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



 
    ALLOWANCE ALLOCATION POLICIES IN CLIMATE LEGISLATION: ASSISTING 
CONSUMERS, INVESTING IN A CLEAN ENERGY FUTURE, AND ADAPTING TO CLIMATE 
                                 CHANGE

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



                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON ENERGY AND ENVIRONMENT

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE

                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              JUNE 9, 2009

                               __________

                           Serial No. 111-44


      Printed for the use of the Committee on Energy and Commerce

                        energycommerce.house.gov




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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
JANICE D. SCHAKOWSKY, Illinois       SUE WILKINS MYRICK, North Carolina
CHARLES A. GONZALEZ, Texas           JOHN SULLIVAN, Oklahoma
JAY INSLEE, Washington               TIM MURPHY, Pennsylvania
TAMMY BALDWIN, Wisconsin             MICHAEL C. BURGESS, Texas
MIKE ROSS, Arkansas                  MARSHA BLACKBURN, Tennessee
ANTHONY D. WEINER, New York          PHIL GINGREY, Georgia
JIM MATHESON, Utah                   STEVE SCALISE, Louisiana
G.K. BUTTERFIELD, North Carolina
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..............
Hon. Fred Upton, a Representative in Congress from the State of 
  Michigan, opening statement....................................
Hon. John D. Dingell, a Representative in Congress from the State 
  of Michigan, opening statement.................................
Hon. Joe Barton, a Representative in Congress from the State of 
  Texas, opening statement.......................................
Hon. Henry A. Waxman, a Representative in Congress from the State 
  of California, opening statement...............................
Hon. Ed Whitfield, a Representative in Congress from the 
  Commonwealth of Kentucky, opening statement....................
Hon. Jerry McNerney, a Representative in Congress from the State 
  of California, opening statement...............................
Hon. John Shimkus, a Representative in Congress from the State of 
  Illinois, opening statement....................................
.................................................................
Hon. G.K. Butterfield, a Representative in Congress from the 
  State of North Carolina, opening statement.....................
Hon. Joseph R. Pitts, a Representative in Congress from the 
  Commonwealth of Pennsylvania, opening statement................
Hon. Gene Green, a Representative in Congress from the State of 
  Texas, opening statement.......................................
Hon. Greg Walden, a Representative in Congress from the State of 
  Oregon, opening statement......................................
Hon. Mike Ross, a Representative in Congress from the State of 
  Arkansas, opening statement....................................
Hon. Steve Scalise, a Representative in Congress from the State 
  of Louisiana, opening statement................................
Hon. Jim Matheson, a Representative in Congress from the State of 
  Utah, opening statement........................................
Hon. Cliff Stearns, a Representative in Congress from the State 
  of Florida, opening statement..................................
Hon. John Barrow, a Representative in Congress from the State of 
  Georgia, opening statement.....................................
Hon. Jay Inslee, a Representative in Congress from the State of 
  Washington, opening statement..................................
Hon. Charlie Melancon, a Representative in Congress from the 
  State of Louisiana, opening statement..........................
Hon. Frank Pallone, Jr., a Representative in Congress from the 
  State of New Jersey, opening statement.........................
Hon. Lee Terry, a Representative in Congress from the State of 
  Nebraska, opening statement....................................

                               Witnesses

Thomas F. Farrell, II, Chairman, President and CEO, Dominion (on 
  behalf of Edison Electric Institute)...........................
    Prepared statement...........................................
Rich Wells, Vice President, Energy, Dow Chemical Company.........
    Prepared statement...........................................
David Sokol, Chairman of the Board, Mid American Energy Holdings 
  Company........................................................
    Prepared statement...........................................
Steve Cousins, Vice President, Refining, Lion Oil................
    Prepared statement...........................................
G. Tommy Hodges, Chairman, Titan Transfer, Inc., (on behalf of 
  the American Trucking Association).............................
    Prepared statement...........................................
David Montgomery, Vice President, Charles River Associates.......
    Prepared statement...........................................
Nat Keohane, Economist, Environmental Defense Fund...............
    Prepared statement...........................................
Reverend Dr. Mari Castellanos, Minister for Policy Advocacy, 
  United Church of Christ, Justice and Peace Ministries..........
    Prepared statement...........................................

                           Submitted Material

Hearing memorandum...............................................


    ALLOWANCE ALLOCATION POLICIES IN CLIMATE LEGISLATION: ASSISTING 
CONSUMERS, INVESTING IN A CLEAN ENERGY FUTURE, AND ADAPTING TO CLIMATE 
                                 CHANGE

                         TUESDAY, JUNE 9, 2009

                  House of Representatives,
            Subcommittee on Energy and Environment,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The Subcommittee met, pursuant to call, at 10:45 a.m., in 
Room 2322 of the Rayburn House Office Building, Hon. Edward 
Markey [chairman of the subcommittee] presiding.
    Members present: Representatives Markey, Inslee, 
Butterfield, Melancon, McNerney, Dingell, Boucher, Pallone, 
Green, Baldwin, Ross, Matheson, Barrow, Waxman (ex officio), 
Upton, Hall, Stearns, Whitfield, Shimkus, Shadegg, Blunt, 
Pitts, Walden, Scalise, Terry and Barton (ex officio).
    Staff present: Matt Weiner, Legislative Clerk; Lorie 
Schmidt, Senior Counsel; Melissa Bez, Professional Staff; 
Michael Goo, Counsel; Ben Hengst, Senior Policy Analyst, Mitch 
Smiley, Special Assistant; Lindsay Vidal, Press Assistant; Matt 
Eisenberg, Staff Assistant; Greg Dotson, Chief Counsel, Energy 
and Environment; Andrea Spring, Minority Professional Staff; 
Amanda Mertens Campbell, Minority Counsel; Aaron Cutler, 
Minority Counsel; Mary Neumayr, Minority Counsel; and Garrett 
Golding, Minority Legislative Analyst.

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

    Mr. Markey. Good morning to all of you, and this hearing 
will come to order.
    Today's hearing will examine the ways in which allowance 
values from the Waxman-Markey clean energy bill can be used to 
assist consumers invest in a new energy future and help the 
United States and the world to adapt to climate change. 
Although that is a tall order for any piece of legislation, the 
Waxman-Markey bill, which was reported from the committee on 
May 21, 2009, does just that. The bill contains comprehensive 
energy legislation that will repower America with new clean 
energy sources, provide for increased energy independence, 
create new clean energy jobs, make investments in renewable 
energy sources, enhance competitiveness, strengthen our 
national security and fight global warming. This bill achieves 
those goals but does so in a way that will help, not hurt, 
consumers, and that actually reduces the budget deficit.
    In the more than 30 years that I have been in Congress, one 
word has always come first in every piece of legislation that I 
have worked on: consumers. From telecommunications to the 
environment to fuel economy standards, I have found that 
starting with the goal of saving families money is always the 
best organizing principle for an effective public policy. That 
is why the Waxman-Markey bill sends such a very high percentage 
of its allowance value directly to consumers. Under the 
legislation, more than 55 percent of the allowance value goes 
directly to consumers. Between 2012 and 2025, 32 percent goes 
to regulated electricity local distribution companies for the 
benefit of consumers. Six point five percent goes to natural 
gas local distribution companies for the benefit of consumers. 
One point six percent goes to States for the benefit of home 
heating oil and propane consumers. Fifteen percent goes to low- 
and moderate-income consumers.
    In addition, the bill allocates 19 percent of allowance 
value to protect trade-exposed industries to help them maintain 
international competitiveness and to keep manufacturing jobs 
here in the United States. The bill also provides 6 percent of 
allowance value to States for investments in clean energy and 
energy efficiency. These programs will also help save money for 
consumers, enhance our energy independence and create good 
clean energy jobs in renewable energy and energy efficiency 
that cannot be outsourced.
    And finally, the bill allocates 2.5 percent of allowance 
value for domestic adaptation including for public health. This 
allocation of allowance will assist consumers faced with 
increasing costs from a multitude of effects due to global 
warming. So if you add it all up between 2012 and 2025, more 
than 80 percent of allowance values will go towards programs 
that will, one, directly benefit consumers; two, lower costs 
for consumers; three, mitigate the effects of climate change 
for consumers; and four, keep or create jobs in the United 
States.
    The rest of the value will also go to important public 
purposes. Between 2012 and 2025, 2 percent is dedicated to 
investments in electric vehicles and other advanced automobile 
technology that will strengthen our energy independence. Three 
point three percent is dedicated to carbon capture and 
sequestration technologies and 1.5 percent will go to research 
and development in clean energy and energy efficiency 
technologies. These investments also will create new jobs and 
help keep America more competitive. Other uses of allowance 
allocation in the legislation includes allocating 5 percent for 
supplemental reductions to be achieved by preventing topical 
deforestation and distributing 2.5 percent for international 
adaptation and clean energy transfer. These allocations will 
ensure that the United States will be well positioned to 
negotiate with other nations in the global climate treaty 
process. That in turn will also help protect our workers and 
consumers from foreign competition and from runaway costs due 
to unchecked global warming.
    And finally, the bill dedicates a portion to the important 
goal of deficit reduction. On Friday, the Congressional Budget 
Office announced in its cost impact analysis that the Waxman-
Markey bill would reduce budget deficits or increase future 
surpluses by about $24 billion over the 2010-2019 period. 
Consequently, this bill is both environmentally responsible and 
fiscally responsible.
    Our current reality is that America's economy is in a slump 
and consumers remain vulnerable to price spikes brought about 
by the old energy economy and an addiction to expensive foreign 
oil, but I have faith in our economy and that it will mend 
itself and once again become fully dominant if we make the 
right choices and unleash innovation now. The choice that we 
opt for now is to invest in clean energy jobs to improve our 
national security and provide a safe and healthy future for our 
economy. We thank all of you for participating in today's 
hearing.
    [The hearing memorandum follows:]*************** INSERTS A, 
B ***************
    Mr. Markey. Now let me turn and recognize the gentleman 
from Michigan, the ranking member of the subcommittee, Mr. 
Upton.
    Mr. Upton. Well, thank you, Mr. Chairman. I have a prepared 
statement that I am going to ask to put into the record, and--
--
    Mr. Markey. Without objection, it will be so ordered.

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

    Mr. Upton. I came back from Michigan and was in the office 
yesterday when I heard about the CBO report, which I have not 
read yet but I am getting a copy and I look forward to reading 
it in the next day or two.
    John Dingell, in a subcommittee hearing that we had, I 
believe it was last month or it might have been the end of 
April, called cap and trade a great big tax, and man, was he 
right. When you look at what different publications say, CBO 
puts hefty price tag on emissions plan, this cap-and-trade 
system is seen to cost $846 billion. It goes on to say in the 
story, American Petroleum Institute president Jack Girard said 
the projected costs of the emission allowance will mean 
increases as much as 70 cents a gallon for gasoline with diesel 
fuel going up as much as 88 cents per gallon. The Brookings 
Institute, not exactly a center right organization, called cap 
and trade to reduce carbon dioxide emissions would lower the 
Nation's gross domestic product in 2050 by 2-1/2 percent. It 
goes on to say that about 35 percent of crude oil-related jobs 
and 40 percent of coal-related jobs will be lost in 2025, 
according to the analysis, and it shows that the personal 
consumption would fall by as much as .5 percent or $2 trillion 
by 2050. It goes on to conclude that they think that the 
government would raise about $1.5 trillion by 2020 if it sold 
all the carbon emissions, so almost double what CBO said.
    During the Memorial Day break, I visited one of my small 
companies that have been around for 100-some years in Niles, 
Michigan, Niles Steel Tank. Now, that is what they make, 
custom-made steel tanks. These are 750-gallon tanks. They know 
about cap and trade. In fact, they said that if cap and trade 
was enacted, they were thinking about canceling the day shift 
and moving all of their production into the nighttime so that 
they could take advantage of lower energy costs because they 
were worried about what those costs would do, knowing that they 
today pay about $11,000 a month in electricity and about $9,000 
in natural gas. The testimony that we are going to hear from 
Mr. Sokol as it relates to refineries, he indicates on page 5 
that India is building a one-million-barrel-per-day refinery to 
make transportation fuels that will be exported almost 
exclusively to the U.S. and European markets. This refinery, 
larger than any refinery in the United States, is equal to the 
total capacity of about 15 of Lion Oils. Under this bill, the 
Indian refinery, which already operates at a significant cost 
advantage, will not be required to purchase allowances for 
CO2 emitted from its plant.
    Mr. Chairman, we are, particularly those of us in the 
Midwest, we are going through some very hard times. The news 
relating to the auto industry and other manufacturing sectors, 
our unemployment rate has been double digits for more than a 
year, and many of our counties, they are predicting perhaps as 
high as 20 percent by the end of the summer and even higher 
then. This cap-and-trade bill, as John Engler said, could put 
us into a permanent recession, those of us that are facing this 
in the Midwest, and I look forward to the hearing and I yield 
back my time.
    Mr. Markey. Great. The gentleman's time has expired. The 
Chair recognizes the chairman emeritus of the committee, the 
gentleman from Michigan, Mr. Dingell.

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

    Mr. Dingell. Mr. Chairman, thank you for holding this 
hearing. It is important that our constituents understand the 
steps the Energy and Commerce Committee has taken to protect 
consumers, protect trade and vulnerable industries, to invest 
in clean technologies and help vulnerable segments of the 
population and our natural environment to adapt to climate 
change. One day of trying to craft a sensible approach to deal 
with climate change, a time several years ago, I have been 
clear in my belief that it is not going to be cheap and that 
most likely consumers will be seeing substantially increased 
energy costs. Moreover, I have been extremely concerned that 
enacting an economy-wide cap-and-trade program could adversely 
affect our already struggling manufacturing sector.
    I have to say, I am impressed with the approach taken in 
H.R. 2454 in terms of allocating and the allowance values to 
address these concerns. H.R. 2454 establishes five programs to 
protect consumers from potential energy price increases. EPA 
has estimated that global warming provisions in the discussion 
draft would cost the average household $98 to $140 per year, 
and they have concluded that the changes made in the committee 
draft will further the costs of the legislation.
    Now, being from the Midwest, where we are extremely 
dependent on coal for our electricity, I have to believe that 
our people are particularly susceptible to electricity price 
increases. I am pleased with the approach adopted by the 
committee. Regulated utilities that distribute electricity to 
consumers will receive allowances that must be used to keep 
prices low. Giving the allowances to regulated utilities should 
cut down on opportunities for rascality. However, this is 
something on which we must be diligent in watching when this or 
similar legislation is signed into law.
    I am also pleased with the portion of allowance values 
going to the auto industry for investment in green vehicles. 
Specifically, the majority would go into the Department of 
Energy section 136, advanced technology vehicles manufacturing 
program, with a portion going to plug-in electric vehicle 
manufacturing and deployment. We have seen remarkable 
innovations from automakers as consumers have begun to show 
interest in more-fuel-efficient vehicles and the allowance 
values will spur more innovations and new green job creation at 
job.
    Finally, Mr. Chairman, I am pleased with the allowance 
values allocated to natural resource adaptation. As I have said 
on numerous occasions, I consider this to be a moral imperative 
and I am pleased that the chairman agrees with my perspective. 
I look forward to hearing from our witnesses today for their 
perspectives on the allocation scheme as laid out in H.R. 2454. 
Thank you, Mr. Chairman.
    Mr. Markey. We thank the gentleman. The Chair recognizes 
the ranking member of the full committee, Mr. Barton.

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

    Mr. Barton. Thank you, Mr. Chairman. First, let me thank 
you and Chairman Waxman for agreeing to this hearing. I had 
asked that we hold two hearings. You all have agreed to at 
least this one and maybe another one. Even though the markup 
has already occurred, I think it is important to try to get 
into the mechanics and to understand the intricacies of the 
allocation and the cap-and-trade allowances part of this 
legislation, so I do appreciate you and Chairman Waxman for 
agreeing to this hearing. I want to thank our witnesses. I know 
many of you have spent many sleepless nights trying to 
understand this system and hopefully you can help explain it to 
the people who are actually trying to put it into place.
    We have a fundamental disagreement on the basic premise of 
this bill. The proponents of the bill are fervent and I think 
sincere in their belief that manmade CO2 is a 
dominant contributor to what is either called global warming or 
climate change. Most of the opponents of the bill, and I 
certainly put myself in that camp, think climate change is an 
issue that we need to study and we need to address but we are 
not convinced that mankind generically and CO2 
specifically is a dominant cause of the climate changing. So we 
start with the fundamental disagreement on the basic premise of 
the bill, but if you get beyond that and you get beyond the 
science, you next come to a couple of inescapable facts. Number 
one is, you can't have it both ways. If manmade CO2 
in the United States really is a problem, then you don't give 
the allowances away. You either have a carbon tax, which would 
be the most efficient and straight-up transparent way to deal 
with the problem, or you do 100 percent auction for 
CO2 allowances. Well, we put 100 percent auction 
allowance on the table in the markup. I think it got five votes 
of 50-some-odd votes. So if you are really not going to charge 
for that commodity, in this case, manmade CO2, you 
are going to give a lot of it away, you are not going to reduce 
it. I listened to Mr. Markey's opening statement downstairs in 
my office on the television, and if I add it up correctly, in 
the beginning he is giving away around 85 percent of these 
allowances. So you are going to auction off 15 percent. You are 
not going to make a dent in CO2 charging only 15 
percent of the population that you regulate trying to control 
it. So that is a fundamental problem.
    The second fundamental problem is, in spite of the best 
efforts, you can't make an allocation system in an economy as 
complex as the United States. You can't really make it fair. I 
don't doubt the sincerity of the proponents of the bill when 
they say they are trying to make sure that nobody pays more 
than their fair share, but just this local distribution company 
system where you get 50 percent of your allowances and it all 
goes to the local distribution company but 50 percent is based 
on the generating capacity and then 50 percent is based on 
emissions. Well, if you are in an area like the Northwest where 
you have huge generating capacity but it is all hydro, you are 
getting a free gift. Now, if you are in an area like the 
Southeast where they don't really have a lot of wind power and 
they don't really have a lot of hydropower, you are going to 
have a health transfer where you pay for your allowances from 
the Southeast to the Northwest. Now, that may be what the 
proponents want but it is not fair and we need to address that. 
Then you start with these allowances for various industry 
groups. Refineries get 2 percent and I heard Mr. Markey say 
there is kind of a general set-aside of 1.6 percent for heating 
oil. When you start trying to interact those types of 
allowances with the generic electricity allowances, you are 
going to in some cases get double counting and in other cases 
get undercounting, and I don't see how you rectify that.
    So, you know, my time is about to expire. The SO2, when we 
did sulfur dioxide cap and trade in the 1990s, that is the 
model that everybody points to that we can make CO2 
work here in the early part of the 21st century. There is a big 
difference. SO2 was almost totally manmade. SO2 had discrete 
point sources that we knew where it was. SO2, we had a 
technology to control it that was cost-effective. We have none 
of that. The bill says any point source in the United States 
that generates more than 25,000 tons a year is subject to 
regulation. Twenty-five thousand tons of CO2 is not 
a lot of CO2.
    So Mr. Chairman, I appreciate you holding this hearing. We 
are really going to have a fine time, as Chairman Dingell would 
say, trying to understand the system and hopefully at the end 
of the hearing the American public will have a better 
understanding of it. Thank you and Mr. Waxman for holding this 
hearing.
    Mr. Markey. We thank the gentleman very much. The Chair 
recognizes the chairman of the full committee, the gentleman 
from California, Mr. Waxman.

