[Congressional Record (Bound Edition), Volume 151 (2005), Part 2]
[Senate]
[Pages 2477-2481]
[From the U.S. Government Publishing Office, www.gpo.gov]




                             GLOBAL WARMING

  Mr. BINGAMAN. Madam President, today marks the entry into force of 
the Kyoto Protocol on Climate Change. Following President Bush's 
decision to opt out of ratification of that treaty, enforcement of the 
Protocol fell onto Russian shoulders and was finally ratified by the 
Russian Federation late last year. Today it is a legally binding 
treaty.
  The basic climate change problem is well understood. We have been 
told repeatedly in peer reviewed scientific assessments that increasing 
concentrations of greenhouse gases will lead to an increase in the 
average global temperature. The increasing temperature of the earth 
will lead to a large number of important changes to today's climate 
system. Through past emissions

[[Page 2478]]

and projected emissions over coming years and decades we expect that 
the warming will accelerate unless the world alters its emissions path. 
Indications of warming are already evident in the global temperature 
record. Last year was the fourth-warmest year since temperature 
measurements began in the 19th century. The warmest year on record was 
1998, followed by 2002 and 2003. Indications are also evident in the 
vast changes now underway in the Arctic and the bleaching of coral 
reefs around the world.
  Over the years there have been many who have been skeptical of the 
science that has informed us of the climate change problem. But the 
mainstream of the scientific community, as evidenced by panels 
organized through the National Academy of Sciences, has been quite 
consistent in their views. Our doubling of the pre-industrial level of 
carbon dioxide has been a major factor in increased global average 
temperatures.
  If human-induced global warming continues on its present path, the 
changes to our way of life could be vast. We know this from looking at 
climates of the past as well as projections made by scientific models. 
There would be significant changes in water resources, because 
precipitation patterns will change. The sea level will increase because 
the oceans will warm and will expand. The ice sheets of Greenland and 
parts of Antarctica could disintegrate, further adding to long-term sea 
level rise. A warming of the earth will place major ecological systems 
at risk, including many of our forests and coral reefs. We are 
essentially performing a global experiment with our planet, with 
increasing risk to the future. A prudent course of action would be to 
take steps now to lower these risks, while we continue to improve our 
understanding of the implications of the warming of our planet.
  The desirability of taking prudent steps now, on a national and 
international basis, to stem global warming is further highlighted by 
other developments. Across the United States, an increasing number of 
individual States are taking policy steps related to global warming. 
California and New York are moving forward with innovative programs to 
do their part in minimizing emissions. Add into the mix States like 
Pennsylvania, Colorado, Texas, Minnesota and others and you can see 
that a patchwork quilt of climate policies is being formed across the 
United States. While States can be a great laboratory of ideas, the 
developing situation really calls out for Federal leadership to get to 
a more coordinated and rational approach across the country.
  The business community is looking for federal leadership as well. At 
a recent hearing before the Energy Committee, an industry economist 
called climate change a ``wild card'' that could shape energy markets 
and governance worldwide. He testified that it would be ``prudent to 
take preparatory steps'' to reduce carbon dioxide emissions. He is not 
alone. Many U.S.-based multinational corporations are looking to the 
Federal Government for help as they seek to comply with the EU 
emissions trading scheme. More than 12,000 factories and power plants 
in Europe are subject to emissions caps, affecting many U.S. 
multinationals with operations in Europe.
  I applaud the hard work that has been done by many of my colleagues 
on the issue of global warming. In past Congresses, we have seen 
productive work both in terms of discrete bills, such as that by 
Senators McCain and Lieberman or the abrupt climate change bill by 
Senator Collins, or as part of large legislation, such as the 
bipartisan climate change titles in past comprehensive energy bills. It 
