there. Developing countries 
who were not, at Kyoto, willing to play are willing to do so. 
For example, the Common Market for Eastern and Southern Africa, 
COMESA, with some 17 countries, the Coalition for Rain Forest 
Nations--all are saying their contribution to dealing with 
climate change will be to avoid deforestation if they are 
provided incentives to doing so. And they must have, because 
the incentives to cut are absolutely so enormous. This is not a 
way of avoiding action. And, indeed, it will encourage more 
aggressive action.
    Brazil announced just a few months ago, Mr. Chairman and 
members of the committee, its first-ever target to cut the 
massive rate of deforestation of the Amazon by 70 percent over 
the next decade. The reason why, if you look at the top five 
countries in emissions, Indonesia and Brazil are in the top 
five isn't because of their industrialization, it is not 
because of their cars, it is because they are cutting their 
forests down.
    Just this week, this very week, Indonesia applied for a 
World Bank program supporting developing-nation efforts to 
fight deforestation and earn money through the sale of tradable 
forest credits.
    Now, I would like to deal very quickly with the questions 
that have just been asked. They are obvious questions. 
President Reagan said, when he was dealing with the Soviets on 
arms control, ``Trust but verify.'' There is verification here, 
and let me go into it very quickly.
    Credits generated from national and subnational reductions 
in deforestation can be, and are being as we speak, verified on 
the basis of objective, transparent, open-access remote sensing 
data. What that means is satellite telemetry has improved so 
substantially, Google can look into neighborhoods and into 
forests. A partnership announced this very week between Cisco 
and NASA and Brazil's INEP are making available free on the 
Internet a national baseline that can be created for forests 
with on-the-ground monitoring and scientific evaluation to 
provide certainty about the level and change of the forest 
carbon content in our forests.
    The Eliasch report, just a few months ago, for the U.K. 
stated that monitoring emissions from forests based on 
satellite telemetry is more reliable than monitoring emissions 
from any other sector.
    In addition, national forest baselines and national 
accounting frameworks can be developed that are critical to 
make these forests' carbon markets integral. Any reductions 
below that national baseline are real reductions, not false 
reductions.
    There are also a variety of insurance mechanisms, Mr. 
Chairman and members of the committee, that can be put in 
place, buffer funds and buffer zones in which a percentage of 
carbon credits and/or forests themselves can be held in reserve 
in case there is any change in policy or forest fires.
    In addition, actual insurance products are being developed 
now by the insurance industry and the World Bank. Liability 
clauses can provide additional insurance. And leakage can be 
dealt with through the market price of the credit, discounted 
if the credit is less valuable. Offset credits would be 
available only if an entire country's rate of emissions from a 
protected sector falls below a particular established baseline.
    Mr. Markey. If you could summarize, Mr. Eizenstat.
    Mr. Eizenstat. Therefore, there are ways to deal with these 
questions, but there is no time for delay. If we dilly-dally on 
this, these forests will be gone by the time we implement this, 
and we will not be able to deal with 20 percent of the problem 
that is existing now in CO2 incentives. It is urgent 
to act now. We can solve this problem. This is a cost-effective 
way, both for U.S. companies and to incentivize developing 
countries that haven't been willing to play before.
    [The prepared statement of Mr. Eizenstat follows:]

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    Mr. Markey. Thank you, Ambassador Eizenstat, very much.
    Our final witness is Dr. Michael Wara, who is the assistant 
professor at Stanford Law School. His research focuses on the 
emerging global carbon market.
    We welcome you, sir. Whenever you are ready, please begin.

                   STATEMENT OF MICHAEL WARA

    Mr. Wara. Mr. Chairman and members of the subcommittee, I 
am honored to appear before you and grateful to have the 
opportunity to talk about my perspective on the performance to 
date and the potential role of international offset programs in 
U.S. climate policy.
    Mr. Markey. If you could speak up just a little bit.
    Mr. Wara. Sure.
    At the outset, I want to emphasize that, while my remarks 
and my written testimony are relatively critical of the clean 
development mechanisms performance to date, I remain a 
proponent of emissions trading in general, because emissions 
trading creates appropriate incentives to internalize the costs 
of climate change for firms and because it has at least the 
potential to substantially reduce the societal costs of 
addressing climate change.
    We cannot afford to neglect the climate change problem any 
longer, but neither can we afford to ignore the present and 
future costs of addressing the problem.
    I am not a proponent of the use of offsets for cost-control 
purposes within such emissions trading systems. However, given 
that offsets are likely to be used for cost control, there is 
much that can be learned from the experience to date in the 
international system to both increase the environmental 
credibility of international offsets within a U.S. system and 
to increase the administrative efficiency and transparency and 
perceived fairness of a U.S. program.
    All offset systems face a tradeoff between the quality of 
the environmental auditing processes used to verify that real 
reductions occurred and the transaction costs and risks that 
offset project developers face. This tradeoff and tension and 
how it is resolved essentially determines the number of offsets 
that are brought to market and the potential ability of the 
system to create cost-control for the emissions trading regime 
at large.
    Assessing whether or not a carbon offset represents a real 
reduction below what otherwise would have occurred or is 
essentially in ``anyway credit'' is an incredibly difficult 
regulatory problem and practice. And I would argue that the CDM 
has not had a very high level of success in resolving this 
thorny issue.
    I think there are two major reasons for this. First is a 
poor administrative legal system that is not terribly 
transparent and provides cover for both changes in policy and 
for politicized decision-making. The second is the incredibly 
broad scope of the CDM. In particular, the fact that it 
includes offset project types where additionality assessment is 
intrinsically difficult to evaluate and where, as a 
consequence, project proponents can easily misrepresent 
financial, technological, and regulatory barriers to a project 
in order to create the impression that additionality exists 
when, in fact, it does not.
    So what can the U.S. do? I think the U.S. can do a lot to 
address these issues in a future program. In particular, 
because, as EPA and EIA have demonstrated in their modeling 
results, in order to create effective cost-control, the U.S. is 
going to likely be compelled to purchase large numbers of 
international offsets and will become, likely, the largest 
buyer of international offsets globally. We have the 
opportunity to exert significant influence on the design of the 
international program and should do so.
    And we should do it in three important ways. The first is 
to push for administrative legal reforms of the clean 
development mechanism or whatever follows it. In particular, we 
need to professionalize the offset regulator. Right now the 
regulators are part-time, volunteer political appointees. We 
need to remove conflicts of interest, which currently are faced 
by the third-party verifier, essentially the auditors and fact-
checkers of the system. These conflicts of interest are 
pervasive and lead to flawed analyses. Third, we need to force 
regulators to justify their decision-making and to explain 
changes from past precedent, even if they aren't bound by that 
past precedent.
    A second major area of reform that I would argue the U.S. 
should pursue is to limit U.S. purchase of offsets to those 
sectors where evaluation of project-level additionality is 
relatively straightforward. We should stay away, in particular, 
from sectors where evaluation of whether an emission reduction 
would have occurred otherwise is a very difficult question to 
determine.
    Those sectors can be addressed but not at the project 
level. There is an important role for the U.S. to pursue in 
developing sectoral approaches to those sectors, especially the 
energy sector and also, I would argue, the forest sector. In 
the energy sector, it is because additionality is a difficult 
problem to assess. And in the forest sector, the concern is a 
leakage as much as additionality, the idea that Member Inslee 
pointed to, that how do we know that forests preserved here 
doesn't lead to forests cut down somewhere else. The 
appropriate answer there are national baselines.
