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65–271—PDF 2009

S. HRG. 111–939 

CLIMATE CHANGE LEGISLATION: 

INTERNATIONAL TRADE CONSIDERATIONS 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

JULY 8, 2009 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

BLANCHE L. LINCOLN, Arkansas 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

CHUCK GRASSLEY, Iowa 

ORRIN G. HATCH, Utah 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

JOHN ENSIGN, Nevada 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

RUSSELL SULLIVAN, Staff Director 

KOLAN DAVIS, Republican Staff Director and Chief Counsel 

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Kerry, Hon. John F., a U.S. Senator from Massachusetts ................................... 1 

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 2 

WITNESSES 

Yager, Dr. Loren, Director, International Affairs and Trade, Government 

Accountability Office, Washington, DC .............................................................. 4 

Claussen, Eileen, president, Pew Center on Global Climate Change, Arlington, VA .................................................................................................................. 6 

Horlick, Gary, Law Offices of Gary Horlick, Washington, DC ............................. 8 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

Prepared statement .......................................................................................... 23 

Claussen, Eileen: 

Testimony .......................................................................................................... 6 

Prepared statement .......................................................................................... 24 

Grassley, Hon. Chuck: 

Opening statement ........................................................................................... 2 

Prepared statement .......................................................................................... 34 

Horlick, Gary: 

Testimony .......................................................................................................... 8 

Prepared statement .......................................................................................... 36 

Kerry, Hon. John F.: 

Opening statement ........................................................................................... 1 

Yager, Dr. Loren: 

Testimony .......................................................................................................... 4 

Prepared statement .......................................................................................... 38 

COMMUNICATION

Cargo Airline Association ........................................................................................ 51 

(III) 

(1) 

CLIMATE CHANGE LEGISLATION: 

INTERNATIONAL TRADE CONSIDERATIONS 

WEDNESDAY, JULY 8, 2009 

U.S. SENATE, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 10:02 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. John F. Kerry 

(acting chairman of the committee) presiding. 

Present: Senators Conrad, Kerry, Stabenow, Cantwell, Nelson, 

Carper, Grassley, and Bunning. 

Also present: Democratic Staff: Bill Dauster, Deputy Staff Director and General Counsel; Amber Cottle, Chief International Trade 

Counsel; and Maureen Wieland, Intern. Republican Staff: Stephen 

Schaefer, Chief International Trade Counsel; and David Ross, 

International Trade Counsel. 

OPENING STATEMENT OF HON. JOHN F. KERRY, 

A U.S. SENATOR FROM MASSACHUSETTS 

Senator KERRY. The hearing of the Finance Committee will come 

to order. 

As everybody knows, the chairman of the committee and the 

ranking member are deeply engaged in the effort to advance the 

health care bill out of this committee. We are hoping, obviously, to 

have that bill moving before the committee, and the chairman was 

called to an urgent meeting regarding that issue at the last moment. He had intended to be here. 

So, I am going to chair the meeting until that time. We are going 

to wrap this up quickly. I think you may be pleased and, hopefully 

we can cover this topic as rapidly as possible by 10:45 or a little 

bit thereafter, because we have two votes that will take place at 

that time. I think it is disruptive enough, not to mention the fact 

that I have to chair a Foreign Relations Committee vote during 

that period of time, simultaneously. So, we will try to move this expeditiously. 

This is an important hearing. This is a very critical component 

of climate change legislation and debate. We have been engaged in 

many discussions on this topic. 

I just came this morning from a breakfast with the Secretary of 

State who is leaving to go to India in a few days. We talked about 

this very issue, among others, because India and China and other 

developed countries’ participation in Copenhagen is going to be absolutely essential. 

2 

It will be essential to come out of Copenhagen with some kind 

of structure that satisfies America and the American people, and 

through them this legislature, so that we have a mechanism to be 

able to guarantee that American industry is not going to be disadvantaged, or that we do not have a carbon leakage which is effectively people, because there is some restraint or requirement here 

in our country that they go seek another site for the manufacturing 

of the same product and then try to slip those products back into 

the country. 