is clear that most Members of the Senate understand the importance of 
global warming. I hope that we will continue to work together this 
Congress on a path toward sensible climate legislation. For my part, as 
the ranking member on the Senate Committee on Energy and Natural 
Resources, I hope that we can find a way to continue to integrate 
global warming concerns in energy legislation.
  Energy legislation is an appropriate place to deal with global 
warming. I have said many times that climate change is so closely 
related to energy policy because the two most prominent greenhouse 
gases--that is, carbon dioxide and methane--are largely released due to 
energy production and use. To a large extent, to do energy legislation 
is to do climate legislation and vice versa.
  As we consider climate in an energy context, I would like to lay out 
three principles that I stand for and that I think are important. I 
think that these principles are both modest and aimed at providing more 
certainty to decisions that need to be made by the many actors who are 
part of our national energy picture.
  The first principle is to have a sensible plan to reduce emissions of 
carbon dioxide. I am very impressed with the recent proposal by the 
bipartisan National Commission on Energy Policy in this regard. They 
have presented a well-thought out plan to create a mandatory emission 
trading scheme that protects the economy and provides the essential 
framework for certainty.
  Industry needs the certainty of a program that will help them make 
investment decisions for the future without causing them to prematurely 
retire capital stock. For example, I would bring to the Senate's 
attention the recent report of the Cinergy Corporation and their 
detailed analysis of the implications of potential greenhouse gas 
regulations. They conclude that neither their company, nor their 
region, nor this country would be endangered in the face of a modest 
greenhouse gas emissions policy that includes a safety valve to protect 
against shocks to the economy. This approach has been championed by 
well known economists such as Glenn Hubbard and Joseph Stiglitz, as 
well as institutions such as Resources for the Future, the Climate 
Policy Center and the Washington Post.
  Protecting our economy will not come from ignoring the situation. 
Lack of attention is as detrimental as legislation that is too 
aggressive. The Energy Commission's proposal is the right mix of 
modesty and certainty.
  The second principle is to couple any emission reduction plan with 
robust technology research and development and a broader energy package 
that addresses energy supply from nuclear power, renewable energy, 
natural gas, IGCC, and other sources. We need our approach to research 
and development to be strategic in the sense of creating new options 
for dealing with greenhouse gases in an economic way.
  The third and final principle I wanted to mention is the need to 
enact policies that affect emissions trends in developing countries, at 
the same time that we try to deal with emissions trends here. EIA has 
projected that we will soon be overtaken by the developing countries in 
terms of greenhouse gas emissions. At the same time, these developing 
countries are not required by the Kyoto Protocol to reduce emissions. 
This has been a key point for opponents of the Protocol who are worried 
about losing competitive advantage to countries with weak environmental 
standards.
  In terms of the long-term resolution of this issue and the 
competitiveness of the U.S. economy, it is essential that the United 
States and developing countries coordinate action. One way to do this 
is to link progress in the United States to policies overseas. Here 
again I point to the Energy Commission proposal that links progress on 
American action to what is done by the international community.
  Climate change is important to the international community. It is 
important to Prime Minister Blair and the other members of the G-8 who 
will be meeting later this year. And, finally, it is important to all 
Americans.
  I intend to propose some sensible climate legislation at an 
appropriate point that is consistent with the principles I have laid 
out here.
  I hope we can address elements of it in energy legislation as it 
moves forward through Congress. We need to find a way to move forward, 
and I believe we can before this Congress concludes.
  I ask unanimous consent that several items be printed in the Record: 
First, an editorial out of the Washington

