good morning this past december the new direction congress passed the energy independence and security act a momentous first step towards combating global warming pollution and securing our energy independence with that down payment in place congress now must turn to the next great challenge enacting an economy wide cap and trade program that will reduce heat trapping pollution eighty percent by two thousand and fifty a cap and trade system harnesses the power of the market to ensure that pollution will be cut by a defined amount at the lowest possible cost cap and trade is an idea that is made in the u s a its advantages have been demonstrated under the clean air act's highly successful acid rain program the europeans have adopted this idea for their emissions trading system for carbon dioxide and fortunately we are now in a position to benefit from the lessons we have learned in implementing that system one of the most important questions that any cap and trade system must answer is how tradable pollution allowances should be distributed should they be given away for free to polluters or should they be auctioned off the acid rain program and the early phases of the eu emissions trading system rely primarily on free allocation but both economic theory and the eu's recent experience have taught us that giving allowances away may result in massive windfall profits for polluters and surprisingly does not lower costs to consumers in most cases polluters will charge consumers for the value of the allowances even if they receive those allowances for free auctioning avoids this problem and ensures that allowances distribution is transparent and fair based on the free market rather than political deals auctioning also has the advantage of sending a carbon price signal that is loud and clear not muffled by special interest giveaways and finally auctioning can provide tens of billions of dollars of revenue which can be used to greatly reduce the overall cost of the program and speed the transition to a low carbon economy by investing auction revenues in technology research and development efficiency renewable energy and rebates and tax cuts for low and middle income households we can provide a much needed stimulus to the economy one that will get us out of the doldrums and unleash a clean green revolution of innovation and prosperity for all of these reasons economists have long been nearly unanimous in advocating auctioning over free allocation now policy makers around the world are moving decisively towards robust action as mister zapfel our witness from the eu will explain the european commission just this morning announced its proposal to move to one hundred percent auctioning of allowances for electric utilities by two thousand and thirteen and to increasing reliance on auctions for other industrial sources at least six of the northeastern states including my home state of massachusetts represent ed this morning by secretary of energy and environmental affairs ian bowles are planning to use nearly one hundred percent auctions to distribute allowances under the rggi cap and trade program as congress begins debate on cap and trade legislation it is imperative that we learn from these experiences the health of our planet's atmosphere is a sacred public trust that belongs to all of us and the right to pollute it should not be given away for free nor should we adopt a program that will enrich corporate polluters at consumers expense i believe that with a well designed cap and trade program based on robust auctions and revenue recycling we can do our part to save the planet from global warming in a way that grows our economy creates jobs is efficient transparent and socially equitable our distinguished panel of witnesses today is well qualified to help us to move forward on this endeavor i would also at this time like to inform the members that david  serves as the select committee's staff director and chief counsel will be leaving that position on february th david is one of capitol hill's most experienced veterans and much to my regret he has decided to retire from the hill after more than twenty five years of serving in the house and the senate david has been at my side on every major issue i have worked on since one thousand nine hundred and eighty five from energy to the environment to telecommunications to consumer protection over the last twenty three years he has worked with me in a series of capacities including legislative director chief of staff in my personal office and as staff director of subcommittee on telecommunications and finance before assuming the role of staff director for this committee whether it is energy efficiency or the v chip children's educational television or rollercoaster safety protecting the arctic refuge or fighting global warming david has been my closest adviser he has combined a deep commitment to the public interest with a mastery of the legislative process over the last year david played a pivotal role in setting up the select committee and he has helped to grow it into a force for change in this congress and in the world david exemplifies all of the best qualities of the staff whose hard work and professionalism make it possible for this institution to serve the public he combines the soul of john audubon with the writing talents of mark twain his skills counsel and creativity will be greatly missed by me and by all of my staff david i want to thank you for all that you have done for me over the years you are not only one of the top advisers that anyone in congress has ever had but you are also my very dear friend and i wish the very best to you your wife our thanks for your public service thank you so who were in lambeau field sunday night that we don't think global warming is such a bad thing laughter because if it weren't for global warming it might have been twenty below there rather than just a little bit below the zero margin and the game was bad today's hearing will focus on the details of a cap and trade system specifically the hearing will examine how carbon credits and allowances are to be distributed in a cap and trade system however i not be offering much input into this nuance question because i will oppose a cap and trade regulatory regime and oppose it strongly no matter how credits are distributed within the system my reason for opposing this mess is simple from the outside of the select committee i said that i will oppose any legislative effort that will hurt jobs and the economy and i am convinced that a cap and trade system will do just that one needs look no further than japan italy and spain to see what quicksand awaits u s ratepayers under a cap and trade system together these nations will have to fork over thirty three billion to buy carbon credits according to a november th bloomberg news article this amounts to a tax on electricity in those countries since the cost of these credits will probably be hidden in the overall electricity bill make no mistake these costs are the price tag of the kyoto treaty president bush has received much grief for failing to sign on to that bloated regulatory regime but after seeing how it is raising electricity costs in europe and asia i am pleased that the president followed my advice and kept the united states out of that bad deal the question isn't if a cap and trade system will raise electric costs the question is how much they will raise costs this is a question that i have been asking over and over today and throughout the year as we continue to examine this issue when this select committee conducted  field hearing in seattle last november i engaged with new york city mayor michael bloomberg on the differences between a cap and trade system and a direct tax on carbon while i disagree with mayor bloomberg on the need for carbon tax we both agreed that at least a carbon tax is an honest attempt to reduce carbon emissions whereas a cap and trade system simply buries the cost deep within your electricity bill cap and tra politician's dream doesn't have to vote for the tax and then can run around and criticize the evil electricity companies for passing the cost of these credits on to consumers it's a dishonest way of doing it at least mayor bloomberg said that if we're going to do this type of a taxing system we ought to do it the honest way if the politicians in washington believe it is a good idea to use taxes in an effort to fight global warming then they should show the ratepayers exactly how much they are spending on these so called global warming solutions i think most people would find that to be the real inconvenient truth ten years ago when i was chair of the science committee an employee of the clinton administration testified that the kyoto treaty and the cap and trade system that was envisioned in that would raise electric rates by eighty percent i can't face the senior  district saying that a procedure that i have advocated cost them that much money and what is going to happen to manufacturing when the cost of energy here goes up that much but the cost in china doesn't go up at all since two thousand and five europe has been under a cap and trade system so far the results don't look good open europe a group that studied the system found that it acted like a wealth transfer mechanism polluters in states making little effort to control carbon emissions while punishing states that had tougher emission allocations perhaps the cost of this system would be worth it if they were actually creating measurable improvements to the environment but as open europe notes this regulatory system has actually led to an increase in emissions from europe the american people deserve a technological approach to global warming that improves the environment while protecting chairman i as always appreciate the eloquence of our ranking member one of the fallacies i hear though in his presentation is that we are already paying huge costs as a result of global warming and the scientific evidence is that it is going to be far greater the stern review suggested that by investing as little as one percent of our gdp we could avoid the worst effects failure to avoid the worst effects could have the gdp worldwide dropping twenty percent i mean this is a wise investment and the good news is that a year from now the united states will no longer be the  single holdout of the industrialized countries that don't believe that we're going into a carbon constrained economy it is still open to how that carbon constrained and it maybe that carbon tax has some merit i am intrigued as you mister chairman with the potential of the carbon cap and trade it might just be the key to saving the planet but it also might be very helpful to get us out of the current economic crisis that we find ourselves in because we have systematic weaknesses economic deficit environmental deficit infrastructure deficit a cap and trade has a potential for creating a great deal of value how that is captured and where it is allocated is of great interest to me i am going to be posing some questions to this terrific panel that you have assembled to see if there is some way that a portion of this value could be reallocated to deal with crumbling infrastructure in some places in the wrong places invested in the wrong ways that we might be able to take a portion of it to be able to revitalize the infrastructure to reduce the carbon footprint over the long run while we stimulate the economy in the foreseeable future and avoid economic blackburn thank you mister chairman thank you for the hearing and i want to thank our witnesses for being here today i also want to apologize we have an o and i committee hearing with energy and commerce