Obviously, it has to be an even playing field, or as even as we 

can make it. And the question is, how do you get there? How do 

you make it enforceable under WTO? What kind of restrictions can 

you put in place? The legislation we had a year ago under the 

Warner-Lieberman bill had one provision. The House WaxmanMarkey bill has another provision. Senator Boxer and I met last 

night and are discussing still a different provision here at this 

point in time. 

So, today’s hearing has the ability to educate and shed light on 

what are the best possibilities for our legislative route and how we 

proceed. There are a narrow set of industries—very narrow, I want 

to emphasize—that the GAO identifies, in response to Senator Boxer’s request, and now in their report today, a very narrow set of 

U.S. industries that are energy-intensive and trade-exposed. And I 

am convinced that within the allowance scheme, let alone in these 

other mechanisms available to us, there is enormous capacity to be 

able to address our concerns. 

So, I think today’s hearing will be very helpful in that regard. 

So, without further ado, let me turn to the ranking member, Senator Grassley, for his opening statement. 

OPENING STATEMENT OF HON. CHUCK GRASSLEY, 

A U.S. SENATOR FROM IOWA 

Senator GRASSLEY. You raised some of the same concerns that I 

am going to raise, so it will be a little bit repetitive, but I appreciate very much your saying those things. 

Today’s hearing is going to explore international trade implications of possible carbon emission legislation. The House has passed 

a bill. The Senate is about to begin its legislative process, so it is 

important for our committee to explore these issues, because Congress could be setting up our manufacturers for a lot of trouble. 

I have said many times that we ought to approach this issue 

through a worldwide international agreement. That is the only way 

to ensure that China and India, and other major carbon-emitting 

countries, are involved. Otherwise, our industry is going to be left 

very uncompetitive. We are going to see more manufacturing moving overseas with less efficient plants that produce far more pollution than our American industries, and nobody should want that to 

happen. 

Some in Congress think the answer to that problem is to include 

some type of border measure in any legislation that Congress 

passes. That is what the House of Representatives did last week. 

I am skeptical of that approach. 

I think it would be difficult to design such an approach that 

would be consistent with WTO rules. If we do something that is inVerDate Nov 24 2008 15:23 Apr 07, 2011 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 R:\DOCS\65271.000 TIMD
3 

consistent with the rules of the WTO, we are going to open ourselves up to trade sanctions that could dwarf our sanctions that we 

have seen in the past, and then we will have hurt our manufacturers, actually, twice. 

We will have raised their costs by imposing the cap-and-trade 

system in the first place, and then we will further compound the 

problem by giving foreign countries a license to hit us with sanctions. That would not be good for us, and it would not be good for 

the trading system, either. And it could be even worse, because 

other countries could follow our lead and impose their border measures against our exporters. We could find ourselves defending our 

measures at the WTO and challenging other countries’ measures at 

the same time. 

Now, the World Trade Organization would prefer to avoid that 

scenario. The Director General, Pascal Lamy, stated recently that 

the WTO membership would not want to decide what is or is not 

allowed from a trade perspective. He indicated that the WTO would 

much rather have the trade issues addressed as part of whatever 

comes out of the meeting scheduled to take place in Copenhagen. 

That makes very good sense. 

If the United States unilaterally imposes border measures, it will 

make it that much harder to reach international agreement. Other 

countries are not going to want to negotiate with us if they think 

we are dictating a specific outcome. 

Border measures are not the only approach that has been suggested in addressing these competitiveness issues. Another suggestion is to give free emissions allowances to domestic industries. 

That is the approach that the European Union took. I have some 

questions about that approach. I am not convinced that giving 

away free allowances would be consistent with subsidy rules of the 

WTO. 

At a minimum, there would be a risk of other countries arguing 

that free emission permits are subsidies that cause adverse effects 

to their industries. If we lost a subsidy case, we would have the 

same risk of trade sanctions. So, for this reason as well, we would 

be better off waiting for an international agreement instead of operating unilaterally. 

I thank you, Mr. Chairman. 

