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


 
   COMPETITIVENESS AND CLIMATE POLICY: AVOIDING LEAKAGE OF JOBS AND 
                               EMISSIONS 

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

                                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 18, 2009

                               __________

                           Serial No. 111-17


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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....................................     3
Hon. John D. Dingell, a Representative in Congress from the State 
  of Michigan, opening statement.................................     4
Hon. John Shimkus, a Representative in Congress from the State of 
  Illinois, opening statement....................................     5
Hon. Michael F. Doyle, a Representative in Congress from the 
  Commonwealth of Pennsylvania, opening statement................     6
Hon. Joseph R. Pitts, a Representative in Congress from the 
  Commonwealth of Pennsylvania, opening statement................     7
Hon. Doris O. Matsui, a Representative in Congress from the State 
  of California, opening statement...............................     8
Hon. Jay Inslee, a Representative in Congress from the State of 
  Washington, opening statement..................................     9
Hon. John B. Shadegg, a Representative in Congress from the State 
  of Arizona, opening statement..................................     9
Hon. Steve Scalise, a Representative in Congress from the State 
  of Louisiana, opening statement................................    11
Hon. Tammy Baldwin, a Representative in Congress from the State 
  of Wisconsin, opening statement................................    12
Hon. Cliff Stearns, a Representative in Congress from the State 
  of Florida, opening statement..................................    12
Hon. Joe Barton, a Representative in Congress from the State of 
  Texas, opening statement.......................................    13
Hon. Greg Walden, a Representative in Congress from the State of 
  Oregon, opening statement......................................    14
Hon. Michael C. Burgess, a Representative in Congress from the 
  State of Texas, opening statement..............................    15
Hon. Gene Green, a Representative in Congress from the State of 
  Texas, prepared statement......................................   164

                               Witnesses

John McMackin, Jr., Williams and Jenson, PLLC, On Behalf Of The 
  Energy Intensive Manufacturers Working Group on Greenhouse Gas 
  Regulations....................................................    16
    Prepared statement...........................................    19
    Answers to submitted questions...............................   185
Martin McBroom, Director, Federal Environmental Affairs, American 
  Electric Power.................................................    42
    Prepared statement...........................................    44
Paul Cicio, Industrial Energy Consumers of America...............    87
    Prepared statement...........................................    89
    Answers to submitted questions...............................   187
Margo Thorning, Ph.D., Senior Vice President and Chief Economist, 
  American Council for Capital Formation.........................   106
    Prepared statement...........................................   108
    Answers to submitted questions...............................   191
Richard D. Morgenstern, Senior Fellow, Resources for the Future..   126
    Prepared statement...........................................   128
    Answers to submitted questions...............................   196
Eileen Claussen, President, Pew Center on Global Climate Change..   136
    Prepared statement...........................................   139

                           Submitted Material

Letter of March 18, 2009, from American Chemistry Council to 
  Subcommittee, submitted by Mr. Green...........................   166
Article entitled, ``Obama climate plan could cost $2 trillion,'' 
  Washington Times, March 18, 2009, submitted by Mr. Barton......   180
Article entitled, ``Trade Barriers Could Threaten Global 
  Economy,'' Washington Post, March 18, 2009, submitted by Mr. 
  Barton.........................................................   182


   COMPETITIVENESS AND CLIMATE POLICY: AVOIDING LEAKAGE OF JOBS AND 
                               EMISSIONS

                              ----------                              


                       WEDNESDAY, MARCH 18, 2009

                  House of Representatives,
            Subcommittee on Energy and Environment,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 9:35 a.m., in 
room 2123 of the Rayburn House Office Building, Hon. Edward 
Markey (chairman) presiding.
    Members present: Representatives Markey, Doyle, Inslee, 
Butterfield, Melancon, Matsui, McNerney, Dingell, Green, 
Baldwin, Matheson, Barrow, Upton, Stearns, Whitfield, Shimkus, 
Shadegg, Blunt, Pitts, Walden, Sullivan, Burgess, Scalise, and 
Barton (ex officio).
    Also present: Representative Terry.
    Staff present: Matt Weiner, Clerk; Michael Goo, Counsel; 
Melissa Bez, Professional Staff; Lindsay Vidal, Press 
Assistant; Andrea Spring, Minority Professional Staff; Peter 
Spencer, Minority Professional Staff; and Garrett Golding, 
Minority Legislative Analyst.

OPENING STATEMENT OF HON. EDWARD J. MARKEY, A REPRESENTATIVE IN 
        CONGRESS FROM THE COMMONWEALTH OF MASSACHUSETTS

    Mr. Markey. Welcome to the Energy and Commerce Committee 
and the Subcommittee on Energy and Environment, and we welcome 
you to this very important hearing, and it is import just 
because of the symbolic nature of today because with March 
Madness about to begin, it is important that we keep in mind 
the need for a level playing field. As we work to get more 
players in the clean energy game, including wind and solar and 
new clean tech companies, we cannot afford to simultaneously 
tilt the playing field against American businesses and 
manufacturers.
    This hearing will explore ways to keep all countries 
economically in bounds in the global challenge to reduce global 
warming pollution.
    Global warming does not recognize national borders. 
CO2 emitted in California has the same warming 
effect as CO2 emitted in China, Europe, or India. 
Rising sea levels threaten millions of people across the globe, 
in places as far apart as Bangladesh, Boston and Shanghai. 
Global warming highlights that we are, in fact, one world.
    And just as we are connected environmentally, so too are we 
connected economically. The actions we take in the United 
States to curb global warming pollution and create jobs cannot 
stand alone.
    A cement factory that emits heat-trapping emissions in the 
United States and then decides to move to Mexico or China in 
response to our laws would have accomplished nothing to reduce 
global warming, except perhaps to export jobs and emissions 
overseas. Thus, in a global economy, we cannot ignore the 
reality of global emissions, nor the reality of global 
competition.
    The subcommittee will hear today about some innovative 
proposals to address this problem, which is important but 
manageable. Once you drill down on the facts it is clear that a 
relatively small number of industry sectors are highly energy-
intensive and directly vulnerable to international competition 
and the effects of that which are brought about by carbon 
limits.
    Those industry sectors include iron, steel, aluminum, 
cement, glass, paper and pulp, and basic chemicals. These 
sectors face international competition and have energy or 
carbon intensive production processes. While it is true that 
these sectors together account for more than half of all 
CO2 from the manufacturing sector, their overall 
percentage is modest: the big six energy intensive industries 
account for only about 6 percent of total U.S. emissions.
    These important industrial sectors interestingly 
constituted a little more than 3 percent of America's gross 
domestic output in 2005 and accounted for less than 2 percent 
of our jobs.
    To avoid shipping jobs or emissions overseas, some have 
suggested requiring that energy intensive products imported 
into the United States be accompanied by some kind of fee or 
surcharge, unless the product comes from a country with carbon 
pollution limits. This approach would put imported, carbon-
intensive products on the same footing as American made goods 
and thus level the playing field.
    Mr. Marty McBroom of the American Electric Power is here to 
discuss the tariff/allowance proposal his company co-authored 
with the International Brotherhood of Electrical Workers.
    Another way of dealing with potential competitive effects 
would be to take some of the allowance values from the carbon 
market and give them to the trade exposed industry sectors to 
aid in their transition to a low-carbon economy. I commend the 
work of Mr. Doyle and Mr. Inslee, who have authored such an 
approach.
    Mr. Jack McMackin, who represents a coalition of energy 
intensive manufacturers who favor such an approach, is here to 
provide his views regarding that strategy.
    Finally, we should remember that in order to stop global 
warming, it will be necessary for virtually all countries, 
particularly industrialized countries, to limit their emissions 
of carbon pollution.
    If we are ultimately successful in halting global warming, 
the playing field will not remain tilted forever, and the best 
approach for keeping all countries in bounds is to encourage 
them to permanently match the United States by limiting 
emissions immediately.
    Only then will it truly be possible for teams and companies 
from places like China, India or Australia to compete without 
restrictions on the same court as teams from places like North 
Carolina or Boston College or the University of Illinois or 
Michigan or Michigan State or Pittsburgh or Wisconsin or Texas 
A&M or Cal-Berkley or the University of Illinois down state.
    Mr. Upton. And don't forget Penn State won in overtime last 
night in NIT.
    Mr. Markey. Penn State is in the NIT? The University of 
Pittsburgh is doing well, however. And again, dare I say it, 
the University of Michigan.
    I look forward to all of our witnesses' testimony here 
today, and that completes time for the opening statement of the 
Chair.
    We turn and recognize the Ranking Member, the gentleman 
from Michigan, Mr. Upton.
    Mr. Upton. Thank you, Mr. Chairman. I look forward to 
putting my bracket up against yours, so you better get yours 
done tonight.
    Mr. Markey. You don't happen to pick all Jesuit schools to 
go all the way, do you? That has never been a winning strategy 
for me, but I can't break my habit of doing that.
    Mr. Upton. I am glad you pick with your heart and not your 
head.
    Mr. Markey. Not a good strategy.

   OPENING STATEMENT OF HON. FRED UPTON, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MICHIGAN

    Mr. Upton. Thank you again for having this hearing. I 
appreciate testimony from our witnesses that I looked at last 
night, but before I begin I would like to submit a letter that 
was submitted to our committee last year from former U.S. Trade 
Representative Susan Schwab. She wrote that we have serious 
concerns particularly for the enthusiasm for using import 
provisions that might be perceived as unilateral trade 
restrictions directed against other countries to push them to 
move rapidly to reduce their emissions of greenhouse gases. 
This approach will take us down a dangerous path and adversely 
affect U.S. manufacturing, farmers, and consumers, and even 
cause an all-out trade war where no one wins and everyone 
loses.
    History has shown that the U.S. is stronger with a robust 
manufacturing and industrial base. The jobs and industries that 
will bear the greatest costs of climate legislation are the 
same industries that we need to keep in America in order to 
remain a power on the world stage. These are the jobs that 
built the middle class, and since 2000, U.S. manufacturing has 
been struggling. From 2000 to 2008, we lost 3.8 million 
manufacturing jobs, a decline of about 22 percent. At the same 
time, imports were up 29 percent, a direct correlation, and my 
home State of Michigan has been ground zero for these losses. 
Manufacturing and energy intensive industrial sectors are 
highly competitive. More often than not, the cost of energy is 
the difference between operating in the U.S. and shutting the 
doors to move overseas.
    What happens to our national security when we don't 
manufacture anything? Well, what happens when we need to order 
all of our steel and aluminum from China? If we take the wrong 
legislative path dealing with climate change, we run the real 
risk of permanently destroying our manufacturing and defense 
supply chains, and in times of crises we will be helpless, at 
the mercy of others. The days of Rosie the Riveter and an 
entire generation of coming together to rebuild our military 
from the ground up will only be a distant memory. By design, a 
cap-and-trade scheme works by adding to the cost of energy, and 
through that, an increase in production costs for energy-
intensive industries and manufacturing. There are cost 
containment mechanisms that will be discussed this morning that 
may help mitigate some of the increases, but at the end of the 
day, they won't be enough to save the jobs. And when factories 
move overseas, the environment is worse for it.
    Let us take steel. In the United States, steel producers 
are the most efficient in the world. An average American steel 
maker emits 1.2 tons of greenhouse gases per ton of steel. 
Compare that to Chinese steel emissions estimated to be in the 
neighborhood of 4 or 5 tons of greenhouse gases emitted for 
each ton of steel they make.
    We are not helping the environment by sending industries 
that operate cleanly and efficiently in the United States to a 
regulation-free China. China is the number one emitter in the 
world with greenhouse gas growth every year that equals the 
current output of German. We shouldn't be tying a hand behind 
our back. We can reduce emission and create jobs through other 
policies, and now is not the time for a costly cap-and-trade 
system.
    In closing, I would like to put the scale of emissions 
reductions being called for in these bills a little bit in 
perspective. These proposals would mean that the United States 
cannot emit more in the year 2050 than we emitted in 1910. That 
is a pretty daunting task considering that in 1910 the United 
States only had 92 million people compared to an estimated 420 
million that we will have in 2050 and a per-capita income in 
current dollars of about $6,000. To reach that lofty goal of 80 
percent reduction, emissions from the entire transportation 
sector would have to drop to zero. Emissions from all 
electricity generation would have to drop to zero. Then we 
would need to reduce the remainder by about 50 percent. Think 
about the industries and jobs that we would lose to meet those 
goals. Can we really succeed as a power on the world stage if 
we shed these industries? Can our economy recover without those 
jobs? My guess is that most of us know the answers. I yield 
back.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from Michigan, Mr. Dingell.

OPENING STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MICHIGAN

    Mr. Dingell. I want to thank you for holding this hearing 
today. It is an important one. As I have said before, you are 
to be commended for building a strong record as we continue to 
move toward comprehensive climate change legislation.
    I would like to be clear. The United States is the largest 
emitter of greenhouse gases, and we are also the lone 
superpower. We must also be a leader. That said, we need to 
make strong action corresponding to ours by developing 
countries and others if we are to go forward on this. We need 
this for three reasons. First, without compensating action from 
developing companies, we simply will not get the reductions 
that the vast majority of scientists agree we need to achieve 
to avoid devastating effects of climate change. And I would 
note that the Senate has already acted on this under the Byrd-
Hagel resolution which passed 95 to nothing, setting out the 
strong feelings of the Senate on this particular matter.
    Two, without corresponding action by developing countries 
with whom we compete internationally, the relative cost of 
American goods and services could increase and could cause U.S. 
industry and jobs to migrate to nations that do not limit their 
emissions. And I can tell you from discussions with the Chinese 
and others that this is a very real danger, especially based 
upon the concerns that I expressed to the Chinese in the 
meeting at Kyoto.
    Three, past debate on climate change suggests that the 
Congress would be unlikely to adopt legislation committing the 
United States to eliminating its greenhouse gas emissions in 
absence of assurances that developing countries will take 
similar action, and I would note again, the Byrd-Hagel 
resolution that passed the Senate 95 to nothing on this point.
    There are two options to ensure mandated reductions in the 
United States will not cause jobs and the emissions associated 
with them to move to countries with less stringent controls. 
First, free emission allocation to entities that produce goods 
sold internationally in internationally competitive 
marketplaces and whose competitiveness would be sorely affected 
by a domestic cap-and-trade program. Second is a program of 
border adjustments which is commonly referred to the IBEW 
approach which you referred to in your comments. Under this 
proposal we would require through tariffs, border taxes or 
other mechanisms the prices of relevant imported goods to 
reflect the same price that is included in competing U.S. goods 
as a result of domestic climate change legislation. Again, you 
referred to this, and I believe it is an essential part of any 
legislation which this Committee or other committees can and 
should move forward. I would note that the draft that 
Representative Boucher and I released last year contains a 
combination of these two approaches, and it is to be noted that 
that draft carries the proposals which were made and endorsed 
and approved by an organization of industry and 
environmentalists. I would urge my colleagues to take a look at 
this draft as a reference point.
    It is critical that whatever approach the Committee decides 
to take, it must be a matter that is reasonably certain to 
withstand a challenge before the World Trade Organization which 
realistically we must expect to be filed.
    I look forward to hearing from our witnesses today about 
the two proposals and their WTO compliance. Thank you, Mr. 
Chairman.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from Illinois, Mr. Shimkus.