[[Page 2479]]

Post entitled ``A Warming Climate''; second, a letter from Glenn 
Hubbard, professor, Columbia University, and Joseph Stiglitz, 
professor, Columbia University to John McCain and Joseph Lieberman; 
third, a summary of the Report to Stakeholders on air issues that has 
been developed by Cinergy Corporation; and finally, a summary of 
recommendations of the National Commission on Energy Policy entitled 
Ending the Energy Stalemate.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

               [From the Washington Post, Jan. 28, 2005]

                           A Warming Climate

       For the past four years members of the Bush administration 
     have cast doubt on the scientific community's consensus on 
     climate change. But even if they don't like the science, 
     British Prime Minister Tony Blair, one of their closest 
     allies in Iraq and elsewhere, has given the administration 
     another, more realpolitik, reason to rejoin the climate 
     change debate: ``If America wants the rest of the world to be 
     part of the agenda it has set, it must be part of their 
     agenda, too,'' the prime minister said this week.
       Mr. Blair's speech came at an interesting moment, both for 
     the administration's energy and climate change policies and 
     for the administration's diplomatic agenda. In the next few 
     weeks, the House will almost certainly vote once again on 
     last year's energy bill, a mishmash of subsidies and tax 
     breaks that finally proved too expensive even for a 
     Republican Senate to stomach. After a House vote, there may 
     be an attempt to trim the cost of the bill and add measures 
     to make it acceptable to more senators--including the growing 
     number of Republicans who have, sometimes behind the scenes, 
     indicated an interest in climate change legislation. Indeed, 
     any new discussion of energy policy could allow Sens. John 
     McCain (R-Ariz.) and Joseph I. Lieberman (D-Conn.) to seek 
     another vote on their climate change bill, which would 
     establish a domestic ``cap and trade'' system for controlling 
     the greenhouse gas emissions that contribute to global 
     warming.
       If domestic politics could prompt the president to look 
     again at the subject, international politics certainly 
     should. Administration officials assert that mending fences 
     with Europe is a primary goal for this year; if so, the 
     relaunching of a climate change policy--almost any climate 
     change policy--would be widely interpreted as a sign of 
     goodwill, as Mr. Blair made clear. Beyond the problematic 
     Kyoto Protocol, there are ways for the United States to join 
     the global discussion, not least by setting limits for 
     domestic carbon emissions.
       Although environmentalists and the business lobby sometimes 
     make it sound as if no climate change compromise is feasible, 
     several informal coalitions in Washington suggest the 
     opposite. The Pew Center on Global Climate Change got a 
     number of large energy companies and consumers--including 
     Shell, Alcoa, DuPont and American Electric Power--to help 
     design the McCain-Lieberman legislation. A number of security 
     hawks have recently joined forces with environmentalists to 
     promote fuel efficiency as a means of reducing U.S. 
     dependence on Middle Eastern oil. Most substantively, the 
     National Commission on Energy Policy, a group that 
     deliberately brought industry, environmental and government 
     experts together to hash out a compromise, recently published 
     its conclusions after two years of debate. Among other 
     things, it proposed more flexible means of promoting 
     automobile fuel efficiency and suggested determining in 
     advance exactly how high the ``price'' for carbon emissions 
     should be allowed to go, thereby giving industry some way to 
     predict the ultimate cost of a cap-and-trade system.
       They also point out that legislation limiting carbon 
     emissions would immediately create incentives for industry to 
     invent new fuel-efficient technologies, to build new nuclear 
     power plants (nuclear power produces no carbon) and to find 
     cleaner ways to burn coal. Technologies to reduce carbon 
     emissions as well as fossil fuel consumption around the world 
     are within reach, in other words--if only the United States 
     government wants them.
                                  ____