so i am going to have to be up and down and back and forth today mister chairman but i do thank our witnesses for being here and i thank you that we are going to look at how a cap and trade would be administered and the prospects for such a system i will tell you right up front i have some grave concerns about this type carbon reduction scheme because of my belief that it would drastically affect the nation's energy supply and would significantly distort the market so i join my colleagues in letting you know that i do have some questions that i would pose to you now i know that proponents of the cap and trade system argue that the system is necessary because humans are causing a global climate change through emissions and carbon dioxide and therefore we have to institute something that is going to drive a change to this human behavior but then we turn around and in our study and research i have read several things in some of our scientific journals from the past decade that show that most if not all of our recent global warming is caused by the sun and other natural causes and cannot be specifically and irrefutably linked to human activity and if these schemes were to be implemented they would have little to no effect in changing the current projected rate of temperature more than a couple of degrees over one hundred years so i think that it is our responsibility it's this committee's and it is congress responsibility to take reasonable actions to protect the environment but closing coal plants and imposing massive energy costs on consumers in developing nations is in my opinion not the way we ought to go a cap and trade or a carbon tax system will likely lead to shuttering many of the power plants that are in existence today and would compromise the american job market and could lead to a greater dependence on foreign energy sources rather than driving us toward energy independence and inslee i was talking to the president of the national academy of sciences the other day and he wasn't worrying about the sun wobbling around or sunspots destroying the climactic system of the earth this is a problem we have got to tackle i am glad we are here because if we don't solve this problem nothing else matters i want to make three comments about cap and trade first those who are critical of the cap and trade system i would just simply say as they say in texas show me what you've got show me what you've got to solve this problem and those who criticize this and approach from a lot of other criticisms never come up with another system to solve this problem it is the best system we have available and we should implement it second for those who argue that a cap and trade system is sort of  a camouflage system trying to avoid responsibility i would suggest the reason it is important is the first word it is a cap and a carbon tax does not have a cap a carbon tax makes some assumptions about behavior that may or may we guarantee our constituents we are going to tell our grandkids we are going to have a solid enforceable limitation on how many megatons of co we are putting into the atmosphere third the most important debate we will have in the next twelve months is on an auction because there are some things we can learn from europe it's true they don't know what football is but there are some things we can learn from them and the number one lesson from europe is that you have to have an auction if you are going to have a meaningfully successful cap and trade system both for reasons of equity because of the tragedy of the commons that they first brainwashed me about in economics back thirty six years ago but also because it has to work that way from an equity standpoint and an enforcement standpoint by putting a price on carbon that is a lesson from europe they have learned it we don't have to go through their painful first few years we can learn from their experience i will be working on legislation to have the earliest implementation of one hundred percent oxygen as soon as humanly and politically possible it is what i believe will be the single most important debate we have in congress this year and we hope that the forces of oxygen prevail for our grandkids sake it is a lesson from europe we have got to learn it thank you gentleman's time has expired the chair recognizes the gentleman from california mister mcnerney mister mcnerney thank you mister chairman i want to thank the panel for coming here today the cap and trade policies that are ultimately adopted this government are not only extremely important but it is also an extremely interesting process speaking as a scientist i look forward to getting into some of these details and having some fun mucking around but in particular such a program will determine the direction of our economy it will help or hurt our poor our lower income people it will guide industry and if done properly will make america a leader as george gobel line i feel like a pair of brown shoes at a black tuxedo event i do favor very strongly a specific tax credit carbon tax credit because i think that that is the most direct most efficient means  us accomplishing a goal i am skeptical about the cap and trade and remain to be convinced and certainly am anxious to hear from our panelists today but i am especially concerned about the auction and represent and i feel that they would be more advantaged by making sure that we had a payroll tax deduction specifically tied to a carbon tax that would both benefit them and i think provide both an appropriate cap and a path forward for us to solve this very difficult problem i think it also would be helpful to us in dealing with our foreign partners most notably in china and india because of the transparency issues that obviously exist but remain to be convinced otherwise the chairman the gentleman's time has expired and all time for opening statements from the members has been completed so we will now turn to our panel and we will hear first from mister dallas burtraw he is a senior fellow at resources for the future mister burtraw is an economist who is recognized as one of the leading national experts on emissions cap and trade systems he has worked in this area for the past two decades and has played an important role in evaluating the clean air act's acid rain program and has worked extensively on the northeastern states rggi program and on the eu's emission emphasize that the views i present today are my own i mean i am going to talk specifically about the question of how emission allowances are allocated or initially distributed in the implementation of a cap and trade program by addressing several specific questions  first is what are the efficiency benefits of auctions there are not many viewpoints that you can get most economists to agree on but one of them is that the role of an auction in the implementation of an emissions cap and trade program delivers significant efficiency benefits one perceived virtue of auctions is that they are consistent with the principle of simplicity and transparency which is valuable in the formation of a new market a second and equally forceful reason that economists favor an auction is that it makes funds available that can be used to achieve other goals depending on how these revenues are used they can help in an important way to reduce the economic costs of climate policy for the purposes of minimizing the costs and promoting economic growth economists would favor dedicating the use of revenues from an auction to reduce preexisting taxes a second approach would be to reinvest some portion of allowance value to reinforce policy goals for example in the ten state northeast regional greenhouse gas initiative that takes effect in two thousand and nine at least twenty five percent of the allowance value which would be realized through an auction is to be budgeted to consumer benefit such as investments and energy efficiency a third idea is that even a relatively small sliver of auction revenues would provide a relatively substantial infusion of support for research and development of new technologies i know that others on this panel have other ideas that deserve consideration on this revenue question second would free allocation of allowances significantly reduce economic impacts on consumers the group that is most affected by climate policy will be consumers in the electricity sector under an auction although we find that some electricity generators are going to bear some costs under an auction consumers of electricity bear about eight times greater costs this results because generators are able to pass along the cost to consumers through increasing prices free allocation of emission allowances to generators cannot be expected to reduce this impact where there are competitive markets the only important exception is in that portion of the electricity sector where there are regulated prices and in these regions consumers would benefit from free allocation to firms however in general throughout the economy the ability of firms to pass on the cost of allowances does not hinge on how they receive the allowances initially sometimes one hears firms argue to the contrary saying they would not charge their customers for emission allowances they received for free when one hears this one might think that a different conversation needs to be had between those firms and their shareholders because it is shareholder value they would be giving away the fact that a firm and competitive market will charge its customers for the use of an asset that the firm has received for free is often a difficult idea for people to grasp at first but is wholly consistent with economic theory and is in general what has been observed in empirical studies in general giving allowances away for free to firms will provide little benefit to consumers there is one way that consumers could benefit from free allocation however and that is if citizens were to receive allowances value directly this approach has been called a cap and rebate to every person with a social security number number three to what extent do auctions deprive polluters of capital needed to invest in achieving substantial reductions  electricity sector most new investment and generation relies on project specific financing meaning that each project is evaluated and financed independently with capital from outside the firm as a consequence implementation of an auction will not affect capital for financing new projects in the important electricity sector what proportion of allowance value is needed to compensate polluting firms overall economic estimates suggest that the loss in market value of industries that are going to be heavily affected by climate policy is less than thirty percent of the value of emission allowances this estimate masks some differences among firms because many firms turn out to be winners and some firms are losers in the electricity sector which again is the center of much attention the industry as a whole would require just six percent of allowance value but this accounts for firms that gain value and to compensate only the losers would require about eleven percent of the allowance value is it feasible to allocate construction an allocation formula that would efficiently target compensation to those firms opportunity costs of compensation to producers in the electricity sector is five times the cost of compensation delivered successfully the difference accrues to firms as windfall profits one way to improve this would be to apportion allowances for the states and let the states conduct allocation to achieve compensation goals this cuts in half roughly the cost of achieving compensation or more modest compensation targets