  OPENING STATEMENT OF HON. JOHN SHIMKUS, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF ILLINOIS

    Mr. Shimkus. Thank you, Mr. Chairman. A theory is a 
coherent group of general propositions used as principles of 
explanation for a class of phenomenon. We unequivocally state 
mostly on my colleagues' side that global warming is a fact. It 
is still a theory, and I would like to submit for the record a 
story yesterday from the University of Wisconsin Milwaukee, and 
the headline is University of Wisconsin Milwaukee study could 
realign climate change debate. And part of it that I have 
highlighted is scientists said that the air and ocean systems 
of the earth are now showing signs of synchronization with each 
other. Eventually the systems begin to couple, and the 
synchronous states destroy, leading to a climate shift in 
climate. When this happens, the climate state changes. You go 
from a cooling regime to a warming regime, or a warming regime 
to a cooling regime. This way we are able to explain all the 
functions in the global temperature trend in the past century. 
The research team has found the warming trend of the past 30 
years has stopped. OK, these are scientists now. The research 
team has found the warming trend of the past 30 years has 
stopped, and in fact, global temperatures have leveled off 
since 2001.
    Now, I say that to start with the debate of is there a 
turning at all and should there be games played? I am not 
convinced that there is. The Chairman is correct in that cement 
factories will move. I have already been told that. Iron, 
steel, manufacturing, it is not the climate provisions, it is 
the energy costs that will cause them to move. A study of the 
Warner-Lieberman, 1 million jobs lost without carbon, 3 million 
with carbon. This hearing is avoiding leakage. That is cute for 
saying jobs will be lost. And I yield back my time.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from Pennsylvania, Mr. Doyle.

OPENING STATEMENT OF HON. MICHAEL F. DOYLE, A REPRESENTATIVE IN 
         CONGRESS FROM THE COMMONWEALTH OF PENNSYLVANIA

    Mr. Doyle. Thank you, Mr. Chairman, and thank you for 
having this very critical hearing. I believe the concerns with 
job and emissions leakage, as well as international 
competitiveness, will be one of the key issues we need to 
address if we are going to be able to successfully pass a 
climate bill this session. As many of you know, Jay Inslee and 
I have been working over the past 18 months to put together a 
comprehensive policy to address this critical question.
    Our policy, which essentially will pay for the additional 
cost the bill imposes on these industries using funds generated 
through a cap-and-trade program, will go a long way toward 
addressing the concerns of a specific group of high-carbon 
intensive industries who have an internally set price for their 
product. It should be noted that the European Union has 
identified similar industries within their Phase III cap-and-
trade program. The industries we believe should qualify would 
include steel, cement, aluminum, along with a few others.
    Our policy, however, Mr. Chairman, will not address every 
single concern these industries face, and other policies will 
be needed to complement it.
    For example, we do not directly seek to address the 
possibility of a rising cost of natural gas, and other policies 
within the overall cap-and-trade bill will be necessary to 
address this very real concern.
    With that said, though, I believe that our policy is the 
most comprehensive one yet proposed and look forward to having 
it included as a baseline provision in the draft bill you are 
expected to release by the end of the month.
    Some specific questions do remain as this policy evolves 
and is integrated into the overall bill. We are limited at this 
time by the lack of necessary data but hope that the greenhouse 
gas registry that EPA is developing will be able to guide this 
policy in the future.
    I look forward to working closely with you, Mr. Chairman, 
as we seek to answer these remaining questions. Although this 
issue is extremely complicated, our proposal will go a long way 
toward answering many of the industries' legitimate concerns, 
and with that, I yield back my time.
    Mr. Markey. I thank the gentleman. The gentleman's time has 
expired. The Chair recognizes the gentleman from Pennsylvania, 
Mr. Pitts.

OPENING STATEMENT OF HON. JOSEPH R. PITTS, A REPRESENTATIVE IN 
         CONGRESS FROM THE COMMONWEALTH OF PENNSYLVANIA

    Mr. Pitts. Thank you, Mr. Chairman, for convening today's 
hearing. In a time of economic crisis, it is critical that 
American jobs are not lost due to an overly burdensome cap-and-
trade bill. However, after looking at several studies on how 
cap-and-trade will affect employment, I have a hard time 
understanding how what amounts to a big tax increase won't lead 
to even more job losses. An EPA analysis illustrates that even 
less stringent emission-cutting measures than the President's 
budget will reduce manufacturing jobs by up to 12 percent. This 
means 3 to 4 million people will lose employment.
    A CBO study says that, ``Investors might see the value of 
their stocks decline, and workers could face higher risk of 
unemployment as jobs in those sectors were cut.'' Even if large 
and high-energy intensive industries are given emissions 
allowances, small business will still be hit very hard as they 
will have to shoulder the burden of high gasoline and energy 
prices and higher-priced goods.
    MIT researchers predict that a family's energy bill will 
increase by $3,128 per year. So not only would Americans lose 
their jobs, they would be forced to pay much higher household 
energy bills because of legislation proposed. President Obama 
acknowledged this in a meeting with the editorial board of the 
San Francisco Chronicle in January of '08 when he said, ``Under 
my plan of a cap-and-trade system, electricity rates would 
necessarily skyrocket. That will cost money. They will pass 
money onto consumers.''
    Mr. Chairman, we need to carefully consider the negative 
impact of an overly burdensome cap-and-trade bill that it will 
have on our economy, and in today's economy, I do not believe 
it is in the best interest of American families to pass a bill 
that will cost jobs, raise energy costs, and make their way of 
life harder and more challenging.
    I look forward to hearing today's witnesses and yield back.
    Mr. Markey. I thank the gentleman. The gentleman's time has 
expired. The Chair recognizes the gentleman from Texas, Mr. 
Green. I am sorry, the gentlelady from California, Ms. Matsui.

OPENING STATEMENT OF HON. DORIS O. MATSUI, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Ms. Matsui. Thank you, Mr. Chairman. Thank you very much 
for continuing to tackle this issue in examining the details of 
how we need to construct an effective and strong climate change 
plan.
    As I have said before in this room, Sacramento is seeing 
the effects of climate change every day from less snow pack to 
increased wildfires to water shortages. My constituents who are 
at the mercy of the Sacramento and American Rivers are truly 
afraid of what will happen if we do not act. However, 
Sacramento's unemployment is over 10 percent. I do not need to 
tell anyone here what more job losses would do. So as we craft 
this bill, I want to ensure that we incorporate appropriate 
policy measures that enhance American industry and vitality.
    The witnesses will be laying out a number of policy options 
today that I want to further explore as we craft this bill. 
However, we need to go more in depth on an exact formula for 
the upcoming legislation. We need to get this right. That is 
why we want to hear from you, our witnesses, on specifics of 
what this country needs to do. If we give allocations to 
carbon-intensive manufacturers, we need to ensure that we do 
not simply give our efforts to clean this planet. If we 
incorporate tax breaks, we need to ensure that they are 
targeted enough so that companies in need receive help but also 
defined in scope so we begin to move to a cleaner economy as a 
whole.
    And if we pursue international agreements and border 
duties, I want to ensure that we fully understand WTO trade 
implications. Some say the devil is in the details, yet I think 
a better future is in the details. I just want to make sure we 
get this right.
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
    Mr. Markey. The gentlelady's time has expired. The Chair 
recognizes the gentleman from Kentucky.
    Mr. Whitfield. Thank you very much, Mr. Chairman. We look 
forward to this hearing, and we certainly welcome our witnesses 
today. Yesterday's AEP had a story, U.S.-China, Worlds Apart on 
Climate Change Curbs, and the Director of China's Climate 
Change Office said that China did not want to be held 
accountable for emissions that it produces to make goods for 
export. He went on to say that if the United States tried to 
impose tariffs on imports from China or other countries that 
didn't have mandatory emission controls, that that would be 
unfair and a violation of trade rules and would start a serious 
trade war.
    So as we move forward, all of us are very much concerned 
about the impact on employment and our competitiveness with 
other countries. I look forward to these witnesses and yield 
back the balance of my time.
    Mr. Markey. The Chair recognizes the gentleman from Texas, 
Mr. Green.
    Mr. Green. Thank you, Mr. Chairman, and I would like to 
waive my time but ask you to place my statement and also a 
letter from the American Chemistry Counsel into the record.
    [The information appears at the conclusion of the hearing.]
    Mr. Markey. The gentleman may do that. The Chair recognizes 
the gentleman from Washington State, Mr. Inslee.

   OPENING STATEMENT OF HON. JAY INSLEE, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF WASHINGTON

    Mr. Inslee. Thank you, Mr. Chairman. I appreciate your 
holding this hearing. I just consider myself a ditto-head for 
Mike Doyle, so I want to associate myself with his brilliant 
comments about this amendment we are working on. We have 
proposed one approach to this, and I just want to note a couple 
of advantages of Mike and my approach that I want to comment 
on.
    First, it is clear that we do need to address this issue, 
and just ignoring it is not a solution. So, number one, we have 
got a proposal addressing it. Two, our proposal is an output-
based allocation of these allowances, and I think that might 
seem a little technical but an extremely important part of our 
proposal because when you do an output-based allocation, it 
essentially is an incentive for efficiency and it gives an 
incentive for our industry to move to more efficient processes 
and infrastructure which will become a great competitive 
advantage in international competition over the long term. So 
the way we structured this, it gives a reason for American 
industry to become more competitive over time so that we can 
win those jobs over the long term in international competition.
    Second, this approach is something we can do now without 
the necessity of risking trade wars right now. You know, that 
is something that we always have the option of doing with trade 
adjustment at the border. We can do this now in a way that I 
think the testimony today will demonstrate can be helpful to 
our industries, both in the import issue and in the export 
issue because our approach will help both the import and the 
export side of the competitive international markets.
    Third, we think we are heading in the right direction in 
figuring out and defining the industries that will be assisted 
by this, and we are going to continue to work with some of the 
witnesses and some of the stakeholders to define that. But we 
think we have got a fairly rational way of doing that.
    So we will look forward to the testimony today. We have 
some more work to do. I look forward to making the right 
decisions. Thanks.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from Arizona, Mr. Shadegg.

OPENING STATEMENT OF HON. JOHN B. SHADEGG, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF ARIZONA

    Mr. Shadegg. Thank you, Mr. Chairman, and thank you for 
holding this hearing. I find that this kind of hearing is 
vitally important for the people of America to understand the 
implications of the policies we are currently considering. I 
think everyone understands that the goal of reducing greenhouse 
gases is well-intended, and it is believed that a cap-and-trade 
mechanism is one mechanism to get there and worthy of pursuit. 
The sad thing is that so many people don't understand exactly 
how that will be applied here in the Nation and what 
consequences it will have.
    I recently was having dinner with a friend of mine who is 
deeply involved in the trucking business, and the President's 
budget had already come out in which he had made it clear that 
whatever cap-and-trade system he imposed, he wanted to have a 
100 percent auction of the initial credits. My friend from the 
trucking industry did not understand that concept and believed 
that the initial distribution of the credits was going to be 
based on historical use as has been discussed here and that 
there would not be an actual auction.
    I think these are very, very important questions to be 
discussed and answered here and to be communicated to the 
American people if, in fact, the President's proposal that we 
auction every single initial credit to those industries that 
need them in order to remain in business, then there will be a 
vast cost imposed by this program across the economy. Many of 
my colleagues on the Republican side are calling this a tax. 
Unfortunately, that may cause some confusion among the public 
because it isn't technically tax. It is not an additional 
charge where the money flows directly to the government. 
However, it is the sale of a new commodity that the government 
is going to create where the revenues come to the government, 
and the people need to understand that and need to understand 
that it will impact literally everything they do, from turning 
on the lights in their home to the price of a suit to the cost 
of a sandwich. And whenever this Congress proposes to enact new 
policies, we need to both make clear the goal those policies 
intend to address and also the consequences of those policies. 
I think the American people deserve to know precisely what the 
cost of this policy will achieve and also what danger it will 
alleviate or purportedly alleviate before we impose, 
particularly on a down economy, a new policy of this size which 
could have vast consequences across the entire economic 
structure.
    So I thank the Chairman for holding the hearing.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from California, Mr. NcNerney.
    Mr. McNerney. Thank you, Mr. Chairman. I appreciate your 
holding this hearing because it is an important issue. I think 
global warming has tremendous potential for us to become more 
efficient, for us to create new industries and new jobs, but 
there are downsides or potential downsides. As my colleague 
right here next to me mentioned, I have unemployment as high as 
18 percent in parts of my district. So losing jobs is the last 
thing that I want to see happen, and I think if we look at Mr. 
Doyle's and Mr. Inslee's proposal carefully, look at all these 
things carefully, we can come up with a good policy that will 
protect American jobs and accomplish the critical goal of 
reducing greenhouse gas emissions and at the same time create a 
whole new sector of jobs.
    So let us look at this with an open mind. I certainly look 
forward to seeing what the Committee is going to say after 
having read their testimony, and with that I yield back to the 
Committee.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from Missouri, Mr. Blunt.
    Mr. Blunt. Thank you, Mr. Markey. With unanimous consent, I 
will place a statement in the record.
    [The prepared statement of Mr. Blunt was unavailable at the 
time of printing.]
    Mr. Markey. Without objection, so ordered. The Chair 
recognizes the gentleman from Louisiana, Mr. Scalise.
    Mr. Melancon. Thank you, Mr. Chairman. I will waive an 
opening statement--oh, I am sorry.
    Mr. Markey. Mr. Scalise.
    Mr. Melancon. I forgot we have two from Louisiana now.