                                              Columbia University,


                                  Graduate School of Business,

                                      New York, NY, June 12, 2003.
     Hon. John McCain,
     Russell Office Building,
     Washington, DC.
     Hon. Joseph Lieberman,
     Hart Senate Office Building,
     Washington, DC.
       Dear Senators McCain and Lieberman: As Congress takes up 
     the issue of market-based systems to reduce emissions of 
     carbon dioxide and other greenhouse gases, we are writing to 
     encourage you to incorporate an allowance price cap sometimes 
     referred to as a ``safety valve.'' In the context of a cap-
     and-trade system for emission allowances, a safety valve 
     would specify a maximum market price at which the government 
     would step in and sell additional allowances to prevent the 
     price from rising any further. Much like the Federal Reserve 
     intervenes in bond and currency markets to protect the 
     economy from adverse macroeconomic shocks, this intervention 
     is designed to protect the economy automatically from adverse 
     energy demand and technology shocks. While we disagree on 
     what steps are necessary in the short run, we both agree it 
     is particularly important to pursue them in a manner that 
     limits economic risk.
       Our support for the safety valve stems from the underlying 
     science and economics surrounding the problem of global 
     climate change, and is something that virtually all 
     economists--even two with as politically diverse views as 
     ourselves--can agree upon. It is based on three important 
     facts.
       First, unexpected events can easily make the cost of a cap-
     and-trade program that includes carbon dioxide quite high, 
     even with a modest cap. For example, consider an effort to 
     reduce domestic carbon dioxide emissions by 5% below future 
     forecast levels over the next ten years--to about 1.8 billion 
     tons of carbon. This is in the ballpark of the domestic 
     reductions in the first phase of McCain-Lieberman allowing 
     for offsets, the targets in the Bush climate plan, and the 
     level of domestic emission reductions described by the 
     Clinton administration under its vision of Kyoto 
     implementation. Based on central estimates, the required 
     reductions would amount to about 90 million tons of carbon 
     emissions, and might cost the economy as a whole around $1.5 
     billion per year. However, reaching the target could instead 
     require 180 million tons of reductions because of otherwise 
     higher emissions related to a warm summer, a cold winter, or 
     unexpected economic growth. Based on alternative model 
     estimates, it could also cost twice as much to reduce each 
     ton of carbon. The result could be costs that are eight times 
     higher than the best guess.
       Second and equally important, the benefits from reduced 
     greenhouse gas emissions have little to do with emission 
     levels in a particular year. Benefits stem from eventual 
     changes in atmospheric concentrations of these gases that 
     accumulate over very long periods of time. Strict adherence 
     to a short-term emission cap is therefore less important from 
     an environmental perspective than the long-term effort to 
     reduce emissions more substantially. Without a safety valve, 
     cap-and-trade risks diverting resources away from those long-
     term efforts in order to meet a less important short-term 
     target.
       Finally, few approaches can protect the economy from the 
     unexpected outcome of higher energy demand and inadequate 
     technology as effectively as a safety valve. For example, 
     opportunities to seek offsets outside a trading program can 
     effectively reduce the expected cost of a particular emission 
     goal--which is beneficial--but that does not address concerns 
     about unexpected events. In fact, if the system becomes 
     dependent on these offsets, their inclusion can increase 
     uncertainty about program costs if the availability and cost 
     of the offsets themselves is not certain. Another proposal, a 
     ``circuit breaker,'' would halt future declines in the cap 
     when the allowance price exceeds a specified threshold, but 
     would do little to relax the current cap if shortages arise. 
     Features that do provide additional allowances when shortages 
     arise, such as the possibility of banking and borrowing extra 
     allowances, are helpful, but only to the extent they can 
     ameliorate sizeable, immediate, and persistent adverse 
     events.
       To summarize, the climate change problem is a marathon, not 
     a sprint, and there is little environmental justification for 
     heroic efforts to meet a short-term target. Such heroic 
     efforts might not only waste resources, they risk souring our 
     appetite to confront the more serious long-term problem. 
     Absent a safety valve, a cap-and-trade program risks exactly 
     that outcome in the face of surprisingly high demand for 
     energy or the failure of inexpensive mitigation opportunities 
     to arise as planned. A safety valve is the simplest, most 
     transparent way to signal the market about the appropriate 
     effort to meet short-term mitigation goals in the face of 
     adverse events.
       While trained economists hold divergent views on many 
     topics--as our own views demonstrate--economic theory 
     occasionally delivers a relatively crisp message that 
     virtually everyone can agree on. We believe this is one of 
     those occasions, and hope you will consider these points as 
     Congress addresses various climate change policies in the 
     coming months.
           Sincerely,
     R. Glenn Hubbard,
       Professor, Chairman, Council of Economic Advisers.
     Joseph E. Stiglitz,
       Professor, Chairman, Council of Economic Advisers.
                                  ____


                   Air Issues--Report to Stakeholders


                           EXECUTIVE SUMMARY

       This report discusses the potential impact on Cinergy 
     Corp.'s operations and risk exposure should Congress pass 
     legislation requiring limits on the emissions of greenhouse 
     gases (GHGs), or if GHG emissions are otherwise limited by 
     treaty, regulations or judicial action. We have worked with a 
     respected

