[Senate Hearing 111-310]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 111-310

          POLICY OPTIONS FOR REDUCING GREENHOUSE GAS EMISSIONS

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

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                                   TO

    RECEIVE TESTIMONY ON POLICY OPTIONS FOR REDUCING GREENHOUSE GAS 
                               EMISSIONS

                               __________

                            DECEMBER 2, 2009


                       Printed for the use of the
               Committee on Energy and Natural Resources


                  U.S. GOVERNMENT PRINTING OFFICE
55-432 PDF                WASHINGTON : 2010
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001













               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                  JEFF BINGAMAN, New Mexico, Chairman

BYRON L. DORGAN, North Dakota        LISA MURKOWSKI, Alaska
RON WYDEN, Oregon                    RICHARD BURR, North Carolina
TIM JOHNSON, South Dakota            JOHN BARRASSO, Wyoming
MARY L. LANDRIEU, Louisiana          SAM BROWNBACK, Kansas
MARIA CANTWELL, Washington           JAMES E. RISCH, Idaho
ROBERT MENENDEZ, New Jersey          JOHN McCAIN, Arizona
BLANCHE L. LINCOLN, Arkansas         ROBERT F. BENNETT, Utah
BERNARD SANDERS, Vermont             JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   JEFF SESSIONS, Alabama
DEBBIE STABENOW, Michigan            BOB CORKER, Tennessee
MARK UDALL, Colorado
JEANNE SHAHEEN, New Hampshire

                    Robert M. Simon, Staff Director
                      Sam E. Fowler, Chief Counsel
               McKie Campbell, Republican Staff Director
               Karen K. Billups, Republican Chief Counsel








                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Alic, John, Independent Consultant, Avon, NC.....................    26
Alterman, Stephen A., President, Cargo Airline Association.......    55
Banks, Jonathan M., Climate Policy Coordinator, Clean Air Task 
  Force, Brunswick, ME...........................................    20
Bingaman, Hon. Jeff, U.S. Senator From New Mexico................     1
Dorgan, Hon. Byron L., U.S. Senator From North Dakota............     4
Gayer, Ted, the Brookings Institution............................    10
Gilligan, Donald, President, National Association of Energy 
  Service Companies..............................................    57
Hawkins, David G., Director of Climate Programs, Natural 
  Resources Defense Council......................................    14
Kopp, Ray, Senior Fellow and Director, Climate Policy Program, 
  Resources for the Future.......................................     5
Murkowski, Hon. Lisa, U.S. Senator From Alaska...................     2

 
          POLICY OPTIONS FOR REDUCING GREENHOUSE GAS EMISSIONS

                              ----------                              


                      WEDNESDAY, DECEMBER 2, 2009

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10 a.m. in room 
SD-366, Dirksen Senate Office Building, Hon. Jeff Bingaman, 
chairman, presiding.

OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW 
                             MEXICO

    The Chairman. All right. Let us get started.
    Today the committee will hear testimony on policy options 
for reducing greenhouse gas emissions. Over the last 2 months, 
the committee has held several hearings on global climate 
change policy, most of which specifically investigated the 
impacts of cap-and-trade programs on the energy sector and 
consumers. These hearings, I think, have been useful in 
educating members of the committee and helping us engage in a 
dialog about the important components of sound climate policy. 
At many of the hearings, we've heard a number of alternative 
policies to reduce greenhouse gas emissions mentioned that have 
been cited as either more or less desirable than cap-and-trade.
    I've long supported trying to put in place a cap-and-trade 
mechanism to reduce greenhouse gas emissions. I believe, based 
on what I've learned to date, that it's preferable to many of 
the other alternatives. I also, however, understand that 
there's value in understanding the pros and cons of other 
policy options that may have the ability to achieve the same 
level of reductions of greenhouse gas emissions.
    This hearing evolved as some of the members of the 
committee asked us to take a step back--Senator Murkowski urged 
that--and to engage in a more general discussion to evaluate 
the pros and cons of various policy options. The options that 
will be discussed today include cap-and-trade, carbon taxes, 
REC regulation, sector-specific approaches, and technological 
innovation.
    It's important to note that these policies are not mutually 
exclusive. In fact, it will more than likely be necessary to 
rely on a suite of these policies to ensure that we are 
effective in addressing global warming.
    Let me call on Senator Murkowski for any comment she has.
    [The prepared statement of Senator Bunning follows:]
   Prepared Statement of Hon. Jim Bunning, U.S. Senator From Kentucky
    Mr. Chairman, thank you. I am pleased the Committee was able to 
reschedule this hearing.
    We need to be careful of moving too quickly in addressing the issue 
of climate change especially as we are still debating the science 
behind it.
    Some groups have proposed mandatory caps; I do not believe they are 
the answer.
    Like some of our witnesses here today, I support providing 
incentives for new technology, moving to lower emission technologies, 
and improving energy efficiency.
    This is precisely what we have done in the Senate. We have been 
addressing the climate issue with a variety of immediate impact 
policies.
    In the past I have authored legislation and worked to expand 
provisions in our recently passed energy bill on clean coal 
technologies.
    Over half of our nation's electricity comes from coal power plants 
and adopting new and cleaner technology would lead to significant 
reductions.
    We have also seen good results in improving energy efficiency in 
the last decade. Since 1990, the U.S. industry has improved its energy 
efficiency by over 20%.
    Our automobiles are becoming more efficient, running at a higher 
fuel efficiency today than they did just a few years ago.
    I support common sense options to reduce greenhouse gas emissions 
that will achieve immediate and long-term results.
    These policy options should be consistent with our existing trade 
agreements and do not put us at a competitive disadvantage with both 
developed and developing nations.
    I thank the witnesses for appearing before the committee today and 
appreciate their comments.
    I look forward to continuing the conversation on this issue and 
discussing the entire scope of climate change.

        STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR 
                          FROM ALASKA

    Senator Murkowski. Thank you, Mr. Chairman.
    I'd like to welcome our witnesses. Thank you for joining 
us.
    As you've indicated, Mr. Chairman, we're here to discuss 
some of the different policy options that are out there for 
reducing greenhouse emissions. It may come as a surprise that 
we're just now looking at this broader range, or this broader 
suite, of options. But, I think that, at this point, Congress 
has little choice but to do just that. For the past year, and 
really throughout the history of this debate, we've focused on 
an economywide cap-and-trade approach to greenhouse gas 
reductions, and once again we, here in Congress, find ourselves 
in a familiar position: the debate has stalled, the bills that 
are currently out there, most people believe, have very little 
chance of being signed into law.
    I think we recognize that bipartisan support is required to 
pass a bill, certainly a bill of this nature, in terms of the 
impact to the economy. But, for multiple reasons, we can't seem 
to bridge that divide. It is apparent, at least in my mind, 
that the policy itself is perhaps at least partly to blame for 
this quandary.
    The main argument for cap-and-trade is that it would create 
a new market in which economically efficient and 
environmentally compliant decisions could be made. Yet, despite 
this, the House and the Senate bills display a clear lack of 
faith in the ability of a carbon market to function on its own. 
Both bills fail to fully preempt EPA regulation, and they also 
include a mountain of new regulations to be imposed on top of a 
cap.
    If a given policy purports to reduce emissions, it should 
be allowed to do just that. Additional layers of bureaucratic 
regulation, which are duplicative, inefficient, or are 
counterproductive, should be taken off the table. If a policy 
is not up to the task, either in theory or in practice, then we 
need to consider our alternatives.
    It's not just those of us here in Congress that are 
wavering on this issue; we've seen a fair amount out there. In 
just the year or so, two of the economists that originally 
developed the concept of cap-and-trade have discussed how 
poorly suited it is to reducing greenhouse gas emissions. We 
had two long-serving EPA attorneys who were similarly compelled 
to speak out against this approach. Then we look at the 
experience of the world's early adopter, the European Union, 
has struggled to make its system function.
    I believe we need to dispense with this somewhat blind 
loyalty to an economywide cap-and-trade, or at least not be 
afraid to question whether or not it's warranted. We should 
objectively review the strengths and the weaknesses of our 
policy options and develop a measure that protects both our 
economy and our environment. Promoting cleaner energy is a 
laudable goal, but measures to make it a reality must provide a 
net benefit to our economy. Unfortunately, the bills that we 
have considered thus far will, in my opinion, harm the economy 
rather that help it.
    It's also worth noting, and perhaps accepting, that the 
rhetorical battle is over. Americans rightly view a cap-and-
trade proposal as a tax, because they understand that it's 
going to cost money to reduce our Nation's emissions. We need 
to be honest about these costs, and ensure that the revenues 
that are associated with them are returned to the people who 
will bear the burden of compliance.
    As we take stock of our options, I think that one of the 
things that we should fairly explore is perhaps pairing a tax 
cut with a price on emissions. Academics and economists suggest 
that climate policy offers an opportunity to improve the 
efficiency of our tax code and benefit our economy. Instituting 
a tax on something that we want less of, such as greenhouse gas 
emissions, would allow us to reduce or eliminate taxes on the 
things that we wish to promote, whether it's work or savings or 
investment. Rather than increasing taxes, we could change how 
and why they're paid. Some, of course, call this approach a 
``tax shift.''
    Now, in testimony before this committee, we've already 
heard about the advantages of relying on the existing tax code 
instead of trying to create a new carbon market susceptible to 
manipulation by special interests. This could greatly reduce 
new bureaucracy and administrative expenses. A specific and 
predictable price on carbon would minimize volatile price 
fluctuations. It could even facilitate greater international 
cooperation.
    Yesterday, there was a poll that was released by Hart 
Research Associates, and it suggests that Americans would 
prefer a carbon tax over a cap-and-trade. The numbers suggest 
that they prefer this by a rather wide margin. In looking at 
the reasoning behind it, it's not hard to understand why. 
They're choosing the option that promises greater simplicity, 
efficiency, certainty, and, clearly, transparency.
    Now, before everybody gets excited out there, I want to 
make sure that I'm not suggesting that cap-and-trade or any 
other approach is taken off the table. I'm also not intending 
to introduce a tax reform bill at this point in time. But, I do 
think that it is very, very important that we be considering 
all of our options. A more inclusive debate will allow us to 
recognize the risks associated with policies that don't match 
the preferences of the American people or that fail to attain 
what is in their best interests, and then act accordingly.
    As we look at the political landscape, I would suggest that 
it's going to be many months before climate legislation is 
brought up on the Senate floor. I believe that we need to take 
this time, during this interval, to ensure that we're 
developing the best possible climate policy.
    I think today's testimony will help enlighten us somewhat, 
and I'm looking forward to the comments of the distinguished 
panel before us.
    The Chairman. Thank you.
    Let me just introduce our witnesses. First, Dr. Ray Kopp, 
who is a senior fellow and director of climate--the Climate 
Policy Program at Resources for the Future; next, Dr. Ted 
Gayer, who is codirector of economic studies and a senior 
fellow at the Brookings Institution; Dr. David Hawkins, who is 
a regular witness before our committee, a director of climate 
programs with the Natural Resources Defense Council, here in 
Washington; Mr. Jonathan Banks, who is climate policy 
coordinator with the Clean Air Task Force in Brunswick, Maine; 
and Dr. John Alic, who is an independent consultant residing in 
Avon, North Carolina.
    Thank you all very much for being here. If each of you 
would take about 6 minutes and sort of hit the high points that 
we need to understand.
    Senator Dorgan wanted to make a statement before we start 
with the testimony.
    Go ahead.

  STATEMENT OF HON. BYRON L. DORGAN, U.S. SENATOR FROM NORTH 
                             DAKOTA

    Senator Dorgan. Mr. Chairman, thank you. I know that this 
hearing is held, in part, because I had asked--and I think 
Senator Murkowski had asked--for alternative policy options on 
reducing greenhouse gases. We have heard about cap-and-trade, a 
carbon fee, command-and-control, and others. There are energy 
toolbox options. So, there's lots of different ways to deal 
with this. Most of the discussion here in Congress has been 
about cap-and-trade. I think this hearing is a really excellent 
way to begin this wider discussion.
    Regrettably, at 10:30, I'm chairing another hearing, as you 
know, on the sixth floor, on jobs. So, I'm sorry I'm not able 
to stay for the entire hearing. But, I'm going to have an 
opportunity to review the testimony. I just wanted to say, to 
the witnesses and Senator Murkowski, who joined me in asking 
for this kind of a hearing, that I'm sorry I can't stay for the 
entire hearing, but chairing another one at this timeframe 
makes that impossible.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Dr. Kopp, why don't you go right ahead.

  STATEMENT OF RAY KOPP, SENIOR FELLOW AND DIRECTOR, CLIMATE 
            POLICY PROGRAM, RESOURCES FOR THE FUTURE

    Mr. Kopp. Mr. Chairman, Senator Murkowski, and members of 
the committee, thank you for the opportunity to testify today.
    I am a senior fellow at Resources for the Future, a 57-
year-old research institution that focuses on environment, 
energy, and natural resource issues. Resources for the Future 
does not lobby or take positions on specific legislative and 
regulatory proposals, and thus, I emphasize, the views I 
present today are my own.
    My testimony focuses on the approaches for the regulation 
of greenhouse gas emissions. When evaluating and choosing among 
regulatory approaches, it is important to keep four attributes 
of such regulation in mind:
    First attribute concerns the scale--concerns to goals of 
the regulation. The goal of stabilizing greenhouse gas 
concentrations, to achieve a maximum 2 degrees Celsius increase 
in global mean temperature has been embraced by the U.S. and G8 
this past July. Such a goal requires global net greenhouse gas 
emissions to eventually decline to zero and, in turn, requires 
regulatory policies that will lead to a full decarbonization of 
the U.S. economy over the next several decades.
    Second attribute concerns technology. Reducing emissions in 
the developed world consistent with the 2-degree goal using 
existing technology will likely be very expensive. Doing so in 
the developing world, with existing expensive technology, is 
likely to be impossible.
    The third attribute concerns the scale and required 
efficiency of the effort. The U.S. economy is composed of 
millions of greenhouse gas sources, from very large to very 
small, and everywhere in between. We don't need to control them 
all, but certainly must control 90 percent of them by volume. 
Importantly, the cost of controlling emissions varies greatly 
among these sources. Therefore, to be efficient, we must gain 
the greatest reductions from the least expensive sources.
    The fourth attribute is cost. While it is a well-worn 
cliche among economists, it is not invoked nearly enough: There 
is no free lunch. There will be costs, and those costs are 
unlikely to be distributed evenly across regions, demography, 
and economic sectors.
    These four attributes call for a regulatory program that, 
first and foremost, places a price on the emissions of 
greenhouse gases from as many sources as possible. The 
economywide emissions price provides economic incentives for 
all sources to reduce their emissions. It also provides 
important incentives for investment in the development and 
deployment of new and more economically efficient mitigation 
options, options that, at present, may be completely unknown.
    Perhaps most important, an economywide emission price 
ensures economic efficiency, in terms of actions taken to 
reduce emissions, and provides incentives for all sources to 
continually search for emission mitigation options that can be 
deployed for less than the emissions price.
    While an emissions price is an absolute requirement for an 
efficient regulatory framework, it is likely not the sole 
requirement. Due to imperfections in a market economy, price 
signals may be dampened or, in fact, be short-circuited. This 
is particularly true in the market for research and 
development, where firms have incentives to underinvest in R&D. 
In this case, the emissions price cannot fully motivate the R&D 
market, and therefore, a well-designed regulatory program will 
contain provisions for government funding of R&D.
    Witnesses today will discuss five different regulatory 
approaches. I will address cap-and-trade.
    The two most important elements of a cap-and-trade program 
are the cap and the allowance price serving as the price on 
greenhouse gas emissions. When combined with allowance trading, 
economic efficiency is achieved, meaning that, at any point in 
time, those most able to reduce emissions at the lowest cost 
are motivated to do so. When the program allows for banking of 
allowances, economic efficiency is gained over time and into 
the distant future.
    The scope of the program--that is, the sources that can be 
regulated under the cap--is limited only by the ability to 
effectively and efficiently monitor emissions. Therefore, the 
program can be truly economywide. Given an economywide program, 
the price signals tells all sources deploying existing 
mitigations technology options, and provides incentives to 
deploy and develop new technology.
    Emission caps can be set decades into the future, serving 
to alter household and business expectations, thereby affecting 
current and near-term investment decisions and accelerating the 
transformation of the economy.
    Allowances have value, and allocating allowances moves 
wealth around in the economy. This is desirable, for two 
reasons. The first, a portion of the wealth can be used to deal 
with the equity and distributional issues that I mentioned 
previously. Second, a portion can be used to finance long-term 
government support for R&D.
    When the pricing mechanism and the allowance allocation 
options are combined, a cap-and-trade program matches up very 
well with the four attributes of greenhouse gas control noted 
earlier in my testimony.
    In short, greenhouse gas emission regulation should include 
as many sources as possible, within a regulatory program, be 
hyperefficient, getting the absolute most out of every dollar 
spent, incentivize all actions to reduce emissions, especially 
incentivize all new technology, be robust and adaptable over a 
very long period of time, and recognize and address issues of 
equity.
    Thank you, Mr. Chairman, I look forward to your questions.
    [The prepared statement of Mr. Kopp follows:]
  Prepared Statement of Ray Kopp, Senior Fellow and Director, Climate 
                Policy Program, Resources for the Future
    Mr. Chairman, Senator Murkowski, members of the committee, thank 
you for the opportunity to testify before the Senate Committee on 
Energy and Natural Resources. My name is Ray Kopp, and I am a senior 
fellow and director of the Climate Policy Program at Resources for the 
Future (RFF), a 57-year-old research institution based in Washington, 
DC, that focuses on energy, environmental, and natural resource issues. 
RFF is independent and nonpartisan, and shares the results of its 
economic and policy analyses with environmental and business advocates, 
academics, government agencies and legislative staff, members of the 
press, and interested citizens. RFF neither lobbies nor takes positions 
on specific legislative or regulatory proposals. I emphasize that the 
views I present today are my own.
    My testimony today will focus on approaches for the regulation of 
greenhouse gas (GHG) emissions. When evaluating and choosing among 
regulatory approaches, it important to keep four attributes of such 
regulation in mind.
    The first attribute concerns the goals of regulation. The goal of 
stabilizing GHG concentrations to achieve a maximum 2 degrees Celsius 
increase in global mean temperature has been embraced by the G8 and the 
United States at their July meeting in L'Aquila, Italy. Such a goal 
requires global net GHG emissions to eventually decline to zero, and 
that in turn requires regulatory policies that will lead to a full de-
carbonization of the U.S. economy over the next several decades,
    The second attribute concerns technology. Attaining the 2 degree 
goal in the United States with existing technology will likely be very 
expensive. Doing so in the developing world with existing expensive 
technology is likely to be impossible.
    The third attribute concerns the scale and required efficiency of 
the effort. The U.S. economy is composed of millions of GHG sources 
from very large to very small and everywhere in between. We don't need 
to control them all, but certainly we must control 90 percent of them 
by volume. And importantly, the cost of controlling emissions varies 
greatly among these sources. Therefore, to be efficient we must gain 
the greatest reductions from the least expensive sources.
    The fourth attribute is cost. While it is a well-worn cliche among 
economists, it is not invoked nearly enough--there is no free lunch. 
There will be costs that are unlikely to be distributed evenly across 
regions, demography, and economic sectors.
    Attribute 1, goals, points to the enormity of the task in front of 
us. Achieving full global de-carbonization will require a great deal of 
effort and investment over a very long period of time. Therefore, the 
policies we put in place to drive that transformation must be highly 
efficient, robust over time, and able to withstand changing economic, 
political, and social conditions, as well as adapt to new scientific 
information regarding the process of climate change.
    Attribute 2, technology, mandates a policy that will substantially 
enhance our ability to invent, develop, and--importantly--finance and 
globally deploy a wide range of inexpensive, low- and zero-carbon 
technologies over the next 50 years.
    Attribute 3, the scope and varied nature of current emission 
sources, requires a regulatory policy that is politically, socially and 
economically tractable, environmentally effective, applicable across an 
incredibly varied economy, and one that encourages and incentivizes 
every sector of our economy to continually reduce emissions.
    Attribute 4 reminds us this task will be economically challenging 
and therefore the regulatory policy must be hyper efficient. We must be 
prepared to address issues of equity resulting from the uneven 
distribution of costs across society due to the regulatory program.
    Economists generally agree that these four attributes call for a 
regulatory program that first and foremost places a price on the 
emission of GHGs from as many sources throughout the economy as is 
logistically possible. An economy-wide emissions price provides 
economic incentives for all GHG sources to reduce their emissions. 
Working through the private market spurs all mitigation activity, 
whether or not those activities are known to the regulator. And an 
emissions price will generate investment in the development and 
deployment of new and more economically efficient mitigation options--
options that at present may be completely unknown.
    An economy-wide emissions price ensures economic efficiency in 
terms of action taken to reduce emissions. Those sources that can 
reduce them for less than the emissions price will continue to do so 
until the cost of reducing the last ton equals the price.
    As the price rises over time, higher cost mitigation options will 
come into play, but in an efficient manner with the least-cost options 
being deployed first. An emissions price that is perceived by all 
sectors of the economy to rise over time will alter the expectations of 
both households and firms with respect to long-lived investment 
decisions and accelerate the transition to a low carbon economy.
    Importantly, an emissions price provides incentives for sources to 
continually search for mitigation options that can be deployed for less 
than the emissions price. This incentive behavior is in sharp contrast 
to standards- or technology-based regulation where all incentives to 
reduce emissions disappear once the standard is met or the technology 
installed.
    While an emissions price is an absolute requirement for an 
efficient regulatory framework, it is likely not the sole requirement. 
Due to some imperfections in any market economy, price signals may be 
dampened or be short circuited. This is particularly true in the market 
for research and development, where it is well known that firms have 
incentives to under?invest in research and development (R&D) due to the 
fact they cannot capture all the returns to R&D--some of those returns 
spill over to others in the market that did not invest as much. In this 
case, the emissions price cannot fully motivate the R&D market and 
therefore a well-designed regulatory program will contain a role for 
government funding of R&D. One important point, the economic case for 
support of government funding grows weaker as one moves from R&D to 
demonstration and deployment.
    In addition to the economic rational for government support of R&D, 
there is a political case to be made. Spurring R&D and demonstration 
and deployment of financially risky technology investments may require 
an emissions price that is not politically viable (that is, it is too 
high to be politically acceptable). In this case, absent the market 
imperfections above, the price is simply too low to generate the needed 
investments and government must step in to support the required levels 
of from R&D and demonstration and deployment.
    The requirement for some level of government support of technology 
implies the need for a source of revenue. Moreover, given the diverse 
nature of the U.S. economy in terms of its use of energy, the sectoral, 
geographic, and income distribution of the burden of a GHG mitigation 
program will be uneven. Efforts to even this distribution through 
transfer payments of one form or another will also require a source of 
revenue.
    Witnesses today will address five different regulatory approaches 
including cap and trade, GHG taxes, direct regulation under the Clean 
Air Act, sector-specific regulatory approaches, and technology policy. 
The attributes of GHG regulation mentioned above can give some guidance 
when evaluating them. In short, new emissions regulations should:

   Include as many sources a possible within the regulatory 
        program.
   Be hyper-efficient--get the absolute most out of every 
        dollar spent.
   Incentivize all actions to reduce emissions, especially all 
        new technology.
   Be robust and adaptable over a very long period of time.
   Recognize and address issues of equity.

                             cap and trade
    The basic steps in the design and implementation of a cap-and-trade 
program for GHG mitigation are now widely known and include:

   identification of the sources of emissions that will fall 
        under the regulatory program,
   a series of annual caps (tonnage restrictions) on emissions,
   issuance of allowances in amounts equal to the caps and 
        requirements of sources to surrender allowances equal to their 
        annual emissions, and
   provisions for the creation of a private market in 
        allowances.