 OPENING STATEMENT OF HON. STEVE SCALISE, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF LOUISIANA

    Mr. Scalise. I will speak for both of us if that will meet 
your time. Thank you, Mr. Chairman. I want to thank the 
witnesses for also appearing before our Subcommittee.
    Serious issues surround global climate change policy, 
issues that spread throughout our country and touch every 
American family. Efforts to tax carbon emissions could cause 
serious, possibly irreparable harm to our national economy, not 
to mention that our country's efforts could be in vain if other 
countries like China and India do not follow a similar 
strategy.
    A strong economy includes a strong energy sector, and this 
Subcommittee must be very careful not to pass an energy tax 
that will have a negative immediate and long-term effect on the 
health of our national economy while adding more than $1,300 to 
every American family's energy bill.
    The dislocation of American businesses and American jobs is 
a strong possibility if Congress passes legislation that will 
make it unrealistic and economically unfeasible to remain in 
our country. Some estimates reach as high as 7 million jobs 
lost in America if we pass a cap-and-trade tax as was proposed 
in the 110th Congress. Add to that the fact that some 
geographical regions of our country will suffer 
disproportionate and devastating economic losses if such 
legislation were to become law. In addition, to take certain 
forms of clean, renewable sources of energy like nuclear off 
the table for consideration only adds insult to injury. As I 
have reiterated in past hearings, it is imperative that we 
consider these realities as we consider these policies. Instead 
of Washington bureaucrats mandating harmful policies that will 
kill key sectors of our national economy, we should instead 
explore policies that encourage investment in cleaner 
technology and innovation in the private sector. The ingenuity 
of the American entrepreneurial sprit is the one that has made 
our country the best in the world, and this Congress would be 
wise to encourage more of that entrepreneurial spirit rather 
than running off with harmful energy tax policies with that 
same spirit. The effect of a cap-and-trade tax are broader in 
scope than some in this Congress want to admit to the American 
people. Such legislation will ship American jobs overseas, will 
make heating and cooling our homes much more expensive, and 
will increase the cost of everyday household products. I would 
urge caution as we proceed with a cap-and-trade plan and make 
sure that we fully explore these adverse effects that such a 
policy would have on American jobs and American families.
    I look forward to hearing from our witnesses, and I yield 
back.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentlelady from Wisconsin, Ms. Baldwin.

 OPENING STATEMENT OF HON. TAMMY BALDWIN, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF WISCONSIN

    Ms. Baldwin. Thank you, Mr. Chairman. Our Nation is a lone 
superpower in an increasingly interconnected and interdependent 
world. With this stature comes the unique responsibility to set 
an example, to model behaviors that we want other nations to 
emulate. It is true that emissions are rising fastest in 
developing countries. China's emissions are projected to 
continue rising rapidly, up 71 percent by 2020. India is in a 
similar situation with emissions projected to continue rising 
up to 68 percent in that very same timeframe. But we cannot use 
the behavior of developing nations as an excuse for our 
inaction. Rather, we must demonstrate by our own example that 
it is possible to rise to the challenge of creating efficient, 
effective, and environmentally friendly climate change programs 
which in turn will create jobs in a new green economy.
    However, we have a responsibility to our Nation, our 
businesses, our workers, our consumers, our constituents to 
ensure that American industries remain competitive, that 
American jobs and the production of products remain right here 
in this country and that prices and costs remain reasonable and 
affordable.
    In Wisconsin, our many energy-intensive manufacturers face 
tough international competition, particularly from businesses 
located in countries that have not committed to regulating 
emissions. To ensure that we do not unjustifiably disadvantage 
our domestic manufacturing base, we must examine ways to 
minimize the costs of cap-and-trade compliance and do 
everything that we can to prevent the loss of U.S. jobs to less 
or unregulated countries.
    I recognize this issue is complex, but there are policy 
options for mitigating potential competitiveness impacts and 
encouraging developing countries to curb their greenhouse gas 
emissions, and I look forward to this challenge.
    Thank you, Mr. Chairman. I welcome our witnesses.
    Mr. Markey. The gentlelady's time has expired. The Chair 
recognizes the gentleman from Florida, Mr. Stearns.

 OPENING STATEMENT OF HON. CLIFF STEARNS, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF FLORIDA

    Mr. Stearns. Good morning. Thank you, Mr. Chairman. I think 
we are hearing on this side that we are going to lose jobs, and 
we hear the gentlelady just talking about this is going to 
create jobs. So I think we got a disconnect here, Mr. Chairman. 
Maybe you can be the referee here, but when we look at, for 
example, the National Association of Manufacturers, they 
estimate that a cap-and-trade scheme will cost up to 4 million 
jobs, the Heritage Foundation, who estimates the loss of up to 
5.3 million jobs, or the Charles River Associates estimate that 
the job loss could be as high as 7 million. So there seems to 
be a consensus on our side, we are going to lose jobs, and yet 
you indicate we are going to gain jobs.
    Now, Mr. Whitfield, in his opening statement, pointed out 
what China said. China does not want to become a low-carbon 
society. In fact, they don't want to have any kind of this cap-
and-trade part of their export process, and their individual 
who is the Director of China's Climate Change Office said it 
would be a disaster and possibly the start of a trade war if 
the United States were to impose tariffs on imports from China 
and other countries that didn't have mandatory emissions 
control.
    So I ask the gentlelady, in light of all the statistics and 
the groups that I see here and in light of what China said, it 
is hard to believe that this cap-and-trade is going to create 
more jobs. In fact, it appears to be the consensus is an 
industry where the jobs are created, it is going to lose jobs, 
and massive regulatory burdens imposed by a cap-and-trade will 
inevitably undercut the growth and innovation we desperately 
need. To build a lasting and effective solution, fostering 
technology and scientific research, not capping the economy and 
trading U.S. jobs will obviously guard our security, increase 
our energy independence, and so Mr. Chairman, I look forward to 
the witnesses and I just think there is another way to go. 
Thank you.
    Mr. Markey. I thank the gentleman. The gentleman's time has 
expired. The Chair recognizes the gentleman from Louisiana, Mr. 
Melancon. The gentleman from Louisiana?
    Mr. Melancon. See, you tried to catch me twice. I am going 
to waive my opening statement.
    Mr. Markey. I thank the gentleman. The gentleman's time has 
expired. The Chair recognizes the gentleman from Georgia, Mr. 
Barrow. The Chair sees the gentleman from Texas, the Ranking 
Member of the Full Committee, Mr. Barton, and recognizes him 
for an opening statement.

   OPENING STATEMENT OF HON. JOE BARTON, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF TEXAS

    Mr. Barton. Thank you, Mr. Chairman, and we appreciate the 
opportunity to have another dialogue today about climate 
change.
    In a global economy where any producer is just an airplane 
ride away from any customer and boundaries don't seem to 
matter, the United States does need a competitive edge. Our 
edge is individual creativity, freedom, an educated and 
dedicated workforce, and an energy policy at least until now 
based on free markets and supply and demand, least cost.
    Unfortunately, we have an unemployment rate that is going 
up, now down. It just hit 8.1 percent. And it appears that 
there is a Congressional majority determined to adopt a carbon 
cap-and-trade policy that is absolutely the worst thing we 
could be doing right now to protect the jobs that we still have 
in our economy.
    We can debate the in's and out's all we want, but if we 
really want to stop job leakage, don't do cap-and-trade. It is 
that simple. We cannot escape the unassailable truth that if 
you are trying to cap carbon, which is one of the most 
ubiquitous elements in the world, it is going to put a price on 
it, it is going to go up, and if the price goes up, jobs are 
going to go down. It is that simple. Manufacturers compete 
globally. The cost of energy has a bearing whether we 
manufacture or create that energy, produce that energy in the 
United States or in China, Mexico, or Brazil. If consumers can 
just as easily import steel, concrete, and other energy-
intensive goods from our competitors, then American producers 
won't be able to add the cost of greenhouse gas permits to 
their bills without losing that competitive edge. Everyone 
knows what happens next. Declining revenues push companies to 
close facilities in the United States and cut American jobs.
    I have a factory in my district in my small hometown of 
Ennis, Texas, of about 15,000 people that has been there for 60 
years. They announced 2 weeks ago they are closing the factory 
and moving it to China. They make mattress box springs. They 
have been doing it for 60 years in Ennis, Texas, but some time 
next year they are going to start doing it somewhere in China.
    We are naive if we think that China and India and other 
emerging industrialized countries will sacrifice their own 
growing economies and their own jobs in response to a theory 
that has yet to be proven. It just won't work.
    So I look forward to this hearing. I know most of the 
witnesses on a personal basis. They are all good people, and I 
am sure we are going to have a good dialogue, Mr. Chairman. 
With that, I yield back.
    Mr. Markey. The gentleman from Oregon, Mr. Walden, is 
recognized.

  OPENING STATEMENT OF HON. GREG WALDEN, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF OREGON

    Mr. Walden. Thank you, Mr. Chairman. I want to touch on two 
topics this morning. Before I get into my views on the cap-and-
trade proposal, I would just like to draw to your attention and 
that of the Committee's that apparently in the stimulus bill 
there was a provision I think a lot of people supported to 
encourage people to install new energy-efficient windows and 
get a tax credit for it. The House passed a version that was 
logical, reasonable, the Senate did as well, but somewhere in 
conference, new standards got put in place that have been 
brought to my attention that would make the cost of these 
windows exceed any logical ability for anybody to make a 
decision to go get them, which negates the whole idea of energy 
efficiency and simulative effect. And I draw that to your 
attention, Mr. Chairman, because I hope we can look into this 
problem and correct it. Apparently this was something 
parachuted in in conference. It sets such a high standard. 
Instead of a $400 or $500 window, it would be a $1,500 window. 
And so people aren't going to take advantage of either the 
incentive or the energy reduction. And so I draw that to your 
attention, and I would hope we could find out how that happened 
and its impact.
    Regarding cap-and-trade, I am deeply concerned about the 
$646 billion tax increases represents when a number of us on 
this side of the aisle met with industry leaders from U.S. CAP. 
I posed the question, if we create a cap-and-trade system that 
means higher energy costs, will you commit not to take your 
jobs to cheaper energy places that don't play by these rules, 
and not a single corporate executive would agree to that 
request.
    I think that is all that needed to be said on that point. 
It is very disturbing what it will do to our economy at a time 
of great job loss to increase taxes and to drive more jobs 
overseas. Thank you, Mr. Chairman.
    Mr. Markey. I thank the gentleman. The gentleman's time has 
expired. The Chair recognizes the gentleman from Texas, Mr. 
Burgess.

OPENING STATEMENT OF HON. MICHAEL C. BURGESS, A REPRESENTATIVE 
              IN CONGRESS FROM THE STATE OF TEXAS

    Mr. Burgess. Thank you, Mr. Chairman, and congratulations 
for getting the television cameras back on. This is great.
    I want to thank you for holding this hearing, and I thank 
you for allowing us to have some time to talk about cap-and-
trade and the effect that it may have on employment and also 
the potential effect that we could have in moving more energy-
intensive industries and jobs from America to countries with 
less stringent emissions requirements.
    Saving jobs and creating new economic growth is something 
that I hope that we could accomplish in this Committee. I don't 
think that we can overlook the fact that these new jobs are 
likely to be at the expense of good jobs in energy-intensive 
industries or in small businesses that do not qualify for 
allocations or protection from higher energy costs.
    Taxing greenhouse gas intensive imports will not be an 
effective way to limit job loss. Consider the impact of the 
United States' attempts to induce foreign countries into 
unfavorable trade agreements. It could possibly incite other 
trade difficulties or at least exchanges of harsh words over 
trade balance. Either way, our Nation's global position 
reliance on trade is too important to risk without a serious 
cost benefit analysis, and to date I don't think I have seen 
one.
    Shifting import taxes upon countries of origin will only 
make American products more expensive. Companies are in 
business to make money. If the rest of the world develops, 
export-rich companies will simply sell wherever the best 
opportunity is for profit. If you are looking to sell product, 
realistically would you look toward a company that is in 
recession and stacking on excessive trade barriers and forcing 
industries to buy carbon credits to cover emission? It is not 
likely, especially when there are major emerging alternatives.
    In the end, globalization of trade markets are based upon 
getting around barriers such as taxes to lower production costs 
and ultimately the prices that consumers pay. If there is a way 
to get around taxes that continue to emit in order to achieve 
higher prices, I suspect people will find a way.
    With that, Mr. Chairman, I will yield back the balance of 
my time.
    Mr. Markey. The gentleman's time has expired. The Chair 
sees no other members of the Subcommittee, but it sees Mr. 
Terry, a member of the full committee who is visiting with us, 
and we welcome you, sir.
    So we will turn to our witness panel, and I would ask the 
witnesses to please move up to their assigned spots at the 
witness table and I will introduce our first witness who is Mr. 
John McMackin. Mr. McMackin is here today on behalf of the 
Energy Intensive Manufacturers Working Group On Greenhouse Gas 
Regulation. Members of that group include many major 
corporations, Alcoa, Corning, Dow, Holcim, U.S., Nucor, Owings-
Corning, Rio Tinto, U.S. Steel, Owens, Illinois. We welcome 
you, Mr. McMackin, and if you could move that microphone in a 
little bit closer, whenever you are ready, please begin.