OPENING STATEMENT OF HON. HENRY A. WAXMAN, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Mr. Waxman. Thank you very much, Mr. Chairman. I appreciate 
this hearing.
    The bill, H.R. 2454, requires major U.S. sources of 
emissions to obtain an allowance for each ton of global warming 
pollution emitted into the atmosphere, and the emission 
allowances provide a critically important tool in transitioning 
the country to a clean energy future. In deciding how to use 
the value of the allowances, the committee was guided by four 
principles. First, we wanted to assist consumers with the 
transition, and we use over 50 percent of the allowances for 
this purpose. We have five programs to protect consumers from 
electricity price increases, one for natural gas, one for 
heating oil, one to protect low- and moderate-income families 
and one to provide a tax dividend to consumers. In combination, 
these programs ensure that American consumers are protected as 
the legislation is implemented.
    Secondly, the bill invests in developing and deploying 
energy efficiency programs and clean energy technology. This 
will be a driver of jobs and innovation and it will help us 
break the connection between energy generation and carbon 
emissions, allowing us to meet increasingly tighter emission 
limits at lower costs than are predicted today. This will also 
help the United States be a global leader in clean energy 
technologies.
    Third, we worked hard to assist industry in making the 
transition to clean energy economy. We cannot afford to add 
significant uncompensated costs that would disadvantage 
manufacturing and production here compared to other countries 
that do not have emission limitations like China and India, and 
providing transition assistance to our industries helps ensure 
that the reductions in emissions occur because our industry is 
becoming more efficient, not because they are moving production 
and emissions overseas.
    Finally, H.R. 2454 provides allowances for a number of 
other important purposes. It would provide assistance to help 
us adapt to climate change both here and abroad. The 
international adaptation piece rises to moral obligations and 
will help the president negotiation a strong treaty in 
Copenhagen. It will also help address some of the national 
security issues that Senator John Warner and others have warned 
us about, and the bill would also generate large additional 
low-cost emission reductions by reducing tropical 
deforestation, helping us to avoid dangerous climate change.
    The committee has worked hard on this allocation plan to 
ensure that it is fair. It does what a good energy bill needs 
to do. It balances the interests of different parts of the 
country and of different stakeholders and accomplishes much of 
what it is important to everyone. It will go a long way to 
moving the country into a clean energy future.
    I do want to point out, there has been some 
misunderstanding I have seen in some of the articles in the 
press. They say that when we give out a free allowance, we are 
not sending the right price signal to the consumers to make the 
reductions in use of energy. Well, I think that misunderstands 
the bill. We do have the limit, overall limit on carbon 
emissions so we have the incentives to make those reductions. 
We wanted to have those reductions made in the least costly way 
and the signals are sent to the people who are most able to 
make the reductions just as we have the requirements on the 
major sources of the pollution that we are trying to reduce. So 
I think that a lot of people think that there is only one way 
and that is to have a harsh burden on people to get the 
reductions. I think we can have a transition, reduce the carbon 
emissions and benefit everyone at the same time.
    I yield back my time.
    Mr. Markey. Great. The gentleman's time has expired. The 
Chair recognizes the gentleman from Kentucky, Mr. Whitfield, 
for 2 minutes.

  OPENING STATEMENT OF HON. ED WHITFIELD, A REPRESENTATIVE IN 
           CONGRESS FROM THE COMMONWEALTH OF KENTUCKY

    Mr. Whitfield. Thank you, Mr. Chairman.
    When I heard you speaking of this bill, I was not sure we 
were talking about the same bill. I was reading recently an 
article signed by Peter Orszag, the current chairman of OMB, 
entitled ``Tradeoffs in allocating allowances for 
CO2 emissions.'' In that study, he said very clearly 
a common misconception is that freely distributing allowances 
to purchasers would prevent consumer prices from rising as a 
result of the cap, and then he goes on to say higher consumer 
costs were borne out in the cap-and-trade programs for sulfur 
dioxide in the United States and also for CO2 
emissions in Europe. Consumer prices increased even though 
producers were given free allowances. He goes on to say in this 
report that those price increases would be regressive and that 
poorer households would bear a larger burden relative to their 
incomes than wealthier households would. He goes on to say that 
job losses in certain energy industries like coal, for example, 
would be severe; job losses would be severe.
    So I am glad we are having this hearing because none of us 
really understand the way this is going to work and we 
certainly do not understand the way that consumers are going to 
be protected. The final comment that I would make, the Energy 
Information Agency came out with a report based on this bill 
and it very clearly shows that we are moving lower electricity 
costs from one area of the country to other areas of the 
country. The States that really get hurt by this bill are 
Alabama, Florida, Georgia, Illinois, Indiana, Kentucky, 
Michigan, Missouri, Ohio, Oklahoma, Pennsylvania, Tennessee, 
Texas, West Virginia and Wyoming, and there are some States on 
the East Coast and West Coast that will benefit from this bill.
    I yield back. My time has expired.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from Virginia, Mr. Boucher.
    Mr. Boucher. I thank the chairman. I will waive opening 
statement and reserve time for questions.
    Mr. Markey. The Chair recognizes the gentleman from 
California, Mr. McNerney.

 OPENING STATEMENT OF HON. JERRY MCNERNEY, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Mr. McNerney. Thank you, Mr. Chairman. First of all, I want 
to thank the witnesses today for coming today. It is a broad 
spectrum of philosophies, and that is important for this 
discussion.
    I am proud to support the Act. I think it is a good Act. It 
leads to environmental goals by capping carbon emissions and in 
the long run it will create jobs, a lot of jobs. You know, the 
allowance allocation is essential. It has been devised to 
protect both businesses and families and to increase America's 
efficiency, which is absolutely essential for us to meet our 
long-term goals of getting ahead of the price increases by 
being more and more efficient so that consumers pay less out of 
their pockets for the same result, or in fact for better 
results, so I think it is essential and I support it, and I am 
looking forward to the discussion. I think there will be some 
good ideas that come out here today.
    So with that, I would yield back.
    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. I am down here, Mr. Chairman. Thank you very 
much. I want to thank Joe Barton and Chairman Waxman for 
agreeing to this hearing. You know, I wish it would have been 
done prior to the markup but that is water under the bridge. We 
move on, and I am ready to move with you.
    I was waiting for the great proclamation from the Chinese 
trip that they had China agree to an international standard to 
cap carbon trade. The chairman has been curiously silent on 
that issue. I am not shocked. What I have heard is that the 
Chinese want $140 billion a year from the United States to help 
them in their transition to cap carbon from the taxpayers. They 
won't sign a treaty claiming to be doing it on themselves and 
their claims actually result in a 30 percent for their carbon 
output. Does that sound like they are playing ball? I would say 
not.
    I also want to make sure that if we have another hearing 
that we address this issue called compulsory licenses. For 
those of you who think that we are going to be making all this 
profit from green jobs and the green economy, guess what? We 
are going to sign an international agreement that forces the 
holder or the patent or a copyright to give away their 
exclusive rights to grant use to the States and to others. So 
all those companies that think they are going to sell and make 
a profit by having a patent, we are going to give it to China 
without compensation or for minimal compensation. That is a 
great plan and that is in this bill and it ought to be stripped 
out.
    And I will just end on this article from Business Week, 
banks gearing up for carbon trading. Here is another wealth 
transfer to large, big banks, but while U.S. policymakers 
continue to squabble over the details of the cap-and-trade 
proposal, big banks--haven't we bailed them out enough--are 
gearing up for what they see as a new profit center. U.S. 
carbon trading is coming.
    So if you want to help out the big banks and bail them out, 
move on this legislation. I yield back my time.
    Mr. Markey. Great. The gentleman's time has expired. The 
Chair recognizes the gentleman from North Carolina, Mr. 
Butterfield.

OPENING STATEMENT OF HON. G.K. BUTTERFIELD, A REPRESENTATIVE IN 
           CONGRESS FROM THE STATE OF NORTH CAROLINA

    Mr. Butterfield. Thank you very much, Mr. Chairman, for 
convening this hearing today and I certainly thank the 
witnesses for their participation. I look forward to this 
hearing because there is still a lot of questions that we need 
to have answered and perhaps some of your wisdom may be very 
helpful to us.
    We have certainly had tremendous difficulty in devising an 
equitable way of making the allowance allocations. We spent a 
lot of time doing that. We finally reached a compromise and now 
we have it on paper. The allowance allocation in this Act 
accomplishes the difficult and necessary balance of assuring 
environmental integrity while easing the transition costs for 
the covered entities and thus easing the cost for consumers. 
And so yes, there will be free allocations. Criticism that the 
free allocation of credits in the early years of this program 
allows polluting companies off the hook could not be further 
from the truth. The overall cap ensures greenhouse gas emitters 
will reduce their emissions. This law forces electric utilities 
and petroleum refineries and steel companies and paper and 
chemical manufacturers to make investments, substantial 
investments in energy efficiency and cleaner fuels whether or 
not the credits or auctioned.
    Throughout consideration of this issue, I have spoken 
repeatedly about the necessity to protect consumers from price 
hikes resulting from this legislation. The allocation 
accomplishes this by devoting resources to regulated LDCs whose 
bylaws require that they pass the value along to the consumers. 
Most importantly, the poorest Americans who contributed least 
to this problem and are least able to ensure any increases in 
cost are held harmless. I am satisfied of that. The 15 percent 
allowance value devoted to these struggling households 
guarantees recoupment of any lost purchasing power and does not 
phase out over the life of the program. This critical component 
is essential to a fair and balanced policy that achieves the 
long-term goal of reducing greenhouse gas emissions while 
keeping struggling consumers free from irreparable economic 
harm.
    Again, Mr. Chairman, I support this legislation and thank 
the witnesses for coming. I yield back.
    Mr. Markey. Great. 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, and thank you for 
holding this important hearing on the allocation policies under 
the American Clean Energy and Security Act.
    Mr. Chairman, like all of us, I believe we should work to 
decrease the amount of greenhouse gas emissions in our 
atmosphere and we should be good stewards of this earth and it 
resources. However, I do not believe this bill, which passed 
out of this committee last month, will do anything to 
accomplish its goal of reducing global temperatures. Instead, I 
believe it will have a crippling effect on our economy for 
years to come without much environmental benefit. It will still 
irreparably damage our economy despite the allocation policies 
that are supposed to protect the consumer. No matter how it is 
doctored or tailored, it is a tax. It is a national energy tax 
that will hurt each and every household. It will destroy 
sectors of our economy and cause job losses at a unprecedented 
rate.
    We should be protecting our environment through innovation, 
through entrepreneurship and cooperation and encouragement. 
This bill tries to cut carbon emissions through taxation and 
punishment, the heavy hand of big government and litigation. We 
should be creating jobs by encouraging entrepreneurship, 
competition, new technologies. Instead, this bill is going to 
cost countless working men and women their jobs. This bill as 
previously drafted in the original draft which had 50 pages on 
light bulbs and two sentences on nuclear power. Now, that has 
changed somewhat, but as analyzed a couple of weeks ago by the 
Public Utility Commission in Pennsylvania, it would have cost 
66,000 jobs in Pennsylvania alone by 2020. Much of it is still 
applicable.
    I urge my colleagues to consider just how irresponsible it 
is to continue to support legislation that will cost so many 
jobs and do so much damage to our economy just as we are 
struggling to come out of one of the worst recessions in recent 
history. The American people can see this and they will be 
angry. It punishes everyone in America who uses energy, that 
is, everyone in America. Instead, we should be crafting 
policies that create incentives to bring online new nuclear 
power plants, hydrogen storage technology, more cost-effective 
wind and solar technology, smart grid technology, more 
efficient electricity transmission and other innovations. We 
don't need to wash trillions of dollars of American taxpayer 
money through the federal bureaucracy in order to get a clean 
energy economy. The alternative to job killing and big 
government cap-and-trade plans is to create incentives and let 
the market pick the winners.
    I want to thank the witnesses for coming today. I look 
forward to hearing their testimony. I yield back.
    Mr. Markey. Great. The gentleman's time has expired. The 
Chair recognizes the gentleman from Texas, Mr. Green.

   OPENING STATEMENT OF HON. GENE GREEN, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF TEXAS

    Mr. Green. Thank you, Mr. Chairman, for holding the 
hearing. I thank you and the Chair of the full committee for 
your leadership on the American Clean Energy and Security Act. 
The success is a testament to your ability to find consensus 
among our diverse membership. I applaud your efforts and look 
forward to continuing to work on refinements in that bill.
    Today's hearing is yet another opportunity to learn more 
about how allowances are distributed under H.R. 2454. The top 
criticisms of any cap and trade are the projected impacts on 
the American consumer and our domestic industries. With our 
economy sluggish and family incomes already stretched, any 
policy must ensure that hardworking Americans do not see their 
energy costs skyrocket or U.S. jobs moved overseas. I believe 
that additional transitional assistance may be needed. H.R. 
2454 struck a careful balance in allocating carbon allowances. 
The legislation devotes significant allocation to protect 
consumer energy price increases, electric, natural gas. LDCs 
receive 40 percent of the allowances, a value that must be 
passed on to the benefit of the consumers through lower 
electric and natural gas bills.
    Second, the legislation provides allowances to keep U.S. 
industry competitive with foreign nations that do not have 
carbon reductions. I want to thank my friends Inslee and Doyle 
for their work on the 15 percent allocation. The 2 percent 
allocation for refiners is intended to keep them competitive 
and encourage energy efficiency improvement. Ultimately, I 
believe more assistance is needed and I know we will hear that 
today from our witness from the refineries.
    I know Congressman Barton is here and he has questioned 
many times whether carbon human activity and knowing our 
ranking member's love for Texas A & M, I just saw a recent 
study, Mr. Chairman, that was released from Reuters from Texas 
A & M showing the Texas coast, particularly Corpus Christi, 
faces widespread flooding and the most powerful hurricanes 
flooding and, quote, from the author of the study, ``hurricanes 
will be more severe.'' Jennifer Irish, assistant professor of 
coastal and ocean engineering at Texas A & M, states, ``The 
worse global warming gets, the more severe the consequences for 
the Texas coast.''
    Mr. Chairman, I have run out of my time but we surely don't 
want to see Padre and Mustang Islands, much less Galveston, 
Texas, have too high of tides. So I will be glad to forward 
this to you, Ranking Member.
    Mr. Barton. Not everything at Texas is as it seems on the 
surface.
    Mr. Green. Thank you. I yield back my remaining time.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from Oregon, Mr. Walden.

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

    Mr. Walden. Thank you very much, Mr. Chairman. I just want 
to make a couple of points. First of all, it has been said that 
there is enormous transfer to the Northwest as a result of cap 
and trade in this bill, and while there is a certain truth to 
that in some sectors, we are going to find out today that the 
553,000 customers of Pacific Corps face a 17.9 percent increase 
in their power costs in the first year of this legislation in 
2012. That is $163 million hit to customers in Oregon, 
according to the data that we are going to hear, and so I think 
we have seen what happens when you have the government take 
over the auto sector. That is playing out in every rural town 
in America right now as dealers are getting shot in the head. 
This bill amounts to a government takeover of the energy sector 
and we are going to see how that plays out.
    Meanwhile, the Chinese, you know--there is a story in the 
Washington Post today that quotes from a May 20th position 
paper regarding the Copenhagen meeting where the Chinese are 
expecting the developed countries to reduce their emissions by 
at least 40 percent from the 1990 level by 2020. This 
legislation reduces it by 4. So you see the level of 
expectation that the Chinese have for us. If that is the case 
and it is a 10-fold increase, then does that mean my ratepayers 
are going to see 179 percent increase in their energy costs?
    Meanwhile, I know you would all be disappointed if I didn't 
point out that this legislation fails miserably in the area of 
woody biomass and in fact, two-thirds of the federal land would 
be off limits as a result. That has still not has been fixed in 
this legislation. I desperately hope it does because, as we 
know from the example in Sweden, you could actually create 
30,000 jobs as they did using biomass and produce 18 percent of 
their electricity with woody biomass.
    Finally, I would say this does amount, according to CBO, an 
$846 billion increase in federal revenues, an $821 billion 
increase in direct spending, and while they initially say that 
is a surplus of $24 billion, they go on to point out that it 
would increase discretionary spending by about $50 billion over 
the 2010 to 2019 period. So it does cost money, it raises 
taxes, it will hurt jobs and it raises rates to consumers.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from Arkansas, Mr. Ross.

   OPENING STATEMENT OF HON. MIKE ROSS, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF ARKANSAS

    Mr. Ross. Thank you, Chairman Markey, for holding today's 
hearing on allowance allocation policies in climate change 
legislation. This is an important topic and I am pleased to see 
the subcommittee discussing this issue.
    I would like to also thank all the witnesses that have come 
before the subcommittee to testify today. I want to 
particularly use my time to recognize one of the witnesses, Mr. 
Steve Cousins, with Lion Oil Company. Steve is the vice 
president of refining for Lion Oil Company, which is located in 
my Congressional district in El Dorado, Arkansas. Lion Oil has 
been a leading employer in El Dorado for over 85 years and 
their refinery in Ed Dorado produces approximately 70,000 
barrels of gasoline and diesel fuel per day. Lion Oil employs 
about 1,200 direct employees in El Dorado, one of many towns 
across my district that has been hit hard by the recession, and 
they employ another 3,600 individuals that depend indirectly on 
the plant in El Dorado. As such, I am concerned about how the 
cap-and-trade legislation that the committee recently passed 
will affect Lion Oil and other small refineries across America, 
and I am eager to hear Mr. Cousins' testimony today on their 
behalf. I am particularly concerned that perhaps as a committee 
we picked winners and losers in the allocation process, and 
certainly I feel that the small refineries came out on the 
short end of the stick. As the leader of the free world, I 
believe that America must lead by example on climate change. 
However, we must embrace a commonsense approach to imposing 
regulations that will help to improve our environment while 
still maintaining jobs and strengthening our Nation's economy, 
and I am hopeful that Steve's testimony and others today will 
help us do that.
    Once again, thank you for holding this hearing and I look 
forward to the testimony in order to work on a solution to 
climate change that is consistent with commonsense Arkansas 
values, ones that does right by the environment and the 
economy. And with that, Mr. Chairman, I yield back.
    Mr. Markey. Great. The gentleman's time has expired. The 
Chair recognizes the gentleman from Louisiana, Mr. Scalise.