    The two most important elements of a cap-and-trade program are the 
cap and the allowance price serving as the price on GHG emissions. When 
combined with allowance trading, economic efficiency is achieved 
meaning that at any point in time those most able to reduce emissions 
at the lowest cost are motivated to do so. When the program allows for 
banking of allowances economic efficiency is gained over time.
    The scope of a cap-and-trade program, that is the sources that can 
be regulated under the cap, is limited only by the ability to 
effectively and efficiently monitor emissions and therefore the program 
can be truly economy-wide. Given an economy-wide program, the price 
signal tells all sources to deploy existing technology options to 
control emissions and gives an incentive to the private sector to 
develop and deploy new technology.
    Emissions caps can be set decades into the future serving to alter 
household and business expectations, thereby affecting current and 
near-term investment decisions. If climate science requires more severe 
reductions than initially planned, the distant year caps can be 
tightened leaving the rest of the program unchanged. However, such an 
adjustment--if unanticipated--will bring with it a concurrent cost.
    Allowances in a cap-and-trade program have value since the holder 
of an allowance can emit GHGs. Creating allowances does not create 
wealth in the economy; what it does is move wealth around. This is 
desirable for two reasons. First, a portion of that wealth can be used 
to deal with equity issues, and second, a portion can be used finance 
government support for R&D.
    When the pricing mechanism and the allowance allocation options are 
combined, a cap-and-trade program matches up very well with the 
attributes of GHG control identified above.
                               ghg taxes
    Taxes on GHGs (often referred to as carbon taxes) have many of same 
desirable attributes as cap and trade. First and foremost, taxes place 
a price on emissions. However, unlike cap and trade where the price is 
set by the private market, under a tax system the price is set by the 
tax rate. This provides the greatest difference between the two 
regulatory approaches. A tax program provides no uncertainty with 
respect to the price of emissions, but there is uncertainty with 
respect to the quantity of emissions abated. In contrast, cap and trade 
provides a good deal of certainty over emissions (limited by the cap), 
but the price can vary and is uncertain. Concerns about price 
volatility in a cap-and-trade program have given rise to the price 
collars contained in the recent cap-and-trade bills.
    Cap-and-trade and tax programs share many other features. A tax 
approach can be as broad as a cap-and-trade one, and emissions source 
coverage is only limited by the ability to effectively and efficiently 
monitor emissions. A tax approach is also economically efficient, 
ensuring GHG reductions are obtained at least cost. And, like emissions 
caps, tax rates can be established quite far into the future and 
adjusted as new climate science becomes known--but, like changing caps, 
altered out-year tax rates can entail adjustment costs.
    The revenue from GHG taxes can play the same role as allowance 
value in addressing equity and the need for government technology 
funds. The emissions price, as specified by the tax rate can be 
established quite far into the future, thereby altering future 
expectations, affecting long-lived investment decisions and speeding 
the transformation of the economy.
                     other forms of ghg regulation
    Looking beyond economy-wide GHG pricing approaches like cap-and-
trade programs and GHG taxes, many other approaches are already in 
place, including renewable energy portfolio standards, efficiency 
standards for buildings and appliances, as well as subsidy programs for 
the production of energy from renewable resources.
    One obvious alternative to an economy-wide regulatory program would 
begin with the regulation of GHG emissions on a modest scale, starting 
with a single sector like electricity generation, and then adding 
others over a period of time. Such staged regulation may prove to be 
more politically achievable than a full-scale economy-wide approach 
since the number and influence of regulated entities at each stage can 
be made relatively small. However, while perhaps politically expedient, 
staged regulation has drawbacks, the most obvious being the need for 
political will to continue adding sectors to the regulatory structure 
over time.
    A second drawback is the loss in economic efficiency that could 
arise from a piecemeal approach. The staged approach could begin with a 
cap-and-trade program for electricity generation, but as the scope of 
regulation is expanded to include other large stationary sources, a 
standards approach to regulation might be applied to the new sources. 
Mixing a price-based approach like cap and trade with a standards 
approach will guarantee a loss in economic efficiency across sources 
when compared to a single cap and trade applied to all sources.
    Following the U.S. Supreme Court decision in Massachusetts v. EPA 
in 2007, the EPA has the authority to regulate GHGs under the Clean Air 
Act (CAA). A staged approach to GHG regulation could logically flow 
from the CAA in the absence of congressional action on a comprehensive 
approach. Some argue that an economically efficient cap-and-trade 
program for carbon dioxide emissions from the electric power generation 
sector could be established, but such a price-based program would 
likely be paired with ``tail pipe'' and other standards for mobile 
sources and technology-based standards for all other sources.
    In contrast to an economy-wide emission pricing program, an 
approach such as that described above would not be economically 
efficient, would not push all emission sources to adopt abatement 
activities, would not provide incentives for continual emission 
reductions, and importantly, would not provide incentives for R&D and 
demonstration and deployment of advanced low-carbon technologies. 
Finally, nonpricing regulatory approaches provide no sources of funds 
for government R&D programs or for programs to address equity issues.
    It is often remarked that we cannot meet the challenge of climate 
change with existing technology and that what is needed is a wave of 
innovation giving rise to perhaps unimagined new zero-carbon 
technologies. I agree with this presumption; however, the question that 
logically arises is what public policies would stimulate this wave of 
innovation? At this point, economists and technologists usually part 
company with those economists pleading for a pricing mechanism to 
create a demand for the new technologies as well as some supply-side 
technology push.

    The Chairman. Thank you very much.
    Mr. Gayer.

       STATEMENT OF TED GAYER, THE BROOKINGS INSTITUTION

    Mr. Gayer. Chairman Bingaman, Senator Murkowski, and 
members of the committee, I appreciate the opportunity to be 
here today to discuss to merits of a carbon tax.
    I will discuss 5 advantages of a carbon tax over 
alternative policies:
    First, a carbon tax--or, for that matter, a cap-and-trade--
will result in substantially lower economic costs than command-
and-control regulations that mandate technologies, fuels, or 
efficiency standards. A carbon tax is similar to a cap-and-
trade, in that they both relay on sending market signals to 
raise the price of carbon, rather than relying on more 
inflexible, and thus, more costly, technology and fuel-
efficiency mandates to achieve carbon reductions.
    Command-and-control regulations, such as technology 
standards, might be preferable to market-based regulations when 
measuring emissions is costlier and feasible. However, this is 
not the case with carbon emissions. I believe to over-reliance 
on inflexible command-and-control regulations will result in 
much higher economic costs than would relying strictly on a 
carbon tax or just cap-and-trade. Indeed, were cap-and-trade or 
a carbon tax to be enacted, the additional regulations would 
likely add to the overall costs of the program without accruing 
any climate benefits.
    Second, there's a well-known finding in the economics 
literature that a tax and cap-and-trade yield different 
economic results when there is uncertainty about the costs of 
reducing pollution. It's long literature, so I won't go into 
the details. But, the general finding is that, with respect to 
climate policy, a carbon tax yields more economically efficient 
results than a cap-and-trade, due to cost uncertainty.
    A third point, which is a related point, a carbon tax is 
preferable to a cap-and-trade, because the latter is 
susceptible to price volatility which would cause economic 
disruptions and complicate investment decisions, including 
long-term investments in low-carbon technologies. Price 
volatility would also be unsettling for consumers, possibly 
leading to political pressure on Congress to repeal or 
substantially loosen the cap in the future, thus adding to the 
uncertainty of the price signal.
    Price volatility, as well as my previous concern about cost 
uncertainty, could be largely addressed within a cap-and-trade 
program by including a safety-valve price in which the 
government offers to sell additional allowances above the cap 
at a pre-established price. Unfortunately, the current bills do 
not--the current proposals do not include any such provision.
    Fourth, a carbon tax in which the revenues are used to 
offset economically harmful taxes or to pay down our deficit 
would substantially lower the costs of climate policy, compared 
to a cap-and-trade program that gives away allowances for free. 
A cap-and-trade program generates public revenue only when the 
allowances are auctioned off by the government. In practice, 
this rarely happens, and the allowances are instead given away 
for free to regulated entities. Failing to capture and direct 
this public revenue to reducing economically harmful taxes and 
deficits would substantially increase the cost of any policy.
    Fifth, the current proposed cap-and-trade programs rely 
heavily on offsets to reduce to overall costs of cap-and-trade. 
Given the substantial potential value of offsets, there is a 
very real concern that offset integrity will not be maintained. 
This would result in a weakening of the cap, undermining its 
environmental benefits. In a cap-and-trade system, an offset is 
a reduction in carbon emissions from sources that are not 
subject to the mandatory cap. The advantage of offsets is that 
they can provide many sources of low-cost reductions, thus 
significantly reducing the overall cost of achieving an 
emissions reduction goal.
    But, offsets also pose a substantial problem, in that they 
are very difficult to measure. The enforcement of a carbon tax 
or a cap-and-trade program relies on measuring emissions, 
typically by measuring the carbon content of fuel inputs. 
Offsets, on the other hand, rely on measuring emission 
reductions rather than emissions. This introduces a host of 
problems, because it is difficult to know what would have 
happened to emissions, absent a given offset project.
    The difficulty of measuring emission reductions could lead 
to honest mismeasurements in which reported reductions are not 
real. Given the substantial value of offsets in the proposed 
cap-and-trade programs, it could lead to deliberate 
mismeasurements of carbon reductions. Unless the integrity of 
carbon offsets can be assured at relatively low costs, the 
environmental benefits of a cap-and-trade program could be 
substantially undermined, resulting in a program that amounts 
to a massive wealth transfer without achieving real climate 
benefits. Given the financial crisis of the past few years, we 
should be cautious about creating an active market in a poorly 
measured financial instrument.
    In conclusion, I have to acknowledge that my arguments in 
favor of a hypothetical carbon tax over cap-and-trade are made 
easier, in that I am comparing my ideal hypothetical carbon tax 
to the actual cap-and-trade programs that are making its way 
through the Congress. Indeed, a cap-and-trade program that 
included a safety valve and that auctioned allowances would 
achieve many of the economic advantages of a carbon tax. The 
current proposals fail to include these features, and they fail 
to exclude expensive and unnecessary command-and-control 
mandates. I think a cleaner, simpler carbon tax or a cap-and-
trade program that included a safety valve and auctioned 
allowances is worth serious consideration by this committee.
    Thank you very much.
    [The prepared statement of Mr. Gayer follows:]
       Prepared Statement of Ted Gayer, the Brookings Institution
    Chairman Bingaman, Ranking Member Murkowsi, and Members of the 
Committee, I appreciate the opportunity to appear before you today to 
discuss the merits of a carbon tax. I commend the Committee for its 
interest in examining all feasible policy tools to address climate 
change.
    My testimony will make the following points:

          1. Either a carbon tax or a cap-and-trade program will result 
        in substantially lower economic costs than command-and-control 
        regulations that mandate technologies, fuels, or energy 
        efficiency standards.
          2. Given the uncertainty of the future costs of climate 
        policy, a carbon tax is more economically efficient than cap-
        and-trade.
          3. Carbon allowances in a cap-and-trade program would be 
        susceptible to price volatility. Price volatility causes 
        economic disruptions and complicates investment decisions. It 
        also could lead to political pressure on Congress to repeal or 
        substantially loosen the cap.
          4. A carbon tax, in which the revenues are used to offset 
        economically harmful taxes or to pay down our deficit, would 
        substantially lower the cost of climate policy compared to a 
        cap-and-trade program that gives away allowances for free.
          5. The currently proposed climate bills rely heavily on 
        offsets to reduce the overall costs of cap-and-trade. Given the 
        substantial potential value of offsets, there is a very real 
        concern that offset integrity will not be maintained. This 
        would result in a weakening of the cap, undermining its 
        environmental benefits.

    Please allow me to elaborate on these points.

 1. carbon tax and cap-and-trade are preferable to command-and-control
          A carbon tax is similar to cap-and-trade in that they both 
        rely on sending market signals to raise the price of carbon, 
        rather than relying on more inflexible--and thus more costly--
        technology and fuel efficiency mandates to achieve carbon 
        reductions.\1\ For existing air pollution regulations, command-
        and-control mandates result in up to 22 times the cost relative 
        to a market-based approach.\2\ Command-and-control regulations, 
        such as technology standards, might be preferable to market-
        based regulations when measuring emissions is costly or 
        infeasible. However, this is not the case with carbon 
        emissions.
---------------------------------------------------------------------------
    \1\ See, for example, Ted Gayer and John K. Horowitz (2005), 
``Market-based Approaches to Environmental Regulations,'' Foundations 
and Trends in Microeconomics 1(4).
    \2\ See Economic Report of the President, 2003, Washington, DC: US 
Government Printing Office, 2003.
---------------------------------------------------------------------------
          I believe the over-reliance on inflexible command-and-control 
        regulations in the existing Clean Air Act and in the House 
        energy bill [HR 2454] will result in much higher economic costs 
        than would reliance strictly on a carbon tax or cap-and-trade. 
        Indeed, were cap-and-trade or a carbon tax to be enacted, the 
        additional command-and-control regulations--such as the 
        renewable fuel mandate, the renewable electricity mandate, and 
        the various energy efficiency requirements--would likely just 
        add to the overall cost of the program without accruing any 
        climate benefits.
2. given cost uncertainty, a carbon tax is more economically efficient 
                           than cap-and-trade
          When there is uncertainty about the costs of reducing a 
        pollutant, a carbon tax and cap-and-trade yield different 
        results with respect to economic efficiency.\3\ With respect to 
        climate change, the benefits of carbon reduction are related to 
        the stock of the pollutant, whereas the costs are related to 
        the flow of the pollutant. Under these circumstances, a carbon 
        tax yields more economically efficient results than cap-and-
        trade.\4\
---------------------------------------------------------------------------
    \3\ See Martin L. Weitzman (1974), ``Prices vs. Quantities,'' 
Review of Economic Studies 41(4): 477-491.
    \4\ See William A. Pizer (1998), ``Prices vs. Quantities Revisited: 
The Case of Climate Change,'' Discussion Paper 98-02, Resources for the 
Future.
---------------------------------------------------------------------------
3. carbon allowances in a cap-and-trade program could be susceptible to 
                            price volatility
          The main distinction between a carbon tax and cap-and-trade 
        is that the former gives certainty about the price of carbon, 
        whereas the latter gives certainty about the quantity of carbon 
        emitted. Market participants prefer stability of prices, in 
        order to better plan capital decisions, including long-term 
        investments in low-carbon technologies. The price volatility of 
        a cap-and-trade program would likely also increase pressure on 
        policymakers to eliminate or substantially weaken the cap, thus 
        creating more uncertainty about future prices.
          Price volatility, as well as my previous concern about cost 
        uncertainty, could be addressed relatively easily within a cap-
        and-trade program. For example, a cap-and-trade program that 
        included a safety valve price--in which the government offers 
        to sell additional allowances above the cap at a pre-
        established price--would eliminate the risk of high-end price 
        volatility. A Congressional Budget Office study on the policy 
        options for reducing carbon emissions also noted that a safety 
        valve would limit the cost of a cap-and-trade program.\5\ And a 
        recent paper by my colleagues at Brookings suggested a price 
        collar, which would establish both a price floor and a price 
        ceiling for cap-and-trade allowances, thus addressing the 
        problem of price volatility.\6\ Unfortunately, the House energy 
        bill does not include any such provisions. A carbon tax could 
        offer a cleaner approach to tackling the issue of price 
        volatility.
---------------------------------------------------------------------------
    \5\ See Congressional Budget Office, ``Policy Options for Reducing 
CO2 Emissions,'' February 2008.
    \6\ See Adele Morris, Warwick J. McKibbin, and Peter J. Wilcoxen 
(2009), ``A Copenhagen Collar: Achieving Comparable Effort through 
Carbon Price Agreements,'' Brookings Institution.
---------------------------------------------------------------------------
  4. a carbon tax that uses the revenue to offset harmful taxes would 
                       substantially reduce costs
          A carbon tax generates public revenue. A cap-and-trade 
        program generates public revenue only when the allowances are 
        auctioned off by the government. In practice, this rarely 
        happens, and the allowances are instead given away for free to 
        regulated entities. Failing to capture and direct this public 
        revenue to reducing economically harmful taxes and deficits 
        would substantially increase the cost of any policy.
          Any successful climate policy would increase the prices of 
        such things as electricity and transportation. These price 
        increases amount to a reduction in real incomes, which in turn 
        magnifies the economic inefficiencies in our overall tax 
        system.\7\ These inefficiencies--known as the tax-interaction 
        effect--can substantially increase the overall cost of any 
        environmental regulation, even in some cases leading to 
        negative net benefits.\8\
---------------------------------------------------------------------------
    \7\ See, for example, Agnar Sandmo (1975), ``Optimal Taxation in 
the Presence of Externalities,'' Swedish Journal of Economics 77(1).
    \8\ See Lawrence H. Goulder (1998), ``Environmental Policy Making 
in a Second-best Setting,'' Journal of Applied Economics 1(2): 279-328.
---------------------------------------------------------------------------
          The way to address this problem is to use public revenues 
        from a carbon tax to offset inefficient taxes or deficits. A 
        carbon tax set at a similar stringency to the House energy 
        bill's cap-and-trade program would likely result in $60 to $100 
        billion per year\9\ that can be used to reduce other 
        economically harmful taxes. A revenue-neutral carbon tax would 
        achieve former Vice President Al Gore's aim to ``tax what we 
        burn, not what we earn.''\10\
---------------------------------------------------------------------------
    \9\ See http://www.epa.gov/climatechange/economics/pdfs/HR2454--
Analysis.pdf
    \10\ See Al Gore's Speech at Constitution Hall in Washington, July 
17, 2008: http://www.npr.org/templates/story/story.php?storyId=92638501
---------------------------------------------------------------------------
       5. carbon offsets could undermine a cap-and-trade program
          In a cap-and-trade system, an offset is a reduction in carbon 
        emissions from sources that are not subject to the mandatory 
        cap. The advantage of offsets is that they can provide many 
        sources of low-cost reductions, thus significantly reducing the 
        overall cost of achieving an emissions reduction goal. This can 
        be seen in the currently proposed climate bills, which rely 
        heavily on offsets to reduce overall costs of cap-and-trade. 
        According to the EPA's analysis of the House energy bill, 
        international offsets would average over 1 billion metric tons 
        of carbon dioxide equivalent per year.\11\ Without 
        international offsets, the allowance price would increase 89 
        percent.\12\
---------------------------------------------------------------------------
    \11\ See http://www.epa.gov/climatechange/economics/pdfs/
HR2454_Analysis.pdf
    \12\ See http://www.epa.gov/climatechange/economics/pdfs/
HR2454_Analysis.pdf
---------------------------------------------------------------------------
          But offsets also pose a substantial problem in that they are 
        difficult to measure. The enforcement of a carbon tax or a cap-
        and-trade program relies on measuring carbon emissions, 
        typically by measuring the carbon content of fuel inputs. 
        Offsets, on the other hand, rely on measuring emission 
        reductions, rather than emissions. This introduces a host of 
        problems, because it is difficult to know what would have 
        happened to emissions absent a given offset project. For 
        example, planting a tree will only lead to a net reduction in 
        carbon emissions if 1) the tree would not have been planted 
        without the offset provision, and 2) the tree will not be 
        subsequently destroyed after the offset purchase takes place.
          The difficulty of measuring emission reductions could lead to 
        honest mismeasurements, in which reported reductions are not 
        real. And given the substantial value of offsets in the 
        proposed cap-and-trade programs, it could lead to deliberate 
        mismeasurements of carbon reductions. A similar problem that 
        also arises with cap-and-trade is the treatment of early 
        reduction credits. These are credits given to count against the 
        cap, based on reductions that have occurred in years past. 
        These early reductions are even more difficult to measure than 
        any future offsets, so are more likely to undermine the 
        integrity of the cap-and-trade program.
          Unless the integrity of carbon offsets and early reduction 
        credits can be assured at relatively low cost, the 
        environmental benefits of a cap-and-trade program could be 
        substantially undermined, resulting in a program that transfers 
        wealth without achieving climate benefits. Given the financial 
        crisis of the past few years, we should be cautious about 
        creating an active market in a poorly-measured financial 
        instrument.
                               conclusion
    I acknowledge that my arguments in favor of a carbon tax over cap-
and-trade are made easier in that I am comparing my ideal hypothetical 
carbon tax to the actual cap-and-trade programs either passed by the 
House or proposed in the Senate. Indeed, a cap-and-trade program that 
included a safety valve and that auctioned allowances would achieve 
many of the economic advantages of a carbon tax.
    The most frequent criticism of a carbon tax is that it would be 
politically unpopular. But to quote Milton Friedman, I think my role is 
to ``prescribe what should be done in light of what can be done, 
politics aside, and not to predict what is `politically feasible' and 
then to recommend it.'' You, of course, have the more difficult task of 
determining what is politically feasible. But given the magnitudes of 
the costs and benefits associated with any climate policy, I recommend 
to you a careful consideration of the merits of a carbon tax.

    The Chairman. Thank you very much.
    Mr. Hawkins, we're glad to have you here. Thanks.

