[Senate Hearing 111-795]
[From the U.S. Government Publishing Office]






                                                        S. Hrg. 111-795

                      GLOBAL WARMING LEGISLATION:
                   CARBON MARKETS AND PRODUCER GROUPS

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

                                HEARING

                               before the

                       COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY

                          UNITED STATES SENATE


                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION


                               __________

                           SEPTEMBER 9, 2009

                               __________

                       Printed for the use of the
           Committee on Agriculture, Nutrition, and Forestry









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           COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY



                       TOM HARKIN, Iowa, Chairman

PATRICK J. LEAHY, Vermont            SAXBY CHAMBLISS, Georgia
KENT CONRAD, North Dakota            RICHARD G. LUGAR, Indiana
MAX BAUCUS, Montana                  THAD COCHRAN, Mississippi
BLANCHE L. LINCOLN, Arkansas         MITCH McCONNELL, Kentucky
DEBBIE A. STABENOW, Michigan         PAT ROBERTS, Kansas
E. BENJAMIN NELSON, Nebraska         MIKE JOHANNS, Nebraska
SHERROD BROWN, Ohio                  CHARLES E. GRASSLEY, Iowa
ROBERT P. CASEY, Jr., Pennsylvania   JOHN THUNE, South Dakota
AMY KLOBUCHAR, Minnesota
KIRSTEN GILLIBRAND, New York
MICHAEL BENNET, Colorado

                Mark Halverson, Majority Staff Director

                    Jessica L. Williams, Chief Clerk

            Martha Scott Poindexter, Minority Staff Director

                 Vernie Hubert, Minority Chief Counsel

                                  (ii)









                            C O N T E N T S

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Hearing(s):

Global Warming Legislation: Carbon Markets and Producer Groups...     1

                              ----------                              

                      Wednesday, September 9, 2009
                    STATEMENTS PRESENTED BY SENATORS

Harkin, Hon. Tom, U.S. Senator from the State of Iowa, Chairman, 
  Committee on Agriculture, Nutrition, and Forestry..............     1
Chambliss, Hon. Saxby, U.S. Senator from the State of Georgia....     3
Thompson, Hon. Mike, U.S. Representative from the State of 
  California.....................................................    41

                                Panel I

Gensler, Hon. Gary, Chairman, U.S. Commodity Futures Trading 
  Commission, Washington, DC.....................................     5
Glace, Joseph R., Vice President for Risk Management and Chief 
  Risk Officer, Exelon Corporation, Chicago, Illinois............    23
Miller, David, Chief Science Officer, AgraGate, and Research & 
  Commodity Services Director, Iowa Farm Bureau Federation, West 
  Des Moines, Iowa...............................................    26
Profeta, Timothy, Director, Nicholas Institute for Environmental 
  Policy Solutions, Duke University, Durham, North Carolina......    21
Winkler, Julie, Managing Director, Research and Product 
  Development, CME Group, and Member, Board of Directors, Green 
  Exchange Venture, Chicago, Illinois............................    28

                                Panel II

Beckstoffer, W. Andy, Chairman and Chief Executive Officer, 
  Beckstoffer Vineyards, Rutherford, California..................    43
Brubaker, Luke, Brubaker Farms, Mount Joy, Pennsylvania..........    47
Rehermann, Frank, Chairman, USA Rice Producers' Group, Live Oak, 
  California.....................................................    45
Yoder, Fred, Past President, National Corn Growers Association, 
  Plain City, Ohio...............................................    49
                              ----------                              

                                APPENDIX

Prepared Statements:
    Gillibrand, Hon. Kirsten.....................................    58
    Grassley, Hon. Chuck.........................................    68
    Thune, Hon. John.............................................    62
    Beckstoffer, W. Andy.........................................    65
    Brubaker, Luke...............................................    71
    Gensler, Hon. Gary...........................................    74
    Glace, Joseph R..............................................    81
    Miller, David................................................    90
    Profeta, Timothy.............................................   106
    Rehermann, Frank.............................................   116
    Winkler, Julie...............................................   121
    Yoder, Fred..................................................   132
Document(s) Submitted for the Record:
Brubaker, Luke :
    Darling International Inc., prepared statement...............   140
    National Milk Producers Federation, prepared statement.......   150
Question and Answer:
Harkin, Hon. Tom:
    Written questions for Andy W. Beckstoffer....................   162
    Written questions for Luke Brubaker..........................   165
    Written questions for Gary Gensler...........................   171
    Written questions for Joseph Glace...........................   173
    Written questions for Dave Miller............................   174
    Written questions for Timothy Profeta........................   176
    Written questions for Frank Rehermann........................   180
    Written questions for Julie Winkler..........................   184
    Written questions for Fred Yoder.............................   188
Grassley, Hon. Charles E.:
    Written questions for Andy W. Beckstoffer....................   163
    Written questions for Luke Brubaker..........................   168
    Written questions for Joseph Glace...........................   173
    Written questions for Dave Miller............................   174
    Written questions for Timothy Profeta........................   177
    Written questions for Frank Rehermann........................   181
    Written questions for Julie Winkler..........................   186
    Written questions for Fred Yoder.............................   188
Thune, Hon. John:
    Written questions for Andy W. Beckstoffer....................   164
    Written questions for Luke Brubaker..........................   169
    Written questions for Gary Gensler...........................   171
    Written questions for Joseph Glace...........................   173
    Written questions for Timothy Profeta........................   178
    Written questions for Frank Rehermann........................   182
    Written questions for Fred Yoder.............................   189
Roberts, Hon. Pat:
    Written questions for Luke Brubaker..........................   167
    Written questions for Frank Rehermann........................   180
    Written questions for Fred Yoder.............................   188
Beckstoffer, W. Andy:
    Written responses to questions from Hon. Tom Harkin..........   190
    Written responses to questions from Hon. Charles E. Grassley.   191
    Written responses to questions from Hon. John Thune..........   192
Brubaker, Luke:
    Written responses to questions from Hon. Tom Harkin..........   193
    Written responses to questions from Hon. Charles E. Grassley.   196
    Written responses to questions from Hon. John Thune..........   197
    Written responses to questions from Hon. Pat Roberts.........   195
Gensler, Hon. Gary:
    Written responses to questions from Hon. Tom Harkin..........   199
    Written responses to questions from Hon. John Thune..........   199
Glace, Joseph R.:
    Written responses to questions from Hon. Tom Harkin..........   202
    Written responses to questions from Hon. Charles E. Grassley.   204
    Written responses to questions from Hon. John Thune..........   205
Miller, David:
    Written responses to questions from Hon. Tom Harkin..........   207
    Written responses to questions from Hon. Charles E. Grassley.   207
Profeta, Timothy:
    Written responses to questions from Hon. Tom Harkin..........   213
    Written responses to questions from Hon. Charles E. Grassley.   214
    Written responses to questions from Hon. John Thune..........   215
Rehermann, Frank:
    Written responses to questions from Hon. Tom Harkin..........   217
    Written responses to questions from Hon. Charles E. Grassley.   218
    Written responses to questions from Hon. John Thune..........   219
    Written responses to questions from Hon. Pat Roberts.........   217
Winkler, Julie:
    Written responses to questions from Hon. Tom Harkin..........   221
    Written responses to questions from Hon. Charles E. Grassley.   223
Yoder, Fred:
    Written responses to questions from Hon. Tom Harkin..........   225
    Written responses to questions from Hon. Charles E. Grassley.   226
    Written responses to questions from Hon. John Thune..........   228
    Written responses to questions from Hon. Pat Roberts.........   225


 
                      GLOBAL WARMING LEGISLATION:
                   CARBON MARKETS AND PRODUCER GROUPS

                              ----------                              


                      Wednesday, September 9, 2009

                                       U.S. Senate,
         Committee on Agriculture, Nutrition, and Forestry,
                                                     Washington, DC
    The Committee met, pursuant to notice, at 10 a.m., in room 
SH-216, Hart Senate Office Building, Hon. Tom Harkin, Chairman 
of the Committee, presiding.
    Present: Senators Harkin, Conrad, Lincoln, Stabenow, Casey, 
Klobuchar, Gillibrand, Chambliss, Lugar, Johanns, Grassley, and 
Thune.

 STATEMENT OF HON. TOM HARKIN, U.S. SENATOR FROM THE STATE OF 
   IOWA, CHAIRMAN, COMMITTEE ON AGRICULTURE, NUTRITION, AND 
                            FORESTRY

    Chairman Harkin. Good morning, and welcome to this hearing 
of the Committee on Agriculture, Nutrition, and Forestry on 
proposals for global warming legislation.
    Senator Chambliss is on his way. We have to get started 
because we are up against kind of a time crunch here. This 
hearing will adjourn promptly at--no later than 12:30.
    Our witnesses today will help us examine issues in 
structuring and regulating markets for greenhouse gas emission 
allowances. They will share the views of a cross-section of 
agricultural producers regarding the pending legislation.
    Let me start by reiterating the urgency and importance of 
addressing global warming. I had a chart here that I keep 
using, if I can have it here again. I do not know if you can 
see it from the back. But as this chart shows, the 
concentration of carbon dioxide in the atmosphere has increased 
by about 50 percent over the last 150 years. We are now seeing 
the effects of that in rising global average temperatures. You 
can just see how rapidly it is going up increasingly from about 
1980 on up at an ever increasing rate. And the ten warmest 
years on record, all occurred in the past 12 years. And just 
last week, Science magazine reported that temperatures in the 
Arctic are at the highest levels in the past 2,000 years.
    In plain words, we humans are changing the Earth's climate. 
And while we do not know precisely all the consequences of our 
current climate trends, we do know they are likely to include 
more severe storms, more frequent and severe heat waves, in 
addition to rising seas and higher temperatures.
    I agree with the majority of Americans who say that we must 
act to mitigate these effects. We must not simply leave future 
generations to cope with a hotter and more dangerous climate.
    Our Committee began to consider the role of agriculture and 
forestry in reducing greenhouse gas emissions and the 
consequences of cap-and-trade at our first hearing in July. 
Today we will examine these issues at the farm level. We will 
hear from a corn and soybean farmer, a rice farmer, a grape 
grower and vintner, and a dairyman. In addition, we are 
obviously going to hear from the Chairman of the Commodity 
Futures Trading Commission at the outset to talk about the 
aspect of how these markets might be regulated by the CFTC.
    Now, while we could not include representatives of every 
type of agriculture, I trust the testimony and discussions of 
these witnesses will begin to provide us with a better sense of 
on-the-ground effects that our agriculture sector is likely to 
see under global warming and under mitigation strategies.
    We will hear from farmers and ranchers how they might 
benefit through actions such as the installation of digesters 
to reduce methane emissions from livestock production and other 
forms of methane emissions; cropping practices such as no-till 
farming or applications of biochar that increase carbon 
contents of soils; increased demand for renewable energy 
resources such as biofuels and wind power.
    As the Committee with the responsibility for legislation 
governing commodity futures markets, the Senate is looking for 
our guidance on how to structure and regulate markets, and our 
first two panels will provide testimony on that issue.
    If we are serious about a cap-and-trade system, we must get 
the trading part right, and that means effective, practical 
regulation and oversight so the markets work. The benefits of a 
cap-and-trade approach have been clearly stated: use the market 
system to reach the least expensive path to reducing greenhouse 
gas emissions. But the potential costs if these carbon markets 
blow up cannot be overstated. Markets that are not properly and 
carefully regulated will blow up, and the economy and 
environmental goals of the program will blow up with it. This 
market has the potential to be a very big and very complicated 
part with a lot of money at stake, and we have seen what can 
happen when there is not sufficient transparency, 
accountability, or limits on risky behavior in markets.
    We should not put too much faith in the markets alone to 
deliver results. Do we want to repeat the adverse impacts of 
excessive speculation in the crude oil market last year for 
carbon? Do we want to replicate for allowances and offsets the 
free-wheeling derivatives market that helped bring down our 
economy?
    We must avoid the dangers of excessive speculation or price 
volatility or so-called innovation that turns out to be all 
about short-term profit and simply creates greater risk instead 
of just managing the risk.
    Some of the ideology and recklessness that helped drive our 
economy and our markets over the cliff are now surfacing in 
discussion of a cap-and-trade system. I find this troubling. We 
have learned a lot from years of both regulating commodities 
and previous cap-and-trade efforts from both regional and 
international carbon markets, and it is imperative that we 
incorporate those lessons into a properly regulated new carbon-
trading regime.
    In closing, I want to thank Senator Chambliss, thank you 
and all of your staff for the support in planning this hearing. 
I look forward to working with you as we outline the 
appropriate representation of agriculture and forestry as we 
provide guidance for the structure and regulation of greenhouse 
gas emissions allowances markets.
    I would now turn to Senator Chambliss for opening comments.

STATEMENT OF HON. SAXBY CHAMBLISS, U.S. SENATOR FROM THE STATE 
                           OF GEORGIA

    Senator Chambliss. Well, thank you, Mr. Chairman, and 
thanks for holding this second hearing on cap-and-trade and its 
effects on agriculture. In spite of the news I saw on TV this 
morning, I hope you are going to be holding many, many more 
agriculture hearings. Things do happen in politics, but you 
have been a great friend on this as well as every other issue 
involving agriculture.
    I suspect that you and our colleagues on this Committee 
heard from many constituents, not just those involved in 
agriculture, over the August recess on cap-and-trade and 
climate legislation. I certainly did. It was clear to me that 
they want the Senate to very carefully consider all aspects of 
this issue and not rush to pass legislation.
    I look forward to hearing from CFTC Chairman Gensler who 
has certainly jumped into the fray on a number of issues, and, 
Mr. Chairman, we appreciate your great leadership, your 
involvement, plus your continued dialog with the Hill. You 
committed to do that during your confirmation process, and I 
thank you for doing exactly what you said you were going to do.
    Additionally, we will hear directly from those that will be 
regulated under a cap-and-trade system. Exelon, as an energy 
generator, will be required to purchase allowances and, 
therefore, deserves a workable risk management system within 
any newly created market. And CME Group, with its pending Green 
Exchange venture, will be subject to CFTC regulation as a 
designated contract market.
    I expect any domestic carbon market would work much like 
existing commodity markets, though with a few notable 
differences. As the Committee with jurisdiction over commodity 
pricing and trading, we need to ensure we are fulfilling our 
responsibilities and weighing in with our colleagues on the 
issue of regulating any such carbon commodity market.
    The issue of market regulation has not received the careful 
consideration that it justly deserves. To date, this Committee 
has focused its discussions on the impact on farmers and 
ranchers, and I am pleased that we will continue to hear about 
that important topic today.
    As many of you know, the Texas A&M University's Agriculture 
and Food Policy Center recently released a report using its 
Representative Farms Data base to model the effects of the 
House climate bill on the farm level. For those of you here 
today who are not familiar with representative farm studies, 
they are commonly used in agriculture to model the effects of 
proposed legislation on the micro level or at the individual 
farm level. The AFPC has been doing this type of work for 
Congress for more than 25 years. While the macroeconomic 
studies help Congress understand the effects of proposed 
legislation on agriculture as an industry, it is the 
representative farms that provide the ground truth of these 
proposals.
    The ground truth that this study shows is very serious. The 
study says that 71 out of 98 farms will be worse off under the 
House cap-and-trade plan, even in the early years of the 
program. Most concerning, the 27 farms that benefit do so only 
because other producers go out of business. Not one rice farm 
or cattle ranch benefits, while only one cotton operation and 
one dairy benefit, mainly due to the fact that they both grow a 
significant amount of feed grains.
    While intuitively we knew that there would be winners and 
losers in cap-and-trade, we did not know that the benefits and 
costs would be so disproportionate and regionally perverse. How 
can we as members of the Agriculture Committee endorse a policy 
that disproportionately favors certain commodities and, thus, 
only one part of the country at the expense of all others?
    Mr. Chairman, I know you are very proud of your corn and 
soybean farmers in Iowa. You should be. But how can I 
reasonably support a bill that will put farmers in Georgia in a 
worse position or farms in California or farms in the 
Southwest, while transferring the benefits to the Corn Belt 
through attrition?
    I look forward to hearing from the producer panel today 
with their thoughts on the House bill and the likely effects it 
will have on producers as reflected in this study. Given the 
complexities of the market issues and the negative effects 
likely to be felt by producers, Mr. Chairman, I think you were 
wise to plan for additional hearings. I hope our staffs can get 
together during this week and plan for the next hearing, and I 
thank you again and appreciate your leadership and your work on 
this issue.
    Chairman Harkin. Well, thank you very much, Senator 
Chambliss. Again, you are correct, we have to make sure that 
agriculture is treated fairly and equitably in this cap-and-
trade legislation. I am committed to that. And we have to be 
cognizant of its varied impacts, depending upon what type of 
agriculture you are in and what part of the country you live 
in. And, hopefully, we will be able to address those and work 
those out as we move ahead on that. Obviously, we do not have 
jurisdiction over all that, but we will have jurisdiction over 
at least making our intents known to the Environment and Public 
Works Committee, I guess it is, before they start marking up.
    We have a full panel today. As I announced earlier, we have 
to adjourn here by no later than 12:30. I am going to ask that 
each witness take 6 minutes. I am going to be--I have never 
been very strict on the gavel before, allowing people to go 
over, but I think we are going to have a lot of people who want 
to ask questions here today. So I am going to ask each of our 
panelists no more than 6 minutes at the maximum to discuss your 
papers. That will give us 54 minutes, and that will leave us 
about an hour and a half for questions. And I am going to ask 
for 5-minute rounds on questions also.
    So we will start off with the Honorable Gary Gensler, 
Chairman of the U.S. Commodity Futures Trading Commission. Your 
statement will be made a part of the record in its entirety, as 
will all statements--and I read most of them last night--be 
made part of the record in their entirety. I would ask you just 
to sum up, as I said, in no more than 6 minutes.
    Mr. Gensler, welcome again to the Committee, and please 
proceed.