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

    Mr. Scalise. Thank you, Mr. Chairman. This hearing on 
allowance allocation policies is long overdue and should have 
been held months ago.
    The allocation section of the cap-and-trade energy tax bill 
that this committee marked up last month remained essentially 
empty until just hours before our committee met. This ill-
advised cap-and-trade energy tax, which was the product of 
secretive backroom deals and special-interest trading will 
hijack our entire American economy and will raise costs on all 
American families and businesses at a time when they can least 
afford it. The American people expect and deserve more, 
especially at a time when they were promised transparency. No 
one denies that the cap-and-trade energy tax will cause 
millions of American jobs to be shipped to foreign countries 
like China and India while American families will pay thousands 
more in increased utility costs. Even President Obama has 
acknowledged that his cap-and-trade energy tax will lead to 
higher electricity prices by stating, ``Under my plan of a cap-
and-trade system, electricity rates would necessarily 
skyrocket.'' And just last month the current CBO director, 
Douglas Elmendorf, testified before the Senate that a cap-and-
trade program would lead to higher prices for energy-intensive 
goods.
    This bill creates big winners and big losers. The big 
losers are American families and small businesses, and make no 
mistake about it, the big winners are countries like China and 
India who are chomping at the bit to take our jobs and the same 
Wall Street speculators who brought our country's financial 
markets to near collapse and who stand to gain billions in new 
profits by creating a trading scheme for these carbon credits. 
Instead of shipping millions of good jobs overseas and killing 
our energy economy, Congress should support an all-of-the-above 
national energy policy that will create American jobs by 
utilizing our Nation's natural resources to reduce our 
dependence on Middle Eastern oil and promote alternative 
sources of energy like wind, solar and nuclear.
    Along with many of my colleagues, I am proud to be a 
cosponsor of H.R. 2300, the American Energy Innovation Act, 
legislation that takes this all-of-the-above approach, and the 
net effect of our comprehensive energy plan will result in 
lower carbon emissions because American jobs and manufacturing 
will not be shipped to foreign countries like China that have 
lower environmental standards than we have today here in 
America. Thank you, and I yield back.
    Mr. Markey. Great. The gentleman's time has expired. The 
Chair recognizes the gentleman from Utah, Ms. Matheson.

  OPENING STATEMENT OF HON. JIM MATHESON, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF UTAH

    Mr. Matheson. Thank you, Mr. Chairman. I think the issue of 
how you structure an allowance program is extremely complicated 
and it is very important that we hold this hearing to create 
better understanding for all the ramifications the way that 
this has been structured now and see if there are suggested 
improvements. I hope as we move forward with this hearing--I 
have not had a chance to read all the pre-filed testimony but I 
would hope as we move forward in this hearing that the panel 
can shed some light on the impacts of the allocation structure 
that is included in the bill as it is written now which shows 
that half the allocations are based on total generation 
capacity and half on the fuel mix, if you will. I may be 
oversimplifying with that. It seems to me this draws into 
question the issue of different impacts on different regions of 
the country. Some regions are heavily based on nuclear, some 
heavily based on hydro. I come from a State where over 90 
percent of the electricity is generated from coal, and I have 
been raising from the outset of these climate change hearings 
the question of impacts in terms of regional income transfers 
and this specific topic today of the allocation structure of 
this bill is one of the key elements of regional impacts, in my 
opinion.
    So I welcome the witnesses. I hope as we move through this 
hearing we can learn more about the impacts on different 
regions of the country, and if there are problems with the 
current allocation structure written in the bill, I look 
forward to suggestions that people think might be a better way 
to address that concern. With that, I yield back, Mr. Chairman.
    Mr. Markey. The gentleman'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. Thank you, Mr. Chairman, and as Ranking Member 
Barton has indicated, we are hoping there will be more than one 
of these hearings. I know that Mr. Waxman and yourself have 
indicated that we would have at least one, and I think is it to 
your credit to have this hearing as well as ours because I 
think judging from the participation of our witnesses, this 
will be a great opportunity for us to ask questions.
    We have the estimate from CBO, we have the Heritage 
Foundation. I am going to mention this briefly. So there is 
quite a diverse opinion here on the impact of this cap and 
trade. As mentioned by others, the CBO has indicated that this 
would hurt families by imposing an $850 billion energy tax that 
would obviously be paid by every American family. If you are 
going to drive a car, buy anything American or just simply turn 
on a light, you are going to be faced with the possibility of 
increased taxes. The Heritage Foundation, their projections to 
2035 are pretty dramatic. Now, I don't know if they take into 
account inflation, which would normally occur, but they say it 
would raise electricity rates almost double and raise gasoline 
prices, raise residential natural gas prices by almost 60 
percent, increase the federal debt by 26 percent and additional 
enormous costs for families. So the resulting higher energy 
rates will be especially hard, I think, on the poor, the 
elderly, low income, particularly those individuals in my 
district who spend most of their paycheck on service 
industries, gas, groceries and cooling their homes.
    During the Energy and Commerce Committee markup, we offered 
numerous amendments, simple amendments that I thought would 
simply pass with bipartisan support, we thought to improve the 
bill to protect these American families from paying these 
massive new taxes, but they were defeated almost along party 
lines, so Mr. Chairman, in the end, this is really your bill. 
This is not a bill that is supported by the Republicans and so 
you will have to make the case why Americans should be saddled 
with an $850 billion new tax, particularly in light of the 
economy now that can least afford it.
    So, you know, I think fostering new technology and 
scientific research instead of capping our economy and trading 
U.S. jobs is a better guard to our Nation's security and 
increase our energy independence, and with that, I yield back.
    Mr. Markey. Great. We thank the gentleman. The Chair 
recognizes the gentleman from Georgia, Mr. Barrow.

  OPENING STATEMENT OF HON. JOHN BARROW, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF GEORGIA

    Mr. Barrow. I thank the chairman. All of us, I think, are 
depending on technological breakthroughs to get us something we 
don't have right now, and that is new sources of energy that 
are clean, cheap and abundant. Mr. Barton talks about 
fundamental disagreements. I am going to outline another one.
    So far, everybody who has talked has depended on increases 
in the cost of dirty energy to provide the incentive or the 
conditions to create this thing we don't have yet, the 
technological breakthroughs we need. The do-nothing crowd says 
we can wait and let natural forces of supply and demand produce 
the crash in prices that will produce the incentives to folks 
to develop what we need. The do-something crowd says we need a 
controlled crash in advance of that condition before Florida is 
awash with water so we can try and, you know, accelerate the 
research and development in a sort of trickle-down fashion. I 
think we ought to disenthrall ourselves from the whole idea 
that increasing the cost of dirty energy is the best way to 
come up with new sources of clean energy. It certainly ain't 
the best way and it is certainly not the only way. We also 
ought to disenthrall ourselves of plans that were adopted at 
the State level or the result of regional cooperation which 
really reflect the limits of what States acting together or 
independently can do under the Constitution. It seems that the 
folks that are pushing that idea are determined to impose the 
limits of State power acting alone or in concert with other 
States on our national efforts.
    What we are talking about here is a plan to redistribute 
the proceeds of a plan to deliberately increase the cost of 
dirty energy in order to create some sort of supply of new 
energy that is cheap, clean and abundant. What I think we ought 
to do is recognize that that is going to provide uncoordinated 
research and development. It is going to provide resources that 
are weaker, inherently weaker than what we can do at the 
national level. What I think we need is not a program that 
depends on a price crash but a program that depends on a crash 
program of sustained public investment in research and 
development and deployment of clean sources of alternative 
energy. That is a level of fundamental disagreement that I 
haven't heard yet and that is where I come from on this. I 
think it is incumbent on those of us who are dissenting from 
this approach to set forth our vision of how we can do a better 
job that is more effective and more coordinated, and with that, 
Mr. Chairman, I yield back.
    Mr. Markey. The gentleman's time has expired. 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.
    Several people have mentioned China as an excuse for doing 
nothing on this problem. We just spent a week in China with the 
Speaker. I thought I would make three points about why we 
should assume our traditional role as world leaders in America 
on this subject.
    Number one, in this bill we have provided protection for 
American workers in trade-sensitive energy-intensive industries 
in steel, aluminum, paper, by providing 15 percent of the 
allocations to these industries so we do not have to concern 
ourselves about job leaking to China in these trade-sensitive 
energy-intensive industries. Mike Doyle and I worked on that, 
and thanks to the Chair we got it in this bill.
    Point number two: China is acting on energy today in three 
ways that we are not even today. Number one, they have a 20 
percent reduction of energy intensity from a carbon 
perspective, CO2 perspective. Number two, they have 
a 15 percent renewable energy portfolio. Number three, they 
have a corporate average fuel economy standard even more 
aggressive than ours. And it is a certain irony today to me 
that some people here are arguing we should not act using China 
as an excuse when those are the same people who would not even 
allow America to do that tomorrow which China has already done 
yesterday. They are actually taking steps on this problem which 
we have not even taken yet, and unfortunately, some of my 
colleagues across the aisle have resisted taking those actions.
    Point number three: They have not done enough and we are 
going to be pressing them to do more. It is clear that we need 
to ask them to do more, given the rise in the number of their 
plants without coal sequestration that they are using right 
now. But it makes no sense to me whatsoever to continue to 
provide China an excuse for further inaction by inaction on our 
own part. When it comes to china, we ought to think of two 
things: one, they are acting; two, they are not going to act 
more unless we start to act.
    This is a start of a clean energy revolution which both 
countries can benefit from. We ought to continue this effort. 
Thank you, Mr. Chairman.
    Mr. Markey. Great. The gentleman's time has expired. The 
Chair recognizes the gentleman from Louisiana, Mr. Melancon.

OPENING STATEMENT OF HON. CHARLIE MELANCON, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF LOUISIANA

    Mr. Melancon. Thank you, Mr. Chairman. This committee has 
set a new high bar for work on a single legislative issue and I 
commend the members and the staff for their dedication to this 
important issue. While this committee has hosted many hearings 
and I think this hearing is helpful in working to fully 
understand this, I do have a few concerns.
    First, what are the real cost impacts on the consumers? We 
know that EPA has come up with an estimate of around $140 per 
family per year, but I don't believe those numbers are modeled 
on RPS or an RES and I don't believe that the allowance 
allocations were included in the analysis either. But also on 
the other side, I do believe that the estimates of $3,100 per 
family were obviously a bit exaggerated to the other side. So 
my question is, what are the real numbers and can we get those 
at some point in time in a timely manner?
    Second, what is the net job creation minus the carbon-
related job loss and will those jobs be more regional or spread 
out. My concern in Louisiana is, I am for green jobs but I am 
not for giving up the good-paying jobs that I have in south 
Louisiana in hopes of getting some new jobs in other parts of 
the country. As mentioned earlier by one member of the 
committee, this shouldn't be about who wins and who loses. This 
should be about us all having some skin in the game and this 
country moving forward in a positive way that benefits all of 
us in the long run.
    Thirdly, what tools can we use to moderate the impact on 
transportation fuels? Providing an allowance relief to 
cogenerate electricity producers was an admirable move to 
ensure that our constituents that are struggling through the 
current tough economic times won't be even more burdened by 
high utility prices. As a representative for a rural district, 
I have to worry about the people who regularly drive long 
distances as a requirement for their employment or commute. 
Developing similar cost containment measures for transportation 
fuels would be helpful to many people facing high gas prices 
this summer. I particularly have a son that commutes quite a 
long ways every day and the concern that he has already is a 
concern for me as a parent.
    So these are concerns of mine and my constituents in south 
Louisiana, and I don't think I have any time to yield back but 
I thank you for the opportunity to comment.
    Mr. Markey. Great. The gentleman's time has expired. The 
Chair recognizes the gentleman from New Jersey, Mr. Pallone.

OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE 
            IN CONGRESS FROM THE STATE OF NEW JERSEY

    Mr. Pallone. Thank you, Mr. Chairman.
    The allocation of emission allowances is one of the most 
important policy provisions in the Clean Energy and Security 
Act. These allowances will protect consumers, invest in clean 
energy and energy-efficiency programs and help trade-exposed 
industries make the transition to clean energy technologies.
    The allocations for renewable energy and energy 
efficiencies are particularly important to me. States will 
receive 10 percent of allowances from 2012 through 2015 to 
invest in programs that will help meet the renewable 
electricity standard. My State, New Jersey, has one of the most 
aggressive renewable electricity standards in the country 
requiring that 20 percent of our electricity needs come from 
renewable energy by 2020. By investing allowances in clean 
energy and energy efficiencies, we are helping States like New 
Jersey meet these goals.
    I have always been a strong advocate for renewable energy 
programs and I believe Congress should be doing as much as 
possible to encourage investments in renewables. This will help 
us not only reduce greenhouse gases in this country but it will 
also create clean energy jobs. Hard choices were made with 
regard to the final allocation formula that passed through this 
committee and those choices will ensure that we take a huge 
step towards cutting greenhouse gas emissions and investing in 
a clean energy economy. The committee did a good job, in my 
opinion, to ensure that consumers are protected, critical 
investment in clean energy and energy efficiency programs are 
included, and industry is not harmfully affected by the cap on 
greenhouse gas emissions. Thank you, Mr. Chairman.
    Mr. Markey. Great. The gentleman's time has expired. The 
Chair recognizes the gentlelady from Wisconsin, Ms. Baldwin.
    Ms. Baldwin. Thank you, Mr. Chairman. I am going to waive 
my opening statement so that we can hear from the witnesses, 
other than to thank you for holding two important additional 
hearings to perfect the record this week. Today's hearing on 
allowances and Friday's hearing on transmission-related issues. 
I believe that these hearings will allow us to perfect or 
further complement the legislation that was already reported 
favorably by the full committee, and I appreciate the fact that 
you are holding these two additional hearings this week.
    Mr. Markey. I thank the gentlelady. Although he is not a 
member of the Subcommittee on Energy and Environment, Mr. Terry 
is here from Nebraska and by unanimous consent we can allow him 
to make an opening statement if he would like.
    Mr. Terry. Yes, I would. Thank you.
    Mr. Markey. The gentleman is recognized.

   OPENING STATEMENT OF HON. LEE TERRY, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF NEBRASKA

    Mr. Terry. I appreciate holding this hearing on what is 
somewhat mysterious because of its complexity, the allowances 
and how they work, and it will be fun, I think, as well as 
educational for us.
    I have some difficulties getting my mind around the whole 
concept of cap and trade when there are alternatives such as 
cap and incentives or plans that we could have taken offline 
older, inefficient, coal-fired plants and perhaps replace them 
with clean and efficient nuclear power plants. Why all those 
type of concepts were just routinely discarded baffles me but 
on we go.
    But I have the pleasure here of having a constituent at the 
witness table in David Sokol. David is one of Omaha's 
preeminent business executives and philanthropists. I have 
known him for a long time, about 20-some years. He is the CEO 
of Mid American Energy Holdings. There is a variety of energy 
companies within that holding generating electricity and also 
pipelines with natural gas, and one of the things that I 
appreciate about Mr. Sokol is he studies the issue. In fact, he 
may have been ahead of the curve in reading the bill before 
most of the members probably had a chance to even read the 
bill. So I am pleased to have him here. He is straightforward, 
common sense, a little bit out of the box which I respect and 
appreciate, so I welcome Mr. Sokol.
    Mr. Markey. The gentleman's time has expired, and all time 
for opening statements has expired. I would just like to for 
the record make it clear that there is absolutely nothing in 
the legislation that requires a compulsory copyright transfer, 
and that is one of the reasons why the Judiciary Committee has 
not been given a referral of this legislation because there is 
nothing in the bill on patents or copyrights, so I just want 
the record to reflect that in terms of transfer of patent or 
copyright interests that is affected by the bill.
    Now let us turn and recognize our first witness, Mr. Thomas 
Farrell. He is the chairman, the president and CEO of Dominion, 
who will speak today as a board member of the Edison Electric 
Institute. Mr. Farrell is also a board member of the Institute 
of Nuclear Power Operations and of the Council of Foreign 
Relations, an independent task force on climate change. Thank 
you so much, Mr. Farrell, for being with us here today. 
Whenever you are comfortable, please begin.

 STATEMENTS OF THOMAS F. FARRELL, II, CHAIRMAN, PRESIDENT AND 
 CEO, DOMINION (ON BEHALF OF EDISON ELECTRIC INSTITUTE); RICH 
  WELLS, VICE PRESIDENT, ENERGY, DOW CHEMICAL COMPANY; DAVID 
  SOKOL, CHAIRMAN OF THE BOARD, MID AMERICAN ENERGY HOLDINGS 
COMPANY; STEVE COUSINS, VICE PRESIDENT, REFINING, LION OIL; G. 
TOMMY HODGES, CHAIRMAN, TITAN TRANSFER, INC., (ON BEHALF OF THE 
    AMERICAN TRUCKING ASSOCIATION); DAVID MONTGOMERY, VICE 
 PRESIDENT, CHARLES RIVER ASSOCIATES; NAT KEOHANE, ECONOMIST, 
ENVIRONMENTAL DEFENSE FUND; AND REVEREND DR. MARI CASTELLANOS, 
MINISTER FOR POLICY ADVOCACY, UNITED CHURCH OF CHRIST, JUSTICE 
                      AND PEACE MINISTRIES

