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






 GREEN AND MEAN: CAN THE NEW U.S. ECONOMY BE BOTH CLIMATE-FRIENDLY AND 
                              COMPETITIVE?

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

                                HEARING

                               before the

                       COMMISSION ON SECURITY AND
                         COOPERATION IN EUROPE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 10, 2009

                               __________

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                                 Europe

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            COMMISSION ON SECURITY AND COOPERATION IN EUROPE

                    LEGISLATIVE BRANCH COMMISSIONERS

               SENATE

                                                    HOUSE

BENJAMIN CARDIN, Maryland,           ALCEE HASTINGS, Florida,
  Chairman                              Co-Chairman   
CHRISTOPHER DODD, Connecticut        EDWARD MARKEY, Massachusetts         
SAM BROWNBACK, Kansas                LOUISE McINTOSH SLAUGHTER,
SAXBY CHAMBLISS, Georgia               New York
RICHARD BURR, North Carolina         MIKE McINTYRE, North Carolina
ROGER WICKER, Mississippi            G.K. BUTTERFIELD, North Carolina
JEANNE SHAHEEN, New Hampshire        JOSEPH PITTS, Pennsylvania   
SHELDON WHITEHOUSE, Rhode Island     ROBERT ADERHOLT, Alabama
TOM UDALL, New Mexico                DARRELL ISSA, California 

                     EXECUTIVE BRANCH COMMISSIONERS

                  Michael Posner, Department of State
               Alexander Vershbow, Department of Defense
               
               
               
               
               
               
               
               
               
               
               
               
               
 GREEN AND MEAN: CAN THE NEW U.S. ECONOMY BE BOTH CLIMATE-FRIENDLY AND 
                              COMPETITIVE?

                              ----------                              

                             MARCH 10, 2009
                             COMMISSIONERS

                                                                   Page
Hon. Benjamin Cardin, Chairman, Commission on Security and 
  Cooperation in Europe..........................................    01
Hon. Alcee Hastings, Co-Chairman, Commission on Security and 
  Cooperation in Europe..........................................    03
Hon. Tom Udall, Commissioner, Commission on Security and 
  Cooperation in Europe..........................................    12
Hon. Sheldon Whitehouse, Commissioner, Commission on Security and 
  Cooperation in Europe..........................................    15

                               WITNESSES 

Richard Morgenstern, Senior Fellow, Resources for the Future.....    03
Trevor Houser, Visiting Fellow, Peterson Institute for 
  International Economics........................................    05
Robert Bradley, Director of International Climate Policy, World 
  Resources Institute............................................    08

 
 GREEN AND MEAN: CAN THE NEW U.S. ECONOMY BE BOTH CLIMATE-FRIENDLY AND 
                              COMPETITIVE?

                              ----------                              


                             MARCH 10, 2009

  Commission on Security and Cooperation in Europe,
                                                    Washington, DC.
    The hearing was held at 10:00 a.m. EST in 428A Russell 
Senate Office Building, Washington, DC, Hon. Benjamin Cardin, 
Chairman, Commission on Security and Cooperation in Europe, 
presiding.
    Commissioners present: Hon. Benjamin Cardin, Chairman, 
Commission on Security and Cooperation in Europe; Hon. Alcee 
Hastings, Co-Chairman, Commission on Security and Cooperation 
in Europe; Hon. Sheldon Whitehouse, Commissioner, Commission on 
Security and Cooperation in Europe; and Hon. Tom Udall, 
Commissioner, Commission on Security and Cooperation in Europe.
    Witnesses present: Robert Bradley, Director of 
International Climate Policy, World Resources Institute; Trevor 
Houser, Visiting Fellow, Peterson Institute for International 
Economics; and Richard Morgenstern, Senior Fellow, Resources 
for the Future.

  HON. BENJAMIN CARDIN, CHAIRMAN, COMMISSION ON SECURITY AND 
                     COOPERATION IN EUROPE

    Mr. Cardin. Good morning, everyone, and welcome to this 
hearing of the Commission on Security and Cooperation in 
Europe. I'm very pleased that we are focusing our attention 
today on climate change. Security, cooperation, these two words 
are central to the commission's title and its mission, and they 
are also two of the essential elements of dealing effectively 
with climate change. Today America's security is undermined by 
our dangerous reliance on foreign oil. Too much of our economy 
is captive to uncertain supplies. Too much of our fortune goes 
to parts of the world that harbor deep animosity towards our 
nation and our values.
    As analysts increasingly point out, climate change is real 
and a present threat to world security. Dramatic shifts in 
climate will likely lead to massive displacement of people who 
are faced with flooding from rising oceans and extended 
droughts that dry up their food supplies. Social unrest is 
almost certain and international instability is likely to 
follow. Europe faces many of the same issues and challenges, 
and that brings us to cooperation.
    The only effective way to address the global crisis of 
climate change will be through unprecedented international 
cooperation. The world has seen an unprecedented international 
scientific collaboration under the auspices of the United 
Nations Intergovernmental Panel on Climate Change, an effort 
that culminated in a Nobel Peace Prize in 2007. We have seen 
nation after nation take important steps to curb the greenhouse 
gas emissions and plot a new carbon-friendly future. This 
effort has been especially important in Europe. The European 
Union has taken strong actions to address climate change. The 
Union designed and implemented the first coordinated 
international cap-and-trade program.
    Although the initial effort was flawed, the entire world 
looked to Europe because of its leadership role. The cap-and-
trade program that we will design in America will owe much to 
the European experience. America has been on the sidelines. We 
have had an administration that denied the reality of global 
warming even as glaciers melted and sea levels rose and the 
international scientific consensus became much more unified. 
Today we have a new president and a new commitment to action. 
This year the Congress and President Obama will work together 
to enact climate change legislation. Based on sound science, 
this legislation will rely on tough mandatory cap-and-trade 
program.
    The climate bill will harness market resources to bring 
down greenhouse gas emissions, while simultaneously stimulating 
investment in a clean, sustainable economy for the decades 
ahead. We live in an interconnected world, where the decisions 
we make here impact other countries and vice versa. Nowhere is 
that clearer than on the issue of climate change. Our economy 
and our environment depend on the commitment we make today to 
retool our nation's economy for the future. Increasingly that 
holds true for the rest of the world as well.
    The time has come for America to do more than simply get 
off the sidelines. The time has come for America to assert its 
leadership in the world again. Taking action on climate change 
legislation must be a top priority for Congress this year. The 
time for action is long past. The time to catch up is now. Even 
in the shadow of the most severe recession in a generation, 
America's role in the world economy is unparalleled. Other 
nations may have more consumers or greater portions of certain 
market share, but it's clear that the world is looking to the 
United States to lead us out of the economic wilderness, and we 
will. It is also clear that the world needs America to exert 
its leadership on climate change. Along with China, we are the 
largest emitters of greenhouse gases in the world, but unlike 
China America has the history of combining intellectual 
resources, entrepreneurial spirit, market savvy and optimism 
that can translate into an effective worldwide leadership on 
this issue.
    With the adoption of a tough cap-and-trade bill, America 
will set on a path that will improve our national security by 
reducing our reliance on foreign oil, stimulate our economy by 
generating millions of new, clean, green jobs in energy 
efficiency, solar wind, biomass, and more, and pull the world 
back from the brink of catastrophic climate change.
    Today the commission will address climate change. When the 
commission goes to Vilnius later this year, we should be 
bringing with us a message of change, hope, and renewed 
commitment to common international actions, and by the time the 
community of nations convenes in Copenhagen in December, all 
should recognize that America is taking meaningful, effective 
action in bringing a strong pragmatic and moral leadership back 
to the world stage.
    Today we will hear from a panel of witnesses who will 
discuss some of the experiences in America and in Europe, some 
of the difficult issues relating to international trade and 
some of the promise that bold action on climate change can 
yield. Before our witnesses start their testimony, I would like 
to point out that in the spirit of today's hearing on climate 
change and the recognition of the need for each of us to take 
steps to combat global warming, the commission is reducing the 
volume of paper that it uses at our hearings by making all 
commissioner and witness statements available online instead of 
distributing hard copy. You can visit our Web site, 
www.csce.gov for all hearing material.
    At this time let me recognize the co-chairman of the 
Helsinki Commission, my friend, Congressman Hastings.

 HON. ALCEE HASTINGS, CO-CHAIRMAN, COMMISSION ON SECURITY AND 
                     COOPERATION IN EUROPE

    Mr. Hastings. Thank you very much, Chairman Cardin. I echo 
your sentiment, Senator. In light of the fact that I have to be 
back over on the House side in about an hour I'm going to 
forego any opening statement and ask unanimous consent that any 
statement that I may make be placed in the record. I'm really 
interested in being able to hear all of our witnesses before I 
leave. Thank you, sir.
    Mr. Cardin. Thank you, Mr. Chairman. We have a 
distinguished panel of witnesses. Their bios have been 
distributed so the bios are before all of us so we know them 
very well, so let me get on by introducing them: Mr. Richard 
Morgenstern, who's a senior fellow with Resources for the 
Future; Mr. Trevor Houser, who is a visiting fellow with the 
Peterson Institute for International Economics; Mr. Robert 
Bradley is the director of international climate policy at the 
World Resources Institute. We will begin with Mr. Morgenstern. 
Let me also point out, as everyone here knows, that he was the 
senior economic counsel to the undersecretary for global 
affairs in the U.S. Department of State before taking on his 
present assignment. Mr. Morgenstern, it's a pleasure to have 
you before the committee.