[[Page 2480]]

     shareholder group, Committee on Mission Responsibility 
     Through Investment of the Presbyterian Church (U.S.A.), and 
     Ceres to discuss the potential for eventual GHG regulations 
     and their consequences on the coal-fired electric generating 
     industry in general, and on Cinergy in particular.
       Cinergy operates nine coal-fired generating stations and 
     burns almost 30 million tons of coal per year. We generate 
     approximately 70 million gross megawatt hours of electricity 
     for use by our 1.5 million customers in southwestern Ohio, 
     northern Kentucky and much of Indiana. Our newer stations, 
     representing 35 percent of our total generation, operate with 
     sulfur dioxide (SO2) scrubbers, while 
     approximately 50 percent of our generation has been fitted 
     with selective catalytic reduction equipment (SCRs), which 
     reduces nitrogen oxides (NOX) emissions. Our 
     operations are in full compliance with all applicable clean 
     air laws and regulations. We have recently announced a 
     significant construction program of additional emission 
     control equipment to comply with more restrictive pending 
     regulations.
       The first comprehensive regulation of air emissions 
     occurred in 1970 when Congress passed the first Clean Air Act 
     (CAA) and established the Environmental Protection Agency 
     (EPA). The CAA has been amended at various times in the last 
     34 years, most recently in 1990.
       Early regulations were based on ``command and control'' 
     that prescribed the maximum amount of a specified 
     ``pollutant'' a company was allowed to emit in a given time 
     frame from a particular unit. Command and control often did 
     not allow any flexibility or account for individual 
     characteristics in the age or type of coal-fired generating 
     stations. Command and control regulations also failed to 
     recognize other important variables that could have lowered 
     compliance costs.
       In the 1990 CAA Amendments, Congress replaced command and 
     control regulations in certain air emissions programs with a 
     newer mechanism--``cap and trade.'' Cap and trade uses the 
     market to produce a far more efficient, least-cost approach 
     to achieving a prescribed level of emissions reductions. Cap 
     and trade imposes a cap on the level of permissible 
     emissions, yet offers companies flexibility by recognizing 
     the large number of technical and operational differences in 
     regulated facilities. This flexibility allows generators to 
     make decisions based on economic and environmental factors 
     and provides incentives to reduce emissions below threshold 
     requirements. An emissions ``cap'' is achieved, but the exact 
     reductions occur where they are most economic. Emissions 
     ``credits'' are traded with units where reductions are not as 
     easily or economically achieved. The result, proven over the 
     last 14 years, is improved air quality at less cost to 
     electric customers than under command and control regulation.
       In early 2004, the EPA proposed new rules to further 
     control S02, NOX and, for the first 
     time, mercury emissions from coal-fired generating stations. 
     The EPA proposed requirements after Congress was unable to 
     pass several emissions reduction bills presented to it, 
     including President Bush's Clear Skies Act. Cinergy expects 
     the EPA to finalize the rule further reducing S02 
     and NOX emissions before the end of 2004 and 
     anticipates the final mercury rule to be issued by March 
     2005.
       Presently, GHG emissions are not regulated, and while 
     several legislative proposals have been introduced in 
     Congress to reduce utility GHG emissions, none has been 
     approved. We anticipate the climate change debate will 
     continue into the 109th Congress, but believe it is unlikely 
     legislation requiring GHG limits will be passed in the next 
     two years.
       Our costs to comply with these or other new environmental 
     regulations will depend on a number of factors, including the 
     timetables, levels of emissions reduction required, the 
     impact on coal prices and, most importantly, whether the EPA 
     will adopt a cap and trade or a command and control approach 
     to further regulation.
       In anticipation of the proposed rules on S02, 
     NOX and mercury, in September 2004, Cinergy 
     announced the largest environmental construction project in 
     its history, asking state regulators to approve a plan that 
     would retrofit scrubbers and SCRs on generating units not 
     currently equipped with these devices. The company also 
     intends, as a pilot project, to install large scale mercury 
     control equipment at a generating station in southern 
     Indiana. The cost for the entire program is projected to be 
     between $1.65 and $2.15 billion through the next decade, 
     depending on whether the ultimate regulations adopt cap and 
     trade or command and control. This plan has been developed so 
     as to comply with a command and control regulatory scheme, 
     with the ability to reduce certain aspects of the plan should 
     cap and trade ultimately be the method of regulation.
       The uncertainty Cinergy faces in the current regulatory 
     climate has made it difficult to plan the capital 
     expenditures we will need to make to comply with all 
     environmental requirements while continuing to serve our 
     customers' future energy needs in a reliable manner. 
     Overlapping regulations with differing implementation 
     timelines are inefficient and unnecessarily costly for the 
     company and its customers. Cinergy has asked Congress to act 