 STATEMENT OF DAVID G. HAWKINS, DIRECTOR OF CLIMATE PROGRAMS, 
               NATURAL RESOURCES DEFENSE COUNCIL

    Mr. Hawkins. Yes. Thank you, Mr. Chairman, Senator 
Murkowski, and members of the committee. Thank you for inviting 
me to talk about the role of performance standards as a climate 
protection tool.
    First, I want to mention that NRDC is a member of the U.S. 
Climate Action Partnership. But, I want to stress that my 
statement here today, and my testimony, is on behalf of NRDC 
and not on behalf of USCAP. USCAP has not taken a position on 
which, if any, of the performance standard or other provisions 
under the current Clean Air Act ought to be retained in a 
climate protection bill.
    My core message to the committee is that there is no silver 
policy bullet for climate protection. Rather, we need a 
combination of tools to reduce emissions in a predictable and 
an efficient manner.
    NRDC believes that a steadily declining cap on emissions, 
combined with performance standards for key sectors, is 
required to achieve large, sustained reductions in greenhouse 
gas emissions.
    This is not an unfamiliar approach. Since 1970, the Clean 
Air Act has combined broad-scope environmental quality 
objectives with performance standards for major pollution 
source categories, such as tailpipe standards for motor 
vehicles, fuel quality standards, and emissions standards for 
major stationary sources--powerplants, refineries, paper mills, 
et cetera.
    A question that's often asked is, If we have a cap, why do 
we need additional performance standards? Senator Murkowski, 
you raised those questions in your opening statement. The first 
point I would make is that, without some assured rate of 
progress for key emitters, there is a significant risk of 
default. We saw this with the reclaim cap program in California 
in the 1990s. There, powerplant owners that were subject only 
to a cap on their nitrogen-oxide emissions waited until the 
last minute, relied heavily on offsets, and when the hour of 
compliance approached, they said, ``You have a choice: Turn the 
lights off or give us a compliance waiver.'' Guess which option 
the public officials chose? We--this could have been avoided if 
we'd had some backstop provisions for performance standards to 
assure steady progress, rather than sole reliance on a cap.
    A second argument for performance standards is that they 
compensate for the real-world compromises that will occur in 
designing a cap program. We can talk all we like about ideal 
concepts, but Congress doesn't enact ideal concepts. It's a 
give-and-take among real-world interests that result in 
compromises. The bills moving through Congress set targets that 
are substantially less than what we really should be doing to 
protect the climate. Very large amounts of offsets are allowed 
for compliance, which Dr. Gayer just mentioned. Other cost-
containment provisions that could impair environmental 
performance are still under debate.
    In the real world, the cap that Congress passes will be a 
compromise, not a requirement that is fully protective. 
Performance standards can help fill the gap between ideal and 
reality.
    Both the House and Senate bills contain performance 
standards for new coal plants, but their treatment of existing 
fossil-fuel plants is very different. The Senate bill would 
retain existing Clean Air Act performance-standard authorities 
to cover existing fossil-fuel plants. But, the House bill 
repeals those provisions of the Clean Air Act, leaving nothing 
but the cap to address emissions from those plants. We believe 
this is not a robust approach. It runs the risk of keeping 
demand for allowances higher than is needed, raising allowance 
prices for everyone. It runs the risk of future noncompliance 
as the cap shrinks, if investments in cleaner generation 
systems have not been made on a timely basis.
    I want to address one myth about performance standards 
under the Clean Air Act. The argument has been made that 
performance standards under the law would result in regulatory 
chaos if applied to carbon-dioxide sources. The reason that we 
think this is a myth is that there is both a regulatory and a 
statutory fix to any concern in this regard. Congress is not 
handcuffed in this matter. EPA has already proposed to set a 
cutoff for performance standards that would apply only to truly 
large sources. If Congress has any doubt about the legal 
robustness of that regulatory approach, it's very easy to adopt 
surgical amendments that would truly limit performance 
standards to the big sources that are appropriate.
    A final point is that, under the law, performance standards 
do not, and may not, demand the impossible. They must be 
reasonable, taking into account technical and economic 
feasibility. One has to ask oneself, Why, as a matter of 
policy, would one want to avoid setting reasonable standards 
for key sectors that are major sources of greenhouse gas 
emissions?
    Now, the current NSPS--New Source Performance Standard--and 
Prevention of Significant Deterioration Review programs are not 
the only possible method to set performance standards for key 
sectors. But, simply repealing them and replacing them with 
nothing but a cap would be a major policy mistake.
    Thank you.
    [The prepared statement of Mr. Hawkins follows:]
 Prepared Statement of David G. Hawkins, Director of Climate Programs, 
                   Natural Resources Defense Council
    Thank you, Chairman Bingaman and Ranking Member Murkowski, for the 
opportunity to testify today on policy tools to build a clean energy 
economy and reduce global warming pollution. My name is David Hawkins. 
I am Director of Climate Programs at the Natural Resources Defense 
Council (NRDC). NRDC is a national, nonprofit organization of 
scientists, lawyers and environmental specialists dedicated to 
protecting public health and the environment. Founded in 1970, NRDC has 
more than 1.3 million members and online activists nationwide, served 
from offices in New York, Washington, Los Angeles, San Francisco, 
Chicago and Beijing.
    NRDC is a member of the U.S. Climate Action Partnership (USCAP), 
the businessenvironmental coalition that supports enacting 
comprehensive climate legislation this year and NRDC is a member of the 
labor-environmental Blue-Green Alliance, which also supports this 
objective. Today my testimony is presented on behalf of NRDC.
    Helping Congress pass effective climate legislation is NRDC's 
highest priority. It is vital to enact legislation this year--to help 
deliver economic, energy, and climate security. As President Obama has 
said, the choice is ``between a slow decline and renewed prosperity; 
between the past and the future.'' Clean, sustainable energy is one of 
the pillars of growth and prosperity in the 21st Century, and enacting 
comprehensive energy and climate legislation is the way to put that 
pillar in place. The time to act is now.
    I understand this hearing seeks testimony on policy tools other 
than the approach known as cap-and-trade. The major point I would like 
to make today is that as members of Congress would make a mistake if 
you saw your role as selecting a single policy tool to attack the 
intertwined issues of energy supply, technology innovation and 
reduction in global warming pollution. The best policy approach is one 
that does not rely exclusively on one tool but recognizes that real 
world versions of policy tools have limits that require use of several 
complementary techniques to help assure success. NRDC believes the best 
policy package to tackle these challenges of energy security, 
technology innovation and climate protection is a comprehensive limit 
or cap on global warming pollution that becomes tighter each year, 
combined with complementary programs to drive improved performance in 
key sectors.
    USCAP in its January 2009 Blueprint for Legislative Action, also 
embraces the view that a cap-and-trade program, complemented by 
additional policies and measures is the sounder approach:

          . . .we believe our nation's climate protection goals can be 
        met in the most cost effective manner through an economy-wide, 
        market-driven approach that includes a cap-and-trade program as 
        a core element. . .  .
          In addition, policies and measures that are complementary to 
        a cap-and-trade program are needed to create incentives for 
        rapid technology transformation and to assure actual reductions 
        occur in capped sectors where market barriers and imperfections 
        may prevent the price signal from achieving significant 
        reductions in emissions within those sectors.

    Today my testimony will focus on the ability of the Clean Air Act 
to provide a set of complementary global warming pollution performance 
standards. This combination of a cap and performance standards would 
further our clean energy objectives and help achieve a comprehensive 
limit on global warming pollution, patterned on the very successful 
model and programs of our current Clean Air Act. In order to set the 
stage for this discussion, I will briefly cover our successful 
experience gained from nearly forty years of regulating air pollution 
under the Clean Air Act.
   1) background: the clean air act's dual-track air quality strategy
    In 1970 Congress adopted a dual-track program to protect and 
enhance our nation's air quality. The first track of that program 
called on states to adopt comprehensive pollution control programs 
under state law to achieve air quality objectives set forth in National 
Ambient Air Quality Standards (NAAQS) adopted by EPA. This ambient 
program is an example of the ``assimilative capacity'' approach to 
environmental management--based on the belief that the environment can 
assimilate a certain amount of pollution or toxins released from human 
activities without causing identifiable harm. This approach starts by 
identifying exposure levels of pollution that current research 
indicates may be tolerable for humans and ecosystems and then seeks to 
reduce emissions from pollution sources enough to meet the maximum 
tolerable exposure targets.
    There is a comparable concept for global warming pollution. Our 
planet, its natural systems and our health will suffer myriad harms due 
to increases in atmospheric concentrations of CO2 and other 
so-called ``greenhouse'' gases that in turn disrupt our planet's 
climate systems. Climate scientists use global average temperature 
increases as a warning indicator of this climate disruption and they 
tell us that we face extreme dangers if global average temperatures are 
allowed to increase by more than 2 degrees Fahrenheit from today's 
levels (equivalent to 2 degrees Celsius over pre-industrial levels). 
National and global caps on annual emissions of CO2 and 
other global warming gases by themselves are another example of the 
``assimilative capacity'' approach to environmental management.
    The Clean Air Act provides an important model for Congress to 
examine as it crafts climate protection legislation. The 1970 Act's 
ambient management program strengthened previous efforts enacted by 
Congress in the 1960s and relied on states to set control rules for 
pollution sources at levels just tough enough to bring total air 
pollution down to the level of the national ambient standards.
    But Congress did not rely exclusively on the assimilative approach 
to air quality protection in the 1970 Act. Congress adopted another 
strategy designed to minimize air pollution by requiring sources to 
meet emission performance standards based on modern ``best practices'' 
in pollution abatement. The performance standard approach does not set 
required levels of control based on atmospheric concentrations of 
pollutants in particular areas or nationally. Rather, the emission 
reductions required by performance standards are set by assessing how 
much traditional polluting processes can be cleaned up, taking account 
of technical and economic constraints.
    Congress included this complementary tool in the law because it 
anticipated that future air quality goals would likely be more 
ambitious than those defined in 1970 and wanted an independent program 
that would be effective in reducing total emissions over time. 
Congress' intent in the performance standard program was to incorporate 
advances in pollution prevention and control when major new sources and 
capital investments were pursued since that is an opportune time to 
design in clean technology.
    Congress applied the performance standard approach to both 
stationary sources (e.g., power plants, oil refineries) and mobile 
sources but with some important distinctions. In the mobile source area 
(cars, trucks, buses), only entirely new vehicles were subject to 
federallyestablished modern performance standards. Congress was 
presented with analyses demonstrating that with traditional rates of 
``fleet turnover,'' most of the benefits of tighter new car standards 
would be experienced in less than 10 years.
    In requiring performance standards for stationary sources, Congress 
adopted a broader approach. The Act requires that both new and modified 
existing stationary sources must meet modern performance standards. The 
1970 Act's principal tool for improved air pollution control for new 
and modified sources was the New Source Performance Standard (NSPS), a 
national, categorical requirement based on very good, but not the best, 
pollution minimizing practices. In 1977, when the Act was amended, 
Congress adopted the new source review (NSR) and prevention of 
significant deterioration (PSD) programs to strengthen efforts to 
minimize emissions and air quality impacts from new and modified 
sources.\1\
---------------------------------------------------------------------------
    \1\ For simplicity, for this testimony I will refer to these 
programs generally as NSR.
---------------------------------------------------------------------------
    In the 1977 Amendments, Congress expanded both the scope of the 
rigor of the requirements for improved performance from new and 
modified sources. A key new concept was that the level of the 
performance requirement would not be tied to often out-of-date NSPS; 
rather case-by-case determinations of current best performance would be 
required.
    Finally, in the 1990 Amendments Congress expanded the scope and 
rigor of the performance requirements yet again, recognizing the value 
of subjecting new and existing pollution sources to modern performance 
standards in order to both manage air pollution growth and reduce 
actual pollution levels. Notably, Congress retained and expanded these 
performance standard approaches--PSD, NSR and NSPS--for the electric 
power sector at the same time that Congress created the 1990 
Amendments' successful acid rain program. This program, of course, 
relies upon a cap on sulfur dioxide emissions from the electric power 
sector, coupled with the ability to trade pollution allowances in order 
to meet a facility's obligation under the cap.
    The ambient management program has been a central program of the 
Clean Air Act since 1970 and it should continue. Critics occasionally 
have asserted that we should rely on the ambient standards approach as 
the only strategy for improving and protecting air quality. And today 
some contend that climate legislation should rely exclusively upon cap-
and-trade and dispense with performance standards and other source-
specific pollution management tools.
    The 1970 and later Clean Air Acts reflect a judgment by Congress 
that the ambient standards approach should be complemented by other 
independently functioning programs such as the NSR and Mobile Source 
Emission Standards programs. I think that this judgment was a wise one. 
The history of air pollution control efforts both before and after the 
1970 Act reveals that broad concentration or emissions loading concepts 
like the ambient standards approach, while conceptually sound, have 
their weak spots, which when exploited, can prevent the program from 
solving air quality problems in a timely fashion.
    The Clean Air Act's dual track approach to air quality management 
employs the principle of diversification to reduce risks. In an 
uncertain world, a prudent investor will forego putting all his money 
into the one stock with the apparent highest yield. Instead she will 
spread her risk by selecting a range of investments--some which offer 
high risk and high yield and others which offer less risk and less 
yield. The Clean Air Act is also like a stable ecosystem, which has a 
diversity of species. Such systems are much less likely to fail when 
stressed than systems that have no diversity.
                      2) the example of acid rain
    The argument has been made that with an overall cap or budget on 
greenhouse gas emissions, we should simply not care about the amount of 
emissions from individual sources or even entire sectors. This argument 
was rejected by Congress in the 1990 amendments to the Clean Air Act 
when it both enacted a cap on sulfur dioxide emissions from the 
electric power sector to combat acid rain, and retained the NSPS and 
NSR programs for the sources covered under the acid rain trading 
program. Those programs have jointly continued to function well to 
minimize emissions from new sources, thereby reducing pressure on the 
sulfur dioxide cap and demonstrating improved and less expensive means 
of emission reduction that can be used to reduce emissions from 
existing sources as well.
    When we have ignored the value of complementary programs, we have 
seen unfortunate results. The RECLAIM program in Southern California is 
an example of overreliance on the cap mechanism alone: there, exclusive 
reliance on a cap program led to long delays in reducing emissions from 
major sources, and to a totally avoidable compliance crisis when the 
final deadline arrived.
                    3) ideal versus real-world caps
    Like for acid rain, the cap on total greenhouse gas emissions is a 
core element of an effective greenhouse gas reduction strategy. It 
creates a market for the many innovations that will be required to 
achieve the deep reductions we need to protect the climate. But we 
should not rely on the cap alone. Theoretical arguments that other 
programs are not needed once we have a cap are misplaced because they 
ignore the reality that the cap enacted by Congress will involve 
compromises. The cap schedule set in this legislation is not likely to 
reduce emissions as fast as may be environmentally and economically 
prudent. The inclusion of cost-containment provisions may also mean 
that cap-driven reductions fall short of those that can be implemented 
cost-effectively in some key sectors.
             4) the example of coal: incentives and offsets
    The goal of reducing emissions by 80% from 1990 levels by 2050 is 
like a marathon: we cannot hope to complete the race if we do not set 
and maintain a pace of technology improvement for key sectors from the 
start of the race. This is especially true for long-lived, high capital 
investment projects like coal-fired power plants. For good reasons most 
cap-and-trade proposals include substantial provision for the use of 
offsets for compliance with the cap. But overreliance on such offsets 
can lead to problematic results. In this sector, the ability to 
purchase offsets rather than retrofit existing plants or develop new 
technologies could result in decisions that seem wise from the 
perspective of the individual firm but collectively result in higher 
allowance costs and make it more difficult to achieve longer-term 
reduction goals. However, the answer is not to eliminate offsets but to 
complement that flexibility with measures that provide for minimum 
emission progress paths in major emitting sectors.
    Even if offsets in a cap-and-trade structure are of the highest 
quality and represent emission reductions fully equivalent to emissions 
from covered sources, overreliance on such offsets by key sectors will 
leave those sectors poorly positioned to achieve the deep reductions 
that are required to meet the longer-term cap objectives of the 
legislation. And if, as is likely, some fraction of offsets do not 
achieve fully equivalent reductions, then system-wide emissions will be 
higher than required to meet the legislation's objectives. While the 
bill that passed the House includes performance standards for new coal 
plants, it does not include any performance metrics for the existing 
coal fleet and repeals tools in the existing Act that could be used to 
achieve reductions from that sector and from other sectors.
    If we do not craft a program that will reduce actual emissions from 
the existing fleet of coal-fired power plants at a reasonable but 
steady pace we run the risk of facing claims of threatened power 
shortages or destructively large electric rate increases as an aging 
fleet reaches the point where major retrofits or retirements are 
required for a huge fraction of the fleet in a very short period of 
time. In the absence of policies to secure steady reductions from 
existing sources, high-emitting old plants are likely to operate for a 
long time, increasing demand for allowances and thereby putting upward 
pressure on allowance prices for all sectors.
    EPA analyzed the House bill, which repealed the NSPS and NSR 
programs for carbon dioxide emissions from existing plants. EPA's 
analysis indicated that only 8 percent of existing coal generation 
capacity will be retired by 2025, with most of the retired capacity 
occurring at ``marginal units with low capacity'' that are ``part of 
larger plants that are expected to continue generating.''
5) myth: retaining performance standards would produce regulatory chaos
    NRDC disagrees with claims that implementing current Clean Air Act 
performance standard authorities for major sources would be disruptive. 
EPA's proposed rule to apply these programs only to truly large sources 
concludes that such a program would be administratively reasonable and 
not interfere with the investments that we all want for a growing 
economy.
    Critics have complained that applying NSR to carbon pollution would 
result in burdensome coverage of barbecues and donut shops. That 
concern is easily addressed by raising the NSR threshold to a level 
that would cover only truly large industrial sources, such as 25,000 
tons per year of CO2-equivalent emissions. EPA has proposed 
raising the threshold to that level in a recent Clean Air Act 
rulemaking. We support inclusion of such a threshold in comprehensive 
climate legislation.
    Establishing higher emissions thresholds under the Act will allow 
EPA and the states to focus on a small number of the largest sources of 
GHG emissions. As structured, the performance standards and reviews 
simply would not apply to the smaller and more numerous but relatively 
insignificant sources of such emissions. EPA estimates that at a 
25,000-tpy CO2e applicability threshold for PSD major 
sources, approximately 400 additional new or modified facilities would 
be subject to PSD review in a given year. This estimate compares to the 
280 PSD permits that are currently issued in a typical year. 74 Fed. 
Reg. 55,331.
    With respect to the Act's Title V operating permit program, EPA 
estimates that currently there are approximately 14,700 Title V 
operating permits nationwide. According to the agency, at a 25,000-tpy 
CO2e permitting threshold, about 13,600 existing facilities 
would be classified as ``major sources'' for their CO2e 
emissions. EPA ``expect[s] that many of the 13,600 existing facilities 
that would exceed the proposed 25,000-tpy CO2e threshold--
the majority of which consist of electric generating units and 
industrial facilities--already have a title V operating permit for 
other regulated pollutants, and thus would potentially require only a 
permit revision or modification to address GHGs.'' 74 Fed. Reg. 55,335.
    What would GHG performance standards look like? Clean Air Act 
section 111 authorizes EPA to establish national new source performance 
standards (NSPS) for new and existing stationary sources. EPA 
establishes performance standards based on the best demonstrated 
systems of emissions reduction, taking into consideration factors such 
as technical feasibility, cost, and energy requirements. EPA also has 
discretion concerning the sizes and types (source categories) of 
facilities to be regulated.
    In the early years for some industrial sectors, NSPS and Best 
Available Control Technology (BACT) under PSD may be limited to 
application of demonstrated process efficiency methods and 
consideration of lower-carbon feed stocks, (e.g., biomass co-firing). 
As advanced approaches are demonstrated they too will become part of 
the suite of options that are considered. As with any other pollutant, 
technical feasibility and economics will determine what standards are 
reasonable for application to various source categories.
             6) federalism and protection of states' rights
    New legislation should retain important provisions of the current 
Clean Air Act that protect the rights of states to go beyond federal 
minimum requirements for control of global warming pollution. States 
have been pioneers in the control of greenhouse gas emissions from 
vehicles and they developed effective programs to deploy energy 
efficiency and renewable energy resources. States, and entities that 
states regulate (such as local distribution companies), have program 
delivery capabilities that the federal government cannot match. States 
can help drive innovation in low-carbon technologies and processes by 
exercising the tools that have been created under the current Clean Air 
Act. Their ability to do so should be protected.
    Revocation of NSPS and NSR authority for covered sources of 
greenhouse gases as proposed in the House bill would cripple many 
states' ability to drive innovation through these programs. The 
National Association of Clean Air Agencies has estimated that at least 
half the states have laws or policies prohibiting state regulators from 
adopting environmental and public health regulations or other 
safeguards more stringent than those contained in federal law. These 
so-called no-more-stringent-than laws prevent state permitting 
authorities from innovating and protecting their citizens to a greater 
degree than EPA does under federal law. Accordingly, repealing these 
NSPS and NSR authorities in federal law would effectively repeal the 
authority of many states, forcing such states to seek new legislation 
from their state legislatures to replace authority they currently have. 
This would be a dramatic departure from the relationship between 
federal and state authority that has developed over the past four 
decades.
                             7) conclusion
    In conclusion, the NRDC believes that the NSR and NSPS provisions 
of the CAA are important complement to the cap-and-trade program in new 
clean energy and climate legislation. The Clean Air Act has been one of 
our most successful laws, based upon a portfolio approach to air 
quality protection that combines ambient approaches, performance 
standards (technologybased or otherwise) and market-based mechanisms 
like cap-and-trade. Hard experience has taught us that we must not rely 
exclusively upon one or another of these air management approaches. 
Accordingly, each successive version of clean air legislation has 
ratified and expanded a complementary measures strategy, providing us 
with a balanced toolbox to address these challenges. And when new 
programs have been created, like the 1990 Amendments' capand-trade 
program for acid rain pollution, Congress wisely preserved the existing 
tools, like emission performance standards. Climate and clean energy 
legislation should not disregard these lessons or abandon these 
successes. Technology-forcing components are critical to the success of 
our pollution reduction programs, and NSR and NSPS provide important 
tools to ensuring the transition to a clean energy economy. These 
programs have been proven to be compatible with industries' desires to 
make timely investments and by focussing them on truly large emission 
sources they can and should be employed in our efforts to cut global 
warming pollution as an important complement to a comprehensive cap 
approach.

    The Chairman. Thank you very much.
    Mr. Banks.