               STATEMENT OF THOMAS F. FARRELL II

    Mr. Farrell. I thank Chairman Markey and Ranking Member 
Upton and members of the committee. Thank you for the 
opportunity to provide testimony on the allocation emission 
allowances under the American Clean Energy Security Act.
    Dominion Resources, to give you some perspective, is one of 
the Nation's largest integrated electric and natural gas 
companies with operations in the Midwest, Northeast and Mid-
Atlantic regions of the country. Our corporate headquarters is 
in Richmond, Virginia. We are active along the entire energy 
production delivery chain. We operate a large fleet of nuclear, 
oil, coal, gas-fired and renewable energy facilities, both 
regulated and merchant. Slightly more than half of our electric 
output is fossil fired. We also operate natural gas pipelines, 
gas storage structures, L&G importation facilities and we 
explore for and produce natural gas. We serve about 5 million 
retail customers in 12 States.
    I am appearing before you today on behalf of the Edison 
Electric Institute. EEI member companies serve 95 percent of 
the ultimate electricity customers in the investor-owned 
segment of the industry and account for about 70 percent of the 
total U.S. electric power business. EEI has endorsed an 
economy-wide cap-and-trade program to reduce greenhouse gas 
emissions that includes provisions to mitigate the cost impacts 
on electricity customers and the economy. Under any scenario, 
it will be expensive to transform the United States into a low-
carbon society. It will take effective carbon regulation and 
the development and deployment of a full range of climate-
friendly technologies to get the job done, some of which are 
commercially available now and some of which are not.
    EEI's membership spent 2 years developing a circumstances 
proposal to minimize the economic impact of reducing carbon 
emissions for all electricity consumers, especially the low-
income families and energy-intensive businesses and industries 
that will suffer the most from higher electricity costs. The 
allowance allocation formula in H.R. 2454 is the essence of the 
EEI proposal. The allowance allocation concept has the broad 
support of a variety of shareholders including the U.S. Climate 
Action Partnership, labor groups and EEI and its member 
companies. The allowance allocation method we support offers 
the best means of protecting electricity consumers of all 
types, large and small, rural, urban and suburban, without 
sacrificing the desired environmental improvements. Consumers 
can be assured that whether they receive electricity from a 
shareholder-owned utility, an electric cooperative or municipal 
utility, they will receive the benefits of the allowance 
program provided for in the legislation.
    The bill's allowance allocations to the power sector amount 
to 35 percent of the total annual allowances available to all 
major sectors of the economy covered by the bill. About 30 
percent go to local distribution companies and about 5 percent 
will go to merchant coal generators and other generators with 
long-term power purchase agreements until direct allocations 
begin to decline from 2026 through 2030. A longer phase-out 
period is one of the modifications of the bill that EEI seeks. 
H.R. 2454 currently provides for allowances to decline 
precipitously from 35 percent to zero in the 5-year period from 
2025 to 2029. Because the emission cap declines sharply from 
2020 to 2030, consumer protection will be strengthened if 
allowances are phased our more gradually.
    The bill specifies that these allowances must be used 
exclusively for the benefit of retail ratepayers. The 
allocation proposal ensures that all classes of electricity 
customers receive the benefits of the value of the emissions 
allowances regardless of the size, location or ownership 
structure of the LDC. Targeting LDCs as the primary recipient 
of the allowances ensures that the benefits and costs of those 
allowances flow directly to end-use consumers. LDC rates are 
regulated by State commissions. These commissions have 
extensive oversight experience and authority to ensure that 
allowances received by LDCs will be reflected in any rate-
making cases. The bill enhances the role of State commissions 
and includes safeguards to ensure that allowances directly 
benefit customers. Allocations to LDCs can also take into 
account regional variations in electricity use generation mix 
and cost. Different regions use different amounts of fossil 
fuel to produce electricity. Some regions use more coal than 
others. Average customer demand for electricity also varies 
significantly by region due to such things as weather and the 
price of power.
    We are pleased that the bill provides direct allowances to 
the electricity sector in the early years of the program. This 
feature of the bill is critical to protecting consumers until 
new technologies are available to enable the continued use of 
our domestic coal resources. It is important to note, however, 
that significant costs remain for the utility sector to comply 
with major programs in this Act. The renewable electricity 
standard and the climate cap-and-trade program will require 
significant financial investments to either change the current 
generation profile, purchase renewable energy credits or 
offsets, make alternative compliance payments, purchase 
allowances from auction or some combination of all of these. 
H.R. 2454 distributes emissions allowances to LDCs based on a 
calculation of each LDC's share of the total LDC allowance 
pool. To give equitable treatment to the concerns of different 
local distribution companies, the distribution of allowances 
follows a 50/50 formula, 50 percent based on each LDC's share 
of average annual electric sector CO2 emissions 
during the base period including emissions associated with 
purchase power and 50 percent based on each LDC's share of 
average annual electricity retail sales during the base period. 
The emissions component of the formula recognizes the concerns 
of utilities with significant fossil generation that their 
customers will face higher compliance costs. Emissions-based 
allowances would help offset those costs. The sale component 
recognizes the concerns of other utilities whose customers 
already face higher prices resulting from utility investments 
in carbon-free power generation.
    Mr. Markey. Mr. Farrell, if you could summarize, we would 
appreciate it.
    Mr. Farrell. It would be my pleasure. We will, I am sure, 
get into discussions about what happens with merchant coal 
generators, a very important part of the bill.
    In sum, we believe the allowance allocation approach set 
forth in the bill will moderate the economic impact of 
greenhouse gas regulation on electricity consumers nationwide, 
especially during the early years of the program. We commend 
the committee for the hard work it has done to craft a climate 
policy that successfully reduces greenhouse gas emissions while 
addressing the cost implications to consumers and the economy. 
Thank you, Mr. Chairman.
    [The prepared statement of Mr. Farrell 
follows:]*************** INSERT 1 ***************
    Mr. Markey. Thank you, Mr. Farrell, very much.
    Our second witness is Mr. Rich Wells. He is the vice 
president for energy at the Dow Chemical Company, where he is 
responsible for Dow's complete energy portfolio. He has been a 
member of the board of directors of the Alliance to Save 
Energy. We welcome you, Mr. Wells. Whenever you are ready, 
please begin.

                    STATEMENT OF RICH WELLS

    Mr. Wells. Thank you, Mr. Chairman and members of the 
committee. I thank you for the opportunity today to comment on 
the allowance allocation provisions of the American Clean 
Energy and Security Act.
    I am vice president of energy for the Dow Chemical Company, 
a leading specialty chemical and advanced materials company 
with over 50,000 employees, half of which are located here in 
the United States. While we are known as an energy-intensive 
company, Dow also makes products that help consumers save 
energy and reduce their greenhouse gas emissions. As an 
example, our thermal insulation and foam sealant products can 
reduce home and business energy costs by up to 30 percent. In 
fact, the recent lifecycle assessment found in emissions 
reductions from the use of Dow insulation products were seven 
times greater than our company's total annual emissions. So as 
you can see, American energy-intensive companies can and do 
develop products that help lower the overall carbon footprint 
of our economy.
    In order for the cap-and-trade system proposed in the 
committee bill to be economically sustainable, it must be 
designed in a way that allows American energy-intensive and 
trade-exposed manufacturers to remain globally competitive in 
the face of rising energy costs. When I testified before this 
committee in April, I said that it was critical under the 
competitiveness title that the output-based rebates be adequate 
to cover direct and indirect emissions associated with sectors 
that meet the energy-intensive and trade-exposed criteria. 
Since that time the committee has allocated 15 percent of the 
total number of allowances toward this purpose. We believe the 
committee has made a reasonable allocation choice based on 
available information. However, due to the uncertainty 
surrounding indirect emissions, we urge continued study of this 
issue as the bill is further reviewed by Congress.
    We are, however, concerned that the current bill phases out 
the amount of allowances for energy-intensive and trade-exposed 
sectors before carbon leakage is addressed. We urge the 
committee to continue to study this issue to ensure that there 
is adequate allocation of allowances until such time that the 
carbon leakage problem is solved through an international 
agreement. If we do not properly address this issue, then we 
will fail to protect American jobs and the manufacturing 
sector.
    Also in April, I testified that the compensatory allowance 
provision for feedstock material was restrictive to the point 
where no company would be able to claim a single allowance for 
using fossil energy in non-emissive ways. We would like to 
thank the committee for modifying that provision which we now 
believe does not punish those companies that use hydrocarbons 
as raw materials to make non-emissive products.
    One of the easiest ways to meet aggressive short-term 
emission reduction targets is through fuel switching from coal 
to natural gas in the power sector. Too strong a price signal 
on carbon would accelerate this movement which is already 
underway, even in the absence of climate change legislation. If 
fuel switching is excessive, demand for U.S. natural gas will 
rise and American manufacturers that depend upon this energy 
source will suffer. Dow supports the allocation of some portion 
of free allowances to coal-fired power generation to help 
minimize fuel switching.
    For the same reason, we also support the allocation of 
bonus allowance to promote carbon capture and storage 
deployment. It is critically important that the bill be 
designed to minimize the cost imposed on U.S. manufacturers. 
That is why we should not assume allowance allocation alone can 
address all the challenges posed by cap and trade for the 
manufacturing sector. For instance, compensatory allowances 
will not cover all the fossil energy Dow purchases as a 
feedstock material. Likewise, allowance allocation will lessen 
but it won't eliminate fuel switching from coal to natural gas. 
Therefore, in order to complement allowance allocation measures 
and to keep U.S. manufacturers globally competitive, we think 
it would be better for the 2020 target to reflect the 14 
percent reduction from 2005 levels rather than a 17 percent 
reduction. We also believe the bill's excessive procedural 
hurdles on offsets will result in high-quality legitimate 
offsets being excluded.
    Mr. Chairman, we commit to working with you and others to 
further refine the basic provisions to assure the 
competitiveness of energy-intensive and trade-exposed 
industries. I thank you for the time today. I would be happy to 
answer your questions when appropriate.
    [The prepared statement of Mr. Wells 
follows:]*************** INSERT 2 ***************
    Mr. Markey. Thank you, Mr. Wells, very much.
    Let me turn now to Mr. Terry to introduce our next witness.
    Mr. Terry. I am pleased I gave him a pretty good 
introduction for time allowed but I want to once again welcome 
and thank a good friend and constituent, David Sokol, CEO of 
Mid American Energy, who has great insight into the issues 
facing electrical generation. Thank you, David.

                    STATEMENT OF DAVID SOKOL

    Mr. Sokol. Thank you, Congressman. Thank you, Mr. Chairman. 
As the Congressman said, I am Dave Sokol, chairman of Mid 
American Energy Holdings Company, part of Berkshire Hathaway, 
and we have $41 billion in energy assets in 20 States and 
around the world, serving 7 million end-use customers. Our two 
domestic utilities service retail electric and natural gas 
customers in 10 States and our generation capacity consists of 
about 22 percent renewables, 48 percent coal, 24 percent 
natural gas and the remainder nuclear.
    I want to be absolutely clear at the outset, cap and trade 
is two concepts. As we have consistently stated, the 
electricity sector can meet the interim and ultimate caps of 
reducing greenhouse gas emissions to 80 percent below 2005 
levels by 2050. But the bill's trading mechanism will impose a 
huge and unacceptable double cost on our customers, first, to 
pay for emissions allowances, which will not reduce greenhouse 
gas emissions by one ounce, and then the construction of new 
low- and zero-carbon power plants and other actions that will 
actually do the job of reducing these emissions. This bill will 
cost hundreds of billions of dollars and we think it is wrong 
to saddle customers with these unnecessary and duplicative 
costs that provide them with absolutely no benefit. Some 
Congressmen claim that the cost of compliance with this bill 
will be zero or modest at worst. They are wrong, either because 
they have not read the bill or they have chosen to 
intentionally mislead the public on this topic. The cost impact 
of the allowance trading mechanism has been grossly understated 
for utilities with coal-fired generation. Under the allowance 
allocation formula, we calculate strictly pursuant to the bill 
that our 2012 allowance shortfall will be nearly 50 percent, 
not 10 percent. This represents 32.4 million allowances which 
at $25 per allowance will cost our customers in the first year 
alone $810 million. That would essentially create a tax between 
12 and 28 percent in the States that we serve. That is just for 
the first year and a very conservative estimate of $25 per 
allowance, and as you know, some predict market prices to be 
two to four times higher. As the cap tightens and auctions 
increasingly replace free allocations, annual compliance costs 
will run into the tens of billions of dollars. But as they say, 
the devil is in the details so let us take a closer look at the 
bill.
    In the first year, the bill creates 4.6 billion allowances, 
takes off 1 percent for strategic reserves and then gives the 
electricity sector a percentage that amounts to 2 billion 
allowances. Now, the sector's total greenhouse gas emissions in 
2005 were 2.4 billion tons, so the 2 billion allowances 
constitute a 16.7 percent shortfall. The bill then gives an 
estimated 300 million allowances to merchant coal generators 
and other long-term power purchase agreements which will 
therefore not be utilized for the benefit of customers and that 
leaves local distribution companies with about 1.7 billion 
allowances, a 30 percent cut below the sector's 2.4 billion 
tons of emissions, not a 10 percent cut.
    But there are other cuts as well. For example, our two 
utilities have added about 2,000 megawatts of wind generation 
since 2004. We are the largest utility owner of wind generation 
in the United States. How does that bill treat our customers 
for their early action and willingness to move on climate 
change by adding wind and reducing carbon emissions? The bill 
penalizes them. And under your bill, utilities, the ones that 
actually need the allowances for compliance, will be forced to 
compete with Wall Street investment banks, hedge funds and 
speculators. Those folks don't generate electricity, they don't 
cut emissions but they do love volatility.
    The bill's supporters also point to the SO2 trading program 
as a successful template for this bill. Let us be clear: the 
only similarity between the SO2 program and the Waxman bill is 
that they are both called cap and trade. The differences are 
huge. First, the SO2 program applied only to the utility 
sector, not economy wide. Secondly, the volume of trading in 
the carbon market will be at least 300 times greater than the 
SO2 market. Third, the SO2 program, when it started, plant 
owners had choices. They could implement off-the-shelf 
available technology, switch to lower-sulfur fuels or buy 
allowances. Today there is no commercially available technology 
to capture and sequester carbon from coal and natural gas 
plants, and as you know, they produce 70 percent of our 
Nation's electricity. And fourth, 97 percent of the SO2 
allowances went to the utilities and were freely distributed 
over the life of that program, again, not the case here. And 
then lastly, the proceeds from the SO2 auction were 
redistributed to the utilities to offset their cost of 
compliance, again, not so here with CO2.
    As we have said, the billions of dollars we pay for these 
allowances in this new market will not reduce our greenhouse 
gas emissions by one ounce. Only actions to actually meet 
emissions caps will do that. If your goal is to decarbonize the 
electric power sector, then you should keep the long-term caps 
but give States the option to bypass this trading mechanism by 
using their existing State and federal regulatory framework to 
determine the most efficient way to get there. This tackles the 
real problem, or at least the problem we thought, which was 
reducing greenhouse gas emissions, but it eliminates the costly 
and useless allowance trading. Is this still going to be 
expensive? Yes, but let us not make the consumer pay twice to 
reach these goals.
    Thank you. I would be happy to take any questions.
    [The prepared statement of Mr. Sokol 
follows:]*************** INSERT 3 ***************
    Mr. Markey. Our next witness is Mr. Steve Cousins, the vice 
president of refining for Lion Oil and chairman of the National 
Petrochemical and Refiners Association Manufacturing Committee. 
We welcome you, sir.

                   STATEMENT OF STEVE COUSINS

    Mr. Cousins. Thank you, Chairman Markey, Ranking Member 
Upton and members of the subcommittee. My name is Steve 
Cousins. I am the vice president of refining for Lion Oil 
Company. My training is as a chemical engineer and I have spent 
my 31-year professional career at our El Dorado, Arkansas, 
refinery, which has been in operation for 85 years. Our 
refinery produces approximately 70,000 barrels per day and our 
main products are gasoline, diesel fuel and asphalt. We employ 
1,200 people directly at our unionized El Dorado facility and 
there are approximately 3,600 other individuals that dependent 
indirectly on our plant for their livelihoods, and like many in 
the audience here today, we wear hardhats to work too. We 
aren't Big Oil. We are a small rural oil refiner.
    The subject of this hearing is extremely important to Lion 
Oil. In our opinion, the proposed allocation of allowances will 
result in the shuttering of our refinery and the loss of the 
1,200 jobs we have worked for decades to bring to and sustain 
in southern Arkansas. If Congress includes transportation fuels 
in a cap-and-trade program and makes refiners hold allowances 
for those products, it must provide the industry with a fair 
and equitable allowance allocation.
    According to EPA's best estimates, the combined carbon 
dioxide emissions for domestic petroleum refineries and the 
consumer combustion of refined products constitute 
approximately 35 percent of the Nation's current CO2 
emissions. These emissions also represent 52 percent of the 
legislation's total emissions allowance pool, and yet the bill, 
as currently drafted, only provides our industry with 2 percent 
of the CO2 emissions allowances. Compare that a 
proposed allocation to other industries. Electric generators 
will receive allocations for 90 percent of their CO2 
emissions. So-called energy-intensive industries will receive 
allocations for 100 percent of their CO2 emissions. 
And remarkably, domestic auto manufacturers which are not 
responsible for the CO2 emissions from their 
vehicles at all will also receive a larger allocation for 
CO2 emissions than refiners.
    Simply stated, American refiners like our business are 
dramatically shortchanged in this bill. I am not an economist 
but I strongly believe that if the bill's current allocations 
stand, the impact on Lion Oil will be profound. At a cost of 
$20 a ton, Lion Oil will have to spend $180 million a year to 
purchase allowances in the first years of the cap-and-trade 
program just to cover our obligation for consumer emissions for 
fuels. Further into the program, our company could be forced to 
spend $750 million by the year 2030 and nearly $2 billion a 
year by the year 2050. Over the last 23 years, Lion Oil's 
actual average net profits have been $13 million per year. It 
is not hyperbole to say that the addition of $180 million per 
year to the operating costs of a refinery that averages $13 
million a year in profit will make our survival impossible. We 
cannot offset these large carbon costly profits from other 
lines of business. We don't have gasoline stations, we don't 
have oil wells. Lion is a small, independent refiner. We are 
not a big oil company. Our operation has to pay for itself or 
the plant cannot continue to operate. In short, without a fair 
and equitable allowance allocation, our company will be 
unprofitable in year one and insolvent within a matter of 
months, not years.
    Proponents of this bill suggest that we will simply pas the 
compliance costs through to consumers in the form of higher 
retail pump prices for gasoline and diesel. Even assuming that 
90 percent of the carbon costs could be passed through, the 
remaining 10 percent, or $18 million per year, is still 150 
percent of our annual profit. No company can survive those kind 
of negative financial results for long.
    Foreign refiners already have a competitive advantage over 
American businesses. This bill would effectively outsource our 
energy future and eliminate hundreds of thousands of American 
jobs in our industry as well as those in companies that rely on 
our industry. There is a new refinery in India and it is 
already expanding to over 1 million barrels per day. It is not 
designed to sell any product in India, it is designed to sell 
its product in the United States and Europe. They don't have to 
meet the U.S. EPA standards. They don't have to meet U.S. OSHA 
standards. They don't have to compensate for their onsite 
CO2 emissions. They would be more than happy to take 
the place of Lion Oil and 15 other small refiners in this 
country.
    In closing, I would simply stress that this legislation 
should not be passed in its current form to protect the quality 
jobs we provide, to protect consumers, farmers and truckers 
that we supply from higher gasoline and diesel fuel prices.
    I appreciate the opportunity to appear before you today. I 
look forward to any questions you may have.
    [The prepared statement of Mr. Cousins 
follows:]*************** INSERT 4 ***************
    Mr. Markey. Thank you, Mr. Cousins, very much.
    Our next witness is Mr. Tommy Hodges. He is the chairman of 
Titan Transfer Incorporated and will speak today on behalf of 
the American Trucking Association. We welcome you, sir.