     and has urged passage of a long-term, multi-emissions bill 
     that would take the unnecessary uncertainty out of national 
     environmental policy.
       Although we do not believe Congress will soon vote to 
     regulate GHGs, we remain hopeful that it will move forward on 
     legislation that provides greater certainty regarding the 
     levels and timetables for reducing emissions of 
     SO2, NOX mercury and particulates. We 
     do believe, however, as our CEO Jim Rogers has said, that we 
     eventually will operate our business ``in a carbon-
     constrained world'' and that it is our responsibility to 
     prepare for that likelihood. We began that preparation in 
     September 2003 by launching a voluntary GHG emissions 
     reduction program, partnering with Environmental Defense and 
     in concert with the President's Climate Leaders program.
       Cinergy's goal is to reduce our GHG emissions to five 
     percent below our 2000 level during the period between 2010 
     and 2012. With our 2000 CO2 emissions at 
     approximately 74 million tons, we intend to reduce our 
     emissions to no more than 70 million tons per year through 
     the period 2010-2012. We have committed $21 million to fund 
     projects through the remainder of this decade to help us 
     reach this voluntary goal. We plan to achieve these 
     reductions despite a steadily rising demand for electricity 
     by our customers and greater internal needs for electric 
     generation to operate the pollution control equipment being 
     installed at most of our stations. Given historical trends in 
     electric demand, we estimate that we will need to cut GHG 
     releases by a total of 30 million tons versus the business-
     as-usual case.
       It is important to note that we must accomplish this goal 
     without access to a readily available CO2 control 
     technology. Unlike SO2 NOX, mercury and 
     particulates, there is no ``carbon machine'' that can remove 
     GHG emissions from our stations. Instead, we expect to meet 
     the goal by improving energy efficiency at our stations, 
     employing effective demand side management programs, adding 
     renewable energy to our generation mix, sequestering carbon 
     through forest preservation, purchasing allowances when 
     economically prudent and, possibly, sequestrating GHGs in 
     underground geologic formations. This latter program would 
     most likely be linked to a demonstration project at a utility 
     scale integrated gasification combined cycle (IGCC) plant 
     that we considering for our next ``base load'' facility. 
     Cinergy recently announced a joint project with General 
     Electric Company and Bechtel Corporation to study the 
     feasibility of constructing an IGCC station in Indiana. We 
     expect that the IGCC plant will run more efficiently than 
     traditionally constructed coal-fired generation and will, 
     thus, contribute fewer CO2 tons per megawatt of 
     electricity produced.
       Cinergy's expertise is also being deployed outside of our 
     legacy utility businesses. Over the last several years, we 
     have created two companies that provide energy management 
     services to a number of industrial and large commercial 
     customers. These services have resulted in significant GHG 
     emissions reductions and operating efficiencies for those 
     customers. To date, we estimate these programs have resulted 
     in the reduction of three million tons of GHGs.
       We anticipate that our voluntary program will help us learn 
     about effective methods of obtaining GHG emission reductions 
     and help us comply with any future regulatory program 
     limiting GHG. Regardless of our planning, however, our 
     ultimate strategy for complying with GHG-restricting 
     regulations will depend greatly on the final direction and 
     timing of such requirements. A well-constructed policy that 
     gradually and predictably reduces emissions can be managed 
     without undue disruption to the company or economy, though 
     even the best plan will have rate impacts on our customers. 
     Much of the future impacts also depend on how readily new 
     technologies emerge, as well as the response of the gas 
     market and resulting gas prices.
       Cinergy and its generating stations are similar to other 
     coal-fired utilities in our market region. Natural gas-fired 
     units in our region are typically the market's price 
     setters--meaning that they are the last units to be deployed 
     or ``dispatched'' to meet short term peak demand--so they 
     would not enjoy any particular advantage With CO2 
     constraints unless gas prices were to drop dramatically, 
     which is a scenario we find highly unlikely. Nuclear and 
     hydropower stations will be well-positioned, though neither 
     is likely to displace coal-fired generation in the short to 
     medium timeframes because their capacity is fully utilized 
     now, with no new construction anticipated in the near term. 
     Renewable energy may well increase in the future, but there 
     are significant impediments, both technologically and 
     economically, before it will make much of an impact in the 
     Midwest.
       Coal fuels more than 80 percent of the Midwest electric 
     market. We do not see it being displaced as the main fuel 
     source for electric production without what we believe would 
     be unacceptable economic and social consequences, not only to 
     the region, but to the entire nation. Although other 
     alternatives are likely to become more economic or practical 
     over time with technological breakthroughs, the nation cannot 
     dismiss a fuel