  STATEMENT OF JONATHAN M. BANKS, CLIMATE POLICY COORDINATOR, 
              CLEAN AIR TASK FORCE, BRUNSWICK, ME

    Mr. Banks. Thank you, sir. Good morning.
    I appreciate the opportunity to speak with you today 
regarding different options for reducing greenhouse gas 
emissions.
    Before I get started, let me say that CATF supports 
immediate and comprehensive action to deal with climate change. 
We've worked closely with members of the House and Senate to 
help enact a Federal climate policy, including the Waxman-
Markey bill and the Kerry-Boxer bill, here in the Senate. We 
cannot, however, afford another multiyear delay. We need to 
pass a mandatory climate policy in this Congress.
    If the politics of Congress demand it, we may need to have 
alternatives available for dealing with climate change. Our 
work to date has made us realize that the best climate policies 
may actually be hybrids that include elements of all the ideas 
we'll be hearing about here today.
    One more caveat. Many of us on this panel are speaking 
about policies that have not undergone the legislative process. 
What may appear on paper as a simple policy may not be so 
simple when it's put through the rigors of the legislative 
process here in the Senate and the House. For instance, have 
you ever seen a simple piece of enacted tax legislation? This 
caveat applies equally to cap-and-trade, cap-and-dividend, 
carbon tax, or sectoral policies, which is what I'm here to 
speak about today.
    The climate debate in Congress is hinged on a number of key 
issues: costs, jobs, impacts to coal in the industrial sector, 
believable technology pathways, gasoline prices, and action by 
sectors other than just the power sector, to name a few. Many 
policy options have been proposed to deal with these concerns, 
but we focused our work to date on creating believable 
technology pathways, shared responsibility amongst the major 
sectors, and, a related issue, bending the curve on 
transportation-sector emissions.
    In an economywide policy, the price signal of the cap can 
be muted in some sectors of the economy; most notably, the 
transportation sector. With an upstream cap on petroleum 
products, refiners pass the price of an allowance on to the 
consumer. But, a $50-a-ton CO2 allowance price 
translates into about 50 cents at the gas pump. While this may 
be a political liability for you all, it would not be a--likely 
be a huge driver of CO2 emission reductions.
    Instead, the petroleum industry will pay the power sector 
to further reduce its emissions. Indeed, modeling of the 
current economywide proposals suggests that almost all the 
reductions between now and 2030 would come from two sources: 
offsets and overcompliance in the power sector. This sounds 
like good economics--that is, finding the cheapest tons 
throughout the economy, and getting our reductions there--but, 
it raises some significant concerns. With most of the 
reductions coming from the power sector, we need to make sure 
the reductions are achievable and believable. But EIA's 
modeling of H.R. 2454 predicts that 100 gigawatts of nuclear 
power, 70 gigawatts of carbon capture and storage, 90 gigawatts 
of renewables will be necessary by 2030. To put that in 
perspective, 100 gigawatts of nuclear plants by 2030 would 
require us to complete seven very large nuclear reactors every 
year from about 2016 to 2030. While models spit these numbers 
out without a problem, in the real world they are likely to be 
a--very difficult to achieve.
    If the power sector cannot achieve these reductions, then 
other sectors will have to make up the difference. We cannot 
wait until 2020 or 2030 to develop these policies that will 
drive the other sectors' emissions down.
    Back in the fall of 2008, following the defeat of the 
Lieberman-Warner bill, we embarked on an exploration of 
alternative climate policies. The policy we are exploring 
represents economywide coverage without an economywide cap. It 
is a work in progress, and the results we are sharing with you 
today are preliminary, but very promising.
    Here's what we modeled: a cap on power- and industrial-
sector emissions on a trajectory equaling 90 percent below 1990 
levels by 2050; an accelerated CAFE program, reaching 45 miles 
per gallon by 2030; technology incentives for renewables and 
carbon capture and sequestration; and increases in Federal 
energy efficiency standards.
    We continue to refine these elements, as well as develop 
additional policies, such as an HFC cap-and-trade program, a 
program for black carbon and methane reductions, additional 
transportation policies, a program to develop and deploy 
advanced renewable technologies such as dispatchable wind, a 
program for marine and aviation emissions, and a comprehensive 
but realistic CCS commercialization program.
    So, what does all this achieve? Relative to the current 
economywide bills, the answer is considerable greenhouse gas 
reductions, lower allowance prices, and, in our view, more 
believable technology pathways.
    In my written testimony, I elaborated on these results, 
but, in the interest of time, I will briefly summarize them: 
CO2 allowance prices are cut in half; the size of 
the market is reduced by about 65 percent; total greenhouse gas 
emissions are 21 percent below 2000--2005 levels by 2030, which 
is considerably higher than H.R. 2454; transportation-sector 
emissions are lower, but still trending up; coal production is 
roughly equal to today's levels; coal power generation remains 
the dominant source of electricity; natural gas generation and 
nuclear generation remain fairly stable with today's levels; 
renewables grow to 20 percents of generation; gasoline prices 
are actually slightly lower than business as usual, and almost 
50 cents lower than in H.R. 2454; electricity prices are 
slightly lower for all sectors.
    The reaction to these kinds of numbers can sometimes take 
completely different directions; either this is the best thing 
since sliced bread or it's going to let the planet burn. The 
reality is that it's neither. We recognize that the policy 
entails a mix of positives and negatives, some of which can be 
dealt with through further policy development. Our goal is to 
continue to refine the policy to get total greenhouse gas 
emissions down to levels comparable to the Obama 
Administration's stated targets.
    What you and your colleagues will have to decide is whether 
the concerns expressed regarding the current climate policies 
require further refinement or, in the end, whether it will be 
necessary to look to policy alternatives. Regardless of the 
answer to that question, we believe that targeted sectoral 
policies will be necessary, either on their own or in 
conjunction with an economywide policy, in order to drive the 
necessary emission reductions.
    I'd be happy to answer any questions you might have. Again, 
thank you for the opportunity to speak to you today.
    [The prepared statement of Mr. Banks follows:]
 Prepared Statement of Jonathan M. Banks, Climate Policy Coordinator, 
                  Clean Air Task Force, Brunswick, ME
    Mr. Chairman, members of the Energy and Natural Resources 
Committee, good morning, my name is Jonathan Banks, and I am the 
Climate Policy Coordinator of the Clean Air Task Force. I appreciate 
the opportunity to speak to you today. Based in Boston, the Clean Air 
Task Force is a nonprofit organization with offices in the US and China 
dedicated to reducing atmospheric pollution through research, advocacy, 
and private sector collaboration. Our staff and consultants include 
scientists, attorneys, economists, and engineers. Our board consists of 
private sector leaders as well as environmental advocates.
    In the fall of 2007, following the cloture failure of the 
Lieberman-Warner bill, CATF began to investigate a number of 
alternative polices that could be used to deal with climate change. Our 
work to date has made us realize that in terms of policy design there 
is no ``right answer'' for climate policy as long as it reduces the 
requisite tons and is passed into law. Rather, the best climate 
policies are ``hybrids'' that incorporate good ideas in a combination 
that can improve both the economics and overall environmental 
performance.
    First, let me say that CATF supports immediate and comprehensive 
action to deal with climate change. We have supported the House climate 
process that lead to the successful passage of the Waxman-Markey 
climate bill earlier this year. We have also been working to help 
enable passage of the Kerry-Boxer proposal in the Senate. We cannot, 
however, afford another multi-year delay in passage of the nation's 
first climate policy. If the politics of the U.S. Senate demand it, we 
need to have alternatives to the current proposals available to policy 
makers. It is in that vein that we embarked on an exploration of 
alternatives to economy wide policies, not as a competitor, but as an 
alternative that may offer a realistic and enactable set of policies to 
help us get started dealing with climate change.
    One more caveat before I speak to the work we have done. All of us 
here on this panel are speaking about climate policies that have not 
undergone the legislative process. What may appear in a white paper as 
a much more simplified way of dealing with climate change, will not be 
simple when it is put thorough the rigors of the Senate and House 
legislative process. For instance, have you ever seen a ``simple'' 
piece of enacted tax legislation? This caveat applies equally to cap 
and trade, cap and dividend, carbon tax, or sectoral policies--which is 
what I came here to speak about. All of these policy alternatives have 
strengths and weaknesses and they are not mutually exclusive.
    The debate surrounding Lieberman-Warner, as well as the debate this 
year over the Waxman-Markey bill (HR 2454) and the Kerry-Boxer bill has 
hinged on a number of key issues. Many of these issues were highlighted 
at the end of the Lieberman-Warner debate by a group of Senators known 
as the ``Gang of 15'', many of whom serve on this committee. The issues 
highlighted include: costs, both to consumers and companies; US 
manufacturing jobs and impact on manufacturing; impacts to the coal 
industry and coal dependent power companies; believable technology 
pathways; gasoline prices; action by sectors other than just the power 
sector; and the size of the carbon market, to name a few.
    In response, policy makers have explored a number of options: 
safety valves, price collars, strategic reserves, expansion of offsets, 
weakening of the interim caps, protectionist trade measures, incentives 
for various technologies, and additional layers of programs and 
regulations to force reductions in other sectors.
    There are, however, some areas where no amount of tinkering will 
suffice to deal with the real world issues raised by the Gang of 15. 
Gasoline prices will go up if we put in place an upstream cap or tax on 
petroleum products. The sheer size of the market, which is simply the 
number of allowances times the price of allowances, cannot be 
constrained without containing allowance prices or eliminating covered 
sectors. And the pathway to compliance, what we call ``technology 
pathways,'' presents a question mark in any economy wide policy, 
whether tax or cap, because we cannot be certain precisely how the 
market will react to the price signal.
    In an economy-wide policy the price signal of the cap can be muted 
in some sectors of the economy, primarily the transportation sector and 
to a lesser degree the residential and commercial sectors. With an 
upstream cap on petroleum products, refiners pass the price of an 
allowance on to the consumer. But a $50 a ton CO2 allowance 
price, translates into you and I paying about 50 cents at the pump. 
While this may be a political liability for all of you, it would not 
likely be a huge driver of transportation sector emissions reductions. 
Instead, the petroleum industry will pay the power sector to further 
reduce emissions.
    This sounds like good economics, that is, finding the cheapest tons 
throughout the economy and getting our reductions there. But, it raises 
two potentially significant problems.
    First, the Energy Information Administration's (EIA) modeling 
suggests that almost all the reductions come from two sources: offsets 
and reductions in the power sector (see figure 1 below). This chart 
shows what sectors EIA believes will contribute to the GHG abatement 
under HR 2454. As you can see almost all of the predicted abatement 
comes from offsets and reductions in the power sector. Again, we would 
expect to see this outcome in response to all economy wide proposals be 
they tax, cap and trade or cap and dividend.
    Second, with most of the action coming in the power sector, we need 
to make sure that the needed reductions from that sector are achievable 
and therefore believable. However, when we look at the energy 
technology build-out necessary to meet these caps that rely on power 
sector over-compliance the problem comes into focus: EIA's modeling of 
the Waxman-Markey bill predicts that 100 GWs of nuclear power, 70 GWs 
of carbon capture and storage (CCS), and 90 GWs of renewables, will be 
built by 2030. To put that in perspective, 100 GWs of nuclear plants by 
2030 would require completing 7 very large nuclear plants every year 
from 2016 to 2030.\1\
---------------------------------------------------------------------------
    \1\ 2016 is the earliest date NEMS will complete new nuclear 
facilities.
---------------------------------------------------------------------------
    While models spit these numbers out without a problem, in the real 
world this is likely to be very difficult to achieve. This, though, is 
not just a near term problem, EIA states in its most recent work on HR 
2454:

          Unless substantial progress is made in identifying low-and 
        no-carbon technologies outside of electricity generation, the 
        ACESA emissions targets for the 2030-to-2050 period are likely 
        to be very challenging as opportunities for further reductions 
        in power sector emissions are exhausted and reductions in other 
        sectors are thought to be more expensive.''\2\
---------------------------------------------------------------------------
    \2\ EIA, Energy Market and Economic Impacts of HR 2454, the ACESA 
of 2009.

    If the power sector cannot achieve these reductions, then other 
sectors will have to make up the difference. We cannot wait till 2020 
or 2030 to develop policies that set other sectors on a path to 
contribute to the necessary reductions.
    CATF chose to explore a combination of policies that target 
specific sectors, with the goals of reducing costs, creating more 
believable technology pathways, and maintaining environmental 
integrity. This policy represents economy-wide coverage, without an 
economy-wide cap. We conducted an initial set of modeling runs on a set 
of proxy policies using EIA's National Energy Modeling System (NEMS). 
Since then, the economic downturn, and a number of additional changes 
have dramatically altered EIA's view of business as usual (BAU). Just 
recently, we updated our initial set of runs to reflect these changes 
and pegged the work to modeling EIA has performed on HR 2454.\3\ Our 
formulation represents a work in progress and the results we are 
sharing with you today are preliminary, but very promising.
---------------------------------------------------------------------------
    \3\ We used EIA's interpretation of the offset provisions, CCS 
incentives, banking provisions and allowance distribution system all 
scaled to a program that covers 60% of energy related GHG emissions.
---------------------------------------------------------------------------
    After a number of rounds of tweaking, our latest work employs the 
following policies:

   A cap on power and industrial sector emissions on a 
        trajectory equaling 90% below 1990 levels by 2050;
   An accelerated light duty vehicle fuel economy program 
        reaching 45 miles per gallon by 2030;
   Technology incentives for renewable energy generation and 
        coal with carbon capture and sequestration (CCS);
   Proxies that reflect significant but achievable increases in 
        federal energy efficiency standards for energy using equipment; 
        and
   An HFC cap and trade program.

    We are continuing to refine these elements, as well as develop 
additional policies (and the necessary analytics to be able to better 
model them) such as:

   A program to spur domestic black carbon and methane 
        reductions;
   Additional transportation policies, primarily focused on 
        commercial vehicle efficiency, that would ``bend the curve'' on 
        emissions from the transportation sector so that total 
        transportation GHG emissions are declining before 2030;
   A program to develop and deploy advanced renewable 
        technologies such as dispatchable wind;
   A comprehensive, but realistic CCS commercialization program 
        to include broad deployment of post combustion CO2 
        capture technology and geologic carbon sequestration at 
        existing coal and gas plants;
   Cost characterization for underground coal gasification with 
        CCS; and,
   Realistic model constraints on CCS, nuclear, and renewable 
        generation expansion through 2030.

    So what does all of this achieve? The answer is a policy that 
achieves considerable greenhouse gas reductions at a lower cost and, in 
our view, with more believable technology pathways. But, we recognize 
that the policy entails a mix of positives and negatives, some of which 
can be dealt with through further refinement of the policy proposal. 
And, some of the results could be viewed as both positive and negative 
depending on where you stand.
    First, allowance prices for the power and industrial sector cap and 
trade are cut in half as compared to EIA's modeling of HR 2454, with 
prices reaching about $34 in 2030 (vs. $64 for HR 2454). The size of 
the market and the revenue generated by it is also considerably lower 
(about 67% lower) as would be expected with a cap that covers only a 
portion of the economy and one whose allowance prices are so much 
lower. Of course, this would also mean less allowance value and/or 
auction proceeds that could be devoted to all the purposes included in 
the Waxman-Markey bill. Although more analysis is needed, we feel that 
a major emitter cap at this stringency could be structured to protect 
electricity consumers and fund the necessary power sector technology 
innovation.
    Under our modeled sectoral policy, total economy wide emissions are 
somewhat higher than HR 2454 (see figure 2 below). However, in the 
early years of the program, covered emissions reductions are the 
primary source of reductions, meaning more reductions are happening on 
system than in an economy wide program. For the power and industrial 
sectors their emissions are higher than in HR 2454 because they are not 
doing the work of the transportation sector.
    On the other hand, transportation sector emissions are lower than 
Waxman-Markey due simply to the accelerated CAFE program (see figure 3 
above). The incorporation of the suite of additional transportation 
policies we are developing, may allow us to achieve full comparability 
(for total GHG emissions) with the current economy wide cap and trade 
policies. These additional policies would go beyond the light duty CAFE 
increases we have already modeled, and likely include:

   Establishment of CAFE for commercial vehicles with annual 
        increases
   Requiring anti-idling technologies for all commercial 
        vehicles
   Funding/credits for hybrid commercial vehicles
   A feebate program for low mileage/high mileage cars
   Incentives or rebates as well as funding for light duty 
        electric vehicle development and deployment.

    Additional results show that under our sectoral approach coal 
continues to remain the dominant source of power through 2030 (45% of 
generation) and renewable generation jumps up to 20%. However, natural 
gas power generation drops, and nuclear power stays roughly at today's 
levels (see figure 4), with only about 4GWs of new nuclear generation 
being built by 2030.
    We expect that in the real world, the amount of CCS built would be 
less than the 63GWs we show in our work, that the nuclear industry will 
be successful in building a number of new reactors, and that any 
remaining gap will be filled by natural gas generation as a bridge fuel 
for later carbon reductions through increased efficiency, renewables, 
CCS, and nuclear. We are currently developing a modeling run that would 
place realistic constraints on CCS, nuclear and renewables development 
to test this idea.
    Coal production in the sectoral case remains roughly even with 
levels in EIA's reference case (although coal power is producing 23% 
less CO2 per megawatt hour as compared to the reference 
case). There are several factors at play. First the sectoral policy 
builds 63GWs of new CCS power. It retires about 33GWs of coal vs. HR 
2454, which retires 130GWs. While some coal-powered units would be 
running less frequently, taken all together, coal production stays 
relatively stable as compared to the Waxman-Markey economy wide cap. 
The big piece is the difference in the number of retirements.
    Gasoline prices are actually slightly lower than BAU due to 
decreased demand from the accelerated CAFE program, and almost 50 cents 
lower than HR 2454. For electricity prices, the sectoral policy shows 
lower prices to all end users, but mostly after 2025 when HR 2454's cap 
declines considerably. For natural gas, there is no upstream cap. When 
we combine that with the efficiency gains and less demand for natural 
gas in the power sector, prices of natural gas are lower than HR 2454 
as well as lower than BAU.
    Offsets continue to play a prominent role in GHG abatement under 
the sectoral policy. Under both HR 2454 and the sectoral policy, 
offsets make up a nearly identical fraction (45%) of the total 
greenhouse gas reductions in 2030. However, the year-to-year fractions 
are quite different with HR 2454 compensating with offsets to a much 
higher degree in the early years (see figure 5). Importantly, the 
sectoral policy uses far fewer total offsets but that is because of the 
cap differences. International offsets make up identical percentages in 
both cases but there is slower ramp up of total offset demand that 
could help allay some concerns about the speed with which an 
international offset market could develop (see figure 6).
    What modeling does not show is the complexity (both political and 
technological) of creating and enacting any climate policy, including a 
sectoral-based approach. For sectoral, some of this complexity could be 
managed by passing multiple pieces of legislation or sectoral titles. 
This would allow for fine-tuning of the program, and could provide a 
more adaptable policy framework over the long haul. This would also 
narrow the number of key stakeholders to a more manageable set of 
groups that need to come to the table on each piece of the policy.
    Currently many in the power and industrial sector have publicly 
stated that they do not want a sectoral climate policy. What exactly 
drives this, we do not know with certainty. It could be the fear of 
potentially being the only industry regulated. It may also be simply 
that economy wide policy is the devil we know. It has been the subject 
of the legislative process for the last 8 years. Industry and members 
of Congress have engaged and have staked out positions and voiced their 
concerns. Of course, the launch pad for the last eight years was 
actually a sectoral approach known as the Clean Smokestacks Act.
    What you and your colleagues have to decide is whether the concerns 
expressed regarding the current proposals in the Senate are best dealt 
with through further refinement of the overall economy wide proposal, 
or in the end whether it will be necessary to look to policy 
alternatives. Regardless of the answer to that question, the imperative 
to take the first step forward on climate remains. I would be happy to 
answer any questions you might have.
    For more information and additional charts, please visit our 
website: www.catf.us/advocacy/legal/

    The Chairman. Thank you very much.
    Mr. Alic.

    STATEMENT OF JOHN ALIC, INDEPENDENT CONSULTANT, AVON, NC

    Mr. Alic. Thank you. Senator Bingaman, Senator Murkowski, 
members of the committee, it's a pleasure for me to be here 
this morning.
    The first author of our written statement, Dr. Dan 
Sarewitz, is a professor at Arizona State University. He has to 
teach today. We both worked on a study of innovation pathways 
as a means of dealing with two linked problems. One is climate 
change, the other is decarbonization of our energy system. The 
two problems are separate, but they're closely related. I'm 
going to summarize, not our entire study, but some of the main 
points that perhaps you haven't really heard in great detail 
about before.
    The first point I'd like to make is that this is a massive 
technological change that we're facing. It is probably, in its 
overall dimensions, going to be comparable to the so-called 
Information Revolution that we've been through over the last 
four or five decades. It's going to penetrate every sector of 
our economy. It's going to involve thousands of firms, tens of 
thousands, perhaps hundreds of thousands of engineers and 
scientists. When our economy emerges from this transformation, 
which is likely to be decades into the future, because these 
things take time, the world around us really will be very 
different. The question before us as a Nation is, How do we 
approach this transformation? How do we do it in a smart kind 
of way? To answer that question, I think we have to think hard 
about how innovation takes place.
    I'd like to read you a quotation. This is not in our 
written statement, so I'll read it carefully. It's from a 
recent interview with Edmund Phelps, an economist who won the 
Nobel Prize in economics a couple years ago. He said, ``Once in 
a while there is a big leap which creates the ground for a 
surge of innovations to follow. Nowadays, we realize that an 
awful lot of innovation just comes from businesspeople 
operating at the grassroots, having ideas on the basis what 
they see around them, nothing to do with science; it's just 
creative humankind chipping away at things.''
    That's a very profound statement. It describes how 
innovation actually takes place. Research is very important. 
Research, by and large, does not pay off in the near term; it 
takes decades for the results of research breakthroughs, true 
breakthroughs, the sort that win Nobel Prizes, to emerge and 
have economic effect. Sometimes that doesn't even happen.
    I spent many years on the staff of the Office of Technology 
Assessment. At the request of this committee and other 
committees, I did a study, back in the 1980s, of high-
temperature superconductivity. That led to a Nobel Prize in 
physics. It has not yet, after more than 20 years, led to any 
meaningful impacts on our energy system. Maybe it will, maybe 
it won't.
    We cannot count on research breakthroughs, but we can drive 
forward technological change. We know how to do that. There are 
many lessons to be drawn, from other parts of our economy, that 
can be applied to climate change and the energy system.
    In our report and in our written statement, we talk about 
the lessons that can be taken from national defense in which, 
in effect, we--we won the cold war in large part through 
technological innovation. That was a government-industry 
partnership. The innovation came from industry. Government paid 
the bills. The bills were costly. We decided as a Nation that 
that was something that needed to be done. If the Nation 
commits itself to dealing with climate change, to decarbonizing 
our energy system, we need to build a similar sort of 
innovation machine. We are not geared up to do that today. We 
are trying to do that indirectly, because, of course, if we 
raise the prices of energy, if we regulate greenhouse gas 
emissions, one of the consequences that everybody is counting 
on is that it will generate more innovation. That's true, but 
that's not the only source of innovation.
    One of the messages of our report is that if we take the 
view that greenhouse gas warming and decarbonization are public 
goods, public missions, and if we gear ourselves to treat those 
as an investment in the future, there are many agencies in the 
government, many smart people who can contribute to that, and 
many lessons to be drawn from other parts of the economy, not 
only defense, but industries that have been long a vital part 
of our economy, such as agriculture, where government, again, 
has greatly boosted the productivity of that sector.
    Thank you again for inviting me to appear today.
    [The joint prepared statement of Mr. Alic and Mr. Sarewitz 
follows:]
 Joint Prepared Statement of John Alic, Independent Consultant, Avon, 
  NC, and Daniel Sarewitz, Professor of Science and Society, Arizona 
State University, and Co-Director, Consortium for Science, Policy, and 
                                Outcomes
    Mr. Chairman and members of the Committee, thank you for inviting 
our testimony. My name is John Alic. Now an independent scholar, I 
worked for more than fifteen years at the Office of Technology 
Assessment. The first author of this statement, Daniel Sarewitz is a 
former House Science Committee staff member and now Professor of 
Science and Society at Arizona State University and co-Director of the 
Consortium for Science, Policy, and Outcomes, which he helped to found 
in 1999. Dr. Sarewitz's research focuses on how science and technology 
policies can help to achieve important societal goals, with a 
particular focus on problems of uncertainty in policy making, and the 
role of technology in meeting human needs.
    Our statement draws and expands on a recently released study 
``Innovation Policy for Climate Change'' (available at: http://
www.cspo.org/projects/eisbu/), which was carried out jointly by the 
Consortium for Science, Policy, and Outcomes, and the Clean Air Task 
Force, and funded by the National Commission on Energy Policy.
    In my remarks today I would like to make a few very important 
points about how to think through the greenhouse gas problem. The 
first, quite simply, is that limiting the concentration of greenhouse 
gases (GHGs) in the atmosphere is largely a problem of technological 
innovation. If this nation, and the world, decides that it is necessary 
to transform the global energy system to radically reduce GHG 
emissions, that means embarking on a path of profound technological 
transformation. It follows that effective innovation policies will be 
the necessary complement to whatever other options Congress may choose 
to pursue in grappling with the immensely difficult challenge of 
climate change, all the more so in that fossil fuel prices are likely 
to remain low relative to other sources of energy over the next decade 
or more, and markets for some of the key technologies that will be 
necessary do not yet exist.
    The second point, again a simple one, is just to emphasize that for 
the past century and more the United States has led the world in 
innovation. If we decide to turn this unmatched capacity to the climate 
change problem, we know, in principle, what to do and how to do it. 
What is daunting is the scale and scope of the problem. But it is not 
without precedent. After World War II, the U.S. government put in place 
a suite of policies aimed at stimulating innovation that helped make 
possible our Cold War victory and fueled continued economic growth and 
job creation. We know what works, based on our experience. Yet so far 
we are not sufficiently applying what we know about innovation to 
address energy technologies and climate change.
    Let me then briefly review our Cold War innovation policies, which 
took on their fundamental shape at the time of the Korean War, for 
which the United States was woefully unprepared. Over the next several 
years, technological innovation became a central pillar in our larger 
Cold War strategy. In the technological response that took shape, 
intense competition among and within the military services combined 
with greatly increased budgets for R&D and procurement in a long-
running search for ``force multipliers'' to offset the numerical 
advantages of the Soviet Union and its allies, especially in Europe. 
The Department of Defense (DoD) paid the bills, which were large and 
carried charges for much waste and duplication but also brought forth a 
flood of innovations from the defense and aerospace industries and 
virtually created the digital electronics industry, and the fields of 
computer science and materials science.
    High-tech military advances created by Cold War innovation policies 
included nuclear submarines in the 1950s, intelligence satellites in 
the 1960s, precision-guided missiles in the 1970s, and stealth aircraft 
in the 1980s.\1\ Advances in military technology during the Cold War 
also spawned civilian applications, innovations, and industries that 
fueled economic growth and created the high technology infrastructure 
that we depend on today, from our communications systems to our 
aviation network.
---------------------------------------------------------------------------
    \1\ John A. Alic, Trillions for Military Technology: How the 
Pentagon Innovates and Why It Costs So Much (New York: Palgrave 
Macmillan, 2007).
---------------------------------------------------------------------------
    The nation's Cold War commitment to technological innovation was 
neither justified nor rationalized by market logic. We committed 
ourselves to a path of technological innovation in pursuit of a public 
good--national defense--and that commitment created powerful incentives 
for market actors to produce improved technologies for both military 
and civilian applications.\2\ Table 1 sets the Cold War innovation 
system alongside an approach to innovation appropriate to the scale and 
scope of global climate change and the restructuring of the nation's 
energy system.
---------------------------------------------------------------------------
    \2\ John A. Alic, Lewis M. Branscomb, Harvey Brooks, Ashton B. 
Carter, and Gerald L. Epstein, Beyond Spinoff: Military and Commercial 
Technologies in a Changing World (Boston: Harvard Business School 
Press, 1992).