STATEMENTS OF JOHN McMACKIN, JR., WILLIAMS AND JENSON, PLLC, ON 
 BEHALF OF THE ENERGY INTENSIVE MANUFACTURERS WORKING GROUP ON 
 GREENHOUSE GAS REGULATIONS; MARTIN McBROOM, DIRECTOR, FEDERAL 
  ENVIRONMENTAL AFFAIRS, AMERICAN ELECTRIC POWER; PAUL CICIO, 
INDUSTRIAL ENERGY CONSUMERS OF AMERICA; MARGO THORNING, PH.D., 
SENIOR VICE PRESIDENT AND CHIEF ECONOMIST, AMERICAN COUNCIL FOR 
   CAPITAL FORMATION; RICHARD D. MORGENSTERN, SENIOR FELLOW, 
 RESOURCES FOR THE FUTURE; AND EILEEN CLAUSSEN, PRESIDENT, PEW 
                CENTER ON GLOBAL CLIMATE CHANGE

                STATEMENT OF JOHN McMACKIN, JR.

    Mr. McMackin. Mr. Chairman and members of the Subcommittee, 
it is an honor to be here. The Energy-Intensive Manufacturers' 
Working Group on Greenhouse Gas Regulation, on whose behalf I 
appear today, greatly appreciates this opportunity, and we 
thank you and all the members of the Subcommittee and staff who 
are devoting so much time and energy to this critical issue.
    I am Jack McMackin, and I am a principal in the law firm of 
Williams & Jensen, and a director of Owens-Illinois, Inc. OI, 
headquartered in Perrysburg, Ohio, and with facilities in 11 
states, is the world's largest manufacturer of glass 
containers. Our group was formed last year for a narrow but 
important purpose, to engage constructively with the other 
stakeholders and Congress to attempt to solve what is often 
referred to as the carbon leakage problem but which, as the 
title of today's hearing indicates, is a problem of the leakage 
of carbon and ob jobs. It is a problem that primarily affects 
energy-intensive industries that face foreign competition, the 
two factors that define our members.
    Our working group is composed of companies from U.S. 
industries that are widely and correctly seen as most 
vulnerable to leakage, that is, ferrous metals, iron and steel; 
non-ferrous metals, aluminum and copper; cement; glass, 
including fiberglass; ceramics; chemicals; and paper. As the 
Chairman indicated, the companies include Alcoa, Corning, Dow, 
Holcim U.S., NewPage Corporation, Nucor, Owens Corning, Owens-
Illinois, PPG, Rio Tinto, and U.S. Steel.
    Let me very briefly highlight five points from my written 
testimony. First, of the two types of leakage solutions that 
have appeared in legislation to date, our group is focused 
exclusively on the allowance allocation type provisions that 
attempt to address the root cause of the problem by mitigating 
the cost differential that unilateral legislation would 
otherwise impose on U.S. production relative to unregulated 
foreign producers. Last year's Inslee-Doyle Anti-Carbon Leakage 
Act, which was largely adopted by the Dingell-Boucher 
discussion draft, is a prominent and in our view very promising 
instance of this type of measure.
    Second, the other type, the border equalization provisions 
that Mr. McBroom will testify about, will take a different 
approach. Rather than mitigate cost differential through free 
allocations or allocation value rebated, border equalization 
provisions attempt to impose comparable cost on competing goods 
at the border. Our group's focus as I said is exclusively on 
the first form of relief, but let me say this. They are not 
necessarily incompatible. It is possible to do both, and indeed 
most of the measures to date, the bills that have been 
introduced have contained both.
    Third, the Inslee-Doyle Output-Based Rebate represents a 
real breakthrough. Let me just talk about two of its key 
attributes, and here I am echoing the comments of Mr. Inslee. 
A, by basing its allowances on actual production rather than 
historic emissions, it removes a significant disincentive to 
additional production and eliminates the possibility of a 
windfall. B, by including in its calculations inefficiency 
standard measured by sectoral average efficiency. It in fact 
creates a powerful efficiency incentive and establishes a 
standard that gets tougher every year as the more efficient 
press their advantage and the less efficient strive to close 
the gap.
    Fourth one, there are several important remaining issues, 
but the single biggest issue requiring further work in our view 
is eligibility. As introduced last year, the Inslee-Doyle bill 
left the determination of eligible sectors or subsectors up to 
EPA subject to a series of generalized standards aimed at 
assessing leakage potential. No given industry could know the 
outcome of an ultimate EPA determination, a determination that 
could be preceded by warring economists and conflicting pricing 
models, nor could any member of Congress know whether key 
industries in his or her district would get relief or not.
    By contrast, most of the other legislative proposals, 
including Lieberman-Warner, the Boxer Substitute, and the 
Brown-Stabenow Amendment on the Senate side and the Dingell-
Boucher discussion draft have straightforwardly listed the 
legislatively determined eligible industries; each proposal 
containing almost exactly the consensus list of industries 
represented by our working group members.
    Fifth, and lastly, a very workable and reasonable solution, 
a middle ground to this eligibility issue is emerging and is 
under consideration by Congressmen Inslee and Doyle, and we 
commend it to the examination of others. Moreover, our group 
unveils today a study by FTI Consulting attached as Attachment 
A to my written testimony, that we hope will help all concerned 
to better understand and better evaluate this proposed solution 
and the general issue of which industry should be eligible for 
relief. Building on the EU approach and work done by the World 
Resources and Peterson Institutes and many others, the proposed 
solution would establish objective criteria for energy 
intensity and trade exposure. Industries that met both of these 
thresholds would be presumptively eligible to receive 
allowances. They could be refused relief only if the 
administrator found that they are not subject to significant 
leakage. Sectors that did not meet the thresholds could still 
establish their qualification by individuated showings that 
they are subject to leakage.
    Mr. Markey. If you could summarize, please?
    Mr. McMackin. Let me say in summary then, Mr. Chairman, 
that the overall results show that about 45 out of the 473 6-
digit code subsectors would qualify. They represent about 8 
percent, Mr. Chairman, of direct emissions in comparison I 
think to the 6 percent figure for the six industries, and that 
does include process emissions.
    So we very much look forward to discussing the study with 
all concerned and to working with the Subcommittee, Congressmen 
Inslee and Doyle, and all other interested members and 
stakeholders to build on the remarkable progress to date in 
fashioning a workable solution to the leakage problem.
    [The prepared statement of Mr. McMackin follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Markey. Thank you, Mr. McMackin, very much. Our next 
witness is Mr. Martin McBroom. He is the Director of Federal 
Environmental Affairs at American Electric Power which owns the 
Nation's largest electricity generation system. We welcome you, 
Mr. McBroom. Whenever you are ready, please begin.

                  STATEMENT OF MARTIN McBROOM

    Mr. McBroom. Good morning, Mr. Chairman and distinguished 
members of the Subcommittee. I am Director of Federal 
Environmental Affairs of American Electric Power. Headquartered 
in Columbus, Ohio, AEP is one of the Nation's largest 
electricity generators and service more than 5 million retail 
consumers in 11 states in the Midwest and south central regions 
of our Nation.
    AEP was one of the earliest companies to publicly endorse 
actual cap-and-trade legislation. We are committed to working 
with you to pass federal legislation that is well-thought out, 
achievable, and reasonable which includes requirements that are 
timed to coincide with the development of advanced technology 
and which would allow AEP to recover costs for deployment of 
advanced technology.
    Any domestic greenhouse gas reduction program must be 
coupled with effective international measures to ensure that 
rapidly developing nations such as China and India also 
promptly address this problem. If such a provision is not 
included, we will not succeed at curbing global loadings of 
greenhouse gases.
    If fast-developing countries do not curtail their 
emissions, then U.S. legislation will succeed only in pushing 
U.S. production and jobs abroad, undercutting and possibly 
worsening the environmental objective. That production shift is 
of concern to AEP because 38 percent of our generation serves 
industrial customers who could be impacted. When factories move 
overseas, AEP loses industrial customers and our residential 
customers who work in those facilities lose jobs and their 
families are in peril.
    Recognizing that trade is a key component in effective 
climate change legislation, Mr. Edwin D. Hill, International 
President of the International Brotherhood of Electrical 
Workers, and Michael G. Morris, Chairman, CEO, and President of 
AEP, jointly proposed in February 2007 a means to effectively 
leverage U.S. climate negotiators to help to make sure that 
developing countries also limit their greenhouse gas emissions.
    We applaud your decision, Mr. Chairman, to include the 
IBEW-AEP proposal in a climate bill you introduced in the last 
Congress. We urge you and your colleagues to do so again this 
year. Simply put the proposal serves as a backstop for U.S. 
climate negotiators and compliments other provisions that 
Congress is contemplating to ensure that U.S. climate 
legislation does not inadvertently undercut U.S. 
competitiveness.
    The IBEW-AEP proposal works in concert and is complementary 
with granting free domestic allowances to industries impacted 
by competitiveness, and we believe both approaches should be 
supported by the Committee, but only the IBEW-AEP proposal 
provides direct leverage to shape the behavior of the largest 
emitting developing counties, and the IBEW-AEP proposal is the 
one backstop that will remain. No matter what the outcome of 
international negotiations might be with regard to fast-
developing countries and regardless of whether free allowances 
are phased out or auction revenues are used for other big-
ticket budget priorities, the IBEW-AEP proposal will remain. 
For those reasons, industry needs both, America needs both. The 
IBEW-AEP proposal creates the possibility that the United 
States Government could require importers of carbon-intensive 
goods to submit international reserve allowances just as 
producers of U.S. goods must, unless the exporting country acts 
to address emissions in a fashion that is comparable to that of 
the United States.
    If the IBEW-AEP proposal is successful, then the allowance 
requirement would likely never need to be applied to imported 
goods. Instead, fast-developing countries would agree to take 
effective action to also reduce their emissions.
    This proposal recognizes that some governments might not 
act or might act ineffectively. The IBEW-AEP proposal affords 
Congress the assurance that at least the exports of carbon-
intensive goods from such countries would not escape the 
regulatory impact of the overall federal program. That is only 
fair. The United States has taken similar action on imports in 
the context of other conservation and environmental programs. 
Those measures were reviewed by GATT and WTO panels. The IBEW-
AEP proposal respects the jurisprudence that has emerged to 
ensure that Congress could deploy these measures in conformity 
with our international obligations.
    Mr. Chairman, AEP believes that our proposal will be 
helpful to you and your colleagues to ensure developing 
countries actually join with America in meeting the climate 
challenge. Thank you again for this important opportunity to 
testify. I look forward to your questions.
    [The prepared statement of Mr. McBroom follows:]

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    Mr. Markey. Thank you very much, Mr. McBroom. Our next 
witness is Mr. Paul Cicio. He is the President of Industrial 
Energy Consumers of America. He has represented the interests 
of a variety of industries and consumers, the National Coal 
Council, the National Association of Manufacturers and others. 
We welcome you, Mr. Cicio. Whenever you are ready, will you 
please begin.

                    STATEMENT OF PAUL CICIO

    Mr. Cicio. Thank you, Chairman Markey and Ranking Member 
Upton and members of the committee. Attached to our written 
testimony are six policy recommendations that would have a 
significant impact on reducing greenhouse gas emissions, and we 
urge you to work with us to do these things today. There is no 
reason to wait on those policies, and they will help 
manufacturing competitiveness.
    For the industrial sector, climate policy is also a trade 
policy, it is energy policy, economic, and it is also 
employment policy. They are all linked, and they are all 
inseparable. It is for this reason that regulating greenhouse 
gas emissions for the industrial sector should be negotiated 
between developed and developing countries in the context of 
fair trade and productivity and not act unilaterally. 
International agreements should be negotiated first, and U.S. 
industrial emissions regulated second. Regulating the 
industrial sector in advance of negotiations removes our 
leverage.
    President Obama rightfully points to the disappearing 
middle class as troubling. We agree. The United States began to 
lose the middle class when we began to lose competitiveness of 
the manufacturing sector. The timing is absolutely consistent. 
Let us just look at the facts. OK. Chart number one.
    [Chart.]
    Chart number one. Since 2000, U.S. manufacturing has been 
losing competitiveness and jobs. From 2000 to 2008, imports are 
up 29 percent, and manufacturing employment fell by 22 percent, 
a loss of 3.8 million jobs. What is not included is the 
hundreds of thousands of jobs that have been lost this year. 
Chart number two.
    [Chart.]
    Chart number two simply extends the trend of job losses 
forward to 2012, and unless Congress and we, the industrial 
sector, work together to stem these losses, a simple extension 
of those job losses says that we are on track to lose another 2 
million jobs by 2012. Chart number three.
    [Chart.]
    Chart number three plots investment in industrial equipment 
in the United States as a share of GDP from 1990 to 2008. This 
slide illustrates companies have consistently invested less and 
less in this country. The only conclusion one can draw from 
this chart is that the United States has not been an attractive 
place to invest, and to the point of this hearing, placing new 
carbon costs unilaterally on us will only make things worse. 
Chart number four.
    [Chart.]
    Chart number four shows emissions of each sector of the 
economy. The industrial emissions are only 2.6 percent above 
1990 levels, while the other four sectors of the economy are up 
an average of 31 percent. Industrial emissions are low because 
of plant shut-downs, job losses, and because of the continuous 
improvement to improve energy efficiency.
    As you can see, industrial emissions are not a problem. 
Most importantly, Congress has a choice to make as it considers 
imposing an economy-wide cap-and-trade regulation. It must 
decide whether to maintain and possibly increase U.S. 
manufacturing jobs by not unilaterally imposing greenhouse gas 
costs, or you can do so but it will create jobs in foreign 
countries and increased imports. The decision actually in our 
view should not be too hard because there is very sound 
economic and environmental justification for Congress to act in 
the short term to not do so. But we do urge you to act to forge 
an important and different policy path that will provide 
sustained and significant greenhouse gas reductions globally by 
harnessing real market forces and competition. We need U.S. 
leadership to forge a global effort to address industrial-
sector greenhouse gas emissions that is focused on fair trade 
and productivity. This is the only way to potentially bring 
developing countries to the table. Productivity is a language 
that all manufacturers around the world understand and is 
fundamental to competition. We believe that all governments 
want productivity by their industrial sectors, so this is a 
win-win.
    In summary, the industrial sector needs a level playing 
field. Adding costs unilaterally helps all of our competitors 
around the world and takes our business and our jobs. However, 
if the United States proceeds to cap industrial greenhouse gas 
emissions anyway, despite our plea, we urge you to provide free 
allowances equal to the resulting direct and indirect cost due 
to greenhouse gas regulations until major competing countries 
have similar cost increases. The decision is yours to make. 
Unfortunately or fortunately, company CEOs have 
responsibilities to their shareholders to protect company 
interests, and they will. Thank you.
    [The prepared statement of Mr. Cicio follows:]

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    Mr. Markey. Thank you, Mr. Cicio. We appreciate that very 
much. I can actually see out in the audience we have been 
joined by former great Republican Congressman Sherwood 
Boehlert, and we thank you for coming here and we wish nothing 
but the worst for the New York Yankees this year, at least from 
this seat. But we welcome you. Thank you for being here.
    Our next witness is Dr. Margo Thorning, Senior Vice 
President and Chief Economist with the American Council for 
Capital Formation which promotes cost-effective environmental 
policies in the United States and abroad. You can move that 
microphone in. Whenever you are ready, please begin.