[[Page 2481]]

     that is as domestically abundant as coal. The capital 
     expenditures we are making at our stations today to comply 
     with the EPA's pending rules are prudent investments because 
     we expect that the generating units will remain economically 
     viable under any reasonable GHG program. We do not believe 
     the resulting price dynamics in the natural gas market will 
     render operation of our coal-fired generating stations cost-
     prohibitive.
       The preparation of this report demonstrates our desire to 
     inform our stakeholders of the GHG challenges we face as a 
     coal-fired electric utility company and to provide insight 
     into how we are meeting those challenges. Because we are a 
     stakeholder-focused company, it is our goal to weigh the 
     interests of all of our stakeholders and come to a balanced 
     result. Our customers, the communities we serve, our 
     employees, regulators, suppliers and most certainly our 
     investors have much at stake as we anticipate and begin to 
     prepare for the challenges we may face in a carbon-
     constrained world.
       We do not project that any of the current legislative 
     proposals would produce these higher prices in the short or 
     medium timeframe. However, this example manifests the 
     importance of developing a policy that does not force 
     reductions too quickly or otherwise limit flexibility and 
     international trading.
     Risk of Very High CO2 Prices Unlikely--Though 
         Details Matter
       It is our view that the very high range of prices shown 
     above would only be expected in the near term (20 years) if 
     sharp emissions reductions were required without being 
     preceded by a period of slowed growth followed by zero growth 
     or there were imposed limits on flexibility. Having said 
     that, the fact is we don't know what prices will be and the 
     risk remains. Should high CO2 prices emerge within 
     the next 20 years, they would flow through to electricity 
     prices because there would be no time to replace the 
     generation fleet with much lower emitting technologies that 
     do not rely on high-priced natural gas. Because electricity 
     prices play an important role in our manufacturing economy, 
     we think that policies that cause dramatic price increases 
     are not viable and, should they occur, would not last long 
     because of political reaction.
       One strategy to protect consumers and producers from 
     CO2 price risks may be to assign price caps to 
     CO2 that increase over time--this is the so called 
     ``safety valve.'' Price caps will provide price certainty (or 
     at least protection from high prices) during the critical 
     years of program start up. This should be important to 
     climate change advocates because price shocks will likely 
     result in a program reversal or unwinding. An unrelated, yet 
     telling example is provided by the price shocks of the 
     California energy crisis, brought on by flawed deregulation. 
     They demonstrate how a program can be quickly scrapped if 
     newly created markets are subjected to dramatic price 
     increases.
       Escalating price caps should be given serious attention by 
     policy makers because of the following important points:
       1. There is a broad range of uncertainty around forecasted 
     CO2 prices as reported by policy analysts. 
     Reported prices are only the single values within a broad 
     distribution of outputs that depend on what input assumptions 
     are made.
       2. The actual prices generated by a real market will be 
     higher or lower than the reported numbers and will vary 
     depending on the supply-demand balance at any particular 
     moment.
       3. If they happen to be quite a lot higher for a sustained 
     period, which is a real possibility, the program will be at 
     risk of being rolled back because of the economic pain 
     generated.
       4. An escalating price cap will prevent this from 
     happening, while creating a less uncertain price signal for 
     those trying to make forward looking decisions.
       5. An escalating price cap will serve as the program's 
     insurance policy, dramatically decreasing the risk of the 
     program producing very high prices that lead to its demise.
                                  ____