                                      TABLE 1. INNOVATION SYSTEMS COMPARED
----------------------------------------------------------------------------------------------------------------
                                  Cold War Innovation System (ca.          Energy-Climate Innovation System
                                             1950-1990)                             (Prospective)
----------------------------------------------------------------------------------------------------------------
Basic Problem                   Offset numerical advantages of       Mitigate climate change caused by carbon
                                 Soviet Union and Warsaw Pact         dioxide and other greenhouse gases through
                                 through technologically superior     decarbonized energy technologies, greater
                                 military systems and equipment.      energy conversion efficiency, and energy
                                                                      conservation.
----------------------------------------------------------------------------------------------------------------
Primary Sub-Problems            Find acceptable balance between      Speed diffusion of both new and existing
                                 conventional and nuclear forces.     lowcarbon technologies in face of massive
                                ...................................   sunk costs in the existing ``energy
                                Restrain the ``military-industrial    system.''
                                 complex'' through high-level        ...........................................
                                 civilian oversight and effective    Defuse politically powerful geographic and
                                 management of budgetary politics     sectoral interests (e.g., coal and coal
                                 and process.                         states) that threaten capture of policy
                                                                      process.
----------------------------------------------------------------------------------------------------------------
Guiding Principles              National security is a public good,  Mitigation of climate change through
                                 the responsibility of government.    control of greenhouse gases is a public
                                ...................................   good, the responsibility of government.
                                The Soviet Union is the primary      ...........................................
                                 threat; for purposes of military    CO2 released in burning fossil fuels,
                                 technological innovation, all        especially coal for generating
                                 other threats can be considered      electricity, is the highest priority
                                 (perhaps incorrectly, in             target.
                                 retrospect) as lesser included
                                 cases.
----------------------------------------------------------------------------------------------------------------
Subsidiary (Design) Principles  Support a wide range of              Support a portfolio of technologies through
                                 technologies and system concepts,    a portfolio of policies tailored to
                                 accepting overlap and duplication    fostering innovation in each.
                                 caused by intra-and inter-service   ...........................................
                                 rivalry.                            Create competition elsewhere in government
                                ...................................   for the Energy Department and its
                                Rely on private firms for system      laboratories to discipline decision-making
                                 design and development based on      and boost organizational effectiveness.
                                 new technology flowing from R&D     ...........................................
                                 also conducted primarily in the     Build durable ties between federal agencies
                                 private sector.                      and private firms to encourage the latter
                                ...................................   to assign their best engineers,
                                In the absence of market forces,      scientists, and managers to energy-climate
                                 rely on military professionals to    projects.
                                 select systems likely to prove      ...........................................
                                 effective in blunting a Soviet      Rely to the extent possible on market
                                 invasion of Western Europe.          feedback to guide technical improvements
                                                                      and reductions in costs.
----------------------------------------------------------------------------------------------------------------

    As just one example, consider the evolution of the jet engine and 
gas turbine. Early jets were in one respect greatly inferior to the 
piston engines they replaced. They burned much more fuel, limiting 
combat radius for fighters to little more than 100 miles, a severe 
handicap in Korea. Defense agencies funded much jet propulsion R&D, 
while procurement contracts created potent incentives for private 
sector innovation, the more so once commercial sales began. After all, 
airlines too place a very high value on fuel efficiency, which affects 
their operating costs and profit margins directly. Feedback from 
operating experience in military and civilian applications led to 
continual technical improvements. Gains in fuel efficiency were such 
that by the mid-1980s, electric utilities began buying gas turbines to 
meet peak power demand. And while early jet engines needed to be 
overhauled every 100 hours or so, in commercial service today they 
remain ``on wing'' for 30,000 hours or more.
    The jet engine story illustrates four key points for energy 
innovation policy:

    First, promising technologies rarely make economic sense early in 
their evolution. They are pursued because they can do something 
different or better than existing technologies, or at least they hold 
that promise. When government is responsible for providing a public 
good like national defense--or public health--it may choose to pursue 
technologies (digital computation, genome mapping) based on their 
potential for providing that good, rather than on strict considerations 
of cost. The very process of applying technologies to the solution of 
societal problems may then lead to accelerated innovation, improved 
performance, reduced costs, creation of new markets and generation of 
new wealth.
    Second, design and development is the core technical activity of 
innovation, and that capability resides mostly in private firms. 
Innovation does not proceed from basic science to applied to 
development and diffusion; rather it is a complex, incremental, 
iterative process of learning over time, much of this learning 
occurring through the real-world use and continued improvement of 
technologies based on producer and customer experience. Although most 
of this activity takes place in the private sector, government policies 
are immensely important for the overall enterprise. Congress well 
appreciates the significance of publicly-funded research, but research 
is only one component of effective government innovation policies. We 
have a portfolio of policy tools to draw from in encouraging and 
accelerating innovation, and different combinations of tools may be 
appropriate depending on the technology and on market conditions. The 
tools include procurement, tax credits and subsidies to producers and 
users, loan guarantees, patents, demonstration projects, technical 
standards, distribution of information, provision of technical support 
to firms, and education of consumers.
    Third, government can be a crucial and demanding early-adopting 
customer, initiating the continuous incremental innovations that unfold 
over time to transform radical new technologies into everyday products 
and systems, such as the Internet. As firms scale up to meet government 
demand, they attract new, non-government customers and investors, and 
benefit from expanding sources of feedback, which speeds learning and 
fosters additional innovation. In the Cold War, the promise of future 
procurement contracts motivated defense firms to build up their 
innovative capacity, beginning by hiring the best engineers and 
scientists they could find, so as to be able to design and develop the 
complex technical systems sought by the armed services and intelligence 
agencies. And as we saw with the jet engine, procurement may also drive 
performance improvements that benefit civilian applications. The 
demonstration effect of government purchases can itself be a powerful 
stimulus for market development, as in the early years of 
microelectronics and computing.
    Fourth, competition among government agencies, like competition 
among firms in market economies, is a powerful stimulus to innovation. 
Competition among the military services was a key part of the Cold War 
innovation story. Deprived of fixed-wing combat planes after the Air 
Force became independent, the Army innovated in helicopters, which grew 
more versatile as their gas turbine engines became more powerful. 
Innovation is inherently uncertain, competition breeds diversity, and 
diversity in energy-climate technologies promises more and better 
options for pursuing effective and efficient carbonfree pathways. 
Competition among agencies also increases incentives for risktaking and 
provides benchmarks for performance and accountability, again like 
competition among firms.
    Of course, looking back at technological successes can mislead us. 
In 1940 no one knew if the jet engine would be a boom or a bust. 
Innovation is a highly complex and uncertain process, and with 
successes come failures. Uncertainties attach not only to technical 
performance (such as rates of improvement over time), but costs, 
compatibility with other technologies embedded in the economy, the 
outcomes of competition among technologies with similar applications, 
and acceptance by customers and society at large. The gas turbine never 
made it into passenger cars or highway trucks, despite much R&D and 
some prototypes. Video phones flopped when introduced in the 1960s, 
while mobile telephony from the beginning expanded at rates beyond all 
expectations. For nuclear power, bust followed initial boom. (Our 
report ``Innovation Policy for Climate Change'' explores the reasons).
    The uncertainties inherent in technological innovation have crucial 
implications for policy. Government must of course invest robustly in 
research to sow seeds for future innovations, and there is no question 
that we have been under-investing for decades in energy-related R&D. 
But breakthroughs cannot be predicted. Indeed, they may even go 
unrecognized until some time after commercialization (as happened with 
the microprocessor). Policymakers, moreover, have few tools to use in 
search of breakthroughs, primarily basic research funding and 
intellectual property protection.
    Pathways from breakthrough to adoption tend to be circuitous and 
subject to blockage, perhaps temporary but sometimes permanent. More 
research may overcome the obstacles, but no one can know (as for fusion 
energy). Consider high-temperature superconductivity, a breakthrough 
discovery in 1986 that seemed to promise virtually 100 percent 
efficient transmission of electrical power. At the time, one of us 
(Alic) directed an entire study by the Office of Technology Assessment 
at the request of this committee (and others). More than twenty years 
have now passed without significant applications. Innovation policies 
that presume technological breakthroughs will achieve particular goals, 
especially in the near-to-medium term, are unrealistic and 
irresponsible.
    If the technological capacity to achieve GHG reductions needs to 
advance significantly in the coming decade or two, then energy-climate 
innovation policies will have to accelerate rates of performance 
improvement and cost reductions for existing technologies. While 
breakthroughs are unpredictable and sporadic, once in use many 
technologies undergo continual incremental improvements that lead to 
large gains over time.
    Incremental innovation depends much less on major conceptual 
advances in science than on learning through experience, supported by 
research--basic or applied--aimed at market expansion, cost reduction, 
or focused on particular problems encountered by users. Over time, 
incremental innovations can add up to enormous gains, as we see in 
domains as disparate as agricultural productivity (which has risen by 
about 1.5 percent per year for the past 50 years) and the reliability 
of nuclear power plants (which reached 90 percent only in the early 
2000s, after some forty years of experience). (Moore's law, which 
predicts a doubling of computer power every 18+ months, is the 
bestknown example of incremental gains, but digital electronics is 
atypical; given physical limits on energy efficiency, there can be no 
Moore's law for energyclimate technologies.)
    Incremental gains may themselves lead to radical innovation. That 
is part of the jet engine/gas turbine story, for which the first patent 
was issued in 1872. The first working turbines followed three decades 
later. Another three decades passed before demonstration of jet engines 
that were ``good enough'' for aircraft.
    In looking back at technological success stories, we sometimes 
forget that different technologies at different stages of evolutionary 
development responded to different policies. Effective technology and 
innovation policies make use of tools appropriate to the task at hand. 
For example, the unprecedented productivity increases in U.S. 
agriculture during the first half of the twentieth century were driven 
in part by research, but also by federal-state extension programs that 
diffused new knowledge and methods to small farmers, many of them 
initially resistant to ``scientific agriculture.'' Yet nothing similar 
has been tried for other sectors and technologies, with the notable 
exception of manufacturing extension partnerships created under the 
1988 Omnibus Trade and Competitiveness Act. Agricultural extension 
succeeded by showing farmers how to improve yields and productivity. 
New energy technologies have been slow to diffuse because of generally 
weak market pull, in part a result of historically subsidized energy 
supplies, yet the lesson from agriculture--that teaching and 
demonstration can accelerate the diffusion of innovations--has not yet 
been taken to heart.
    With the observations above in mind, let me now turn to some 
specifics for how government can boost energy-climate innovation 
capacity. The Obama administration has begun by channeling more than $6 
billion in stimulus funds (under the American Recovery and Reinvestment 
Act of 2009) to the nondefense R&D programs of the Department of Energy 
(DOE). These appropriations, to be spent during fiscal years 2009 and 
2010, represent a 50 percent increase of DOE's energy R&D over the two-
year period. That's a good start. But, as I have tried to make clear, 
R&D is only one indicator of innovative capacity, and sometimes it is 
overemphasized. If such investments are not accompanied by a 
comprehensive and systemic approach to energy innovation policy, they 
could generate impressive scientific results without making much 
difference, or could potentially allow others in the world energy 
technology market to capture the benefits.
    The most important lesson for energy-climate innovation from our 
comparison with the Cold War innovation system is this: government, in 
addition to paying for basic and applied research, has many tools for 
accelerating and guiding technology development. Procurement will often 
be the most potent of these. If private sector innovators and 
entrepreneurs see government purchases as a meaningful market, they 
will design and develop products and services accordingly, tapping 
internal funds along with whatever R&D contracts they may win from DOE 
or other agencies.
    In turn, government R&D investments are most valuable for 
innovation in the near-to-medium term when they respond to problems 
identified by private sector innovators. By the 1950s, the U.S. 
military had come to accept its dependence on private industry, and had 
broken free of its earlier dependence on internal arsenals and supply 
bureaus. As firms began to uncover and define technical problems, DoD 
sponsored research aimed at overcoming them. This was the story for the 
development of more powerful and efficient jet engines and fly-by-wire 
control systems, reliable light-weight materials with reproducible 
properties, and digital hardware and software for signal processing at 
real-time speeds. Priorities for DoD-sponsored research, that is, 
reflected needs revealed in the course of engineering design and 
development in the private sector. DoD learned to cooperate with 
defense firms (and universities) in providing ``just-in-time'' 
research, as well as in advancing the knowledge base--and training the 
technical workforce--that underpinned new systems and equipment.
    Today, while about four-fifths of DoD R&D funds support work 
conducted by private firms (even though the services have many R&D 
laboratories of their own), some three-quarters of DOE R&D funds 
(including those for defense programs) go to the agency's own 
laboratories (although some of the money passes through to firms and 
universities).\3\ So long as government is not a customer for energy-
climate technologies, DOE cannot, realistically, be expected to forge 
consistently close connections with the broad communities of firms and 
industries working to commercialize advanced energy-climate 
technologies. Yet without those connections, the type of 
innovationaccelerating system that the United States built during the 
Cold War may remain beyond reach. Should, on the other hand, the U.S. 
government decide to treat GHG reduction as a public good, and purchase 
goods and services with that as its direct objective, doing so in 
economically significant quantities (for example, by purchasing 
CO2 itself, for sequestration; by buying and operating, or 
contracting for the operation of, direct air capture equipment; and by 
``greening'' the federal government's enormous infrastructure), it will 
bring DOE closer to the market and pull innovative firms closer to 
government. Government purchasing power will boost U.S. energy-climate 
innovation capacity, and policymakers will be better positioned to 
learn what else is needed to foster the sort of innovations necessary 
for large-scale decarbonization of the energy system. (Table 2 expands 
on the principles we have been discussing.)
---------------------------------------------------------------------------
    \3\ Science and Engineering Indicators 2008, Vol. 2 (Arlington, VA: 
National Science Board/National Science Foundation, 2008), Appendix 
table 4-30, p. A4-53.

       TABLE 2. PRINCIPLES FOR ENERGY-CLIMATE INNOVATION STRATEGY
------------------------------------------------------------------------
          Principle                            Rationale
------------------------------------------------------------------------
Recognize decarbonization of   In providing public goods in the absence
 the energy system as a         of viable markets, the U.S. government
 public good akin to national   has often spurred technological
 defense, provision of clean    innovation, notably in military and
 water and sewage treatment,    intelligence technologies during the
 and protection from natural    Cold War and in public health.
 disasters.
------------------------------------------------------------------------
Encourage interagency          Innovation occurs in response to
 competition, within limits,    ``environmental pressures'' such as
 among government bodies        those created by market forces and
 charged with responding to     public policies (e.g., regulation). And
 climate change and fostering   just as market competition encourages
 energy-climate innovation.     innovation by business firms,
                                competition within government encourages
                                innovation by agencies. Although too
                                much competition within government leads
                                to wasteful overlap and duplication of
                                effort, DOE's monopoly over energy has
                                not been conducive to either
                                technological advance or policy
                                development.
------------------------------------------------------------------------
Tailor innovation policies to  The U.S. government can call on many well-
 particular technologies and    proven policy tools in addition to R&D
 suites of technologies.        for stimulating innovation. By most
                                accounts, for example, procurement of
                                integrated circuits for military and
                                space systems had more impact on early
                                innovations in microelectronics than
                                government R&D, while DoD's insistence
                                on non-proprietary technologies had
                                powerful long-term effects on computing
                                and computer networks.
------------------------------------------------------------------------
Rely on private firms for      Government has been a ``smart customer''
 innovation.                    for military technological innovations,
                                outlining requirements and offering
                                incentives in the form of possible
                                future contracts for design, testing,
                                and production of defense and
                                intelligence systems. For energy, the
                                U.S. government has relied too heavily
                                on the DOE laboratory system, which has
                                some excellent research capabilities,
                                many of them closer to pure science than
                                to practical energy technologies, but
                                has not had strong and stable incentives
                                to develop and maintain effective
                                working relationships with innovative
                                firms.
------------------------------------------------------------------------
Seek international agreements  Many countries will have to take action
 and arrangements conducive     if greenhouse gas emissions are to be
 to indigenous innovation in    controlled. Among the most powerful
 developing economies such as   incentives for action is the prospect of
 China and India.               home-grown innovations that can become a
                                source of business profits, jobs, and
                                exports. Viewing other countries
                                primarily as passive recipients of
                                ``technology transfers,'' or as export
                                markets for U.S.-based firms, would slow
                                worldwide technological advance and
                                hinder adoption of GHG-reducing
                                innovations.
------------------------------------------------------------------------

    Let me close by offering the following recommendations. They are 
intentionally general, but not vague: they can be understood as 
criteria for both designing and assessing energy innovation policies.

          1. To improve government performance, and expand innovation 
        options and pathways, Congress and the administration should 
        foster competition within government. Competition breeds 
        innovation. That is true in economic markets and it holds for 
        government too. Inter-agency competition has been an effective 
        force in innovation across such diverse technologies as jet 
        engines, genome mapping, and satellites. Insufficient 
        competitive forces exist for energy-climate technologies. While 
        ARPA-E provides a new capability within DoE that could 
        productively boost intra-agency competition, appropriate 
        expertise and experience also exist in many parts of the public 
        sector, including the DoD, the Environmental Protection Agency, 
        and state and local governments. As just one example, DoD's 
        huge infrastructure offers a potential test-bed for a wide 
        variety of advanced energy technologies that no other public 
        agency or private sector entity could replicate.
          2. To advance GHG-reducing technologies that lack a market 
        rationale, government should selectively pursue energy-climate 
        innovation using a public works model. There is no customer for 
        innovations such as postcombustion capture of power plant 
        CO2 and air capture of CO2. (Indeed, no 
        more than about two dozen people worldwide appear to be working 
        on air capture at all--an unacceptably small number by any 
        standard.) Recognition of GHG reduction as a public good 
        redefines government as a customer, just as it is for, say, 
        pandemic flu vaccines, flood control dams, or aircraft 
        carriers. This perspective points to new approaches for 
        creating energy-climate infrastructure, in support of 
        innovation and GHG management. Some tasks might be delegated to 
        state and local authorities, which already collect trash, 
        maintain water and sewer systems, and attempt to safeguard 
        urban air quality. The federal government currently budgets 
        over $60 billion annually for infrastructure investments, and 
        state and local governments spend about three times as much.\4\ 
        Policymakers could approach GHG control as a similar form of 
        infrastructure investment. Indeed, many of the energy 
        expenditures in the American Recovery and Reinvestment Act 
        could be viewed as a down payment on such an approach.
---------------------------------------------------------------------------
    \4\ Issues and Options in Infrastructure Investment (Washington, 
DC: Congressional Budget Office, May 2008), Table 1, p. 4.
---------------------------------------------------------------------------
          3. To stimulate commercialization, policy makers must 
        recognize the crucial role of demonstration projects in energy-
        climate innovation, especially for technologies with potential 
        applications in the electric utility industry. Demonstrations 
        in energy may have a poor reputation, but government-sponsored 
        demonstration programs have a long-established place of 
        importance in U.S. technology and innovation policy. In 
        aviation, DoD and other federal agencies funded many 
        demonstrations of unproven technologies, including the famous 
        series of X-planes. In microelectronics and computing, 
        government acted as a ``lead customer,'' demonstrating what 
        these then-new technologies could do, for all to see. The 
        primary purpose of demonstration projects is to reduce 
        technical and cost uncertainties, which means the private 
        sector should be chiefly responsible for managing them. So long 
        as government provides financial support, it should also see 
        that results are disseminated openly, so that all parties can 
        take advantage. Well-planned and conducted programs could push 
        forward technologies such as CO2 capture from power 
        plants. While, for example, the DOE has supported exploratory 
        R&D on advanced coal-burning power generation for several 
        decades, it has only recently begun to address the issues 
        raised by capturing CO2 from the nation's existing 
        coal-fired power plants, which produce over one-third of U.S. 
        CO2 emissions. We have emphasized the uncertainty of 
        innovation, and no one can know whether a new generation of 
        those advanced coal-burning plants will ever be built. On the 
        other hand, technologies do exist for capturing CO2 
        from a substantial portion of the 1500 or so coal-burning 
        plants operating today, and they have not even been evaluated 
        at full scale.
          4. To catalyze and accelerate innovation, government should 
        become a major consumer of innovative energy technology 
        products and systems. The many billions of dollars DoD spends 
        each year on procurement has been an enormously powerful 
        influence on innovation. In contrast, the U.S. government has 
        not systematically or strategically used its purchasing power 
        to foster energy-related innovations. Yet each year, federal, 
        state, and local governments spend large sums on goods and 
        services with implications for GHG release and climate change, 
        including office buildings, motor vehicles, and transit 
        systems. Government can be a smart and demanding customer for 
        the best energy-climate innovations, helping to demonstrate new 
        approaches, create early markets, drive competition among 
        firms, and foster confidence in advanced technologies, 
        including those that are not yet price-competitive. The 
        President's October 5 Executive Order establishing 
        sustainability goals for Federal agencies is an excellent first 
        step in this direction.
          The private sector will be the main source of energy 
        innovation, as it is for other areas of technology. That is 
        where the knowledge and experience lie. So far, of course, the 
        incentives have been lacking. But it will take more than a 
        price on carbon, or regulatory inducements. Government must 
        build stronger bridges to industry and become a smarter 
        customer, just as DoD has often been a smart customer with deep 
        pockets for military innovation. By treating climate mitigation 
        as a public good and GHG reduction as a public works endeavor, 
        analogous to public health and safety, vaccine stockpiles, 
        dikes, levees, weather forecasts, and national defense, the 
        United States can begin to show other countries how to build 
        energy-climate technologies into the fabric of their innovation 
        systems and their societies.
          The nation's energy system--and the world's--is 
        extraordinarily complex. Rapid technological transformation of 
        such systems to achieve meaningful reductions in greenhouse gas 
        emissions over the next twenty to thirty years is an enormous 
        task, without precedent and hard even to comprehend--and much 
        more complex than other environmental problems of recent 
        decades. In seeking to understand how such a goal might be 
        pursued, we have offered lessons from the nation's Cold War 
        innovation experience. Whether the climate threat merits a 
        response of this magnitude is of course something that Congress 
        will continue to deliberate upon. Our goal in this statement 
        has been simply to show that the experience of the United 
        States provides essential yet thus-far neglected lessons for 
        accelerating innovation in support of long-term national goals.