also reduce the cost nonetheless under any strategy there are important considerations regarding the difficulty of achieving compensation finally to what extent are the economic impacts of legislation on polluting firms likely to be spread among shareholders who hold diversified portfolios in this modern age the vast majority of shareholders hold few if any stocks in individual companies most of us hold assets in mutual funds for this reason the way to deliver compensation to owners of equity is to design an efficient policy in order to lessen the overall cost of the policy which is precisely the virtue of the use of options thank you for the opportunity to testify the chairman thank you sir very much  second witness is mister peter zapfel mister zapfel is the coordinator for carbon markets and energy policy for the european commission mister zapfel has represented the european commission as a delegation member in the n climate negotiations and has been actively involved in the commission's work on emissions allowance trading including the eu's proposal just released today to transform the eu emissions system post tw i would like to state for the record that the committee appreciates mister zapfel's voluntary participation the committee recognizes that because of mister zapfel's status as a representative of the european commission neither congress no alluded already before we have earlier this morning when you were getting out of your beds the european commission has tabled a set of legislative proposals to implement our far reaching climate and energy policy goals for the next decade  would like to do in my five minutes of intervention here focusing on auctioning is give you some information of what we have proposed this morning why we have proposed to go to auctioning as the main method of allocation gi e some experience we have with free allocation and end up with a few recommendations before going into auctioning i also however want to point out that the core of our proposal this morning on reviewing  and we go and do a transition so that by two thousand and twenty in principle auctioning is the only method of allocating allowances to the european common market free allocation would immediately end at the end of the second rating period in two thousand and twelve from  profits finally as i said some recommendations i think we reckon in the european union that auctioning as a method of allocating emission allowances is a fairly new thing in emission markets there are several environmental markets operated here in the united states some auctioning has are two things i want to raise at the end of my testimony of what is crucial in our view to make auctioning a successful mechanism of allocating allowances first of all we think we need to take time to design the auction mechanism very well that's why we have proposed today to trust in principle we want to go to auctioning but we will work out as part of the implementation process a detailed regulation and we want to work with a lot with stakeholders with the experts in financial markets to design a well functioning massachusetts he is a recognized national leader in climate and energy policy secretary bowles oversees the state's six environmental natural resources and energy regulatory agencies among other things secretary bowles has the lead role in massachusetts implementation of the regional greenhouse gas initiative rggi prior to serving as secretary mister bowles was associate director of the white house council on environmental quality  president clinton we welcome you mister secretary whenever you are ready please begin mister bowles thank you very much mister chairman and members of the committee thank you for your focus on this tremendously important topic today i am delighted to be here my comments today reflect the general context in new england we have expensive electricity we have no indigenous coal and natural gas face transportation costs to bring those fuels to our region we have on average lower greenhouse gas emissions than the rest of the nation and we have across new england a deregulated power market in massachusetts we have also made and other new england states have as well considerable investments in energy efficiency and in massachusetts we are currently in a rate decoupling proceeding where we are trying to eliminate the current economic incentive on our distribution utilities to maximize power sales at a time when we are trying to cut greenhouse gas emissions we already have in place some limited greenhouse gas limits on our power plants and as the chairman noted we are in the process of transitioning to the rggi system the first of next year in renewable energy we are moving forward with three new biomass power plants the cape wind project a sizeable solar program and new incentives for biofuels and as the chairman noted we have combined first state in the nation to do so our energy and environmental agencies together to focus on three key goals tapping the economic potential of the burgeoning clean energy sector in massachusetts we have got a quarter of billion dollars of private venture capital investment and a great deal of job creation in that area second curbing our greenhouse gas emissions and third reducing our energy costs when governor patrick brought massachusetts into the rggi process early last year one of the central questions we faced was whether to auction for allowances or whether to grant them based on our analysis we concluded that auctioning was a better way to protect the interests of the ratepayer and the core thing to know there is that in a deregulated power market the value the economic value the market value of an allowance is going to make its way into the electricity bill one or another whether that generator decides to expend the allowance as they dispatch power to the grid whether they save those allowances for a future generation event in the future or whether they decide to sell those allowances and either way that value is priced in whether or not that allowance is given out or whether it is sold to the generator on the contrary if you sell it to the generator then you've got those revenues to do something with and you can protect the ratepayers and that's what we decided to do with our auction proceeds and our first auctions begin in the second quarter of this year as we move into the compliance period for rggi as we did an analysis of what we should spend those monies on to best protect the rate environmental objectives energy efficiency stood out above all else we have the opportunity to not only save money for the ratepayers but also to lock in permanent greenhouse gas emissions reductions in terms of the cost of rggi we see in the first couple of years less than a one percent increase in potential electricity bills and as energy efficiency investments grab hold and accrue over time within ten years we see over five percent energy savings now why is that  it's because we've got a great deal of energy efficiency left in our system and indeed across the nation that is cheaper in many cases than power generation in terms of how much revenue we are going to produce if it's a one dollar permit you will produce about twenty six dollars million if it's a five dollars permit it will be one hundred and thirty three dollars million at the higher end of that scale would be effectively doubling our investment in energy efficiency in the commonwealth as you think about a federal system i would make a couple of key points one is that states i think  position to deliver energy efficiency services it's something where the federal government is somewhat too removed from the individual ratepayers and the end use consumers it's something that states have done a great deal on and i think you could set up objective standards to say what is the performance basis that we would like to see for use of proceeds down at the state level for energy efficiency i would also make that point that as compared to a grandfathering scheme where you are giving out allowances the auctions really level the playing field across all of the different sectors instead of building in potentially unfair treatment for early movers as we conduct our auctions this summer we are going to focus on a few things i will mention them quickly i am happy to get into more detail in the questions we are going to have our auctions open to any qualified buyer as we watch the market develop we may add rules in the future to make sure there isn't any hoarding or anything of that nature we are going to have a sophisticated market monitoring system so we know who some of the players are and then as we go forward we are going to use a three year compliance period to allow some flexibility between years because emissions vary depending on things like weather events finally i just would mention i have submitted a longer ten page appendix  managing and overseeing all policy development daily operations and staff activities of the white house mister podesta has also held a number of other senior positions on capitol hill and in the white house and is a recognized expert on technology would like to make four quick points first i would like to take this up a notch make no mistake while it may be slow moving i think we are in a crisis as our understanding of the implications of global warming increase the case for dramatic immediate action is only made stronger just last week we learned that the western antarctic ice sheet is melting faster at a rate that was anticipated this could mean a sea level rise of two meters as doctor pachari noted in this century not the inches or as originally predicted by the ipcc fourth assessment which will threaten population centers agricultural patterns and coastal ecosystems around the world perhaps the best we can hope for and certainly the least we ought to plan for is a climate that will  cause severe economic dislocation and national security challenges to the united states worldwide we are already feeling some of the economic consequences of climate change we will soon feel the national security consequences of human migration food short water scarcity destructive weather events spread of disease and national resource competition the challenge i think we face as a nation and a world is nothing short of conversion of our economy that is sustained by high carbon energy  putting both our national security and the health of our planet at risk to one based on low carbon sustainable sources of energy the scale of that undertaking is immense but its potential as the chairman noted is also enormous my second point is that energy policy is economic policy in order to reverse the economic downturn we are currently facing and to capture the opportunities provided by a low carbon energy transformation we must put energy at the center of our nation's economic growth fundamentally changing how we produce and consume energy investing in low carbon innovation and transforming our economy to a low carbon model are key to promoting economic growth mobility job creation and regaining the technological leadership in the global innovation marketplace mister sensenbrenner noted a ten year old future clearly are on the clean energy side the us congress obviously realizes the importance of energy policy to the economy i commend the congress for passing the two thousand and seven energy bill and particularly for your work mister chairman over the years on  the raising the cafe standard the center for american progress recently released a report entitled capturing the energy opportunity that laid out a strategy that we believe is pro growth provides opportunity and takes on global warming all  fiscally