   STATEMENT OF HON. GARY GENSLER, CHAIRMAN, U.S. COMMODITY 
           FUTURES TRADING COMMISSION, WASHINGTON, DC

    Mr. Gensler. Thank you, Mr. Chairman and Ranking Member 
Chambliss. It is good to be back together with you and members 
of the Committee. My testimony will focus on the Commodity 
Futures Trading Commission's experience regulating emissions 
trading markets and how we can apply those experiences to 
trading in government-issued greenhouse gas allowances and 
offset credits. I am testifying on behalf of the full 
Commission, our four Commissioners, as I was glad to do the 
last time I was with you as well.
    We believe that effective regulation of carbon allowance 
trading will require cooperation on the parts of several 
regulators. There are five components that I believe should be 
considered: first, the standard setting and allocation, and, of 
course, the environmental compliance that goes along with that; 
second is recordkeeping, maintaining a registry for the 
allowances and offsets; third, overseeing trade execution 
systems; fourth, overseeing clearing of trades; and, fifth, 
protecting against fraud, manipulation, and other abuses.
    Now, in terms of these first two components, those fall 
within the expertise of other agencies other than the Commodity 
Futures Trading Commission. In other words, there are others 
better equipped to regulate the ``cap'' part of cap-and-trade.
    EPA, for example, currently issues allowances on sulfur 
dioxide and nitrogen oxide as mandated under the Acid Rain and 
Clean Air Market Acts. On a smaller scale, a group of ten 
States from Maryland up to Maine has the Regional Greenhouse 
Gas Initiative and issues allowances on greenhouse gas 
emissions. And in each of those cases, other entities issue the 
allowances, do the environmental compliance, and maintain the 
registry. The constant, however, in all of these markets is the 
CFTC currently regulates the emissions futures trading markets. 
In other words, the CFTC has a great deal of experience 
regulating the ``trade'' part of cap-and-trade.
    We have broad experience in the latter three components of 
carbon trading: regulating the trade execution systems and 
clearing of trades and protecting against fraud, manipulation, 
and other abuses. The Commission already oversees this trading 
and clearing of emissions futures and options contracts of the 
New York Mercantile Exchange and the Chicago Climate Futures 
Exchange. Additionally, just last month, under direction from 
Congress in last year's farm bill, the Commission began looking 
into if the Carbon Financial Instrument spot contract traded on 
what is called the Chicago Climate Exchange, a sister exchange 
to the futures exchange, is actually a significant price 
discovery contract. So the Commission has abundant experience 
in the regulation of centralized marketplaces, and should 
Congress seek to regulate cash markets for emission 
instruments, the Commission is well suited to carry out that 
function as well.
    The Commission has thorough processes to ensure that 
exchanges and clearinghouses are in place to protect market 
participants and ensure fair and orderly markets, and that 
trading in these exchanges comply with the law and regulations. 
Our surveillance staff keeps a close eye on the signs of 
manipulation and congestion and determines how to best address, 
and we have the authority to set position limits as well within 
these markets.
    The CFTC also has wide-ranging transparency initiatives, 
and it is designed to provide as much information to the 
American public as possible. So should you go forward with the 
cap-and-trade legislation, the CFTC would work with other 
regulators and market users to make sure that the transactions 
that occur--transactions that would have to be recorded on a 
registry kept by the EPA or USDA or others--that that registry 
be updated on a very real-time basis so that there would be 
market transparency.
    The CFTC, however, if you were to move forward, would need 
additional resources. I fear that I keep saying this, but the 
staff and technology to effectively regulate the expanded 
carbon markets. We have the expertise. We would probably need 
some additional resources.
    We also would want to work with Congress and look forward 
to working with Congress to enact broad, comprehensive reform 
of the over-the-counter derivatives marketplace. This reform 
must also include an oversight of the emissions and allowance 
markets if they were to develop in the over-the-counter space 
as well.
    As Congress moves forward and possibly regulated cap-and-
trade legislation, I look forward to working with this 
Committee to ensure that the new markets are comprehensively 
and effectively regulated. I believe the CFTC does have the 
expertise and experience necessary to help regulate the growth 
in carbon markets, and we must protect against the same hazards 
in the carbon markets that we currently guard against in other 
commodity futures markets, particularly fraud, manipulation, 
and other abuses.
    I thank you for inviting me here today. I look forward to 
your questions. I did it in 4 minutes.
    [The prepared statement of Mr. Gensler can be found on page 
74 in the appendix.]
    Chairman Harkin. That is perfect. Thank you very much, 
Chairman Gensler, and I will say that we will have just 5-
minute rounds. Again, I hope that we will respect each other's 
time on that and try to limit it to 5 minutes, and I will start 
off and start my clock at 5 minutes.
    Chairman Gensler, two things I want to ask. If we have a 
cap-and-trade system for greenhouse gas emissions, is there 
really a need for an over-the-counter market? And, second, I am 
concerned about derivatives. If we allow trading of derivatives 
on greenhouse gas offsets and allowances, would it make sense 
to require at the end date of a future or other derivative 
contract that there be a transfer of the actual offset or 
allowance, not simply a cash settlement?
    I ask both those questions because of my concern about 
derivatives on offsets or allowances and then derivatives on 
those derivatives and derivatives on those derivatives, and we 
are right back where we started before. And so I repeat: Is 
there a need for an over-the-counter market? And, second, 
should there at some point near the settlement date be some 
delivery of the actual offset or allowance and not simply a 
cash settlement?
    Mr. Gensler. Mr. Chairman, I appreciate your question. It 
continues a dialog we have had before in these hearing rooms. I 
believe that all futures on these carbon markets should be on 
exchanges, just as we have all futures for corn and wheat and 
oil and natural gas on regulated exchanges, and we are equipped 
to do that. I believe working with Congress, we need to make 
sure that any--what is currently called over-the-counter 
derivatives or swaps on these are brought under regulation, 
that the dealers in carbon markets, just like the dealers in 
oil or in wheat markets, should be fully regulated for capital 
and so forth; and that the standard contract should also be 
brought on exchange rates, standard swap contracts for these 
carbon allowances.
    But I do believe that there are going to be times where 
there is going to be tailored product that cannot readily be 
brought onto a centralized clearing. An example might be that 
if you wanted to build a utility in Iowa or in Georgia or in 
any one of your States, and that utility wants to bring on a 
financing for 10 years or even 20 years, you might want to lock 
in--that utility might want to lock in the price of the carbon 
emissions out 10 and 20 years, and that might not be readily 
available on a market.
    I do believe, though, working with Congress, that contract 
too should be under regulation by making sure that the dealer 
who is transacting that has to have the capital, has to report 
it to the regulators, the EPA and possibly other regulators 
regulating the cap side, and also to the regulators regulating 
the trading side as well.
    Chairman Harkin. How do we control the possible 
proliferation of derivatives on greenhouse gas emissions and 
the speculation thereon?
    Mr. Gensler. Well, I think as we are working with Congress 
to bring the whole over-the-counter derivatives marketplace 
under regulation, we must do that here as well; that the 
dealers in these contracts must be regulated for transparency, 
100 percent of their transactions, whether they be tailored or 
standardized; but also if you were to move forward and ask the 
CFTC to regulate that, that we be able to set aggregate 
position limits across those traded in the futures market as 
well as those in what might be in this tailored or still 
bilateral market.
    Chairman Harkin. One last thing. I hope that you and the 
other Commissioners and your staffs will continue to monitor 
what is being done here--not here, but in the Congress--so that 
at the appropriate time, when this legislation looks like it is 
mature and is ready to go to the floor, that we could get from 
you what resources you would need to carry out the provisions 
of the bill in order to provide adequate oversight and 
regulation.
    Mr. Gensler. We will do that, Mr. Chairman, and I commit to 
work with you and the appropriators to share that with you.
    Chairman Harkin. I just want to make sure they just do not 
dump on your lap all this stuff without the resources that you 
would need to regulate and have this oversight.
    Mr. Gensler. Thank you.
    Chairman Harkin. Thank you, Mr. Chairman. Thank you, 
Chairman Gensler.
    Senator Chambliss?
    Senator Chambliss. Thank you, Mr. Chairman. And let me just 
echo that, Mr. Chairman, because you and I have talked before 
about the fact that I think you are underresourced right now 
for what you have been charged to do; and I think you are 
finding that out every day you go to the office. So we need to 
make sure as we go through the whole financial overhaul, 
restructuring that we do not load you up with something else 
that would prevent you from being able to do your current job.
    I want to continue along that same line. I understand what 
you are saying about seeking to regulate all of these contracts 
and put them all on exchanges, but we know that today where the 
only cap-and-trade market that is functioning is in Europe, 
about 75 percent of contracts are traded over the counter. If 
they have been at this for a while and they are trading that 
high a percentage over the counter, what are we going to do 
different to try to bring those contracts onto the exchange?
    Mr. Gensler. Senator, I believe that you are right to 
look--Europe does give us some guidelines as to what might 
happen here. There are actually three marketplaces. There is 
the futures marketplace, where actually in Europe that market 
is all on exchange, the futures. There is a cash marketplace, 
and I think that is what you refer to. Some of that is off-
exchange, of course.
    If I could say it here, if a farmer in Iowa wanted to 
transact and sell an offset to another farmer in Iowa or maybe 
in Georgia, they might do that over the counter.
    Third, there is the swaps or derivatives marketplace. I 
believe that we have to have 100 percent of the futures 
marketplace regulated, just as we do in corn and wheat and oil. 
I believe that we have to have the standard derivatives 
contracts onto exchanges, as we are trying to do with Congress 
in other contracts as well, and that leaves the question on the 
cash markets. Can one farmer transact with another farmer? And 
I think that is probably appropriate. But if a centralized 
market comes together, I think we have to regulate that 
centralized market to protect against fraud and manipulation. 
These election trading platforms should have oversight and 
regulation, I believe.
    Senator Chambliss. Does the proposal by the administration 
that has come forward from Treasury, and while it is not firm 
yet by any means--and I know you have some issues with it. We 
have some issues with it. But the proposal that is out there, 
does that, do you think, give you the appropriate power to 
regulate the carbon contracts also? Or are we going to have to 
make some changes in that?
    Mr. Gensler. I believe that the administration sent up to 
Congress a very strong package and that that package actually, 
to your question, does cover in the definitions of swaps 
contracts on emissions, allowances, and offsets. If it does 
not, we will have to tweak it, along with Congress, but the 
intent was, working with Treasury, that it did cover that.
    Senator Chambliss. Let us talk for a minute about this 
issue of standardized versus specialized contract, and we have 
got the same issue, obviously, out there today with a number of 
other commodities. But is there going to be any difference in 
trying to say that a contract on a carbon emission is a 
standardized contract if it does so-and-so versus an interest 
rate contract that is standardized if it does so-and-so? Where 
are we going to come down on this? And how are we going to 
define ``standardized''?
    Mr. Gensler. I think it is very similar. What the 
administration put forward, and I support, is that the biases 
toward bringing more transparency and lowering risk that 
standardized products are on exchanges or trading platforms and 
centralized clearing, if a clearinghouse accepted a carbon 
allowance swap to be cleared, then the presumption would be 
that it would be standardized.
    That still might be the case that if somebody has to 
finance a 10- or 20-year utility plant, they could do that. But 
most likely the 1-year, the 2-year, or the 3-year carbon 
allowance trading would be largely standardized--maybe not 
entirely, but largely standardized.
    Senator Chambliss. OK. Just in addition to staying in touch 
with us relative to the resources, I think this issue is going 
to be critical with respect to the markets you have 
jurisdiction over now as well as any carbon contracts. And it 
is another reason I think we better be careful as we move ahead 
with cap-and-trade to make sure we get it right, and that if we 
are going to clear all of these contracts, with few 
exceptions--and I agree with you, I hope we can do that--we 
need to make sure that the traders out there on both sides of 
these contracts really have some direction. And I think we have 
got to be very careful that we give them the right kind of 
language to know what it is they are going to be dealing with.
    Mr. Gensler. Senator, I agree, and I also think you have 
highlighted the intersection of Congress' work between cap-and-
trade and over-the-counter derivatives reform. These two 
legislative initiatives might be timed a little differently and 
through different committees at times, but they very much 
relate in the regards you just said.
    Senator Chambliss. Thank you, Mr. Chairman.
    Chairman Harkin. Thank you, Senator Chambliss. Senator 
Klobuchar was next, she is not here. Then we turn to Senator 
Grassley, Senator Grassley?
    Senator Grassley. Thank you, Mr. Chairman. Thank you, Mr. 
Gensler.
    In your testimony, you state that emissions contract 
markets operate no differently than other commodity markets 
that CFTC regulates. However, there are members of the 
following panel that say these markets are quite different 
because the market is mandated by a Government-imposed cap and 
the market is ever reducing supply. So would you please 
reconcile these two points of view that the market really is 
different, but should be regulated in a uniform way as other 
commodities?
    Mr. Gensler. There are many similarities, like in the 
agricultural products this Committee oversees and their futures 
in corn and wheat. There is an annual crop in a sense. There is 
an annual crop of allowances that are issued. It may be 
reducing instead of growing. Hopefully we think of corn and 
wheat growing, and this might be reducing.
    It has some similarities to even Treasury bonds. Treasuries 
are issued by the Government. These are issued. Again, we would 
like to think that there would be fewer treasuries, but, 
unfortunately, there seems to be more every year. So there are 
many similarities.
    Where the similarities depart--I would certainly look 
forward to working with this Committee and Congress to see if 
there is additional oversight we would need. But I think in 
terms of overseeing a trading market, there are far more 
similarities than there are differences to all the other 
products that are overseen, whether it be the agricultural, the 
energy, or the financial products that are currently overseen 
in the futures markets.
    Senator Grassley. Next, you mention briefly in your 
testimony about the recent public hearings that CFTC held on 
whether to set position limits on energy markets like we do in 
agriculture markets. Expand for me and the Committee on your 
findings at the hearings.
    Mr. Gensler. We had three hearings where we had 23 
witnesses, and we had over 400 comment letters that came in. 
What we are looking at is Congress really directed in our 
statute that the CFTC set position limits--this was back in the 
1930's--and we did so in agricultural products and still do so. 
We did in energy products with the help of the exchanges 
through June of 2001. And, in fact, it was just 8 years ago 
that we sort of backed away from that, and the exchanges now 
have what is called accountability levels rather than hard 
limits.
    So we are taking a very close look as a Commission at this, 
all the comments, the thought really being that markets--how do 
we best promote a market, the fair and orderly market that no 
one party is so highly concentrated in that market that 
actually by being so large in the market, it sort of distorts a 
market and limits liquidity and limits the market function 
rather than adds to the market?
    It is a lot to move forward, but if we were to move 
forward--and I say ``if'' because we have a Commission 
process--we are looking to do that in the fall with proposed 
rules. We would take more public comment through the usual 
means that we do that.
    Senator Grassley. Thank you, Mr. Chairman.
    Chairman Harkin. OK. Thank you.
    Senator Klobuchar?
    Senator Klobuchar. Thank you very much. Thank you, 
Chairman.
    Over 25 years ago, Minnesota was the first State in the 
Nation to adopt legislation to address acid rain, and since 
then, as you know, President George H.W. Bush in 1990 created 
the Acid Rain Emissions Trading Program. And so our country has 
had some experience with this, and I know this is an emissions 
program that is regulated by the EPA. However, the CFTC has 
oversight of emissions trading. Could you comment about how 
that is working and any analogies you can draw with the 
proposals before us?
    Mr. Gensler. Senator, I thank you. I did not know it was 
your home State that started that.
    I think it has worked well. It is a small market, and much 
smaller than these anticipated markets. But under the Acid Rain 
and Clean Air Act, two products--sulfur dioxide and nitrogen 
oxide--are limited, and that is all done by the EPA. There is 
no offset program. It is more an allowance program. But then 
there are futures trading on these various contracts, and they 
are traded on something called the Chicago Climate Futures 
Exchange, and then also there is, I will call it NYMEX, or New 
York Mercantile Exchange, has--and I think you have a witness 
later today about that.
    Those futures trade. They are under our current regulatory 
regime. So far there has not been any issues that are not 
similar to the other things that we oversee to protect against 
fraud manipulation. We oversee the clearing and the exchanges 
on these.
    Senator Klobuchar. And do you think it has been a success, 
the trading on that?
    Mr. Gensler. I think that the trading--I am not going to 
speak to the environmental side, which I have read a lot about, 
but it is other expertise. I think the trading has brought 
greater price discovery, that those participants in the market 
who want to transaction, have a broad national market; that 
natural hedgers, just like in corn and wheat and oil, have 
somebody on the other side who might take the other side, who 
is a speculator but is setting a price with them to ensure that 
outcome.
    So I think in that regard, yes, it has been a success. It 
is still a very small market, of course.
    Senator Klobuchar. OK. So you think you could draw some 
knowledge and wisdom from that, but that this would be a much 
bigger project to tackle?
    Mr. Gensler. I think that is right.
    Senator Klobuchar. OK. And how does it compare with what is 
happening with the EU and how the EU has handled it?
    Mr. Gensler. Well, in Europe, you are right to mention that 
they, too, have gone forward, but they have a greenhouse gas 
initiative. They have two contracts, two trading--one is on the 
allowances, the EU allowances, and one is on emissions 
reductions or what we here call ``offsets.'' And those two 
contracts trade very actively on the European Climate Exchange 
and on something called Bluenext, two different exchanges. One 
is regulated by a French financial regulator, the other by the 
U.K. regulator.
    The open interest there, interestingly, is about the size--
I just looked at it last night--about half a million contracts 
on the European Climate Exchange, which is about the size in 
open interest in corn or wheat, which are about 300,000 or 
400,000 contracts. It is about a third of the size of WTI oil, 
which is about a million and a half open interest, just to give 
you a sense of the size of that market.
    Senator Klobuchar. OK. Since you have mentioned wheat a few 
times--and this is a little different topic--in January, the 
GAO issued a report in response to House Ag Committee Chairman 
Collin Peterson, who is a Minnesota Congressman, and he asked 
the GAO to examine issues surrounding the regulation of futures 
trading, as you know. And once noteworthy aspect of the report 
was the conclusion that eight empirical studies generally found 
limited statistical evidence of a causal relationship between 
speculation in the futures market and changes in commodity 
prices. A recent report by Homeland Security revealed that 
speculation was, in fact, one of the major causes behind the 
recent fluctuations in wheat.
    So could you comment on these reports and the connection 
between speculation and volatility of commodity prices?
    Mr. Gensler. We have recently--I think it was just last 
week--promoted greater transparency in these markets by 
disaggregating our weekly reports. We now also break out the 
index investors in the market. I think that the best role for 
the CFTC is to help promote transparency so market analysts can 
best answer the Senator's question.
    I do think as it relates to wheat specifically, if I can 
narrow that, I do think that index investing in the wheat 
contract in Chicago--and it is a very narrow topic--probably 
did contribute to what is called a lack of convergence in the 
wheat market. That is, the price of futures and cash in the 
wheat market has not come together. And so I think a little bit 
over half of that marketplace in the Chicago wheat market is 
index investors, and I think that is one of the contributing--
not the only factors, but contributing factors to the lack of 
wheat convergence.
    Senator Klobuchar. Thank you very much.
    Chairman Harkin. Thank you.
    Now Senator Stabenow.
    Senator Stabenow. Thank you, Mr. Chairman, and welcome, 
Chairman Gensler.
    Mr. Gensler. Good to be back in front of you.
    Senator Stabenow. It is good to see you. Just as one 
member, I would indicate, and speaking to our appropriations 
leaders, that if we move forward on cap-and-trade, we certainly 
need to address resources to make sure the CFTC is able to 
fully address all of the issues involved in this, which are 
incredibly important.
    I wanted to follow up more on the over-the-counter issue, 
which I think is a very important piece of all of this, and not 
only as we look at reforms that we are addressing here in this 
country, but in the House bill they would allow U.S.-covered 
entities to use international carbon instruments by the EU, the 
emissions trading system, or the UN's Clean Development 
mechanism to meet our domestic compliance purposes.
    So given that approximately 75 percent of all the emission 
trading in Europe takes place over the counter, how do you see 
commonizing international carbon instrument compliance if the 
U.S. legislation were to restrict such instruments for 
compliance purposes to those traded on regulatory markets?
    A second question would be, as a follow-up: Has the CFTC 
conducted an analysis of what impacts, if any, the 
administration's Over-the-Counter Derivatives Markets Act of 
2009 would have on the domestic and international carbon 
markets?
    Mr. Gensler. Well, in the first question, I think that 
international cooperation is critical. I do not know where 
Congress will come out in terms of whether those allowances or 
offset allowances over in Europe will be allowed here. But even 
if they are not, there is going to be some relationship of 
these two marketplaces.
    I believe that we have to have full transparency even into 
the over-the-counter market. The over-the-counter swap market 
may still be allowed, but it should be fully regulated. We 
should have the transparency. Any dealer in those markets 
should be registered, and we should have 100 percent 
transparency into that, and we should report the aggregate 
positions.
    In terms of the second question about the over-the-counter 
reform that has been proposed by the administration, it does 
include oversight of the carbon allowance markets. We have not 
had a separate study of that because it is such a small part, 