                  STATEMENT OF MARGO THORNING

    Ms. Thorning. Thank you, Mr. Chairman and Ranking Member 
Upton, thank you, members of the Committee, for allowing me to 
appear before me. I am Margo Thorning, Chief Economist, Senior 
Vice President with the American Council for Capital Formation, 
and I respectfully request my testimony be submitted for the 
record.
    Mr. Markey. Without objection it will be.
    Ms. Thorning. I would like to make four points. First, 
policies to reduce greenhouse gas emissions such as were 
debated last year in Congress with the Lieberman-Warner 
proposal or the new Obama Administration proposal are virtually 
certain to reduce jobs and to increase unemployment. May I draw 
your attention to Table 1 of my testimony which presents a 
survey of different modeling results on the Lieberman-Warner 
bill from the ACCF-NAM study, Charles River, the Energy 
Information Administration, the Environmental Protection 
Agency, and MIT. There is a range of estimates for the impact 
of the loss of jobs and GDP which, in 2020, which, the lowest 
is .7 percent of GDP, the highest from EPA is 1.5 percent loss 
in GDP. Job losses in 2020 range from 270,000 fewer jobs to as 
many as 3.2 million fewer jobs. And these modeling results do 
take account of new, green jobs that are thought about as we 
move more into renewables and alternative technologies. By 
2030, the results are even more striking. So I think the 
evidence suggests that cap-and-trade proposals such as are 
being discussed now will certainly have a negative impact on 
U.S. employment and job growth and will speed leakage of jobs 
abroad.
    Second point, the Obama Administration's revenue estimates 
are seriously understated. Their new budget suggests that 
revenue yield from carbon allowance auctioning would be about 
$80 billion a year. I believe that is a serious understatement. 
We looked at the numbers that the Energy Information 
Administration released last year when they analyzed the 
revenue yield of the Lieberman-Warner bill which is not that 
different from the Obama Administration proposal in terms of 
ultimate targets.
    As you see in Figure 3 in my testimony, the blue bar is the 
estimate of $675 billion over the 2012-2019 period that the 
Obama Administration says their cap-and-trade proposal would 
bring in. EIA's estimates, we recalculated EIA's numbers on 
Lieberman-Warning assuming 100 percent auctioning. Those 
numbers, the hash mark numbers, are significantly higher, three 
to four to five times higher than the yield that the Obama 
Administration is showing.
    We then recalculated using the lower initial targets in the 
Obama plan which is the red bars in my Figure 3. Those show 
revenue cost to taxpayers and business of three to four times 
higher. So I am guessing that actually the Obama plan would 
bring in a trillion to over $3 trillion over the 2012-2019 
period. So that is a very significant cost that would have the 
impact, of course, of slowing job growth and GDP growth, and in 
fact the Administration recognizes that. If you look at their 
budget, page 129 of their budget, footnote five, it says that 
if additional revenues are raised, those will be rebated to the 
public. So it is clear that they know 100 percent auctioning 
proposal that they have would yield much more revenue.
    Third point, the environmental benefits of achieving the 
Obama plan or the Lieberman-Warner plan are very small, and if 
you talk about cost-benefit analysis, I think a look at the 
table that the Administration released in their Council of 
Economic Advisors' report, which is Figure 5 of my testimony, 
the Administration says that if we achieve the Lieberman-Warner 
targets, which again are similar to the Obama Administration, 
by the end of this century, there will be virtually no 
environmental benefit. So if you look at costs and benefits, it 
is clear that going it alone is not likely to yield any 
meaningful environmental benefit, but it will impose 
significant cost.
    Final point, there are positive strategies that the United 
States can adopt to reduce greenhouse gas emissions. There are 
things we can do here. I commend you to look at Table 2 of my 
testimony which shows how slow the capital cost recovery is in 
the United States for new energy investments. Our Ernst and 
Young study which is on our ACCF Web site shows that the United 
States has the worst capital cost recovery and the highest 
effective tax rate on new energy investment of major industrial 
countries. We could also continue to promote international 
cooperation that previously administrations have started 
through the Asia-Pacific Partnership, the Global Nuclear Energy 
Partnership, Clean Technology, and the Major Economies 
Initiative. These international agreements are designed to 
promote technology transfer.
    Finally, if we do impose a mandatory regime, I would 
suggest a carbon tax rather than a cap-and-trade system. It 
would provide more certainty to the business community and 
households than the cap-and-trade. Thank you, Mr. Chairman.
    [The prepared statement of Ms. Thorning follows:]

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    Mr. Markey. Thank you Dr. Thorning very much. Our next 
witness is Dr. Richard Morgenstern. He is a Senior Fellow at 
Resources for the Future. His research includes work on 
economic analysis of environmental policies. Prior to joining 
Resources for the Future, Dr. Morgenstern was a Senior Economic 
Counselor at the Department of State and participated in the 
negotiations of the Kyoto Protocol. So we welcome you, sir, and 
whenever you are ready, please begin.

              STATEMENT OF RICHARD D. MORGENSTERN

    Mr. Morgenstern. Mr. Chairman, I appreciate the opportunity 
to appear here and address you and members of the Committee. I 
would note for the record that Resources for the Future is both 
an independent and non-partisan organization, and the views I 
present here today are mine alone.
    I would like to summarize a few basic points in my written 
testimony. First of all, the aggregate impact for proposed 
legislation are relatively small. Using the Lieberman-Warner 
bill as a benchmark, the Energy Information Administration has 
estimated GDP reductions in 2030 that range from .3 to .8 of 1 
percent of GDP, and 2030 is the time period where GDP levels 
are expected to approximately double over today's levels.
    There are other modelers besides EIA who have other 
results. Some are similar, some are different. I would note 
that the ones that differ usually, not usually, but in fact, 
the differences are related to three factors. Number one, other 
modelers have much more conservative assumptions about 
technology development than the Energy Administration. 
Secondly, other modelers ignore domestic and international 
offsets which are in fact a part of most of the bills. And 
thirdly, other modelers ignore banking of allowances which is 
in fact the basic proposition in all the bills. These are 
factors which can influence model results, and you can see 
significant differences along these lines.
    Secondly, despite the small aggregate impacts of these 
legislation on the sale of Lieberman-Warner, there are 
potentially significant employment and output effects in some 
industries, particularly energy-intensive and trade sensitive 
industries as this Committee is well aware.
    Third, modeling analysis by myself and others indicates 
that the impacts decline over time, as firms adopt new 
technologies, they change processes, they vary outputs. So some 
of the impact numbers we see are based upon initial impacts and 
do not always reflect these changes. Additionally, I would note 
that the modeling that has been done, including my own, is 
based upon unilateral action, and this is a convenient 
technique we use in doing calculations, but in fact other 
countries are adopting, certainly the Europeans are adopting 
changes, and in all likelihood, the estimates generated by this 
modeling approach of unilateral action overstates the impact on 
the United States industry.
    Fourth, a key challenge to this Committee and to all of us 
is to identify particular industry segments that are most 
affected. Calculations that I have done suggest that when you 
look at a broad industrial category, typically referred to as a 
two-digit industrial category, you can see within that category 
variation that can vary by a factor of 10. So different sub-
elements of broad categories of industries can have quite 
different impacts, and that is a challenge in devising 
appropriate remedies.
    Fifth, a missions leakage is clearly a concern in some 
industries, and this is particularly a concern over the long 
term.
    Turning to possible solutions, there are basically two 
approaches to address this problem. One approach is to exempt 
certain industries or provide special regulations for them, and 
the second approach is to try to level the playing field 
between domestic and international competition, and the 
mechanisms for that are the border tax, mechanisms that have 
been referred to, or free allowance allocation. As regards to 
exemptions, this was tried in the BTU tax days that were back 
in the days when President Clinton introduced this notion, and 
other than simplicity, I would say this approach has very 
little to recommend it. It ignores some low-cost reduction 
opportunities that exist in some industries. It makes 
CO2 reductions more expensive for others, and it 
encourages what we call rent-seeking behavior which is not 
justified by the fact.
    Turning to the border tax and free allocation mechanisms, 
they are both contained as you have discussed in several bills. 
The emphasis to put on one versus another depends on several 
factors. Trade law is certainly a big issue. I am not a trade 
lawyer, but I do read the literature on this subject and 
certainly many have raised questions about the defensibility 
and the timing of border tax adjustments. And I would note that 
none of the bills addresses exports which is in fact an 
important consideration in international trade. Additionally, a 
border tax adjustment is going to require more information on 
the part of Government about foreign companies and foreign 
countries, and this can be very difficult to obtain, and as has 
been noted by earlier commentator, this could lead to trade 
wars.
    Almost done, Mr. Chairman. Free allowance allocation is 
certainly a very attractive mechanism, particularly the output-
based allocation that has been discussed here. It can address 
both import and export issues. The Inslee-Doyle approach is a 
very pragmatic mechanism for addressing this. I understand that 
some revisions are under consideration, and I would be happy to 
answer questions on that. Thank you.
    [The prepared statement of Mr. Morgenstern follows:]


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    Mr. Markey. Thank you Mr. Morgenstern very much. Our final 
witness is Eileen Claussen. She is the President of the Pew 
Center on Global Climate Change where she specializes in 
international issues. She is the former Assistant Secretary of 
State for Oceans and International Environmental and Scientific 
Affairs. Whenever you are ready, please begin.

                  STATEMENT OF EILEEN CLAUSSEN

    Ms. Claussen. Mr. Chairman, Mr. Upton, and members of the 
Subcommittee, thank you for the opportunity to testify.
    Addressing global climate change presents policy challenges 
at both the domestic and the international levels, and the 
issue of competitiveness underscores the very close nexus 
between the two. In the long term, a strong multilateral 
framework ensuring that all major economies contribute their 
fair share to the global climate effort is the most effective 
means of addressing competitiveness concerns. In designing a 
domestic climate program, the question before Congress is what 
to do in the interim, until an effective global agreement is in 
place.
    A first step in addressing competitiveness is assessing the 
potential scope and magnitude of potential impacts. Our focus 
must be on energy-intensive industries whose goods are traded 
globally such as steel, aluminum, cement, paper, glass, and 
chemicals. As heavy users of energy, these industries will face 
higher costs as a result of domestic greenhouse gas 
constraints. However, as the price of their goods are set 
globally, their ability to pass along these price increases is 
limited.
    To empirically quantify the potential magnitude of this 
competitiveness impact, the Pew Center commissioned an analysis 
by economists at Resources for the Future. This work, which we 
will be publishing shortly, analyzes 20 years of data in order 
to discern the historical relationship between electricity 
prices and production, consumption, and employment in more than 
400 U.S. manufacturing industries. Our analysis found that at 
the price levels studied, the projected competitiveness 
impacts, as well as the broader economic effects on energy-
intensive industries, would be modest but not insignificant, 
and in our view, readily managed with a range of policy 
instruments.
    In a domestic cap-and-trade system, competitiveness 
concerns can be addressed in part through banking and borrowing 
and the use of offsets, which can help reduce the costs to all 
firms. However, other transitional policies may be needed to 
directly address competitiveness concerns for energy-intensive 
industries for the period preceding the establishment of an 
effective international framework.
    Allow me to mention a couple of options we would not 
recommend and then a few that we would. One option is to 
exclude vulnerable sectors from coverage under the cap-and 
trade program. Exclusions however would undermine the goal of 
reducing greenhouse gas emissions economy-wide and reduce the 
economic efficiency of a national greenhouse gas reduction 
program. They also would give exempted industries an economic 
advantage over nonexempt competitors and provide no incentive 
for improved performance.
    A second option is to try to equalize greenhouse gas-
related costs for United States and foreign producers by impost 
or other requirement on energy-intensive imports from countries 
with weaker or no greenhouse gas constraints. Such measures 
would apply however only to imports to the United States and 
would not help level the playing field in the larger global 
market, which is where U.S. manufacturers compete. In addition, 
if the United States were to impose border requirements there 
is a greater likelihood that it would become the target of 
similar measures. There is a significant risk that border 
adjustments would engender more conflict than cooperation, in 
the end making it more difficult to reach agreements that could 
more effectively address competitiveness concerns globally.
    The Pew Center believes that Congress should seek to 
address competitiveness concerns by strongly encouraging the 
executive branch to negotiate a new multilateral climate 
agreement establishing strong, equitable, and verifiable 
commitments by all major economies and including in cap-and-
trade legislation transitional measures to cushion the impact 
of mandatory greenhouse gas limits on energy-intensive trade-
exposed industries and the workers and communities they 
support. These transitional measures should be structured as 
follows: In the initial phase of a cap-and-trade program, 
allowances should be granted to vulnerable industries to 
compensate them for the costs of greenhouse gas regulation. For 
direct costs, allocations should be based on actual production 
levels. For indirect costs, allowances should reflect an 
emitter's production-based energy consumption, taking into 
account the greenhouse gas intensity of its energy supplies.
    Allocations should be set initially so a producer whose 
emissions intensity is average for the sector is fully 
compensated for regulatory costs, while those who are above or 
below-average receive allowances whose value is greater or less 
than their costs, respectively. This factor should be adjusted 
over time as an incentive to producers to continually improve 
their performance. This is similar to the approach proposed by 
Congressmen Inslee and Doyle.
    Allowance levels should decline over time, gradually 
transitioning to full auctioning, although at a slower rate 
than for other sectors. A review should be conducted 
periodically to assess whether sectors are experiencing 
competitiveness impacts and, if warranted, to adjust allowance 
levels or the rate of transitioning to full auctioning. A 
portion of allowance auction revenue should be earmarked for 
programs to assist workers and communities in cases where 
greenhouse gas constraints are demonstrated to have caused 
dislocation. Transition assistance should be curtailed for a 
given sector upon entry into force of a multilateral or 
sectoral agreement establishing reasonable obligations for 
foreign producers, or upon a Presidential determination that 
such measures have been instituted domestically.
    We believe this approach addresses the transitional 
competitiveness concerns likely to arise under a mandatory cap-
and-trade program, while maintaining the environmental 
integrity of the program and providing an ongoing incentive for 
producers to improve their greenhouse gas performance.
    Thank you very much.
    [The prepared statement of Ms. Claussen follows:]