    The Chairman. Thank you very much.
    Let me start with a few questions.
    Let me ask you, Jonathan Banks, first. Your sectoral 
approach, as I understand it, involves putting a cap on the 
power sector and the industrial sector, large emitters in those 
two areas. You calculate that by just doing it on those two 
sectors, rather than economywide, you will reduce the price of 
allowances, cut it in half. Also, I believe you said that you 
would anticipate that the price of electricity would be 
reduced.
    Mr. Banks. Slightly reduced.
    The Chairman. Slightly reduced. I guess I'm having trouble 
understanding why going from economywide just to that sector 
would get a reduction of half in the allowance price. Maybe you 
could explain that a little.
    Mr. Banks. I'd be happy to, sir. The economywide proposals 
that are out there right now rely heavily on two things. They 
rely heavily on offsets and they rely heavily on an 
overcompliance from the power sector. That over-reliance on the 
power sector creates the higher allowance prices, it creates 
more-difficult-to-meet technology pathways. When we reduce the 
cap down to the stationary sources--the large industrial 
boilers and the power sector--what we do is, we set them on a 
trajectory to meet a very aggressive reduction, but over the 
course of between now and 2050, versus meeting--versus massive 
overcompliance in order to meet the economywide goals. So, you 
have the power sector on--and the industrial sector--on a 
slightly--on a less-steep curve, between now and, say, 2030, 
than they would be in order to comply with an economywide bill. 
That--because we're not over-relying on the power sector, that 
reduces the allowance prices considerably.
    The Chairman. Let me ask if any of the other witnesses have 
a point of view on that.
    Mr. Hawkins, did you have a perspective on that approach?
    Mr. Hawkins. Yes, Mr. Chairman. I think the easiest 
explanation is in figure 2 on page 6 of Mr. Banks' testimony. 
Essentially, the reason that allowance prices are cut in half 
is that the emission reductions are about half of what you'd 
get under an economywide bill. The emissions in--under the 
proposal that he has outlined would be a little shy of 6 
billion tons of CO2 in 2030, compared to 4 billion 
tons of CO2 in 2030 under the Waxman-Markey 
approach. So, you get smaller--you get fewer emission 
reductions and you get a lower price per ton for the 
allowances.
    It's like buying a 1-inch television or a 36-inch 
television. The 1-inch is cheaper and it's smaller.
    The Chairman. Let me ask you, Mr. Hawkins, on a related 
issue--we've had quite a bit of testimony, at previous 
hearings, about the whole issue of offsets. I think several of 
the witnesses talked about the difficulty of verifying offsets 
and the fact that the economywide cap-and-trade proposals that 
we now have before us contemplate a very substantial use of 
offsets. Does that give you folks concern? If so, what do you 
think should be done about it?
    Mr. Hawkins. It does present some challenges. I think the 
reality is that the ability of offsets to chase down emission 
reduction opportunities in sectors that won't be covered by the 
cap is very attractive, and its ability--the role of offsets in 
reducing the overall costs is also very attractive. So, I think 
the political reality is that a cap bill will almost certainly 
involve some offsets.
    That will require, first and foremost, full transparency. 
We will need aggressive monitoring and reporting and a system 
in place so that everyone can track performance and we can have 
a constant-feedback mechanism to improve what we think will 
inevitably be subpar performance in the earlier--in the early 
years. But, as long as we have a transparent system, where we 
have close to real-time information, we can improve performance 
and try to get the maximum benefits out of the offset program, 
without the downsides.
    The Chairman. Senator Murkowski.
    Senator Murkowski. Dr. Gayer, you mentioned the impact of 
price volatility, and we certainly appreciate that, as we're 
trying to look to policies that are rational, make sense and 
work, we need to understand what goes on within the volatility 
aspect. We're told that environmental certainty is best 
achieved under a cap type of a proposal. But, your testimony 
certainly suggests that the possibility of a price volatility 
under a cap presents itself, and then you have a situation 
where the pressures to eliminate the cap or possibly weaken it. 
We know, here in Congress, we are just as capable of adjusting 
a tax as we are adjusting a cap. In terms of providing the 
regulatory certainty that I think businesses are looking for, 
as we speak to the volatility issue, in your opinion is a tax 
or a cap more workable, more manageable when it comes to the 
issue of volatility? Most of your testimony was spent 
discussing the attributes of the carbon tax, but can you speak 
to this particular issue, as it relates to the two different 
options?
    Mr. Gayer. Certainly. Yes, I think a lot of our discussions 
that we're having here are alluding to it. David talked about 
the risk of a cap being undermined later on.
    Senator Murkowski. Right.
    Mr. Gayer. Then a regulatory response, and then saying 
Congress is not handcuffed, so, if that turns out to be too 
costly, Congress can respond to that. The kind of political 
economy of that, I think, is very difficult. But, all this 
discussion is coming along--coming down to the same thing, 
which is, we're concerned about the costs and the price signal. 
If you want to forestall this--both the uncertainty and the 
risk that you undermine it or something gets changed 
drastically, 1, 2 years, if you have a transient spike in gas 
prices, you can imagine a big, kind of, response to that, 
whereas a carbon tax or a safety valve would just limit the 
ability of that to happen. It would basically--the concern I 
think everybody has is, there's uncertainty, going forward, and 
we want to be able to, at some sense, cap the cost, at least at 
some high end. Otherwise, there could be all sorts of responses 
that undermine the whole existence of the program. So, I think 
a carbon tax or a reasonably set safety valve directly 
addresses that.
    Senator Murkowski. So, do you think that they're equal, in 
terms of their ability to reduce or eliminate the volatility?
    Mr. Gayer. ``They,'' being the safety valve or----
    Senator Murkowski. Safety valve.
    Mr. Gayer. Yes. So, I think a carbon tax is--gives you more 
certainty on the price, so--depending on what--the safety valve 
would--it kind of depends where you set the safety valve--
    Senator Murkowski. Right.
    Mr. Gayer [continuing]. The range of it. So, there is still 
a little bit. But, at the very least, I think it's--if you 
forgive me--the responsible thing to do, because there--I think 
everybody has a price by which it becomes too expensive. The 
debate is, What price is that? A carbon tax, I think, sets it.
    On the climate benefits, I understand the desire to have 
certainty on the emissions, but the goal isn't necessarily 
certainty on emissions, it's certainty on environmental 
outcome. There's enough uncertainty about how those tie 
together that you're never really getting perfect certainty on 
the environmental outcome. So, there's an innate fuzziness 
there, anyway.
    Then, additionally, on the environmental side, I do worry 
that, without fixing the price or capping the price, that, like 
I said, it can get undermined in the future. I think that's a 
real risk, both for investors in, kind of, you know, long-term 
capital decisions, if you worry about the response, and from an 
environmental point of view. I think it can undermine the goal.
    Senator Murkowski. As we are looking to how we define the 
carbon price signal, in the discussion this morning about 
permits and allocations, we recognize that you have real value 
with these permits. We saw the effort on the House side, 
everybody coming with their hand out saying, ``Don't forget 
about us in our sector'' and we certainly recognize that giving 
out permits for free, is just one of the options. In terms of 
how we can use the revenues, the question I'll ask to you, Mr. 
Gayer, or to anyone else, in the uses of these climate 
revenues, I would suggest that all uses are not necessarily 
created equal. Are there changes to the tax code that a carbon 
price could facilitate and would allow for stronger economic 
growth when we're talking about how we might utilize these 
revenues? Any comments?
    Dr. Gayer.
    Mr. Gayer. So, I'm going to remove myself from the 
political complications of such a thing. That's something you 
have to deal with, of course.
    You had mentioned tax reform. I think we have a very narrow 
tax base and very high marginal tax rates. That, by all 
reasonable economic measures, inhibits economic growth. So, any 
tax revenues that can be directed toward reducing, or, you 
know, to doing some form of tax reform on--along those lines, 
certainly would help economic conditions.
    Off topic a little bit, there is increasing discussion 
about payroll tax suspensions and other job-promoting 
activities. So, there's a long-term fiscal concern with any of 
these. If you talking about $100 billion a year of permit 
revenue or carbon tax revenue, that could be a substantial 
suspension of a payroll tax, for example, which would also 
promote the labor market.
    So, I see lots of potential uses of the revenue. I'm sure 
it's not an easy thing to work out, so I'm deferential to that. 
But, from where I sit, I think there are efficiency gains for 
the economy.
    Senator Murkowski. Mr. Chairman, my time is expired, but 
perhaps we can have a second round.
    The Chairman. All right.
    Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman. I feel for you, 
because I went through the same thing last week. I just made a 
recommendation which helped me a great deal, and I see that you 
have already taken steps. So, I hope you feel better.
    Mr. Alic, given the concerns over the effectiveness and 
whether or not Federal R&D programs have been good stewards of 
taxpayer dollars, what role to you see industry-led consortiums 
playing in advancing the development of new and breakthrough 
technologies?
    Mr. Alic. Innovation comes from industry. Government R&D is 
very important in building a technology base, knowledge and 
methods from which innovators draw. It's industry, the private 
sector, that knows how to innovate. They think in business 
terms. We're talking about altering the business conditions, 
the economic conditions to deal with this problem. We have to 
find more effective ways to create incentives for industrial 
innovation. Consortiums----
    Senator Bunning. In other words----
    Mr. Alic [continuing]. Are a part of that.
    Senator Bunning [continuing]. You don't think we are 
effectively doing that right now.
    Mr. Alic. No. The----
    Senator Bunning. Thank you.
    Mr. Alic [continuing]. Reason is--I think everybody in the 
room understands--is that prices for energy are simply too low. 
They don't create the powerful incentives that are needed for 
the fundamental transformations in these technologies.
    Senator Bunning. Prices for energy are too low for some, 
but for others who want to change the technologies, they're too 
high. In other words, if you look at the country in certain 
areas, the cost of energy in the middle Southwest or middle 
Atlantic, where coal is the number-one generator of the 
electricity, compared to California, compared to the Eastern 
seaboard, there is a disproportionate share of costs, because 
they use natural gas, they use imported energies. So, there 
wouldn't be the technology advancements, or the need to have 
technology advancements, except where the cost was very high.
    Mr. Alic. Yes, that's--you're certainly correct, Senator. 
The point I was making was that the costs are--on average, 
are--need to be very high to get this kind of innovation.
    Senator Bunning. If we do it--if we go it alone, you're 
absolutely right.
    Mr. Alic. Yes.
    Senator Bunning. If the United States takes it upon 
themselves to implement--whatever--a carbon tax, a cap-and-
trade bill, or whatever--if we don't have a global agreement 
with China, Russia, India, whoever, who have said to us, flat 
out, ``We're not going to do this. We're going to continue 
burning coal without any restrictions. We're going to continue 
to put--produce cheap energy because our economy is going to 
suffer too much if we do otherwise.'' I like to lead in this 
manner, but someone's got to follow.
    I want to ask Dr. Gayer. Let's assume a carbon tax is 
implemented. Even if the consumer were provided tax relief to 
compensate for higher energy prices, wouldn't it be nearly 
impossible to make everyone whole?
    Mr. Gayer. To make everybody whole. Certainly if you 
include any benefits of the environmental gains from it, then, 
yes, you would make them more than whole. But, on a strict 
pecuniary/monetary point of view----
    Senator Bunning. Yes. That's what I'm talking about.
    Mr. Gayer. Yes, regulating carbon is going to be costly. 
But, not using the revenues wisely will make it more costly, 
was my point. So, if you----
    Senator Bunning. You've made some suggestions to Senator 
Murkowski about the use of the money.
    Mr. Gayer. Certainly.
    Senator Bunning. We have a debt that's going to reach, you 
know----
    Mr. Gayer. Yes.
    Senator Bunning.--$13 trillion, shortly.
    Mr. Gayer. Yes.
    Senator Bunning. That's just the public debt. If you take 
in the interagency debt, we're getting close to $18 trillion. 
I've got 40 grandkids. They're not going to be able to pay the 
bill.
    Mr. Gayer. I agree, which was why I was suggesting that if 
we were to do--and in my written testimony, every time I 
mention one can use the revenues to lower tax rates, I also 
say, ``or pay down the deficit,'' for that very reason.
    Senator Bunning. That's very important to understand.
    Mr. Gayer. No, I understand. I completely--which is--also, 
on the payroll-tax idea that I mentioned, just to clarify my 
thinking on my statement on that, if one were to do such a 
thing, this is a way in which to pay for it, as opposed to 
adding debt to your----
    Senator Bunning. You mentioned in your testimony ``reducing 
other economically harmful taxes.''
    Mr. Gayer. Right.
    Senator Bunning. Give me an example.
    Mr. Gayer. Any--I think Senator Murkowski mentioned it in 
her opening statements, as well. Economically harmful taxes are 
taxes that decrease the incentives for work, saving, and 
investment.
    Senator Bunning. How about the Federal Reserve's zero-based 
tax or zero-based interest rates. Who do you think that hurts?
    Mr. Gayer. I don't think that's a tax on----
    Senator Bunning. Oh----
    Mr. Gayer [continuing]. Savings.
    Senator Bunning [continuing]. It's a tax on me and anybody 
that has a penny to save--
    Mr. Gayer. Yes.
    Senator Bunning [continuing]. Because, we can't get any 
income from anybody for saving. So, it's a disincentive to 
save.
    Mr. Gayer. Yes. I would love--Fed policy might not be my 
specialty----
    Senator Bunning. Oh, no. But, I----
    Mr. Gayer [continuing]. But it also is a----
    Senator Bunning. We're talking about taxes.
    Mr. Gayer. Sure. So, it's a disincentive for you--for--
you'll get a lower return on your savings, but, it's--the 
problem it's seeking to address is an--is the absent credit 
markets and the inability of small business to borrow, and 
other businesses to borrow.
    Senator Bunning. Absolutely. Thank you very much, Doctor.
    The Chairman. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman. Thanks for having 
the hearing, and, each of you, for your testimony.
    My interest in this topic has been to figure out way that 
you take the emotion and energy around climate and use it to 
create energy security. There are a lot of things that keep 
that from happening. Certainly, I think the bills before us 
definitely do that.
    But, Dr. Alic, you were talking about the way innovation 
occurs. You know, we had people in here a couple years ago that 
were trying to build cellulosic or ethanol facilities. 
Basically, they were saying, ``Look, you know, the fact that we 
don't know exactly what the price of petroleum is hurts us, and 
we need a floor on petroleum.'' At that time, it was about 40 
bucks a barrel, they were saying it needed to be, as a floor 
for them to continue to make investments.
    It's interesting, people who now focus on cap-and-trade 
say, ``Well, they want the market to fluctuate.'' What's 
happened, of course, with, you know, the economy going down 
around the world, and the price of carbon has dropped, and 
people are not making investments in innovation as it relates 
to energy, because there's no constant there. That's why the 
whole notion of a carbon tax, if you're going to do something 
like this, has always seemed like the more intelligent thing to 
do. It's a constant. You know that it's there. I wonder if you 
might respond to that.
    Mr. Alic. I think that's absolutely correct. Stability 
works to boost innovation. I think the essential point that 
I've tried to make in response to earlier questions is, the 
prices need to be a lot higher. I mean, if--and I understand 
the--I live in a small town in North Carolina, a working-class 
town. People struggle with energy costs in their households. 
But, you know, either you solve the problem or you don't. If 
we're going to solve the problem, we have to understand, as 
several of the Senators have said, that the costs are going to 
be much higher than they are today. It's a question of how--who 
pays from them, how they're distributed. If you want 
innovation, you need those signals to the private sector. You 
don't get innovation just by dumping money into R&D. You get 
innovation by sucking it into the economy through demand.
    Senator Corker. Dr. Gayer, I--the issue of transportation 
fuels, it seems to me that, whether you're dealing with cap-
and-trade or a carbon tax, you really don't get there, because, 
just--I know, in years past, the Chairman offered a bill that 
had a safety valve, I think, at 17 bucks, or something like 
that, and I know that might change over time, if you offered a 
different bill. But, let's just say at 15 bucks a ton, that 
translates to about 15 cents a gallon. OK? It's just the way 
the math works out. Is there something about a carbon tax that 
is better, as it relates trying to change people's consumption 
of transportation fuels, than cap-and-trade, or worse? I----
    Mr. Gayer. I actually think they'd be equivalent. I think 
the issue there becomes on the stringency of the cap, relative 
to the stringency of the carbon tax. The only caveat, as we've 
already discussed, is, as we saw 2 years ago, you have spikes 
in gas prices, for example, that can then lead to a response 
that I think would be more likely to happen under a cap, maybe. 
So, I'm almost getting into the politics of it more. But, kind 
of, on the fact value of it, the translating the--whatever you 
do, whether or not it's a cap-and-trade to a carbon tax, into a 
price signal will really depend on the stringency of the 
relative--of the two different instruments that you're looking 
at, I think.
    Senator Corker. Is there--I know you've alluded to the 
safety-valve issue as--I mean, at the end of the day, if you 
set the cap low enough, by default you--the safety valve price 
ends up being the price of carbon, right? So, when you say that 
that's equivalent to a carbon tax, or it works almost as well, 
are you saying that because, politically, a cap--in your 
opinion, a cap-and-trade bill with a safety valves doesn't 
directly confront consumers with the fact that there's actually 
a tax, and, by default, you end up in the same place? Or 
doesn't a cap-and-trade bill--I assume you'd be talking about 
100-percent auctions, if you did that, without any of the 
trickeries of offsets and free allowances and all of that. I 
wonder if you could expand.
    Mr. Gayer. I think--I prefer the auctions, but I don't know 
that it's integral to it. I think the way I would design it 
would be that you would have a cap that would bind, and that 
you would have a safety valve set for these, kind of, transient 
shocks that happen in the economy, as we've seen. Where that 
is, I don't know. But, the idea of it is, we have some estimate 
of how much carbon reductions we want to get and what that's 
going to cost. We could be wrong in any given year; it could be 
much higher. The safety valve would trigger, but then, the next 
year, would could come back down.
    So, in some senses, all I'm trying to do is for the--all I 
think that the safety valve would do is just for, kind of--for 
just these shocks that we get through the economy.
    Senator Corker. But, that just sets an upper limit.
    Mr. Gayer. It sets an upper limit.
    Senator Corker. It doesn't set the lower limit that would 
disaffect or create a bigger problem for Dr. Alic, who wants to 
see innovation take place.
    Mr. Gayer. Yes. So, that would be a price collar, where you 
set a lower limit. If you squeeze those enough, you're back to 
the carbon tax.
    Senator Corker. Might as well--back. So----
    Mr. Gayer. Essentially, you're right. I would say--I mean, 
so there is this question, Are you just trying to backdoor a 
tax? I think Senator Murkowski is right, I mean, the goal here, 
is to raise the price of carbon, and I think people realize 
that, with a cap-and-trade or a carbon tax, that's what you're 
doing. To me, that's a feature, not a bug. But, I think that's 
the transparent way of doing it.
    Senator Corker. Mr. Chairman, I know my time is up. I have 
a couple more questions, but I don't know if you're going to 
have a second----
    The Chairman. Yes.
    Senator Corker [continuing]. Round.
    The Chairman. We'll just do another round, here.
    Let me ask Mr. Banks. I understand your testimony is that 
you want to have an economywide plan for reducing greenhouse 
gas emissions, but do it sector by sector. Is that accurate? If 
that is your approach, do you believe that the appropriate 
regulations or limits or laws could be put in place, with 
regard to each sector, to get us to the same place that a 
economywide cap-and-trade would get us?
    Mr. Banks. That is our goal. We are looking to create--we 
are exploring a policy. What I've talked about here today is 
just kind of the initial pieces of it. We're still developing a 
number of additional policies that we would see as integral to 
this. But, our primary goal is to get the emission reductions 
down to levels that would be commensurate to, say, the Waxman-
Markey proposal, over on the House side. We see that as just--
it's the only way to get from here to where we want to go, as 
far as the emission reductions we need. The reason we go with 
the--we've been exploring the sectoral policy is because of 
this disconnect between the price signal at the gas pump that 
Senator Corker was speaking of. If we go economywide, or if we 
go with a carbon tax policy, we will still need these 
transportation policies to be layered on top on this. We can't 
get to where we need to go in the transportation sector without 
additional policies.
    So, regardless of whether we do sectoral policies or 
whether we do economywide or whether we do carbon tax or cap-
and-dividend or whatever the policy is, at the end of the day, 
we need to have targeted policies that deal with the 
inconsistencies of the price signal within the economy.
    The Chairman. Let me ask about the EPA's proposed actions 
that they're starting at this point. I think, Mr. Hawkins, you 
made the distinction between the new coal plants and existing 
plants. Currently, we have a very different set of regulations 
applying to the 2. Do you see what EPA is proposing here as 
solving that, or do you think we're running the risk of, sort 
of, further reinforcing the continuation of power production 
from highly polluting plants?
    Mr. Hawkins. Senator, EPA has authority, under the current 
Clean Air Act, to address emissions, both from new plants as 
well as existing plants. The existing plant authority would be 
implemented through Section 111(d) of the Clean Air Act, which 
allows the agency to establish standards for existing plants 
that take into account the remaining useful life of the 
facilities and still have to meet the tests of economic and 
technical feasibility.
    Our concern with that, by itself, is not that it would be 
cumbersome or difficult to implement, but that it would be slow 
and probably would not achieve the level of reductions fast 
enough that we need. That's why we think that--we need the 
overarching objective of the cap to help drive emissions.
    If I could, I'd like to disagree with a statement that's 
been made by several, which is the--about the goals of this 
program. The goals of the legislation, in our view, are not to 
raise the price of carbon or to raise the price of energy. The 
goals are to reduce emissions. We would be perfectly happy with 
an outcome that reduced emissions without raising the price of 
carbon or raising the price of emissions at all.
    Now, economists may shake their head and say, ``Well, 
that's impossible.'' The reality is that if we have a program 
that focuses on flexibility and drives efficiency, then 
householders can wind up with lower overall energy bills, even 
though the price per BTU may go up.
    The price per BTU is not what consumers care about. They 
care about what they write on their check to their utility 
company. They care about the--what they put on their credit 
card at the gas pump more than they care about the price per 
gallon. The price per gallon is the obvious thing, but what 
they actually care about is the total number of gallons they 
have to pump in there, multiplied by the price. That's what a 
cap can do, if it's well designed, is to innovate--is to create 
that innovation.
    The Chairman. Senator Murkowski.
    Senator Murkowski. Thank you, Mr. Chairman.
    Just to follow up, Mr. Hawkins, as it relates to the EPA 
and the pending regulations. I said in my initial comments that 
additional layers of bureaucratic regulation that may be 
duplicative, inefficient, or counterproductive should be taken 
off the table. Now, I think we would agree that this threat out 
there of the EPA stepping in to regulate emissions has perhaps 
spurred some to come to the negotiating table, to sit down and 
talk about how we will advance a climate policy. But, if those 
EPA regulations don't go away, if EPA acts, what incentive is 
there for us to continue to pursue a climate policy, from the 
congressional perspective?
    Mr. Hawkins. That's an excellent question. My answer would 
be that there are several major reasons to consider this 
comprehensive legislation. The first is that it starts to head 
off a threat, which is only going to be more and more of a 
threat to the U.S. economy--that of climate disruption--the 
longer we wait to deal with it. The second is that if we start 
reducing business uncertainty, we're going to start creating a 
job-creation mechanism. This is something that the members--the 
business members of the U.S. Climate Action Partnership firmly 
believe in. They've testified before Congress, on a number 
occasions, saying, ``We're not making investments now. Why? 
Because there's too much policy uncertainty.'' We've got a 
track record.
    The third thing I would say about it is what Senator Corker 
had mentioned, which is energy security. For example, a cap-
and-trade program with a stimulus program for carbon capture 
and storage can produce large quantities of CO2 that 
can be used to enhance domestic oil production. This is a no-
brainer. It's a win-win-win situation, where we can go into 
fields that are--don't involve going to new pristine areas, 
drill deeper in the holes that are already there, get more oil 
out, and dispose of the CO2 at the same time. But, a 
program of that scale, that's actually going to make a dent in 
energy security--in energy--in oil imports, is not going to 
happen through the normal appropriations process. I would argue 
it's not going to happen through the tax process. But, it could 
happen through dedication of allowances.
    So, the main reason is not to remove the potential 
annoyance or threat of environmental regulations from EPA. 
Those can be streamlined. We've had experience with it under 
the acid rain program. We had the so-called ``command-and-
control'' regulations that Congress stayed in place in 1990, 
even though we adopted a cap on sulfur dioxide emissions. It's 
worked just fine.
    Senator Murkowski. As I understand the position of USCAP, 
they don't think that the EPA regulation is the best tool to 
implement climate policy, and if what we're looking for is 
predictability you have the uncertainty that is thrown in 
through EPA regulation.
    Let me ask, and again this probably goes back to you, Dr. 
Gayer or Dr. Kopp. We have been so focused on the issue of a 
cap-and-trade as a policy, and you look to some of the 
conversations that are in play right now in some of the 
European countries, there have been reports that political 
leaders in France, China, Japan are warming to the idea of a 
carbon tax.
    There was an interview last month. A gentleman from Oxford 
was asked about countries implementing a carbon tax, and he 
responded that, in Europe they have Finland, Sweden; Ireland's 
going down that route; France has just begun to go down that 
route; the U.K., possibly. Then, it's been suggested, by others 
here, that a tax on CO2 emissions, not a cap-and-
trade system, offers the best prospect of meaningfully engaging 
China and the U.S. while avoiding the prospect of unhinged 
environmental protectionism.
    The question to you is, Are we seeing a change in the 
conversation about a carbon tax, as opposed to a cap-and-trade, 
or is there just too much invested, certainly from the European 
perspective, where the road that they're going down and a 
carbon tax is not part of those discussions? What kind of 
trends are we seeing, internationally?
    Mr. Gayer. I guess I have two points. One is, there might 
be a change in the conversation or a leaning toward carbon tax, 
for the very reason you mentioned earlier, which is, the cap-
and-trade does increase the price of carbon, as it's supposed 
to do. So, as I said, I think this is a feature, not a bug, but 
it is, effectively, a tax. So, if you're going to have a tax, 
then I think some people now realize, Why don't you do it more 
directly? So, that makes it a little bit, kind of, more 
presentable in public, I guess.
    The other issue, from an international point of view, I 
mean, I think there's always a difficulty of negotiating 
baselines and what's the baseline year for each country and how 
do you deal with that. Ultimately, I go back to the point I 
alluded to earlier, with the domestic approach, which is, 
you're looking for some sort of comparability of effort across 
countries. To me, the phrase ``comparability of effort'' 
translates into price. You know, if you give me a target for a 
country, I need to figure out what would have happened relative 
to their 1990 or 2000 emissions. It's really hard to know how 
burdensome that would be for any particular country. If you 
give me a carbon tax, I know, here's what they're going to pay 
for on the marginal reduction. So, in some sense, when you're 
talking, internationally, about trying to come up with some 
sort of comparability, a tax, I think, presents itself as a 
very clear instrument to kind of make sure that everyone's 
bearing what is perceived as a fair burden.
    Mr. Kopp. It's not entirely clear that the world is 
changing and switching totally in favor of a carbon tax, but a 
carbon tax was basically here first. I mean, the idea of 
dealing with environmental bads through a tax mechanism has 
been known by economists for 100 years, and carbon cap-and-
trade systems are relatively new.
    But, on the international scene, I mean, I think a lot of 
countries--Japan, in particular, is looking at both cap-and-
trade programs and carbon taxes. When they make their 
distinction between the two, I think one of the things that has 
become fairly important now is the price certainty. This is 
what we've been talking about through this committee hearing 
quite a bit, and that is, Can we do something to ensure that 
the volatility, both the near-term volatility that might occur 
within particular years due to demand-and-supply imbalances, 
plus some structural instability that might occur from the fact 
that the cap is a lot tighter than we would like it to be for 
the allowance price, gives rise to these notions of putting 
some safety valves or some strategic reserves in place that 
keep those prices within some politically and economically 
acceptable bounds? Of course, a carbon tax does that with 
absolute certainty. It does, however, let the emissions move at 
will. So, you're always going to be balancing those two.
    But, as we've seen already, you can approximate a carbon 
tax with a collar. It begins to look an awful lot like a carbon 
tax, particularly if you get stuck on the upper or the lower 
side. But, there really is not an awful--tremendous distinction 
between the two if you auction the revenues and you have a 
mechanism by which you're going to redistribute those revenues 
or use those for deficit reduction or offsetting distortionary 
taxes, and you do the same thing with the carbon tax revenues. 
From an economic perspective, these look almost the same. They 
do have very different environmental implications, with respect 
to the level of emissions, and a certainty with respect to 
those.
    Senator Murkowski. Thank you, Mr. Chairman.
    The Chairman. Senator Bunning.
    Senator Bunning. Thank you.
    Mr. Alic, given the need for long-term security, what type 
of policies could be implemented to secure a sound return on 
investments for private investors without assigning a high 
price or value to carbon? Is this even achievable, given the 
high capital costs required for those type of investments?
    Mr. Alic. I think it would be difficult to achieve, 
Senator, but not impossible. One way to think about that is to 
have the Federal Government buy carbon dioxide from electro-
power plants--
    Senator Bunning. Whoever produces----
    Mr. Alic [continuing]. For sequestration. Create a 
predictable market. The technology exists to extract carbon 
dioxide from existing coal-fired powerplants. Those plants--
there's only 1500 in the country--they account for fully 35 
percent of U.S. carbon dioxide emissions. If the Federal 
Government was to say, ``We're going to buy that carbon dioxide 
and, you know, inject it into geological formations''----
    Senator Bunning. Or wherever.
    Mr. Alic. Sorry.
    Senator Bunning. Or use it for--as suggested earlier, for 
oil----
    Mr. Alic. Yes.
    Senator Bunning. Just use it.
    Mr. Alic. Some of it can be used. I think there's probably 
too much. We don't drink that much soda pop in the country.
    Senator Bunning. No, I understand.
    Mr. Alic. Yes. So, yes----
    Senator Bunning. OK. You think the----
    Mr. Alic [continuing]. We can do that.
    Senator Bunning. OK.
    I want to go back to Dr. Gayer. I would like to revisit my 
previous question on if it is possible to achieve equity 
without--with a carbon tax, even if it's--other harmful taxes 
were reduced. For example, people living in an area that is 
heavily dependent on coal. Ninety-five percent of all our 
electric generation in Kentucky is done by coal-fired 
generation. We would face much higher prices than people in 
other areas.
    Also, it is very difficult to reach low-income families 
with tax relief, because many do not fill out tax returns. In 
your opinion, how should tax relief be structured to prevent 
the maximum amount of harm to consumers?
    Mr. Gayer. So, let me begin with what--I think what I said 
earlier is, the revenue recycling, I think--I'm comparing to 
not-revenue recycling. So, there are going to be distributional 
burdens to people in coal or carbon-intensive consumers, for 
example----
    Senator Bunning. The Midwest----
    Mr. Gayer [continuing]. If you don't----
    Senator Bunning. If you take the Midwest, if you take 
Indiana, Ohio----
    Mr. Gayer. Sure.
    Senator Bunning [continuing]. Kentucky, West Virginia, and 
all of that area----
    Mr. Gayer. Yes.
    Senator Bunning. They are going to be disproportionately 
affected----
    Mr. Gayer. Yes.
    Senator Bunning [continuing]. With a carbon tax.
    Mr. Gayer. Or with a cap-and-trade.
    Senator Bunning. Yes.
    Mr. Gayer. Yes. I would say, any tax that we levy on any 
activity, including income tax or any other tax, will have 
distributional implications across the geographic landscape.
    My only point is, if we are going to levy a tax or a cap-
and-trade in order to address an environmental concern, that 
does yield revenues by which we can help to address some of 
those distributional and efficiency concerns.
    Senator Bunning. How do we do it with the low-income folks 
that do not file tax returns?
    Mr. Gayer. I don't know, offhand, on how we do tax credits 
without tax returns. I think we did it with the Bush stimulus, 
did we not? I have to remember----
    Senator Bunning. We just sent that--no, we just----
    Mr. Gayer. You could do it through----
    Senator Bunning [continuing]. Sent checks----
    Mr. Gayer. For example, through payroll tax.
    Senator Bunning [continuing]. Added them to the deficit. 
I'm sorry.
    Mr. Gayer. For example, through a payroll tax you could do 
it.
    Senator Bunning. Payroll tax.
    Mr. Gayer. Yes, for example.
    Senator Bunning. OK.
    Mr. Gayer. There's one example, because you don't have to 
file----
    Senator Bunning. Reduce to payroll tax.
    Mr. Gayer. Reduce the payroll tax. In fact, I think Gill 
Metcalf, who's a professor at Tufts, suggested such a thing, 
where you reduce it for the first certain amount of payroll 
taxes that you earn, so in--it goes disproportionately----
    Senator Bunning. In other words, our Medicare and all these 
other things----
    Mr. Gayer. But, you fund it--but it's funded. You don't--I 
mean, you have the revenue by which--that it replaces the taxes 
paid by low-income in their payroll tax. So, you can make it 
targeted toward low-income. I should add, if we're looking at 
job-promoting stimulus policies, it would effectively lower the 
cost of labor to employees.
    Senator Bunning. We've got to do it quickly, then, because 
we really need jobs.
    Mr. Gayer. There you have it.
    Senator Bunning. Thank you very much.
    Mr. Gayer. Sure.
    Senator Murkowski [presiding]. Senator Corker.
    Senator Corker. Thank you, Madam Chairman.
    One of the things that people who talk about cap-and-trade 
a great deal envision is this--sort of, the world carbon 
market, where a ton of carbon here is traded with a ton of 
carbon some other place. Yet, when you're creating an 
artificial market for carbon by restricting the amount of 
carbon that can be emitted, the value of a ton of carbon is 
equal to the circumstances you've created to put that price in 
place. In other words, in Europe, if their baseline is 1990 and 
ours is 2005, or their--my point is, it's the artificial 
conditions that actually create the value of the carbon in the 
first place.
    So, when I hear people--and I see Dr. Kopp and Dr. Gayer 
are both agreeing--the fact that people envision--and so many 
people who are pursuing this cap-and-trade bill say, ``Well, we 
can create a world market for carbon.'' That's hooey, because 
in each area, the circumstances you're creating in that 
confined area are generating the price. First of all, is that 
not true?
    Mr. Kopp. That's absolutely correct, Senator. But, I mean, 
let's examine--let's suppose, for example, the U.S. adopted a 
cap-and-trade program, and so did Canada. Under NAFTA rules, we 
decided to combine those two programs. If the Canadians had a 
very lax target, and therefore, a very low allowance price, and 
we had a very tight target and a high allowance price, then 
what would happen is, we would end up buying Canadian 
allowances, OK, and they'd be selling them to the U.S. The 
combined reductions, then, would be equivalent to what Canada 
has achieved and what we've achieved. So, we would actually 
combine those, and permits would flow across the border one 
way, and money flow another way. If they were fairly close, 
then the allowance prices would be fairly similar and you 
wouldn't find those massive transfers.
    But, this is exactly right. When you combine programs, 
permits will generally flow in one direction and money will 
flow in the other direction.
    Senator Corker. Whichever has the more lax standards, money 
will flow to, because those----
    Mr. Kopp. That's exactly right.
    Senator Corker. So, I get back to the carbon tax issue, 
then. It seems to me, if one were going to, quote, ``create a 
world regime,'' one would focus on, as we do with currency or 
something else, some carbon tax. I mean, that's a--people keep 
saying, ``Well, with a carbon tax, you can't do that.'' That's 
absolutely not true; you can do it far more easily with a 
carbon tax than you create--than by creating a world market for 
carbon that, again, has these varying circumstances that are 
actually creating the value of that carbon per ton, anyway. Dr. 
Gayer, is that not true?
    Mr. Gayer. Yes. I think that--both your points, I think, 
relate to each other, which is, you're looking for a system of 
harmonizing. I think you second point is right, it's probably 
easier to have harmonized carbon taxes than it would be to have 
harmonized quotas or caps. But, essentially you're right.
    Senator Corker. So, if you look at what the bills have been 
about, from my perspective, OK, it's been about money, OK. I 
mean, the fact is that the--all the bills that have been 
created so far have been about either buying constituencies 
with money or free allowances--and I hate to be so crass, but 
that's really what it's been about--or taking money out of the 
economy and using it for something else, but doing it in a 
disguised way. It has been about money. So, many of us have 
said, ``Well, you know, if we could figure out a way to make 
this neutral, and it doesn't hurt the economy, that may be 
interesting to talk about.'' In other words, no money coming 
into the general fund of government, but all moneys being 
returned. By the way, groups on the left and right have 
supported that. I know USCAP doesn't, because they're making a 
lot of money off this by participating.
    But, Dr. Kopp, what is an appropriate level of research and 
development that needs to take place in this country to meet 
the kind of goals that have commonly been discussed? I mean, 
how much consumption of any kind of a tax, whether it's a cap-
and-trade system or carbon tax, is necessary, in your opinion--
I would support, like, zero--but, from your perspective, how 
much is necessary to do the appropriate amount of research and 
development that you think is necessary?
    Mr. Kopp. I guess I'm a little confused, Senator. How much 
money should the government spend----
    Senator Corker. Yes.
    Mr. Kopp [continuing]. On R&D.
    Senator Corker. That's right.
    Mr. Kopp. I wish I had the answer to that. Unfortunately, I 
don't. I mean, it's clear, from an economic perspective, that 
the incentives within the private sector to invest in R&D are 
affected by the fact that they cannot reap all the gains. So, 
there's a role for government. There have been estimates that 
we need to spend probably ten times as much as we're spending 
now on the basic R&D, and then you need to incentivize----
    Senator Corker. How much is ten times the basic R&D for 
energy today?
    Mr. Kopp. I don't know, Senator.
    Senator Corker. Dr. Alic, do you have any idea what that 
ought to be?
    Mr. Alic. That would be roughly $60 billion a year. We 
spend about $6 billion a year.
    Senator Corker. On energy research and development.
    Mr. Alic. Yes, yes.
    Senator Corker. Let me ask you. Do you think ten times that 
number is an appropriate amount, or is that----
    Mr. Alic. I would like to see that level spent in the 
private sector, not by the Federal Government. I think the 
Federal Government certainly has a role to play. What we have 
to do, if we really want innovation, we have to get it from 
industry, because they're the people who know how to do it. 
They do it every day.
    Senator Corker. Mr. Hawkins is shaking his head up and 
down, which semi-surprises me, and I appreciate. So, what I'm 
hearing from the two of you is that, really, there's no need 
for government to invest, that, with a price signal, where 
people knew that there were going to be benefits to investing 
in the energy efficiencies and different types of energy, that 
the private sector could handle that. Don't let me put words in 
your mouths. But--so, if there's a way to, quote, ``tax 
carbon,'' and yet, absolutely make it revenue-neutral, where 
somehow--or whether it's a payroll tax reduction or something 
else, there's an absolute lowering of some other tax so that no 
money is being taken out of the--out of Americans' pockets. You 
think that alone--through private-sector innovation, that alone 
would be sufficient to make this happen.
    Mr. Hawkins, since I haven't really----
    Mr. Hawkins. Thank you, Senator.
    Fundamentally, yes. But, as I said before, there's no 
silver bullet. I would say that the bulk of the investment that 
needs to be done should come from the private sector, and the 
way to make it happen is to create a market. That's what a cap 
on carbon is; it's a market-creation machine. It essentially 
tells entrepreneurs that goods and services that have a lower 
carbon footprint will be rewarded in the marketplace. That's 
when you get the attention of the board of directors and the 
CEOs, and they can rationalize putting more money into 
projects, which they cannot rationalize today. That money is 
going to be so many times larger than anything that plausibly 
comes out of the Federal Treasury. That's what we need to 
harness. The way to do it is to create this market with a 
predictable program that values carbon reduction.
    Senator Corker. Does a carbon tax do that, in your 
estimation?
    Mr. Hawkins. In theory, a carbon tax would do that. Our 
concern with a carbon tax, as a legislative policy matter, is 
that it's an indirect mechanism of achieving the purposes of 
the legislation. As I said, before, our view--the purposes of 
this legislation, the reason we're talking about it, is not to 
raise money, it's to reduce emissions. That's the reason that 
we should be doing this. A tax is an indirect mechanism for 
doing it. In the real world of congressional taxwriting, we 
think that the risks are pretty large that the approach to it 
would be that, whatever that level of the tax is, the higher it 
is, the worse it is, from a political perspective. So, there'll 
be constant pressure to create exceptions.
    Senator Bunning asked questions about tax equity, and I 
think it's predictable that the coal interests would have the 
same reaction to a tax as they do to a cap program. They'd be 
looking for modifications, variances, exceptions, transfers, in 
order to manage the transition. That's not a bad idea, but, the 
point is that a tax approach sounds simple when you're talking 
about it from a theoretical standpoint, but you're going to 
confront exactly the same considerations that you would with a 
cap.
    I would also make that comment about the international 
aspects. I don't think that an international tax is any easier, 
and it may not be any more difficult, than an international cap 
program. The same set of national considerations are going to 
enter into any country that, as a sovereign matter, says, ``I 
will accept this level of a cap,'' or ``I will accept this 
level of a tax.'' They'll go through the same calculus.
    Senator Corker. I agree. I agree. I will--is it all right 
if I keep asking a----
    Senator Murkowski. It is.
    Senator Corker. You know, I will say that--you say the goal 
is not to create money. But, I offered an amendment to the 
Boxer bill, last summer, to return all of the money that was 
generated through a dividend program, and there sure wasn't a 
lot of support for that. I think that there is a lot about this 
that is about money. If you look at all the interest groups 
that benefit monetarily from the cap-and-trade bill that's 
being created, my guess is that a lot of the interest in the 
bill is being generated by the money that is going out to 
various groups in the form of either cash or free allowances, 
which, you know, let's face it, is a marketable security; it's 
just like a share of IBM stock that can be converted to cash 
immediately. So, I think it's nice of you to say that. I would 
just say, in the world we live in here today, climate has 
turned into being about money. OK? There's a lot of people that 
stand to benefit from that. I think some of us have said, 
``Look, if there's some way we can figure out this to make it--
a way to make this neutral to the American citizen, it's an 
interesting thing to discuss, but there are a lot of old-time 
politicians around here, apparently, that still want to focus 
on the money.''
    Mr. Hawkins. If I could just say, quickly, Senator, I think 
the key thing that you can do, as a design matter, is to make 
sure that, if there are free allowances, that those free 
allowances are used for public-benefit purposes. That's the key 
feature. So, for example, if there are free allowances to the 
electric sector, make sure that those free allowances are used 
to address consumer rate impacts and address industrial 
consumer rate impacts. If there are free allowances to the 
trade-exposed industry sector, make sure that those free 
allowances are used to keep those businesses competitive and to 
keep them as employment centers.
    So, those are techniques that are completely available to 
you, as a member of Congress, to make sure that whatever free 
allowances are there, they're used for public-benefit purposes, 
and that's what we advocate.
    Senator Corker. Yes. There's a lot of vagueness, just for 
what it's worth, in describing the public goodness that's being 
generated. I mean, I think you--it just seems to me, you'd be 
so much better off focusing on either a carbon tax or 
absolutely no free allowances whatsoever, and just returning 
the money back to the American people. I mean, that's a way you 
ensure that there's actually a public good that's taking place. 
Whereas, when you give companies--distributors the ability to 
make those decisions, and it's pretty vague, I think there's a 
lot of room for that not occurring. But----
    This has been very good. May I ask another question?
    Senator Murkowski. Go ahead.
    Senator Corker. This is not a dig. I hope you can see I've 
been generally interested in this. I've tried to come to all 
the hearings we've had. I've traveled with our chairman and 
others, looking at this issue in other places. But, the whole 
notion of these emails that have just come out in the 
scientific community, what--is that--those of you who are most 
closely involved with that, is that a--do you consider that to 
be a major issue? I mean, is that--is there any bloom off the 
issue of focusing on climate change? Is that disturbing? Is 
this just nothing but a minor menace, or is this a--is this 
something that's of greater impact on the whole movement 
regarding climate change itself?
    Mr. Hawkins. I would offer a couple of comments, Senator. I 
think there are two issues involved with this email archive. 
One is, What does it say about the solidity of the scientific 
basis for concern about climate change? Second is, Is there an 
issue of personal behavior that needs to be addressed? They're 
2 very different questions.
    On the impact on science--and I actually was describing to 
my college class email list, a--what this was all about, so I 
pointed out that there are about eight scientific propositions 
that form the basis for the conclusion that human emissions are 
affecting the global climate and that the risk is great in the 
future, and they are: No. 1, that certain atmospheric gases 
absorb heat that would otherwise go back into space; No. 2, 
that annual emissions of these so-called ``greenhouse gases'' 
have increased dramatically over the last 100 years or so--
CO2 by a factor of ten, in the last century; No. 3, 
that global annual average surface temperatures have increased 
over the course of that century; No. 4, that the 10 warmest 
years in the instrumental record since 1880 have occurred 
between 1997 and 2008; No. 5, that some additional warming, 
beyond what we've already measured, is already locked in 
because of inertia in the atmosphere; No. 6, that the amount of 
future warming is going to be delivered--determined both by 
amount of future emissions and what's called ``climate 
sensitivity''; and the last is that the impacts from future 
warming are going to be widespread and substantial, although 
the amount is uncertain.
    Now, of those propositions, the emails don't challenge 
anything related to those findings. The emails are related, 
when you look at them, to arguments about one line of evidence 
that has been used in some models to estimate the level of 
future warming associated with different emissions pathways. 
Even if you decided, which would be an overreaction, to say, 
``Well, we're just going to assume that that line of evidence 
has no validity whatsoever,'' you have all these other lines of 
evidence pointing to estimates about what the level of warming 
will be in the future if we don't address these emissions.
    The policy argument for acting now is not that we have a 
computer model, or five or six computer models, that says, ``In 
the year 2100, we can predict that the temperature is going to 
be X.'' That's not the argument. The rationale for acting now 
is that we can't rule out really cataclysmic outcomes. We can't 
rule it out, because we don't have the tools to rule it out.
    So, we have a policy challenge. What do we do with that 
information? We look at what the dynamics of the system are. 
The dynamics of the system are dominated by inertia. The 
powerplants, the factories we build that release these 
greenhouse gases have very long capital lives. So, that means 
you have a risk of sunk costs, of stranded costs, if you try to 
do something about it after they've been built.
    The second thing is that the emissions we put into the 
atmosphere has a very long lifetime. Half of the emissions that 
we put into the air when fought World War I are still in the 
air today. One thousand years from now, 15 percent of those 
emissions will still be in the air.
    So, as I said to my classmates, as Johnny Cochran might 
have said, ``Once you've emitted, you're committed.''
    [Laughter.].
    Mr. Hawkins. This is the challenge we face. That's the 
argument for acting. These emails, even if they raise questions 
about the behavior of certain individuals, or certainly their 
judgment in expressing themselves, they touch nothing about the 
fundamental science.
    Senator Corker. Is it OK if we keep going, for a second?
    Mr. Gayer. I just wanted to respond. I think I--independent 
of the implications for climate policy, I think I find--I 
found--and I've only--there's a lot to read, so I've only read 
parts of it, but I do find them a little bit troubling, mostly 
just as an empirical researcher. I think human nature--you, me, 
and everybody--tends to look more favorable on evidence that 
confirms our beliefs and less favorable on evidence that 
doesn't confirm our belief. I think everybody suffers from 
that. That's what is--that's part of human nature. It might be 
idealistic. The scientific process is to--is set up to 
establish a set of norms that resist those kind of confirmation 
bias. In other words, you should be welcoming opposing views 
and feel confident in your evidence to discredit those views. 
The most troubling parts isn't so much on the science, but, for 
me, with some of the evidence suggesting that there was a 
defensiveness to opposing views. I don't--you know, if you 
think somebody's publishing in a referee journal, and you 
disagree with the paper, you can respond to that paper, or you 
could not submit articles to that paper. But, I don't think any 
additional pressure should be borne as if it's some sort of 
adversarial--unhealthy adversarial relationship.
    So, as far as implications go, I don't think--as David 
said, I don't think it, kind of, reshapes the whole 
understanding of the climate knowledge. I think it's particular 
to these people and to these emails.
    I do think, broadly speaking, it does bring up the issue of 
data-sharing and transparency, which, kind of, as a academic, 
is something we should always be promoting, and especially when 
there's large political or policy ramifications involved.
    Mr. Kopp  Senator, can I just make one last----
    Senator Corker. Sure.
    Mr. Kopp [continuing]. Point? I mean, I think--we tend to 
all agree with what David said. I do think this doesn't 
undermine any of the scientific evidence. It just suggests that 
scientists, like everybody else, are people, like all of us. If 
you went through a set of economists' emails, back and forth, 
on different kinds of things they'd be talking about, it would 
probably be a lot more embarrassing than this. It's just the 
nature of the game.
    I do think that there is a standard we all try to aspire 
to, but we don't necessarily attain, in our daily actions, and 
certainly with respect to our emails.
    But, I think the underlying truth of this--and I've spoken 
with colleagues in the climate science community, at the major 
universities that we deal with, and this doesn't--has not 
affected any of the underlying protocols or any of the 
underlying conclusions that have come in that science that 
David talks about. So, I don't think it's--it's embarrassing, 
but it certainly doesn't change the nature of the game, at 
least as a social scientist views it, and, you know, someone 
who's uncapable of analyzing the science for themselves.
    Senator Corker. Yes, sir.
    Mr. Alic. I'm a scientist.
    Senator Corker. I can tell. You sound a lot more 
intelligent than any of us up here.
    [Laughter.].
    Mr. Alic. I've lived in this world for decades. You know, 
scientists fight like cats and dogs over these things. It's not 
often visible to the public. Now it is. But, I think the 
essential point is that the huge rewards in science come from 
overturning the conventional wisdom. Anybody who could actually 
demonstrate and persuade the community that global warming, you 
know, is not happening, that's Nobel Prize stuff. I mean 
there's huge rewards for that. So, you know, this is noise, 
really. Yes, it's embarrassing, but it's not, I think, very 
meaningful.
    May I go back and--I don't want to be misunderstood on some 
of the other subjects we've talked about. First, on Federal 
R&D. If we want innovation today, and we need it today, as has 
been very eloquently said, we get it from industry. If we want 
innovation in 20 or 30 years, we need to put more money into 
basic research in energy climate fields now so that we can reap 
the fruits later on. We will need to do that.
    Second, on carbon tax. I think it's important to do kind of 
a back-of-the-envelope calculation of what kind of carbon tax 
it will take to have real impact on greenhouse gas emissions. 
When I do that, I get a ballpark figure that's, like, $100 a 
ton. That's an awful lot of money.
    Senator Corker. Can I just close?
    [Laughter.]
    Senator Corker. By the way, the--none of the cap-and-trade 
bills, I think, that have been discussed even generate that. 
OK?
    So, if I could just close by, first of all, thanking--Madam 
Chairman, you're awfully generous. I appreciate you letting me 
go on as I have.
    It seems to me that all of you would agree that every dime 
that's taken out of the private sector slows the economy, 
generally speaking. I mean, I--so, it seems to me that whatever 
we did as a country, if something is going to occur, we would 
focus on a policy that does not negatively impact the economy 
by taking additional moneys out. What we would do, if there's 
concern--I mean, there's a scientist that I met in Greenland, 
who said, ``Look, we need a policy that, if we're right about 
global warming, the policy works, and if we're wrong about 
global warming, it works.'' What I mean by that, it drives us 
toward energy security. I've always been fascinated with that 
statement.
    It seems to me that the cap-and-trade bills before us take 
money out of the economy. They do do that; regardless of what 
anybody says, they do. It seems to me that--going back to Dr. 
Gayer, that a carbon tax or a cap-and-dividend, where 100 
percent of the money is returned, you end up potentially 
achieving a policy that is--especially with the carbon tax, 
that may be perceived to be beneficial, at the same time, 
doesn't take any money out of the economy, if you lower some 
other tax exactly equal to that. It just seems to me that 
climate enthusiasts--and I'm an energy-security enthusiast, 
OK--but, it seems to me that climate enthusiasts would just 
wise up to that and focus on that and--instead of using this as 
a way to take money out of the economy, which is going to slow 
the economy. I just have not been able to understand the desire 
to create a larger central government, which is what these 
bills do, in the process of trying to address climate change, 
when there are much more simpler, elegant ways of dealing with 
it that don't slow the economy. Does anybody disagree with 
that, at this----
    I didn't mean to ask that question.
    [Laughter.]
    Senator Corker. I'll see you all later.
    Senator Murkowski. Senator Corker, thank for engaging the 
panelists in, again, very thoughtful discussion.
    I think this has been very helpful for the committee. I 
only wish that we had more of our committee members with us 
this morning to hear it, because I think it is important, as we 
look at how we meaningfully make reductions in emissions while 
at the same time absolutely ensuring that we're not harming the 
economy, I think we need to be encouraged to look to all of the 
alternatives. Unfortunately, so many of them have been kicked 
to the side with the discussion about a cap-and-trade. We have 
boxed ourselves in, and said, ``This is the legislation, this 
is the way that we're going to approach it, and it's either all 
or nothing. You either take it or leave it.'' But, I think it 
is important, as we look to our tax policies and what is wrong 
with encouraging the things that we want to encourage, such as 
savings and investment and job creation, and utilizing a tax 
policy to discourage those things that we don't want to 
encourage? In this case, that relates to our level of 
emissions.
    It is a good, healthy discussion. I think oftentimes we are 
afraid to talk about taxes, using the ``T'' word, for fear that 
we're going to be labeled with that. But, I do think that it 
needs to be part of our discussions. When we're talking about 
the reductions of emissions, I think we do appreciate, and, 
being intellectually honest about it, we recognize that there 
is a cost involved. How can we work to ensure that the cost to 
the economy, the cost to the individual consumer, is 
ameliorated? I think that there are ways, there are paths 
forward that we can take, but we have to be willing to have 
these discussions.
    I appreciate the thoughtful input from each of you. Mr. 
Banks, you know, when you were talking about your hybrid 
approach and all the things that need to go into your proposal, 
I look at the energy bill that we produced here in this 
committee and passed out, on a bipartisan basis some months 
ago, that's now just sitting. There's a lot of those component 
pieces that you have spoken to, the efficiency piece, the 
renewable energy aspect of it, and how we advance that forward. 
That could be a real base for our beginning, and maybe it is a 
discussion about the sectoral approach. Maybe we do look to 
some other proposals. But, again, we ought not be afraid of 
having the conversations and just assuming that the deal has 
already been done, and that's cap-and-trade. So, I appreciate 
your input.
    Senator Corker, thank you for providing so much to this 
very important conversation.
    [Whereupon, at 11:52 a.m., the hearing was adjourned.]