Senator KERRY. Thank you very much, Senator Grassley. 

Let me just say to you that we do not want to turn this into our 

conversation, but I will say to you very quickly that I just came 

back from a week in China to talk with the Chinese about this, and 

the reality is that we signed up to an agreement in 1992. 

It was a voluntary agreement, but we did sign it, and we did ratify it. And the fact is that the world has been watching while they 

know that we did not do anything to try to meet what we did ratify. So, we are in a position here where most of the world is waiting 

to see what the United States does. 

And we will not get an agreement in Copenhagen, pure and simple, if the United States does not lead. Point blank, flat statement: 

we will not get an agreement unless the United States is prepared 

to lead. If we do lead, China has said they are prepared to be a 

positive, constructive force and comply with the requirements of 

having measureable, reportable, verifiable reductions in emissions. 

4 

The Secretary of State is leaving to go to India in a week, and 

she will raise this issue to get the Indians on board, and then we 

have the Europeans and Americans. Those are the four largest 

emitters, four largest emitters in the world prepared to actually go 

to Copenhagen to actually do something. So, we get caught in the 

chicken-and-egg situation. I think we have to really be thoughtful 

about it. 

The second thing I would say to you is that, on the border tax 

issue, I have serious questions about that, too, and we will raise 

them today. But, if we have an international agreement and this 

is the law globally and we have accepted it, then you have an ability to be able to put in place some restraints that are compliant, 

I believe, with WTO. They are not solely a border tax, but they restrain people’s ability to sell products. They have to sell to us. 

China, unless they sell to the United States, has a serious problem. So, I think there are options available to us. Europe did use 

allowances. Allowances have been part of the process. 

So, let us talk about this as we go into the day, here. 

Ms. Claussen, if you would lead off. I am sorry. I apologize. Dr. 

Loren Yager is going to lead off, and we will discuss the findings 

of the GAO report. We appreciate your being here. The second witness will be Ms. Eileen Claussen, president of the Pew Center on 

Global Climate Change Strategies for Global Environment. And finally, Gary Horlick, international trade lawyer at the Law Offices 

of Gary Horlick. Thank you all for being with us. 

Dr. Yager, if you would lead off, please. 

STATEMENT OF DR. LOREN YAGER, DIRECTOR, INTERNATIONAL AFFAIRS AND TRADE, GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, DC 

Dr. YAGER. Thank you, Mr. Chairman, Ranking Member Grassley, members of the committee. Thank you for the opportunity to 

appear again before the committee to provide insights from GAO’s 

work on important international issues. 

In order to mitigate climate change effects, countries are considering varying approaches to reducing greenhouse gas emissions, 

such as carbon dioxide, which is the most important greenhouse 

gas due to its significant volume. However, imposing costs on 

energy-intensive industries in the United States could potentially 

place them at a disadvantage to foreign competitors. 

As the Congress considers the design of a domestic emissions 

pricing system, a key challenge will be balancing the need to reduce greenhouse gas emissions with the need to address the competitiveness of U.S. industries. 

In my statement, I will provide excerpts from the report that we 

are issuing today to the Finance Committee. In particular, I will 

describe, briefly, some of the key challenges associated with estimating the industry effects from climate change measures and illustrate key characteristics of some potentially vulnerable industries. 

In terms of estimating the effects of domestic emissions pricing 

for industries in the United States, the magnitude of effects on output, profit, and employment depend on the greenhouse gas intensity of industry output. The effects will also be dependent upon the 

5 

stringency of U.S. climate policies in comparison to other nations, 

in the extent that emission pricing encourages technological change 

that reduces greenhouse gas intensity. 

Finally, the effect on U.S. industries will also depend on the features of the legislation designed to address these competitiveness 

issues, such as border measures and output-based rebates, to the 

most affected industries. 

Let me use one set of the industry graphics from our report to 

illustrate some of the characteristics that make industries more 

vulnerable to international competition. Looking at Figure 1, the 

height of the columns in Figure 1 shows the size of the industry 

relative to the other sub-industries, and in this graphic, iron and 

steel mills is the largest sub-industry category. The axis extending 

to the right reflects the energy intensity. 