it is a small market in nitrogen oxide and in sulfur dioxide. 
There is a small market also between ten States, in New England 
down to my home State, Maryland, called the Regional Greenhouse 
Gas Initiative. But, again, it is small. We have not had an 
independent study yet.
    But I do think that if we move forward, we must cover 
carbon allowances in what is being considered in the over-the-
counter derivatives legislation that the administration sent 
up.
    Senator Klobuchar. So, just to recap, you are not seeing a 
problem in between what is happening internationally and at 
least at this point what the House bill has said in terms of 
using--allowing the international emissions standards versus 
what we are doing here? I mean, harmonizing that, would you 
have any recommendations as it relates to that?
    Mr. Gensler. My recommendation would be is if an allowance 
or an offset there is fungible into a U.S. system, if the 
Congress decides that it is fungible, then we want to make 
sure, just as oil is fungible worldwide, that we are looking at 
the aggregate markets, that we would have to be working even 
more closely with the FSA currently overseas and then there is 
a French financial regulator that oversees those trading 
markets over there. So fungibility puts a greater burden--this 
fungibility is a global fungibility of offsets. It puts a 
greater burden on the regulators to have a coordinated 
approach.
    Senator Klobuchar. And do you feel confident that you can 
achieve that?
    Mr. Gensler. I think we can, but it is a greater challenge 
because sometimes they have a different point of view than we 
do on how to regulate these markets.
    Senator Klobuchar. All right. Thank you, Mr. Chairman.
    Chairman Harkin. Thank you, Senator Stabenow.
    Now Senator Casey.
    Senator Casey. Mr. Chairman, thank you very much, and, 
Chairman Gensler, thank you for your appearance again. You have 
appeared in front of many Senate committees, and we are 
grateful you are here again.
    I am going to give you a little commercial in a moment, but 
I wanted to, first of all--that is because of your Pennsylvania 
connections, by the way, but I also want to commend your work. 
But we are here today to talk about a challenge that faces not 
just our country but the world, and the basic challenge is how 
to slow, stop, and reverse global warming. Obviously, there is 
legislation that is in the House, and the Senate is working on 
this as well. As we do that, we have to be able to balance and 
take into serious consideration and implement strategies within 
the legislation to make sure that our farm families are not 
adversely impacted. I believe, though, by as much as it is a 
challenge, it is an opportunity. It is an opportunity not just 
to stop global warming and keep our environment clean, but it 
is also a jobs opportunity, to create jobs and also to enhance 
our national security.
    We know that rural America, the families in rural America 
have been hammered by this recession. In fact, some of them 
were adversely impacted long before the recession with the high 
energy costs. Senator Gillibrand and I were just talking about 
our dairy farmers, all across States like Pennsylvania and New 
York and so many others, that have been adversely impacted.
    We are grateful today that you are here. We are grateful 
for your work in restoring confidence and giving a sense of 
strategy and a sense of purpose to the work that you do as a 
regulatory body that needs, as I realize, more resources.
    I know that later today we will hear from, among others, 
Luke Brubaker from Pennsylvania, and he was kind enough to 
provide some Pennsylvania crop insurance advertising. We are 
grateful for that, and we are grateful it was on the top of the 
pile of our papers. I want to thank him on behalf of the people 
of Pennsylvania.
    Senator Klobuchar. Would you like one?
    Senator Casey. Senator Klobuchar is passing out extra 
copies.
    But that all leads back to you because I know you are a 
Wharton graduate. We are pretty proud of you, and we hope you 
come back to Pennsylvania and live and pay taxes and do all 
that.
    [Laughter.]
    Senator Casey. But in the meantime, you have got a lot of 
work to do here in Washington.
    I was especially impressed by and happy about the fact that 
in your testimony you said--I am looking at page 2. You said, 
and I quote, ``As Congress moves forward with... cap-and-trade 
legislation, I believe it should ensure that there is a 
comprehensive regulatory framework over the expanded carbon 
markets...'' I think those are very important words, 
``comprehensive regulatory framework.'' And then later, on page 
6, you emphasized ensuring that ``all transactions in both the 
carbon futures and cash markets are promptly reported and that 
a central registry is updated at least on a daily basis.'' And 
all of the concerns that you have raised about how we do this 
to get it right and to be able to regulate it.
    I will ask in the very limited time that I have left, 
because I know I have talked for a couple of minutes here as a 
preface, but in terms of your resources, both human, staff 
resources as well as technology, tell us about what you need to 
do your job generally, but also in particular, if legislation 
is passed to give you this additional assignment, so to speak. 
What would you need specifically or as best you can guess in 
terms of people and resources? And on the technology part of 
it, is it both hardware, software, and other aspects of 
technologies?
    I know it is a broad question, but you have all of a minute 
to answer.
    Mr. Gensler. Well, I thank you, and I appreciate the 
advertisement. If there is anything you like in what I do, you 
can credit it to my University of Pennsylvania education. 
Anything that you do not like, you could credit to my wayward 
days elsewhere.
    [Laughter.]
    Mr. Gensler. But in terms of needed resources, with 
Congress' help we have just gotten back to the size we were in 
1999, about 570 people. We are going to submit, the Office of 
Management and Budget, to Congress in, I think, a week's time a 
much larger number, but it is going to be what we really 
believe we need to do our current duties. In technology, it is 
mostly software upgrades. We need to take our position and 
trading surveillance systems, probably spend on the order of 
$11 or $12 million, but we do not know--it is probably a multi-
year project--to upgrade that to 21st century surveillance 
rather than right now it is too much after-the-fact 
surveillance.
    Senator Casey. Well, thank you very much, and, Mr. 
Chairman, both Chairman Gensler and I have been very careful on 
our time, so I will stop right here. Thank you.
    Chairman Harkin. Thank you very much, Senator Casey.
    Senator Johanns?
    Senator Johanns. Thank you, Mr. Chairman. Let me, if I 
might, start my questions with maybe a little bit of context. 
In our last hearing with the Agriculture Committee, I asked a 
question of one of the panelists, Lisa Jackson. If we do what 
the House bill wants us to do, what will the environmental 
benefit be? Will temperatures come down? Will we reduce CO2 
emissions in the world? And the answer was no. You know, going 
it alone is not going to change much. Then soon after that, 
India and China weighed in, and they basically said, ``We are 
not interested in capping emissions.'' So we are asking our 
farmers and ranchers to bear the burden of this when, quite 
honestly, I would find it very hard to make a claim to them 
that we are going to see really any environmental benefit.
    Second, although there is some debate about the nature and 
extent of this, it is a given that they are going to have 
higher input costs. Now, like I said, we can have a great 
debate as to whether diesel fuel is going to go up X versus Y 
and this and that, but I think it is a given that they will pay 
higher input costs.
    Now, I put that together with this notion that we have had 
in agriculture, especially as a result of the 2002 farm bill, 
that really what we are trying to do with agriculture is take 
some of the volatility out of it. We talked about the safety 
net and the loan deficiency program, the marketing loan 
program, the countercyclical program, the ACRE program. All of 
those are designed to kick in at a point where we take some of 
the volatility out of it.
    You know, farming is one of those businesses: They cannot 
pick their price; they cannot predict the weather; they cannot 
predict what kind of pests they are going to deal with, and on 
and on. So it is a very, very difficult situation anyway.
    Here is what worries me about your piece of this puzzle. I 
do not think there is anything that we could do that would 
guarantee that in the trading here that is going to occur that 
there is not going to be volatility. We might be able to 
define, to some extent, what the parameters of that are going 
to be. But it just seems the nature of this that there is going 
to be volatility.
    Now, I think the Ranking Member made some excellent points. 
As I read the Texas A&M study, there are more losers than 
winners on this in agriculture. And even in the two farms from 
Nebraska that they analyzed, those are dryland farmers, and in 
Nebraska we irrigate. I think they would have been on the 
losing side of the equation because of higher electricity 
costs.
    So my question to you is: How much should farmers and 
ranchers be worried about the volatility, the additional 
volatility that this cap-and-trade legislation is going to put 
into their lives? And how much does this bill prevent that from 
happening?
    Mr. Gensler. Senator, I think that you are right, as you 
said, that farmers and ranchers cannot pick the price, cannot 
predict the weather, and so forth. I think that what we can do 
moving forward with Congress is make sure that if you move 
forward, the trading side is most transparent so the farmers 
and ranchers can see that pricing; that if they want to hedge 
it, they can hedge it out a long time; and that the price that 
they get is created in a market that is free of manipulation 
and it is fair and orderly. That is our remit at the CFTC, is 
to make sure that price discovery is fair and orderly, it is 
transparent, and the farmer can hopefully hedge their risk out, 
you know, on a yearly or multi-year basis.
    Senator Johanns. Here is the difficulty of that if you are 
a farmer, and I will use the turkey industry as a good example. 
When corn went to $6.50, $7, it wiped out the turkey industry 
in Nebraska. Just wiped them out. So if you have higher prices 
and you end up with that kind of situation with higher input 
costs, it will be zero consolation to that farmer when I call 
them and say, ``I am sorry you went broke because of this 
thing, but it was transparent.'' Do you see what I am saying?
    Mr. Gensler. No, I mean, I see what you are saying. I am 
just addressing what we do well as a market regulator is 
assuring that there are markets that are not only transparent, 
but the price discovery function--and this is also for farmers 
or ranchers that would be having offsets and they wanted to 
sell those offsets, too, and get the benefit of a price that 
way as well, as a revenue, that that market is free from 
manipulation on the trading side of cap-and-trade.
    Senator Johanns. Thank you, Mr. Chairman.
    Chairman Harkin. Thank you, Senator Johanns.
    Let us see. Senator Conrad was next. Senator Gillibrand?
    Senator Gillibrand. Thank you, Mr. Chairman.
    Mr. Gensler, thank you so much for being here. We are 
extremely grateful for your testimony and your leadership on 
these issues. I have basically three areas of inquiry that I 
hope you can address.
    The first is about the regulatory structure. I want to know 
your opinion on whether we should develop a regulatory 
structure for carbon trading that is distinct from other 
commodities, or would that, in fact, be more detrimental to the 
goal of providing effective market regulation and make it more 
difficult for the CFTC to do their job--enforce position 
limits, protect against fraud, and other regulatory objectives? 
So, basically, I would like your opinion on which regulatory 
structure you think is best and would be most effective?
    Second, I want you to address a little bit more 
specifically about the clearing process. Equity and equity 
options are handled through an open format, and the multiple 
exchanges competing for business generally can bring down costs 
for both clearing and settlement, and it has had that effect 
over recent years.
    Clearing for commodities remains a closed system that lacks 
any competitive dynamic, and as a result, the costs are higher 
associated compared to equity and equity options contracts.
    So, in your opinion, is it better to create a new model 
utilizing a noncompetitive model? Or would you prefer to do a 
more open competition, open access market? Which do you think 
is more effective, and why?
    Then the third issue is a little bit about over-the-counter 
and customized markets, what you would recommend? If we did 
have a customized market, an over-the-counter market, what 
would you recommend for that? And, in particular, do you 
believe it is appropriate to exempt anyone, particularly end 
users with bona fide hedges, from the mandate of everything 
having to go through clearing or an exchange? And do you think 
it would be appropriate and enforceable to exempt firms with 
inherent carbon risk--for example, utilities producers--from 
such a mandate?
    So, essentially, do you imagine or would you recommend any 
trading of customized markets for the carbon exchange that 
would not necessarily have to go through clearing or not 
through an exchange rate, depending on what we choose? And 
then, second, if you do imagine an exception, what kind of 
regulatory oversight would you imagine? Because, clearly, you 
would want to have transparency and the regulators would need 
to know volume. But what would you imagine for the regulatory 
aspect of that piece?
    Mr. Gensler. Let me see if I can try to address all three 
of your questions and some of the subparts. It is good to be 
back with you, Senator.
    In terms of regulatory structure, I think that the 
Commodity Futures Trading Commission does have the expertise 
and experience, does currently oversee the futures markets, 
albeit small, in emissions for these out of the acid rain 
program and even the regional alliance that I think both of our 
home States are in. So I think that is a good structure. We 
have two market regulators in this country. I am not sure we 
need a third market regulator. There is enough that we can 
harmonize between the SEC and the CFTC.
    I think that in terms of clearing you raise a very good 
point. We have actually recommended for over-the-counter 
derivatives that we have an open model for clearing. We think 
that that will promote greater competition amongst exchanges 
and exchange platforms, and certainly I think it is worthy to 
think about that in terms of the carbon markets. We would 
certainly recommend that for the carbon over-the-counter 
derivatives marketplace, but you raise a question about carbon 
futures, which is a worthy question. Right now it is a more 
closed approach on the Chicago Climate Exchange, I believe, but 
I might be mistaken on that.
    Now in terms of over-the-counter markets, I think that it 
is important to bring as much of the over-the-counter market 
into centralized clearing and onto exchanges as possible. Some 
will not be able to be standardized, of course. You raise a 
second question as to whether, if there was a hedge that is 
entered into for accounting purposes, it is a bona fide hedge--
I think, if I read into your question, might that be treated a 
little differently? The administration proposal was to grant 
the SEC and CFTC some rule-writing authority in that regard to 
allow some of that to be exempted.
    I do have a concern that the more we exempt, the more that 
we might be years from now looking back at 2009's Enron 
loophole or something. So I think we have to be very careful in 
each of these categories in terms of exemptions, because we 
want end users to manage their risk appropriately, these tens 
of thousands of end users, but I think society also needs to 
lower the overall risk by bringing as much into central 
clearing as possible.
    Senator Gillibrand. So if there is a customized market 
left, what would you have it look like? And who would be 
eligible----
    Mr. Gensler. Well, I think there will be a customized 
market, both in carbon markets as well as interest rate 
products and elsewhere. But I think the dealers in those 
markets have to be fully regulated so that the customized 
transactions and the standard transactions, the dealers would 
have to have capital; there would be business conduct to 
protect against fraud and manipulation so we could police the 
markets along with the SEC on the other products. These 
products would probably be more ours, oversight, and then the 
transparency, that not only as regulators we saw it, but we 
could aggregate the data and put it out to the public.
    Senator Gillibrand. Thank you.
    Chairman Harkin. Thank you, Senator Gillibrand.
    Senator Lincoln?
    Senator Lincoln. Thank you, Mr. Chairman, and thanks for 
holding the hearing today. Welcome, Chairman Gensler. We are 
glad you are back.
    Mr. Gensler. Good to see you again.
    Senator Lincoln. I would like to associate my comments with 
the Senator from Pennsylvania, Senator Casey, in terms of the 
challenges that we face, but the opportunities that we can find 
there. And I think there are great opportunities here.
    I also want to associate my comments with him in terms of 
making sure that as we do move forward, we do not do so putting 
a disproportionate burden on our hard-working farm families and 
our agricultural communities across this country. They do a 
tremendous job providing food and fiber for the world, and I 
hope that as we look at what we are trying to do, we will keep 
that in mind always.
    While it is not necessarily my preference to move on cap-
and-trade legislation in the Senate this year, if the Senate is 
going to move on climate change legislation in the future, 
certainly the regulation of carbon markets is something that we 
have to get right. And we are certainly going to need you all 
at CFTC to help us do that, Mr. Chairman.
    Under the cap-and-trade legislation, we are venturing to 
create kind of a whole new commodities market which presents, I 
think, a number of these challenges that we talk about and 
issues for Congress. And we thank you for your hard work in 
this area and the research you have already done in working to 
try and come up with those solutions.
    Just a couple of questions for the Chairman. Obviously, 
CFTC could play such a large role, as you have mentioned, and 
has the capability to do that in regulating carbon markets 
under a cap-and-trade system. What would you say is probably 
the most important thing that you have learned or that we, all 
of America, should have learned or could have learned from the 
EU experience in regulating the carbon market?
    Mr. Gensler. I think that what we have learned from the 
European experience is these markets are going to be likely 
sizable, that we have to bring transparency to these markets, 
that they need to be regulated. They do not yet regulate the 
over-the-counter derivatives marketplace, and I cannot point to 
a problem there, but I think enough problems have been in our 
markets that we should include the carbon markets in what 
Congress is moving forward in over-the-counter derivatives for 
sure. But I think transparency and to make sure that we bring 
it under market regulation, any centralized cash market, any 
centralized futures market, and also this over-the-counter 
market.
    Senator Lincoln. Will you continue to, I think, certainly 
re-emphasize the fact that what we have done in the past hear 
in similar situations has been on a much, much smaller scale 
when we talk about--you have mentioned the SO2 and the SOX and 
the NOX and what we have dealt with there. Do you think what we 
are dealing with here is too large to deal with, with this type 
of an approach?
    Mr. Gensler. No, I do not. I think it is just a larger 
scale. The size of it makes it even more incumbent upon us that 
we have an oversight function, that the price discovery 
function is free of manipulation, and that it is transparent; 
that a national registry, even if it is kept by EPA, is updated 
on a very regular, real-time basis--not at the end of the 
month, not at the end of the quarter, but it is really updated 
on a very regular basis and so forth.
    Senator Lincoln. Well, I have some real concerns about the 
volatility or the possible volatility in these new markets, 
carbon markets. And I guess the two questions I would have to 
you on that would be if you believe that the Waxman-Markey 
approach is the correct approach to helping prevent carbon 
markets from wildly fluctuating, what do we see in the 
possibility of the ramifications of that volatility, that 
possible volatility, particularly to consumers?
    I know Senator Johanns brings up his turkey farmers. I have 
got a lot of poultry farmers and catfish farmers and others 
that exactly what happens, cattlemen as well, when the price of 
that feed goes up, they are out of business. And when they do, 
then the price of those products, those foods in the grocery 
stores go up. There is concern all around.
    What about that volatility? Do you think the Waxman-Markey 
approach has enough in it to deal with that volatility? And how 
do you think that volatility could affect our consumers?
    Mr. Gensler. I think that as Congress tries to address 
itself to how to lower the emission of greenhouse gases, the 
trading piece of this, it is most important to make sure there 
is transparency. Like other markets, there will be some 
volatility, but the way one addresses that volatility is to 
make sure that people can hedge their risk for long periods of 
time, that they are not subject to the whims of a current 
weather pattern or some weekly pattern and they can hedge it; 
they can see that national pricing, they are not subject just 
to some dark market; and that you have a strong regulator who 
is going to enforce manipulation standards and aggregate 
position limits as we seek to do in other markets.
    But you are right, and both Senators are right. I mean, 
there will be some volatility in this marketplace, but I think 
transparency, anti-manipulation, a national market rather than 
smaller regional markets, and aggregate position limits are a 
part of the puzzle here.
    Senator Lincoln. Thank you.
    Thank you, Mr. Chairman.
    Chairman Harkin. Thank you, Senator Lincoln.
    Again, Chairman Gensler, thank you very much for your 
testimony and for your leadership at the Commodity Futures 
Trading Commission. I listened as intently as I could to a lot 
of the questions. Some of those were kind of policy questions 
and things like that, but we just need to have you keep in 
close contact with us on resources that are needed and how we 
structure the oversight and regulatory regime for this so that 
it functions well.
    I leave you with where I started and, that is, my concerns 
again about speculation on derivatives and how that might 
artificially jack up the prices on these allowances and offsets 
and not in accordance with really what they should be worth. I 
asked that question at the beginning, and I still have concerns 
about it, but this would be an ongoing dialog and discussion, I 
am sure.
    Mr. Gensler. Thank you, Mr. Chairman, members of the 
Committee, and we are available to be of help at any time.
    Chairman Harkin. I appreciate it very much. Thank you very 
much, Chairman Gensler.
    Mr. Gensler. Thank you.
    Chairman Harkin. We will call our next panel up: Mr. 
Timothy Profeta, Director of the Nicholas Institute for 
Environmental Policy Solutions at Duke University; Mr. Joseph 
R. Glace, I believe--I hope I pronounced that right--Vice 
President for Risk Management and Chief Risk Officer, Exelon 
Corporation; Dr. Dave Miller, Chief Science Officer, AgraGate, 
and Research & Commodity Services Director for the Iowa Farm 
Bureau; and Ms. Julie Winkler, Managing Director, Research and 
Product Development, CME Group, and Member of the Board of 
Directors of the Green Exchange Venture.
    Mr. Glace, did I pronounce your name correctly?
    Mr. Glace. Yes, sir.
    Chairman Harkin. OK, good.
    Senator Casey. Mr. Chairman, Mr. Glace also has 
Pennsylvania educational roots. Am I correct?
    Mr. Glace. Yes, sir.
    Chairman Harkin. What is this, Pennsylvania Day here? Or 
what is going on here?
    Senator Casey. We are just going to keep that commercial 
going. Thank you.
    [Laughter.]
    Chairman Harkin. We have Pennsylvania on the next panel, 
too. Pennsylvania Day here.
    Well, welcome to all of you again. You can tell from Mr. 
Gensler's testimony and our questions that there is a lot of 
interest in this Committee on how this is not only structured, 
but how it is regulated. This panel basically will continue our 
discussion on how we regulate carbon markets in a cap-and-trade 
system. Our next panel will be from the producer group 
perspectives, but I understand that a lot of this stuff flows 
back and forth, and we might get into some producer things also 
here on the regulatory panel.
    As I said in the beginning, your statements will be made 
part of the record in their entirety. I would ask you to sum up 
in 6 minutes or less what your main point is so we can get to 
discussions with you on those points.
    I would start first with Mr. Timothy Profeta, Director of 
the Nicholas Institute for Environmental Policy Solutions, and 
not a stranger here to the U.S. Senate.