    Finally, the U.S. must make clear that offsets are a 
temporary solution to developing-country greenhouse gas 
emissions. We need to provide both positive and negative 
incentives for major developing countries to accept caps in the 
medium term. I argue that these incentives should include a 
time frame for phaseout of U.S. offset purchases and, as a 
carrot to induce a cap to be accepted, guarantees a full-market 
access to U.S. emissions trading markets for countries who do 
accept caps.
    Mr. Chairman, that concludes my statement. I will be happy 
to answer questions at the appropriate time.
    [The prepared statement of Mr. Wara follows:]

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    Mr. Markey. Thank you, Mr. Wara, very much.
    We will now turn to questions from the subcommittee 
members, and the Chair will recognize himself for a first 
round.
    I would like to ask, first, a yes-and-no question to all 
six of you, and that is on the merit of establishing an 
independent science advisory committee to help guide EPA's 
development, implementation, and updating of an offset program. 
Would you support the inclusion of such a mechanism inside a 
Federal climate piece of legislation put on the President's 
desk, an independent science advisory committee to guide EPA's 
deliberations?
    Mr. Stephenson?
    Mr. Stephenson. That is not really a yes-or-no question, 
but ``yes'' if it is part of an overall verification scheme for 
offset programs.
    Mr. Markey. OK, great.
    Mr. Gero.
    Mr. Gero. With the caveat that we don't take advocacy 
positions, I think that any stakeholder group, including 
scientists, is important to ensure the credibility of offsets.
    Mr. Markey. Thank you.
    Ms. Figdor.
    Ms. Figdor. Mr. Chairman, by all means, yes. And I would 
add that this body, an independent advisory board, should be 
the ones who are determining what types of projects, if any 
offsets are allowed, what types of offset projects would be 
allowed.
    Mr. Markey. Thank you.
    Mr. Martin.
    Mr. Martin. Yes. And I would encourage that committee to 
engage at the international level, as well.
    Mr. Markey. Great, thank you.
    Mr. Eizenstat.
    Mr. Eizenstat. Yes.
    Mr. Markey. Yes.
    Mr. Wara.
    Mr. Wara. I agree. I think it is essential.
    Mr. Markey. OK. Next I would like to focus on the potential 
role of international offsets in U.S. climate legislation. We 
don't want international offsets to become some kind of a 
welfare system. To get the kind of global emission reductions 
we need, we have to encourage major developing countries to 
take broad action on climate change.
    Several of you have testified about the potential to use 
access to the U.S. carbon market as a lever to encourage such 
action. You have mentioned the idea of moving to sectoral 
instead of project-based offsets, and you have also talked 
about requiring developing countries to take on a progressively 
greater domestic commitment as a condition of being able to 
sell offsets into the U.S. market. I would like to ask you to 
expand upon your views on that subject.
    We will begin with you, Dr. Wara; then we will come back 
through you, Ambassador.
    Mr. Wara. Well, let's see. International offsets have been, 
historically, an important part of encouraging developing-
country engagement in international frameworks to address 
climate change. There is no question about that.
    But, in the long run, offsets only engage at the margin. 
They are not likely to lead to the truly substantial reductions 
and, really, alteration in development path that we need to 
accomplish in developing countries in order to fully address 
this issue and to make U.S. efforts worthwhile.
    In that context, and especially in sectors, I would argue, 
sectors where regulation plays an important role--and what I 
mean by that is, in particular, the energy sector in developing 
countries--I think we need to really focus on talking to the 
regulator to address policies that discourage greenhouse gas 
emissions, rather than simply focusing at the project level, at 
the power plant level. Because, in many respects, the power 
plants do what the regulators tell them to.
    Mr. Markey. Ambassador Eizenstat?
    Mr. Eizenstat. International credits are absolutely 
essential. They are essential, number one, to incentivize 
developing countries to finally participate in the process when 
they will not initially take economy-wide cap-and-trade limits 
of their own.
    Number two, Mr. Upton, this is not, sir, a transfer of U.S. 
taxpayer dollars to developing countries. This is a private-
sector decision by a private U.S. company that may wish to 
reduce its cost of compliance by purchasing an international 
credit. It is not the transfer of a U.S. tax-based dollar.
    Number three, there have been discussions about the EU 
ETS--I was Ambassador to the EU--and the CDM. The CDM was 
something we reluctantly agreed to because it was the only way 
at the time to get China, India, and the developing countries 
to agree at all. It is a bureaucratic nightmare. It is nothing 
like the kind of market-based system we are talking about now 
internationally. It should not be used as a model. The 
Europeans and the ETS don't believe in offsets; they don't 
believe in reducing the cost on industry. That is their 
problem. We should care about reducing the cost on industry, or 
we won't get a bill.
    So international offsets incentivize developing countries, 
they provide a market mechanism, and they reduce the cost for 
U.S. companies to comply, and they are verifiable.
    Mr. Markey. My time has expired. The Chair recognizes the 
gentleman from Michigan, Mr. Upton.
    Mr. Upton. Thank you, Mr. Chairman.
    I have a whole series of questions, and I want to focus a 
little bit on what the EU does. They, as I understand it, can 
do offsets both within the EU as well as internationally, is 
that right? Collect international offsets as well as get 
offsets from within the EU itself?
    Mr. Eizenstat. They can through the CDM mechanism, but, as 
I said, the CDM mechanism is an inherently flawed mechanism.
    Mr. Stephenson. Well, the offsets are only for developing 
countries.
    Mr. Upton. Right. And the offsets outside of the EU are 
only for developing countries.
    Mr. Eizenstat. They can't do it within the EU.
    Mr. Upton. They cannot do offsets within the EU?
    Mr. Stephenson. Correct.
    Mr. Eizenstat. They can have internal trading, emissions 
trading within the EU, within the 27, but they can only do 
offsets outside.
    Mr. Upton. What lesson might we learn from the example that 
we used, that I referenced in my opening statement, as it 
related to the $90,000, in essence, that was sent to North 
Dakota for no-till for an offset from the U.S. capital funds 
here? In terms of reliability, would they have done that 
otherwise? I mean, that is an essential ingredient that has to 
be part of any definition, in fact, that we would make sure 
that it was going to be done and perhaps outside of what would 
have been done otherwise.
    Mr. Eizenstat. The additionality, Congressman Upton, in 
terms of the forestry sector, is absolutely clear. And the 
reason is this: The incentives to cut forests in developing 
countries are so enormous that the notion that somehow they 
would stop doing it absent these incentives just doesn't have 
any credibility at all.
    They are cutting them down, as I indicated, at the rate of 
one football field a second, because there is such tremendous 
incentives to cut and plant and export. So we are not dealing, 
at least in the forestry sector, with an additionality problem.
    Mr. Upton. Now, China was in Dr. Wara's testimony, got 
nearly 5 billion euros for emission reductions. China, at the 
same time, as you know, particularly as we look at 
deforestation in Africa, is part of the clear-cutting along the 
eastern Mozambique, all those countries.
    Here, China is a beneficiary of this and, at the same time, 
they are a major force in deforesting the world's forests as it 
relates to carbon.