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    Mr. Markey. Thank you, Ms. Claussen, very much, and that 
concludes our opening statements from the witnesses. We will 
now turn to questions from the Subcommittee members, and the 
chair will recognize himself for a round of questions, and I am 
going to start with you, Mr. McMackin and you, Mr. McBroom. Is 
there a way in which we can reconcile, you know, the two 
approaches which you present, that is, the free allocation 
approach which Mr. Doyle and Mr. Inslee are proposing or, you 
know, some border protection measures, which are taken as well. 
Is there a way to do them in concert, sequentially? What would 
be your recommendation if they could be put together as 
complimentary policies?
    Mr. McMackin. Mr. Chairman, our working group doesn't have 
a formal position on the border equalization provision, so I 
guess that means we don't have a formal position on the 
interface of the two, but let me say this sort of for myself at 
least that I think it is reasonable to say that most people who 
would support doing both would say that there is a role for 
border equalization at least as a backup measure and as one of 
the weapons of armamentarium of our negotiators. For instance, 
kind of as a necessity, the allowance grants takes priority 
because if we eliminate the cost differential at the source, 
there is no cost differential to be equaled at the border. But 
what if the allowances are inadequate? What if some future 
Congress decides to eliminate allowance grants? Well, then some 
believe that rather than let leakage proceed which is 
unacceptable that at that point consideration of a WTO 
compliant border equalization process or at least negotiations 
that involve those might be good policy.
    Mr. Markey. Mr. McBroom.
    Mr. McBroom. Well, I want to begin by associating myself 
with the remarks of Mr. McMackin. I think we are in complete 
agreement. Both should be utilized, both can be utilized. They 
serve complimentary purposes but somewhat different purposes. 
Some have noted the issue that the IBEW-AEP would not deal with 
exports. A grant of free allowances would, in fact, accomplish 
that because you are providing the direct grant of allowances 
or subsidy to industries that are impacted by competitiveness, 
and that helps solve both of those issues at the same time.
    Mr. Markey. So let me go down to you, Ms. Claussen. Do you 
agree with that? Can they be made complimentary as policies?
    Ms. Claussen. You could, but I would like to take issue a 
little bit with what Mr. McMackin said that having all of these 
things in your quiver as you go and do an international 
negotiation, I think actually the border measures would have 
the opposite effect and make it very difficult to negotiate an 
international agreement. So I think if you were going to 
include them, they should absolutely be a last resort.
    Mr. Markey. OK. Let me go back to Mr. McBroom. You heard 
what Ms. Claussen just said.
    Mr. McBroom. No, not entirely. I would make two points both 
referencing both her comment and other comments that have been 
made by many members. Recently as Mr. Whitfield acknowledged, 
Chinese officials came to the United States and they protested 
very loudly on two points. One is that they don't want a border 
adjustment mechanism. In that I would say they protest too 
much. The fact that they are protesting as vigorously as they 
are would indicate that it is in fact effective leverage 
because at the same time they are saying that they don't want 
to be held accountable for any of the emissions from any 
products that they make that export to the United States, so 
they want the jobs, they want the factories, they want the 
economic growth.
    Mr. Markey. So let us come back to Ms. Claussen. What is 
your answer, Ms. Claussen?
    Ms. Claussen. Yes, actually, it was The Pew Center event at 
which the Chinese Director General spoke.
    Mr. Markey. Congratulations on having such an interesting 
event.
    Ms. Claussen. And I actually think it was misreported. I 
mean, they did raise the issue of their goods, but you know, 
this has been common in international negotiations. I mean, the 
Canadians raise it all the time. So they weren't actually 
making it as a proposal, they were just sort of making a point. 
Unfortunately, I think the AP story was slightly off.
    Mr. Markey. And Mr. Cicio, Ms. Claussen, suggests that we 
should wait to cap greenhouse gas emissions until we have a 
global agreement. What do you think of that approach?
    Ms. Claussen. I do not think we can get a global agreement 
unless we act first.
    Mr. Markey. Mr. Morgenstern, do you agree with that?
    Mr. Morgenstern. Yes.
    Mr. Markey. Mr. McMackin, do you agree with that?
    Mr. McMackin. Mr. Chairman, I think that we will be aided 
in getting a global agreement if we do an Inslee-Doyle type 
measure for this simple reason.
    Mr. Markey. So you agree that it would be good if we pass 
something first before we begin to negotiate?
    Mr. McMackin. Our group is solely limited to working 
constructively on that.
    Mr. Markey. That is great. Thank you. Mr. McBroom.
    Mr. McBroom. The most likely scenario is that Congress will 
pass something first, but I think it will be too difficult in a 
very short period of time to negotiate an international 
agreement that will include mandatory binding commitments on 
the large emitters in the developing world. The negotiation 
will simply take too long, so as a practical matter in terms of 
chronology, you are most likely to see domestic legislation to 
move first.
    Mr. Markey. Thank you, Mr. McBroom. My time has expired. 
The Chair recognizes the gentleman from Michigan, Mr. Upton.
    Mr. Upton. Well, thank you, Mr. Chairman. I want to make a 
couple points. First I want to talk a little bit about coal. 
Mr. McBroom, I am glad that you are here. Although you didn't 
say this specifically, it was in your testimony. I just want to 
reiterate it. China's coal use as a percentage of world 
consumption increased from about 20 percent in 1985, and it 
will almost double by the year 2025. We know that China is 
bringing on line almost two new plants every single week. In 
fact, in 2006, China brought into service 90,000 megawatts of 
new coal-fired generating capacity which amounts to two large 
coal-generating units every week as I said, and we also know 
that emissions have increased by 80 percent since 1990 and they 
are projected to rise by another 65 percent by 2020. Now, it is 
my understanding that they have made some strides, and I think 
they are using the low-sulfur coal, but obviously they are not 
using the new technique that we would like to see happen, 
carbon capture. And because we haven't developed the carbon 
capture technique fully yet in this country, I don't think we 
brought a single new coal plant on line in the United States at 
all last year.
    So what is happening is that they are imitating what we 
have done on coal. They have another, in all likelihood, about 
50 or 60 years probably of generating capacity with current 
technology that we have, and obviously that is one of the big 
reasons why they have become the number one emitter in the 
world. Now, this statement that is in today's Wall Street 
Journal that has been referenced a couple times by my 
colleagues dating back to the conference earlier in the week. 
This is from Secretary Chu who says, ``If other countries don't 
impose a cost on carbon, then we will be at a disadvantage and 
we would look at considering perhaps duties that would offset 
that cost.'' Li Gao, a senior Chinese negotiator from the 
National Development and Reform Commission told Dow Jones news 
wires Monday that a carbon tax would be a ``disaster,'' would 
prompt a trade war and wouldn't be legal under the WTO. And 
then he says this, ``It does not abide by the rule of the WTO, 
and secondly it is not fair,'' adding that his delegation would 
relate China's concerns to U.S. officials.
    Now, as we look at manufacturing in this country and the 
charts in terms of the loss of jobs, we see what China is doing 
without real clean-coal technology and we see what I think will 
be a real migration of jobs, and as much as we would like to 
say, well, we can use the WTO to make sure that they have to 
purchase offsets, we had heard last year from Susan Schwab that 
in fact that would provide real difficulty and we see what the 
Chinese are saying. And furthermore, we had testimony last 
year, and India and China, neither one of them, thought that 
they would really want to participate.
    So to me it sounds a little bit like pie in the sky. I 
don't know how we achieve what we would all perhaps like to see 
happen, and we just see a further migration of the jobs. Mr. 
McMackin is a board member on OI. I don't know how much 
production is in this country. I know that OI has international 
facilities all around the world. I mean, you are in the State 
of Ohio. Eighty-six percent of your electricity comes from 
coal. So if you impose these burdens, and I don't know Ohio all 
that well, but I don't know if you have production in Ohio. Do 
you?
    Mr. McMackin. We have some production in Ohio, yes.
    Mr. Upton. Well, how much of a base in Ohio do you have in 
terms of total production that you have got? Twenty percent? 
Fifty percent?
    Mr. McMackin. No, about a third of our worldwide production 
is in the United States. Our major states of production are 
Pennsylvania and California.
    Mr. Upton. And what will happen if we have something like 
this that will have a cap-and-trade and increase those costs, 
knowing in fact that--you know, as we look at China, I think 
they are about currently, if we send all those jobs there, they 
don't export all that much here but it will be a higher burden 
for us.
    Mr. McMackin. Mr. Upton, I am from the little town of 
Brockway, Pennsylvania, which has two of these glass plants, 
and my main motivation is to get those people a fair level 
playing field to compete against foreign location suppliers. So 
I do agree. Unless we do something, something that mitigates 
the cost that would be imposed on energy-intensive, trade-
exposed industries like glass, that employment will suffer and 
jobs around the country, including in Brockway, Pennsylvania, 
will be at risk.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from Pennsylvania, Mr. Doyle.
    Mr. Doyle. Thank you, Mr. Chairman. You know, I would just 
say to my colleagues, I think we all accept the fact that if we 
implement a cap-and-trade system and both put in some 
provisions in the bill to deal with issues of leakage or issues 
with coal-fired utility plants, of course it is going to end up 
being a very expensive proposition, and jobs are going to be 
lost and it is not going to be a good way to go and we aren't 
going to pass a bill because I don't think many members will 
vote for a bill like that.
    What we are trying to do and what we are trying to learn 
more about today is how we can put provisions in the bill that 
deal with some of these issues so we don't have some of the 
things that we are afraid may happen if we do nothing. So it is 
the whole part of this hearing. Mr. Chairman, I appreciate it 
and I look forward to continuing to work with you on this bill.
    Mr. McBroom, thank you for your testimony today. I was glad 
to hear you say and to see that there is a widespread agreement 
on the panel that the border tax and the proposal that Jay and 
I have been working on, you know, don't compete with one 
another or are not mutually exclusive of one another. Both can 
be done, and one does not, you know, negate the effects of the 
other. And I agree. I think we need as many weapons in the 
arsenal, so to speak, as we can. So I was happy to hear your 
testimony today.
    Ms. Claussen, Mr. McMackin shared a report with us that is 
offering some suggestions as the best way to answer the 
eligibility question, you know, what industry should or 
shouldn't be covered by this policy. What do you think about 
the energy-intensive trade exposures benchmarks that his report 
suggests? Have you had a chance to see it?
    Ms. Claussen. No, I am sorry, I haven't had a chance to 
look at it. We will look at it. I would be happy to get back to 
you on what we think of it.
    Mr. Doyle. Thank you. And Mr. McMackin, we appreciate you 
saying that our proposal is a breakthrough, but we know we 
still have some more work to do and probably this whole issue 
of eligibility of, you know, looking at these industries and 
these industries subsect. There is still a lot more work to be 
done, and we need some more data. But I look forward to seeing 
the report that you have on the subject. I haven't had a chance 
to read it yet, either, but we are looking forward to do that.
    I wonder for the benefit of our colleagues here on the 
Committee if you could just take a moment and express to our 
colleagues here the process as you view it that helps lead us 
to this latest version of the proposal.
    Mr. McMackin. Mr. Doyle, I have been doing policy work in 
Washington for about 30 years, and the process on crafting to 
this point the energy-intensive foreign trade exposed relief 
provision has been as constructive as I have been engaged in. 
It has been transparent. It has been open and inclusive. We had 
the advantage of course that the leakage problem is every bit 
as much an environmental problem as it is an economic problem. 
So all stakeholders had a real incentive to solve it, and we 
have made very good progress because everyone has been able to 
engage in a constructive dialogue.
    Mr. Doyle. Thank you. Mr. Morgenstern, I think your 
testimony also made a strong case for why, you know, certain 
industries face unique challenges with leakage and loss of 
competitiveness, and you talked a little bit about the free 
allowance allocation as part of the solution to the problem. I 
just want to give you an opportunity if you wish to expand on 
what you see as the strengths or weaknesses of our approach and 
how it could be improved.
    Mr. Morgenstern. Well, I think the idea that you have 
identified energy intensity and trade sensitivity as the key 
issues is absolutely right, and I commend that completely. I 
think in any of these approaches there are details that need to 
get sorted through, and there are major data issues as you and 
others have referred to that kind of limit the ability to have 
a very precise answer as we sit here. And presumably, some 
additional information will be forthcoming in, for example, the 
EPA Registry which is forthcoming.
    I think the idea that Congress would ultimately give very 
precise guidance to the agencies is really important and not 
leave this open to a great deal of discretion because I think 
that can cause problems down the road.
    Mr. Doyle. Thank you. Mr. Chairman, thank you very much. I 
yield back my time.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from Texas, Mr. Barton.
    Mr. Barton. Thank you, Mr. Chairman. I want to acknowledge 
in the audience we have a former colleague and chairman of the 
Science Committee, Congressman Sherwood Boehlert of New York, a 
nemesis of this Committee when he was on the Science Committee, 
but a good friend and an avid baseball player, baseball fan.
    Mr. Chairman, I have two articles from today's papers I 
would like to put in the record, a Washington Times article, 
Obama Climate Plan Could Cost $2 Trillion and the Washington 
Post article, Trade Barriers Could Threaten Global Economy.
    Mr. Markey. It sounds like two things we want in the 
record, so without objection we will include them.
    [The information follows:]
    Mr. Barton. Well, it is two things that need to be in the 
record, and I appreciate you and the members of the Committee 
allowing them to be in the record.
    Mr. McMackin, you talked about an efficiency standard in 
your testimony. Would you and your group support such a 
standard absent a mandatory cap-and-trade program?
    Mr. McMackin. Mr. Barton, I think that most of the members 
of the group would be very reluctant to. Efficiency standards 
are more in the nature of the command and control type 
regulation than the more market-oriented cap-and-trade, and we 
think that Mr. Inslee and Doyle have found a way to make it 
work within the context of an allowance grant of cap-and-trade, 