responsible way at the core of that strategy is a fundamental commitment of the federal government to invest in green collar jobs research and development and deployment of low carbon technology and to assist low and middle income americans with rising energy cos s my third point is that a cap and trade needs to be at the center of that energy policy cap advocates an energy strategy that employs both a cap and trade system and a suite of public investment policies funded by the auction revenue of carbon permits a cap and trade will identify the necessary level of carbon reductions to get us to a point where we have a sustainable planet and allow the marketplace to price the cost of those emissions in order to avoid a windfall profit for polluting industries we recommend auctioning one hundred percent of the carbon credits our proposal would allocate ten percent of auction revenue to businesses operating in energy intensive sectors to compensate shareholders employees and communities in those sectors we recommend half of the remaining ninety percent of the revenue be allocated to low and moderate income americans to help offset energy price increases polluting industries and not hardworking american families should shoulder the burden of this transformation to a new  energy in the future and to ensure that low and moderate income americans are protected from short term increases in energy costs we estimate and commit three hundred and thirty six dollars billion over ten years for income support and for middle congress has recently passed in implementing a fifty five mile per gallon cap based standard by two thousand and thirty improving our distribution in fueling infrastructure investing in transportation infrastructure and another suite on the electricity side  including creating a performance standard for all new coal fired facilities equivalent to the best available carbon capture and store technology so my last point and i will conclude by saying that we cannot continue waiting to jumpstart this energy transformation adopting a combination of short term stimulus and long term public investment policies will not only enable for the u s to once again become a world leader in low carbon energy innovation but will also diversify our energy base thus fostering economic stability helping to boost economic growth creating new green collar jobs and boosting productivity for our economy we think we can create a virtuous cycle and a win win situation for the american public chairman thank you mister podesta and our final witness mister robert greenstein the founder and executive director of the center on budget and policy priorities mister greenstein has written numerous reports analys on budget and poverty related issues including most recently how best to design planet policies to address impacts on low income households for his outstanding work at the  federal budget and the implications that has for the design of a cap and trade system our analysis indicates that congress can design climate change policy that is environmentally sound and fiscally responsible treats consumers avoids increases in poverty but to do so the policy will have to be well designed and it will need to generate sufficient revenue to meet the requirements of sound climate change policy and mitigate the impact on vulnerable populations that means it will be essential to auction most or all of the allowances our analysis of these issues can be summed up in four key numbers number one seven hundred and fifty dollars to nine hundred and fifty dollars per year that is the average increase in energy related costs for the poorest fifth of the population from a quite modest fifteen percent reduction in emissions the kind of target that is often mentioned for say two thousand and twenty as you know climate change policies work in part by raising the price of fossil fuel energy products to encourage efficiency and the substitution of clean energy sources that will raise costs to consumers for a variety of items from gasoline and electricity to food mass transit and other products that have energy inputs households with limited incomes will be affected the most because they spend a larger share of their income on energy related products than more affluent households do and they also are less able to afford investments that can reduce their energy consumption such as buying a new energy efficient car or going out and buying a new heating system for their home if climate change legislation is passed but nothing is done to protect people of limited means more of them will slip into poverty those who are poor will become poorer and the trend toward widening income inequality will be aggravated now let me give you a little context this figure of seven hundred and fifty dollars to nine hundred and fifty dollars per year in increased costs for the bottom fifth of the population from a fifteen percent reduction in emissions the people in question the bottom fifth of the population have average income of only a little over thirteen thousand dollars a year so seven hundred and fifty to nine hundred and fifty would be a big hit on them figure number two fifty dollars billion to three hundred dollars billion per year that is the congressional budget office estimate of the resources potentially generated by climate change policies that is cbo's estimate of the value of the emissions permits under a cap and trade system in other words it is the amount of the proceeds the government would receive if the permits were fully auctioned off key figure number three approximately fourteen percent that is the share of the auction proceeds needed to fully offset the increased energy costs that low income consumers would face in my written testimony i outline principles for designing a mechanism an approach to fully and efficiently offset the increased energy costs on the bottom twenty percent of the u s population and also provide some relief to hard pressed working families in the next to the bottom twenty percent that could all be done for about fourteen percent that is one seventh of the value of the proceeds from auctioning off the permits in a cap and trade system now if congress wanted to assist middle income consumers as well that could be accomplished if a somewhat larger share of the proceeds were used for that purpose for example with approximately half of the allowance value half of the value of the permits congress could fully compensate the bottom sixty percent of americans and provide significant compensation to the next twenty percent leaving out only the most affluent twenty percent which is the group that consumes the most energy and is most able to afford to make sizeable adjustments in their consumption patterns my final my fourth key number less than fifteen percent that is the congressional budget office's estimate of the share of the allowance value that is needed to fully compensate energy companies and other emitters for financial losses due to climate change policies cbo has conducted a review of all of the literature in the field there are a number of studies that have been conducted  the broad set of findings are that the net impact on the emitters could be in terms of potential economic losses would be offset for less than fifteen percent of the permits and c has called the provision of a larger share of the permits free to emitters as an approach that would result in cbo's terms windfall profits for the companies receiving the free  misconception mr chairman you referred to it in your opening remarks a misconception some have that energy prices will not rise or not rise as much if the allowances are given away that belief flies in the face of the basic laws of supply and demand a cap on emissions will limit the supply of energy from fossil fuels and when supply is restricted prices rise regardless of whether the government gives away or sells the allowances the energy companies will be able to sell their products at the higher price they will be able to charge what the market will bear harvard economist greg mankiw who served as chair of president george w bush's council of economic advisers has characterized a cap and trade mechanism in which the allowances are given away in large numbers for free as a form of in mankiw's words corporate welfare now the chairman if you could pl services the cost of heating schools hospitals and the like will go up cost of living adjustments for social security and veterans programs will need to be higher to reflect the higher energy costs the pentagon is the nation's single largest consumer of energy and it will rise those can all be addressed too those issues by devoting a share of the permits to offsetting the resulting increases in federal state and local costs all of which comes back to the same issue all of these things can be taken care of if most is making a big change today they are moving in a completely different direction than they did in their original phase in dealing with greenhouse gas emissions what happened when the  allocation was free for the various sectors of the european economy what was it that you found happened ongoing economic assessment our scheme is now just going into its fourth year there is empirical evidence we continue to learn but in principle we see that as has been said before even if allowances are given for free some sectors find it fairly we don't do changes overnight we had for example a lot of debate whether we should already change our rules on very short notice so that the second phase would already see regulatory changes the commission has not entered in such changes because we think for the market to develop that do come from an auction system are in fact preserved for r and d are preserved to take care of the poorest citizens who may be affected by this very dramatic change in the way in which we  regulate energy in our country mister podesta mister markey that is a very good question but i think that we have dealt with it before in the land and water conservation fund and other funds that could be segregated either through the direct appropriations process or moving in the direction that we see for example in the lieberman warner bill where the money is deposited directly into certain accounts that would be used only for the purposes  that would be put forward but i think that's in the end of the day i think a critical question to ensure that the money goes to both what mister greenstein spoke about which is to cushion the burden again in have seen in california because they are using less energy as efficiency is driven through the system but ultimately they are going to pay a little bit more and we think that those accounts need to be balanced and that the structure of the cap and trade system  sensenbrenner thank you very much mister chairman as i think we all know there is a great deal of concern about the direction that our economy is taking and the fix is on for a bipartisan economic stimulus package and the debate is over not whether to stimulate the economy but how best to do it the bottom line is that there will be money pumped into the economy to try to prevent a recession from occurring or  worse now i am a member of congress and everybody up here is a member of congress how does a member of congress justify voting to pump money into the economy in an economic stimulus package and then turn around and support a cap and trade program which takes money out of the economy and could cost both consumers and businesses billions of dollars let me start with you mister advice is always very good to members of congress mister podesta well mister sensenbrenner i don't think you need to have that net impact in fact