STATEMENT OF TIMOTHY PROFETA, DIRECTOR, NICHOLAS INSTITUTE FOR 
ENVIRONMENTAL POLICY SOLUTIONS, DUKE UNIVERSITY, DURHAM, NORTH 
                            CAROLINA

    Mr. Profeta. Thank you, Mr. Chairman. Thank you, Mr. 
Chairman and Members of the Committee, for the opportunity to 
testify today. Right now I wish I went to school in 
Pennsylvania, but it is an honor to be here.
    My testimony today is focused on the issues and concerns 
regarding the design of the carbon market. Given the financial 
market failures in recent years, however, it is understandable 
that a market approach should not be viewed as a foregone 
conclusion. However, I want to submit at the outset that, in 
our institute's evaluation of a number of policy options, the 
market remains the best means to achieve the environmental 
goals at the lowest cost.
    Almost by definition, private actors with a market 
incentive will find a lower, less costly alternative to reduce 
greenhouse gas emissions than the Government could determine by 
fiat. And cost, in the end, is the determining factor. No 
sector is more aware of this than the agricultural sector. And 
as one more aside, let me note that the institute this week 
released a report co-authored by our colleagues at Texas A&M 
and Oregon State and EPRI to try and put an end to the ``he 
said, she said'' debate over agricultural impacts. At bottom, 
our study found that the net flow of greenhouse gas revenue and 
indirect commodity market revenues for farmers still outweighed 
the increased operating costs that we did see from the climate 
program.
    Much of the market's cost-reducing benefits, however, could 
be weakened if the market does not operate transparently and 
efficiently. We know all too well that imperfect markets occur. 
Recent market failures provide a number of lessons, however, 
that you can apply to the creation of a new carbon market, 
including the importance of market transparency, vigilant 
regulators with adequate resources and jurisdiction, and 
effective risk management.
    But before I recommend how these lessons should apply to 
the carbon market, let me first point out its uniqueness. 
Carbon will be unlike other commodity markets. It is an 
especially important point right now as the question of a 
carbon market is becoming complicated for fear that it will be 
a proxy for greater commodities regulation. I would like to 
point out a few distinguishing aspects of the market.
    First, unlike other commodities markets, the entire carbon 
market is created by the Government to achieve a societal goal. 
Demand for the product, and the product itself, is created by 
Government action, and thus the Government has a special duty 
to ensure that the market operates effectively.
    Second, entities covered by the legislation will have no 
choice but to participate in the market, and it is a market 
with an ever reducing supply.
    Third, the carbon market is likely to be driven heavily by 
derivatives, underscoring the need to design an appropriate 
regulatory structure. In particular, climate legislation will 
likely create a long-term, 38-year obligation for regulated 
entities, and these entities will need access to financial 
instruments to hedge their exposure through derivatives--a 
necessary element to securing investment for new, low-carbon-
emitting energy technologies.
    I would like to leave you today with four principles for an 
effective carbon market based on the lessons of the past 
decade: one, real-time transparency; two, adequate risk 
management and settlement; three, a vigilant and well-funded 
regulator; and, four, transparent data and strong quality 
controls on the allowances traded.
    First, transparency. To the extent that instruments are 
traded on registered exchanges, the exchange member's activity 
will be ``printed'' on the exchange providing for the needed 
transparent information. If OTC transactions are to take place 
in the carbon market, the legislation will need to ensure that 
the regulator, market participants, and the general public have 
sufficient data to oversee and evaluate trading activity.
    Finally, Congress will need to balance the public's access 
to timely market information with the legitimate concern that 
covered entities may need to protect their confidential 
business information. In addition to the information made 
available to the general public, regulators should have access 
to the full range of market activity in real time in order to 
prevent and punish market abuses, including fraud and 
manipulation. The obligation should lie with the market 
participant to provide the information to the regulator, not 
the other way around.
    Current market participants also need to know that the 
allowance purchased on the spot, forward, and futures markets, 
which are held to maturity, will be delivered. In regulated 
financial markets, counterparty risk is generally managed by 
clearing the transactions. If the Committee wants to minimize 
the risk from counterparty failure, as much trading should 
occur on exchanges, or at least be cleared centrally, as is 
feasible.
    Many will contend that clearing of long-term structural 
contracts will be difficult, as such transactions are unique 
and not liquid, and that parties will be required to post the 
collateral, or margin, necessary to participate in the market. 
These are non-trivial issues and pose a choice between 
mitigating systemic risk and creating the additional cost of 
posting margin.
    It is important to note that market participants pay for 
the risk or risk management somehow, either through the posting 
of margin or through the pricing of OTC instruments. It will be 
your role to evaluate that tradeoff.
    In the case that Congress provides exceptions to cleared or 
exchange-traded transactions, transparency for the 
counterparties and the regulator is even more important.
    Access to market data should be coupled with sufficient 
resources to process and analyze the information, broad 
jurisdiction that allows the regulator to oversee any trading 
that involves allowance-based financial instruments, and 
appropriate enforcement authority. If Congress will ask the 
CFTC to take on the oversight of this new market, then more 
resources will be required to build the team of regulators 
needed.
    Finally, the Government must ensure that the information 
regarding emissions is transparent, predictable and reliable. 
It must predictably produce information about the Nation's 
emissions to allow the market to evaluate the demand. A good 
example of an effective program has been the U.S. Acid Rain 
cap-and-trade program.
    The Government also must provide the market with adequate 
assurances that the products traded in the carbon market are 
what they claim to be. With regard to the emissions allowances, 
the Government will create, serialize and track the Government-
issued right to emit.
    With regard to offset credits, however, the Government's 
role is to provide adequate protocols and procedures to ensure 
the market that any carbon offset project is real and verified.
    The market is a powerful tool, by which environmental 
objectives may be achieved at historically low costs. Concerns 
about market abuses have, nonetheless, led some to conclude 
that now is not the time to create a new market. Let me posit 
that the exact opposite is true. If you choose to create a 
market, now is the best time to create a transparent, effective 
market that prevents excessive speculation and manipulation. 
The lessons are clear, and the public is attuned to the needs. 
If it wants to do so, Congress has the tools it needs to create 
a well-functioning marketplace.
    Thank you, Mr. Chairman. I look forward to your questions.
    [The prepared statement of Mr. Profeta can be found on page 
106 in the appendix.]
    Chairman Harkin. Thank you, Mr. Profeta.
    Now we will turn to Joseph Glace, Vice President for Risk 
Management, Exelon Corporation. Welcome, Mr. Glace.

     STATEMENT OF JOSEPH R. GLACE, VICE PRESIDENT FOR RISK 
MANAGEMENT AND CHIEF RISK OFFICER, EXELON CORPORATION, CHICAGO, 
                            ILLINOIS

    Mr. Glace. Good morning and thank you for inviting me to 
testify this morning. It is truly an honor to be here today.
    My name is Joe Glace, Vice President and Chief Risk Officer 
of Exelon Corporation. Exelon is a public utility holding 
company headquartered in Chicago. Our local retail distribution 
utilities, ComEd and PECO, serve 5.4 million customers, or 
about 12 million people--more than any other company in the 
United States. We have fossil, hydro, nuclear, and renewable 
generation facilities. Our nuclear fleet is the largest in the 
Nation and the third largest in the world. I have worked in the 
energy field for over 29 years. At Exelon, I am responsible for 
leading the risk management function, including the 
identification, assessment, and monitoring of market, credit, 
and operational risks.
    In my testimony today I would like to highlight the 
following: Exelon's support for comprehensive climate 
legislation; Exelon's opposition to requiring all trading, 
derivatives, and hedging activities to be conducted on 
exchanges; Exelon's support for expanding the CFTC's 
jurisdiction to the new market for carbon allowances, including 
the over-the-counter market; and Exelon's support for the 
reporting requirements for OTC transactions in the carbon 
markets.
    Exelon was an early and vocal advocate of climate change 
legislation. Our CEO, John Rowe, first testified in favor of 
addressing climate change by means of a carbon tax in 1992. We 
are pleased that the House has passed a comprehensive climate 
and energy bill and look forward to working with the Committee 
and the Senate to pass comprehensive, cap-and-trade legislation 
this year.
    Exelon supports a bill with realistic targets and an 
effective cost containment mechanism, such as a cost collar, 
and allocating allowances to regulated local utilities with a 
requirement that the value represented by those allowances be 
used to provide benefits to customers.
    I think it is important to explain briefly Exelon's overall 
approach to commodities trading. We are not speculators. We use 
commodities trading primarily to reduce price risk from spot 
market power prices. Our business model is to lock in, or 
hedge, the price we are paid for the electricity we generate.
    We do this by buying and selling energy products in the 
markets that are available. For example, we might sell 
electricity at an agreed-to price for all hours in the summer 
months of June through September. We also might transact in the 
over-the-counter market for coal to lock in our fuel cost.
    Our customers benefit from this hedging and trading 
activity. We are in a position to agree to longer-term power 
sales contracts with both wholesale and retail customers. It is 
our experience that retail customers, in particular, want 
stable power prices. Without hedging and trading, that simply 
would not be possible.
    One of the principal concerns many have expressed with 
adopting a carbon control regime is how it will affect our 
fragile economy. Simply put, a properly regulated, robust 
trading program, plus liquid trading markets, will help control 
the overall cost of the program.
    It is important to view the issues before this Committee 
from the customer's perspective. What steps should the Congress 
take to regulate carbon trading emissions without imposing 
undue costs on consumers? Our strongly held view is that any 
regulatory reform of the commodities markets should ensure that 
the products which we use to hedge our risks remain available 
to us and at a cost that is comparable to the costs we face 
today. We believe it would be a mistake to force most, if not 
all, derivative hedging activities to exchange-traded 
platforms.
    Today, a substantial component of our derivatives hedging 
program is in the OTC market without clearing. Transacting on 
exchanges is much more expensive than in the over-the-counter 
markets because it requires posting of substantial amounts of 
cash as collateral. This is one reason we do not--in fact, 
cannot--conduct all of our hedging activity on exchanges. 
Moving all our hedging to exchanges would require substantially 
larger cash outlays. This in turn would mean our customers 
would have to pay substantially more for electricity.
    Another drawback of limiting hedging activity to exchanges 
is that these entities only offer a standardized set of 
products. Exelon often enters into customized transactions that 
mitigate the particular risk we are trying to hedge than would 
one of the exchange-traded standard products. To draw the 
obvious conclusion, power prices will be higher, meaning 
consumers will ultimately pay more than they would otherwise, 
if companies like Exelon are forced to do all of their hedging 
on exchanges.
    I will now turn to the question at hand: what to do about 
the coming market for carbon emissions allowances. The cost of 
carbon allowances will be a cost of doing business for 
generators. It will be just like the cost of natural gas, oil, 
or coal--an input that is necessary to enable us to make and 
sell our product. Exelon will need to hedge the price risk 
associated with that product. Exelon will want to have both 
exchange-traded and over-the-counter offerings that now exist 
to manage these risks.
    We recognize, however, that there is a need for fair and 
balanced regulation. No one wants another crisis that could 
pose systemic risk, or a market structure with continuing 
regulatory gaps. That is why we support the expansion of the 
CFTC's jurisdiction to the new market for carbon allowances, 
including the over-the-counter market. This should allay any 
concern that any trader could artificially drive prices up.
    The Commodity Exchange Act already contains strong anti-
manipulation provisions that should be made applicable to the 
OTC markets and perhaps revised and refined to ensure that they 
provide to the CFTC the tools it needs to prevent manipulation.
    For the same reason, Exelon also supports the adoption of 
new reporting requirements for OTC transactions in the market 
for carbon allowances. The CFTC has to have access to 
information about transactions to enable it to fulfill its 
regulatory oversight and enforcement function. Also, the 
obligation to report, as such, will be a powerful deterrent to 
would-be manipulators.
    I appreciate the Committee's invitation to testify today. 
This is a complicated subject area. I hope that I have provided 
you with a sense of why it is important to ensure that there is 
effective oversight of the emerging carbon markets while at the 
same time guarding against over-regulation that would result in 
higher costs for companies like Exelon and in turn for our 
customers.
    I would be pleased to answer any questions you may have 
this morning. Thank you.
    [The prepared statement of Mr. Glace can be found on page 
81 in the appendix.]
    Chairman Harkin. Thank you very much, Mr. Glace.
    Now we will turn to Mr. Dave Miller, Chief Science Officer 
for AgraGate, and Iowa Farm Bureau. Welcome, Dr. Miller.

STATEMENT OF DAVID MILLER, CHIEF SCIENCE OFFICER, AGRAGATE, AND 
   RESEARCH & COMMODITY SERVICES DIRECTOR, IOWA FARM BUREAU 
               FEDERATION, WEST DES MOINES, IOWA

    Mr. Miller. Thank you very much for this opportunity to 
discuss issues regarding market structure and market 
performance as it pertains to carbon markets. My name is David 
Miller, and in addition to the activities and services working 
with the Iowa Farm Bureau and AgraGate, I also farm. On our 
400-acre farm in southern Iowa, we converted to continuous no-
till in order to qualify to earn carbon credits under CCX 
rules. I am one of thousands of U.S. farmers who work more than 
16 million acres that have been paid for providing 
environmental services through the CCX enrollment and carbon 
services. While I have served for over 6 years on various 
governing committees at CCX, I am speaking today on behalf of 
AgraGate and the Iowa Farm Bureau.
    Occasionally, we have been asked why all of the credit 
registrations we have done through AgraGate have been on the 
Chicago Climate Exchange, and the simple answer is that the CCX 
has the only protocols that are workable for production 
agriculture and private forestry. Market design and structure 
matter and are critical to market performance. Some of the 
items that I would like to discuss today include market 
transparency, offset protocol standards, and the critical need 
for fungibility of compliance offsets. And I apologize to the 
Committee for getting down into the weeds on some of these 
things, but as a farmer, I know if I do not take care of the 
weeds, there is no crop.
    Market transparency is critical to smooth operation of a 
carbon market. Transparency means that not only must there be a 
clear enumeration of what criteria are used to define offsets, 
but that there must be a mechanism in place so that prices--
bids, offers, and sales transactions--are publicly reported and 
readily available. The only market in the offset market that 
currently offers that transparency is the Chicago Climate 
Exchange. Unfortunately, that pricing transparency has been 
sharply curtailed. Under the provisions of H.R. 2454, there is 
language that suggests that domestic offsets from current 
registries may be exchanged or recognized in the Federal 
regulatory program, but not allowances or international 
offsets. This has resulted in all offset transactions moving to 
the bilateral, privately negotiated trades where the buyer can 
be assured that they will receive offsets rather than the other 
compliance instrument as might be the case on the electronic 
platform.
    To improve transparency, CCX rules have been updated to 
require that all these privately negotiated trades be reported. 
But the bid-ask spread has widened significantly, and the 
market has fragmented. This has increased the transaction costs 
associated with carbon marketing and has reduced the net 
returns to the actual offset providers.
    Regulatory uncertainty is now harming the thousands of 
farmers and companies who have taken the lead in building these 
rules-based carbon markets, and it is extremely important that 
we provide a smooth transition for those who are making 
emissions reductions today in CCX and other verified programs.
    With regard to fungibility, the fungibility of compliance 
offsets is extremely important, where a registered offset 
credit equals a registered offset credit regardless of the 
source of the credit. It is a market design characteristic that 
is essential if the transaction costs of the carbon market are 
to be minimized.
    ``Term Credits,'' as delineated in H.R. 2454, are not 
fungible compliance instruments. They only delay compliance 
obligations. They do not satisfy them. They are an inferior 
product, and based on the experience of temporary credits under 
the European trading system, they will have little or no value. 
It is extremely problematic that H.R. 2454 has relegated all 
soil sequestration offsets, by design, to the class of term 
credits. It is neither necessary nor desirable from a market 
design perspective to address the issue of permanence in this 
manner.
    Design criteria for offset protocols can make or break the 
viability of agricultural and forestry offsets as real tools in 
the efforts to reduce atmospheric carbon. To be viable, offsets 
must be designed for ``working lands.'' And to be a workable 
part of the solution, the carbon offset protocols must work 
within the framework of existing agricultural markets. Length 
of contract matters. In Iowa, more than 60 percent of the 
farmland is rented by the operator with the vast majority of 
that land on 1-year renewable leases. In our experience of 
working with farmers on carbon offsets, the No. 1 reason why a 
farmer would not participate in a carbon offset program is the 
length of contract.
    We have looked at the proposed protocols of other 
registries. Some of these protocols have single-term length 
commitments anywhere from 20 years to 199 years. Our experience 
is that farmers and private forestry landowners are very 
reluctant to sign contracts that extend that long.
    Generalized quantification methodologies are a very 
effective and low-cost way to quantify soil sequestration 
offsets. But do not be fooled by the ``illusion of accuracy'' 
that some would say exists when credits are granted based 
uponsite-specific soil sampling. And there is more in my 
statement about that, but for time, I will leave that to the 
written.
    I would like to address some of the market regulatory 
framework. As is being demonstrated by the early action 
programs, carbon can and is becoming a commodity that can and 
will be traded just like other commodities. The experience of 
the Chicago Climate Exchange is proving that markets for carbon 
can and do work. The actual registry and retirement of 
allowances and offsets should be done on regulated, open, 
transparent markets with specific standards for price reporting 
that include date of transaction, vintage, quantity, and price 
information.
    The CFTC should continue in its role as the regulator of 
derivatives, futures, and options contracts associated with 
carbon trading, and Farm Bureau opposes the efforts to combine 
CFTC and the Securities and Exchange Commission and supports 
regulation of the commodity futures business by CFTC. 
Derivatives, futures, and options on carbon contracts are not 
fundamentally different than other derivatives, futures, or 
other markets. The oversight provided by the CFTC can be 
adequate for those markets.
    In my written testimony, I also talk about some of the 
capital and margin requirements. Leverage is important, and I 
think we need to pay attention to those.
    I would finish by saying that USDA has a distinct and 
unique role as part of the administration of offsets, and that 
is a unique part of also the regulatory structure.
    I thank you for the opportunity to be a part of this, and I 
stand ready for any questions.
    [The prepared statement of Mr. Miller can be found on page 
90 in the appendix.]
    Chairman Harkin. Dr. Miller, thank you very much for your 
statement, both here and the written statement.
    Now Ms. Julie Winkler, Managing Director, Research and 
Product Development for the CME Group, and member of the Board 
of Directors of the Green Exchange Venture, and since everybody 
is bragging about Pennsylvania, I am told you really came from 
Waterloo, Iowa. I want to state that for the record.
    Ms. Winkler. That is correct.
    Chairman Harkin. Thank you. Ms. Winkler, please proceed.