    Mr. Eizenstat. The reason is that the CDM is a project-by-
project concept which does not provide real incentives for 
avoided deforestation. You need a full market-based mechanism 
which provides billions of dollars through the private market 
to provide those incentives. The notion that an individual 
project here and there in China or in Indonesia is going to 
have any impact simply doesn't do the job.
    Mr. Upton. Dr. Wara, in your testimony, you indicated that 
you thought that the offsets that paid China nearly 5 billion 
euros could have been done for less than 100 million euros. Get 
into that a little bit.
    Mr. Wara. Yes, sure. So the issue there has to do with what 
are known as the industrial gas projects in the CDM, which are 
projects that capture process emissions from industrial 
facilities that emit gases that are many times more harmful, 
thousands times more harmful than carbon dioxide.
    And the fact of the matter is that those emissions have 
been captured voluntarily by some manufacturers in the U.S.--
DuPont, for one--for many years now. And the factories in China 
that were emitting these emissions--because they had no 
incentive to capture them. It does cost money. And DuPont, I 
think, does this for brand value in the U.S., because they care 
about their environmental and sustainability portfolio. But in 
China there was no incentive to capture the emissions.
    The cost of capture is incredibly low, and yet the market 
price of the credits is so high that, effectively, these 
factories make now more money from capturing emissions than 
they do from manufacturing the products that they were created 
to produce.
    Mr. Boucher [presiding]. The gentlelady from California, 
Ms. Capps, is recognized for 7 minutes.
    Mrs. Capps. Thank you, Mr. Chairman. And thank you for 
acknowledging that I have a couple extra minutes. I have three 
questions to ask three different people, so we will have to 
keep the answers, I suppose, a little short.
    I will start with you, Ms. Figdor. We have discussed today 
the various merits and drawbacks of including offsets in 
climate change legislation, a complex topic. And if we include 
offsets in climate change legislation, we have to make sure we 
do it right. I have gotten that message from all of you, I 
believe.
    As we explore the topic further, I am concerned about 
proposals that have emerged to use our oceans as places to 
sequester carbon. Ms. Figdor, what might be the consequences of 
using the ocean for carbon sequestration? And do you think 
these techniques, such as iron fertilization, should be 
considered as potential offsets in climate legislation?
    Ms. Figdor. Thank you.
    I absolutely do not believe that ocean fertilization should 
be considered as a potential project type able to receive 
offsets under a cap-and-trade bill. Ocean fertilization is not 
a proven method of sequestering CO2. According to 
the Intergovernmental Panel on Climate Change, they call the 
technology, quote, ``largely speculative and unproven and with 
the risk of unknown side effects.''
    So, in fact, creating an offsets market could have a very 
perverse incentive of, first of all, not actually resulting in 
real, verifiable cuts in emissions or reductions in pulling 
carbon out of the atmosphere. And, in addition, it could have 
very serious repercussions that we are currently not aware of. 
So this is one of the worst ideas, in terms of types of offset 
projects.
    Mrs. Capps. Thank you. I wanted to get that on the record.
    Ambassador Eizenstat, I have visited the Brazilian Amazon, 
and I have seen firsthand, myself, the destruction wrought by 
deforestation. And I have also noted the wide variety of groups 
that have been making efforts to protect these forests and 
their biodiversity, including through the extensive development 
aid.
    You have been very strong in your statement of need for 
doing these kinds of things under a market framework. You say 
the incentives are completely realigned for developing 
countries.
    What I would like to ask you, but you can expand on that 
for a minute if you would like to, but I am very concerned, the 
timing being what it is, about the period before a cap-and-
trade program could be up and running. Are there steps we 
should take immediately to assist developing countries in 
controlling deforestation while the other programs are under 
way?
    Mr. Eizenstat. Well, time is really running against us, as 
you indicate. Brazil just made this announcement a few weeks 
ago about taking a first-ever cut in their massive rate of 
deforestation. I mean, what we can try to do is, through 
diplomatic means, ask them, in effect, to stop and implement 
already the commitment they have already made, in return for 
which there would be, in effect, an early-action credit, 
something that could be credited against their action at a 
later point in time.
    So that we want to do that, frankly, with companies as 
well. I am on the board of the Chicago Climate Exchange, and 
they have a verifiable system. If you have early-action credits 
for companies, that should be a part of any legislation, so 
that companies are incentivized before the legislation passes. 
It may be a year or two before----
    Mrs. Capps. Right.
    Mr. Eizenstat [continuing]. And, even then, there will be 
an implementation phase and then an implementation phase.
    So I think providing these kind of early-action credits for 
countries like Brazil or for companies would be an integral way 
to try to encourage them to act now and not wait until this 
carbon market gets established several years from now.
    Mrs. Capps. Thank you. I appreciate that very much. Thank 
you, Ambassador.
    Now I will finish my question time with you, Mr. Gero. Last 
winter--and I am a California Representative--the California 
Climate Action Registry verified emission reductions from the 
Garcia River Forest Project in California. This was a joint 
project of The Conservation Fund and The Nature Conservancy and 
PG&E. PG&E announced the purchase of 200,000 tons over 5 years 
for its ClimateSmart program.
    There has been a lot of debate over the success of 
voluntary carbon markets. The Garcia River Project is an 
example of a successful, I hope you agree, voluntary carbon 
market. Would you tell us or share with us what made this 
program work where others have failed? And then follow it up 
with what lessons can be learned and applied at the Federal 
level by such voluntary efforts.
    And if there is time, I will ask other people to join in, 
as well.
    Mr. Gero. Thank you for that question. And the Garcia River 
Project is, I think, a prime example of the kind of activities 
that the carbon market--the voluntary and ultimately a 
regulatory carbon market could incentivize. Here, the incentive 
provided by the offset allowed The Nature Conservancy and The 
Conservation Fund to buy land that would otherwise have been 
developed and put it under a sustainable management plan.
    With our protocols, we were able to quantify what the 
distinction was, or the delta was, between standard practice, 
business as usual, what would have occurred on that land and, 
in fact, the management plan that The Conservation Fund 
implemented. Based on those standards--and those standards are 
performance-based--we were able to generate credits as a result 
of the verification of that activity.
    Our standards are written by stakeholder groups that 
include scientists, industry, academics and others. And I think 
that that is a model that can be used in the Federal system, as 
well, that you need to have all of the stakeholders around the 
table deciding on what are good, credible standards.
    I think the other thing that the Garcia River Project 
points out is that openness and transparency is important. 
Absolutely every step of the way with that project, 
stakeholders were engaged, people were able to see what was 
going on, what the management plan was, what the rules were, 
what the verification activities were. And, ultimately, when 
that project was verified, those credits were issued on a 
serialized basis so that when PG&E and others purchased them, 
it is clear who owns those credits. And I think that all goes 
to creating a credible system.
    Mrs. Capps. And so you would suggest, by this, that 
projects like the Garcia River Forest could serve as examples 
and models, that we don't have to start from scratch, we can 
look to the voluntary sector or the private sector as we seek 
to develop pathways to Federal regulation.
    Mr. Gero. Absolutely. I think that a lot of good existing 
infrastructure has been created in California through the 
California Climate Action Registry. Our protocols in our system 
I believe are world-class, and that infrastructure and those 
systems can and should inform a Federal system.