i think as i said you could create the virtuous cycle of taking money out of the economy that's going towards polluting the atmosphere creating a worldwide crisis causing us long term national security problems that will require us to put more money into defense take that money out from the pollution side put it back in through rebates for low income people carbon breaks for the rich using carbon instead of tax and debate in the vernacular if we go to tinkering around which people are debating about aren't we turning cap and trade into a wealth redistribution system mister greenstein mister greenstein i would say the answer is no under a cap and trade system you have a decision you have to make a decision you give the permits away for free you auction them off you have to make a decision the cbo report indicates if you have a cap and trade system and you give away the permits for free you have highly regressive effects if you have a cap and trade system and you auction off some substantial share to all of the permits then whether it's regressive progressive or neither of the above sort of make this just kind of right in the middle depends on what you do with the proceeds from those permits that you auction off but the only way in which it is clearly regressive is if you either if you give away a substantial share of the permits for free it clearly going to be regressive because you clearly won't have enough money to offset the regressivity that the increases in consumer prices alone would cause as long as you auction off a substantial share of the permits you have the potential honest if we're going to increase energy costs to do this why doesn't congress directly levy a tax which is the honest way of doing it and that way members of congress have to be accountable for their votes one way or the other rather than simply folding the cost of this into energy bills and then congress taking a bow for giving money away to people that we decide need to get the money from the auction isn't mayor bloomberg right in saying let's be up front and honest rather than you know going through this tremendously bureaucratic system with all kinds of values of who deserves the money from the auction and who doesn't mister greenstein there may be a different set of answers now as you know the advantage of a cap and trade is you have a firm cap on emissions and the disadvantage is you don't know in advance the impact on the price with the carbon one of the benefits of the head in the sand attitude of this administration is that we have a chance to look at the experiences in other parts of the world as people are struggling with how we are going to have a carbon constrained  appreciate our witnesses saying that these things are not mutually exclusive in terms of stimulating the economy by not taking it out of the economy everything i heard from the witnesses is you are thinking that this is not somehow something that is going to be shot into space that is going to be circling the planet this value is going to be reinvested somewhere it is going to be a windfall in the hands of some it is going to be targeted towards redevelopment  am not certain that i would use the land and water conservation fund as an example that gives me hope i think we can learn from that experience as well but you are suggesting that it is part of a comprehensive strategy as i hinted at in my opening statement what i interested in is your observations about making it part of a comprehensive strategy that focuses on the two principal expenditures of american households both in terms of dollars and in terms of think we can best harness the value that could be created to help households with infrastructure and energy conservation and transportation that would reduce their carbon footprint stimulate the economy and protect their economic security mister podesta well let me begin i think the congress and again i commend you has already taken a giant step by increasing vehicle efficiency on the transportation side  there is obviously more investment to do in transportation in smart growth in some of the initiatives that you have championed in more mass transit spending et cetera and i think some of the proceeds of the auction should ought to go to those kinds of investments on the housing side i think you get it that through again complementary policies through the cap and trade better building codes a smart grid investment in the electric infrastructure so that you could have real time metering and basically begin to do what has happened in california which over the past thirty years has kept its per capita energy consumption flat while the united states energy consumption has grown by forty percent while maintaining high levels of growth in the economy and high levels of wealth in the state so i think those complementary policies and mister bowles is trying to implement those in massachusetts are directly going at  percent increase five percent longer term savings in energy can you talk about in a little more detail how you think you can seize on that and make that sort of difference mister bowles yes i mean just the key point i think of the question is and i would agree with everything john just said that we have a tremendously inefficient and creaky electricity system in the united states we need to upgrade transmission we need real time metering and we need a hell of a lot more end use efficiency it is the lowest hanging fruit so when congress thinks about what should we be doing to use these auction proceeds i think a lot of the whole panel agrees that auctioning makes sense once you got the proceeds what do you do how do you prioritize it i would use the criteria of how can we save the most for consumers low income middle class i mean how can we lock in the greatest environmental benefits i think things like appliance standards which congress has moved forward on vitally important building codes are at the state level we in massachusetts are joining the international energy conservation code vitally important so i think you can do a great deal of that on the efficiency side there is a tremendous amount of return we did an economic analysis in fact it was done under the romney administration i am happy to share it with the committee that showed the disproportionate returns that would come from allocating the auction proceeds to energy efficiency we could see savings above five percent in commercial industrial and residential parts of the electricity sector so that's the lowest hanging fruit and i think the biggest anybody who wants to answer it or as many of you that want to answer it what certainty do we have that any cap and trade program would achieve carbon target certainty and also with all of the trading going on where do you see the tangible reductions taking place anybody on the second part first our modeling and modeling by the eia suggest that over the first couple of decades of a climate policy although the electricity sector is responsible for about forty percent of the co emissions in the country it's expected to account for two thirds to three quarters of the emission reductions that would be achieved that is why there is so much attention given to the electricity sector the other part of your question is how can we be sure that a cap would be obtained and not violated is roughly twenty to twenty two euros per ton of co if you fail to surrender the emission allowance there is a financial penalty levied on the company of one hundred euros per ton of co so that creates a very strong incentive to comply with the cap and the reductions come not from the question that one of the benefits of auctioning is you have price discovery and you figure out what it is worth to have one of these allowances if you just give them away you don't have that information so you can adjust your cap at the federal level to say are we hitting our target and do we need to send a l price signal into the economy i think it's a real benefit of the cap and the auction approach that you don't get necessarily from a carbon t comment quickly on what we have done in the regional greenhouse gas system so there are two different triggers based on price that allow access to a larger market for offsets so there is a large market for carbon offsets which are other ways to achieve greenhouse gas reduction so it starts out in a new england market then goes national and goes international based on price triggers so as price goes up you have an increasing pool of alternative ways to reach compliance  sensenbrenner i was just advised that the times of london reported this morning that the united kingdom under the new european system that mister zapfel described would end up having to pay an additional six billion pounds or twelve dollars billion a year in order to comply with this you know i am just wondering what the hit on the british economy would be which is an economy that  insignificant and this is what the largest and most respected newspaper in the united kingdom analyzed what you have just announced today it ain't free mister zapfel as i said i cannot confirm those figures overall for the european reduced there is some research your statement refers to the first period the first trading period two thousand and five to two thousand and seven which was for us in europe a learning period we didn't have the benefit as you have in the u s with  cap for the trading scheme in the second phase already about ten percent compared to the first phase which makes sure that we will see emissions reductions in the second phase and as i stated in my introductory statement before this emissions cap will come down by another eleven percent recognize the gentleman from washington state mister inslee mister inslee thank you i think mister greenstein mentioned that someone argued that this would be corporate welfare if you don't have an auction system i just want to ask about the logic of that and if we're going to give rights away to people to pollute that you are giving away a scarce asset it has an economic value and therefore it would be a sense of welfare of giving away a public asset for free it would be like giving away gold  from our national parks or the like is that the logic and does an auction solve that problem mister greenstein well an auction does solve that problem but you don't have to go to that logic to reach the corporate welfare conclusion and the term isn't mine although i would agree with it what is interesting is the corporate welfare term in this context actually is greg mankiw's term he is a leading conservative republican economist at harvard he was the chair of president george w bush council of economic advisers what mankiw was saying you don't even have to go to the commons thing to get it what mankiw was saying was look if in a cap and trade system you give to energy companies and other allowances that exceed in value the increased costs they will incur under the new system then you're giving them a form of welfare it's one thing if you simply offset the increased costs t but if you go beyond that and you just give them these permits which they can sell for billions of dollars above and beyond what is needed to offset their costs that is corporate welfare that is what cbo is essentially saying as well c term is windfall profits mankiw's is corporate welfare it is simply saying you give them more than they need to offset their costs you are giving away billions of dollars in gain to these companies and their shareholders that is clearly a  i appreciate that mister podesta i really appreciate you are basically saying that environmental policy in this case isn't economic policy it's a view i share i want to let you know