                  STATEMENT OF G. TOMMY HODGES

    Mr. Hodges. Thank you, Mr. Chairman, Ranking Member Upton 
and other members of the committee. My name is Tommy Hodges. I 
am chairman of Titan Transfer out of Shelbyville, Tennessee, a 
nationwide truckload carrier hauling all type of goods all 
across the country. I also come on behalf of the American 
Trucking Association as first vice chairman of that association 
and also as chairman of the ATA's sustainability task force, an 
effort that we have made over 2 years ago to try to reduce our 
carbon footprint.
    Mr. Chairman, we are an industry of small businesses. 
Roughly 96 percent of all trucking companies in America have 20 
or fewer trucks and are considered by any standard small 
businesses. Our industry operates on margins on fractions of 
cents. We are a penny industry that handles dollars in and 
hopes a few pennies stick to the bottom line. We are especially 
vulnerable to fluctuations that are sudden and out of our 
control in our operating expenses, as we have witnessed in 2007 
and 2008, over 5,000 small trucking companies going out of 
business and much of that can be traced back to the volatility 
of fuel of 2008.
    Since 1998, the trucking industry has been a major 
contributor and participant in cleaning up in our atmosphere. 
Over 90 percent of the particulate matter and nitrous oxides 
have been eliminated from our exhaust pipes at a tremendous 
cost. A catalytic converter on a new truck costs me as an 
investor in that equipment $9,700. We cannot continue to add 
costs on an industry that is so vital to our economic engine. 
Let me my company as an example. We have a little over 400 
trucks based on Shelbyville. We drive about 36 million miles a 
year and we use a little over 5 million gallons of fuel. A 
sudden impact on that when we operate on pennies puts us out of 
business. We cannot afford to do that. Speculation in the 
carbon markets will add to the volatility of this fuel and 
drive more companies out of business. The Nation's long-haul 
trucking industry depends on diesel fuel. We are not 
recreational users. We don't choose to go to the movie house in 
our trucks. We use the fuel to deliver products and services to 
the American public. We don't make useless trips. We would be 
out of business if we did so.
    One of our biggest concerns about H.R. 2454 is that none of 
the generation of monies from the sale of these carbon taxes or 
carbon credits will go to fix one of the critical problem we 
have in the Nation, and that is the lack of capacity on our 
highways, congestion. We waste about 62 billion gallons of fuel 
over a 10-year period by going nowhere, stuck in traffic. 
Nothing that we have read in this bill solves one bit of that 
problem. We think it is imperative that that gets addressed.
    Mr. Chairman, as the previous Mr. Cousins indicated, when 
30 to 35 percent of our carbon problem is generated by 
petroleum-based burning, whether that is in our trucks or 
whatever use, and we only give a 2 percent credit to that 
industry, we are mandating volatility. We will have no choice. 
We will again drive small businesses out of business. The 
allocation shortfall will have a dramatic impact upon the price 
of petroleum derived from fuel and will negative impact the 
trucking industry and the U.S. economy by adding another layer 
of volatility to the price of fuel. Special consideration 
should be given to diesel fuel if nothing else under H.R. 2454 
because of its critical nature of moving America's goods. We 
have a saying in our industry, and it is simply that without 
trucks, America stops. We believe that. Trucking is and will 
remain the predominant means of moving the Nation's freight.
    We must be careful not to inhibit the ability of the 
Nation's trucking fleets to afford fuel purchases in order to 
keep up with business and consumer demands for products. If the 
diesel fuel prices are not kept in check, the movement of the 
Nation's freight will be impeded and the very core of the 
Nation's economy impacted. One might ask how. In our area of 
the woods, there is a little plant in Red Boiling Springs 
called Nestle's and they make water, and all of us got addicted 
to carrying around a bottle of water, and that bottle of water 
is far more expensive than diesel fuel but we still spend and 
buy it, and most of the times we will buy a bottle for 99 
cents. If that bottle suddenly costs us a dollar, you may not 
buy that bottle of water, but with little thought that you just 
put somebody out of a job in Red Boiling Springs. And some of 
the proponents may ask quickly, well, they will find another 
job in a green industry. There is no other industry in Red 
Boiling Springs, Tennessee.
    Mr. Markey. Can you summarize, please, Mr. Hodges?
    Mr. Hodges. Yes. Mechanisms should be put in place to 
ensure fuel emissions and allowances that in fact keep prices 
in check.
    Thank you, Mr. Chairman. This concludes my oral remarks and 
I would encourage each member to read and study my written 
testimony and would be happy to provide ATA's sustainability 
task force reports to committee members.
    [The prepared statement of Mr. Hodges 
follows:]*************** INSERT 5 ***************
    Mr. Markey. Thank you, Mr. Hodges, very much.
    Our next witness is Mr. David Montgomery. He is the vice 
president of Charles River Associates and co-head of their 
energy and environment practice. Welcome, sir.

                 STATEMENT OF DAVID MONTGOMERY

    Mr. Montgomery. Thank you, Mr. Chairman. I am honored by 
your invitation to appear today. Although I am the vice 
president of Charles River Associates, I am speaking to my own 
conclusions today as an economist. I have actually worked on 
the subject of emission trading for close to 40 years, I made 
the unfortunate calculation, starting with my Ph.D. thesis that 
turned into the first rigorous theoretical analysis of how a 
cap-and-trade program could actually be made to work.
    My testimony today is based on some of the findings in a 
report that was recently authorized by several of us at Charles 
River Associates and I would like to submit that for the record 
as well as my testimony in order to try to provide backup for 
the statements.
    Mr. Markey. Without objection, it will be included in the 
record.
    Mr. Montgomery. Thank you. I think the most important point 
in my testimony is that no distribution of allowance value can 
eliminate all of the costs of capping emissions. Free 
allowances can only eliminate the necessity of paying the 
government for permission to emit up to the level of the cap. 
But even if allowances are free, businesses and consumers must 
still bear the costs of the actions that they need to take to 
get emissions down to the cap. I think this is the point also 
made by Mr. Sokol and I think he is absolutely right on that.
    The cost of bringing emissions down to the cap is reflected 
in reductions in GDP and household consumption. Allocations do 
shift who bears the burden across industries, regions and 
income groups as would decisions about how to spend or return 
to taxpayers the revenues from allowance auctions but it is 
important to keep in mind that there is never enough to go 
around in the allowance value and completely insulating some 
parties only increases the share of the cost of achieving the 
cap must be borne by others. The cost for the average family 
would be significant even after taking into account free 
allocations and spending of auction revenues. These impacts 
can't be predicted with certainty but taking into account all 
of the provisions of the bill in our analysis on average 
nationwide the cost per household in 2020 could be from $600 to 
$1,600 per household, and we base this range on what I think 
are reasonable assumptions at both ends of the range.
    It is also important not to be deceived by these averages 
in looking at the impacts on any particular sector or group. 
The cost, for this hearing, I have taken a closer look at the 
regional impacts of H.R. 2454, taking into account the 50/50 
formula for allowance allocations to local distribution 
companies in particular. Even with those allowance allocations, 
our analysis suggests that the regional impacts would be 
unequal and uneven. Impacts on household income differ across 
regions and appear regressive based on regional average income 
and the magnitude of cost increases. The wealthiest regions, 
Northeast, Mid-Atlantic and California, have the lowest cost 
and the two least wealthy regions, which in our analysis are 
Oklahoma, Texas and the Southeast, have the highest cost per 
household. The free allocations to electric local distribution 
companies according to the formula will also lead to different 
increases in electricity rates in different regions. 
Interestingly, there also seems to be an inverse relationship 
between regional income and the benefits of free allowances. 
The Southeast has the lowest average regional income and a 15 
percent increase in electricity costs while the Northeast has 
the highest average regional income and nearly no increase in 
electricity costs.
    International offsets and allocations to tropical 
deforestation also play a huge role in H.R. 2454. All the 
economic impacts I have discussed would be much larger if the 
full amount of international offsets allowed by the bill does 
not become available, and I think there is some significant 
questions that have been raised by recent studies about whether 
the countries that are suffering now from the highest rates of 
deforestation and forest degradation have the institutional 
capacity to meet the requirements of ACES for governance of 
those forests.
    Let me turn to another topic that I think is quite 
important. Despite some claims to the contrary, how allowances 
are allocated can have effects on the overall economy. It 
depends on the allocation formula. In particular, thinking 
about the allocations to LDCs, if free allowances are used to 
reduce energy prices seen by consumers, the incentive to 
conserve energy will be reduced and the costs of complying with 
H.R. 2454 will increase. Two other use of allocations can also 
increase economic impacts. Technology subsidies that lead to 
uneconomical choices of technology such as bonus allowances for 
CCS or use of allocations to interfere with the economics of 
fuel switching will raise costs. Output-based allowances to 
industries can also lead to uneconomic choices in the level of 
output.
    The output-based award of allowances to specific trade 
impact of industries has been mentioned a couple of times today 
but it appears to me based on the work we have done on trade 
issues that it would be in direct violation of the WTO 
agreement on subsidies and countervailing measures. It would 
likely to be ruled an actionable subsidy if any other country 
were to challenge it before the WTO. Everything about the WTO 
is murky but this possibility seems to have gone unrecognized. 
It needs to be carefully considered, otherwise we might pass a 
bill into law that we later discover doesn't have any real 
trade protection at all.
    If any of these problems materialize, limited availability 
of international offsets, distortions created by free 
allocations, and I would also mention, I discuss in my 
testimony, unnecessary regulatory measures that could raise 
costs by imposing the judgment of Congress and government 
agencies over the judgment of consumers in response to a cap-
and-trade program, and the bill contains many regulatory 
measures but the idea of a cap-and-trade program is to put a 
price out there and let individual businesses and consumers 
make the decision. I am in favor of letting the market work 
that way but those regulatory measures, if they become binding, 
could significantly increase the cost of the bill and change 
it. Anyway, if any of these materialize, then the cost of 
reducing emissions to the stated caps will increase. I think 
that is relevant to the topic today because the higher the cost 
is of getting emissions down to the cap, the harder it is to 
use allocations to insulate needy portions of the economy from 
the cost and larger will be the cost that those who do not get 
free allocations have to bear.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Montgomery 
follows:]*************** INSERT 6 ***************
    Mr. Markey. Thank you, Mr. Montgomery, very much.
    Our next witness is Nat Keohane, an economist and director 
of economic policy and analysis for the Environmental Defense 
Fund Climate and Air Program. We welcome you, sir.

                    STATEMENT OF NAT KEOHANE

    Mr. Keohane. Thank you, Mr. Chairman and distinguished 
members of the subcommittee for holding this hearing. I am 
honored to be here today. I will add, I am also an economist by 
profession and training and have worked on cap-and-trade 
markets, although I can't claim to have the 40 years behind me 
that--when Dr. Montgomery was writing his thesis, I was yet to 
be born, so that is an interesting contrast.
    So with the----
    Mr. Markey. I am with you, Mr. Montgomery.
    Mr. Keohane. With the proposed legislation that is the 
subject of this hearing, Congress has an unprecedented 
opportunity to put the American economy on a stronger footing 
for the 21st century. A cap on carbon will harness the efforts 
of entrepreneurs and innovators throughout our economy, 
ensuring that America will lead the world in making the next 
generation of clean energy technologies, and the investment 
unleashed by a carbon cap will help jump-start our economy 
today while paying rich dividends later in the form of cleaner 
air, enhanced energy security and most of all, a livable planet 
to pass on to our children and grandchildren.
    In the process, a carbon cap will transform a common 
resource into a valuable asset. That asset is a public trust 
and allocating its value wisely and equitably is a crucial test 
of any climate bill. So what are the principles any set of 
allocations should reflect? First, a substantial portion of the 
allowance value should go to energy consumers, particularly 
low-income households. Second, the allocations should preserve 
and strength international competitiveness of American 
businesses and workers during the transition to a clean energy 
economy. Third, the allocation must be fair and equitable, 
respecting differences across States and regions. Fourth, the 
integrity and credibility of the program must be preserved. 
Allowances that are intended for the benefit of consumers must 
be accompanied by strong safeguards to ensure that consumers 
receive the value, and while some allowances may fairly be 
allocated to industries in order to smooth the transition to a 
clean energy economy, Congress must avoid giving windfall 
profits to industry. Finally, the allocations should use some 
value to help advance the underlying objectives of the 
legislation such as investment in clean energy and for 
adaptation. These principles are consistent with the blueprint 
for legislative action that the business and industry 
coalition, U.S. CAP, has put forward, and the bill performs 
well on each of them.
    First, energy consumers will receive ample protection 
against increases in cost. For the first part of the program, 
40 percent of the allowance value will directly benefit energy 
consumers, households, small business and industrial users. In 
addition, a full 15 percent of the allowance value will be 
given to low- and moderate-income households. The Center for 
Budget and Policy Priorities estimates that this amount is 
sufficient to fully compensate those low-income households for 
higher energy costs. Finally, nearly 20 percent of the value of 
allowances over the whole period will be returned to all 
households in the form of tax rebates. When you add it all up, 
about 44 percent, nearly half of the total allowance value, 
goes directly to households in the form of tax rebates or lower 
utility bills. That amounts to an estimated $700 billion in 
present value using EPA's projected allowance prices. So that 
is the first principle.
    What about the second? Well, the Inslee-Doyle provision 
directs up to 15 percent of allowances in the early years to 
energy-intensive trade-exposed industries, and EPA estimates 
that this provision will fully compensate those industries for 
their increased costs. Third, the bill strikes an equitable 
balance across regions. This is done, as we have heard, by 
allocating half of the allowances for the electricity sector on 
the basis of carbon dioxide emissions and half on the basis of 
electricity generation. But more broadly, regional equity is 
ensured by the use of multiple channels, for example, combining 
direct tax rebates for households with reductions in utility 
bills. Fourth, the legislation ensures that allowance value 
intended for consumers will reach them. Allowances will be 
allocated to local distribution companies with clear and 
stringent provisions requiring those LDCs to demonstrate how 
they will pass on the value to consumers before they can 
receive a single allowance. Finally, over one-quarter of the 
allowance value over the life of the bill will fund public 
purposes to help achieve the broader environmental objectives. 
These include funding for clean energy innovation, for carbon 
capture and sequestration, for investments in renewable energy 
and energy efficiency, and adaptation.
    In sum, this legislation satisfies the five principles I 
laid out and does so with flying colors, but in a sense, the 
true test of the allocation scheme boils down to just one 
number: the estimated cost to American households. The best 
estimate we have is from a recent analysis by the Environmental 
Protection Agency of the bill. You will hear groups on both 
sides including the prior witness come up with other numbers 
but the EPA relied on the gold standard, two of the best and 
the most widely respected peer-reviewed economic models 
available, and what they found--and by the way, they only 
looked at the costs to households. They did not look at the 
benefits in the form of enhanced energy security and cleaner 
air and averting catastrophic consequences of climate change, 
only looking at the costs. The EPA estimated the average cost 
of the average household at just $98 to $140 per year in 
present value. One way to think of it, that is 27 to 38 cents a 
day for the average American family, or less than a postage 
stamp. It is also, and I have done this before but I will do it 
again to make it concrete, it is about 13 cents per person per 
day, a little more than a dime a day. A big part of the reason 
these estimated costs are so low is because they take into 
account that much of the value of allowances will go back to 
households, and while the EPA specifically analyzed the 
discussion draft, it has reported that the estimated household 
costs are likely to be even lower once all the provisions of 
the current legislation are taken into account.
    Mr. Chairman, environmental organizations like mine are 
quick to criticize Congress when public policy diverges from 
what we see as the public interest. In this case, however, this 
committee got it right. The proposed allocations will keep 
costs low for consumers, ensure a level playing field for 
American industry and promote investment in a clean energy 
future, all while preserving the environmental and economic 
effectiveness of this legislation.
    Thank you for inviting me to testify. I look forward to 
your questions.
    [The prepared statement of Mr. Keohane 
follows:]*************** INSERT 7 ***************
    Mr. Markey. We thank you very much.
    Our final witness is the Reverend Dr. Mari Castellanos, and 
she is a minister for public advocacy with the Justice and 
Peace Ministries of the United Church of Christ. We welcome 
you.