but that is a very different consideration in its absence.
    Mr. Barton. Mr. Cicio, you point out in your testimony that 
industrial emissions in the United States have only gone up 
about 2\1/2\ or 2.6 percent while residential, commercial and 
transportation emissions have gone up between 27 and 29 
percent. In your opinion, is it possible to cap-and-trade those 
parts of the economy that continue to go up more rapidly than 
the economy itself?
    Mr. Cicio. The question is, can we cap the other sectors?
    Mr. Barton. Yes, sir.
    Mr. Cicio. Just those sectors?
    Mr. Barton. Yes, sir. I mean, it seems kind of silly to cap 
industrial emissions when they are going up less than the rate 
of growth of the economy but commercial, residential and 
transportation are going up 10 times as rapidly. If you really 
want to cap it, that is where you have to do it but I don't 
think you can do it.
    Mr. Cicio. No, capping all of those sectors wouldn't make 
sense. In our view that there are many, many cost-effective 
ways to improve the efficiency and reduce the greenhouse gas 
emissions of those sectors without cap-and-trade. And the thing 
that we have to as a country continue to look toward in this 
important debate is cost effectiveness, and an economy-wide 
cap-and-trade approach is not necessarily in our view not cost 
effective. There are better ways.
    Mr. Barton. OK. Ms. Claussen, first let me say I enjoyed 
our dialogue at the Congressional Quarterly breakfast. You are 
actually a very pleasant person when you are not testifying, 
disagreeing with me on whatever the subject happens to be. My 
question for you, because we talked about it at the CQ 
breakfast, would the groups that you represent support meeting 
our electrical generation targets with natural gas plants, even 
though natural gas, when you consume it or burn it, it does 
create CO2. It just creates less CO2 than 
coal plants?
    Ms. Claussen. Well, I enjoyed our breakfast, too, and you 
are a very nice person when you are not asking me hard 
questions.
    Mr. Barton. That is my easy question.
    Ms. Claussen. First of all, I should clarify that I don't 
represent anybody other than The Pew Center. We work with lots 
of companies ourselves, we work within U.S. CAP so we work with 
lots of companies.
    Mr. Barton. Well, would they accept natural gas as an 
element of our----
    Ms. Claussen. I think most would agree that natural gas 
could be a transition because of course burning natural gas 
does result in greenhouse gas emissions but far less than coal. 
On the other hand, we are very sensitive to what we could call 
a dash-for-gas because we really think coal is going to be part 
of our future.
    Mr. Barton. We put you down as undecided on that? Anytime 
somebody answers a question on the other hand----
    Ms. Claussen. On the other hand----
    Mr. Barton. I have got one more question I want to----
    Ms. Claussen. I just want to say there is no single 
solution here. You need all of it. We have to do carbon capture 
and sequestration. In my opinion we have to do nuclear, we have 
to use gas, we have to do efficiency, meet everything.
    Mr. Barton. I will take that as a yes. Dr. Thorning--can I 
ask one----
    Mr. Markey. Please, yes, please.
    Mr. Barton. I tried to get it in before it went to zero, 
Mr. Chairman. I was starting to ask the question.
    Mr. Markey. You were wasting a lot of time being gracious 
to each other, OK? Just stick to the subject.
    Mr. Barton. I have learned that from you, though. It is a 
good trick. Dr. Thorning, you go into some of the economic 
consequences of reducing our CO2 emissions below the 
1990 baseline and other baselines. The Obama budget would 
reduce by the year 2020 emissions 14 percent below the 2005 
baseline and 83 percent by the year 2050. I am told if we adopt 
the Obama budget and actually meet those targets, by 2050 we 
will have an absolute emissions level in this country last seen 
in 1910 and a per capita emissions level last seen in this 
country in 1875. 1875. Do you think the American people would 
support those types of lifestyle changes to get those draconian 
reductions?
    Ms. Thorning. I think the American public would be 
reluctant to make the drastic changes in lifestyles that would 
be necessary under any of the major plans. In my testimony I 
have a couple of charts, one of which shows the per capita 
emission reductions that would be required by 2020 and 2030 to 
comply with the Obama plan. Cutting emissions from an average 
of 23 tons per person right now down to approximately 18 by 
2020 and down to perhaps 12 by 2030 would require the kind of 
changes that the American public simply would not go along 
with. So I think we need to be very cautious as we approach 
this issue because if you can't sell it politically, it is just 
not going to happen.
    Mr. Barton. Thank you, Mr. Chairman.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from Texas, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman, and I appreciate the 
time and the hearing. Let me first say before I get into my 
questions, I am concerned, Ms. Claussen, about the dash-for-gas 
also but that is also because I have a chemical industry that 
provides a lot of jobs that is really in tough shape right now. 
But just for the panel, last year is probably the first year we 
actually increased our production of domestically produced 
natural gas. There has been some great discoveries in the Gulf 
of Mexico, obviously in the shales and in other parts of the 
United States. So there is a way that we can produce that and 
literally cut our emissions much down. And I understand the 
transitional phase and that is true, but the transition may 
last a few years until our economy can absorb it.
    The other issue I think that if we do not have something 
like that Inslee-Doyle amendment that is enforceable, I don't 
think we will see cap-and-trade. I can't vote for it because I 
can't see a fake to the blue-collar workers of our country that 
we are really going to control not exporting your jobs. Again, 
coming from a blue-collar area that is refinery and chemical 
jobs, those products could easily be made in India or China. In 
fact, I had this discussion with a diplomat from India, and I 
said, you can't expect me to want to send my jobs to you while 
we are concerned about climate change. Whether it goes up in 
India or China or in Texas, it still creates carbon in our 
atmosphere. And so that is why that amendment and as strong as 
possible--I think our country can provide leadership in climate 
change and still say this is the way we want to do it. And we 
haven't had that leadership for a number of years, and I would 
like to see the leadership but also want to make sure it also 
goes in the right direction.
    Mr. McMackin, in your testimony you state that ``a true 
cost negating anti-leakage provision would address indirect or 
other direct costs and that the Inslee-Doyle approach would not 
compensate for cost increases on feedstocks or other inputs, 
nor would it compensate for the demand and demand-curve cost 
increases in natural gas.'' Unlike you, I believe in all the 
higher costs contribute to the costs of competitiveness. Should 
the compensation program take these and other indirect cost 
impacts into account?
    Mr. McMackin. Congressman, it is true that the Inslee-Doyle 
provision would leave a significant gap in making up for these 
regulation-caused cost increases, and that does raise the risk 
of leakage. And that is one of the reasons we are looking 
forward to continue to working with Congressman Doyle and 
Inslee and others on the provision to try and make sure we get 
that balance right.
    Mr. Green. Do you have an idea what we would need to cover 
those full and direct costs?
    Mr. McMackin. It is very difficult to know because the one 
you mentioned that is the most troublesome, the most difficult 
to measure, is that part of the increase in natural gas which 
is not just a function of the allowances that need to be 
submitted for its combustion but that part of the increase that 
increases because demand for it will go up and the demand curve 
will shift precisely because it is carbon advantage. It would 
be very difficult to know how to measure that.
    Mr. Green. Anyone else like to touch on that one before I 
go to another?
    Mr. Cicio. Yes, sir. I would. Natural gas, increased 
natural gas demand and the resulting increase in the price of 
natural gas is only part of the increased cost. The fact is 
that across the country, natural gas-powered generation sets 
the march on the price for electricity. So as the price of 
natural gas goes up, because of climate policy, that will help 
drive up the price of natural gas also. So actually, there is 
two impacts that are not accounted for in the Inslee-Doyle 
approach.
    Mr. Green. Thank you. Mr. Morgenstern, in your testimony 
you state that the hardest-hit industry is by carbon pricing 
for chemicals, plastic, primary metals, non-metallic minerals, 
and that over the long term you estimate that the leakage rate 
for the few most vulnerable industries could be as high as 40 
percent in the case of the unilateral $10 per ton of 
CO2 price, at $10 you estimate a 40 percent leakage 
rate. The Obama Administration estimates that carbon permits 
will sell for $20 on the average for their cap-and-trade 
proposal. How much would you estimate the leakage change under 
$20 per ton for the average carbon cost?
    Mr. Morgenstern. Congressman, we have actually not done 
that calculation. It might be somewhat higher, but it is 
certainly not double. I am pretty sure of that. We are in the 
process of doing that analysis right now.
    Mr. Green. OK. I appreciate any follow-up that you could 
provide to the Committee. In your testimony you state that 
unilateral policy that establishes a price on carbon dioxide 
emissions, a readily identifiable set of industries is at a 
greater risk of contraction over both the short and long term 
and that the hardest hit industry, petroleum refining, would 
likely be able to pass along most cost increases, thereby 
muting the impact. On what statistics do you base your 
assertion that the refiners can pass through all their costs?
    Mr. Morgenstern. Well, Congressman, the principal statistic 
is the percentage of product which is imported, and as opposed 
to certain other industries which have a much higher percentage 
of their product imported, petroleum refining has a relatively 
small number. I don't have the actual number at my fingertips.
    Mr. Green. I would estimate, I think I heard numbers, that 
60 percent of our oil is imported. So does that seem right?
    Mr. Morgenstern. Well, Congressman, I think you have to 
distinguish between imported crude oil and finished product, 
and imported crude oil would be subject to the same charge as 
domestically produced crude oil. So there is not going to be 
any change in incentives on that side. It is strictly on the 
slightly additional cost of refining because refining, as you 
well know, is an energy-intensive activity. There would be some 
additional costs associated with that, and they would not be 
completely able to pass them along but given the relatively 
small percentage of the product that is imported, they would be 
relatively protected.
    Mr. Green. A study by the NERA Economic Consulting on the 
impacts of Lieberman-Warner on the refining sector states that 
the level of cost passed through is highly uncertain, 
particularly in later years since price increases depend upon 
the nature of increased costs, the level and nature of 
international competition and other factors. One of these 
factors is the market and the fact gasoline stations compete 
and consumers make choices based on a penny a difference per 
gallon. Given these realities and certainties, how can you be 
certain that American refiners would be able to pass through 
all their cost? Won't competition from international products 
undermine the cost for recovery to a certain extent? For 
example, higher carbon cost and U.S. relative international 
sources of refined products could likely lower the pass-through 
of carbon costs.
    Mr. Morgenstern. Congressman, you are correct. They would 
not be able to pass through 100 percent of their costs. There 
will be some burden placed on domestic refineries. Compared to 
the other industries we studied, we believe it will be 
relatively small.
    Mr. Green. Thank you, Mr. Chairman.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from Illinois, Mr. Shimkus.
    Mr. Shimkus. Thank you, Mr. Chairman. What happens to these 
coal miner jobs in a cap-and-trade regime, Ms. Claussen?
    Ms. Claussen. If we can get carbon capture and 
sequestration up and running----
    Mr. Shimkus. How long is that going to take us? What are 
the projections?
    Ms. Claussen. Well, there are lots of projections.
    Mr. Shimkus. What is the shortest time projected?
    Ms. Claussen. Probably 10 years.
    Mr. Shimkus. Ten years? Ten years. What happens to these 
jobs if we don't have carbon capture and sequestration 
immediately? You know, the difference between the Clean Air Act 
Amendment of '90 and now is that we could fuel switch or we had 
technology. Is there current technology to save these coal 
miner jobs?
    Ms. Claussen. I mean, I believe that the first thing that 
happens when you put a cap-and-trade in place is that people 
try to become more efficient because that is the cheapest way.
    Mr. Shimkus. But we have new legislation called New Source 
Review that doesn't allow coal power plants to be efficient. In 
fact, it delays the implementation of more efficient generators 
with a permitting process that takes years.
    Ms. Claussen. Please don't ask me to talk about New Source 
Review.
    Mr. Shimkus. It is a failure of our policy. Anyone else 
want to answer the question of what happens to these jobs? Mr. 
Morgenstern?
    Mr. Morgenstern. Congressman, I guess I would note that in 
several of the analyses that have been done, I believe by the 
Energy Information Administration, they find, and it does 
depend on scenario, you are correct, but they find that actual 
production, domestic production in 2020, is higher than it is 
today.
    Mr. Shimkus. Do you know what happened in the State of Ohio 
when they passed the Clean Air Amendment in 1990? We had 
testimony of that last week. Do you know how many jobs they 
lost? Thirty-five thousand. Dr. Thorning?
    Ms. Thorning. I would like to mention that in Table 1 of my 
testimony I do present various scenarios from EPA and EIA, 
including scenarios that we think are more realistic. Under 
EPA's scenario number seven, when they analyzed Lieberman-
Warner last year they assumed slow growth of nuclear generating 
capacity. They assumed carbon capture storage would not be 
available until at least 2020 or 2025, and they found that 
there would be a significant----
    Mr. Shimkus. I am really running out of time. I got three 
more major issues. So do we lose the coal mining jobs?
    Ms. Thorning. Pardon?
    Mr. Shimkus. Do we lose----
    Ms. Thorning. A significant number of coal mining jobs, and 
those are detailed in the ACCF study. Mr. Cicio? Sir?
    Mr. Cicio. Yes, absolute correlation to your point. I can 
relate to manufacturing, and that is that when energy prices 
went up in this country relative to the rest of the world, we 
lost 2 million manufacturing jobs in the period of less than 2 
years.
    Mr. Shimkus. Isn't that the intent of climate change 
legislation, to raise energy rates?
    Mr. Cicio. Yes.
    Mr. Shimkus. It is President Obama's statement. Let me 
quote from the Washington Post, April 9, higher electricity 
rates are the intent of the whole exercise. If there were no 
effects, why should you have a cap-and-trade system? Now, when 
you addressed the manufacturing jobs, your testimony talks 
about the emissions side. What is a job loss because of higher 
energy costs?
    Mr. Cicio. As I said, there is a direct correlation to the 
increased cost of natural gas and then electricity that started 
in 2000 to 2003. We lost 2 million manufacturing jobs just like 
that.
    Mr. Shimkus. I am not trying to be disrespectful, I just 
don't have a lot of time. So higher energy cost relates to job 
loss. Does everyone agree with that? Yes? Everybody is nodding 
yes? That is the intent of this Administration and this 