    [The following statements were received for the record.]
 Statement of Stephen A. Alterman, President, Cargo Airline Association
    Mr. Chairman and members of the Committee: My name is Steve 
Alterman and I am the president of the Cargo Airline Association (``the 
Association''), the nationwide voice of the all-cargo air carrier 
industry.\1\ I also have the honor of serving as the current Chairman 
of the FAA's Environmental Subcommittee of the Agency's Research, 
Engineering and Development Advisory Committee (REDAC). As a key 
segment of the air transportation industry, the all-cargo carriers 
recognize the growing importance of addressing our industry's 
contribution to global climate change. At the same time, especially in 
a time of global economic uncertainty, any environmental legislation 
must take care not to impair our ability to compete in the worldwide 
marketplace. We are pleased you have chosen to hold this important 
hearing on policy options because we believe there are intelligent 
solutions to addressing our industry's emissions in addition to cap and 
trade.
---------------------------------------------------------------------------
    \1\ U.S. air carrier members of the Cargo Airline Association are 
ABX Air, Atlas Air, Capital Cargo, FedEx Express, Kalitta Air and UPS 
Airlines.
---------------------------------------------------------------------------
                               background
    The nation's aviation industry represents approximately 5.6% of the 
U.S. Gross Domestic Product (GDP); contributes over $1.2 trillion 
annually to the U.S. economy and is responsible for approximately 11 
million jobs.\2\ In addition to these economic facts, the industry has 
been in the forefront of addressing environmental issues associated 
with our operations. To a large extent, of course, the environmental 
record of the entire aviation community is a result of a search for 
greater fuel efficiency in an era of generally rising fuel prices. 
Nevertheless, the environmental benefits of this quest for fuel 
efficiency cannot be overlooked. For example:
---------------------------------------------------------------------------
    \2\ FAA, The Economic Impact of Civil Aviation on the U.S. Economy 
(October 2008). This report is available at: http://www.faa.gov/about/
office_org/headquarters_offices/ato/media/
2008_Economic_Impact_Report_web.pdf