  RICHARD MORGENSTERN, SENIOR FELLOW, RESOURCES FOR THE FUTURE

    Mr. Morgenstern. Mr. Chairman, thank you very much. I 
appreciate the opportunity to appear today to discuss 
competitiveness and trade impacts of domestic carbon action. 
Resources for the Future is an independent, nonpartisan 
research organization, and the views expressed today are those 
of myself, strictly.
    Broad market-based strategies of the type that you've 
referred to, cap and trade, that attach a price to greenhouse 
gas emissions have the potential to offer significant cost and 
efficiency advantages to the United States as it seeks to 
reduce its carbon emissions. At the same time, there is the 
potential that this approach will impose significant costs on 
particularly energy-intensive, import-sensitive industries. It 
is these industries and this question of competitiveness that 
is referred to as the subject of this hearing and which my 
comments relate to.
    I have been involved in some research activities with 
several of my RFF colleagues and what I want to do today is 
quickly review some of the key results of those studies that we 
have conducted, and then talk about some of the options that 
the United States might have in trying to deal with these 
problems. The conclusions of our research can really be 
succinctly stated in a couple of points.
    Number one, measured by the reduction in output, a readily 
identifiable set of industries is at the greatest risk of 
contraction over both the short and long term as a result of 
domestic action. Secondly, although the short run output 
reductions may seem relatively large in these industries, these 
reductions shrink over time as firms adjust inputs and adopt 
new technologies to the changing environment. Third, the 
largest cost increases are concentrated not in broad industry 
categories as we commonly refer to them, but oftentimes in 
industry sub-categories. For example, we may see impacts on 
aluminum, which is a broad category. We may see impact on lime, 
which is a somewhat smaller category. And it is this 
combination of large and small industry sectors that we need to 
understand.
    In the non-manufacturing sector there are also some 
declines that are seen, but a rather diverse pattern applies. 
For example, you see that in the electric utility industry the 
impact is relatively consistent over time, whereas you see in 
something like mining there may be a continuing deterioration 
as there is a substitution away from metals, to a substitute 
for metals that may be attractive.
    In terms of employment, the short-run impacts are roughly 
proportional to the losses in output, but over the longer term 
we tend to see other industries come in, pick up the slack, and 
we do not see a net loss in employment.
    Most experts agree that the best solution for addressing 
this problem is to have an international agreement that in fact 
binds all of our key trading partners to some relatively 
comparable policy to the one the United States would undertake. 
But in the interim, unilateral action should and must be taken, 
in my view, to begin to address this problem. That leads to the 
possibility, and in fact the likelihood that there will be some 
emissions leakage, and that means that some of the domestic 
reductions will be partially offset by increases abroad as 
production increases outside the United States and energy-
intensive activities are relocated globally.
    Importantly, displacement of production through lost 
competitiveness is not the only source of carbon leakage. A 
large scale withdrawal of demand for carbon-intensive energy in 
the United States will drive down prices globally and expand 
consumption elsewhere.
    Turning, to the question of how do we address this problem, 
there are really several different ways that we can go about 
it. An efficient policy, a cap-and-trade policy of the type 
that you've referred to and President Obama has endorsed is 
certainly a first step in that direction. Several other 
measures, for example the use of carbon offsets, either 
domestic or international, are other ways of addressing the 
competitiveness issue.
    Thirdly, one can envision cost containment policies whereby 
there's an attempt to prevent dramatic fluctuations in prices 
which could in fact adversely affect competitiveness. Those are 
the approaches that are commonly discussed.
    Beyond those, pending legislation here in both the House 
and the Senate is focused on two approaches. One is free 
allowance allocation, and the other is trade-related border 
adjustment type approaches. Speaking to the latter, import 
adjustment proposals would require importers to purchase 
allowances based on the embodied emissions in their products, 
which would attempt to level the playing field. One can imagine 
a broader border adjustment where you also dealt with exports. 
However, I would point out that there are particular WTO 
problems that may impede that action.
    The other approach is to try to limit the increases in 
domestic costs by using free allowance allocation, and 
particularly a type of free allowance allocation that we have 
some experience with, but somewhat limited experience with in 
the United States, and that is in contrast to, say, the Clean 
Air Act approach, where we grandfathered the allowances based 
upon historic emissions, this would involve an updating of 
allowances. That is to say, that the better performance that is 
turned in by a firm, the more allowances it would receive. This 
has the effect of lessening the burden of the cap-and-trade 
system of the carbon price on that particular industry.
    I would point out there are other approaches that have been 
discussed. For example, people have talked about the 
possibility of exempting certain industries from control, and I 
would note that doing so removes any incentive that you would 
normally want to place on these industries to reduce their 
emissions, and it also raises the cost to all other industries, 
every other individual in the United States, of reaching the 
carbon goal.
    In summary, Mr. Chairman, I would say that until we have a 
truly global system in place where we would not need these 
special provisions to deal with the problems imposed on energy-
intensive industries, I would personally advocate a free 
allowance allocation via updating as a transitional measure for 
the adversely affected industry. Thank you, Mr. Chairman.
    Mr. Cardin. Thank you very much for your testimony. I 
Appreciate it. Mr. Houser.

    TREVOR HOUSER, VISITING FELLOW, PETERSON INSTITUTE FOR 
                    INTERNATIONAL ECONOMICS

    Mr. Houser. Thank you very much. My name is Trevor Houser. 
I'm a visiting fellow with the Peterson Institute for 
International Economics, and the director of the energy and 
climate practice at RHG, which is a New York-based research 
firm. The same disclaimers that Dick provided are all true for 
me. Any comments that I have are mine and not the Peterson 
Institute's.
    The title of this panel is, ``Can a New U.S. Economy Be 
Both Climate-Friendly and Competitive?'' I would urge us to 
think about that question broadly. The transition to a low 
carbon economy is going to affect U.S. competitiveness in many 
ways, and the first is what Dick commented on, a need to create 
a level carbon playing field for energy intensive industries 
that might be put at a disadvantage. The second would be our 
ability to capture opportunities in new low-carbon energy 
technologies that will be required to make the transition. 
Third is our ability to trim some of the $450 billion we spend 
each year on imported oil would make the U.S. more competitive. 
And then finally, as we make these new investments in energy 
efficiency, to take that as an opportunity to invest in 
increased U.S. productivity more broadly.
    This panel is focused on the first of those, on creating a 
level playing field, and that's where I'll focus my comments. I 
wanted from the outset to put that in a broader context of how 
we think about competitiveness.
    This issue of the impact on energy-intensive industries, 
it's critical that we get this piece right, and in doing so we 
need to think about three things: first, dealing with the 
impacts for domestic industry in a way that's equitable and 
effective. Addressing climate change is going to be a multi-
decade process that's going to require continued political 
support. And to draw a lesson from trade liberalization, the 
need to up front make sure that folks who might be negatively 
impacted are compensated or retrained is going to be critical 
to maintaining a consensus surrounding climate policy going 
forward.
    Two, we need to make sure that we do that in a way that's 
supportive of international climate negotiations. As the 
chairman pointed out, this is a problem that no individual 
country can solve and that we'll need a collective solution 
for. And so we have to address this through the lens of the 
multilateral approach. But finally, it's important that we do 
this in a way that is compatible with the principles of the 
world trading system because for us to capture that upside, the 
clean revolution on which our ambitions lie, we're going to 
need open markets to export low carbon goods to the rest of the 
world, so we need to think about that inclusively.
    In the 110th Congress, most of the energy and climate bills 
that were introduced, cap-and-trade bills, took one primary 
approach to addressing this issue of competitiveness, of 
leakage, and that is to impose a comparability test, to look at 
what other countries are doing to reduce emissions, and those 
who are seen as not taking comparable action to the U.S. to 
have the price for carbon on energy-intensive imports--on 
steel, aluminum, and cement--adjusted at the border.
    The goal here is to meet two objectives simultaneously. The 
first is to address the leakage concern that Dick mentioned, 
and the second is to try to provide a leverage on other 
countries to help encourage them to join international climate 
negotiations. And the authors of those provisions were pretty 
thoughtful about trying to design them in a way that would be 
consistent with the WTO.
    I would argue, though, that by combining leakage and a 
desire to address leakage with a need to create leverage, those 
provisions fail at doing both. Let me point out why. On the 
leakage front, an international agreement of the type that we 
hope to get from Copenhagen is not going to yield the same 
carbon price between countries that are part of that agreement. 
We need to allow flexibility between developed and developing 
countries in how they reduce emissions, and then within a 
country we need to allow flexibility for what types of targets 
and timetables we adopt.
    For example, Europe is committed to reduce emissions 20 
percent by 2020 off a 1990 baseline, 30 percent if we get an 
international agreement. The Obama plan pledges to reduce 
emissions 14 percent by 2020 from a 2005 baseline, which is a 
slight increase over a 1990 baseline. That means there's going 
to be different carbon prices between the U.S. and Europe, let 
alone between the U.S. and China. And that's okay from an 
environmental standpoint as long as the end of the day we get 
to the numbers that we need for global emissions reductions. We 
can't rely on a global agreement in the interim until we get to 
a single global carbon price which is ultimately where we'll 
try to go to address our concerns of leakage. We need to do 
that in the way we design domestic policy.
    The approach taken in the Boxer-Lieberman-Warner bill--
would impose trade measures on countries that stay outside of 
an international agreement but doesn't look at how we can 
adjust the prices between countries within a national 
agreement. That's something we need to consider.
    On the leverage front, if we look at imposing a tariff on 
the carbon content of goods that come into the U.S. we don't 
have sufficient leverage to force any country to the 
negotiating table. While exports from China of textiles, T-
shirts and electronics are very important for economic 
development, exports of carbon-intensive goods like steel, 
aluminum, cement aren't, because most of the steel, aluminum 
and cement that countries like China and India manufacture is 
for domestic consumption to feed this massive urbanization 
drive that's going on in those countries today. Exports of 
energy-intensive goods of the type that RFF's work has 
identified as being potentially vulnerable account for about 
0.1 percent of Chinese GDP. That's fairly small in comparison 
to the cost of climate policy.
    The good news is that developing countries are in fact 
willing to come to the negotiating table on their own and we 
probably don't need that type of leverage. And that's something 
that I think Rob's going to mention.
    In a multilateral environment we could think about the role 
of trade sanctions imposed on all goods as a way to enforce an 
international agreement. But to be effective we'd have to do 
that multilaterally. No individual country is going to have 
enough leverage by denying market access to get any major 
emitter into an international agreement. It'll have to be a 
collaborative approach.
    For addressing leakage, until we get to a harmonized global 
carbon price--either a global cap and trade system or global 
carbon tax--which is more than a decade off at least--we could 
have a multilateral agreement on how to adjust border prices--
adjust carbon prices at the border between countries, in the 
way that Europe does a value-added tax. Alternatively, we could 
have an international sectoral agreement where within the 
broader global agreement countries agree to a common price or a 
common set of standards for internationally traded goods like 
steel and cement. Both of those things would need to be 
negotiated multilaterally.
    In the interim, as Dick mentioned, we have a number of 
options available to us in the way we design our allowance 
system to offset costs to domestic industry, in particular of 
the types of output-based rebating proposals that folks in the 
House are working on today hold quite a bit of promise.
    Thanks very much.
    Mr. Cardin. Thank you very much for your testimony. Mr. 
Bradley.