So, on the graphic, the primary aluminum sub-industry near the 

top of the figure has an energy intensity of 24 percent, the axis extending to the left shows trade intensity, and, in this case, the 

electro-metallurgical products sub-industry has the highest trade 

intensity of about 70 percent. The shaded floor in this graphic indicates those industries that meet these two criteria from the 

Waxman-Markey legislation for industry eligibility for output-based 

rebates or trade measures. 

The second graphic provides information about the source of energy for the various industries, which is important since some fuels 

are more carbon-intensive than others. As shown by the first column in Figure 2, iron and steel mills use the greatest share of coal 

and coke, and steel manufacturing in ferrous metal foundries, the 

third and fourth columns, use the greatest proportion of natural 

gas. 

Since coal is more carbon-intensive than natural gas, subindustries that rely more heavily on coal could also be more vulnerable to competitiveness effects. Industry vulnerability may further 

vary, depending upon the share of trade with countries that do not 

have carbon pricing. 

To illustrate this variability, Figure 3 provides data on the share 

of imports by the source country. As shown, while primary aluminum is among the most trade-intensive industries, the majority 

of imports are from Canada, which is shown in the graphic as black 

with a diagonal stripe, and Canada is the country with agreed 

emission reduction targets. However, for iron and steel mills, almost 30 percent of imports are from China, Mexico, and Brazil. 

Finally, many members have expressed concern about the potential for increased imports from China. As shown in Figure 4, China 

already has an increasing share of imports in some of the primary 

metal sub-industries. Although the increases are not uniform 

across sectors, iron and steel mills still manufacturing in aluminum products have all shown a growing trade reliance on Chinese imports since the year 2002. 

Mr. Chairman, as Mr. Baucus stated in his opening statement 

for last month’s hearing on climate change, he wanted to examine 

what the legislation will mean to trade-exposed industries. Ranking Member Grassley also noted and stressed the importance of an 

examination of the effects on the U.S. economy. 

6 

I hope that our analysis contributes to that discussion, and I welcome the opportunity to answer any questions from you, and other 

members of the committee. 

[The prepared statement of Dr. Yager appears in the appendix.] 

Senator KERRY. Thank you very much. 

Ms. Claussen? 

STATEMENT OF EILEEN CLAUSSEN, PRESIDENT, PEW CENTER 

ON GLOBAL CLIMATE CHANGE, ARLINGTON, VA 

Ms. CLAUSSEN. Mr. Chairman, members of the committee, thank 

you for the opportunity to testify. 

Addressing global climate change presents policy challenges at 

both the domestic and the international levels, and the issue of 

competitiveness underscores the very close nexus between the two. 

In the long term, a strong multilateral framework ensuring that 

all major economies contribute their fair share to the global climate 

effort is the most effective means of addressing competitiveness 

concerns. In designing a domestic climate program, the question 

before Congress is what to do in the interim until an effective global agreement is in place. 

Concerns about competitiveness center on energy-intensive industries, whose goods are traded globally, such as steel, aluminum, 

cement, paper, glass, and chemicals. As heavy users of energy, 

these industries will face higher costs as a result of domestic greenhouse gas constraints. 

However, as the prices of their goods are set globally, their ability to pass along these price increases is limited. To empirically 

quantify the potential magnitude of this competitiveness impact, 

the Pew Center commissioned an analysis by economists at Resources for the Future. This work, which was published in May, 

analyzes 20 years of data in order to discern the historical relationship between electricity prices and production, consumption, and 

employment in more than 400 U.S. manufacturing industries. 

We found that, at the price levels studied, the projected competitiveness impact, as well as the broader economic effects on energyintensive industries, would be fairly modest, and in our view are 

readily manageable with a range of policy instruments. 

In a domestic cap-and-trade system, competitiveness concerns 

can be addressed, in part, through banking and borrowing and the 

use of offsets, which can help reduce the costs to all firms. However, other transitional policies may be needed to directly address 

competitiveness concerns in the period preceding the establishment 

of an effective international framework. 