    Mrs. Capps. Thank you very much, Mr. Chairman.
    Mr. Markey [presiding]. The gentlelady's time has expired. 
The Chair recognizes the gentleman from Texas, Mr. Barton.
    Mr. Barton. Thank you, Mr. Chairman.
    I am in, obviously, a dilemma here. I don't believe we have 
a need for a cap-and-trade program, but I will admit that if we 
are going to have a cap-and-trade program and you could figure 
out a way to make an offset program work, it would be a good 
thing.
    So I could go either way on this. I could try to define a 
program that is really tough but, if you implemented it 
correctly, it would work. Or I could try to implement a program 
that is so lax that it, on paper, works but it doesn't cost 
anything, and makes it easier to comply with.
    So you have put me in a real box here, Mr. Chairman.
    I do want to compliment Mr. Stephenson on his educational 
choice. I, too, went to Purdue and got a master of science 
degree in industrial administration. And you have, I think, an 
industrial management degree or industrial engineering degree. 
So I appreciate that.
    Mr. Stephenson, is it fair to say that the studies that the 
GAO has conducted so far on these offset programs, if I had to 
just put it in a one-sentence conclusion, the existing programs 
just don't work and are almost impossible to make work?
    Mr. Stephenson. That has been the case with the CDM. It is 
a pilot program. They are addressing problems and trying to get 
it right the next time.
    But the problems of trying to determine what someone is 
going to do in the future is different than it is doing today 
is just an insurmountable barrier, quite frankly. And the 
bureaucracy to verify that, in fact, that is happening would be 
pretty large.
    Mr. Barton. Ambassador Eizenstat, first of all, thank you 
for testifying. It is really good to have somebody with your 
expertise and credibility before the panel.
    As I understand your testimony--again, I try to simplify 
things so that, if I can understand it, hopefully other people 
can too, because I am a pretty good case since I am probably 
below average in ability to understand these things. If we 
keep----
    Mr. Markey. Can I just--you wouldn't have gotten into this 
program at Purdue if that was the case.
    Mr. Stephenson. That is what I was going to say.
    Mr. Markey. But the problem is, he is very humble but he is 
proud of his humility.
    Mr. Barton. They may have had a Texas set-aside, you know. 
You never know.
    If you prevent a forest from being cut down, you get the 
benefit of keeping the sink, which sequesters CO2, 
plus the benefit of not the deforestation releasing greenhouse 
gases. Is that correct? You get a double benefit?
    Mr. Eizenstat. You get a double benefit. It absorbs carbon, 
and, if you cut it, it releases carbon.
    Mr. Barton. Now, I am told that the whole issue of 
deforestation projects is extremely complicated to verify. So 
my question to you would be: Under international law, would it 
be possible for multinational corporations, consortiums, or 
sovereign nations to purchase forests to prevent the 
deforestation of that forest and also keep the carbon sink in 
place? Would that be possible?
    Mr. Eizenstat. First of all, in terms of your own humility, 
I have had the privilege of testifying before you many times. 
You are not one of the cases of Lake Wobegon, where all the 
children are above average. I can assure you of that.
    The GAO study, first of all, dealt only with voluntary 
markets and with a highly flawed CDM process. With respect to 
the international markets that you are talking about, if you 
have a combination of highly sophisticated satellite telemetry, 
plus on-the-ground monitoring, you have a high degree of 
verification that countries will not be cheating.
    And, if they do, you set up a mechanism in which you hold 
back, say, 20 or 25 percent of the credits, you bank them in 
effect, or you hold back the economic benefits that would 
occur, so that if there is a change in policy, if there is an 
effort to cutback a forest in another way, you can see it from 
above, you can monitor it from below, and you draw down that 
credit against them if they attempt to do so.
    Now, in many cases, the people who will manage these 
forests will be private companies and private-sector entities 
who will go to Brazil and say, ``Look, we will manage this for 
you for a fee,'' and it will work that way. But, again----
    Mr. Barton. I have one more question to ask, and I know my 
time is about up.
    I want to ask Mr. Gero, your job in California is to try to 
verify these offset programs are real, is that correct? I mean, 
your organizations.
    Mr. Gero. That is correct.
    Mr. Barton. You are doing the best you can to really try to 
make sure it works.
    I want to ask you a specific question. If I move to 
California and I purchase an existing coal-fired power plant 
and replaced it with an equivalent megawatt output nuclear 
power plant, would that qualify as an offset program?
    Mr. Gero. Under our protocols, no, we don't have a protocol 
specifically for that activity. Our program has developed, set 
up protocols for specific activities. These are programmatic 
protocols. We don't have one for fuel-shifting.
    Mr. Barton. OK.
    Thank you, Mr. Chairman.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from Utah, Mr. Matheson.
    Mr. Matheson. Thank you, Mr. Chairman.
    The EPA estimates that the forestry and agricultural 
sectors can offset as much as 12 percent of this country's 
total annual emissions. So this sounds like an opportunity to 
reduce emissions more cheaply if these are real offsets. But I 
am concerned that an offset market could end up being just 
another subsidy program for certain parts of our economy, like 
the farm bill.
    There are certain interests in this country that are going 
to view this and look to take advantage of it. And I think it 
is really important, if we are going to design some type of 
offset system, that we make sure it is structured in a way that 
it does not just become another subsidy program.
    So everyone here has said they need to be measurable, 
verifiable, enforceable. That seems to make sense, but I just 
think we need to put that in the context of how a lot of people 
will look to game this system if it isn't set up right.
    It also seems clear from the testimony that designing this 
type of program is going to require some pretty complex and 
serious scientific and technical questions about how to measure 
changes in emissions. If we don't have a verifiable system in 
place, we are going to have a situation where a company can 
sell low-priced offsets that don't really have any integrity. 
And, in the competitive marketplace, because they are so low-
priced, the other company that is trying to do the right thing 
and will have a higher price is going to be left out of luck.
    So those are, sort of, general concerns I have, in terms of 
how you are going to structure some type of offset program.
    I want to ask the panel--it has been discussed, the notion 
of creating a board of scientists to provide input on design 
and review of offset projects just to make sure we hold 
everyone to the right standards. But I am interested if people 
have other comments about what model we should have in mind for 
this board, why it should be housed at the EPA and not at other 
Federal agencies. And if someone wants to respond to that line 
of questioning?
    Ms. Figdor. I would be happy to at least start off.
    The EPA currently, for setting national ambient air quality 
standards, seeks the advice of FACA Chartered Science Advisory 
Board, an independent board that, over the years, has proved 
very successful in providing EPA the latest science and 
technical information needed to set our air quality standards. 
I believe that model has worked very well and could be a model 
for use in an offsets program, if such a program is formed.
    And then it should, first and foremost, be housed at EPA 
because the goal of this program is to reduce global warming 
emissions. It is an environmental goal, and the environmental 
agency should be in the lead actually--certainly consulting 
with other agencies as well, but should be the lead in 
establishing and monitoring the system.
    Mr. Stephenson. I would just double that. EPA is 
responsible for the Clean Air Act. It already has a Clean Air 
Advisory Committee that does things like this, so it makes 
sense that that would be the place to start.
    Mr. Matheson. OK. It seems to me--oh, go ahead.