ROBERT BRADLEY, DIRECTOR OF INTERNATIONAL CLIMATE POLICY, WORLD 
                      RESOURCES INSTITUTE

    Mr. Bradley. Good morning, Mr. Chairman, Mr. Hastings, Mr. 
Udall. Thank you very much for the opportunity to join you 
today. My name's Robert Bradley and I direct the international 
climate policy work for the World Resources Institute.
    Both my companions here, Trevor and Dick, in their 
testimonies have referred to the desirability of placing U.S. 
climate policy in the context of a broader international 
agreement. And so I wanted to step back and explore that 
possibility a little bit.
    I'd like to make three points, each of which I treat in 
more detail in my written testimony which I hope can be 
included in the record. First, success against climate change 
will mean strong federal policy in the United States and action 
from major developed and developing economies. Second, the 
world has changed dramatically since the days of the Kyoto 
Protocol. Major developing countries are ready to take 
significant action on limiting emissions. And third, all 
countries will seek to harness the benefits of growth and new 
jobs from a switch to cleaner energy. Constructive 
international policy on both trade and technology cooperation 
can help build support for an effective climate regime.
    The United States is an indispensable leader in the fight 
against climate change. Without the world's largest economy and 
biggest historical emitter other countries cannot fix the 
problem. But nor can the U.S. do it alone. Almost 80 percent of 
global emissions are produced by 15 counties, nine of which are 
in the developing world. The Kyoto Protocol, the main climate 
agreement to date, has been rejected by the United States in 
particular because of the concern that without meaningful 
participation from major developing countries it would be 
ineffective and costly to the U.S. economy.
    Developing countries have historically argued that with 
their poverty and small historical contribution to the climate 
problem they should not be responsible for curbing emissions. 
But in recent years there's been a flood of developing country 
climate plans. For example, Brazil announced that it would 
reduce its deforestation rate over 50 percent from recent 
levels by 2017, avoiding an estimated 4.8 billion tons of 
carbon dioxide emissions. China committed to reducing national 
energy intensity--that's energy per unit of gross domestic 
product--by 20 percent by 2010 and looks on course to meet that 
goal with programs expected to cut emissions by 550 million 
tons of CO2. Investment in wind, hydro, nuclear and 
biomass are expected to save an additional 640 million tons by 
2010.
    India has a number of states that are taking forward 
aggressive renewable energy targets with renewable portfolio 
standards. Mexico pledged to half its greenhouse gas emissions 
by 2050 and is considering a cap and trade policy not 
dissimilar to the one recently considered by U.S. Congress. 
South Africa has presented a highly detailed and ambition plan 
to peak its national emissions by 2020 and to bring them down 
to low levels in 2050.
    These policies will often not be of the same form as the 
cap and trade approach favored in the United States and Europe, 
but that need not make them any less ambitious. They are the 
more impressive when we consider the poverty of many of these 
countries. In India 550 million people still lack any access to 
electricity and they, like Europeans and Americans in the last 
century, legitimately aspire to get it, but they are seeking to 
do so on a lower carbon pathway.
    An international climate agreement can help reinforce these 
actions. Many of these countries have a poor record of 
implementing national plans. It will certainly not be enough 
for countries to take each other's plans at face value. The 
Bali Action Plan, which frames negotiations for a post-2012 
climate agreement, provides for both developed and developing 
countries to take mitigating actions that are, quote, 
``measurable, reportable and verifiable.'' This language also 
applies to finance technology and capacity building support for 
developing countries.
    One factor common to all countries taking action on climate 
is the promise of new jobs and economic opportunity from the 
switch to clean energy. Over 10 percent of the United States' 
recent stimulus package was aimed at climate-friendly and 
environmental objectives. In South Korea the corresponding 
figure is 80 percent. China has also pledged to put hundreds of 
billions of dollars from its stimulus package into projects 
that cut greenhouse gas emissions. And rightly so. Research we 
have undertaken recently with the Peterson Institute calculates 
that green recovery programs generate 30,000 jobs on average 
per $1 billion invested. They also reduce the cost of meeting 
climate goals in the longer term.
    All countries focus on generating jobs at home. But the 
truth is that clean energy, like any high-tech industry, will 
depend on inputs from around the world. A multilateral approach 
to developing and deploying clean technologies can be enhanced 
through cooperation on climate change and supported by freeing 
up trade and environmental goods and services.
    This body can shape the success of the international 
process. An ambitious federal climate policy will unleash 
action not only in the United States but also from countries 
that have been waiting on the world's biggest economy. 
International cooperation on technology programs can help build 
on the push to cleaner energy through the stimulus. Finally, 
U.S. policy should include provisions for financing 
international action on adaptation, forest protection and clean 
technologies to help ensure an inclusive climate deal.
    I don't want to imply that this will be easy. Many 
countries remain wary of commitments and their rhetoric will 
stress these fears. But the world has moved on a lot in 10 
years. There's a real willingness to tackle emissions and a 
potential agreement that can turn this willingness into 
verifiable action.
    Thank you and I look forward to your questions.
    Mr. Cardin. And, Mr. Bradley, thank you for your testimony. 
We'll start with Congressman Hastings.
    Mr. Hastings. Thank you very much, Mr. Chairman. And 
gentlemen, thank you all for your testimonies. And I can assure 
you your words resonate very strongly.
    Mr. Chairman, I was thinking as our three presenters were 
going forward that probably in other places around the world--
either today, yesterday or tomorrow--similar type discussion 
are being had. One of the continuing problems it seems that we 
have in trying to reach international agreement is the lack of 
communication. I would emphasize at the outset you spoke about 
our Web site and I would hope that the testimony of these 
gentlemen will be appropriately diaried and disseminated to 
other individuals in other countries that might very well find 
their remarks useful. Mr. Morgenstern, how long were you 
actually involved and to what degree were you involved in 
Kyoto?
    Mr. Morgenstern. I was working at the Environmental 
Protection Agency throughout most of the '80s and in the '90s, 
and then in the early 2000s. I worked on Kyoto pretty much from 
the inception. I was at Rio in 1992. I attended a conference in 
Toronto that was in the late '80s. I've been involved in this 
issue for a long time. I guess you might say the short answer 
is from the outset.
    Mr. Hastings. All right. Now, taking from all of your 
testimonies, and specifically from Mr. Bradley's, it appears 
that for a variety of reasons the United States never became a 
signatory to Kyoto. Is that correct?
    Mr. Morgenstern. Technically we signed it but we didn't 
ratify it.
    Mr. Hastings. We've kind of like been missing in action on 
the subject. Would you agree with me that those who would use 
an argument that--to trust your partners for international 
agreements would then turn around and argue, well, the United 
States didn't go along with Kyoto. What makes us think that 
they or Russia or China or India or any of the larger countries 
are going to go along with some kind of carbon emission 
international agreement?
    Mr. Morgenstern. You raise a very important question, Mr. 
Chairman. I guess I would say that looking back on the 
situation with Kyoto that the fact that United States did not 
take any domestic initiative at that time, perhaps the 
negotiators got a little bit ahead of the political reality 
back home.
    That the current thinking now--certainly it's embodied by 
President Obama's statements and by the actions in both houses 
of Congress in the past several years in developing 
legislation--is that the United States really needs to be a 
leader and needs to take domestic action and that that's a way 
of demonstrating to the world that we are serious and that 
we're simply not showing up at the negotiating table, 
participating in all the rhetoric and then failing to deliver.
    That's probably the approach that makes most sense given 
the way our system operates.
    Mr. Hastings. But now we're in a climate of slumping 
economic activity and the overall financial crisis globally. 
And my read is that Europe's ambitious plans are now suspect 
among themselves. Reading one statement from a European 
negotiator whose name doesn't appear in the article, he says 
the Germans are giving up and the Italians are getting ready to 
follow. And then we know about President Chirac--Sarkozy's 
forward-leaning discussions. Mr. Bradley talked about it, about 
trying to come to some terms by the year 2020.
    My overall concern is this: In any major change that 
requires world agreement, it takes too much time. And how then 
can we shorten that time and get to the business of collective 
undertaking worldwide or the collaboration that's going to be 
needed in order to do anything really substantial?
    I hear you argue and I agree with you that unilateral 
action is going to have to take place. But it seems in order 
for us to be unilateral we need then to have widespread 
understanding inside the United States and the various sections 
that are likely to be affected from steel, petrochemicals, all 
the way down the line, and try to get as many people on board 
with the policy rather than coming up here and yakking it up. 
That's, to my way of thinking, what needs to be done. You can't 
have a one-day summit. You have to have an ongoing, 
concentrated, hot effort to try and come to agreement from 
within before we act unilaterally. Or am I making any sense?
    Mr. Morgenstern. Definitely so, Mr. Chairman. I guess two 
key elements of a domestic initiative that could pave the way 
to a greater international cooperation. Number one is that the 
domestic action be cost-effective; that is to say that it be 
designed in a way that it is affordable and it is efficient and 
it is getting the most possible reductions for the dollars that 
we commit to it. Secondly is that we need to demonstrate to 
ourselves and to the world that there are new technologies that 
can come into play quickly and efficiently and that they can 
lessen the burden for others as well as ourselves in trying to 
meet these goals.
    The United States' initial action is really a small down 
payment to a global future here. Nobody is kidding themselves 
to think that we can solve the problem. As we all know, we're a 
fraction of the emissions and so on. But the fact is that we 
need to demonstrate that this can be done efficiently and that 
in fact new technologies can come into play and that they can 
be effective and efficient.
    Mr. Hastings. Right. Right here in our bicameral 
legislature, Mr. Chairman, in my view it would be helpful if we 
communicated better among ourselves. A lot of times the left 
hand doesn't know what the right hand is doing. A hearing is 
held over here in Commerce, another one's held over here in 
Foreign Affairs and another one's held over here in financial. 
All of this stuff needs to be coordinated, at least in my 
opinion.
    Thank you, Mr. Chairman.
    Mr. Cardin. I think Mr. Bradley wanted to respond.
    Mr. Bradley. Thank you with your indulgence. As the more 
astute amongst you will have noticed, I am European and I was 
actually closely involved in the design of the European 
emissions trading system. And I wanted to pick up on a point 
that Mr. Hastings made, that there is a very similar dialogue 
going on in capitals around the world.
    I would include in that Beijing, to a certain extent Delhi. 
The countries are in fact saying to themselves, we get it; 
climate change is a really big deal. China's national climate 
change program goes a great length into just how badly China is 
going to get hit by climate change. They say, we get it. We 
have to do something. We're a really big emitter. It can't be 
done without us. We have to still combine that with other 
concerns we have: economic development, energy security and 
things like that. But how can we move without the United 
States?
    So this comes to your second point, Mr. Hastings, about how 
we can move forward urgently--because you're right; 
international agreements themselves don't move particularly 
fast. But I would argue that while an international agreement 
is important in an ongoing confidence building, it's not the 
thing that will trigger action. The thing that will trigger 
action, the thing that can be done here that will be far more 
important than any other single activity undertaken on climate 
change in the world will be to implement and give a clear 
signal about the implementation of U.S. climate policy.
    The European Union has spent the last decade--you refer to 
the divisions. Those divisions are rooted in in a reluctance to 
move too far ahead without the United States. The Europeans 
have actually put a lot on the line by saying we'll do--we'll 
go for 20 percent below 1990 levels by the year 2020 in terms 
in greenhouse gas emissions, regardless of what everybody else 
does. But they've actually gone out and said if other major 
emitters play then we can maybe get that down to 30 percent.
    The Europeans are not the only ones but they're perhaps the 
ones that have gone out most transparently in making that case. 
The U.S. has it in its power not only to take action on 
American emissions but to trigger action amongst others.
    Mr. Cardin. Thank you. Senator Udall.