you are not alone i was just looking at a report from mckinsey and company it just came out in december they concluded that almost forty percent of abatement could be achieved at negative marginal costs in other words forty percent of your savings of co you would actually reduce your costs there would actually be a profit margin for the u s economy if you will and it talked about the barriers to achieving those forty percent improvements or principal capital accumulation to do the work the rehabbing your house the acquisition of new heating and cooling system more efficient cars the whole nine yards i just wondered if you could give me any more thoughts about how we could fence off the revenues from a cap and trade system to be used for the legitimate purposes of that both r d help to consumers to weatherize their homes help to them to obtain new efficient equipment what is the best way to do it i know you gave us some ideas but what is the best way in the real life to do that  segregating that money and making those important investments but ensuring that that money is available either through tax credits which again we hope to see i think the production tax credits reauthorized in  this session of congress on renewable energy or through direct investments that could be operated either through the states or directly is the best way that takes again a good chunk of that money and apply  it to the very real challenge the other place that we would spend some money is on innovation itself into boosting the r and d portfolio of the united states we have seen enormous returns of investment in the  particularly at darpa and the dod programs but if you think about the information technology revolution driven by federal investment at the front end i think you can imagine at least an energy innovation virtuous cycle driven by investment at the federal level into these new technologies we see a lot of venture capital pouring into that arena right now but i think if you had the right kind of investment portfolio from the federal government that would  recap your proposal and then comment on how free giveaway of the cap and trade system would distribute revenue mister podesta well i think that you know again we have had your european experience described here this morning i income people where that mechanism doesn't work very well to do it through other kinds of income supports which bob of course is the expert on and then taking forty five percent making these public investments that i described and then we  of production of energy i am thinking here particularly in places hard hit that are coal producing and those kinds of arena the cbo estimates that that looks like to be about ten to fifteen percent of the revenue so we would say put that back into those communities help them weather the transition to a new economy mister greenstein can i add one quick point on that there have been questions from several members to john on how do you make sure the money actually goes for these purposes and have been discussions of trust funds and the like i think we need to separate out the discretionary part of the budget the appropriated part from the other parts entitlements taxes and so forth you would need some kind of trust fund mechanism like that for the discretionary part you wouldn't and i wouldn't recommend it for the consumer relief part if you're giving part of the consumer relief through an expansion in the earned income tax credit or a new tax credit such as mister larson has in his  bill that's based on the first certain amount of the payroll tax that is paid we don't have anything in the tax code where the irs has to look each year at how much money is in a particular trust fund and make the tax credit go up and down every year you just do the tax credit you work with cbo and the joint tax committee you have an estimate of how much revenue is going to come in from the auctioning of the proceeds you design the appropriate tax credits that you  need you make sure the scores all fit and you go forward so trust fund thing would be needed for the discretionary part for the tax part and the direct spending part you need some direct spending for the low income people as john mentioned you just write that into the recommendations in terms of how to make sure that the federal programs complement those instead of what other possibilities there are mister bowles thank you for the excellent question one thing i just would try to underscore for this whole discussion is a lot of the cost negative items that mister inslee mentioned from the mckinsey report which i commend to the committee to read are really implemented by the states things like building codes energy efficiency building renewable power plants zoning smart growth a lot of the easy stuff we need to do is going to be implemented by the states so i really encourage the committee and the congress to look at giving financial incentives with some of those auction proceeds to say if you state are doing all those things plus rate maximizing efficiency then we're going to support you you need to create some incentive because the states are the units that regulate the utilities and have such a big role where a lot of the easy things are going to be done first back to your broader question  look i think the congress could do us in california and seventeen other states a great favor by making sure epa got out of the way on the cal lev standards they are vitally important and goes beyond what the cafe increase which is terrific does obviously we're seeking epa implementation of the mass v epa case on the clean air act and so i think there are a lot of things that the bush administration could do to get out of the way of states like massachusetts  illuminate further in acknowledging and helping quantify what costs may be associated with making this transition but also identifying the economic opportunities that exist and ensuring that we don't ignore the fact that there are costs to inaction  i do want to describe sort of a set of circumstances though as it relates to the part of the country that i represent the great plains in rural america and just get your thoughts if you could comment on if we do move to a ca described or if we move to something more one hundred percent auction nearly immediately with what we set up because i have some concerns about that in light of the circumstances present in say south dakota  the positive side of cap and trade for south dakota i see greater incentives to develop our wind resources greater incentives to develop solar resources throughout our area in the southeast and other regions reinvestment it relates to certain farming and grazing practices as carbon storage and transitioning to integrating new technologies for cleaner burning coal in our coal fired facilities that service our rural electric cooperatives but that is sort of the difficult here of cap and trade that when you have rural electric cooperatives you have rural consumers you have very poor consumers in certain parts of the great plains that live on native american reservations when we are still working to develop the transmission that some of you talked about the need to reinvest in the infrastructure of our transmission capacity for wind time to measure just precisely and the chicago climate exchange is trying to do this for agriculture it seems to me that we need a little time to adapt and that's why i think that at least for now i sort of favor more of a phase in approach rather than something that is nearly a one hundred percent option immediately within the system so if you could comment on that and then mister zapfel if you could the bills there is a major phase in in the sense that the emissions reduction target is a small amount of emissions reduction initially and that phases in very gradually over a number of decades that is the major phase in with regard to the permits one could do something where you give away a large share of the permits for free initially and then phase that down the lieberman warner bill i think gives away forty percent or more of the permits for free initially and on paper it eventually phases it to zero my concern is the politics being what they are and the power of the companies being what they are i believe that if lieberman warner were  acted we would never get to zero the congress would come back and change the law well before we got to zero and that we could end up getting stuck permanently at too high a level that doesn't mean you couldn't do any phasing at all but i think the notion of starting with i don't know more than fifteen or twenty percent of the permits being given away starting with any higher percentage and just assuming you're phasing it way down i think i dangerous i think it risks the potential that before the phase down occurs companies get the law changed and then the various purposes for which you thought you had money such as a number of the things you just mentioned can't get the resources to be funded would like to just add the phase in in terms of the changes in electricity prices is going to be immediate so the program can be put in place and you can talk about allocation in different ways but you are going to see an immediate change in product prices so there is no phase in to talk about except in some portions of the country in the electricity sector where there are two alternatives in those regions of the country where there are regulated prices and a free allocation to firms will get passed through to consumers and soften the blow initially but the problem is that treats the country in a very asymmetric way because you have roughly half the country under cost of service and half the country with competitive electricity markets i think that's inviting a new civil war so an approach that has emerged recently that has surprising support from very disparate companies would be free allocation to load serving entities these are the retail electricity companies that deliver electricity services directly to customers and they could be expected to pass through to customers the value of the emission allowances  this has a politically attractive appeal that it would keep electricity prices low and would look like a phase in as we enter the new constrained carbon regime the problem as other speakers have already mentioned is this constitutes essentially a subsidy to electricity consumption that you don't get for natural gas or transportation fuels or to industry and commerce and so to put this in place to enshrine this would dramatically raise the cost of carbon policy nationally we don't want to get our feet stuck in cement there so if you want to look for a phase in allocation to load as is the component of the lieberman warner bill is a reasonable way to start but i would urge you to think about that as a rapid transition to a full auction and recognize coming from the great plains you know this this three hundred and fifty dollars billion a year in intangible property right is analogous the last time we saw this in american history was the assignment of property rights in the great american west because this is going to be on a recurring annual basis this is an enormous new property right and the question include credits from agriculture and forestry but we remain of the opinion that for the time being they should stay outside of our carbon trading mechanism for mainly two reasons first of all we need high quality monitoringreporting of the emissions we could have more of the press here on such a weighty issue of discussion of the cap and trade system versus something that i think still needs to be pursued in terms of dialogue and discussion in terms of a carbon tax now