                 STATEMENT OF MARI CASTELLANOS

    Reverend Castellanos. Good morning, Chairman Markey, 
Ranking Member Upton, Ranking Member Barton and other members 
of the committee, thank you very much. Thank you for the 
invitation to testify today. It is a pleasure to be here, and I 
am honored to be here this morning representing the National 
Council of Churches.
    The church is going to address the issue of climate change 
to remain faithful to our teachings about justice and 
stewardship. The Bibles teaches us to love our neighbors as 
ourselves, to protect and provide for those living in poverty 
and to tend for God's creation in a manner that recognize the 
beauty and the bounty that the Lord has blessed us with. 
Climate change is a moral issue and a reflection of our failure 
to live out God's call. Diverse faith traditions including 
Catholics, Protestants and Jews have recognized the importance 
and necessity of reducing our greenhouse gas emissions to a 
level that will prevent the worst impacts of climate change.
    A recent report by the Global Humanitarian Forum paints a 
bleak picture of the impact that climate change is having and 
will continue to have on God's creation and God's people. The 
findings indicate that every year climate change leaves over 
300,000 people dead, 325 million seriously affected and creates 
economic losses of $125 billion. These are astonishing numbers 
but they provide the quick realization that climate change is 
not any longer something that may happen but rather it is 
already happening, and we must act decisively to prevent the 
worst impacts while protecting the most vulnerable.
    Rosemary Miega is one individual whose story comes to mind. 
A middle-aged Ugandan woman after retiring from government 
work, Rosemary started her own farming cooperative. After 5 
successful years of Rosemary working with local farmers in her 
region, helping them increase their profits, the rain patterns 
in Uganda began to shift. What had been a flourishing, self-
sufficient farming community became impoverished almost 
overnight. Churches and non-governmental organizations around 
the world are working to help communities adapt to changes in 
their local environment but it is not enough. Estimates 
indicate that $86 billion per year will be needed to help 
developing countries adapt to climate change. As the world's 
largest historical emitter of greenhouse gases, it is morally 
imperative for us to provide a response that is adequate to 
their needs and proportional to our share of the emissions.
    This is why ample international adaptation assistance must 
be included in any climate legislation the United States puts 
in place. At a bare minimum, the United States should provide 
$7 billion a year to the most vulnerable developing nations, 
those who are suffering and will suffer from the impacts of 
climate change we can no longer reverse. This is an issue of 
justice and moral responsibility. It is also an issue of global 
security and stability. Our willingness to adequately assist 
our global neighbors in their time of need will be a direct 
reflection of our ability to accept responsibility for our past 
actions and will play a critical role in the development of a 
successful global agreement that addresses climate change.
    As the United Nations currently negotiates the post-Kyoto 
treaty, it is vital for the United States to commit to a more 
equitable response. For the United States to be seen as a good 
global neighbor, we must provide financial assistance to 
developing countries through both bilateral and multilateral 
agreements. For too long we have dragged our feet. If we are to 
be taken seriously, we must bring something substantial to the 
table. The inclusion of responsible international adaptation 
assistance will help to maintain both economic stability and 
global security. We truly live in a global village and depend 
on all our neighbors for our prosperity. International 
adaptation assistance will ensure the economic and political 
stability of developing nations. The committee's inclusion of 
equitable international adaptation assistance in the American 
Clean Energy and Security Act would be a compassionate, just 
and appropriate step forward to meet the severe needs of those 
who are already suffering and at risk.
    Mr. Markey. If you could summarize, please?
    Reverend Castellanos. While we are thankful to the 
committee for its support of this critical component, we do 
fear that the amount of money available to this program is 
insufficient to meet the present and growing needs of the 
communities around the world.
    Thank you very much, and may God bless your endeavors.
    [The prepared statement of Reverend Castellanos 
follows:]*************** INSERT 8 ***************
    Mr. Markey. Thank you so much. Our committee needs God's 
blessing in terms of this legislation. Thank you.
    The Chair will recognize himself for a round of questions, 
and I will first note that in December of 2008 the price of a 
barrel of oil had gone down to $30 a barrel. It is now up to 
$69 a barrel. The price of gasoline at the pump, the national 
average was $1.61 in December. It is now up to $2.62, so it has 
gone up 80 cents, and this is as we are in the middle of the 
worst recession since World War II, so we can only assume that 
we are in the eye of the storm. We are heading back towards $4-
a-gallon gasoline. We are heading back towards $147 a barrel 
for oil. So we need a plan and we can't run the risk of just 
living on this roller coaster. Our economy just rises and falls 
with the price of oil and held hostage by OPEC. So we need a 
plan and we need something that works.
    Your company, Mr. Farrell, generates power using a similar 
formula to Mr. Sokol's company. We have a formula in the 
legislation that follows the recommendation of the Edison 
Electric Institute that allocates 50 percent of electric 
power's allowances based on emissions and 50 percent based on 
retail electricity sales. Can you explain why you believe that 
formula, why EEI believes that formula is fair and what would 
happen in terms of EEI's support if we altered that formula?
    Mr. Farrell. Mr. Chairman, thank you for the question. The 
background for the formula is important I think to understand 
how it got to where it is. EEI has member companies from all 
across the country, represents all the regions, all different 
kinds of customers, has all different kinds of generation mix, 
some very heavy coal, some very heavy nuclear, some mixed like 
ours is, like some of Mid American's assets, and as we sat 
through a 2-year process to come up with a program that could 
allocate out the allowances, we came to a conclusion, the 
compromise that made sure that there was the most consumer 
protection across the Nation was to come up with this formula 
where half of the allowances came related to your sales and 
half of it came related to the way in which your power is 
generated, and that includes purchase power for utilities that 
don't own all of their generation, a very important component. 
But the key is not so much the allocation methodology, the 
breakdown between 50 percent sales and 50 percent how your 
generation comes. It is the length of the timetables and the 
rapidity with which you have to meet the caps. So the longer 
the timetable, the more consumer protection and the lower the 
cap is or the higher the emissions allowed are over the period 
of time, the greater the consumer protections, and that is why 
our focus was on trying to get to 2025 before there was a 
phase-out. We were hopeful that the phase-out would be longer 
and we hoped that there would be improvements.
    But no one is requiring a utility--the mandate in the bill, 
as I understand it, is the cap, is a reduction of greenhouse 
gas emissions over a period of time. You are not required to 
take allowances. If you choose to change out your fleet over 
that period of time, you are free to do that so there wouldn't 
be any costs associated with allowances over that period of 
time as may have been suggested. So the key is, we were trying 
to come up with a methodology that would spread out the 
consumer protections across as many consumers as possible and 
to take into account the various generation mixes that exist in 
the United States. That is how we came up with the formula.
    Mr. Markey. Mr. Keohane, could you reflect on Mr. 
Montgomery's testimony? Tell me about past studies that have 
been conducted by his organization and generally how have past 
industry cost estimates compared to actual costs of programs 
under the Clean Air Act.
    Mr. Keohane. Thank you, Mr. Chairman. Yes, I think it is 
important to note a few things, and by noting these, I am just 
looking at the numbers. I don't mean to cast any aspersions on 
the intents or what Dr. Montgomery and his colleagues may have 
tried to do. But it is a fact that if you look, if you go back 
and look, every time there has been a climate change bill, 
there is a range of cost estimates and CRA is always on the 
high end of those cost estimates. Even more tellingly, we went 
back actually and we looked at a range of estimates that CRA 
had made of prior environment regulation, and again, in that 
case, every time CRA was on the high side, usually at the very 
high side, of those estimates of environmental regulation, 
sometimes several times, three to four or more times the costs 
that were estimated by EPA and independent government agencies, 
and when you go back and you compare those to the actual costs, 
CRA consistently was much, much higher than the actual costs. 
This is, by the way, a general trend and it is useful to 
mention because several researchers including some at Resources 
for the Future have gone back and compared actual costs of 
environmental regulation to predicted costs that were done at 
the time it was passed, and in an overwhelming majority of the 
cases, particularly for market-based regulation, the estimates 
that were made at the time of legislation, even by government 
agencies like EPA, turned out to be much higher than the actual 
costs. I will give one estimate. We have heard about the SO2 
allowance program. That turned out to be less than 30 percent 
of the cost that was estimated by EPA on the eve the 
legislation was passed. So I think if we take that pattern, 
what we learn from the past record is that estimates and 
particularly by CRA but frankly by everybody have turned out to 
be overestimates of the cost of environment regulation, and the 
reason is, they can't take into account technological 
innovation. Thank you.
    Mr. Markey. Thank you, Mr. Keohane.
    I am going to have to recognize--my time is expired. I am 
sure that there are members who are going to give you plenty of 
time----
    Mr. Barton. Mr. Chairman, I think since he made a direct 
comment against Mr. Montgomery, Mr. Montgomery ought to have a 
right to respond to what he just said.
    Mr. Markey. Well----
    Mr. Barton. I ask unanimous consent that the chairman has 
an additional 2 minutes so that Mr. Montgomery can respond.
    Mr. Markey. If the gentleman would like to yield me 2 
additional minutes, that would be great. I am not requesting 
it.
    Mr. Barton. You can object to it, Mr. Chairman.
    Mr. Markey. No, not at all. Mr. Montgomery?
    Mr. Montgomery. Thank you, Mr. Chairman. I appreciate your 
indulgence. But Mr. Keohane's statements about the comparison 
between CRA's estimates and analysis of the costs of climate 
legislation are simply not true. I am sure that we have been on 
different ends of the range of estimates at various points in 
time, and I am not sure I can even figure out what it was that 
he is referring to in our analysis of other environmental 
regulations.
    But let me point out what actually happened last year. This 
disturbs me because this calumny against CRA has been repeated 
over and over again, that we are consistently higher than 
everyone else, and we have actually responded to it for the 
record in the hearings that were held of the Lieberman-Warner 
bill, and I would like to submit again both the question and 
the answer for the record that we submitted when this came up 
in the Lieberman-Warner debate when my colleague Ann Smith was 
testifying. But the fact is that last year there were a number 
of studies that were done of the Lieberman-Warner bill. They 
differed a great deal. They differed mostly because people made 
different assumptions about what was in the bill. Many of the 
studies were looking at outdated versions of the bill. The 
Electric Power Research Institute, which is, I believe, an 
independent and objective research institution, part of the 
electric power industry, put on a forum in Washington where 
they brought all of the modelers who had actually produced 
analyses of the Lieberman-Warner bill, the Clean Air Task 
Force, the Energy Information Administration, the work that was 
sponsored by the National Association of Manufacturers, 
Massachusetts Institute of Technology with their EPO model, EPA 
and Charles River Associates. When you took the analyses that 
made similar assumptions and that characterized the bill in a 
similar way, we were dead in the center of those results. We 
have generally been dead in the center of any effort to look at 
our analysis that has compared comparable analyses that were 
looking at the same bills, the same carbon credits and the same 
characterization, for example, of how much offsets were 
available. So I object to the characterization that we have 
always been higher than anybody else in this analysis.
    Mr. Markey. The gentleman's time has expired. The Chair 
recognizes the gentleman from Michigan, Mr. Upton.
    Mr. Upton. Thank you, Mr. Chairman. I ask unanimous consent 
to put in a statement from Jim May, president and CEO of the 
Air Transfer Association of America, on allowance allocations, 
if I might.
    [The information follows:]*************** COMMITTEE INSERT 
***************
    Mr. Markey. Without objection, so ordered.
    Mr. Upton. I regret in my opening statement I referred to 
Mr. Sokol's testimony. I meant Mr. Cousins, so I apologize for 
that.
    Mr. Cousins, how much money have you all invested in 
environmental improvement projects at your refinery, and can 
you describe some of those improvements that you have made?
    Mr. Cousins. Well, first, that is the first and only time 
in my life I am going to be mistaken for somebody as articulate 
and intelligent as Mr. Sokol, so I appreciate that.
    We have spent somewhere upwards of $300 million over the 
last 30 years on environmental projects. I do not have the 
exact number because some of the data is----
    Mr. Upton. And do you have an estimate of what this bill 
for you to stay in business--you indicated in your testimony 
that you would be out of business fairly short order, 1,200 
jobs, but if you were able to stay in, what type of capital 
improvements would this bill require you to do in terms of 
cost?
    Mr. Cousins. Well, actually, in our business, since there 
is no way to reduce the carbon and hydrocarbon products, there 
really is no investment solution to fix this for us.
    Mr. Upton. You are just done?
    Mr. Cousins. Just buying the credits, which is $180 million 
a year and progressing on up to as high as $750 million or $2 
billion a year, which are far beyond our annual profits of $13 
million a year.
    Mr. Upton. Is your sense that what Jack Girard from the 
American Petroleum Institute said today that is quoted in the 
Washington Times, that allowances would mean increase as much 
as 77 cents a gallon for gas and diesel going up 88 cents? Is 
that about right?
    Mr. Cousins. I have seen numbers that high. I have seen 
numbers as low as 20 cents a gallon and as high as the 80-cent 
range. It is very difficult to predict. The carbon number 
portion you can predict. The ramifications of shifting most of 
this Nation's energy supply into the hands of a very few giant 
multinational corporations out of the hands of a more diverse 
group of smaller companies is hard to predict.
    Mr. Upton. And Mr. Hodges, what would an 88-cent increase 
for a gallon of diesel do to the trucking industry?
    Mr. Hodges. Well, it would take our number two cost and 
immediately push it to our number one cost. It would 
immediately start to drive trucking companies out of business, 
mostly those that are small and somewhat marginally 
capitalized.
    Mr. Upton. Mr. Sokol, you indicated in your remarks that 
you were figuring that it was going to cost $810 million at $25 
a ton.
    Mr. Sokol. That is just for our regulated utility 
customers.
    Mr. Upton. Right, and I notice that, I guess it was 
Brookings that said Brookings estimates that the market could 
drive up the price of carbon dioxide allowance to as much as 
$50 a ton by 2020, so I would presume that that would double 
the cost.
    Mr. Sokol. We have seen estimates between $50 and $125 a 
ton.
    Mr. Upton. And how much would that mean for the average 
consumer? Is it really 13 cents?
    Mr. Sokol. No, and those numbers--you know, you can make 
numbers say whatever you want. If you like, I can go through an 
example in the State of Iowa where while I actually live in 
Nebraska, we actually--Nebraska is 100 percent public power 
State, which I point out public power associations and rural 
electric co-ops also oppose this bill for the same reasons we 
do, and the reason is, it throws the consumer under the bus. In 
Iowa, our cost increase just for 784,000 customers is $283 
million in the first year just for the allocation purchases. 
That will be $110 per month per customer. They can't afford it.
    Mr. Upton. Mr. Wells, last question as my time is coming 
up. You indicated in your testimony that you would support a 
carbon agreement to prevent carbon leakage.
    Mr. Wells. What we are saying is for trade-exposed energy-
intensive industries, we need the 15 percent allowance until 
such time that there is agreement, international agreement to 
level the playing field.
    Mr. Upton. So if for some reason the WTO rules that either 
the border adjustment or free allowances are in fact unfair and 
need to be taken out, is Dow Chemical going to still support 
this bill?
    Mr. Wells. If we don't have the free allowances----
    Mr. Upton. If those are taken out?
    Mr. Wells. Yes, if the free allowances aren't there, that 
would put us at a competitive disadvantage to other economies, 
particularly those economies that are more carbon intensive. 
That would be a problem for our industry and for our company.
    Mr. Upton. My time has expired. Thank you.
    Mr. Boucher. [Presiding] Thank you very much, Mr. Upton. 
The Chair will now recognize himself for a round of questions.
    Mr. Farrell, as a fellow Virginian, let me take this moment 
of personal privilege to welcome you to the subcommittee today 
and thank you for your outstanding testimony. I want to 
propound several questions to you in order to demonstrate how a 
cap-and-trade program that operates based on free allocation 
can effectively reduce greenhouse gas emissions with the least 
cost to consumers. So let us begin with the obvious. Some have 
suggested that for the program to be effective, it has to be 
based on an auction, that only the auction can put a price on 
carbon dioxide emissions, that only under an auction scenario 
will the program actually be effective in reducing greenhouse 
gases. So let me ask you to explain how under free allocation 
with a cap-and-trade provision reductions actually occur.
    Mr. Farrell. Thank you, Mr. Chairman. There is a cap, as 
you say, and the cap limits the amount of carbon dioxide 
emissions that can actually occur. So the cap itself acts to 
reduce carbon emissions.
    Mr. Boucher. And then that cap is lowered over time?
    Mr. Farrell. Lowers over time. As you get to 2050, you are 
at an 80 percent lower level than you are now, so that is how 
you get there with one respect. We didn't touch on this, but 
the bill has a very rigorous energy efficiency standard in it 
which is going to reduce carbon emissions independently from 
the cap-and-trade part of the bill. The allowance provisions, 
the free allowance provisions, particularly for electric 
utilities, allow us to keep costs of the transition of this 
economy away from more carbon-based sources of generation to 
less carbon-based to dampen, moderate the costs on the 
consumer. I think to--I don't want to get into a debate with 
another witness but to suggest that a free allowance system 
throws consumers under the bus is something I just cannot agree 
with----
    Mr. Boucher. Well, I will get to that part of it in just a 
moment. So what I think we can conclude from this answer is 
that the effectiveness of the cap-and-trade program based on 
free allocation comes from the cap itself and the fact that 
that cap is lowered every year in accordance with the terms of 
the program and so the emitting entities are allowed to emit 
less each year, and as they comply with that lowering cap, 
overall emissions are reduced. Is that a fair description of 
how it works and that works with free allocation?
    Mr. Farrell. Yes, Mr. Chairman.
    Mr. Boucher. So I think the next obvious question is, how 
we make sure that the financial value of these freely allocated 
allowances inure solely to the benefit of the electricity 
consumers and could you address the provisions in the 
legislation that make sure that when these allowances are 
allocated to the local distribution companies, that the 
benefit, the financial benefit of that allowance inures to the 
ratepayer benefit?
    Mr. Farrell. Mr. Chairman, local distribution companies, 
that is the essence of the proposal, and what that means is, is 
that the local company that has the wires that distributes the 
electricity rather than the generator of the electricity, it is 
the company that distributes it will receive the allowance in 
this 50/50 breakout, 50 percent based on sales, 50 percent 
based on its generation sources. Local commissions, State 
commissions exist in all 50 States and have been regulating 
electric utilities for 100 years, have a lot of knowledge on 
how to protect ratepayers against profit taking by utilities or 
excess profits by utilities. So to the extent there is some 
dysfunction and there is some over-allocation of a particular 
allowance, the local utility commission is there to ensure that 
the benefit of it will go to the ratepayers and the bill has a 
particular provision in it, this bill, requiring it go to the 
benefit of the ratepayer.
    Mr. Boucher. And the local distribution companies are 
regulated everywhere in the Nation?
    Mr. Farrell. All 50 States, and the District of Columbia.
    Mr. Boucher. OK. Now, you have mentioned in your testimony 
a problem with the provisions in the bill that require a phase-
out of free allocation and a phase-in of auctions, and that 
phase period begins in 2026 and goes through 2030, and I think 
you have recommended that that phase period be a longer period 
of time rather than simply 5 years. Can you talk about the 
importance of having a longer period as opposed to just that 5-
year period?
    Mr. Farrell. Well, Mr. Chairman, the key consumer 
protection in this bill, as I said earlier, is not so much the 
50/50, that is very important, but is the length of the time of 
the free allowances and the phase-in period as you move to 
auctions because we need time for the technology to catch up 
with the public policy, and the more time we have to get to the 
same endpoint, the 80 percent reductions by 2050, the more time 
we have to change out our technologies, which is going to cost 
consumers money, the longer we have the free allowances the 
better.
    Mr. Boucher. One argument that I have heard for a longer 
period is that as that as the transition to auction occurs over 
a 5-year period, the electricity price increases that attend a 
movement from free allocation to auction would be relatively 
severe in each of those 5 years, that if you have a longer 
phase-in period, perhaps 15 years, the price shock of 
electricity price increases is therefore lessened, and from the 
vantage point of consumers, it would be better to have that 
longer period rather than the shorter period. Would you agree 
with that?
    Mr. Farrell. That is correct. We would agree with that.
    Mr. Boucher. Now, let me address one final issue while I 