   HON. TOM UDALL, COMMISSIONER, COMMISSION ON SECURITY AND 
                     COOPERATION IN EUROPE

    Mr. Udall. Thank you very much too both chairmen for doing 
this hearing, and thank you for the witnesses for being here 
today.
    I'm of the belief that there will be a long-term 
competitive advantage for those who embrace green technology 
and infrastructure in a world moving towards a low carbon 
economy. Mr. Bradley, it really goes to the heart of what you 
were talking about there. I mean, we're in this situation where 
we say, let's not move forward unless we have the rest of the 
world--or many seem to be saying that. And if we don't move 
forward, the rest of the world won't engage and won't continue 
to push down the road of a low carbon future.
    I would ask the panelists, how do you suggest we promote 
green technology and infrastructure without saddling companies 
with additional burdens and distorting global competitiveness? 
Go ahead.
    Mr. Bradley. Thank you. I very much agree with the premise 
of the question you're articulating there. The World Resources 
Institute, incidentally, together with several partner NGOs and 
27 major U.S. corporations, in the form of the U.S. Climate 
Action Partnership, has come out very strongly in a unified 
voice over the last two years in making the case for the United 
States moving forward with clear policy.
    The economic advantage that American corporations are 
seeing in that is that if you're playing in the power sector or 
in heavy industry, the one thing you don't want is uncertainty. 
They get it that climate change is going to be a problem. They 
get it that sooner or later, public policy is going to have to 
respond to that problem. Better that you know that sooner 
before you start building your power plants and that you know 
what that's going to be and that you have some clear forward 
signal that allows you to adapt not only your investment 
choices today but your research and development and the 
business choices that you make looking into the future. So 
while we can get lost in the weeds, That's a very strong early 
signal.
    Mr. Udall. What you're talking about there is really a 
price signal in the market, isn't it? Having some kind of 
consistent strong price signal to move us in a new direction in 
terms of green technology and infrastructure and that kind of 
thing?
    Mr. Bradley. Absolutely. If you're managing a business unit 
and you want to go to your executive board and ask for capital 
this year, they're going to ask how you hedged against all of 
the risks that they see against both the reality of climate 
change and the reality of the potential policy coming down the 
pipe. The sooner you can have a price that you can start 
incorporating into the forward planning on that, the sooner 
you're able to make smart decisions that help your growth and 
your employment in the long run.
    Mr. Udall. That's one of the first things we need to be 
doing, isn't it? It's to put that price signal out there, to 
get it in place, and then that will start driving where we want 
to go.
    Mr. Bradley. That's absolutely correct. There are a lot of 
other very exciting things going on at the moment--certainly 
spending through some of the stimulus and recovery measures in 
new technologies. But without a long-term signal that allows 
them to say, okay, not only do I develop this technology but 
there is a market for it, the impact of those things is going 
to be limited.
    Mr. Udall. Current price signals right now aren't doing the 
job, are they? I mean, when we have the drop in oil and gas 
prices to where they are today, that's not sending a price 
signal to move us in a low-carbon direction, is it?
    Mr. Bradley. It's not providing the consistent enough 
signal. We've certainly seen as oil prices went up over the 
last year how the market can respond to those things. People 
were buying different vehicles. People were making different 
investment choices. But of course, then demand goes down. The 
oil price drops. Instead of maintaining a longer-term signal 
that can then help consistent investment, we're subject to the 
vagaries of what happens in the oil market. Certainly a more 
active price signal would allow us to take control of our 
destiny a little bit more.
    I would note that, again, this isn't the only country where 
this discussion is taking place. In China, India, not to 
mention Europe, other countries are also saying, hey, wow, if 
we start moving early on this, we'll be the ones who are 
leading this green technology revolution. The Chinese are 
already making a third of the world's solar panels. And the 
Indians have some of the world's leading wind energy companies. 
This is not a static target. This is something that I would say 
is very much an opportunity that others are starting to seize.
    Mr. Morgenstern. If I could add perhaps one point of 
emphasis, beyond the price signal, which will clearly stimulate 
new technologies, most of the legislation that's been 
introduced has a significant auctioning component for the 
allowances. And that generates a significant revenue stream for 
the federal government, which in most of the proposed bills is 
channeled to some extent to new technologies. This provides an 
additional mechanism whereby one can aid and facilitate 
development and deployment of new technologies.
    Mr. Udall. Richard, would you comment on the idea of having 
a mandate in terms of renewable energy for electric power 
companies? I mean the president has put out a proposal for 25 
percent by 2025. Without picking technologies, you give a goal 
and you give a mandate and you say that's the direction we want 
to move in. Do you have any thoughts on whether that is a 
helpful way to go?
    Mr. Morgenstern. The question you're asking is whether the 
focus on on renewables, in general--is the preferred way to go. 
I guess my own sense is that we should probably have a little 
more of a market focus by setting up a carbon pricing 
mechanism, which allows all technologies to compete. Renewables 
will do very well. But a renewable standard tends to 
distinguish, focus on only those. If we're seeking to get the 
most bang for the buck, the carbon price mechanism may be the 
most effective way.
    Mr. Udall. So you'd rather see a cap-and-trade than a 
renewable standard? That first?
    Mr. Morgenstern. If it was a choice, I would certainly 
rather see that. I guess the question is whether one could 
augment the other. And that gets into some complexities. But I 
would probably favor the strong cap-and-trade.
    Mr. Udall. Thank you, Chairman.
    Mr. Cardin. Mr. Houser, did you have a point?
    Mr. Houser. I just wanted to add one comment. I mean, we're 
having this conversation in the midst of the worst economic 
crisis in a generation. That's certainly coloring the politics 
of this. And as Senator Udall pointed out, people are looking 
to investment in green technology as a way to help us emerge 
from this crisis, which is promising. It's important to think 
about the timelines.
    We're having the debate about a cap-and-trade program today 
in the midst of a crisis. The costs wouldn't hit the economy 
until 2012. That's when it would take effect at the earliest, 
by which time we all hope that we're on a more stable economic 
footing than we are today. But as Rob said, setting that price 
signal now, even if the costs aren't going to take effect in 
2012, is critical in giving companies certainty. I mean, part 
of the reason that investment has dried up is about uncertainty 
about the health of the financial system. For energy-sector 
companies, that's coupled with uncertainty about the outcome of 
environmental regulation, which they know is coming but don't 
know what it looks like. Clarifying that uncertainty now will 
help unlock investment in the energy system, which will have a 
broader economic effect.
    Now, until that price for carbon takes effect, there's 
things we can do to help prime the pump and ensure that the 
cost of carbon, once it's imposed, has as little impact on the 
economy as possible. We did a decent amount of that with the 
stimulus bill in investing in emerging technologies and 
alleviating infrastructure bottlenecks. The benefits of those 
programs, if properly implemented, is that not only will they 
reduce the costs of a cap-and-trade program but the energy 
savings that will come off of them will help offset the 
budgetary impact of the stimulus efforts we're having now.
    In the report that we did a couple months ago, we estimated 
that of about the dozen green stimulus programs that were being 
considered, on average for every billion dollars of government 
investment, $450 million per year in energy cost savings were 
returned to either the federal government or the economy as a 
whole, which helps smooth the transition into both a cap-and-
trade system and eases the budgetary impacts.
    Mr. Cardin. Senator Whitehouse.