  STATEMENT OF JULIE WINKLER, MANAGING DIRECTOR, RESEARCH AND 
PRODUCT DEVELOPMENT, CME GROUP, AND MEMBER, BOARD OF DIRECTORS, 
           GREEN EXCHANGE VENTURE, CHICAGO, ILLINOIS

    Ms. Winkler. Mr. Chairman, members of the Committee, I am 
Julie Winkler, Managing Director of Research and Product 
Development of CME Group Inc. and a member of the Board of 
Directors of the Green Exchange LLC. Thank you for the 
opportunity to appear before the Committee today and provide 
our views regarding the regulation of a U.S. carbon market.
    The Green Exchange Venture believes that cap-and-trade is 
the preferred solution for guaranteeing emissions reductions at 
the lowest possible cost to the economy. In order for the 
promise of a cap-and-trade program to be met, it must be built 
on certain design principles.
    First, we strongly support providing compliance entities 
with a choice of utilizing exchange-traded derivatives and OTC 
instruments to meet their environmental obligations. Also, in 
order to provide these customers with effective risk management 
tools and liquidity, the U.S. carbon markets must allow for 
broad market participation. We further believe that the 
Commodity Futures Trading Commission is best suited as the 
regulator of the U.S. carbon marketplace. Last, to ensure the 
creation of a transparent U.S. carbon market with the necessary 
liquidity and price discovery they provide, regulatory 
proposals should not include a transaction tax.
    CME Group is one of six founding members of the Green 
Exchange Venture, which is currently comprised of 13 partner 
firms from the energy, environment, and financial sectors. CME 
Group currently provides the electronic trading platform, 
central counterparty clearing services, and other exchange 
services. Our partners are currently major participants in the 
European carbon markets as well as regional environmental 
markets.
    We strongly believe that a cap-and-trade program offers the 
best opportunity to minimize the cost of mandatory reductions 
in greenhouse gas emissions. Emissions trading systems are 
already operating or planned in over 35 countries, and they 
have proven that cap-and-trade programs can successfully cut 
emissions with efficiency and cost-effectiveness.
    There are several design features that are critical to a 
well-functioning cap-and-trade system and related derivatives 
markets. Based on our extensive market development experience, 
we strongly believe that a cap-and-trade system must include 
participation beyond compliance entities.
    Futures markets perform two essential functions: they 
create a transparent venue for price discovery, and they permit 
low-cost hedging of risk. And to be effective, futures markets 
depend on a broad universe of market participants with both 
short-and long-term expectations to make markets and provide 
liquidity.
    We also believe that imposed price floors or ceilings 
should be avoided if a carbon market is to create meaningful 
price discovery. Price caps reflect factors extraneous to the 
fundamental factors that drive prices and, thus, are not 
connected to actual supply and demand.
    While it may seem that artificially constraining prices 
with a ceiling will reduce price volatility or market 
manipulation, the opposite is likely to result.
    We fully understand the motivation to protect American 
consumers from dramatic increases in the cost of carbon. 
However, we believe this can be facilitated through strong 
market oversight and not through price floors and ceilings.
    By offering electronic trading of exchange-traded carbon 
derivatives, coupled with a comprehensive clearing solution, we 
will enhance price discovery, contribute significantly to 
liquidity, and reduce risk and uncertainty for market 
participants. CME Clearing is one of the largest central 
counterparty clearing services in the world and has provided 
clearing services for the futures industry for over a century 
without a single customer default.
    Electronic trading and clearing solutions also provide a 
trustworthy and timely audit trail to effectively identify 
anyone who engages in misconduct. We believe that because of 
the CFTC's established expertise and coordination with the 
global derivatives industry, it is in the best position to 
provide strong regulatory oversight to the carbon markets.
    We applaud the efforts of this Committee and the 
administration to ensure that a mandatory U.S. cap-and-trade 
program will enhance transparency, integrity, efficiency, and 
fairness in the markets. As beneficial as exchanges and 
clearinghouses will be in a U.S. carbon market, they will not 
meet all the needs of customers. Although the Green Exchange 
Venture and other emissions trading platforms would likely be 
the presumed beneficiaries if all transactions were required to 
be executed on electronic trading platforms, we do not believe 
this would be in the best interest of a U.S. cap-and-trade 
program.
    Exchange-traded and OTC derivatives markets are essential 
to the efficient functioning of a U.S. carbon market. Together, 
these markets can provide compliance entities with the ability 
to increase their certainty in their future cash-flows by 
protecting against price risk and effectively managing their 
capital, thereby increasing their ability to meet compliance 
obligations at the lowest possible cost.
    The OTC market is complementary to standardized exchange-
traded products by providing products customized to a regulated 
entity's emissions and their time horizon. While some types of 
customized transactions must be conducted OTC, the remainder of 
carbon transactions that we envision will likely lend 
themselves to exchange-traded products.
    While OTC transactions should be present for a cap-and-
trade program to be fully successful, the OTC carbon market 
must provide a greater level of transparency than what is 
currently present in other OTC markets. As part of its special 
call reporting, the CFTC already requires extensive reporting 
of OTC commodity derivative positions. This reporting framework 
can be leveraged and extended to include new carbon 
derivatives. Entities such as the Green Exchange Venture will 
provide capped entities and other market participants with the 
venue to safely and securely manage their carbon price risks.
    Regulated exchanges, clearing solutions, and the CFTC will 
ensure a high level of transparency to the U.S. carbon markets. 
This strong regulatory structure combined with added 
transparency in the OTC market will enable compliance entities 
to meet their environmental obligations and allow agricultural 
and forestry offset developers to fully participate in a well-
functioning U.S. carbon market.
    I appreciate this opportunity to offer these comments to 
the Committee and will be pleased to respond to any questions.
    [The prepared statement of Ms. Winkler can be found on page 
121 in the appendix.]
    Chairman Harkin. Thank you very much, Ms. Winkler, for your 
testimony. Thank you to our entire panel.
    Mr. Profeta, are there any reasons why the success of a 
cap-and-trade approach in reducing sulfur dioxide emissions 
under the Clean Air Act cannot be replicated here for reducing 
greenhouse gas emissions? What have we learned from the 
European market? And why can't we just replicate that here? Is 
that something that we could do?
    Mr. Profeta. Well, Mr. Chairman, I think the first foremost 
lesson is yes, both of those experiences have taught us that 
the market does work. The acid rain trading program somewhat 
famously came in at about 20 to 30 percent of the cost 
estimated, what was estimated when the legislation was passed. 
We found in the EU that the market works as well.
    There are distinctions here in terms of this greenhouse gas 
market that might be created by Congress and those markets that 
have--I think the universal opinion on this panel would be that 
there might be greater oversight and need a comprehensive 
regulatory program at the outset.
    The acid rain program is a different scope and scale and 
not nearly as driven, likely to be driven to the derivatives as 
this long-term market would. And the EU market as well, the 
cost was somewhat mitigated by some of the distinctive features 
in the EU market and has actually started to gravitate toward 
exchanges. Now about 50 percent are on an exchange, and, of 
course, the EU market also, being short term, does not have the 
long-term requirement of the emitters that this would have.
    So both those teach us a lesson that the markets can work 
and also there can be distinguishes not in need of regulatory 
oversight as this one.
    Chairman Harkin. I also want to note that in your written 
testimony, you mentioned as an aside the study that was co-
authored by several leading agricultural economists. You said 
it found that ``the net flow of greenhouse gas revenue and 
indirect commodity market revenues for farmers far outweigh the 
increased operating costs.'' It says ``benefits to crop and 
livestock producers far outweigh these economic losses``--to 
consumers and agricultural processors--``signaling gains to the 
sector as a whole. If done the right way, agriculture can be 
made a winner in climate legislation.''
    I assume, though, that there are some sectors within 
agriculture that will do better than others. Is that right?
    Mr. Profeta. Absolutely true. There will be ebbs and flows 
in the system, and some sectors and some farmers will do better 
than others. I think in general we have found there were higher 
input costs but higher output costs as well, a modest consumer 
response, increased bioenergy supply, and offset income 
opportunities. And the key feature, the main benefit to the 
farmers that really come through in these modeling runs come 
through indirect commodity market shifts that drive up crop 
prices and revenues. So that is not seen in some of the other 
studies, and I should note that in doing that we reached out to 
our colleagues at places like Texas A&M and Oregon State to try 
and bring together a team that could get after the ``he said, 
she said'' that has been happening in terms of the agricultural 
economics of climate.
    Chairman Harkin. Mr. Glace, do you believe a price collar a 
floor and ceiling would bring about desired certainty in terms 
of controlling risks and volatility? How do you feel generally 
about a price collar?
    Mr. Glace. Exelon advocates the use of a price collar. The 
main reason is to protect customers from higher prices in the 
early transition period for this program, if you will. We think 
that it is very important to protect customers from being 
impacted by higher prices, and we think that is the primary use 
of the collar. In any risk management situation, if you are 
afraid of volatility and uncertainty, it is nice to have 
options. Collars and floors help band in some of the risk, and 
these are the tools in the bag that we all use routinely to 
manage risks.
    Chairman Harkin. I want to turn now to Dr. Miller and Ms. 
Winkler. I have only got a minute left here, but back to the 
issue of derivatives and swaps and the over-the-counter market, 
Ms. Winkler is basically praising and is in favor of that. Dr. 
Miller, you raised some questions about it.
    As I understand, Ms. Winkler, you are saying that we need 
this to get financing for offset projects. Well, that may be 
one way, but aren't there other ways such as forward 
contracting, traditional bank lending, or guaranteed USDA loans 
that could also ensure offset projects get financed rather than 
just through a derivatives?
    I am concerned about this view that we must have 
customization, especially when compliance obligations are 
measured in standard government-issued allowances due each 
April 1st. Given that do we really need customization? I am 
still searching for that answer. Ms. Winkler?
    Ms. Winkler. Yes, Chairman, I think the best example would 
be my fellow panelist Joe Glace talking about the needs for him 
to have the flexibility to have both customized transactions in 
the over-the-counter market in addition to the standardized 
exchange-traded products that he uses. So while financing is 
certainly one reason why people would use over-the-counter 
instruments, it is not the only reason. You know, some of the 
other things is that it can help an emitter specify the actual 
emissions that they are offsetting against and hedging against, 
and also being able to customize it to the time horizon that 
they are most concerned about.
    Also, as Joe pointed out, you know, for some entities it 
becomes more difficult to be able to post that collateral with 
the exchange in terms of the margin requirements, and with the 
role of an exchange and a clearinghouse, we are providing mark-
to-market and settlement values on a daily basis, which could 
at times, with price movements, require substantial dollars to 
be moved in and out of the clearinghouse.
    Chairman Harkin. Dr. Miller, do you have any observations? 
My time is----
    Mr. Miller. Yes, I think one of the great issues is 
transparency of the over-the-counter market, and you can gather 
and get additional transparency with reporting. We do reporting 
of the cash grain markets. We do not report every individual 
transaction, and we do not report who was at the transactions, 
but we do report the prices and we do report where those things 
were happening. And that gives sufficient transparency to that 
system that it functions well, and that is partly what is 
missing in the current over-the-counter markets.
    Chairman Harkin. Got it. Thank you.
    Senator Chambliss?
    Senator Chambliss. So, Dr. Miller, if we went to a system 
where there was complete transparency and the reporting of 
those contracts that were traded over the counter, would that 
address the concerns that you have about OTC?
    Mr. Miller. To a large degree, I think it would, 
particularly as it would apply to the compliance instrument 
itself. The actual offsets or allowances are going to be 
registered products that are standard products because they are 
a compliance instrument. And right now in the voluntary market, 
the only exchange that is doing broad-based price reporting is 
Chicago. The other exchanges, I went out and looked, and I 
cannot find reported prices for the Climate Action Registry. I 
cannot find reported prices. I can for the futures markets that 
are regulated, but for the spot markets on a number of these 
other projects and CDM projects, there is no price reporting. 
There is no transparency.
    The associated issue that is connected with that, though, 
is leverage, and one of the problems that was part of the 
debacle, if we would say, that occurred in the financial 
markets with regard to credit default swaps, et cetera, was not 
only a transparency issue but a leverage issue. And, yes, there 
is cost to doing margining and things on exchanges, but the 
exchanges did not have any defaults, the exchanges did not have 
those problems because there were limits to the amount of 
leverage that could be put to those type of derivatives.
    Senator Chambliss. Well, Ms. Winkler, if we develop a 
system that requires transparency of all trades, whether they 
are standardized trades or whether they are more tailored 
transactions, which I assume we could devise some system to do 
that, would that interrupt the market in any way, in your 
opinion?
    Ms. Winkler. Senator, we are very much in support of full 
transparency of the marketplace, and, you know, our goal as 
operating an exchange and a clearinghouse is being able to 
serve as the price discovery vehicle for what carbon is in the 
U.S. And I believe through our existing infrastructure and also 
the audit trail that our electronic trading system and our 
clearing system can provide, in the close coordination we have 
with the CFTC, we are going to be able to easily accommodate 
that additional transparency that is going to be needed.
    Senator Chambliss. Mr. Glace, would your ability to enter 
into financially settled swaps for electricity such as the 
example outlined in your testimony be hindered or become more 
expensive under the recent proposal put forward by the 
administration for regulating over-the-counter derivatives?
    Mr. Glace. Yes, sir. We believe that, again, a lot of the 
forcing to organize the exchanges would seriously reduce the 
amount of hedging that would be able to be done in the 
marketplace because of the fact of all the initial cash that 
has to be put up to support the transactions.
    Senator Chambliss. And who is going to pay for that 
ultimately?
    Mr. Glace. Ultimately, consumers pay for this additional--
any additional cost that enters the system ultimately finds its 
way into the price to the consumer.
    Senator Chambliss. Yes. Well, in talking about the 
transparency issue, which I think is going to be the focus of 
the debate when we get to this financial system overhaul issue, 
I assume you have no issue with transparency.
    Mr. Glace. No, sir.
    Senator Chambliss. You are not trying to hide anything or 
do any secret deal out there. So is there a way, in your mind, 
that we could develop a system that would provide full 
transparency and allow you to operate in the market with 
tailored transactions like you sometimes do today?
    Mr. Glace. Absolutely. Exelon supports expanding the CFTC's 
jurisdiction and expanding the CFTC's ability to gather 
reporting and transactional information to assess positions. 
And we believe in rigorous oversight in the markets and full 
transparency.
    Senator Chambliss. Mr. Profeta, let me ask you to comment 
on that same question. You encourage, obviously, the clearing 
of all transactions ``as is feasible,'' I think is the way you 
put it in your testimony. I think that has been stated an awful 
lot and with different wording by different experts in this 
field. But is there a way to take tailored transactions, in 
your opinion, and whether you call them standardized or not, 
effect total transparency in the marketplace?
    Mr. Profeta. I think the most important thing is to make it 
transparent to the regulator, and I think it is possible to do 
that in much the way my co-panelists have described here. The 
best way to control for the risk is to build it into the system 
so you do not get to the point where to regulate it is to see 
it. But there are distinct, long-term structured deals that it 
appears cannot be standardized and put--cleared. And if it is 
open and apparent to the regulator, I think we can control for 
a lot of the risk that way.
    Senator Chambliss. What do you think would be the biggest 
hurdle in having a tailored product transparent to the 
regulator? Or is there a hurdle out there?
    Mr. Profeta. I think it is just a matter of establishing 
the correct authority for the regulator to receive that 
information. As I suggested in my testimony, it may be 
appropriate to put the obligation on the transacting parties to 
give the information to the regulator rather than putting the 
obligation on the regulator to make sure that the data gets to 
the CFTC.
    Senator Chambliss. Mr. Chairman, I know I am over my time, 
but let me follow up. Mr. Glace, is there a problem from your 
standpoint as a participant in these contracts in the 
marketplace in providing the regulator with full disclosure of 
what the transaction that you have entered into from the hedge 
standpoint is all about?
    Mr. Glace. No, sir. Full disclosure is not a problem.
    Senator Chambliss. OK. Thank you.
    Chairman Harkin. Thank you, Senator Chambliss.
    Let us see now. Senator Johanns?
    Senator Johanns. Mr. Profeta, let me get started with you. 
I think in response to some questions, you have acknowledged 
that for farmers there is going to be higher input costs, and I 
think virtually every study shows that. Is that something we 
agree upon, input costs will go up?
    Mr. Profeta. Yes, input costs will go up. Fertilizer costs 
may be controlled by provisions to help that industry, but 
input costs will go up, yes.
    Senator Johanns. And I think the fertilizer business would 
debate you on that one. They seem to believe their costs are 
going to go up also.
    Mr. Profeta. I have said the word ``may'' cautiously 
because I have no idea what the Senate's policy will be on that 
and how it will be affecting the industry. But there are 
efforts at least to try and hold that sector of the industry 
harmless.
    Senator Johanns. Now, as I understand the Texas A&M study--
and, again, by inference from your testimony, it appears that 
you are reaching much the same conclusion--it is not the 
credits or allowances or whatever that is really going to help 
the farmer out to deal with those input costs. It is your 
belief that they will get a higher price for their products, 
right?
    Mr. Profeta. Yes. This is the study that we released. I am 
happy to bring the authors who are intimately familiar with it 
to meet with you, Senator. But, yes, their findings were that 
the key benefit to the farmers comes from the indirect 
commodity market shifts that drive up the crop prices and their 
revenues. They do have some benefits from the offsets, from 
tillage practices, manure management, et cetera, but that is 
not the driver. The driver is the crop price.
    Senator Johanns. Now, if you are on the buying end of that, 
though, if you are in the dairy industry--which is absolutely 
going broke at the moment, if you are in the pork industry and 
one pork producer said to me recently, he said, ``Mike, we are 
30 days from being bankrupt.'' If you are in the cattle 
industry that has not made money for 2 years, this is pretty 
much a disaster for them, isn't it?
    Mr. Profeta. I would like to go through the numbers with 
you. I do not think that the input cost projections that came 
out of the study are in the realm of disaster, particularly 
compared to the fluctuations we have had in those input costs 
in the past year. They far exceed what would be projected out 
of this legislation.
    Senator Johanns. Well, if you are the one going broke--and, 
believe me, dairy is not making any money at the moment, quite 
the opposite. Pork is really getting hammered. Beef has not 
been good for a couple of years. Call it what you want. This is 
not a good situation.
    Mr. Profeta. Senator, I would agree, and let me be clear. 
The intent of the study was try and get after, you know, the 
assumptions and lay them there and let you as a Senator to make 
a judgment as to--I am from the State of North Carolina. I work 
with the pork industry a lot. I know how they are suffering. 
And I am certainly not advocating for any legislation that 
would cause the kind of pain that you feel.
    I think there are ways to balance these societal 
objectives, not hurting the industry and also addressing 
climate change, and what we are trying to do is give you the 
data that helps you get to that place.
    Senator Johanns. Now, let me, if I might, kind of pivot off 
of your comments to Mr. Glace. Mr. Glace, you are, as I have 
described, a big guy--not in stature. In business is what I am 
referring to. How big are you? What would your revenues be in a 
year?
    Mr. Glace. Approximately $15 billion.
    Senator Johanns. $15 billion. Now, if we do something up 
here that impacts your bottom line, you are just going to pass 
it on to the consumer, right? You are not going to go broke.
    Mr. Glace. Exelon believes that all costs to manufacture 
and inputs to make electricity ultimately get into the power 
price, and that does, in fact, get to the consumer.
    Senator Johanns. Yes. And if you are the irrigator and you 
are buying electricity, they are going to pay more, right?
    Mr. Glace. Yes, sir.
    Senator Johanns. One of the concerns I had with the study, 
the Texas A&M study, is the two farms they looked at in 
Nebraska were dryland, and about 60 percent of our row crops 
are actually irrigated. So those irrigators are going to pay 
more for electricity if, in fact, the Government raises the 
cost of doing business.
    Mr. Glace. We believe that power prices will increase, yes.
    Senator Johanns. Now, you can hedge your risk just simply 
because you are going to notify somebody in an electric bill 
that they are paying more. But where the farmer does not set 
the price, how do they possibly compete with you? I mean, you 
are such a big enterprise. You can control your prices. The 
poor farmer out there just is going to get what they get, and 
if it causes them to go broke, they will go broke, won't they?
    Mr. Glace. Again, I cannot speak for the farmers' economics 
very specifically, but we do believe that all--Exelon believes 
in markets, and markets set prices. And whatever the buildup of 
the ultimate market inputs are that determine the market price, 
the market clears and the market sets a price. And Exelon 
believes that markets produce the least efficient--the most 
efficient, excuse me, possible outcome for the consumer, and 
that a market-based solution is always going to be the least 
cost or most effective solution.
    Senator Johanns. See, here is the problem with that in 
agriculture. The fat cattle guy cannot go to Tyson's and say, 
``Boy, you know, I just got a higher electric bill, and I got 
this and I got that. Instead of selling these fat cattle for 
$100, I need $110.'' Because you know what? Tyson's is going to 
go, ``So what?'' I mean, it is the reality of the marketplace 
for farmers. Do you agree with me there?
    Mr. Glace. I do not pretend to know the farmer realities 
and the farmer marketplaces, but I do know that if a market 
sets a price for clearing that the farmer will get a bill that 
is commensurate with that market price.
    Senator Johanns. They cannot pass it along.
    Mr. Glace. I will take your word for it.
    Senator Johanns. Yes. Well, that is the way it works.
    Mr. Glace. Absolutely.
    Senator Johanns. Thank you.
    Mr. Glace. Thank you, sir.
    Chairman Harkin. Thank you very much, Senator.
    Now Senator Gillibrand.
    Senator Gillibrand. Thank you, Mr. Chairman. I want to go 
over some of the issues that Ms. Winkler raised and some of the 
questions that you asked, Mr. Chairman.
    One of the issues was about why do we need a customized 
market, and there were a couple of areas that I wanted you to 
perhaps provide--anyone on the panel who has information and 
wants to provide more detail, that would be helpful.
    On the question of whether it will provide offset projects 
financed under the bill, will be able to provide the financing, 
one of the reasons is that financing for projects is often 
contingent on a firm being able to predict their future carbon 
risk through a derivative contract, for example, and if you 
just have exchange-traded, you have no more than 5-year-out 
contract.
    So could you please elaborate more on that financing 
perspective, because the Chairman brought up, well, why can't 
you just get a loan? What is the difference with that access to 
capital, then the liquidity that the derivatives market would 
provide, if any, to further answer that question?
    Ms. Winkler. Thank you, Senator. One of the main 
differences is just because of the customized nature of that 
instrument and the financing needs for those particular 
projects that need to be developed. It is in their best 
interest to be able to deal with a counterparty that is able 
to, you know, lend to them and also that they are able to 
contribute toward the financing of that the physical assets 
that they have. And in the cases of many of these project 
developers, these projects take anywhere from 7 to 10 years 
and, especially in terms of the offset projects, need to be 
verified and approved along the way. So there is a substantial 
amount of risk that is outstanding. A typical lender is going 
to find that pretty difficult to be able to stand behind that 
at a reasonable rate.
    Senator Gillibrand. So you are saying that the lending 
market may not be readily available because of the outstanding 
risk, and so that you really need a derivative to hedge that 
risk specifically for the amount of time that that project may 
well take to come to fruition.
    Ms. Winkler. That is correct.
    Senator Gillibrand. Now, is that your experience, Mr. 
Glace?
    Mr. Glace. Yes.
    Senator Gillibrand. OK. Second, you said in your testimony, 
Ms. Winkler, that if you were going to have--if you were not 
going to have a customized market, it would leave out certain 
players who need access to these markets because of the capital 
requirements. But one of the things we talked about earlier 
that the Ranking Member brought up was that we would actually 
want capital requirements. And, in fact, not only do we want 
complete transparency for what the trade is going to be, but 
that we actually might even have higher capital requirements 
because of the increased risk. So that does not address your--
that would undermine your argument that certain players would, 
therefore, be excluded from the market.
    Ms. Winkler. I think the way to describe it is that an 
exchange-traded market, we believe, relies on broad market 
participation, and that is kind of central to being able to 
have the market determine what that carbon price is going to 
be.
    There are many differences in terms of the over-the-counter 
market and the level of sophistication of the people that 
interact in that market, and typically they are eligible 
contract market participants. And so I think there are pretty 
significant differences just between who we would anticipate 
dealing in that customized market versus what we would expect 
in the exchange-traded market. And it is certainly our hope and 
our intention that both markets have to have increased 
transparency over what they have today.
    Senator Gillibrand. And capital requirements. I want to get 
to your argument that you thought the reason why we needed to 
have an OTC market was because there would be no capital 
requirements. And what I think the Ranking Member was getting 
at is if we create this over-the-counter market and allow for 
it, it is going to need increased transparency and significant 
capital requirements, which would undermine your argument.
    Ms. Winkler. The capital requirements is certainly 
something that is under review by the administration as part of 
their larger over-the-counter and financial regulatory reform. 
So we would view that anything that would need to be done in 
carbon over-the-counter ets would be in line with those broader 
goals of the administration.
    Senator Gillibrand. And then the third issue that addresses 
this is the question of foreign carbon allowances to be 
purchased and used for domestic appliance. It is allowed in the 
Waxman-Markey bill right now. However, the issue of mandated 
standardization and exchange trading is impacted because 75 
percent of the European market right now is over the counter. 
So how do you see that impacting the harmonization efforts that 
we are trying to make and participation--if the EU, for 
example, has a 75-percent over-the-counter market and the U.S. 
has none, how will that affect us in terms of competitiveness 
or access to capital or liquidity or volatility or any of the 
issues that you brought up?
    Ms. Winkler. I think the biggest concern, Senator, is that 
if there is not an over-the-counter market that is allowed in 
the U.S., we believe that that activity is going to take 
place----
    Senator Gillibrand. Go overseas.
    Ms. Winkler [continuing]. And it is going to go overseas to 
less transparent environments and areas where our regulators do 
not have as direct authority as they do here in the United 
States. While we certainly still see, you know, some 
transactions taking place in the over-the-counter market, we 
have been seeing a trend in the EU ETS toward clearing. And 
that has been a positive trend, and it kind of speaks to how 
over-the-counter markets develop over time, and they do become 
more standardized, they do become more liquid. And now kind of 
the predominant number of the instruments are being cleared, 
and we would view that being as much of the same development 
that we will see here in the U.S. But our primary concern is 
that if we do not allow over-the-counter transactions, people 
are going to need those customized tools, and they are going to 
lend themselves to less transparent environments that we do not 
have the authority to regulate properly.
    Senator Gillibrand. Thank you.
    Chairman Harkin. Thanks, Senator Gillibrand.
    Senator Lugar?
    Senator Lugar. Thank you, Mr. Chairman.
    In our last comprehensive hearing on this subject, the 
testimony of Secretary Vilsack was that all farms would benefit 
from a cap-and-trade situation similar to the House bill. 
Senator Chambliss, in releasing the Texas A&M study, which has 
been cited several times in the hearing, indicated that 71 
farms would not prosper, 27 would, and so that is quite a 
disparity. And the reasons were varied, but the farms that came 
out best were farms such as my farm in Indiana that produces 
corn and soybeans.
    I take the privilege of these personal references because I 
want to ask you, Dr. Miller, about a situation on my farm or 
maybe at yours. We have about a third of our acreage in corn, a 
third in soybeans, and a third in trees. About 22 years ago, my 
son and I started planting black walnuts in rows, some other 
trees subsequently, and in due course, the Chicago Climate 
Exchange approached us and said, ``Would you like to be a 
partner in this exchange?'' They wanted some farm in Indiana at 
least to have that situation going, but they could measure only 
most recently planted trees because the idea was that if you 
have trees already on the farm, why, those were already there. 
The incentive was to plant more.
    So, as a result, they measured some of our trees, and I 
have been accumulating credits. I go to the website of CCX and 
find that I have no several thousand tons of carbon sequestered 
in those trees on the farm.
    My problem is that the price of that carbon per ton has 
been plunging. It was as high one time as $7 a ton. It is now 
25 cents a ton as you go to the website today.
    Now, there is something wrong with the market there, as we 
are all busy patting about climate change, and yet the markets 
are not reflecting that much is going to happen there.
    Now, CFTC, in a very bold move, has taken CCX apparently 
under its wing and at least is hoping that this may be 
established as a market of sorts.
    I go through all this detail to say that it is not at all 
clear, even if you were on a farm in which you wanted to put 
pastureland into trees or, as the Texas A&M study points out, 
most of the gain for the corn farmers comes from the fact that 
fewer acres apparently are planted. Therefore, supply and 
demand raises the price of corn, and that has all kinds of 
implications in terms of the American food system, quite apart 
from the worldwide food system in which our whole emphasis is 
on more acreage and more production with the population of the 
world growing.
    These are all contradictory problems but relevant, I think, 
to the ordinary farmer who might contemplate. How do you, in 
fact, stay alive? Do you plant trees? Is there going to be a 
similar market for no-till planting? We have had celebrations 
at the Farmers Union, people here in our Committee.
    I ask all of this simply to raise a question that maybe you 
can help answer. How established is it that there is going to 
be any market for my trees or any trees I should plant? How 
about the trees that are already there if I promise not to 
harvest them? You say a contract period of 5 years or 10 years. 
Do I get credit for that? Or is that in the past? Give me some 
inclination, if you can, from this practical example.
    Mr. Miller. The market is in its infancy, and in its 
infancy it will have more variation and gyration than it will 
in a mature market. But regulations matter, and one of the 
challenges that the current Chicago market has is that part of 
its tradable compliance instruments were deemed basically 
worthless by the future regulations. Therefore, that piece of 
the market is trending toward zero.
    The offsets are not trading at zero, but they have had to 
move to the over-the-counter market to find value. And so when 
we sell offsets such as from forestry or soils right now, we 
are trading at 4 times, 5 times, 6 times what that listed 
exchange price is that is trading allowances that 2454 did not 
recognize.
    So it is the same problem Europe had when they did not 
allow banking forward of a market that was long offsets in the 
current term or long allowances in the current term. They went 
to zero, and that is what markets do when you have an excess 
supply of something that has no carry-forward.
    Relative to the ability for farmers to participate, we are 
at, again, the infancy of what all these solutions can be from 
the agricultural and forestry sectors in our markets. The CCX, 
which has the only broad-based set of workable protocols, is an 
incomplete set. There is a real role for USDA to help set and 
develop additional protocols. Nitrous oxide management is one 
that possibly almost all farmers could participate in. But we 
have no standard protocol for that yet. It is a more expensive 
protocol to probably do. It is more difficult. It has got some 
scientific challenges.
    At CCX, we took the ones that had the best science around 
them at the time we did them and started with those, and we 
have added protocols.
    In the Texas A&M study, their ranches did not have any 
offset income in the Texas A&M study, and I am quite familiar 
with that. Partly, when they did their panels, the CCX 
rangeland offset requires management of the stocking rates, and 
those particular ranches in those representative panels could 
not economically do what is required of the CCX offsets in 
order to get offset credits. We have ranches that are complying 
with that--us, Farmers Union, various different aggregators--
but it is not something that every ranch is going to be able to 
do and remain economically viable. And I think that is one of 
the things we have to be aware of. While it might be 
technically feasible for the individual resources that are 
available, it may not be economically viable to do the things 
that are required in order to earn offsets.
    Senator Lugar. I ran over my time, Mr. Chairman. I would 
just underline the importance for our Committee, if we are to 
adopt a cap-and-trade situation, to go well beyond the House 
bill and to get into the weeds, so to speak, of this because, 
otherwise, this is going to be a fiction that somehow there are 
allowances here, or credits or even a market, without somebody 
going into the details Dr. Miller has just illustrated in 
brief. And I think this is critical, or we are going to leave 
farmers absolutely without defense in this situation, I think 
zapped all across the board.
    Chairman Harkin. Senator Lugar raises a good point. I 
thought about this at that previous panel that, you know, you 
have a stand of trees, we had a forest, a private forest. Now, 
because he is not adding anything additional, therefore, he 
gets no offsets. But if he cut down his trees and planted new 
ones, well, then he would be OK. This is that same old thing 
that we have been through so many years on this Committee on 
conservation and other things. If you tear out what you have 
got and plant something else, well, then you will get the 
benefits. But if you just keep your conserving practices or 
what you have done to your land, then you do not get anything, 
and that just does not make sense to people. It does not make 
sense to me either. So we have got to address that also on 
this.
    Well, thank you all very much, and we will call our next 
panel. Thank you very much.
    Our next panel, our producer group perspectives, we have 
Mr. Andy Beckstoffer, and he will be introduced by our 
colleague. Come over here, Mike. Then Mr. Frank Rehermann, 
Chairman of USA Rice Producers' Group from California; Mr. Luke 
Brubaker from Brubaker Farms in--I had a wrong address here on 
it--Pennsylvania. Mount Joy, Pennsylvania. Mr. Fred Yoder, Past 
President of the National Corn Growers Association from Ohio. 
We will ask you all to take your seats there.
    We are graced with the presence of a long-time friend of 
mine, our colleague from the House side, Representative Mike 
Thompson, and I am going to turn to him for the purpose of 
introduction because I know he has to get back to the House. 
But in my way of introducing the introducer, I will just say 
that Congressman Thompson was first elected to represent 
California's 1st District in 1998. It includes all of Napa, 
Lake, Mendocino, Humboldt, and Del Norte counties. I do not 
know what else you have added. Sonoma County, too?
    Mr. Thompson. Part of Sonoma.
    Chairman Harkin. Part of Sonoma County, and Yolo, also. 
Prior to serving in Congress, Representative Thompson 
represented California's 2nd District in the California State 
Senate, where he chaired the Budget Committee. So, again, not a 
stranger to us at all, and a great friend and colleague from 
the House side. I will turn to Congressman Mike Thompson for 
purposes of introduction.