still have another couple of minutes remaining. I think it is 
important that everyone understand that there are two possible 
ways that electricity price increases could occur in 
association with a cap-and-trade program. One comes from the 
allocation process itself, and we have taken steps in our 
legislation, I think you would agree, to make sure that to the 
greatest possible extent we have cushioned the ratepayer from 
the rate increase effects that might come just from the 
allocation process. The second way in which electricity prices 
could increase is when utilities and other emitters have to 
take steps in order to meet the emission reduction requirements 
that come under the cap and the ratcheting down of that cap 
year by year, and I would like for you to address, if you 
would, the extent to which you think the provision in our 
legislation that would actually auction 15 percent of the total 
allowances and then have the revenue that the government 
receives from that auction be dedicated to cushioning the 
effect of the rate increase from that latter phenomenon, that 
is, the cost of actually reducing emissions for the middle and 
lower income electricity consumers across the country. Could 
you talk about the extent to which you think that can be 
effective?
    Mr. Farrell. Yes, Mr. Chairman. There will be, as the 
generation fleets are changed out over time, there will be 
increases in expenses in utilities to change to newer systems 
as Mr. Sokol referred to. It is an absolutely valid point, and 
we go over time, those will increase. The point of the 15 
percent set aside is that that will be a revenue source and can 
be redistributed to help dampen the costs of what will 
necessarily increase electricity rates from the change-out of 
our generation fleets.
    Mr. Boucher. All right. Thank you very much, Mr. Farrell.
    My time is expired. The gentleman from Texas, the ranking 
Republican on the full committee, Mr. Barton, is recognized for 
5 minutes.
    Mr. Barton. Thank you, Mr. Chairman. I want to commend you 
for chairing this hearing in the absence of Mr. Markey and also 
commend you for actually paying attention. I think it is 
somewhat telling that on the majority side, you are the only 
one here, and this is pretty important, so hopefully you will 
take your knowledge and disseminate it on your side so that 
they will at least know what was said at this important 
hearing.
    Mr. Sokol, when you made your remarks, you talked about 
some costs. My understanding is that you are taking those 
numbers strictly from your service territories that your 
company provides electricity for. Is that true?
    Mr. Sokol. That is correct, and I think it is very 
important to understand, those numbers that I gave you--and 
Congressman Boucher, we appreciate the efforts you have made to 
try and make this as fair as possible and I don't mean to--you 
have done everything I think you can, given the cards that are 
being dealt to you. But those numbers take into account 
everything you said, and I will tell you we have the concern 
that the consumer is being left under the bus here, not 
intentionally by you, I understand that, but all of these 
numbers that I went through for just the State of Iowa, $283 
million a year, is after all the allocations are passed 100 
percent through to the customer, the 15 percent is reallocated 
to low income, it doesn't change the fact that purely 
compliance with the purchasing of the trading credits costs 
$283 million, which cumulates uninflated to $9 billion over 30 
years for those consumers and that is on top of the $9.3 
billion they are going to have to spend to build new generation 
plants to actually meet your caps because your point was an 
important one. We have to meet the caps, and we have not argued 
with the caps.
    Mr. Barton. Well, I need to reclaim my time, Mr. Sokol, 
because I have about four other questions. My question to the 
rest of the panel, does anybody dispute Mr. Sokol's numerical 
analysis? Anybody?
    Mr. Keohane. I would just like to point out that I think 
Mr. Sokol speaks from a unique case----
    Mr. Barton. But do you----
    Mr. Keohane. --very long on coal-fired generation and----
    Mr. Barton. I am not asking where he--I am asking if you 
dispute his----
    Mr. Sokol. We are also the largest owner of renewables.
    Mr. Barton. --numerical analysis.
    Mr. Keohane. I think there is an issue----
    Mr. Barton. Is he telling the truth? I mean, he knows what 
the numbers are in his service territory. Do you dispute that 
he is lying to this committee? Do you assert that he is lying 
to this committee?
    Mr. Keohane. I didn't say that, Mr. Barton. I said that he 
is an exception to a rule. I also want to point out, it is 
interesting to hear Mr. Terry talk about old coal-fired power 
plants when----
    Mr. Barton. Mr. Chairman, could I reclaim my time? I only 
have 2 minutes and 22 seconds. So we have established that one 
of the major power companies, at least in his service 
territory, there are huge cost increases in this bill that you 
can't paper away.
    Now I want to go to Mr. Cousins. You are represented by Mr. 
Ross, I believe. I think he is in--your facility is in his 
district.
    Mr. Cousins. Yes, sir.
    Mr. Barton. If I understand you correctly, for refinery 
industry, you are saying that there are 2 percent allowances 
given to refineries generically but the products that the 
refinery industry in America creates are responsible for 35 
percent of the emissions. Is that correct?
    Mr. Cousins. That is correct.
    Mr. Barton. And you are saying in the case of your 
refinery, you simply can't recoup the cost it is going to cost 
your refinery to stay in business. It is going to cost you $180 
million a year and you don't believe you can pass that through. 
Is that correct?
    Mr. Cousins. We do not believe we can pass 100 percent of 
that through.
    Mr. Barton. So you are fairly certain if this bill becomes 
law or isn't changed in a material way for refineries, that 
your refinery that has been in business for 80 years is going 
to go out of business.
    Mr. Cousins. Yes, sir, and that is a serious thing to say, 
for us to say publicly. We would not say that if we were not--
--
    Mr. Barton. And that is 1,200 direct jobs and 3,600 
indirect jobs.
    Mr. Cousins. That is correct.
    Mr. Barton. Now, would you care to speculate on how many of 
those job losses are going to get one of these new green jobs 
and at what level they are going to be compensated if they do 
get one of the new green jobs?
    Mr. Cousins. We don't have any of those jobs in our area 
right now, and I am not an economist or even--I wouldn't know 
how to speculate on that. I would not think that many of those 
are paying in the $25- to $30-an-hour range.
    Mr. Barton. Mr. Montgomery, the analysis of the bill for 
many of the proponents of the bill uses a per-ton estimate of 
about $10 a ton. In the bill itself in the strategic reserve, 
they have a minimum price for allowances sold for the strategic 
reserve of $38 a ton. Could you explain if you wish to the 
dichotomy between people that estimate the cost at $5 to $10 a 
ton and the fact that the strategic reserve minimum price is 
$38 a ton?
    Mr. Montgomery. I am not sure I can give a definitive 
answer to this, but my understanding is that the intention of 
this strategic reserve is to prevent prices to intervene much 
like the strategic petroleum reserve when prices spike to an 
unanticipatedly high level. I think that the estimate of $10 a 
ton presumably is those who assume that there is a very large--
that all of the international offsets for forestry, from other 
sources, all the domestic offsets will be available at very low 
prices and that there is not much left to do after that to 
reduce emissions and that comes up with a price of $10 a ton. 
It suggests that price would have to increase by a factor of 
four before the strategic reserve accomplished anything which 
implies there is an awful lot of price volatility that would 
remain even if the strategic reserve were released when 
something really absolutely extraordinary happened.
    Mr. Barton. Mr. Chairman, my time has expired. I would like 
Mr. Keohane to submit for the record an answer to that same 
question since he is also an economist, or if you wish to give 
him a chance to testify right now, I would appreciate that.
    Mr. Boucher. Thank you, Mr. Barton. Mr. Keohane, let me ask 
you in fact to do as Mr. Barton suggests and submit that for 
the record, and add to that answer, if you would, your response 
to Mr. Sokol's economic analysis. Look at it carefully, run 
your analysis against it and let us have the benefit of your 
view on that as well.
    Mr. Keohane. I would be pleased to do both those things. 
Thank you.
    Mr. Boucher. Thank you very much.
    The gentleman from Kentucky, Mr. Whitfield, is recognized 
for 5 minutes.
    Mr. Whitfield. Well, thank you, Mr. Chairman, and this 
testimony today has been quite interesting, and Mr. Sokol, now, 
you and Mr. Farrell, your companies both are members of the 
Edison Electric Institute. Is that correct?
    Mr. Sokol. Correct.
    Mr. Whitfield. And the Edison Electric Institute, did they 
formally, Mr. Farrell, endorse this bill or did they not 
endorse the bill?
    Mr. Farrell. We are very supportive of the allocation 
formula and we are supportive of the bill going through the 
legislative process.
    Mr. Whitfield. So you support the bill as is?
    Mr. Farrell. We are supportive of the bill going through 
the legislative process. We have asked for improvements which 
the chairman mentioned a couple, yes, sir.
    Mr. Whitfield. So you are supporting it but you hope you 
can improve it as we go through the process?
    Mr. Farrell. Yes.
    Mr. Whitfield. Now, I am assuming that the Edison Electric 
Institute Board voted upon this and the majority of them felt 
this way, correct?
    Mr. Farrell. It was unanimous of those attending the 
meeting.
    Mr. Whitfield. OK.
    Mr. Sokol. We voted against it.
    Mr. Whitfield. You voted against it?
    Mr. Sokol. Yes.
    Mr. Whitfield. Oh, oK. So it was unanimous but someone 
voted against it. I won't get into that.
    Mr. Sokol. I know for sure we voted against it.
    Mr. Whitfield. Well, Mr. Sokol, up here listening to you 
and Mr. Farrell testify, you both have retail electric, you 
both have natural gas customers, you both--both your companies 
operate in multiple States, 12 and 10 States, and you heard Mr. 
Farrell's testimony to Mr. Boucher's question, but would you 
explain to the committee why in your opinion your company and 
Mr. Farrell's company do not agree on this legislation?
    Mr. Sokol. Well, the Edison Electric Institute, of which we 
have been involved with the discussions for several years, 
first of all, it is an association so it deals with all kinds 
of different members, some of which have 100 percent nuclear, 
some have no generation at all, and so a normal and 
understandable debate would occur within an association that 
basically there were winners and losers, and it ultimately came 
from down from the association standpoint that this is the best 
they could get, and our view is, the consumer is not being 
represented in this debate, and I will give you an example and 
this is----
    Mr. Whitfield. And could you try to also specify what the 
difference is you think between your company and Mr. Farrell's 
company?
    Mr. Sokol. There really is no difference between any of the 
companies in that the bill will act as it is written. Our 
difference is, and I think I can state it perhaps using a third 
company, a large company, AEP. They were recently challenged 
that this may cost their company $28.6 billion, a number they 
did not refute. Their comment was well, the report doesn't 
remember that we get to recover these costs through rate 
increases. That is the problem, is that utilities, particularly 
investor-owned utilities, and we own several, have made the 
decision that they are going to cut the best deal they can and 
then let the customer beware. But the customer is not in this 
room and that is what bothers us. Our ratepayers have to pay 
this. If you would add something that says have every public 
utility commission in every State in the next 30 days analyze 
this bill and tell the consumer what it will cost them and the 
consumers are happy with that, it is a pass-through for us. So 
but I am not going abdicate my responsibility to those 
consumers because people have to pay these bills and that is 
our difference with the Edison Electric Institute, and I think 
it is why EPPA and the rural electric co-ops are very 
concerned. They don't have shareholders. They just have 
consumers.
    Mr. Whitfield. And I have heard from both of those groups 
quite emphatically, but Mr. Farrell, you sound like you are not 
worried about any increase for the consumer. I mean, are you 
concerned about that or do you feel that this bill actually 
protects them?
    Mr. Farrell. We are absolutely concerned about consumer 
protections, Mr. Whitfield, and I apologize to Mr. Sokol if I 
didn't hear his vote at the meeting. It was a very large 
majority of member companies----
    Mr. Sokol. That is true, by the way.
    Mr. Farrell. --across the United States. And EEI's proposal 
is all about consumer protections. If the bill had called for 
100 percent auctions, we would not--I certainly wouldn't be 
here responding favorably to Mr. Boucher's questions. Changing 
this to the free allowances for the length of time, we would 
like a longer period of time. We would like a less quick rise 
to the cap because we think that would increase the consumer 
protections but it is the essence of the free allowances 
through 2025, even though the cap is rising over that period of 
time, that provides the consumer protections in this bill. If 
they were not there, EEI would not be where it is today.
    Mr. Whitfield. I might also say, Mr. Hodges, I am glad you 
are here testifying today. I read an article in the New York 
Times about six months ago comparing the trucking industry in 
the United States to China, and this article said we have in 
this country one of the most stringent emissions standards for 
diesel fuel emissions for trucks in the world, that China has 
one of the worst and it sounds like from your testimony with 
the possible increase of diesel fuel cost, it will even be less 
competitive with the Chinese transportation system.
    Mr. Hodges. Well, fortunately, we don't haul to China.
    Mr. Whitfield. But companies do.
    Mr. Hodges. We are concerned with domestic transportation 
and everything that China does send to this country generally 
ends up getting delivered by a truck and that truck is powered 
by diesel fuel.
    Mr. Whitfield. And the reason I am concerned about it is, 
when companies decide where to locate, they look at cost, and 
if transportation costs, labor costs, environmental costs are 
higher, then they may make decisions to go elsewhere. My time 
is expired.
    Mr. Boucher. Thank you, Mr. Whitfield.
    The gentleman from Oregon, Mr. Walden, is recognized for 5 
minutes.
    Mr. Walden. Thank you, Mr. Chairman.
    Mr. Sokol, I want to go to this issue of equal allocation 
around the country because I have heard from some witnesses 
that this seems to be all fairly distributed and couldn't have 
been done better and yet I understand from data I have received 
that Pacific Corps, your subsidiary company in Oregon, is only 
going to receive 53 percent of the allowances for free that it 
needs for compliance in 2012, which means ratepayers there will 
have to make up the difference of $163.5 million in one year. 
Meanwhile, our neighbors to the north under this legislation, 
Seattle City Light will get 29 times the number of allowances 
it needs for compliance for a windfall of $54 million in one 
year alone. Now, that doesn't sound like a very even 
distribution of allocation of these credits, does it, to you?
    Mr. Sokol. It doesn't, and I think it begs the question, if 
all these allocations are free, why are we doing it? You know, 
rarely have I seen a circumstance in my career where someone 
says all right, you have to buy these and then I am going to 
give them to you for free and so you are going to be neutral. 
Well, if it is that simple, why don't we just not do it? And 
that is really our point. Sometimes I think people can't take 
yes for an answer. Place the caps in place, the caps of 3 
percent reduction, 17 percent growing to 83 percent by 2050. If 
that is policy, put them in place and mandate that every 
utility in the United States meet it. Those that already meet 
it have no cost and no harm. Those that don't meet it, and our 
utilities would not meet it, we would be required to go and 
change our equipment to do that, and that is a fair thing for 
us to do. This bill then adds again to that through this 
trading mechanism, and I guess the point just is, why have it? 
If the allocation is fair and is not going to cost anybody 
anything, then why are we doing it and why don't we just put 
the caps in place as we did with the Clean Air Act initially 
and ask our companies to meet it and we will do so or be shut 
down.
    Mr. Walden. That is a thought I have often had, Mr. Sokol, 
that I don't get this. It looks to me like we should have 
learned our lesson from the subprime market. We had an 
amendment to prevent derivatives being pulled out of this and I 
think that was defeated during the markup. I am deeply 
concerned about the gaming of the system that lies ahead and 
the cost to ratepayers. Now, we focused a lot and rightfully so 
on household costs, and I have heard ranges from a postage 
stamp to, you know, $1,600. My concern, having been a small 
business owner for 21 years that ran transmitters in the radio 
business, we consumed a lot of electricity. Has anybody done 
analysis you are aware of or anybody on the panel on what this 
means to small businesses in America because I don't see them 
getting a rebate under this. They don't get a check from the 
government under this, do they? I mean, if I am a Pacific Corps 
customer and my business was, I have sold it, what do I get out 
of this bill other than a higher rate in Oregon?
    Mr. Sokol. Well, the way the allocations are done, the 
industrial customers would carry a larger piece of it, but----
    Mr. Walden. Is a small business an industrial customer? You 
are just a shopkeeper. Is that how you are treated?
    Mr. Sokol. You know, barber shops, grocery stores, things 
of that nature would not fall underneath the low-income 
assistance side of the allocations.
    Mr. Walden. So what happens to them?
    Mr. Sokol. They would pay more.
    Mr. Keohane. Mr. Chairman, may I very quickly?
    Mr. Walden. Actually I control the time but go ahead.
    Mr. Keohane. I was just going to say, I think the 
commercial ratepayers are included in that local distribution 
company allocation so I think they would be addressed through 
the----
    Mr. Sokol. But that is----
    Mr. Walden. Mr. Sokol, would you----
    Mr. Sokol. Those allocations are already in the numbers you 
used, 100 percent of them are given to the customers' benefit. 
The low-income allocations would not go to commercial----
    Mr. Walden. Right, that is my point, and so it is a little 
misleading to say they are going to get that when these numbers 
include that, and so they don't get the extra help, and you 
know, I am in a district that is really facing Depression-era 
unemployment numbers. We are second to Michigan and Oregon in 
unemployment. My counties are at 17 to 20 percent unemployment. 
People are trying to figure out how to keep their doors open 
and this bill is going to absolutely put a new bill on their 
doorstep they can't afford, and I have been a small 
businessperson. I have signed the front of a payroll check and 
paid the bills, paid the light bills, the public utilities, the 
co-ops and even to you in the old days, Pacific Corps, and it 
matters and I am deeply concerned about where this is headed.
    Now, I want to go off onto wind because my district has a 
lot of wind energy and I just want to get something on the 
record here, and I have been an advocate of renewable energy 
and wind energy, but I don't think it is the panacea some 
people think and it has a cost associated with it, and Mr. 
Sokol, it is my understanding that for every megawatt of wind, 
a power company has to have a backup or prudently should have 
some sort of backup energy source for when the wind doesn't 
blow. Is that true in your company, and if so, is there a ratio 
that you use?
    Mr. Sokol. If you are a load-serving utility, the answer to 
that is, you do need to have a backup until--and hopefully 
there is a lot of promise for battery storage technology 
currently emerging, and if that happens, that will help 
enormously, but without that, the wind only blows when it blows 
so----
    Mr. Walden. So you have to have gas backup, right?
    Mr. Sokol. Gas or other generation.
    Mr. Walden. Mr. Farrell, is that correct? You are nodding 
your head as well.
    Mr. Farrell. It is.
    Mr. Walden. So aren't we in effect creating two energy 
systems here, one that works when the wind is blowing and one 
that works when it doesn't, and isn't there an added cost to 
that? And I am not against wind. We have a lot of it. It is a 
good thing, but to me, there are limits to what we can do and 
we need to know what those costs are.
    Mr. Sokol. I think in fairness, there is a cost to it but 
there is also environmental benefit that when the wind is 
blowing, we are not creating any emissions and so----
    Mr. Walden. I agree with that.
    Mr. Sokol. --you know, there is a balance there, but there 
is a cost.
    Mr. Walden. My time has expired, Mr. Chairman. Thank you.
    Mr. Boucher. Thank you very much, Mr. Walden.
    The gentleman from Louisiana, Mr. Scalise, is recognized 
for 5 minutes.
    Mr. Scalise. Thank you, Mr. Chairman. I will start with Mr. 
Wells.
    In your earlier comments, you had talked about the carbon 
leakage. I think you had said will fail to protect American 
jobs if the allowances aren't allocated properly. You said the 
2020 target is too high. There are excessive procedural hurdles 
and then you said if free allowances are not in the bill, Dow 
will be at a competitive disadvantage. Now, you are supporter 
of this bill, right? This is coming from somebody who is a 
proponent.
    Mr. Wells. Yes, much like the previous comment. We are 
supportive of it to continue to move through the process but 
there are parts of the bill we would like----
    Mr. Scalise. So those are the highlights of the bill, is 
that jobs can be shipped overseas if it is not done properly. I 
want to ask you, especially as you talked about if the 
allocations aren't done properly you will be at a competitive 
disadvantage. Exactly what do you mean by that? Who you will be 
at a competitive disadvantage against?
    Mr. Wells. Let me use an example. Natural gas, I have 
talked about that every time I have been here, very, very 
critical to the American chemical industry. Natural gas prices 
have gone up 460 percent since 2000. In that time, American 
manufacturers have lost 3.7 million jobs. My own industry has 
lost close to a million jobs.
    Mr. Scalise. Because of the higher costs----
    Mr. Wells. The higher costs of energy----
    Mr. Scalise. --as it fluctuates.
    Mr. Wells. --and the higher costs of feedstocks associated 
with the rise in natural gas pricing. If free allowances are 
not there for what we call the energy-intensive trade-exposed 
manufacturers like petrochemicals, then it is safe to assume a 
similar sort of thing will occur.
    Mr. Scalise. Loss to where? Where would be----
    Mr. Wells. They would move places where energy costs are 
cheaper, so----
    Mr. Scalise. Do you have some examples of some of the 
countries?
    Mr. Wells. It would be the Middle East.
    Mr. Scalise. So our friends in the Middle East who were 
trying to--those of us who want to have a real comprehensive 
energy policy to encourage use of our natural resources to 
create good jobs here to reduce our dependence on Middle 
Eastern oil, in effect the Middle Eastern countries could 
actually benefit from a cap-and-trade energy tax if there is 
not adequate allocation to keep you competitive?
    Mr. Wells. Absolutely, yes.
    Mr. Scalise. Well, that is encouraging for some people, 