 HON. SHELDON WHITEHOUSE, COMMISSIONER, COMMISSION ON SECURITY 
                   AND COOPERATION IN EUROPE

    Mr. Whitehouse. Thank you, Mr. Chairman. Thank you to the 
witnesses for being here. We describe the problem here as a 
climate change problem. We describe it as a global warming 
problem. We very rarely describe it as an ocean chemistry 
problem. The fundamental problem is carbon loading of the 
atmosphere that creates global warming; it creates climate 
change. It also creates chemical changes in the ocean that can 
lead to acidification of the ocean that could dramatically 
change the ecosystem of the ocean. The little krill and algae 
and things, the coral creatures that build nurseries in the 
tropical waters, all of those things are very much at risk.
    There is evidence yesterday out of, I believe, New Zealand 
about a 30-percent reduction in the shells of these microscopic 
creatures. We haven't seen these kinds of changes in the oceans 
in certainly living memory. It could well be that ocean 
acidification, the wipeout of the bottom of the food chain as a 
result of the inability of these small creatures to make the 
shells that are their structural frameworks and the consequent 
collapse of the food chain that depends on that base could be 
the worst outcome for humankind of our carbon loading. It could 
be more significant, ultimately, than climate change or global 
warming.
    There seems to be very little discussion about that and I'm 
interested in to what extent, as you look at this as an 
international issue, this issue is cropping up in other 
countries in their discussions? It seems to be the forgotten 
issue in this case. In fact, the very name that we give to the 
problem overlooks this dimension of it. Mr. Bradley.
    Mr. Bradley. It's a very important point. The short answer 
to the question that you ended with is that largely those two 
areas are conflated. The countries are focused on the question 
of bringing carbon emissions down, thus reducing the carbon 
loading in the atmosphere.
    It certainly lends color to the discussion that still 
periodically takes place in climate circles: To what extent are 
we trying to adapt to change as opposed to cutting the 
emissions off at source? Certainly this lends color to the view 
that our ability to adapt to those kinds of changes is likely 
to be pretty small, not least of course because the oceans that 
are getting hit by increased acidification and by warming at 
the surface layers are simultaneously being hit by all kinds of 
other human activity, whether it's nutrient runoff from our 
farms, whether it's over-fishing, which has devastated most of 
the world's fish stocks.
    Certainly, we're seeing a combination of warmer waters and 
higher acidity levels dealing death blows to a lot of coral 
reefs. I'm a diver myself. I see a lot of the impact there in 
ways that is extremely sad to see, but as you say has much 
broader repercussions. That lends very much color to the idea 
that, yes, we need to help poor and vulnerable people adapt 
where we can. But we should not kid ourselves that we can adapt 
our way out of this problem. Essentially, dealing with it at 
source through urgently moving forward on mitigation is going 
to be needed.
    Mr. Whitehouse. Mr. Morgenstern.
    Mr. Morgenstern. Yes, Senator. I guess I would just maybe 
reinforce your point. I should say I'm an economist, not a 
natural scientist, so take what I say with a grain of salt 
perhaps. The impact on oceans is a very important issue. I 
would note that the IPCC, the Intergovernmental Panel on 
Climate Change, which has been examining and kind of 
summarizing the literature in a number of different areas, has 
studied the potential and the already-observed impacts--of 
climate change. And they have identified ocean impacts as quite 
significant.
    They have also looked at other areas of great concern. I 
would emphasize, for example, terrestrial ecosystems. And there 
is a concern that in various parts of the United States, we 
have vulnerabilities, for example, in mountain regions, that 
are quite significant. We could see a rather significant 
alteration of our ecosystems, which could impact, not 
necessarily the food chain but could impact life as we know it 
in the United States and around the world.
    They've also looked at sea-level rise, infrastructure 
impacts, agriculture impacts, health impacts and others. So I 
would just emphasize that there's a whole range of concerns out 
there that are, as you highlight, extremely important.
    Mr. Whitehouse. The other question that I wanted to get 
into with all of you, again from an international perspective--
we have not had very robust experience yet with the management 
of a cap-and-trade system. There are issues about regulation. 
There are issues about market manipulation. There are issues 
about licensing. Who should be allowed to participate? There 
are issues about the verifiability of offsets and whether 
they're actually marginal offsets at all or just paying people 
to do what they'd do anyway.
    Around the world, are there good and more developed or 
robust models for solving those market management problems? I'm 
sold on the notion that a cap-and-trade system is necessary. 
The market aspect of it is efficient. But we've seen even 
developed and regulated aspects of our economy go completely 
into the trash in the last couple of months, largely because of 
failures of regulation, blind eyes--whether deliberate or not--
to exotic and bizarre products that nobody wanted to take a 
look at. Are there models out there that can give assurance 
that we can keep a cap-and-trade model running cleanly from 
around the rest of the world?
    Mr. Morgenstern.
    Mr. Morgenstern. Thank you. I was trying to think of 
examples in the environmental field which even come close to 
paralleling the financial disasters and I can't think of any, 
and I've been involved in this field for some time. And I look, 
for example, at the Clean Air Act, where we've used a cap-and-
trade system in this country very successfully to control SO2 
emissions and partially NOX emissions. And the EPA reports a 
compliance rate of near 100 percent on their SO2 program.
    Mr. Whitehouse. Although to jump in on you there, my 
understanding is that that program deals specifically with a 
narrow group of emitters and doesn't allow offsets. It gives 
you credit for reducing and you buy back and forth. But you 
don't go to the forest in Brazil and claim that you've saved on 
sulfur dioxide emissions by going someplace else.
    Mr. Morgenstern. Now, that is absolutely correct, Senator. 
And that I was just trying to start off by saying that our 
experience with environmental regulation, using cap and trade, 
the notion of it, the principle of it, I think, has been well 
established. And as you suggest, we probably all agree on that.
    If you move to looking at non-traditional sources of 
emissions and you move outside of highly regulated areas, there 
is the potential for greater problems. I would put these in a 
couple of categories. First of all, let's distinguish domestic 
from international. The consideration is that the United States 
might start off with its own system where we would have a lot 
more control over all the issues that are kind of implied by 
your question. That's the first point to make.
    The second point to make is that we're looking largely at 
an upstream system. You can think about how you would regulate 
greenhouse gases. And one extreme would be all the way upstream 
when the carbon essentially emerges into commerce. The other 
would be a kind of downstream system. The Europeans, in fact, 
have chosen somewhat more of a downstream system than the 
United States has, if you look, at least as embodied in the 
proposals that have been advanced.
    As you think about an upstream system, you're more likely 
to be able to have better information, better controls, 
better--kind of two sets of books really, which kind of enable 
you to have a better set of accounting of what's going on. So I 
would say that the upstream system has a lot to recommend it in 
terms of the credibility and the avoidance of problems.
    Now, when you move into offsets, you do get into a softer 
area. There's no question about that. That the notion would be 
that here at home we would set up a system. It might well be 
more stringent than the global system, than the international 
system that is set up under Kyoto, to try to track and regulate 
and monitor the use of these offsets. That there are issues 
there.
    But I guess perhaps the premise of your question was that 
this is somehow like the financial system. While obviously, the 
future is uncertain, I would say that we have enough experience 
to give us reasonable confidence that we're not going down that 
road. But let me turn to my colleagues.
    Mr. Bradley. Clearly this is a bad time to be sort of 
discussing a policy that puts its faith on the financial 
markets. And the irony is lost on nobody. But, first of all, 
Dick is right. The kind of markets that are being proposed here 
are linked back to, particularly energy, commodity markets that 
allow some sort of cross-checking. We're not quite disappearing 
into the world of ultra-abstract, highfalutin derivatives 
markets, although of course derivatives markets can spring up 
around anything. Broader questions of financial regulation are 
ones that are going to apply to any market. And maybe the 
flipside of the financial crisis that we're in at the moment is 
that this is a great time to be thinking about financial 
regulation and how we structure it better in general. And 
perhaps then an incipient carbon market can start off on the 
right foot.
    In addition to the Clean Air Act that Dick already talked 
us through, I would say that the experience in the EU emissions 
trading system to date is relatively robust on that score. 