i say that and i want to thank mister podesta because i thought he started off and framed this in the appropriate we're in a crisis and this crisis has to be solved and it has to be solved now the inconvenient truth is that as you heard our good colleague from wisconsin say that well the most direct and straightforward transparent way to deal with this of course would be for a carbon tax but of course he wouldn't be for that and neither would a lot of colleagues because of the anathema attached to taxes and of course we have an aversion to taxes in this country for example we fund a war or well we don't fund the war with taxes we go into debt with a war and tell the american people that it is being paid for  so i believe that the choices are difficult and they become more clear and i thank mister greenstein also for i think illuminating the choices that we face here one that deals with the follows what vice president gore and my god if we can get vice president gore and the president of the chamber of commerce to agree that this is the way that we should go in terms of a carbon tax and that it should have to offset the mitigating factors  the regressivity of it a direct payroll reduction that corresponds in it so that you can get down the road relief for people that actually need it then i think we've got something notwithstanding i am interested in this whole auctioning thing i have to say i have to give this the augie and ray's test now most of you don't know what augie and ray's is it's a little hamburgerhot dog joint in east hartford where most of the people that i know gather but they're pretty down to earth you know and they people pretty well debate the red sox and the yankees yadda yadda yadda but here is the deal you say auctioning to them and they're looking at me like i am on mars and i've got to be honest how would it work who administers it transpire this is not going to be and i heard mister greenstein talk about the lieberman warner bill gee is this a hedge fund windfall how would this be administered how do the proponents of this see this auction actually taking place who controls it who sets up the auction who is purchasing what is going on here mister bowles thank you mister bowles let me just comment from our experience in new england connecticut being  day into the bid stack to figure out whether they're going to dispatch power or not so they do it every day they know how to do it it's not complicated all we have to do to set up the auction process is get one of the auction vendors in the rggi organization mister larson what is an auction vendor mister bowles auction vendors generators do this every day nothing much changes except that we're going to make them pay for this little thing to help protect the environment and we're going to find a way to pass that back into more savings for you because like massachusetts connecticut is also just passing least  greenstein i do want to say that all else being equal i would prefer a carbon tax to a cap and trade having said that i don't want to let the perfect be the enemy of the good i am not sure you could pass a carbon tax i think you more likely able to pass a cap and trade than a carbon tax and if you have a cap and trade with an auction what that auction really does is to make the cap and trade more like a carbon tax not fully just educating us we need to go out to our constituents and to the country and help to educate them so that they will understand that the corner store or you know the deli that i go to in my district when people talk about similar kind of governmental process this is proven ground i also come from a place myself moral place and a philosophical place that says that there is there should be and there exists an implicit environmental bill of rights and that every one of us every child born on this planet has a right to breathe clean air and to have clean water to drink and unsoiled soil  for their food to be grown in and so i object to the idea that oh we're interfering with business somehow we got way ahead of ourselves and polluted the planet and the ecosystem to the point where we're not only dealing with or trying to deal with climate change but we're also suffering from asthma epidemics and emphysema epidemics in our inner cities especially among our children and last summer across the entire state of new york there were a number of days when we had dangerous air quality alerts in rural parts of the state where you wouldn't expect that and it's because of the pollution moving from other power plants in the midwest or wherever across state lines and  so by trying to deal with greenhouse gas emissions we will also be dealing with our dependency on foreign sources of oil a balance of trade deficit creating new jobs in new industries and new technologies  here making ourselves more independent keeping our sovereignty not having to fight wars in unstable parts of the world et cetera et cetera so there are so many it's a win win win thing we're talking about cap and trade is only one small y as one of the most effective and immediate steps we can take to cut greenhouse gases and our power bills but under the current system it is counterintuitive for utilities to pitch in since they make their money by selling power in your testimony you decouple sales from revenue could you elaborate on those efforts and what types of investments we could make with auction revenues or allowance incentives that we could use to bridge the gap mister bowles thank you for the excellent question and thank you for your  t very well said at the beginning i would agree new york state just did a rate decoupling as i am sure you know the public utility commissions of the states regulate utilities they have got a history of rate making that is by and large tied to volumetric sales of power whether or not those utilities own the power generation or not so in the half of the country as dallas mentioned that has a deregulated power system new york and massachusetts and all of new england our utilities don't own the power generators they o just the wires so they bring it to your house and the power generators own power generation so we have inherited a system in the past where it made sense to measure rate recovery for the utilities based on the volumetric sales it seems like a simple thing instead the criteria should be on performance and reliability outages things like that least cost service so making sure that the utilities are bringing good power and reliable power to your doorstep but not incenting them or discouraging them on the volume of power that they sell and that is really the crux of rate decoupling is severing that link that manifest economic incentive that says to the utilities maximize power sales in order to maximize revenue for your shareholders instead we need t to be indifferent or in fact incented on a performance basis to be partners in energy conservation i think the utilities new york has got a terrific model with nyserda in different states the utilities such as massachusetts actually run the efficiency programs and that is a good thing because they are very close to their partners but they need the type of oversight to make sure their spending is done well so i think a federal incentive in terms of conditioning some of the auction proceeds back to states who have done  has expired the chair recognizes the gentleman from missouri mister cleaver and i think there is going to be a roll call coming up in just a very little bit up on the house floor but if each member for a second round would like fine slum landlords two thousand dollars each time their property was cited as violating the city code and we discovered after about five years that there were some landlords who actually built the fines into the cost of doing business because you know you are only going to get caught every month or every other month and so they just built it in what i guess i just would say that i think that really summarizes the argument for auctioning instead of allowances because the power generators will charge their customers for the economic value of that permit because they can sell it to someone else or they can expend it when they run or they can save it for the future so i would say that concern is best addressed through having an auction whether it is a clear transparent understanding of what the value is and then you also have the revenue that you can go back to help out  income energy consumers to get control of their own energy bill through things like energy efficiency but others may have answers as well mister greenstein i would add that the whole purpose of the cap and trade system is really to raise prices in a sense for fossil fuel energy and create the incentive for private actors in the market companies and consumers to switch to cleaner more efficient forms of fuel in fact so to the degree that a company keeps prices higher putting all of this in then whether it's wind and solar or all sorts of other forms of alternative energy that may not be that economically attractive now they become very economically attractive because they become cheaper one other quick point on that is when you are thinking about how to use the proceeds certain things that can't happen now without government subsidies in the energy sector no longer need government subsidies under a cap and trade because the price point has changed and in fact listening to the discussion this morning mister chairman i started to become a little concerned that i  would offer a caution when you design the legislation make sure you don't squander some of the proceeds on efficiency incentives that the government isn't needed anymore that the market itself will drive as a result of the changes in prices that the cap and trade will come about i'm not saying you don't need any energy efficiency subsidies but i think you may need less than you think you would need if the cap and trade fuel use it's fairly transparent to calculate the carbon content of fuels that are being used so that is one fortunate aspect of this problem that with a lesson we have learned from that sulfur dioxide trading program with certain penalties in place you  can expect to achieve virtually one hundred percent compliance under this program gentleman's time has expired now we will go to a lightning round here give members if they want two minutes to ask any follow up questions they would like to make the chair recognizes the gentleman from washington state mister inslee thank you we went to europe last summer and looked at the cap and trade experience and it was described to me as a great scandal the situation where there was an allocation without auction and then there are windfall profits in the billions of dollars taken by utilities in europe and consumers in europe were outraged by this when they found out they had been gamed by this system that this asset had been given to the utilities and then they turned around and put it in the rate base and charged the consumers the implicit value of not selling the asset and they said not selling the asset was a cost to the utility which then they turned around and sent right to the consumers so what i was hearing from europe is that give away system turned out to be a scandalous affair and i presume  one of the things that is driving the move now towards more of an auction i just wonder mister zapfel if you could comment on that was i reading that situation correctly and then i want to ask mister burtraw to what extent could that be replicated in the united states zapfel thank you congressman i would not go as far as considering it as a scandal but i think what we have learned in practice is that the same thing