    Mr. Martin. If I could, so I agree that it needs to be with 
the EPA. But to the extent--you are right, some of these issues 
are very technical, and it requires specific knowledge in very 
diverse areas, from forestry to agricultural methane, et 
cetera. So, to the extent that you can engage with the private 
sector to get all of that expertise, I think is a win for both 
sides.
    Mr. Stephenson. The advisory boards are made up of many 
private-sector participants and academic participants, as well.
    Mr. Matheson. Does that model that we have done, in terms 
of the Clean Air Advisory Committee, is it set up in a way that 
I think this should be set up, where, in addition to taking 
scientific opinions, we also ought to have on-the-ground 
experience and actually be out in the field measuring to make 
sure this is working, is that type of model going to accomplish 
those goals I just mentioned, of that on-the-ground focus as 
well?
    Mr. Gero. I can take a shot at that one.
    I think that you need to both--or, actually, all of those 
activities. So, one, you need strong standards, as you have 
said, that are written by a group of stakeholders to bring them 
credibility.
    But then those standards, when they are implemented, do 
need to be verified on the ground in each project. And that is 
where you go out and you measure; you look at metering 
equipment. If it is a forest, you actually do plot samples and 
measure trees. You make sure that the project is, in fact, 
performing in accordance with the standards, and only then do 
you issue any credits. They are always on an ex-poste basis; 
that is, activity reductions that have actually occurred in the 
previous year, not on a future basis, so you know for certain 
that those are real emission reductions.
    Mr. Matheson. OK. So we set the standards, and then we go 
on around to verify it. And then my next question is, once we 
have set the standards and we are verifying what is going on, 
then we learn from experience, how can that board then be 
structured so it is going to maybe add to the list of 
acceptable offsets or remove items from the list that don't 
work? Is there a way to structure the board to make sure it has 
that type of flexibility?
    Mr. Gero. I think that is absolutely vital. In fact, that 
is part of the program that we have developed. None of our 
standards or protocols are static documents. They are all 
dynamic documents that learn from experience and from the state 
of science as science progresses. So you do need to regularly 
review and update the protocols themselves. I think that, 
without that, you have a program that is stuck in the mud, 
essentially.
    Mr. Stephenson. Let me just say that the board is sort of a 
test of reasonableness, but it is not the implementer. You 
still are going to need an army of estimators and verifiers and 
monitors to make sure that any offsets would remain viable and 
in place for many years.
    Mr. Gero. I think the last point on that is that 
additionality itself changes over time. So something that is 
additional today, that is surplus today, when you are looking 
at standards 2 years from now or 3 years from now when you do 
an assessment, if that activity has become commonplace, that is 
no longer additional. And you are right, there is a process for 
removing that from the list.
    Mr. Matheson. How do we make sure under this structure, on 
a going-forward basis, how do you make sure you prevent the 
marketing of questionable offsets in the market, as we go on 
over time? I mean, there are going to be vendors all over the 
place, saying, ``Have I got a deal for you.'' So how do we 
ensure that we don't--how do we screen out those questionable 
offsets?
    Mr. Gero. The model that we think about--and we use this 
analogy a lot--is either an organic seal of approval, so there 
is some Federal standard that says, ``Here is an offset that 
has an organic seal of approval,'' or a UL listing, ``This is a 
certified offset credit that has met some standards set forth 
by the U.S. Government.'' Any other credits that are sold out 
there are sold without that seal, and it is buyer beware.
    Mr. Matheson. Thanks, Mr. Chairman.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the chairman from Illinois, Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman.
    Last year we had a hearing called ``The Cost of Inaction,'' 
and I asked the panel, is there a cost of increased energy in a 
climate change bill? And I would ask you for a yes or no 
answer: Will this increase energy cost?
    Dr. Wara, why don't you go first, and just go down the 
panel.
    Mr. Wara. I think the honest answer is yes, it is likely.
    Mr. Shimkus. Thank you.
    Ambassador.
    Mr. Eizenstat. Yes, but very----
    Mr. Shimkus. Thank you.
    Mr. Eizenstat. Excuse me?
    Mr. Shimkus. Thank you.
    Mr. Martin.
    Mr. Martin. With all due respect, it is not a yes-or-no 
question.
    Mr. Shimkus. But quickly.
    Mr. Martin. Yes, the offsets are there to contain the 
costs.
    Mr. Shimkus. Thank you. Because we are putting a price to 
carbon is what we are doing. And if 50 percent of electricity 
today is carbon, you are going to add more cost. So, I mean, I 
think the answer is pretty clear.
    Ms. Figdor.
    Ms. Figdor. It absolutely depends on how you structure the 
program. If you invest heavily in energy efficiency, you can 
actually----
    Mr. Shimkus. Well, just to the basic question, will energy 
costs go up?
    Ms. Figdor. It depends how you structure the program.
    Mr. Shimkus. So you can't give us a yes or no?
    Ms. Figdor. It really depends on the----
    Mr. Shimkus. OK.
    Mr. Gero.
    Mr. Gero. It is not my area of expertise. I really can't 
comment.
    Mr. Shimkus. OK. Has energy cost gone up in--you know, 
California, being one of the highest energy cost States in the 
Nation, is energy cost up in California?
    Mr. Gero. We don't have a cap-and-trade program in place 
today, so----
    Mr. Shimkus. No, I was just--Mr. Stephenson?
    Mr. Stephenson. It is impossible to give you a yes or no, 
but----
    Mr. Shimkus. And you shouldn't really, as GAO.
    Let me refer, Mr. Chairman, if I can add to the record an 
editorial from the Detroit News from yesterday, ``Cap-and-Trade 
Plan Will Sink Michigan.''
    ``President Obama's proposed cap-and-trade system on 
greenhouse gas emissions is a giant economic dagger aimed at 
the Nation's heartland, particularly Michigan. It is a multi-
billion-dollar tax hike on everything that Michigan does, 
including making things, driving cars, and burning coal.''
    So if I could submit that for the record, I would like to 
do that.
    Mr. Markey. It will be included in the record, without 
objection.
    [The information was unavailable at the time of printing.]
    Mr. Shimkus. If we are going to monetize the cost of 
carbon, and we have all these problems with the CDM and these 
voluntary systems, why not a carbon tax? Mr. Martin?
    Mr. Martin. I will take a stab at that one.
    So the difference between a carbon tax and a cap-and-trade 
program is the cap-and-trade program gives you environmental 
certainty. It tells you what your emissions are going to be 
over time. With a carbon tax, you have certainty over the 
price, but you don't know what results----
    Mr. Shimkus. So you don't trust the government that is 
collecting the tax to use the money to mitigate the climate 
issues. I mean, that is really the debate.
    Mr. Martin. It is not so much that. You just don't know how 
much effect that price will have.
    Mr. Shimkus. Well, no, I think it is. Let's propose this: 
We have a presidential budget that has $646 billion in it for, 
in essence, this cap-and-trade program. Would it be 
intellectually dishonest if not every single dollar of that tax 
would go to mitigate the effects of climate?
    Mr. Wara.
    We have great experience in this committee about us passing 
on taxes and not using the money for what its intended purpose 
is; i.e., the Nuclear Waste Fund is a perfect example. If we 
are in a position of raising taxes on the American people, 
using that to help mitigate the carbon emissions in the 
atmosphere, and not using that money to do that, would you not 
say that that is being dishonest to the citizens of this 
country?