Certainly the system has had problems, but those have actually 
been largely around the politics of allocating allowances in 
the first place in ways that simply don't have an analogue in 
the United States; essentially, Brussels doesn't have anything 
like the power relative to London and Paris that Washington has 
within the United States as a solid nation-state.
    Countries essentially got a license to allocate to their 
own industries and sort of competed to be overgenerous. That's 
an approach, incidentally, that the Europeans have since 
corrected. But certainly I don't think that any of the problems 
that have arisen so far have been of a nature that questions 
the sort of financial regulation around those areas, which 
probably makes it one of the few markets that hasn't run into 
those problems.
    Financial regulation is going to be clearly very important, 
but I don't think that we should necessarily think of a cap-
and-trade system as particularly vulnerable in that area. But 
it is something that, as we reexamine the whole question of how 
the financial sector is regulated, is a new ingredient that 
needs to be there in our minds.
    Mr. Houser. I guess I would think about that question in 
three ways: We're concerned with possible systemic risk of 
financial market regulation; we're worried about price 
volatility; and then we're worried about the verifiability of 
offsets. So, from a systemic-risk standpoint, the size of the 
carbon markets that we're thinking about here is unlikely to be 
at a point where the type of very real systemic risk we're 
facing from things like collateralized debt obligations or 
credit default swaps is creating.
    If we're thinking about a 100-billion to $200-billion 
carbon market, even if you had derivative products arise around 
that that were leveraged five times you're not going to get to 
the systemic risk point. You compare that to a corporate bond 
market of $5 trillion that has derivatives on it of $60 
trillion or a Forex market that has derivatives of hundreds of 
trillions of dollars riding on it. And those are the systemic 
risk challenges we're facing.
    But a carbon market will be a commodity market. The good 
news of that is that someone has to take delivery of the 
product at the end of the day. There's a tangible asset that 
guards against extraordinary bubbles. But it also means that 
prices will be volatile like in commodity markets, like in oil 
and gas markets.
    I would say the difference of a carbon market, relative to 
our experience with the SO2 program is that with SO2 we had 
fairly clear backstop technology and a flue gas 
desulphurization system. We don't as clearly have a backstop 
technology on carbon. That's where the price uncertainty comes 
from, is that we're not entirely clear on what the technology 
solution will be. The way we address that is through 
flexibility for firms, banking and borrowing allowances, giving 
people flexibility in the timeframe that they meet compliance 
costs.
    People have talked about the possibilities of price 
collars. There could potentially be value for that if the 
ceiling was set high enough to only address those extraordinary 
price spikes that might occur. On offsets, there are challenges 
facing domestic offsets and challenges facing international 
offsets. On the domestic side, offsets are likely to come from 
places that aren't regulated, from non-regulated entities, 
which means that that additionality test that you talked about, 
which is so troublesome for international offsets, won't really 
play a role as much because those non-regulated sectors will 
have no compliance obligation.
    On the international side, we have a lot of lessons to 
learn from the clean development mechanism under Kyoto and how 
exactly to measure what's additional. That's going to be a 
major challenge in how we design policy here and how we design 
policy internationally. The important thing to keep in mind is 
that the use of offsets is going to play a valuable role in 
keeping overall costs down. We're going to have to balance the 
risk that those offsets are valid with the benefit it provides 
as a cost-containment mechanism.
    Mr. Cardin. One of the most difficult public-relations 
problems we have in the United States in passing a strong 
bill--and I am for unilateral action, I'm for us moving forward 
and becoming a leader, it's going to be good for our economy. 
Our economy will grow as a result of capping carbon emissions. 
But the public is saying, why would the United States move 
forward unless simultaneously there was action from China and 
India and other emitters of major greenhouse gases--and that 
the United States will put our industries at a disadvantage.
    We've talked about that and your testimonies have dealt 
with it. And you have pointed out the difficulties of enforcing 
this through border adjustments, if we were trying to adjust 
for the carbon content. And you raise a very valid point that 
the specific product coming in from a country might be low-
carbon content compared to the total emissions of a particular 
country.
    If we're successful in Copenhagen and there is a regime 
that is developed as to what is expected from nations like the 
United States and developed nations, what is expected from 
developing countries, and then if we can adjust our 
international trade commitments under WTO to reflect that type 
of commitment then it seems to me that we have a regime that 
could enforce the reasonable expectations of the international 
community, which could be enforced through the WTO for those 
countries that are concerned that they might be disadvantaging 
their own industries by allowing products from other countries 
to come in that are not subject to the international regimes on 
carbon reductions.
    That seems to me to be a reasonable path. And when I ask my 
European friends about it, they seemed like, gee, that's a 
novel approach; why hasn't someone suggested that the WTO be 
amended as we move forward with a Copenhagen-type of an 
agreement. I'm wondering whether in your circles these 
discussions have any traction, whether there could be an 
expectation of a change in the WTO as it relates to 
environmental issues if there's an international consensus 
reached in Copenhagen.
    Mr. Houser. Chairman, I would absolutely agree and my 
colleague at the Peterson Institute, Gary Hufbauer, released a 
book last week about how to make modifications to the WTO to 
address the climate-change reality that we're going to be 
facing. I think that those changes would come in two forms. The 
first is the potential role of trade sanctions as a way to 
enforce an international agreement. So the countries that are 
party to a Copenhagen protocol, or whatever the emerging 
climate agreement that we have, agree that if countries fail to 
comply that trade sanctions can be used as an enforcement 
mechanism. I think that there's promise there.
    The other amendment that would need to be made is a 
multilateral agreement on allowing within a global framework 
individual countries to adjust carbon prices at the border to 
allow them to take aggressive cuts. For Europe and the U.S. to 
be able to take the type of aggressive emission-reductions 
target that we're talking about, ultimately, we're going to 
need to be able to ensure that our carbon price is consistent 
at the border.
    The key is that you have to negotiate that multilaterally 
otherwise countries will have different opinions about what the 
criteria used should be. And if we have a unilateral approach 
that gets settled at a WTO dispute panel without a code 
beforehand where we have multilateral agreement then we risk 
undermining the credibility of both the WTO and creating 
extraordinary tensions for climate negotiations.
    Mr. Cardin. I agree with your point there. That's going to 
be the challenge. But I just hope we put some energy into that 
in addition to just trying to deal with Copenhagen.
    Mr. Morgenstern, I appreciated your comments on that and I 
also didn't quite understand your point about import-export 
differential that you said in your original testimony. Maybe 
you can help clarify that for me. It seems to me adjusting for 
imports could have the same WTO problem as making a border 
adjustment for exports.
    Mr. Morgenstern. My understanding, Mr. Chairman, is the 
prospect of dealing with an import adjustment, for example, as 
embodied in the various legislative proposals that have been 
advanced, has a pretty good chance, probably, to that being 
accepted by the WTO whereas an export rebate, which is what it 
would have to be in order to allow your domestic producers to 
compete overseas, would face more difficulties internationally. 
That there is a difference within the WTO lingo there.
    But the reason why I actually asked to comment on this was 
that your question, if I understood it, was really about the 
public relations aspect. I presume that where you were going 
with this, in part, was to suggest that if we act unilaterally 
and we harm our domestic industry somehow, if we cause further 
job losses, if we do things that are perceived as negative, 
there's going to be a public outcry.
    Mr. Cardin. I'm not sure we could pass the bill with the 
public perception that we're putting U.S. industries at a 
disadvantage. I personally believe the U.S. industries will 
compete more effectively if we become a leader on greenhouse 
gas emissions. But the political reality of trying to get a 
bill passed in Congress is that this will disadvantage U.S. 
industries if we act and China does not.
    Mr. Morgenstern. I appreciate that point. And I guess what 
I was going to say was that Trevor has spoken about the ways to 
modify the WTO, which sound very promising and I want to 
support those. But I want to come back to a point that I tried 
to make earlier, which is that the use of an updating free 
allocation system for these impacted industries, the use of a 