happens that for example mister burtraw would show even if you give away the allowances for free in some sectors demonstrating that the carbon market is in effect functioning that the price signal is created and the price signal works itself through the economy and the efficiency advantages of the common market can be realized in practice what we talk about with allocating allowances will not depend on how that allocation occurs so if you are giving away this valuable asset to firms that is a transfer that is a form of compensation there is a second form of compensation they receive which is the changes in revenues the changes in product prices and this opens the possibility for potentially dramatic overcompensation or what people have called windfall profits so the same thing i would expect to occur in the u s as was observed in the eu if there was free allocation of emission allowances to generators efficiency boost in the early days of this i think would be money well spent and again creates a virtuous cycle of efficiency productivity in the economy and  mcnerney one of the auctioning schemes i am aware of starts with the first year of the auction giving out permits equal to the amount of carbon produced in the prior year and then reducing that level by a percent or two per year  until over a thirty year period you have reached your long term goals now that would allow businesses to plan ahead for auctioning price increases and so on is there another scheme that makes more sense than that or is that basically what you are advocating  is talking about going to say a fifty percent emissions reduction in ten or fifteen years the key i think is to have that emissions cap gradually tighten over an extended period of time have people know where cap is going over an extended period of time and that is the key thing i think for the planning of the future mister podesta the old mccain lieberman bill stair stepped down it had more dramatic reductions at a stair step level but i think  that a phased reduction is a more sensible way it is easier to plan and it permits you to hit your target and again get the pollution savings that are necessary but i think the most important issue at the end of the day is what you are trying to get to and i would say europe has adopted the target of hitting a two degrees centigrade rise in temperature above pre industrial level by two thousand and fifty that is i think okay let me pursue that a little bit further because i know you think and to a degree i agree with you the auction is the way to level the playing field but there are certain regions of the country that start out at a disadvantage and i am very concerned mister podesta if you could respond to this because as you laid out how you see the percentages of how you allocate the revenue i don't see sufficient revenue there to dramatically improve our transmission capacities so when i am in south dakota and we are dealing with the western area power administration of the west and the midwest independent system operator to the east and we have got all this wind that we can't get out that would benefit the electricity providers and other businesses in south dakota i mean i would be more willing to identify it as a issues involved with that we apply ten percent to try to soften the blow if you will on communities that are particularly affected you know you could argue it's fifteen percent but it's probably not much more than that there is a second question which is does giving away the auction permits actually result in the investment or does auctioning the permits and then having the money available to make those investments which is the better system i think the people on the panel all think that a more transparent system is auction the permits and then use the proceeds of the permits to upgrade the grid make the r and d investments et cetera ms herseth sandlin and i don't think i disagree with you on that my concern is the one hundred incentives for people to reduce their emissions i mean what if the cap is above it may be too high above the performance of emissions trading systems previously although there is a lot of concern about price spikes and cost containment empirically the most important phenomena has been price collapses or prices have turned out to be much less than we thought because well it turns out economic incentives work and a lot of innovation comes to the market so one of the ways to protect against that is a reserve price in an auction which makes and that is a standard feature of good modern auction design you are going to find it on ebay the next time you try to go auction something there and so it puts in a floor on the value of emission the gentleman's time has expired i am going to ask a final question here and i am then going to ask each one of you in reverse order of the original statements to each give us your one minute question and all of you on this panel seem to disagree with that approach of giving away the allowances and the acid rain process did work so what is the difference mister burtraw there are two things that are different number one that was only targeting the electricity sector and in one thousand nine hundred and ninety one hundred percent of the electricity sector was under cost of service regulation so if the regulators were awake and doing their job they were going to make sure that companies could not charge consumers for something they had received for free so consumers were well protected under traditional cost of service regulation today we have had half the country in the electricity sector move away from that for their very own good reasons the second is that again that was only in the electricity sector and today we're looking at a program that is going to affect the entire economy so with that type of free allocation in the electricity sector it made sense in that it suppressed electricity any change in electricity prices any more than needed to happen there but when we go economy wide that type of an approach for those regions of the country in the electricity sector that are still regulated will constitute a subsidy to electricity consumption and that is going to cause a disequilibrium in marginal costs across the economy and raise the costs of carbon policy significantly our modeling for example that it could push up national allowance prices by fifteen percent that means all of the other sectors of the economy are going to have to work that much harder the chairman great thank you i received a letter from the southern alliance for clean energy regarding the subject of today's hearing and i would like to ask unanim i think the case has been well made at this hearing for auctioning the permits and also for the need both substantively and politically for consumer relief so i won't use up much of my one minute on that however there is one issue i mentioned  in my testimony we never came back to and it's kind of i think maybe not on the radar screen so let me spend thirty seconds on that we really do need to pay attention to the fact that the price point the increase in prices which will create incentives for various efficiencies will also raise the price of everything from heating school buildings education at the state and local level to a variety of federal programs from the pentagon's cost to veterans cost of living increases and you need to make sure that there is some room within the allowances to deal with those costs that the public sector is going to incur you don't want an impact of cap and trade to be cuts in local education budgets or cuts in veterans programs i know it is not as politically attractive as this incentive and that incentive but i think it is a key part of what needs to be taken into account or we end up having cuts in basic services increases in other taxes or big increases in deficits down the road as a result of the impact of higher energy prices on the important things th state and the federal governments do again very briefly the cost of doing nothing is a lot more than the cost of doing something and i think if we get this right and i think cap and trade is at the heart of a new energy policy it can really power the economy forward it is not a central part of his economic development strategy and i think we need to start looking at it in the opportunity context more second i just would tell the committee we have also built in greenhouse gases to our state environmental review process and we have seen new proposals for green buildings we saw the harvard allston campus agree to the first legally enforceable cap on greenhouse gas emissions from a real estate development project that is another area that we can get into that i think is important and third i would just say send clear signals and level the playing field don't penalize early action states as you move forward and measures like auctions really set an even playing field and i encourage you to move forward as quickly as you can thank  nitrogen oxide markets here the common market starts to deliver in europe so there has been i think some of the debate you were having here now should you go for a cap and trade system we had the same debate in europe but now three or four years after introducing our  leave the impression that auction design is actually fairly simple emission allowance is a very simple commodity compared to the spectrum auction or the daily electricity auctions and this is not the time to go into it in great detail but really it is dramatically simple so do not be intimidated by the notion that designing and putting in place an auction for emission allowance is going to be a difficult thing to accomplish it is probably one of the more simple auctions that could be designed and it is not at all uncommon for the government to now charge for things that previously it gave away for free to put such a mechanism as that in place and secondly i would just like to leave the question in your mind with you of where does this value come from in the first place it really comes from citizens in the u s in terms of their value isn't being taken out of the economy or sent away and burned but rather it's changing the way that property rights are assigned throughout the economy an approach that i think is a candidate approach with all others i mean an economist prefers an auction because of the opportunity to use auction revenue to promote economic growth and other program goals but also another approach that could be a candidate would be to use an fdr type of an approach and see that these emission allowances belong to citizens and they could be directly allocated to citizens spectrum we created a third fourth fifth and sixth cell phone license in every community and it revolutionized the wireless marketplace moving from analog to digital up until then we had given away the spectrum but by changing the model we actually created more entrepreneurial environment and derived more revenues for the federal government i don't think it is as complex i do agree with you on that as well before closing i would like to thank the outstanding panel i think we are unanimous in that that this was a first class panel and an excellent way to kick off this important debate this year i think we have learned that robust auctions and well targeted revenue recycling must be a core element of a cap and trade system this is the only way to ensure that we can meet the goal of saving the planet while keeping the playing field level ensuring consumers are protecting and spurring innovation and economic growth as we move to a low carbon economy i think it is also clear that we need to look closely at mechanisms for oversight of auctions and the carbon market to ensure