    Ending the Energy Stalemate: Reducing Risks From Climate Change

       To address the risks of climate change resulting from 
     energy-related greenhouse gas emissions without disrupting 
     the nation's economy, the Commission recommends:
       Implementing in 2010 a mandatory, economy-wide tradable-
     permits system designed to curb future growth in the nation's 
     emissions of greenhouse gases while capping initial costs to 
     the U.S. economy at $7 per metric ton of carbon dioxide-
     equivalent.
       Linking subsequent action to reduce U.S. emissions with 
     comparable efforts by other developed and developing nations 
     to achieve emissions reductions via a review of program 
     efficacy and international progress in 2015.
       The Commission believes the United States must take 
     responsibility for addressing its contribution to the risks 
     of climate change, but must do so in a manner that recognizes 
     the global nature of this challenge and does not harm the 
     competitive position of U.S. businesses internationally.
       The Commission proposes a flexible, market-based strategy 
     designed to slow projected growth in domestic greenhouse gas 
     emissions as a first step toward later stabilizing and 
     ultimately reversing current emissions trends if comparable 
     actions by other countries are forthcoming and as scientific 
     understanding warrants.
       Under the Commission's proposal, the U.S. government in 
     2010 would begin issuing permits for greenhouse gas emissions 
     based on an annual emissions target that reflects a 2.4 
     percent per year reduction in the average greenhouse gas 
     emissions intensity of the economy (where intensity is 
     measured in tons of emissions per dollar of GDP).
       Most permits would be issued at no cost to existing 
     emitters, but a small pool, 5 percent at the outset, would be 
     auctioned to accommodate new entrants, stimulate the market 
     in emission permits, and fund research and development of new 
     technologies. Starting in 2013, the amount of permits 
     auctioned would increase by one-half of one percent each year 
     (i.e., to 5.5 percent in 2013; 6 percent in 2014, and so on) 
     up to a limit of 10 percent of the total permit pool.
       The Commission's proposal also includes a safety valve 
     mechanism that allows additional permits to be purchased from 
     the government at an initial price of $7 per metric ton of 
     carbon dioxide (CO2)-equivalent. The safety valve 
     price would increase by 5 percent per year in nominal terms 
     to generate a gradually stronger market signal for reducing 
     emissions without prematurely displacing existing energy 
     infrastructure.
       In 2015, and every five years thereafter, Congress would 
     review the tradable-permits program and evaluate whether 
     emissions control progress by major trading partners and 
     competitors (including developing countries such as China and 
     India) supports its continuation. If not, the United States 
     would suspend further escalation of program requirements. 
     Conversely, international progress, together with relevant 
     environmental, scientific, or technological considerations, 
     could lead Congress to strengthen U.S. efforts.
       Absent policy action, annual U.S. greenhouse gas emissions 
     are expected to grow from 7.8 billion metric tons of 
     CO2-equivalent in 2010 to 9.1 billion metric tons 
     by 2020--a roughly 1.3 billion metric ton increase. Modeling 
     analyses suggest that the Commission's proposal would reduce 
     emissions in 2020 by approximately 540 million metric tons. 
     If the technological innovations and efficiency initiatives 
     proposed elsewhere in this report further reduce abatement 
     costs, then fewer permits will be purchased under the safety 
     valve mechanism and actual reductions could roughly double to 
     as much as 1.0 billion metric tons in 2020, and prices could 
     fall below the $7 safety valve level.
       The impact of the Commission's proposed greenhouse gas 
     tradeable-permits program on future energy prices would be 
     modest. Modeling indicates that relative to business-as-usual 
     projections for 2020, average electricity prices would be 
     expected to rise by 5-8 percent (or half a cent per kilowatt-
     hour); natural gas prices would rise by about 7 percent (or 
     $0.40 per mmBtu); and gasoline prices would increase 4 
     percent (or 6 cents per gallon). Coal use would decline by 9 
     percent below current forecasts, yet would still increase in 
     absolute terms by 16 percent relative to today's levels, 
     while renewable energy production would grow more 
     substantially; natural gas use and overall energy 
     consumption, meanwhile, would change only minimally (1.5 
     percent or less) relative to business-as-usual projections.
       Overall, the Commission's greenhouse gas recommendations 
     are estimated to cost the typical U.S. household the welfare 
     equivalent of $33 per year in 2020 (2004 dollars) and to 
     result in a slight reduction in expected GOP growth, from 
     63.5 percent to 63.2 percent, between 2005 and 2020.

  The PRESIDING OFFICER. The Senator from Missouri.

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