    Mr. Wara. Well, I think the important thing to recognize is 
that a carbon tax, the point of a carbon tax is to sometimes 
raise the cost of emitting greenhouse gases, and that is 
accomplishing its objective. What you do with the money, 
whether you rebate it to consumers or to citizens or use it on 
other initiatives is a question of how you want to distribute 
the cost of the program across society. The same thing is true 
of a cap and trade, however. Depending on how you choose to 
distribute allowances, you can significantly impact the 
distributive effects of a climate policy program to make it 
actually progressive rather than regressive.
    Mr. Shimkus. Anybody else?
    Mr. Eizenstat. Yes, Congressman.
    My view is that under a cap-and-trade program, with the 
revenues that are mentioned in the President's budget, that the 
overwhelming majority of that should be rebated back to 
industry and to consumers so that you offset the additional----
    Mr. Shimkus. And I would agree. I would go further. I would 
say not the overwhelming, I would say all. I would say all. And 
hopefully some of that overwhelming will address the cost per 
individual.
    We have this great debate--and I will close with this Mr. 
Chairman, I see my time is short--95 percent of Americans got a 
tax cut. Whoo-hoo, $400 a year. Cap-and-trade evaluation costs 
$700 a year. So maybe that additional $300 will go to mitigate 
the increased cost to the individual. That is not a break even 
based upon this tax relief. But I would pose a question that if 
the revenue is not to mitigate climate, then we are just going 
down another failed experience of the nuclear waste fund.
    I yield back.
    Mr. Markey. The gentleman's time has expired.
    The Chair recognizes the gentleman from Georgia, Mr. 
Barrow.
    Mr. Barrow. Thank you, Mr. Chairman.
    Ambassador, I have to say, you don't know this, but you are 
sort of a hero of mine. I have been watching you for a long 
time from something of a distance. The first time we met was 
the last time we met. It was at the Democratic National 
Convention in New York in 1976 when you were transitioning the 
incoming administration of then President-elect or soon to be 
President-elect Jimmy Carter.
    You have got a great client at this hearing, and I know 
they got a great lawyer.
    I want to ask you to kind of trade places with me and try 
to represent my client in this offset debate a little bit and 
try and help me understand what is in it for the folks in 
Georgia. Here is the impression I get from reading the 
testimony, from hearing the statements. And my understanding so 
far, and this is a case that is most powerfully made by you, it 
seems to me and the way I would state it is, not getting 
developing countries to go down the road, to go down the trail 
that our forefathers blazed when they cleared this continent, 
gives us a whole lot more bang for our offset buck, does a 
whole lot more good, easiest to do and-- you know, easiest to 
monitor, easiest to verify, easiest to measure, easiest to 
avoid leakage. All these things seem to point in the direction 
of your client, the goal, the interest that you serve playing a 
very large role in this.
    By contrast, I represent a lot of folks in a part of the 
country where things like RPS are going to result in a whole 
lot of money being paid, if not by taxpayers then by rate 
payers, who are very much the same group of people I might add, 
going to other parts of the country. And I want to know what is 
in it for us? What is the most robust role an offset program 
can play for intensely farmed areas, intensely worked land, 
like Georgia, where we have a small amount of things like 
renewables that we can build on a renewable portfolio standard? 
What is in it for us? If you fly over Georgia, you will see 
that all our forested land is laid out in nice neat little 
rows. What looks like forests are really just stands of crops 
to be harvested. They are planted to be cut. So what is in it 
for Georgia? What can we get out of this?
    Mr. Eizenstat. First of all, good land-use planning should 
also be rewarded in the legislation in terms of no-till farming 
and the like.
    Number two, companies in your district and in districts 
throughout our State, the State that I grew up in, and yours, 
would have the same benefit as companies throughout the 
country. They are going to be under an obligation under a cap-
and-trade bill to reduce their emissions. This affords them a 
less costly way of achieving their goal.
    Mr. Barrow. But if I could speak for the skeptics caucus 
here amongst us. The leakage problems are the greatest. The 
measuring problems are the greatest. The verifiability problems 
are the greatest. What is the highest, what is the best outcome 
we are likely to get out of this as a practical matter given 
the relative complexity of our situation as opposed to the 
pristine simplicity of the interest you are trying to 
represent?
    Mr. Eizenstat. Well, first of all, I don't believe there is 
a problem with verifiability, as I indicated. I think that the 
combination of establishing a national baseline, which should 
be required for a developing country, satellite telemetry, on-
the-ground monitoring, all of those can assure that we have a 
verifiable credit that can be purchased by a company in your 
district to reduce the cost of their compliance. I believe 
firmly we are not going to be able to pass a piece of 
legislation that doesn't have effective cost reductions tied 
into it, so that it is a very effective way for companies in 
your district to be able to comply at a reduced cost.
    Mr. Barrow. Well, that is usually important to me, so I 
want to pose my own yes-or-no question to other members of the 
panel. Is there anybody on the panel here who doubts that we 
can participate in Georgia every bit as much as they can any 
place else for an offset problem? What are the problems that 
would affect our land use in seventh-generation managed land, 
like my family has got in Oglethorpe County, Georgia, as 
opposed to not cutting down old-growth forests in far parts of 
the world?
    Mr. Gero. I for one will say absolutely that Georgia and 
other parts of the United States, the vast majority of the 
United States, are probably going to benefit greatly by an 
offsets program because offsets apply in sectors that are not 
likely to be capped, and agriculture and forestry are not 
likely to be capped sectors.
    Mr. Barrow. I got an impression one reason why it is not 
going to be capped is it is so hard to manage in the first 
place. It is so hard to establish. It is hard to bring in a cap 
program.
    Mr. Gero. It is hard to regulate from an emissions 
reduction standpoint, but it is not hard necessarily to write 
good strong rules to ensure the project is additional, that it 
is verified, and that in fact the ownership is clear and 
permanent.
    Mr. Barrow. Does everybody on the panel agree that it is 
essential that we be able to participate in this at home as 
well? That we be able to offset it right here and right now?
    Ms. Figdor. I would say, not through an offset program, but 
you can achieve the conservation goals that you are discussing 
by creating a fund domestically to sequester to improve the 
sequestration of carbon in plants and soils. That fund would be 
created through auction revenue and would be a very important 
part of the solution of reducing--achieving the deep long-term 
reductions in emissions that the science shows are needed.
    So I believe it is a very important part of the solution, 
but shouldn't be done through offsets, because then it is done 
at the expense of actually achieving with certainty the cuts in 
emissions that science shows are needed. This should be done in 
addition to the cuts from large sources, like power plants.
    Mr. Barrow. Does anybody else on the panel have anything to 
offer that I can take back home?
    Mr. Stephenson. I was just going to say that if you auction 
the credits under a cap-and-trade program, there is going to be 
revenue generation that could be used for incentives. That is a 
separate argument from whether offsets should be part of a cap-
and-trade program or not.
    Mr. Martin. The only comment I would add is, and I don't 
know the specifics of Georgia per se, but in Alberta, they have 
a greenhouse gas market, and one of the offset projects that 
they have is this no-till agriculture. So from an area that is 
also heavily farmed, that is one way of reducing emissions, and 
it seems to be working.