 STATEMENT OF HON. MIKE THOMPSON, U.S. REPRESENTATIVE FROM THE 
                      STATE OF CALIFORNIA

    Mr. Thompson. Well, Mr. Chairman, thank you very much, Mr. 
Vice Chairman, thank you also for allowing me to do this. I 
have got a couple friends testifying today, but I have been 
asked and am honored to introduce one that I represent at home, 
and that is my good friend Andy Beckstoffer.
    Andy is the founder and the Chairman and the owner of 
Beckstoffer Vineyards, which farms over 3,000 acres of vineyard 
in Napa, Mendocino, and Lake counties of California. He is the 
largest non-winery grape grower in Napa Valley and along 
California's north coast. He is also the largest seller of 
premium winegrapes in Napa and on the north coast area, and he 
provides grapes to over 80 premium wineries.
    Since 1970, Beckstoffer Vineyards has been a leader in 
developing and implementing new vineyard technologies in the 
California premium north coast area, and Andy has been 
recognized around the world for these efforts. And I hope he 
gets a chance to talk about this, but he is doing some great 
stuff now, a whole bunch of new organic plantings in Mendocino 
County and Lake County, and something that he might not think 
is exciting, and maybe you will not either, but being a 
vineyard owner myself, we have to rip our land before we plant 
vineyards, and Andy now in his new plantings, he is only 
ripping the area specific as to where the grapes will be 
planted, not disturbing the rest of the ground, which I think 
is pretty cutting edge.
    In 1975, he was a founding director of the Napa Valley 
Grape Growers Association. In 1976, he became a member of the 
Napa County Planting Commission and in 1983 a director of the 
Winegrape Growers of California. He is also a member of the 
World Presidents Organization, a director of the Wine Market 
Council, the California Association of Winegrape Growers, and 
the Land Trust of Napa County. And he is an accomplished 
conservationist. As a farmer and businessman, he understands 
that investing in the conservation of our land is an investment 
in our future. His leadership in helping build national support 
for increased tax incentives to put property into conservation 
easements will be felt for generations to come.
    I carried that bill in the House. It has tremendous support 
over here in the Senate, and he was really the catalyst for 
that, helped put it together, and he not only talks the talk, 
but he walks the walk. After that bill was passed, he was the 
first landowner across the country to put his land into a 
conservation easement, and it is really significant because it 
is a historic vineyard in the Napa Valley. And if I told you 
the property values of a vineyard like that, most people in 
agriculture would not believe that they would draw that kind of 
money.
    So he has been on the cutting edge. He has worked to 
restore the Napa River throughout the Napa Valley, and he is a 
lifetime expert in specialty crop farming. And as everybody in 
this room knows, specialty crops represent about 50 percent of 
the entire plant crop economy, and they contribute mightily to 
our Nation's nutrition.
    He has a hands-on knowledge of how not only climate change 
is affecting winegrapes, but also the benefits that specialty 
crops provide in helping our country meet the challenges of 
climate change.
    I want to thank you all for allowing me to do this, and I 
want to thank you in advance for listening to his comments. And 
I am just proud to be the one to have brought Andy to the 
Senate.
    Thank you.
    Chairman Harkin. Thank you very much, Mike. You are welcome 
to stay if you would like. I know you have probably got----
    Mr. Thompson. We are working on this thing called ``health 
care reform'' over there.
    [Laughter.]
    Chairman Harkin. I have heard of it. I have heard of it. 
All right. Well, thank you very much, Mike.
    Mr. Thompson. Thank you.
    Chairman Harkin. I really appreciate it very, very much.
    Then we will start with you, Mr. Beckstoffer, and we will 
work from right to left in this regard. Mike was mentioning 
something about ripping grapes and stuff. I turned to Saxby, I 
said, ``Is that like minimum tillage that we know about?'' It 
sounds a little bit like that.
    Also, I want you to know something else. In 2000, in my 
State of Iowa, we had a total of 100 acres of grapes in Iowa. 
We now have over 1,000. So look out, here we come.
    [Laughter.]
    Senator Chambliss. Mr. Chairman, let me just say, too, that 
Mike happens to be the Chairman of the Wine Caucus over on the 
House side, and as a former Member of the House and a consumer, 
Mr. Beckstoffer, we appreciate you sending a little bit up here 
every now and then of your fermented product that we can make 
sure we test every now and then.
    Chairman Harkin. Mr. Beckstoffer, welcome, and please 
proceed. Again, I am going to ask you to summarize. As you 
probably have heard, all your statements will be made part of 
the record in their entirety. If you could sum it up in 6 
minutes, please.