Allow me to mention a couple of options we would not recommend, and then a few that we would. One option is to exclude 

vulnerable sectors from coverage under the cap-and-trade program. 

Exclusions, however, would undermine the goal of reducing greenhouse gas emissions economy-wide and reduce the economic efficiency of a national greenhouse gas reduction program. They also 

would give exempted industries an economic advantage over nonexempt competitors. 

A second option is to try to equalize greenhouse gas-related costs 

for U.S. and foreign producers by imposing a cost or other requirement on energy-intensive imports from countries with weaker or no 

7 

greenhouse gas constraints. However, as such measures would 

apply only to goods entering the United States, it would not help 

level the playing field in the larger global market, which is where 

U.S. manufacturers compete. In addition, if the United States were 

to impose unilateral border requirements, there is a greater likelihood that it would become the target of similar measures. There 

is a significant risk that border adjustments would engender more 

conflict than cooperation, in the end making it more difficult to 

reach agreement that could more effectively address competitiveness concerns. 

The Pew Center, instead, believes that Congress should seek to 

address competitiveness concerns by: (1) strongly encouraging the 

executive branch to negotiate a new multilateral climate agreement, establishing strong, equitable, and verifiable commitments 

by all major economies; (2) including in domestic legislation incentives for such an agreement, including support for stronger action 

by developing countries; and (3) including in cap-and-trade legislation transitional measures to cushion the impact of mandatory 

greenhouse gas limits on energy-intensive trade-exposed industries 

and the workers and communities they support. 

These transitional measures should be structured as follows: in 

the initial phase of a cap and trade program, free allowances 

should be granted to vulnerable industries to compensate them for 

the cost of greenhouse gas regulation. For direct cost, allocations 

should be based on actual production levels. For indirect costs, allowances should reflect an emitter’s production-based energy consumption, taking into account the greenhouse gas intensity of its 

energy supplies. 

Allocation should be set initially so a producer whose emissions 

intensity is average for that sector is fully compensated for regulatory costs, while those who are above or below receive allowances 

whose value is greater or less than their costs, respectively. This 

factor should be adjusted over time as an incentive to producers to 

continually improve their greenhouse gas performance. 

Allowance levels should decline over time, gradually transitioning to full auctioning, although at a slower rate than for other sectors. A review should be conducted periodically to assess whether 

sectors are experiencing competitiveness impacts and, if warranted, 

to adjust allowance levels at the rate of transition to full auctioning. A portion of allowance auction revenues should be earmarked for programs to assist workers and communities in cases 

where greenhouse gas constraints are demonstrated to have caused 

dislocation. 

We believe this approach addresses the transitional competitiveness concerns likely to arise under a mandatory cap-and-trade program, while maintaining the environmental integrity of the program and providing an ongoing incentive for producers to improve 

their greenhouse gas performance. 

Thank you. 

[The prepared statement of Ms. Claussen appears in the appendix.] 

Senator KERRY. Thank you, Ms. Claussen. We appreciate it. 

Mr. Horlick? 

8 

STATEMENT OF GARY HORLICK, LAW OFFICES OF 

GARY HORLICK, WASHINGTON, DC 

Mr. HORLICK. Thank you, Senator Kerry, Senator Grassley, 

members of the committee. It is a pleasure to appear here today. 

I would like to first address two basic rules which I think are 

worth considering, and then deal with some of the specifics of WTO 

law and climate change. The first rule is, before adopting something, we want to make sure that we do not mind if other countries 

do the same to our exports. Conservatively, we export about 20 percent of our manufactured goods, and about 30 percent of our farm 

products. So, it is a very practical concern. If someone is going to 

do something to us, we better think about it. 

Second, we want to ask ourselves: is the measure consistent with 

WTO rules and other international agreements? We have a series 

of FTAs, as well as WTO to consider. It is very tempting, and you 

have seen a lot of debate about this, whether we can re-interpret 

these WTO rules. 