surely not people like me. What is the average pay of the jobs 
that your company has?
    Mr. Wells. They are well paying. I don't have a number. Our 
operators in the Gulf Coast, it has been many years since I 
worked down there but $70,000 and above is a good number.
    Mr. Scalise. Seventy thousand dollars a year on average. 
When you talk about jobs going to the Middle East, and 
obviously we have expressed concerns in this committee in other 
industries of jobs going to places like China, India, steel 
makers going to Brazil, in your industry, if a job that is 
producing products here in America goes to the Middle East 
where they are going to be producing the same product, they 
will just be producing it in another country, do you know how 
the carbon emissions compare? In other words, how much carbon 
your company emits producing something here in the United 
States versus how much they would produce in a country in the 
Middle East?
    Mr. Wells. I don't have exact numbers but, you know, in 
many cases our carbon footprint is a function of our energy 
efficiency and how well we use energy, and I have testified in 
front of this group that my particular company has cut our 
energy usage by 38 percent since 1990. We know that developing 
economies have not had that kind of improvement so it is safe 
to say that they are much more carbon intensive than we are.
    Mr. Scalise. Yes, which is another irony of this 
legislation, that purports to want to reduce carbon emissions 
when in effect by running more of these jobs overseas they are 
going to go to countries that emit more carbon, and carbon is a 
worldwide----
    Mr. Wells. If we don't take care of our energy-intensive 
trade-exposed----
    Mr. Scalise. So you could end up emitting even more carbon 
by legislation like this because those jobs go to other 
countries that emit more.
    Mr. Cousins, you had talked about your refinery, the 1,200 
jobs that would be lost, I think thousands more indirect jobs 
that would be lost. What is the average pay of your workers?
    Mr. Cousins. The pay is similar to the Gulf Coast. We might 
be 5 percent lower, so that number is--that $70,000 with 
overtime, we have got many employees in that range.
    Mr. Scalise. Seventy thousand dollars a year, jobs that 
would be lost. I know my time is running out. I don't know if 
you have seen the Spain study. Spain did a study on cap and 
trade in their country and how it affected them after years and 
years of going through that process. What they identified was 
for every quote, unquote, green job that they created, they 
lost 2.2 full-time jobs and in effect the green jobs they 
created, nine out of 10 of them were temporary jobs, so if you 
looked at it from a permanent job standpoint, for every one job 
they created, they lost 20 full-time jobs, and when you talk 
about the jobs that would be lost and you talked about India 
building a refinery basically to take the place when they shut 
down your 1,200 jobs at $70,000 a year. India will now be 
refining that oil that they will then be shipping here. How do 
their emissions compare to carbon that you emit?
    Mr. Cousins. It is going to be the same. It is going to go 
in the same atmosphere. It is going to be the same amount of 
carbon. It is going to be the same amount.
    Mr. Scalise. And if they don't follow the same regulations 
that are followed in America, if they actually emit more 
carbon----
    Mr. Cousins. Right, they won't have to----
    Mr. Scalise. --producing the same oil that then we would 
have to be paying more for because then it would be coming from 
another country.
    And Mr. Hodges, if I can, you had talked about the job 
losses. I think you said last year somewhere over 5,000 when 
the price of oil hit over $4 a gallon. Obviously because we 
don't have a strong policy, we became more dependent on Middle 
Eastern oil. For those of that want to reduce our dependence on 
Middle Eastern oil if we can lower that, we could, I guess, 
create more jobs but how many jobs would you lose if you 
actually had to pay more money because as President Obama said, 
prices would skyrocket under cap and trade. As his budget 
director, Peter Orszag said, families would have to pay higher 
utility costs and energy costs. Would you be able to absorb 
those costs or would you have to pass those on?
    Mr. Hodges. Most of the time in our industry, we can pass a 
percentage of fuel increases to our customers, but 
unfortunately, we only get about 85 percent of that cost 
recouped from our customers, meaning we would have to absorb 
the 15 percent in addition to, as noted earlier, we would have 
additional high electricity costs. When we have a $40,000 spend 
a month for utilities, we are suddenly looking to going from 
$40,000 to $50,000.
    Mr. Scalise. So if you can't pass all of it on, then what 
happens?
    Mr. Boucher. Mr. Scalise, I believe your time----
    Mr. Scalise. I apologize. So obviously the costs will be 
raised and you will lose jobs too, so I yield back. Thanks.
    Mr. Boucher. Thank you, Mr. Scalise.
    The gentleman from Florida, Mr. Stearns, is recognized for 
5 minutes.
    Mr. Stearns. Thank you, Mr. Chairman.
    At this hearing, the American Gas Association wanted to 
testify, unfortunately weren't able to. They would like to put 
their statement with unanimous consent as part of the record, 
Mr. Chairman.
    [The information follows:]*************** COMMITTEE INSERT 
***************
    Mr. Boucher. Without objection.
    Mr. Stearns. I would like to ask each of you a question, 
and this is relative to India and China. Because once assuming 
let us say that somehow this gets through Congress and it is 
signed by the President, the question would be, would India, 
China, Russia and other countries unilaterally go ahead and 
implement a similar cap and trade. So the question I will have 
just for each one of you, just go down the panel here, do you 
believe that India and China would unilaterally adopt a cap and 
trade after we did it, yes or no, and then you might just give 
me a sentence if you say yes, why they would do it, and if you 
say no, why they wouldn't do it. I will start with you, the 
Reverend Castellanos.
    Reverend Castellanos. Well, you are asking a theologian to 
come up with an answer from an economist, but I would----
    Mr. Stearns. What better person to ask?
    Reverend Castellanos. I would say yes, if they really want 
to be faithful to the commitment to the nature and the 
environment.
    Mr. Stearns. I mean, do you think the history of China has 
shown that they will be faithful?
    Mr. Stearns. I believe in hope and I think that people 
change, and I see progress, and I think we could have a great 
influence on whether it goes that way.
    Mr. Stearns. OK. Next?
    Mr. Keohane. I think sometimes the difference between 
theology and economics is not so great as people say. So at any 
rate, in answer to your question, I do think that the most 
important thing the United States can do to get countries like 
India and China----
    Mr. Stearns. Well, just yes or no. Do you think they will 
do it, first of all, yes or no?
    Mr. Keohane. I do think they will follow----
    Mr. Stearns. So yes, they will unilaterally pass a cap and 
trade. OK.
    Mr. Keohane. I think they will follow with a program to 
reduce and a commitment to reduce their own emissions within a 
reasonable period of time, and I know this, that if we don't do 
anything, they won't do anything, and that means that the 
climate crisis will continue.
    Mr. Stearns. Even though they are building a new coal plant 
every week, but anyway, go ahead, Mr. Montgomery.
    Mr. Montgomery. Unequivocally no.
    Mr. Stearns. OK.
    Mr. Montgomery. China--we would be giving away the only 
card remaining in our hand as we negotiate with the Chinese to 
convince them that they need to do something other than that we 
do not pay 100 percent of the bill for it. These are 
negotiations on national interest and we would be--and by 
committing ourselves to do something which they want us to do 
and getting nothing in exchange, we give away our only 
position.
    Mr. Stearns. And you are also saying that they have a 
competitive advantage by not adopting a cap and trade so they 
can stretch this out a couple years and say we will, we will 
but we won't and over 5 or 6 years they would get a competitive 
advantage.
    Mr. Hodges?
    Mr. Hodges. I would say also no, simply based on the fact 
that it has been my experience over years that issues like this 
only get addressed as economies mature. When they are in rapid 
growth, they don't address these issues. They address other 
issues that are pertinent to the growth, not issues that are 
pertinent to controlling the growth and refining that growth.
    Mr. Stearns. Mr. Cousins?
    Mr. Cousins. Based only my limited supply of common sense, 
I would say no.
    Mr. Stearns. OK. Mr. Sokol?
    Mr. Sokol. I think when it becomes in their economic and 
political interests to do it, they would and not until then.
    Mr. Stearns. So your answer is no, and so we are operating 
on a cap and trade and they would not adopt it, and they 
would--do you think they would ever adopt it?
    Mr. Sokol. Well, at some point, as I said, when it becomes 
in their economic and political interests, then they will but 
that point may be 20 years from now. And your question really 
drives to the point that I think is extremely important is, if 
we are going to do this, and I think the sense is, we are going 
to put the caps, let us do it at the lowest cost to the 
consumer and to industry so that if we are wrong in our guess 
that they are going to follow us, we have at least done the 
least damage economically.
    Mr. Stearns. Right, so we are losing whole complete 
competitive advantage.
    Mr. Wells?
    Mr. Wells. No, I don't think they are going to have cap and 
trade any time soon. However, I do think if we go ahead, they 
will do things to address their intensity. I am particularly 
very optimistic about their work on energy intensity and energy 
efficiency which in fact in many cases is better than what we 
are doing here.
    Mr. Stearns. Do you think India is developed enough that 
even if they could, they would? Do they have the regulatory 
powers and the type of political environment that they could 
adopt something like this?
    Mr. Wells. I would have to defer. I am not an expert on 
India. I do know quite a bit more about China but cannot answer 
for India. I apologize.
    Mr. Stearns. OK. And lastly, Mr. Farrell?
    Mr. Farrell. Congressman, I am here on behalf of EEI, and 
as far as I am aware, they don't have a position on that 
question.
    Mr. Stearns. How about you? Do you have a position?
    Mr. Farrell. I am not an expert enough in what goes on in 
China and India to offer you any useful information.
    Mr. Stearns. OK. So you defer not to answer. OK.
    Mr. Markey. The gentleman's time has expired.
    Mr. Stearns. OK. Thank you, Mr. Chairman.
    Mr. Markey. The Chair recognizes the gentleman from 
Washington State, Mr. Inslee.
    Mr. Inslee. Thank you.
    Mr. Wells, I want to commend your company for its great 
energy efficiency. It has been a real leader, and our 
commendations to you.
    Mr. Wells. Thank you, Congressman.
    Mr. Inslee. Mr. Sokol, I don't know much about your company 
but I presume it considers itself responsible. I want to ask 
you about your solid-waste disposal programs. I presume you do 
not dispose of your solid waste on land which you don't own 
without permits, I assume. Is that correct?
    Mr. Sokol. I think I can say fairly we don't dispose of any 
waste in any location that is not properly permitted. I can't 
confirm to you that we own 100 percent of the land but I think 
it would be in the high 80s or 90s but I am not certain it is 
100 percent.
    Mr. Inslee. Right. And I assume you don't believe that you 
own the atmosphere.
    Mr. Sokol. Clearly not.
    Mr. Inslee. And yet your testimony would suggest that you 
believe your company has the right to dispose of your gaseous 
waste in the form of carbon dioxide in an atmosphere which you 
do not own without charge and without regulation, and I don't 
understand how you take that position. Could you explain that?
    Mr. Sokol. Congressman, I don't know where in my testimony 
you see that. We have agreed for 5 years on these caps, 
actually slightly more stringent. We have no issue with the cap 
on CO2. If that is government policy, put it in 
place as we did the 1970 Clean Air Act, the 1990 amendments, 
and allow us to go meet it. We don't disagree with the early 
caps, the late caps. It is only the trading mechanism which 
becomes a duplicative cost without any help at all to the 
environment that we struggle with for our customers but we are 
not opposed to the caps, and if these caps are put in place we 
will meet them on time.
    Mr. Inslee. So you recognize the need for a limitation on 
the amount of carbon dioxide in the atmosphere but you expect 
the government to just give you a permit to that gratis to an 
unlimited amount----
    Mr. Sokol. Tell us what the limit is and we will meet it. 
That is all we are asking.
    Mr. Inslee. Well, we have a limit.
    Mr. Sokol. There is no limit today on CO2.
    Mr. Inslee. Here is my question to you. We have set a limit 
in this cap. That means there is a limit on the amount of 
carbon dioxide that can go into the atmosphere. So some of----
    Mr. Sokol. Yes, we would meet that, and we don't want you 
to pay for us to do that.
    Mr. Inslee. Well, but somehow we have to figure out who is 
going to have the right to use that limit to cap, to dispose of 
CO2 into the atmosphere, and you have suggested by 
objecting to this partial auction that somehow you should have 
full right to give as much as you want from your company 
without figuring how the next company will get its permit. I 
don't understand how you----
    Mr. Sokol. No, what the bill states for utility is that you 
would go back to our average 2005 CO2 emissions 
rates and that we would have to reduce them pursuant to this 
cap in each of the years shown, and we are fine with that and 
we don't want anybody else's allocation, we don't want to go 
plant trees in Honduras. We will make technological changes----
    Mr. Inslee. But what gives----
    Mr. Sokol. --to our system to meet them pursuant to the 
cap.
    Mr. Inslee. What gives your company a right to, sort of a 
constitutional right to a permit to use a limited carrying 
capacity vis-a-vis some other company or some other ratepayer? 
In other words, why are your ratepayers sort of 
constitutionally entitled in your view to a free permit as 
opposed to my ratepayers or somebody in Florida or anywhere 
else? I just don't understand that.
    Mr. Sokol. I don't think they are. I am not asking for a 
free permit.
    Mr. Inslee. But you are asking for a free permit. You are 
essentially saying that you shouldn't have to buy in any 
auction at any price set by the market----
    Mr. Sokol. No, Congressman, I----
    Mr. Inslee. --for this limit asset. I don't understand 
that.
    Mr. Sokol. The last time I checked the Constitution, I have 
got a copy here, these assets are owned by us. We have 
operating permits today to operate them. The United States 
Congress is trying to make a decision to put limits on 
CO2 and tell us that we can emit less in the future, 
and we think that is appropriate government policy decision to 
make and when you make that we will comply with it. We are not 
asking you to give us anything. We are running these facilities 
today pursuant to State and federal law. They were regulated. 
Some of them are in the State of Washington, Oregon, Nebraska--
or not Nebraska--Iowa, Wyoming, Utah, and you are asking us to 
reduce the amount of CO2 we have emitted and we are 
saying we will do that.
    Mr. Inslee. Well, my concern is that, and I will just make 
a comment and I have got one more question. My concern is, we 
have limited ability to hand out, if you will, permits for a 
limited carrying capacity of the atmosphere, and when people 
come and want total free permits, they are asking for something 
that doesn't belong to them frankly. It belongs to the 
taxpayers and the citizens.
    I want to ask a quick question of Mr. Farrell, if I can. We 
do have regional disparities by almost necessity, and I am not 
responsible for putting the Columbia River in the Northwest nor 
am I responsible for putting coal in the East.
    Mr. Farrell. It was Virginians who found the river though.
    Mr. Inslee. That is the way it should be, but we have tried 
to--isn't it fair to say that by having a half-and-half 
distribution model between the type of energy you have and that 
is half of the system, the base, half the amount, isn't that 
one way to try to address some of these regional disparities?
    Mr. Farrell. That is exactly what we are trying to 
accomplish, Congressman.
    Mr. Inslee. Thank you.
    Mr. Markey. Thank you. The gentleman's time has expired. 
The Chair recognizes the gentleman from Arizona, Mr. Shadegg.
    Mr. Shadegg. Thank you, Mr. Chairman. When he left, Mr. 
Walden asked that this paper from the American Forest and Paper 
Association be put into the record. He had been asked by them 
to put it into the record. He forgot to do so. I ask unanimous 
consent to do so.
    [The information follows:]*************** COMMITTEE INSERT 
***************
    Mr. Markey. Without objection, it will be included in the 
record.
    Mr. Shadegg. Thank you very much.
    Mr. Sokol, I would like to clarify the question that just 
occurred because it confused me. The Clean Air Act, for 
example, regulates various pollutants, NOX, SOX, SO2 and 
others, and it did that by simply setting limits. It did not 
charge a fee for emitting what was below the limit. Is that 
correct?
    Mr. Sokol. That is correct.
    Mr. Shadegg. And that is what you envision here?
    Mr. Sokol. Yes.
    Mr. Shadegg. You are willing to live with a limit as 
proposed in this legislation. As I understand it, you said you 
could live with a limit that was even lower than that. This 
notion of charging you for what you are currently emitting to 
allocate it between varies companies is something that would be 
completely new to the emissions of pollutants so far as I know. 
The Clean Air Act doesn't operate in that function, does it?
    Mr. Sokol. It does not, and the reference that people often 
make to the SO2 trading situation from the 1990 Clean Air Act 
is completely unanalogous.
    Mr. Shadegg. Yes, I thought you did an excellent job of 
pointing out the differences in that. So you can meet the caps 
in this legislation. I think people listening to your testimony 
would like to have greater clarity on I think a fundamental 
point you made. You said the bill doubles the cost, that is, 
consumers are actually paying both to reduce carbon dioxide, 
presumably a good thing, but also paying for this tremendous 
trade mechanism that can be gamed on the other side. I believe 
in Europe it has been gamed. I would like you to take a moment 
and re-explain why you see it doubles those costs.
    Mr. Sokol. In our testimony that we filed for the record, 
you will see we have done it for each of our utilities. This is 
going to be very quick, but this bottom red line here is the 
amount of free allocations we will receive from this bill, our 
customers will receive. The black line is the stepping down of 
carbon obligation under your cap. We are a utility. Our natural 
gas plants emit CO2, our coal plants emit 
CO2. There is no technology commercially available 
today to take that CO2 out of that air stream so 
what we have had to do is go with our regulator and say, look, 
if this is the requirements, here is how quickly we can replace 
those plants to meet these requirements. You don't build new 
generation in a day and new generation is not free. So that is 
laid out. Then between now and then, we just have to buy 
allocations up to the cap to continue serving our customers. 
Those two costs, the costs of compliance is $9.1 billion over 
30 years to build those new plants and then the cost of just 
paying for the allocations again below the cap, we are already 
going to be at or below the cap, is another $9.3 billion that 
our customers will pay. That is the double cost. We are below 
the cap. Why should they be penalized more? And all that is, is 
a wealth transfer and a good portion of it going to States like 
Washington and California and others from the Midwest and it 
doesn't make any sense.
    Mr. Shadegg. Well, and the trading market itself, at least 
if we look at what happened in Europe, has made a number of 
people rich. That has allowed people to get rich off of the 
trading scheme itself, hasn't it, and is that a part of your 
objection or is that not a part of your objection?
    Mr. Sokol. Well, is it not only an opportunity for the 
gaming of the system, which will be massive. There was a recent 
article written that said within 3 years it will be larger than 
the trading of petroleum as a commodity market, and that is 
over $1 trillion a year. But secondly, our industry doesn't 
need it. Just set the permits where they need to be and make us 
go do it.
    Mr. Shadegg. Got it. Some of us would agree with that.
    Quickly, this hearing is on the allocations. It looked to 
me like your testimony pointed out that the allocations as 
between electricity generation and high-intensity energy users, 
language that I think was negotiated by one of my colleagues 
from Pennsylvania, is not fair or equitable and the same with 
regard to the auto industry. Is that correct?
    Mr. Sokol. Well, I think there is a whole number of 
elements here that people in good faith probably tried to 
negotiate to be fair but this is a massive question and the 
allocation of fairness--there should be weeks of regulatory 
hearings where people can submit information to get these 
unintended consequences known. I mean, if you want to make a 
bad decision, you know, you are Congress and I am fine with 
that, you have the prerogative, but at least know the decision 
you are making, and that is what is not happening and this is a 
reordering of the American economy.
    Mr. Shadegg. Mr. Cousins, as I understood your testimony, 
which I thought was quite clear, there is no question but that 
at the cost of this legislation, which you said could not be 
passed on 100 percent, that being, I guess I calculated it 
about seven times what your profit has been in the past, 13 to 
100 million, it would drive you out of business.
    Mr. Cousins. Yes, sir.
    Mr. Shadegg. Mr. Barton asked you about the number of job 
losses that would produce and you said direct and indirect were 
how many?
    Mr. Cousins. Direct were 1,200 and indirect were 3,600.
    Mr. Shadegg. At your----
    Mr. Cousins. At our facility.
    Mr. Shadegg. And are there similar refineries that would be 
in the same position?
    Mr. Cousins. Yes, there are. There are approximately 36 
small refiners in the small category that are our size roughly 
spread all out in rural areas, and most of those would be 
equally vulnerable.
    Mr. Shadegg. I have one last question. It seems to me that 
in part this bill is being sold as a way to make us less 
dependent on foreign energy sources yet the story you told 
about the refinery built in India to deliver product to the 
United States, not to India, combined with this bill driving 
your company out of business, I guess you perceive this bill's 
impact resulting us having less refining capacity in the United 
States and driving us or forcing us to use foreign suppliers 
rather than domestic. Is that correct?
    Mr. Cousins. In the near term I think that is absolutely 
correct. In the long term, I think that is beyond my ability to 
predict.
    Mr. Shadegg. Thank you very much.
    Mr. Markey. Great. The gentleman's time has expired. All 
time for questions from the subcommittee members has now 
expired. We thank you all so much. This was a very valuable 
hearing. It is helping us to focus on the very important issues 
at the heart of this legislation. With the thanks of the 
committee, this hearing is adjourned and we ask the witnesses 
to stay close to us. We are going to need additional 
conversations with you. Thank you.
    [Whereupon, at 1:46 p.m., the subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]

                                 
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