STATEMENT OF W. ANDY BECKSTOFFER, CHAIRMAN AND CHIEF EXECUTIVE 
     OFFICER, BECKSTOFFER VINEYARDS, RUTHERFORD, CALIFORNIA

    Mr. Beckstoffer. Thank you very much. I live in St. Helena, 
which is a small agricultural town in the Napa Valley of 
California, and my family grows winegrapes, as you said, and 
that in your terms is a specialty crop.
    We are small farmers, but grapes are a big business. There 
are over 24,000 grape growers in the Nation, and the full 
economic impact of wine and grape products is estimated at over 
$162 billion. Grapes are grown in over 40 States today, and 
grapes are a significant part of the specialty crop segment of 
the U.S. agricultural economy. Specialty crops, as Mike says, 
represent approximately 50 percent of the farm gate value of 
total plant agricultural production.
    We in the winegrape and wine business are very proud of the 
fact that most medical people believe that wine is good for 
your heart. I truly believe and hope that that is true.
    Chairman Harkin. I believe.
    Mr. Beckstoffer. But, for sure, grapes and peaches and 
pears and carrots and lettuce and tomatoes and all fruits and 
vegetables are specialty crops that provide essential nutrition 
to the American people. That is where their real importance is.
    Where I live in the Napa Valley, it is a very well known 
premium winegrape-growing region. What is not so well known is 
that while some 9 percent of Napa County's land mass is devoted 
to vineyards, over 10 percent of the county's land is protected 
by some sort of open space or agricultural conservation 
arrangement. Conservation and environmental sensitivity are 
hallmarks of our lives in the wine country. The increased tax 
incentives on conservation easements which were legislated in 
2006 have made a major contribution to our ability to conserve 
these agricultural lands. In our small valley, over 1,650 acres 
have been put under conservation easements since 1960, and over 
300 of that has been our lands.
    Senator Baucus here in the Senate and Congressman Thompson 
in the House are now sponsoring legislation to make those 
incentives permanent. These incentives are crucial to land 
conservation. They are crucial to keeping small farmers on the 
farm and ultimately crucial for positive climate change.
    In considering my testimony, in the limited time I want to 
emphasize three major concerns.
    First, specialty crop growers are generally relatively 
small farmers. Our family is the largest vineyard owner in the 
Napa Valley and the north coast. But on any statistic involving 
all farms, we are very small farmers. This is the case with 
most specialty crop farmers. We are scattered politically and 
geographically and do not have the organization or capacity to 
compete with the large program crops for adequate consideration 
in major legislation, such as that involving climate change. 
Without your special indulgence and careful consideration, much 
of the Nation's nutrition engine will suffer.
    Second, it has been widely reported that many car dealers 
have opted out of the Cash for Clunkers program because of the 
heavy documentation requirement on their limited staffs. We 
have similarly limited staffs. I would hope that the reporting 
requirements of any climate change program would be held to the 
minimum.
    Third, the USDA's Economic Research Service reports that 
between the years 1997 and 2002 over 8 million acres of 
American farmland have been lost to agriculture due in good 
part to urbanization and economic pressures. In California, our 
population is estimated to double in the next 25 years.
    In the Napa Valley, some 60 miles from San Francisco, there 
is tremendous urban pressure. It is my view that winegrape 
vineyards here are the long-term highest and best economic use 
of the land. And for this reason, we have been able to preserve 
the vineyards with that urban pressure. This is true in varying 
degrees in all agricultural lands near urban areas. These lands 
in many cases are relatively small specialty crop lands. It is 
widely anticipated that Federal and State carbon reduction 
programs will increase costs for energy, fertilizer, pest 
management tools, and other inputs such as transportation. If 
winegrape growers and agriculture are not excluded from any 
carbon emissions cap while being able to receive credits for 
offsets provided, these unaddressed increased costs will result 
in the loss of an additional increment of agricultural lands.
    Further, it is my understanding that agriculture, through 
plant and soil sequestration, has been identified as a priority 
area for cap-and-trade offsets. If the profitability of 
agriculture is further reduced through increased costs and 
competition from foreign wines made with cheap labor with 
Government supports, that will serve to limit the availability 
and expansion of agriculture as an important component of any 
cap-and-trade program.
    The winegrape quality and standards in the Napa Valley are 
in no immediate danger or short-term danger from climate 
control activity. There are some things that are changing, 
however. For example, we are experiencing more heat spikes. 
Generally speaking, heat and sunlight bring beneficial effects 
to grape ripening and maturity. We prepare our trellises and 
canopy management to accept and accentuate this. When heat 
spikes occur, they damage the grapes and thus we must prepare 
our trellises to avoid sunlight and heat--in direct 
contradiction to our major objective of heat and sunlight 
accumulation.
    The nights are getting warmer. The secret of producing 
great winegrapes involves achieving a chemical balance between 
sugar, acid, and pH. Sugar is accumulated during the day, acid 
in the cool nighttime temperatures, and pH at both times. 
Climate change is increasing our nighttime temperatures, and at 
this time we have no way of knowing the effect on grape balance 
and quality. We greatly need research to show these effects. I 
understand that most of the carbon sequestration research has 
been done on annual crops. Our vines with a 20- to 40-year life 
span have a significantly different carbon footprint, and their 
relationship to annual crops should be analyzed.
    Another area where climate change is beginning to affect us 
is pest infestation. The disruption in the ecosystem is 
producing new pests and mutations and vine diseases that we 
just do not understand. This could have a major effect on our 
ability to limit pesticides.
    For reasons of economics, fruit quality, and soil and water 
conservation, we have over the past many years drastically 
reduced our tractor usage in the vineyards. We limit irrigation 
practices for reasons of fruit quality, and when we do 
irrigate, we use effective drip irrigation. We make extensive 
use of cover crops to host beneficial insects and limit 
pesticides as well as reduce tillage to limit soil moisture. 
We----
    Chairman Harkin. Mr. Beckstoffer, could you summarize?
    Mr. Beckstoffer. OK. We in the grape business have been 
practicing for a long time, and we just hope that these early 
practices will be recognized in any potential carbon market or 
offset program.
    Thank you very much.
    [The prepared statement of Mr. Beckstoffer can be found on 
page 65 in the appendix.]
    Chairman Harkin. Thank you very much, Mr. Beckstoffer. I am 
sorry. We are just running out of time.
    Next, Mr. Frank Rehermann, Chairman of USA Rice Producers' 
Group, also from California. Welcome, Mr. Rehermann. Please 
proceed.

  STATEMENT OF FRANK REHERMANN, CHAIRMAN, USA RICE PRODUCERS' 
                  GROUP, LIVE OAK, CALIFORNIA

    Mr. Rehermann. Good afternoon, Chairman Harkin, Ranking 
Member Chambliss, and members of the Committee. My name is 
Frank Rehermann, and I am a rice producer from Live Oak, 
California. Since 1972, my wife and I have produced rice in a 
family partnership which now includes our two sons. I currently 
serve as Chair of the USA Rice Producers' Group, one of four 
organizations which comprise the USA Rice Federation. And, 
incidentally, Chairman Harkin, I am proud to say that all 850 
acres I farm are enrolled in the CSP program.
    Chairman Harkin. Good for you. Thank you.
    Mr. Rehermann. The USA Rice Federation is the global 
advocate for all segments of the rice industry. Our multi-
billion-dollar industry provides jobs and income for a broad 
and diverse array of people in the value chain. Beyond our 
obvious economic and nutritional benefits is the fact that we 
provide winter-flooded habitat for important species of 
migratory waterfowl and other species. That habitat is critical 
to their very survival.
    Our objections with climate change legislation as recently 
passed by the House lie in the area of increased production 
costs. Hopefully, our own Congress will not approve legislation 
that will have, may have the unfortunate, albeit unintended, 
consequence of shifting rice production to our foreign 
competitors because we can no longer compete.
    The U.S. rice industry is already faced with the 
importation of some 750,000 tons of rice per year from foreign 
origins, and, therefore, competing in our own markets has 
become more difficult. And as that happens, the natural 
consequence of that would have an effect on the Nation's 
ability to provide food security. That would be placed at 
further disadvantage.
    We currently have few, if any, opportunities in rice 
production to further sequester or reduce greenhouse gases. 
However, on a proactive basis, work is newly underway in 
California to develop computer modeling techniques to quantify 
greenhouse gas emissions and, accordingly, to estimate emission 
responses to possible changes in cultural practices. All 
factors will be evaluated to determine their feasibility.
    However, as of now, we cannot identify a way to offset the 
increases in production costs of rice attributed to H.R. 2454. 
Moreover, the much discussed study by Texas A&M demonstrates 
that on all rice farms sampled, production costs will go up 
significantly, and that causes our bottom line to reduce 
significantly and ultimately has an effect on equity.
    The American Farm Bureau Federation estimates that just the 
increase in rice production cost per acre could reach as high 
as $153 per acre. Within that margin lies any ability we have 
to show a profit.
    Additionally, we consider it highly unlikely that rice-
producing countries with whom we compete will impose onerous 
regulatory burdens, as evidenced by historical evaluation. 
Therefore, we respectfully urge the members of this Committee 
to fully evaluate alternative approaches to curbing greenhouse 
gas emissions and to oppose pending or similar climate change 
legislation.
    We have some suggestions that we would like to make today, 
but in the event that legislation similar to H.R. 2454 is 
considered in this body, we believe there are several key 
provisions which must be clearly and explicitly included in the 
bill to help ensure U.S. agriculture is not irreparably injured 
in the process.
    One, a specific exemption should be included for the 
agriculture sector from the greenhouse gas emission reduction 
requirements of climate change legislation and the underlying 
Clean Air Act.
    Second, a definition of ``agriculture sector'' for the 
purposes of this exemption should be clarified to include 
production as the path from the field through the stage of 
processing necessary for the commodity to be marketed in 
commercial channels.
    We will need additional funding to accomplish more research 
by USDA and the land grant university system. We need the 
establishment of a program using the funds and authorities of 
CCC to compensate producers for their increased input costs. We 
would like to see the establishment of a robust agricultural 
offset program that is flexible and run entirely by the USDA.
    In conclusion, I urge this Committee to work and the Senate 
to postpone consideration of climate change legislation until 
such time that alternative legislative approaches for curbing 
greenhouse gas emissions are developed which do not injure 
American agriculture. If this effort, however, is unsuccessful, 
we request that this Committee work with other committees of 
jurisdiction and your Senate colleagues to ensure that our 
recommendations are included in any climate change legislation 
enacted into law. We believe that these provisions in the 
current approach to climate change would be very detrimental to 
the U.S. rice industry.
    Again, thank you for the opportunity to present our views. 
I will be glad to answer any questions.
    [The prepared statement of Mr. Rehermann can be found on 
page 116 in the appendix.]
    Chairman Harkin. Well, thank you, Mr. Rehermann, for being 
here and thank you for your testimony.
    Now we turn to Mr. Luke Brubaker of Brubaker Farms of--is 
it Mount Joy, Pennsylvania?
    Mr. Brubaker. Mount Joy, right.
    Chairman Harkin. Mount Joy, Pennsylvania. Welcome, Mr. 
Brubaker. Please proceed. I am sorry. I was looking at your 
folder here.

    STATEMENT OF LUKE BRUBAKER, BRUBAKER FARMS, MOUNT JOY, 
                          PENNSYLVANIA

    Mr. Brubaker. Thank you, Chairman Harkin and Ranking 
Member. And I am so disappointed my Pennsylvania Senator just 
left me earlier, and all the rest of the members, I was going 
to address them, but they have gone.
    Chairman Harkin. That is all right.
    Mr. Brubaker. I would like to thank you for the opportunity 
to speak before you today about the issue of global warming. I 
do not come here today as an expert on global warming, but to 
tell you some of the great things that happen on Brubaker 
Farms, and I believe that we can have an impact on the 
atmosphere and on global warming.
    To begin, I would like to speak with you about Brubaker 
Farms Dairy and dairies in general and how they can profit from 
the product--manure--which, in some cases, is thought of as a 
liability rather than an asset.
    I like to think of myself not just as an environmentalist, 
but also as a business leader where I can lead in the local 
community and represent dairy farmers on State and national 
issues. Please refer to my short bio which I believe you 
received.
    Brubaker Farms of Mount Joy, Pennsylvania, is owned by my 
wife and myself, in partnership with our two sons, Mike and 
Tony Brubaker. My father purchased the farm in 1929 and started 
the operation with eight cows. My brother and I purchased the 
farm in the early 1960's, and at that time it was an animal 
operation that consisted of 18 cows. In the early 1990's, my 
sons graduated from college and wanted to come back to the farm 
to be a part of that operation. At that time, my brother sold 
his interest in the farm to me and my sons, and we entered in 
to a formal partnership to manage Brubaker Farms. At the time 
the partnership was formed, the Brubaker animal operation 
consisted of 200 cows. The farm now consists of over 800 cows, 
600 young stock, and also a 250,000 bird broiler chicken 
operation per year. These expansions to the operation allow it 
to provide the necessary income to sustain the three families 
that now rely on it for their economic well-being.
    We have developed an operation that is both financially 
stable and is an important part of the local economy. We have 
taken actions to ensure that the site is maintained as a 
working farm in the future through participation in the 
Pennsylvania Farmland Preservation Program. In order to address 
farm commodity price issues, farm expenses, and family 
financial needs, we are ready to make the necessary business 
decisions to ensure that the farm will continue to be viable 
into the future. The farm is a family business, and the 
economic viability of the operation is critical in order to 
allow it to continue to be an effective business well into the 
future, and for it to be an economically sustainable family 
enterprise.
    The most recent project we have completed is a manure 
digester. We are excited about what this new addition means to 
our farm and to the energy security of Lancaster County, 
Pennsylvania, and neighboring communities. At the present time, 
our digester is generating approximately 4 to 5 megawatts of 
electricity a day. Most of the electricity that we generate is 
sold back to the local electric utility company, PP&L. We have 
the capacity of producing enough electricity to supply 
approximately 150 to 200 homes a day, and most of that is 
closer to 200 homes a day now.
    Key to the methane production is the cows and heifers. The 
manure flows by push and gravity to a recovery pit where it is 
pumped into a large lagoon of approximately 700,000 gallons and 
where bacteria in the lagoon converts volatile solids in the 
manure into biogas or methane gas. The lagoon is completely 
covered and insulated. The gas flows underground into the 
generation building which houses a large Guascor engine and 
generator capable of producing 225 kilowatts.
    Now I would like to speak to some of the advantages of a 
methane digester: reduces the strain on the PP&L grid; reduces 
the need for electricity produced from fossil fuel power 
plants; reduces pathogens in the digested manure; separates the 
solids from liquid and recycles the solids for bedding; reduces 
the odor by 75 to 90 percent after digested; fly larvae are 
killed by the digester, resulting in less flies; reduces 
methane and other greenhouse gases into the atmosphere; weed 
seeds killed in digested manure which in turn can reduce 
chemical use; selling electricity to the local power company as 
renewable energy.
    We are permitted to add food by-products that can be 
metered to the manure which makes extra electricity; 
possibility of partnering with cafeterias to use food scraps 
added to manure rather than land filling which also makes 
electricity. In turn, this can result in a profit to the 
farmer.
    Methane is one of the potent greenhouse gases. It is 20 to 
23 times more powerful in trapping heat in the atmosphere than 
carbon dioxide. We make a profit from the sale of carbon 
credits to industry or individuals who need or want to offset 
emissions.
    As a greenhouse gas, methane differs from carbon dioxide in 
an important way. Methane remains a climate change threat in 
the atmosphere for a number of years.
    The reduction in the methane from our digester can lead to 
a slowing of climate change. Use of the manure after it goes 
through the digester is readily available to plants for plant 
food, which in turn helps prevent leaching and a chance for 
run-off.
    As you know, in this critical time, the dairy farmer has 
some financial difficulty. Some of the things we talked about 
today could help the dairy producer. And as a side note, I 
would be happy to offer suggestions or ideas that could help 
correct the dairy situation.
    I believe that over the next 10 years, environmental and 
renewable energy issues are going to be some of the biggest 
challenges for agriculture and farmers. Using State and Federal 
funding and loan assistance for this project and our new solar 
project to produce electricity for about 150 homes on the roof 
of our new heifer barn helps Brubaker Farms make our goals a 
reality.
    I believe investing in projects like these is good for the 
future of the dairy farmer industry and livestock industry, the 
economy, the environment, and the whole world.
    I will be glad to answer any questions that you might have, 
and thank you again for the opportunity to speak today.
    [The prepared statement of Mr. Brubaker can be found on 
page 71 in the appendix.]
    Chairman Harkin. Well, Mr. Brubaker, thank you very much. 
Very stimulating. Very stimulating.
    Now we turn to Mr. Fred Yoder, Past President of the 
National Corn Growers Association, from Plain City, Ohio. 
Welcome, Mr. Yoder. Please proceed.