mechanism which, essentially, provides a cushion to domestic 
industries which are facing this increased competition is a way 
of addressing the problem in the near term, at least as a 
transitional measure. It's a way of providing protection, if 
you will, of some sort without labeling it protectionism in WTO 
terminology for our domestic industries.
    That this approach, my own observation, has not gotten 
adequately debated and I don't think that the public fully 
understands that this is a way of helping domestic industry 
and, in fact, offsetting--even offsetting by 100 percent--the 
burdens that would be imposed by this system.
    Mr. Cardin. Of course the cap-and-trade bill that was 
considered last year in the Senate had significant transitional 
assistance for carbon-intense industries. There was, in 
reality, a rebate, whether it was labeled that or not, they did 
get credits and those credits were worth money and they got 
help, I think Mr. Bradley wanted to comment first and I have a 
follow-up question on whether that should be done or not.
    Mr. Bradley. Sure, thank you. I won't add to Trevor and 
Dick's comments on the viability of the WTO approach. I would 
endorse their comments.
    I wanted to make a couple of notes to that. One is that the 
tone in which this question is often posed certainly in some of 
the debates in Washington--is, how do we coerce countries like 
China to the negotiating table? Can we use trade measures to do 
that?
    I've tried to make the case in my testimony that the need 
for coercion is not obvious. In fact, Trevor's made the point 
that a trade measure may not be a very good--an effective 
measure--to leverage that participation, and I would also make 
the case that it's probably not necessary. The way that you 
have framed this, in a way, of taking trade measures forward in 
as multilateral a way as possible, is very promising and is a 
welcome variant on the type of discussion that we've been 
having.
    Another area is also to focus on what might be done in the 
WTO in a more positive sense around trying to move some of 
these technologies forward. Periodically, we revisit this 
question of liberalizing the trade in the environmental goods 
and services. A lot of countries still maintain fairly high 
tariff and non-tariff barriers to technologies that we actually 
want to see widely deployed in the world. Disentangling that 
from a broader trade agenda is not easy; a lot of developing 
countries see that discussion largely as a self-serving one 
from the rich economies. And frankly, it's been handled fairly 
clumsily in the past. It's not that long since the EU and the 
U.S. both brought forward a proposal, which didn't manage to 
get a whole lot of buy-in from developing countries.
    But if we're serious about trying to move technologies on a 
global scale that are going to help us deal with this problem, 
that is something positive and forward-looking that can be done 
within the trade regime that goes beyond and is complementary 
to the, perhaps, more defensive measures that help us with 
these transitional arrangements around energy-intensive 
industries.
    Mr. Cardin. Thank you. Let me just bring up an issue, that 
we're trying to get a greater consensus in Congress to pass a 
strong bill and the suggestion has been made that gives me 
heartache, but let me just bring it out. That is that the 
concerns expressed by many of the colleagues on the other side 
of the aisle is that there's too much money in a cap-and-trade 
bill and that it establishes--it's really a tax and it 
establishes all these new programs.
    Why don't we consider putting in the cap--and to the extent 
that there's revenues generated, that they be rebated to the 
consumers of America or to the businesses of America that are 
impacted, but without the revenue flow to government to deal 
with investment issues, whether they are in developing a 
reasonable flow of affordable alternative fuels or renewable 
fuels, whether it's in public transportation, whether it's in 
our international funds that are created to help Third World 
countries or developing countries, that that be left to the 
normal budget process rather than going through this 
extraordinary revenue flow created through the cap-and-trade 
system. I welcome your thoughts on that approach as a way of 
trying to get a broader consensus in Congress to move forward 
on a cap on our carbon emissions.
    Mr. Houser. The first comment I would make is that a cap-
and-trade bill will have--the impacts will not be equitable, 
either by region or by income group, and there are 
redistribution impacts that will have to be addressed. Now, 
that can be addressed by directly rebating the emission 
allowances for free to affected industries and consumers or by 
moving that revenue through the budgetary process.
    But there's two issues, that will critical to maintain--not 
just to generate, but maintain--public support for a cap-and-
trade bill that will deal with allowance revenue. The first is 
what Dick talked about--providing some cost offsets to energy-
intensive industry to help them invest in new technologies to 
reduce emissions so that they're competing on a level playing 
field. That's a critical component. And that to be effective, 
we'll have to be addressing it that way--that unilateral trade 
measures won't be effective in protecting those industries.
    The second is consumers in coal-rich parts of the country 
that will see a higher increase in electricity prices than 
consumers in less coal-rich parts of the country. To help those 
utilities make the transition and offset the impacts of those 
consumers that's going to be important. Taking the histories of 
trade liberalization, coming from a trade and finance think 
tank, to sustain political support for these types of policies 
that have distributive impacts, like climate change and trade 
do, it's important to be serious about those efforts. 
Otherwise, you risk undermining support for a bill a couple 
years down the road.
    Mr. Morgenstern. I would just add one or two points. I 
agree with Trevor's comments here. There are some, clearly, 
particularly adversely affected segments of society. You 
probably have to deal with those as we've been discussing and 
as Trevor's indicated. But it's also true, as you indicated, 
that there's a lot of money that's generated by either a cap-
and-trade or a carbon tax. Any of these is going to generate a 
lot of money.
    That it's really up to Congress to decide how they want to 
allocate those dollars. Certainly, one can think of a long list 
of activities that one can choose to support, either in the 
normal federal budget process or, in some way, outside of it. 
My answer is--it sounds like a bit of a cop-out--but maybe 
that's why they pay the big bucks, okay? Essentially, it's a 
political decision and it really there are some clear questions 
of equity, okay. One can make a case that helping technologies, 
advancing new technologies that are essential for the future 
are critical.
    Mr. Cardin. I agree with that, and I guess one of my 
concerns is with how we do this; to me is critically important 
that it's not just capping the carbon emissions, but if the 
people of my state don't have better public transportation, 
it's going to be an extraordinarily difficult change in 
lifestyle that they shouldn't have to suffer. We should be 
investing in public transportation. When else are we going to 
get the revenues to really build the types of transit systems 
that we need in this nation if we don't use the revenue flow 
from a cap-and-trade system? I'm sure Senator Whitehouse in 
Rhode Island has a different priority that he thinks is 
important for his constituents, and I agree that we have to 
make those decisions--but I think, though, it would be a 
mistake if we just ignore the need for public investment.
    Then our international commitments--there's going to be 
serious issues that the international community needs to 
address with developing countries, as a matter of fairness and 
to get to the goals that we need to get to. We're going to have 
to be prepared to make those investments. The United States is 
going to have to put up the money to do that. To try to rely on 
the normal budget process for that, it's going to be difficult 
to see us meet those goals.
    Mr. Morgenstern. The good news, Senator, is that you do 
have a revenue stream here. You do have a fairly reliable 
revenue stream that can support the types of initiatives that 
you're talking about.
    Mr. Cardin. That's the point. The point is, do we give up 
that revenue stream? I think that was the compromise that was 
suggested, that we give up that revenue stream.
    Mr. Bradley. Picking up on that, I would agree with what 
Trevor and Dick have said and I'm not even an American voter, 
so I'm not going to take a stab at what is the appropriate 
political, sort of, distribution between the various, important 
priorities--dealing with consumers that are impacted by energy 
prices, dealing with businesses that have competitiveness 
concerns. I do want to speak briefly to this question of some 
of the international priorities, though, that will be funded.
    I tried to make the case in my testimony that there is a 
significant national interest for the United States in seeing a 
successful international climate deal. It helps bind 
international partners into delivering on the things that they 
said they were going to deliver. In the long run, it helps us 
deal with a critically important problem that affects all of 
us. It's not an exaggeration to say that if there is no finance 
available for some issues within the international regime, 
there will be no climate agreement.
    It's important that we shouldn't have any illusions about 
that. It's true that developing countries, as part of the 
inevitable negotiating process, vastly overstate some of the, 
sort of, bottom lines that they say they have in terms of what 