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

    While these accomplishments are significant, we recognize that more 
must be done to meet the environmental challenges of the future. Many 
of the necessary improvements will come from advances in technology and 
the implementation of FAA airspace modernization initiatives. This 
process requires the cooperation of all parties to the aviation 
environmental debate--industry, Congress and the Administration.
                       an international approach
    As a global industry, we believe the role of the International 
Civil Aviation Organization (ICAO) and its ongoing attempts to 
establish international standards for aircraft emissions that relate to 
climate change cannot be overlooked. Significant expertise rests with 
ICAO as does the ability to establish a framework that all air carriers 
worldwide may follow. Additionally, both aviation and the environment 
would benefit from taking a global approach with harmonized standards 
for aviation rather than a single country approach. However, we 
understand the political realities facing Congress and if legislation 
is enacted we have outlined below why our industry would be best served 
by a carbon tax.
              ``cap and trade'' and its impact on aviation
    The entire aviation industry is extremely capital intensive and any 
move to impose significant additional costs on an industry already 
suffering in today's economy will reduce the industry's ability to make 
the investments necessary to service customers around the world. 
Unfortunately, some of the initiatives now being advanced for dealing 
with global climate change will have this negative effect. 
Specifically, a cap and trade regime potentially will have a severe 
dampening effect on aviation's global competitiveness. The Clean Energy 
Jobs and American Power Act legislation that has been introduced in the 
Senate (S.1733) appears to impose an ``upstream'' tax on aviation, with 
the industry forced to buy carbon credits from fuel producers who will 
pay the fees directly (or in a secondary market that will undoubtedly 
emerge). At least for aviation, this method of attempting to deal with 
global climate change is extremely problematical. Some of the obvious 
downsides of such a cap and trade system are:

   As noted above, such a system will, in effect, impose a 
        significant additional tax burden on an already heavily taxed 
        industry.
   These taxes will inhibit the ability of the industry to make 
        the capital expenditures necessary to take advantage of a 
        modernized airspace system--a system that will provide 
        significant environmental benefits.
   As we understand the current proposals, they will 
        potentially funnel monies collected to a variety of programs--
        none of which have any relation to aviation or modernization of 
        the aviation system.
   The bureaucracy necessary to administer any cap and trade 
        program will siphon off a significant portion of any funds 
        collected.
   A cap and trade system is subject to market manipulation.\5\
---------------------------------------------------------------------------
    \5\ See, for example, op ed piece by Rep. Peter DeFazio in the 
January 27, 2009, edition of the Oregonian.
---------------------------------------------------------------------------
              potential alternatives to ``cap and trade''
    Faced with these facts and potential pitfalls, is there another way 
for aviation to meet its environmental responsibilities, while, at the 
same time, remaining competitive in the world marketplace? We believe 
that there is. Rather than being subjected to a cap and trade system, a 
tailored revenue-neutral carbon tax for the commercial airline industry 
appears to make more sense.\6\ Under such a system, the commercial 
airline industry could be further directly taxed on its use of aviation 
fuel (the source of pollutants contributing to global climate 
change),\7\ with these levies offset by a corresponding decrease in the 
existing excise taxes paid by the airlines.\8\ Such a scheme would 
provide a powerful incentive to modernize aircraft fleets, while, at 
the same time, retain the same overall level of industry taxation.\9\ 
In addition, the funds collected could be used to assist in the effort 
to convert the nation's air traffic system into one based upon 
satellite technology rather than the existing reliance on decades-old 
ground-based radar. And, since such taxes would be collected at the 
pump, virtually 100% of the proceeds could be used on aviation programs 
that benefit the environment.\10\ As noted by the non-partisan 
Congressional Budget Office (CBO), ``A tax on emissions would be the 
most efficient incentive-based option for reducing emissions and could 
be relatively easy to implement.''\11\
---------------------------------------------------------------------------
    \6\ If a cap and trade system is enacted, however, with respect to 
aviation it should contain ``safety valve'' provisions to protect 
carriers if the price of oil escalates past a predetermined level and 
funds collected should be transferred to the Aviation Trust Fund for 
use in system modernization.
    \7\ Commercial airlines currently pay a fuel tax of 4.3 cents per 
gallon.
    \8\ The existing excise tax on air cargo is a 6.25% airway bill 
levy.
    \9\ We recognize that variations of the carbon tax possibility set 
forth herein have been suggested by various parties to the global 
climate change debate. Each of these other proposals should be analyzed 
for their merits and their impact on U.S global competitiveness.
    \10\ Other, ancillary, issues that should be included in the 
discussion of aviation's place in the global warming debate include the 
need for any federal action in this area to preempt any state and local 
action that would result in a patchwork quilt of regulations on an 
industry that operates nationwide.
    \11\ See, Policy Options for Reducing CO2 Emissions, 
Congressional Budget Office, February 2008.
---------------------------------------------------------------------------
                               conclusion
    The challenge of dealing with global warming is not easy, and the 
all-cargo industry is supportive of exploring policy options beyond cap 
and trade that may achieve similar emissions reductions for our 
industry. We understand the reasons that legislation is being 
considered to ensure that global climate change is addressed--and 
addressed as expeditiously as possible. But that legislation must take 
care not to cripple an industry that is necessary for economic recovery 
and that has a long-standing record of environmental sensitivity.
    We recognize that the suggestions made herein are broad overviews 
and that the details of any final plans to address global climate 
change will require difficult negotiations among both industry and 
government representatives. For our part, we stand ready to engage in 
this necessary dialogue. If the Committee, or its staff, wants to 
discuss these issues further, please do not hesitate to contact us.
    Thank you very much.
                                 ______
                                 
 National Association of Energy Service Companies (NAESCO),
                                 Washington, DC, December 16, 2009.
Hon. Jeff Bingaman,
Chairman, Energy and Natural Resources Committee, 703 Hart Senate 
        Office Building, Washington, DC.
    Dear Senator Bingaman: The National Association of Energy Service 
Companies (NAESCO) recognizes your leadership in developing the next 
generation of national energy policy, and is pleased to be able to 
submit this letter asking you to authorize substantial new funding for 
energy efficiency in the development of comprehensive energy and 
climate legislation by the Senate.
                           naesco background
    NAESCO is a 26-year old organization whose current membership of 
about 65 organizations includes firms involved in the design, 
manufacture, financing and installation of energy efficiency and 
renewable energy equipment and the provision of energy efficiency and 
renewable energy services in the private and public sectors. NAESCO 
members deliver about $6 billion of energy efficiency, renewable energy 
and distributed generation projects each year--about equal to the total 
energy efficiency investment by all US utilities combined, according to 
a recent report by the Lawrence Berkeley National Laboratory.
    NAESCO numbers among its members some of the most prominent 
companies in the world in the HVAC and energy control equipment 
business, including Honeywell, Johnson Controls, Siemens, Trane, 
Comfort Systems USA Energy Services, and Schneider. Our members also 
include many of the nation's largest utilities: Pacific Gas & Electric, 
Southern California Edison, New York Power Authority, and Oncor Energy. 
In addition, ESCO members include affiliates of several utilities 
including ConEdison Solutions, FPL Energy Services, Pepco Energy 
Services, Constellation Energy Projects and Services and Energy Systems 
Group. Prominent national and regional independent members include 
Atlantic Energy, AECOM Energy, NORESCO, Onsite Energy, EnergySolve 
Companies, Ameresco, UCONS, Chevron Energy Solutions, Synergy 
Companies, Wendel Energy Services, Control Technologies and Solutions, 
Clark Realty Capital, McClure, SAIC, and Lockheed Martin.
                  energy efficiency is the first fuel
    We respectfully submit that energy efficiency should be the 
centerpiece of future national energy policy for the simple reason that 
no sources of energy--renewables, clean coal, nuclear, oil or gas--is 
cheap enough to use inefficiently.

   Energy efficiency is much less expensive than any other 
        source of energy;
   Energy efficiency is the logical first step in any national 
        strategy to reduce carbon emissions, because energy efficiency 
        can deliver massive carbon emissions reductions at less than 
        zero cost;
   Energy efficiency is plentiful, even though it has delivered 
        the equivalent of more than half of our new energy resources 
        during the last forty years.
   Energy efficiency can deliver energy resources today and for 
        the next decade, bridging the gap while we are developing the 
        next generation of technologies that will make the other energy 
        sources less expensive and more reliable; and,
   Energy efficiency delivers new equipment and improvements to 
        residential, commercial and institutional buildings, as well as 
        industrial processes, all paid for from energy savings. This is 
        especially important during a time when our public facilities 
        are starved for funds to maintain and modernize their 
        facilities.

    The experience of NAESCO member companies is a good example of the 
potential of energy efficiency. During the past twenty years, our 
industry has grown from virtually nothing to its current level, and has 
delivered:

   $35 billion of projects
   $50 billion of guaranteed energy and operations savings to 
        customers
   330,000 person-years of direct employment
   $25 billion of public infrastructure improvements
   420 million tons of CO2 emissions reductions, at 
        no additional cost
                       energy efficiency is cheap
    Experience in numerous states shows that efficiency improvements on 
average cost about 3 cents per lifetime kilowatt-hour saved\1\ compared 
to about 7 cents to over 13 cents per kilowatthour for conventional 
electricity generation.\2\ The graphic below,* derived from data 
developed by the investment bank Lazard, illustrates the cost 
differences between technologies.
---------------------------------------------------------------------------
    \1\ Kushler, York and Witte, 2004, Five Years In: An Examination of 
the First Half Decade of Public Benefits Energy Efficiency Policies. 
Report U042. Washington, DC: American Council for an Energy-Efficient 
Economy.
    * All graphics have been retained in committee files.
    \2\ Lazard. June 2008. Levelized Cost of Energy Analysis--Version 
2.0: http://www.narucmeetings.org/Presentations/
2008%20EMP%20Levelized%20Cost%20of%20Energy%20-
%20Master%20June%202008%20(2).pdf
---------------------------------------------------------------------------
                     energy efficiency is plentiful
    The international consulting firm McKinsey estimated, in a recent 
report\3\, that the U.S. can reduce its energy consumption in 2020 by 
about 23% by adopting a comprehensive portfolio of energy efficiency 
programs. McKinsey estimates that this portfolio would have a first 
cost of about $520 billion and would return about $1.2 trillion in 
savings over the life of the energy efficiency measures. The graphic 
below illustrates the efficiency potential in the U.S.
---------------------------------------------------------------------------
    \3\ Unlocking Energy Efficiency in the US Economy, McKinsey Global 
Energy and Materials, July 2009
---------------------------------------------------------------------------
              energy efficiency is the logical first step
    Energy efficiency is the logical first step in any program to 
reduce CO2 emissions, because energy efficiency reduces 
CO2 emissions at less than zero cost. Most energy efficiency 
technologies repay their first cost in a fraction of their useful life, 
and the total value of the technologies is typically 2-4 times their 
first cost. There is no extra cost attached to the CO2 
emissions reductions. The graphic below, taken from a report by the 
international consulting firm McKinsey\4\, illustrates the cost of 
various technologies that reduce CO2 emissions. The 
horizontal line in the middle of the graphic is the zero cost line. The 
bars on the left side of the graphic below the zero cost line are, with 
the exception of sugarcane ethanol, all energy efficiency technologies.
---------------------------------------------------------------------------
    \4\ The carbon productivity challenge: Curbing climate change and 
sustaining economic growth, McKinsey Global Institute, June 2008
---------------------------------------------------------------------------
                    energy efficiency is the bridge
    If energy efficiency programs can reduce energy consumption by more 
than 20% in the next decade, then it can serve as the bridge to the 
next generation of energy supply technologies, (e.g., energy storage 
and grid management systems that facilitate the increased use of 
renewables, clean coal plants with carbon capture and sequestration 
(CCS) or modular nuclear power plants) that will require a decade to 
develop and pilot.

   Administrative Infrastructure in Place.--The essential 
        elements of large-scale energy efficiency programs (marketing, 
        energy audit standards, contract procedures and documents, 
        technical assistance for customers, financing systems, savings 
        monitoring and verification, and quality assurance) are in 
        place across the country. These program elements have been 
        refined through two decades of field experience and can be 
        rapidly expended to meet new national mandates. One example of 
        this infrastructure is the increasing number of states that 
        have Energy Efficiency Resource Standards, mandates that 
        utilities procure a minimum amount of their energy resources 
        from energy efficiency. The graphic below, excerpted from a 
        recent report from the American Council for an Energy 
        Efficiency Economy (ACEEE)\5\, illustrates this trend.
---------------------------------------------------------------------------
    \5\ The 2009 State Energy Efficiency Scorecard, ACEEE, Report 
Number E097, October 2009
---------------------------------------------------------------------------
   Work Force in Place.--In contrast to other market sectors, 
        the work force required to quickly implement a large volume of 
        energy efficiency projects, particularly in large commercial 
        and institutional buildings is in place and looking for work. 
        The same contractors and skilled trades people who were working 
        in commercial new construction a couple of years ago are now 
        available to work in energy efficiency retrofit projects. They 
        don't need training in how to install lighting and HVAC 
        systems, and they are used to working with the federal laws 
        (e.g., Davis-Bacon and Buy American) that pose a startup 
        barrier in other market sectors.
   Leverage Allowance Values.--Energy efficiency programs can 
        multiply the value of carbon cap-and-trade allowances or carbon 
        emission allowance auction proceeds because the allowance value 
        does not have to cover the whole cost of the carbon abatement. 
        As noted above, energy efficiency improvements repay their 
        entire cost from energy savings, producing emissions reductions 
        as a no-cost side benefit. This is not a new concept. Tens of 
        billions of dollars worth of energy efficiency improvements 
        have been implemented in the past two decades with a 
        combination of utility or state government incentives. 
        Financial incentives like allowances, therefore, can be used to 
        accelerate the implementation of energy efficiency projects, 
        not pay their entire cost, with the balance of the first cost 
        of the project supplied by private capital sources.
                               conclusion
    NAESCO urges you to authorize substantial new federal funding, 
through direct appropriations or the allocation of carbon emissions 
reduction allowances to energy efficiency programs. We believe that 
exploiting all available cost-effective energy efficiency should be the 
first priority in our national energy policy. Energy efficiency is 
plentiful and is much less expensive than other energy resources. 
Energy efficiency can produce the new energy resources we need now to 
bridge the decade we will need to develop and pilot the next generation 
of energy production technologies.
    Thank you in advance for your consideration of this request.
            Respectfully submitted by,
                                           Donald Gilligan,
                                                         President.

      