STATEMENT OF FRED YODER, PAST PRESIDENT, NATIONAL CORN GROWERS 
                 ASSOCIATION, PLAIN CITY, OHIO

    Mr. Yoder. Chairman Harkin, Ranking Member Chambliss, it is 
a pleasure to be here. Unfortunately, somebody has to be last, 
and I guess today I was the last one. I guess I am just lucky.
    Again, my name is Fred Yoder. I grow corn, soybeans and 
wheat near Plain City, Ohio, and I have been an active 
participant in climate change discussions for many years. In 
December, I had the opportunity to attend and participate in 
the United Nations World Climate Conference in Poland where I 
was able to discuss the role of agriculture in reducing 
greenhouse gas emissions. Also, in addition to being part of 
NCGA's efforts, I serve on the boards of numerous ad hoc 
groups, including the 25x25 Carbon Working Group and the Ag 
Carbon Market Working Group here in D.C.
    I feel strongly that agriculture needs to be considered a 
significant part of the broader solution as we evaluate ways to 
reduce greenhouse gas emissions. Our Nation's farmers can play 
a major role in the market-based cap-and-trade system through 
sequestering carbon on agricultural lands. In fact, numerous 
economic analyses have indicated that a robust offset program 
will significantly reduce the costs of a cap-and-trade program 
for consumers.
    In the near term, greenhouse gas reductions from livestock 
and agricultural conservation practices are the easiest and 
most readily available means of achieving reductions on a 
meaningful scale. The EPA estimates that ag and forestry lands 
alone can sequester at least 20 percent of all annual 
greenhouse gas emissions in the United States.
    Further, agricultural producers have the potential to 
benefit from a properly crafted cap-and-trade system. Given 
these opportunities, it is critical that any climate change 
legislation seeks to maximize agriculture's participation and 
ensure greenhouse gas reductions while also sustaining a strong 
farm economy.
    For years, corn growers have adopted conservation practices 
such as no-till or reduced tillage which result in a net 
benefit of carbon stored in the soil. In fact, on my farm, I 
engage in both no-till and reduced tillage. Also, for the past 
5 years, I have worked with my State association, the Ohio Corn 
Growers, on a research project with Dr. Rattan Lal of the Ohio 
State University on soil carbon sequestration research. As part 
of our research, we have on-farm plots at six different 
locations to study various soils and their carbon capture 
capabilities. I have been actively engaged from the beginning 
in defining the research protocols, and this is just one 
example of the proactive steps our industry has taken.
    NCGA was pleased with the inclusion of a number of 
agricultural offset provisions during the House negotiations on 
H.R. 2454. However, we currently have a neutral position on the 
legislation until we finish conducting an economic analysis of 
the House bill. We expect to have preliminary results of our 
study coming in the next few weeks, which will better explain 
the potential cost increases and income opportunities for corn 
production under the American Clean Energy and Security Act. We 
must get this nailed down.
    Perhaps one of the largest unresolved issues in H.R. 2454 
is the treatment of early actors and the definition of 
``additionality.'' Producers who have taken steps to sequester 
carbon or other greenhouse gases should not be at a competitive 
disadvantage by being excluded from selling credits for future 
offsets that occur as a result of ongoing efforts. The House 
bill acknowledges this by allowing the generation of new carbon 
credits for producers who initiated sequestration practices as 
early as 2001; however, NCGA does not believe that this 
language is inclusive enough.
    Planting and tillage decisions are made each and every 
year, and there is no guarantee that a producer will decide to 
continue the same practice as the previous season. Each and 
every crop we grow sequesters additional carbon, and Congress 
should not establish policies that offer perverse incentives to 
producers to discontinue their conservation practices.
    To that end, NCGA supports the development of an ``avoided 
abandonment'' offset credit so that no-till producers can 
participate in a carbon market for their ongoing sequestration 
activities regardless of when that practice began.
    As an aside, the House-passed version of H.R. 2454 also 
includes an important provision related to the Renewable Fuels 
Standards. The House bill prohibits EPA from considering 
indirect land use change when conducting their life cycle 
analysis for corn-based ethanol until a peer-reviewed study can 
be conducted to verify the scientific accuracy of the model.
    NCGA disputes recent data that would suggest direct 
correlation between domestic ethanol production and 
international deforestation. The language in the House bill is 
a step in the right direction toward sound science and a more 
rational life cycle analysis. We would urge that the Senate 
include the same provision in its version of the climate bill.
    In conclusion, it is our hope that we can continue to work 
with the Senate Agriculture Committee to ensure Congress 
chooses the best path for agriculture and rural America. I 
thank the Committee for its time, and I do look forward to your 
questions. Thank you.
    [The prepared statement of Mr. Yoder can be found on page 
132 in the appendix.]
    Chairman Harkin. Well, thank you very much, Mr. Yoder. 
Thank you all.
    I will just start with you, Mr. Yoder, on what you just 
kind of closed on. The whole idea of stackability is one that 
we have looked at, and we will be making, obviously, strong 
recommendations on that so that a farmer might be able to get 
CSP-type payments and do other things and still get to be able 
to get offsets for carbon sequestration. That is a little bit 
easier than the early actors.
    Now, the early actors, as you point out, was under 2001, I 
think it is in the House bill.
    Mr. Yoder. That is what was in the House bill.
    Chairman Harkin. But what about the case of the forester we 
had here in an earlier panel we had in July, where he is the 
third generation--I forget. They had 1,000 acres of timber or 
something like that, but they do other kinds of farming, too. 
Obviously, it has been in their family a long time. Obviously, 
they are sequestering carbon. If he cuts down all those trees 
and plants new ones, he gets to sell offsets. If he does not, 
he gets nothing. So I think that whole thing has to be 
addressed because that is a pretty permanent practice to have 
timber like Senator Lugar has on his farm. So both of those, 
you raise those issues, and they are very important issues to 
us.
    Mr. Brubaker, very stimulating, what you are doing there. I 
guess the question I would have is: How have your neighbors in 
Lancaster County who also raise livestock, how have they 
reacted to the addition of a methane digester to your 
operation? There are other dairy farmers around you.
    Mr. Brubaker. Right. There are many dairy farmers. If 
Lancaster County was a State, we would be, I think, about 
number 11, maybe number 12 now. If just Lancaster County was a 
State, for the number of dairy cows, we would be about number 
11 in the United States. So, yes, there are a lot of dairy 
farmers around, and we are getting a lot of interest in 
building methane digesters. They are coming from Vermont. They 
are coming from Minnesota. They are coming to look at our 
digester. And we are not the only digester in the United 
States. Do not misunderstand me. I think there are about 110 
digesters, give or take, in the United States. But we just 
built this probably about 2 years ago--well, about a year and a 
half ago we built it. We started thinking of this in about 
2006. I guess that was when milk prices were a little weak 
then, and we thought, ``We have got to find another profit.'' 
And we decided it would be a profit coming from the back end of 
the cow, and so we decided to build a methane digester, which 
we are getting so much interest in. Our power company in 
Pennsylvania is paying us a good price for electricity, and 
that is what I hear around the country, that power companies 
are not paying a good price for electricity. They are paying us 
a good price for electricity, and we are selling carbon 
credits, and it is a win-win situation.
    So that answers some of your question.
    Chairman Harkin. I assume you are just running the methane 
through, what, kind of an engine or something that is turning, 
a generator? Is that the way you are doing it?
    Mr. Brubaker. Yes. If you look on the back side of the 
paper that I--that is actually the picture of the digester 
right there. And from that digester there, you will see over 
there at the far left, there is some piping that runs about a 
6-inch pipe over into an engine room, which runs a big, almost 
a 400-horsepower Guascor engine, which runs a generator, which 
we are selling the electricity right onto the grid.
    Chairman Harkin. Is this economically viable to do 
something like this? Can you actually make money on something 
like this?
    Mr. Brubaker. Well, yes, we are making money on it, and 
that is why people are looking at it. We did have--in about 
2006, Governor Rendell was out to the farm for a meeting, 
myself and my two sons and the two Secretaries of Agriculture. 
We took a little trip after the talk, and we sat him beside the 
manure pit, and we told him what we want to do. He did some 
writing and said he wants to look into this situation. It was 
not too long until Pennsylvania had a Harvest grant. We got a 
Harvest grant, and we also got a grant from USDA which made it 
work for us to take the risk to build a digester, which it cost 
about a million and a quarter to do. But if everything goes 
well, the way we are producing, we are way above expectations 
on producing electricity, and we should pay it off in 3 to 4 
years. And if we would not have had the grants, I believe we 
could have paid it off--could pay it off in, to be 
conservative, 8 to 10 years.
    Chairman Harkin. Mr. Rehermann, again, one of the benefits 
of having you here is, again, to highlight the fact that 
different parts of agriculture do not fare as well under the 
proposed legislation, and one of those that has come to our 
attention are the rice farmers.
    I have heard mention of methods to reduce methane emissions 
from rice farming. I guess that comes from the straw or 
something? I do not understand that. But are there any kind of 
practices like that that would be viable as an offset practice 
for rice farmers?
    Mr. Rehermann. For approximately, Mr. Chairman, the last 30 
years, we have investigated methods by which we can rid 
ourselves of our straw, which yields about 3 ton per acre, a 
good rice crop. We have sought alternative uses, and to date, 
we have no feasible, large-scale alternative use for rice 
straw. And so most of it is incorporated into the soil. 
Certainly that leads to methane gas production.
    We continue that plight. We continue to search, but we have 
no real evidence that we are going to be able to sequester or 
reduce the emissions any more than we do.
    We irrigate. We are under constant irrigation. We use a 
fairly high amount of nitrogen. We till the soil. Our soils are 
heavy clay and not well drained. All those things lead to the 
emission.
    Chairman Harkin. Again, it is a balancing here that we are 
trying to do here. There have been, obviously, a lot--well, I 
have gone over my time. I am sorry. I was not paying attention 
to the clock. I will finish there, and if I have a follow-up, I 
will follow up later.
    Senator Chambliss?
    Senator Chambliss. Well, gentlemen, thanks for your 
testimony here today. Mr. Yoder, always good to see you.
    We have talked about the study that Texas A&M did that has 
just been released in which there is a very distinct difference 
in farmers who would prosper from this versus farmers who would 
struggle from it. We heard some of that from you folks here.
    We have got to develop a policy that hopefully will benefit 
all farmers and ranchers across America and not just a policy 
that is going to--in this case, as the Texas A&M study showed, 
would particularly benefit Midwest farmers and corn and soybean 
farmers.
    Do you have any advance understanding of what your study is 
going to show with respect to this particular piece of 
legislation and its effect on corn that may be grown in Georgia 
or North Carolina versus corn that may be grown in the Midwest?
    Mr. Yoder. Well, I cannot really say for sure what the 
study that we are doing right now will say, but I will say 
this: With our work in Ohio with Dr. Lal from Ohio State, there 
is a definite difference in soil's ability to sequester carbon. 
So there will be some differences across the country. It is not 
going to be one size fits all. In fact, if Senator Johanns was 
here, in the sandy soils of Nebraska it would be virtually 
impossible to generate a credit from soil sequestration because 
of the sandy soil, the lack of organic matter.
    However, the study that you are referring to from Texas A&M 
really only looked at two types of offsets, and that was no-
till sequestration and also methane digesters. And so it was 
really kind of narrow in scope.
    The other thing, too, that we have to consider is that in 
the Waxman-Markey bill there were 13 different projects that 
they listed as projects for agriculture to participate, and it 
is much broader than just no-till sequestration or methane 
digesters. For instance, raising a cover crop or reducing the 
amount of water that you irrigate with, with maybe some 
varieties that take less water, reducing nitrogen use and 
things like that.
    So I think the thing we have to do in order to make this 
work for all of agriculture is to come up with scientifically 
based verifiable projects that we can do clear across the 
United States and not put one part, like Georgia, at a 
disadvantage compared to an Iowa or something like that. I 
think we have the science to do this, but I think it is 
important for your Committee to really work on broadening this 
and making sure that we have some science-based projects that 
everyone can participate in and not just a few.
    Senator Chambliss. All of the testimony thus far that we 
have heard indicates very strongly that we are going to see a 
rise in input costs. Apparently, nobody is in disagreement with 
that, whether it is nitrogen or petroleum or whatever it may 
be. So in order to continue to generate a profit from a corn-
growing standpoint, obviously you are going to have to get a 
higher price for it, which we all assume that would be a likely 
scenario. Otherwise, as the Texas A&M study showed, the only 
way you are going to see corn and soybeans prosper is for 
acreage to come out of production, which means farmers going 
out of business.
    Mr. Brubaker, if that scenario does play out and we see a 
significant increase in corn prices--we have heard testimony 
that we are going to have an increase in electric prices, we 
are going to have an increase in the other feedstuffs that you 
use in your production. With the dairy market in very tough 
times right now, what is that going to do to your operation?
    Mr. Brubaker. Well, maybe we are in a better position than 
some, but I want to try to look at it as the whole picture of 
dairy and livestock producers. Maybe one thing you could do 
would be if a farmer participates in the carbon sequence in one 
way or another, that you would offset his expenses, his fuel 
expenses or something like that, if that is going to raise fuel 
and electric costs. I am just trying to think of something that 
would offset it. Exempt that farmer if he participates in the 
program, offset his fuel prices, electric prices, or doing 
something like that. Maybe that is an opportunity, or maybe 
that is an encouragement.
    Senator Chambliss. Well, we are in an atmosphere, 
unfortunately, that rather than increasing subsidies, we keep 
getting shot at from the standpoint of decreasing subsidies. 
And it makes it pretty difficult.
    Frank, good to see you as always, too. Thanks for being 
here. The Texas A&M study as well as other studies have shown 
that rice farmers are not going to fare too well for the 
reasons that you enumerated. What is this going to do to you 
and the international market? If the United States forges ahead 
with a cap-and-trade program, where are rice growers in this 
country going to be from a global market standpoint?
    Mr. Rehermann. Senator Chambliss, we cannot help but be 
severely disadvantaged by that if we lose our ability to 
compete in that global marketplace, and we are constantly being 
reminded that in order to effectively compete, we have to be a 
lower-cost producer than trending higher. We have had the same 
impacts on our input costs, the energy-related input costs that 
every other business in the United States has had. The 
principal difference, as you know, is that we cannot pass those 
costs along to the consumer.
    So I peril to think of the disadvantage we are going to be 
in the export market. We are having a more and more difficult 
time, as I mentioned, competing against imports into this 
country.
    Senator Chambliss. Well, and I know some of the 
difficulties you are experiencing now. The last couple of years 
have been pretty tough years in the rice industry from a global 
competition standpoint. And if we are looking at increasing 
your input costs without seeing a collateral increase in 
prices, are we going to see more and more rice growers go by 
the wayside?
    Mr. Rehermann. I fear that in this country you will. I 
think that the people who will benefit will be the growers in 
the countries that do not implement such onerous regulations, 
our competing nations--Vietnam, Thailand, Burma. If China and 
India export, we have big trouble there. I do not look for them 
to lead the way in climate change initiatives.
    Senator Chambliss. Mr. Beckstoffer, I am particularly 
interested in how a small California winegrape grower can 
provide offsets under this cap-and-trade program. Can you tell 
us what emission reduction or carbon sequestration activities 
winegrape growers are doing now and what they can do under an 
offset program? And I apologize. We just do not grow a lot of 
grapes over our way. A lot of muscadines, but not grapes, are 
used extensively in the manufacture of wines. So educate us a 
little bit about what you are doing and what can be done.
    Mr. Beckstoffer. We do not plant grapes but once every 40 
years, so that we do not do new things that often. So as many 
of the people on this panel have said, if our early practices 
where we sequester carbon every year based on what is already 
in the ground is not give credits, we are not going to get many 
credits, because we simply do not do that.
    What we do for reasons of grape quality, if you will, and 
soil conservation is that we--we are very worried about 
compaction and things of that sort, so we do not drive tractors 
that much. We are worried about pesticides, so we grow cover 
crops so we can host beneficial insects and things of that 
sort. We use drip irrigation so we do not use a lot of energy 
to irrigate. But all of those are practices that we do every 
year, and so somehow or another, we must get credit for the 
photosynthesis and for the carbon sequestration we do with our 
normal business practices, and that for plants that are planted 
every 40 years, as Mike Thompson was saying, we do this 
precision ripping, and that cuts down on tractor usage. It cuts 
down on carbon because you are actively--you are turning the 
soil.
    But we started that because the rocks were really big and 
it cost a lot of money to move those rocks. But most of the 
things we do for wine quality and for soil conservation are 
things that would help climate control, plant and carbon 
sequestration. But you have got to give us credit for what we 
do every year, or we are not going to get much benefit.
    Senator Chambliss. All right. Mr. Chairman, I think that is 
all I have right now. Thank you very much, gentlemen.
    Chairman Harkin. I have another one to ask Mr. Beckstoffer, 
and that is, it seems to me that you are in a unique position. 
Your vines are long-term type, carbon sequestration, 30, 40 
years on some of these vines. Do I assume that you also--do you 
do any kind of cover crop in between your vines and stuff like 
that?
    Mr. Beckstoffer. Yes, we do, and we do that--what we do is 
we do it to dry out the soil. We plant the kind of crops that 
would dry the soil in the spring and then would go away when 
the plant needs the soil in the rest of the summer, because in 
California we get rain from November to March and not any time 
in between that. But our vineyards are--there is a cover crop 
between the rows that we mow and we do not turn the soil 
anymore. We mow it, and we mow it only, say, once a year 
because the kind of crops we do die in the summertime because 
we do not want to use the soil--we do not want them taking up 
our soil moisture.
    But if you would look at a vineyard, you would see--we 
plant over 1,000, 1,200 vines per acre, so that is very intense 
in terms of the green foliage there, which is the 
photosynthesis. But the ground much of the year is green as 
well.
    Chairman Harkin. Well, thank you all very much. I just have 
to respond to my friend from Georgia here on this issue of the 
increased input costs and the increased price for feed for our 
dairy farmers or hog farmers or cattle farmers.
    Senator Thune and I just had a hearing out in Sioux City 
here a week or so ago on energy, basically biofuels, and it was 
stated there by not only growers but some of the 
representatives of our big seed manufacturers that 300 bushels 
per acre of corn is not too far in the distance. In fact, I 
think it was--let me see. It was DuPont or the other one, 
Monsanto--I forget which one--which they predict that by 2020--
they did not predict. They said it is certain that we will have 
a 40-percent increase in the productivity of corn per acre in 
this country. And that is not even taking into account some of 
the genetic research that is going on now, in corn especially. 
I am probably particular to corn because of Iowa, but corn 
where they are developing strains of corn that use less water, 
that can grow in different parts of the world with less water. 
Some of it may even be brackish-type water that the plant can 
utilized like--I always point out there are some plants that 
produce fruit or something that use sea water, but they have a 
gene in there that says, ``Salt, you stay here, and we will 
take the fresh water.'' And they are finding that--like 
coconuts being, of course, the most obvious one. So if you can 
find those kinds of genes that we could help introduce, then we 
could grow corn in a lot of different areas that we are not 
growing it now.
    So we are going to have--I am told it was Monsanto who said 
that we will have 300 bushels by 2030. Pioneer said we would 
have a 40-percent increase in 10 years, so that is basically 
equivalent from both of them. So there is a lot of--we are 
going to produce a lot more corn per acre in the future. And 
that is good. That is very good for all of us. So I do not 
think we have reached the limits of our research yet on those 
areas.
    Well, thank you all very much; this has been very helpful 
to us, all your testimony. Rest assured we are trying to figure 
out how we can give the best information possible to the other 
committees when they bring this up--sometime, I do not know 
when, maybe this fall.
    Thank you all very much, the Committee will stand 
adjourned.
    [Whereupon, at 1:06 p.m., the Committee was adjourned.]
      
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                           SEPTEMBER 9, 2009



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