they would need to see on the table. But it's important to 
recognize--and it has been recognized, as bills have been 
formulated in both houses during the last couple of years--that 
there is a strong case for financing, in particular, I would 
pick out adaptation, where, in part because of the lifestyles 
that we've led and the prosperity that we enjoy, people around 
the world are going to be suffering significant impacts, in 
some cases--and I regularly meet with representatives of some 
of the small island states--these are existential threats--
their countries will disappear.
    But even on less dramatic scales, there are impacts around 
the world. I think there's a strong sense amongst many U.S. 
constituencies--and in particular, I point to the religious 
community and the way that this unfolded over the last couple 
of years--that, really want to take up that ethical challenge 
that we all face to try and deal with some of those questions. 
We all have an interest in seeing markets for clean technology 
expand, and if we can be collaborating internationally around 
technology and helping co-finance some of those things, that's 
going to be really important to helping that process move 
forward. It is important that that should be raised.
    Now, does allowance revenue provide a sort of politics-free 
or politics-light way of securing that revenue? That seems to 
be what we were, in many cases, hoping in the last round of 
bills--I wonder whether that dream is kind of evaporating but 
whether we get around the politics or not, that argument needs 
to be won. And I would argue that just as we have, from a U.S. 
perspective, legitimate grounds to try and put an international 
deal together that tries to hold our international partners to 
some standard of, verifying and reporting that they're really 
making progress, it may not be a bad idea to have a similar 
structure in which commitments that the U.S. takes up to fund 
things, whether adaptation or forest protection or technology, 
also be subject to that verification.
    When you're in an appropriations discussion, being able to 
say this isn't something that we're arbitrarily throwing on the 
table this year, this is part of an overall international 
engagement that we've got, we know what we're getting in 
exchange for it; we're getting the viability of this deal going 
onwards. That seems to me something that can help us construct 
what ultimately an international agreement is all about, which 
is a greater level of trust that enables countries to move 
forward more effectively together.
    Mr. Cardin. Senator Whitehouse.
    Mr. Whitehouse. I wanted to follow up on the chairman's 
discussion about the local impacts and how you address them. We 
touched on, for instance, the states where much of the 
electricity is generated by coal. It's obvious that a great 
deal of the revenue generated by a cap-and-trade program needs 
to be returned to the people who will be paying for it--to 
families. If you do it across the board, as many have 
suggested, through reductions in the withholding tax, through 
reductions in tax rates, through increases in EITC and things 
like that, you spread it evenly across the country and you fail 
at the goal of making region-specific adjustments.
    If you go specifically to the cost centers in the region, 
like the utilities, and you rebate back to them, you risk 
either mitigating or even completely canceling the price signal 
that it was the purpose of the legislation to achieve. If you 
do it state-by-state and say, well, we're going to give Ohio, 
West Virginia a slug of money to compensate for this and they 
can figure out how they make that distribution, you get into 
the problem of the state government becoming an agency for 
itself and you see what we saw, for instance, with the tobacco 
settlement, in which every dollar just disappeared into various 
prerogatives and it did not get back to solving the smoking 
problem that it was designed to address.
    I don't see a ready way to transfer revenues back to 
regular families on a regionally defined basis that doesn't 
suffer from one infirmity or another. Am I missing a silver 
bullet that solves this problem?
    Mr. Morgenstern. I'm not sure I'd call it a silver bullet, 
but I guess I would say that assuring that the program that's 
put in place is gradual in nature and doesn't bring about very 
abrupt changes--and Trevor mentioned the idea of a price collar 
or some other cost-containment mechanism. This is a way of 
preventing price shocks on the upside and, by the way, on the 
downside, it would limit declines that could be a problem for 
new technology developers who are concerned that they--if they 
push forward a new product, the market collapses and somehow, 
they can't sell their product. It actually is helpful on both 
sides.
    But something of that nature could prevent some of the 
extreme price shocks, but the fact that there may be some--not 
may be--that there will be some redistributive effect in ways 
that cannot be readily compensated, that's, to some extent, 
unavoidable, but if you can keep it small, that's probably the 
best hope.
    Mr. Whitehouse. How about in the area of conservation? It 
would seem to go back to the coal-fired electricity example, 
that if we wished to focus resources in areas that were 
suffering particularly because of their dependence on this as a 
result of the increased cost, that we could increase 
conservation in those areas and, although the ultimate 
consumer's per-kilowatt-hour rate might be higher, if their 
ultimate electric bill is lower because they burn less of it 
because we've funded conservation very aggressively in those 
areas, we may have a situation in which the price signal has 
not been reduced or mitigated or canceled and yet, they're not 
harmed in the family pocketbook when they have that long, grim 
night every month at the kitchen table trying to make sure that 
the bills and the checkbook meet.
    Mr. Houser. I work at the Institute for International 
Economics so that I don't have to answer sticky questions like 
this but I guess one thing that I could add is, you're right in 
that the goal is not just to offset the cost of electricity 
increases to coal-dependent parts of the country, it's to help 
them transition to less coal-dependent sources of energy or 
less energy consumption. And there's a couple of ways to do 
that: If allocations are provided for free to utilities that 
does provide the potential for revenue. The key is in ensuring 
that if those allowance are provided for me, that that money 
transitions into new investment and is not passed through into 
price increases for consumers.
    If utilities are going to finance their transition to a 
low-carbon economy on the backs of consumer price increases, 
then that's where the assistance needs to be transitioned to 
offset that price increase as they make that technology 
investment. Ultimately, you're right: However the assistance is 
targeted, the price signal needs to be there and the incentives 
need to be right for moving towards lower-carbon forms of 
energy.
    Mr. Cardin. Senator Whitehouse has really summarized the 
dilemma we have rather effectively. It's interesting, if you 
look at the Lieberman-Warner bill from last year, it was 
developed in a very political environment. Senator Boxer was 
very clear: She wanted to get the support to get the bill out 
of committee and, hopefully, moving on the floor and she ended 
up with 54 senators prepared to move forward on a pretty 
controversial cap-and-trade bill. I would suggest she got it 
right last year.
    We were pretty close to the balance that Senator Whitehouse 
was talking about of making sure that we deal with the adverse 
impacts that we didn't want to see happen in our community, but 
still allowing the market forces to operate in order to make 
our economy function the best way with low-carbon emission. I'm 
not saying we can't improve last year's bill; we can improve 
last year's bill and it will be different as it moves through 
this Congress, but I do think a lot of these are political 
judgments that we have to make in order to try to balance the 
competing interests.
    Let me thank our witnesses for their testimony. What I 
intend to do is to take this testimony and use it in developing 
a position for the Helsinki Commission that we will move 
forward in Vilnius when we have our parliamentary assembly 
meetings this summer, hopefully working with our administration 
as to the position that we will be taking moving towards 
Copenhagen so that the United States plays a very constructive 
role in the Copenhagen meetings. I know that the committees of 
Congress intend to be very actively involved in work leading up 
to Copenhagen, and I would like to see the Helsinki Commission 
be part of that effort, recognizing that we're all going to 
have to give a little bit to get us to an effective 
international agreement.
    I have very strong views about some of the international 
enforcement issues under WTO and I'm always concerned that our 
European partners are too timid in trying to use WTO to advance 
legitimate international objectives. Hopefully, we'll be able 
to work out those issues as we move forward. The bottom line is 
that the United States cannot sit on the sidelines--that we 
have to be the leader--and we have relinquished that role. I do 
thank our European friends because that they have done some 
really remarkable initiatives on dealing with carbon emissions.
    That will help us a great deal in reaching, I hope, a 
consensus in Copenhagen. Once again, let me thank our witnesses 
for their participation. It was extremely helpful and we 
particularly appreciate your frankness in the exchanges that 
took place with the members of the commission. We'll stand 
adjourned.

                                    


  

  

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