    Mr. Barrow. Thank you.
    Mr. Chairman, I yield back.
    Mr. Markey. The gentleman's time has expired.
    There are about three roll calls on the House floor right 
now. And I think we would be well advised just to take a brief 
recess until approximately 5 minutes past 12:00, at which point 
we will reconvene the hearing and recognize the members. So, 
with that, we will stand in recess.
    [Recess.]
    Mr. Markey. Ladies and gentlemen, thank you so much.
    I think we are going to have clear sailing for a little bit 
of time out on the House floor. So, as a result, we can 
continue uninterrupted for a fairly good period.
    Right now let me turn and recognize the gentleman from 
Virginia, Mr. Boucher, for his round of questions.
    Mr. Boucher. Well, thank you very much, Mr. Chairman. And I 
want to compliment all of the witnesses on their superbly 
presented testimony here this morning.
    Ambassador Eizenstat, if I may ask a couple of questions of 
you, you have strongly advocated for tropical forestry 
preservation. I agree with you that that should be an eligible 
subject of offsets. Do you see other international offset 
opportunities, or should we limit the eligibility just to 
tropical forest preservation?
    Mr. Eizenstat. No, I don't think we should limit it at all. 
I think there may be other opportunities as well. My focus is 
on the forestry issue. But you can have methane capture. There 
are a whole host of other ways in which developing countries 
can reduce their greenhouse gas emissions, and they should be 
incentivized to do it.
    I would also like to say, Mr. Chairman, that we focused 
almost entirely on the issue of forest carbon credits. But even 
in the forestry area, there are other things that we think 
should be in the bill. For example, market readiness, a 
dedicated funding stream, that could be done by development 
assistance to support efforts to build capacity in developing 
countries, not only for forest but for methane capture and 
others, to develop their monitoring networks. Then we have 
talked about the credits as well. And the third is direct 
support for other forest carbon conservation actions, like 
actions against illegal logging, additional allowances within a 
domestic cap to address early action and things like that. So I 
think that forests are one area. Even within that area we 
should look at market readiness and conservation, but that 
there are other ways to get developing countries engaged in 
this. And we should see that as a step toward ultimately 
getting them to take a cap-and-trade.
    Mr. Boucher. You have faulted the clean development 
mechanism that is an aspect of the European emissions trading 
system. Given the problems that have existed with that, what 
level of confidence should we take, that if we go beyond the 
readily verifiable tropical forestry eligibility, and we go 
into developing countries with things like methane capture and 
other types of credits, that we can have confidence in the 
verifiability of those offsets?
    Mr. Eizenstat. That is a very good question. I mean, land-
use practices are also something that is very important in 
developing countries. The COMESA Group is very much in favor of 
that. That can be monitored also by telemetry and on-the-ground 
monitoring.
    The reason the CDM is not a good model, and I have to say I 
am somewhat surprised that the testimony from GAO would stress 
so much and then extrapolate that onto a very different system, 
it is a project-by-project system. It is not the kind of 
broadbased carbon market system that we are talking about. So I 
think that one can have a great deal of certitude. The CDM is 
bureaucratic. It has to be approved on a project-by-project 
basis by a bureaucracy. It hasn't approved one forest-based 
project at all. It is very flawed. It is really something we 
should be moving away from. So it is not a model at all for 
what I am talking about.
    Mr. Boucher. OK. Thank you.
    Mr. Martin, let me pose one question to you. Do you believe 
that Shell would have endorsed the blueprint put forward by 
USCAP and the targets and time frames for taking greenhouse gas 
emission reductions in the absence of that blueprint's 
availability of offsets, which as I understand it would be 1.5 
billion domestic tons and 1.5 billion international tons 
annually?
    Mr. Martin. Probably not. And the reason for that is that 
the kind of technologies that we are going to need in the 
longer term to hit some of these very aggressive targets, like 
capture carbon sequestration, just aren't available yet. And 
the costs of those initial projects are going to be much higher 
than the next 10 and the 10 after that. So, really, the 
abilities to use offsets is that bridge mechanism to allow us 
to put more funds into some of the technologies that we know we 
are going to require in the future.
    Mr. Boucher. And so by allowing offsets, we provide a space 
and time for technology to catch up.
    Mr. Martin. Absolutely.
    Mr. Boucher. And so your believe is Shell would not have 
endorsed the USCAP targets and time frames in the absence of 
the offsets.
    Mr. Martin. I can't categorically say no, but that is my 
view, yes.
    Mr. Boucher. OK. Thank you.
    Thank you, Mr. Chairman.
    Mr. Markey. The Chair recognizes the gentleman from 
Louisiana, Mr. Scalise.
    Mr. Scalise. Thank you, Mr. Chairman.
    There is a statement that the National Alliance of Forest 
Owners wanted to submit for the record. If I could have that 
submitted into the record?
    Mr. Markey. Without objection it will be included in the 
record.
    [The information was unavailable at the time of printing.]
    Mr. Scalise. Thank you.
    Mr. Stephenson, the statements I think in your presentation 
you talked about the complications of, what is an offset? Is it 
a tangible good? If you could describe to me how you really 
determine what an offset is.
    Mr. Stephenson. I don't know how best to answer that. It is 
being treated as a tangible good if you use it in a marked-
based system. However, the problems in estimating what occurs 
in the future versus what have occurred under a normal business 
scenario is where it creates uncertainty and risk.
    Mr. Scalise. Have you all seen that there are various 
definitions and maybe varying definitions that could create 
completely different interpretations on what somebody actually 
is buying?
    Mr. Stephenson. Certainly in the voluntary market in the 
U.S., there are a number of different verification schemes and 
estimating schemes. The reason the ETS didn't approve forestry 
projects and agriculture projects was because it is inherently 
difficult to estimate what you are getting for that. So in 
deference to what the Ambassador said, we think that is a high-
risk proposition.
    Mr. Scalise. Are some offsets more credible than others?
    Mr. Stephenson. Yes. Certainly methane capture from 
landfills is fairly easy to measure. But, again, you have the 
problem of additionality. If a landfill may want to capture 
methane anyway because the market value is going up for gas in 
the broader use of methane, the more economic incentive a 
landfill would have for doing that anyway, without an offset 
program.
    Mr. Scalise. Are there any estimates on how much we would 
be sending overseas to purchase international offsets?
    Mr. Stephenson. We really haven't looked at that.
    Mr. Scalise. I don't know if anybody else on the panel can 
address the question of international offsets.
    Mr. Eizenstat. Yes. The International Offset Program, 
Congressman Scalise, would not be sending U.S. taxpayer money 
abroad; although there may be some foreign assistance to help 
with capacity building. This would be private-sector money, a 
decision by a U.S. company, which it wouldn't be required to 
do, that it would like to meet part, not all, of its obligation 
to reduce emissions by purchasing an international credit from 
abroad. That credit certainly has to be verifiable and so 
forth. But that is a private-sector decision using private 
money.
    Mr. Scalise. Dr. Wara, you talked about some of the 
problems or experiences that China--I think China has gotten a 
significant amount of money from the European Community on 
offsets. I think $6 billion was a number I had seen. Can you 
describe what they did get and for what did they get it for?