legislation. Let me do another quote from President Obama, 
President-elect at the time. He was a candidate. When I was 
asked earlier about the issue of coal, uh, you know, under my 
plan of a cap-and-trade system, electricity rates would 
necessarily skyrocket.
    So we can talk about the carbon dioxide. We are talking 
about leakage of jobs. I would love to engage in a debate. Let 
me ask you this question. From his inaugural address, we will 
harness the sun and wind and soil to fuel our cars and run our 
factories. Yes or no. Can we run a factory on wind and solar 
power?
    Mr. Cicio. I am afraid not.
    Mr. Shimkus. Well, are we close to it?
    Mr. Cicio. Manufacturing needs reliable energy, and they 
run often 24/7. Solar, wind----
    Mr. Shimkus. What is the percentage of electricity 
generated in this country today by renewables? Anyone know?
    Ms. Thorning. Three percent if you don't count hydro.
    Mr. Shimkus. If you don't count hydro, 3 percent? So if we 
doubled to six, that would be a dramatic gain. We will have 
massive job loss, massive job dislocation, and I challenge the 
democrats to move this bill because we will defeat them at the 
polls. I yield back.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from Washington State, Mr. Inslee.
    Mr. Inslee. Well, I just want to say I always welcome my 
good friend, Mr. Shimkus, to come in and challenge me in the 
first district in the State of Washington. I will just--as they 
say, but that is another matter.
    Dr. Thorning, I want to ask. We were comparing in any 
economic analysis two scenarios, one an action scenario based 
on a cap-and-trade bill, one an inaction scenario where we 
don't respond to climate change. In your assessment, what 
figure did you or what assumption did you make about the jobs 
that will be lost in the inaction scenario where we do not as a 
result of the significant changes to the climate in the United 
States? What assumption did you make?
    Ms. Thorning. It is an excellent question, and I would like 
to draw you back to the figure in my testimony showing the 
impact on global concentrations of CO2 at the end of 
this century. If we do adhere to the Lieberman-Warner targets, 
for example, and the rest of the world does not adopt strict 
targets.
    Mr. Inslee. Excuse me just for a minute. I only have 5 
minutes. Could you just answer the question? What assumptions 
did you make about the job losses that would be caused by 
climate change if the U.S. Congress sits on its hands and 
doesn't do something about climate change? What assumption did 
you make? How many jobs would be lost by the inaction scenario? 
Just give me a number or a percentage, please?
    Ms. Thorning. We did not specifically look at jobs lost due 
to inaction because climate change is a global problem. It 
really doesn't matter what the U.S. does because our emissions 
are an ever-shrinking share. The point is, how many jobs will 
be lost if we move down a cap-and-trade or even a tax proposal 
because each 1 percent of GDP is accompanied by a .3 percent 
increase----
    Mr. Inslee. I appreciate your answer because I think it 
exposes a Titanic flaw in your assessment of this problem. 
There are two choices America can make. It can decide not to 
act on this and have massive job losses in the agricultural 
economy, massive job losses in the sectors that depend on water 
because the snow pack is not going to be in the Cascades which 
is feeding our hydroelectric system which feeds the Boeing 
manufacturing plant with relatively inexpensive electricity, 
massive job losses in a whole host of areas. The Stern Report 
indicates there will be five times any jobs losses associated 
with action on global. Your assessment, you are coming in here 
and telling us we are going to have job loss when any 
assessment says we are going to have more job loss that has 
been done. The only assessment that I have seen in the course 
of the globe not responding to climate change. Now, I find that 
stunning that an economist would come in here and not compare 
apples to apples in this regard. Now, do I take it that the 
reason that you didn't do that is that you thought that because 
this is a global problem it just doesn't matter and the United 
States will just ignore it? That is pretty much your 
assessment, right?
    Ms. Thorning. The point of my testimony is it is a global 
problem, and even if the United States were to hit the targets 
in the Lieberman-Warner proposal, the Administration's own 
analysis shows that it won't matter.
    Mr. Inslee. Well, let me just say----
    Ms. Thorning. So we need to think about maintaining 
economic growth so that we can develop the technology to 
capture and store carbon.
    Mr. Inslee. I have hardly ever heard a more defeatist 
statement in this hearing that we are just going to let the 
world go burn, and because we can't solve it alone, we 
shouldn't do anything. That I would assert is not the American 
act of leadership. There was something that a couple other 
witnesses talked about that I am not sure I fully understood 
that may be a virtue of one of the approaches that Mike and I 
have suggested, and I don't mean to get into a contest between 
border adjustment or what Mike and I have proposed because they 
may be complementary. But I do want to make sure I understand 
something a couple of witnesses talked about. The approach that 
Mike and I have suggested would give a benefit on the export 
side of the economy. In other words, it would give the benefit 
to our manufacturers as they export product because they would 
get this benefit of a free allowance. Do I understand correctly 
that a trade adjustment, at least to the extent that I have 
seen it proposed, would not give that benefit on the export 
side, it would give them a benefit by protecting against 
imports, competitive imports, but would not give a benefit to 
our exports which also have to compete internationally outside 
of our domestic markets. Is that a correct assessment?
    Mr. McMackin. Mr. Inslee, it is. We view that as one of the 
critical advantages of the Inslee-Doyle type allowance. Grant, 
the problem is a WTO prohibition on export rebates. There is 
some talk of trying to design one that is WTO compliant, but I 
am certainly not an expert on that.
    Mr. Inslee. Anyone else disagree with that assessment at 
all. Thank you. Thank you very much.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from Pennsylvania, Mr. Pitts.
    Mr. Pitts. Thank you, Mr. Chairman. Mr. Cicio, China's top 
climate negotiator Monday said any fair international agreement 
on emissions reduction should not require China to reduce 
emissions caused by goods it exports to other countries. This 
doesn't sound like China wants to play by our self-imposed 
rules. What evidence do we have that we can convince China to 
go along if we make our industries less competitive?
    Mr. Cicio. Congressman, that is exactly why our testimony 
has taken the approach that it has, is that cap-and-trade is 
not a viable policy option for the industrial sector in 
developing countries, nor is it good for us. A better approach 
that all industrial companies around the world understand is 
productivity. They can control the efficiency. They can improve 
the electricity improvement in their plant, the natural gas 
improvement, or whatever fuel. They can improve the yield, but 
it is very, very difficult for them to reduce absolute 
quantities. There is no movement on the part of the Chinese 
that we have seen that they will accept a cap and the absolute 
reduction for the industrial sector. This is why we need to 
jump-start negotiations across all developed and developing 
countries to deal with explicitly the industrial sector from a 
trade and from a productivity standpoint.
    Mr. Pitts. Dr. Thorning, a lot of the policy discussion 
about effectiveness of cap-and-trade is derived from large, 
integrated models of the economy and international markets. It 
involves a model-based analysis of what we might expect if the 
United States and all nations work together to reduce 
emissions. Do these modeling exercises represent what happens 
in the real world?
    Ms. Thorning. That is an excellent point, Congressman, and 
I think that we need to take account of the reality of 
politics. For example, stepping back and looking at China, 
China buys huge portions of U.S. debt. They are funding our 
lack of saving. If we impose a border tax adjustment on China 
using other imported goods, there might be some reluctance on 
the part of the Chinese to continue to invest in the United 
States. So I think we need to look at climate policy as a whole 
and look at how moving one part of our economy through say 
border tax adjustments might impact other parts of our economy. 
I think the models that have been developed simply do not 
recognize political reality. We don't have the ability to 
enforce international agreements. We have been working on this 
for some 20 years trying to evolve that type of agreement. It 
hasn't come about, and according to a recent study by Lee Lane 
and David Montgomery, it is unlikely to. We are going to have 
to depend on technology. We are going to have to depend on new 
technology, new nuclear, carbon capture and storage if we want 
to continue to grow our economy as well as reduce greenhouse 
gas emissions.
    So I think the models that have been developed simply are 
not reflective of reality.
    Mr. Pitts. Dr. Thorning, what in a nutshell is the European 
industry doing to cope with its cap-and-trade system, and how 
does this compare with what the United States will face?
    Ms. Thorning. Well, the experiment in the European Union, 
they have had an ETS since 2005, shows that they don't have the 
political will to tighten down emissions to actually hit their 
Kyoto target. Without strong, new measures the EU is unlikely 
to meet their Kyoto target because they have exempted large 
sectors of their economy and haven't covered enough facilities. 
Their new plan, their 20/20 by 2020 reduction, is unlikely to 
be enforced because it would require significantly higher 
taxes. The only way Europe will meet their new target is 
through economic collapse.
    Mr. Pitts. Ms. Claussen, should we be concerned about a 
trade war if we impose tariffs on countries that don't take 
action on greenhouse gas emissions? Would a trade war have 
implications for our relationship with China and other arenas 
such as working to improve China's record on human rights or 
China's relationship with Tibet?
    Ms. Claussen. We do not like trade wars. We do not like 
border adjustment measures, so I think if you are going to use 
them, they should absolutely be a last resort and we should do 
everything else before we get there.
    Mr. Pitts. Thank you, Mr. Chairman.
    Mr. Markey. The gentleman's time has expired. And we will 
end the hearing by recognizing Mr. Scalise from Louisiana for a 
round of questions.
    Mr. Scalise. Thank you, Mr. Chairman, and I will try to run 
through them quickly since the vote is going on right now on 
the floor. Mr. Morgenstern, in your testimony you had stated, 
and I will quote this, ``Within the manufacturing sector the 
hardest-hit industries are chemicals and plastics, primary 
metals, and non-metallic minerals. Another hard-hit industry, 
petroleum refining, will likely be able to pass along most cost 
increases, thereby muting the impacts.'' When you talk about 
muting those impacts, clearly if they are passing them on, who 
have they been passing them on to and who would actually get 
that impact if they didn't get the impact?
    Mr. Morgenstern. Congressman, they would pass along the 
impacts in the form of higher prices which in turn will enter 
into consumers' and businesses' calculations about their choice 
of technologies, new vehicles, et cetera.
    Mr. Scalise. Any estimates on how much would be passed on 
to consumers, let us say, when somebody goes to fill up their 
gas tank how much more they will pay, or when they go to the 
grocery store, how much more will they pay?
    Mr. Morgenstern. Yes, I don't have a number at my 
fingertips, but it would be a very high proportion of the 
actual cost of the allowances that would be passed forward to 
the consumer.
    Mr. Scalise. And I have seen reports that show up to $3,000 
per American family in increased costs due to these pass-
throughs, whether it be from electricity bills going up because 
the utility companies would be able to pass those costs on or 
the energy-related products that would also be able to be 
passed on. And in fact, Mr. Orszag, the President's Budget 
Director, himself acknowledged that there would be increased 
costs to consumers because of these.
    Mr. Morgenstern. Congressman, my colleague, Dallas Burtraw, 
who is not here today has actually done an extensive study on 
this question, and there clearly will be higher costs to 
consumers and to households across the country. It will vary 
somewhat by region, and some of the provisions in the 
legislation presumably would attempt to compensate for those 
losses.
    Mr. Scalise. Yes, and that concerns a lot of people. Ms. 
Claussen, if you could real briefly get on that?
    Ms. Claussen. Yes, I mean, there is a wide range. It 
depends on the model you use. Some of them are as low as $200 
per household per year. Some of them are as high as you pointed 
out as $3,000 per household per year. I think the most 
important thing to do is to make sure that there are no price 
spikes or really high prices for consumers which you can do by 
making sure that there are allowances for local distribution 
companies who provide electricity.
    Mr. Scalise. Yes, and I think we have seen that there are 
some proposals to exempt certain people which, of course, under 
the President's budget, he expects to generate $640 billion in 
new taxes from this proposal. So that would actually put an 
even higher disproportionate share. We used the teacher married 
to the police officer. That married couple would then almost 
see a doubling if you exempt lower income earners because that 
couple would earn about $80,000. And so that teacher married to 
the police officer would not appreciate the fact that they are 
considered rich under these proposals and would have to pay 
maybe $5,000 more.
    Ms. Claussen. That is----
    Mr. Scalise. I have only got about a minute left. I 
apologize for that. Mr. Cicio, you had talked about U.S. 
industries working on efficiencies. For decades we have seen 
people cutting back, businesses cutting back. Are there more 
effective policies that can help foster innovation to provide 
that next generation of energy efficiency other than this tax 
policy?
    Mr. Cicio. Manufacturing is very energy efficient, but 
there is always this constant effort. We need good tax policy, 
faster depreciation. We certainly need removal of regulatory 
barriers and financial barriers to utilizing, for example, 
combined heat and power and waste heat. These are all very 
positive incentives that would be very helpful to the sector.
    Mr. Scalise. And final question, how has regulatory policy 
such as decoupling electricity rates actually affected your 
industries?
    Mr. Cicio. Well, I am glad you asked that question because 
decoupling separate volume from price, and manufacturing needs 
a return on investment to invest in energy efficiency with the 
objective of course of reducing the amount of for example 
electricity that it would consume. But when you decouple, oK, 
there is all of a sudden a lack of incentive, financial 
incentive to invest because the prices will not go down.
    Mr. Scalise. All right. That is all I have. I yield back. 
Thank you, Mr. Chairman.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from--and all of the time for this 
hearing has expired. We thank this panel very much. Obviously 
in any legislation which we draft we are going to need to deal 
with those industries that are most affected, especially from a 
trade perspective, from a climate policy which we adopt and we 
intend on doing that. We thank this panel very much, and we 
would like to stay in close contact with you as we are moving 
along in the legislative process. This hearing is adjourned.
    [Whereupon, at 11:52 a.m., the subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]

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