    Mr. Wara. Well, the credits issued by the CDM to date are 
mostly from these industrial gas projects that I talked about 
earlier where costs of reduction are very low relative to the 
current, even the current market prices for CDM credits, which 
have fallen considerably because of the crash and the EU 
emissions trading scheme market and costs by the recession. But 
those projects actually, I think, are additional in the sense 
that they would not have happened but for the CDM.
    On the other hand, when one steps back from the current 
mechanism and says, are there more cost effective ways to 
address industrial gases in particular, I think the answer has 
to be yes. And the model that has worked very well under the 
Montreal Protocol to limit emissions of those undepleting 
substances in developing countries could be applied very 
effectively in this context. And in fact, there are discussions 
within the Montreal Protocol context of revising that treaty to 
include some of these gases, so that might be possible.
    Mr. Scalise. Now, what is there to tell us that Europe 
wasn't paying China to do things that China was already going 
to do to build nuclear plants, which they are doing anyway?
    Mr. Wara. So, I think that issue is a big one in the energy 
sector. And moving forward, one lesson from the early 
experience with CDM is that big projects tend to be more 
successful than small projects because they more easily 
overcome transaction costs in the system which are high. So in 
the energy sector in China, particularly with the construction 
of natural-gas-fired power plants, which essentially all gained 
registration under the CDM, which is the precursor to getting 
credits issued, I think there are real questions about whether 
those plants would have been built anyway. And in that context, 
I think Europe is paying for things that would have happened 
anyway because they are in the interests, in China's energy 
security and national security interests.
    Mr. Scalise. Thank you.
    Mr. Markey. The gentleman's time is expired.
    The Chair recognizes the gentleman from Washington State, 
Mr. Inslee.
    Mr. Inslee. Excuse me if some of you have gone through this 
exercise before, but we have to do this at every hearing it 
seems, which is to compare the cost of the status quo, which is 
inaction and continued climatic change and all it portends, 
with the cost of action, which is curtailing CO2 
emissions. You were asked a question by Mr. Shimkus about the 
costs associated with this. Many of us, including Lord Stern, 
who has done the most authoritative research on this, have 
concluded that the cost of inaction will greatly exceed by a 
factor of five the cost of action associated with a well 
designed CO2 emissions plan globally. I think he put 
the figure of 5 percent reduction of GDP if we do not act on 
this.
    It is my belief that a well-crafted plan will actually cost 
less in comparison to the costs associated with inaction with 
the damages to the U.S. economy associated with that. I will 
just go down the row and ask if people agree or disagree or 
have no opinion on that.
    Doctor.
    Mr. Wara. Agree.
    Mr. Eizenstat. 100 percent agree.
    Mr. Martin. Agree.
    Ms. Figdor. Strongly agree.
    Mr. Gero. Absolutely agree.
    Mr. Stephenson. I agree. In fact, the re-insurers in the 
insurance market in climate change have already recognized the 
value of inaction in their premiums that they charge.
    Mr. Inslee. So let me say that those who are opposed, this 
is just one congressman talking for a moment, those who will 
make the most noise saying that this program is going to cost 
the U.S. economy, will cost five times more than those of us 
who want to engage in action. That is a bold statement. I think 
it can be backed up. The shoe will be on the other foot during 
this debate, and so let the discussion begin.
    I want to ask about the general idea of offsets in a forest 
setting. My take on this is that the only way to really have a 
long-term credible program is to make sure we get additionality 
in saving forests. And the only way to do that is to have a 
national nation-by-nation program to assure that when we buy 
forestation, we in fact get more forestation in the Nation, not 
just the individual plot of land. The reason is that, if we buy 
a plot of land, we buy a lifetime easement or a permanent 
easement, and the next-door neighbor just clearcuts his land, 
you haven't got anything for your money.
    So, Ambassador Eizenstat, I read your testimony. I didn't 
get to hear it, but I read your testimony, and I sort of 
understand you saying we need to start into that process, but 
we can start before we have those in place. Could you elaborate 
on that?
    Mr. Eizenstat. Yes, sir. We should not look at the 
different modes of dealing with avoided deforestation and 
cutting forests as oppositional to each other. We, for example, 
can have set-asides. We can have foreign assistance that can 
prepare countries to develop their monitoring systems. We can 
have the forest credits that we have been talking about 
internationally, and consider all of those together, not an 
either/or. We will need all of those.
    Second, I want to emphasize very strongly, these are highly 
verifiable. The Eliasch report that just came out from the UK 
said it is easier to verify forest carbons emissions than it is 
other emissions. And the reason is the combination of satellite 
telemetry, which is now highly developed, being used by 
Brazil--NASA and Cisco just announced this week a joint venture 
on that, you have got Google and others who really have that 
capacity. You combine that with on-the-ground monitoring and a 
national baseline; you allow a set-aside. So you say, we are 
not going include 100 percent of forest. Let us take into 
account there may be a fire. There may be policy changes, and 
you bank that, bank it and insure it, so that if there is a 
problem you have got a safety valve involved as well. You 
combine all of that, and you have got a highly verifiable 
system. We need to start on that immediately and we can start 
on it again by market readiness, by ODA, by set asides. All of 
those things are necessary in addition to the carbon credits 
working together to provide an incentive not to cut the 
forests. And again, I really feel so strongly about this 
because we are cutting these forests down, Mr. Inslee, at the 
rate of one football field a second. Once these forests are 
gone, they are gone forever. The habitats are gone. The people 
who depend on them, the rural poor in these developing 
countries, will have to migrate. We will start a terrible 
cycle.
    Mr. Inslee. Thank you.
    Mr. Markey. The gentleman's time is expired.
    I know, Mr. Eizenstat, you wanted to add one more thought.
    Mr. Eizenstat. I am sorry to the committee. I have to 
leave, and I appreciate--I wanted to make a couple of points. 
The first is the point I was just making to Mr. Inslee. We 
should not look at these things as being whether you are for 
foreign assistance, whether you are for set-asides, whether you 
are for carbon markets. The amount of money that needs to be 
aggregated, private-sector money, that needs to be aggregated 
to provide the incentive for countries that have every 
incentive to cut these forests is enormous. So we should be 
looking at all combined as a way of doing it.
    Second, these credits would only be provided after 
performance is demonstrated, not before. They have to 
demonstrate over a period of years that they are not cutting 
their forests down. Only then do they get their credits. And 
again, we can use insurance schemes, set-asides, banking of 
credits and zones in the forest to make sure that if they slide 
back, that they pay a price for it. All of these together are 
necessary.
    And then last, on the EU. The EU, Mr. Stephenson, I can 
tell you from experience having been ambassador there, having 
been at Kyoto, they don't believe in market mechanisms, period. 
And that is one of the problems they had with forestry credits. 
They just don't. Now, they are coming around to it because 
their industries are also saying we can't afford this 20-20-20 
target unless we have offsets, so they are moving. But there 
just is a mentality against market mechanism that, thankfully, 
we don't have in this country.
    Mr. Markey. Thank you, Mr. Eizenstat.
    And we thank all of you for your excellent testimony today. 
It is going to be very helpful to us in the formulation of the 
draft legislation which we are putting together right now and 
towards the goal of passing legislation by Memorial Day. We 
thank you all.
    This hearing is adjourned.
    [Whereupon, at 12:35 p.m., the subcommittee was adjourned.]

                                  
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