Again, just from a practical consequence, I want to ask: do we 

want to do that? America’s economy depends more than anything 

else on innovation in both agriculture and manufacturing. 

A good example is biotechnology. We lead the world in biotechnology. It is revolutionizing medicine, agriculture, and manufacturing. We have been resisting for years European attempts, 

and other countries’, to stop us from selling products made with 

biotech. So, the idea that we would re-interpret WTO rules in the 

climate change context based on how things are made means we 

could well lose exports of crops like corn and soybeans to major 

markets. Again, this is not saying yes or no. It is saying we should 

think about it. 

Let me turn to specifics. Border measures. As the WTO itself 

pointed out in a recent report with the United Nations Environmental Program, border measures are permitted, the WTO is quick 

to point out, under certain conditions. Certainly, if the U.S. did a 

VAT-like carbon tax or energy tax, we could impose that on imports and rebate it on exports, and indeed, some members of this 

committee, historically, have wanted to do that in general. 

Once you get away from a pure VAT tax, it gets really complicated. I am happy to discuss some of the complications. I will 

mention some of them, but before I do that, before I get into questions of legality again, do we want other people doing the same to 

us? It is always a concern of mine. 

As President Obama pointed out recently, both India and China 

have lower per capita greenhouse gas emissions than we do. So, 

you could easily imagine India and China, both large, growing 

economies and major targets for U.S. exports, saying, well, we are 

going to impose border measures based on U.S. per capita emissions. It is a practical concern, as much as a legal one. 

Another practical concern is that border measures would raise 

costs for some U.S. manufacturers, just as they are adapting to 

other costs that may be in the legislation. It cuts several ways. 

And, finally, I see in practice as a WTO lawyer, countries get 

mad about border measures. We do, too, by the way. They do not 

seem to get mad about subsidies, or not as mad. There are many 

fewer cases in the WTO challenging subsidies than there are chalVerDate Nov 24 2008 15:23 Apr 07, 2011 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 R:\DOCS\65271.000 TIMD
9 

lenging border measures. So, to some extent, that argues in favor, 

just from a pure likelihood of litigation standpoint, of permit allocations rather than border measures. 

Turning to permit allocations, permit allocations are permitted 

by WTO rules, but again, it depends on the design and the details. 

If permit allocations are linked to requirements to use domestic 

content or to export, it would be prohibited, and, indeed, most of 

the WTO cases on subsidies are about those kinds of requirements. 

Even if there is not a requirement, as Senator Grassley pointed 

out, they can be challenged and, if they are big enough, might be. 

The point I want to make here is we insisted on those rules. 

Those rules came into effect in the WTO because we wanted them, 

so, before we start changing them, we need to make sure we know 

all the consequences. I would note the same subsidy rules apply not 

only to permit allocations, but also to incentives for developing new 

sources of energy, and even to renewable energy standards. Again, 

I am not saying do not do them, but be careful how you design 

them. 

The best way to do all this is through an international agreement. I keep harping on the fact, let us not do something we do 

not want others to do to us. The cleanest way to do this, the most 

efficient, is do it with everyone else. 

And one final point which I want to emphasize most strongly is 

the sheer practicality of it. If a third of the countries adopted a permit requirement, a third adopt border measures, and a third simply allocate permits, how are you going to link all those up? 

An Apple iPod is made in 20 countries. The box says ‘‘Made in 

China,’’ but that does not come close. How are you going to figure 

out what the carbon content of each of those parts is? You are talking about a customs officer at the border dealing with all these. 

Thank you. 

[The prepared statement of Mr. Horlick appears in the appendix.] 

Senator KERRY. Thank you very much, Mr. Horlick. 

I am going to reserve my time in deference to the ranking member’s schedule and recognize Senator Grassley. 

Senator GRASSLEY. Thank you, Mr. Chairman. I appreciate that. 

Mr. Horlick, I am going to start with you, and I will not use more 

than my 5 minutes. I would like to ask several questions, so if you 

would give short answers—— 

Mr. HORLICK. Sure. 

Senator GRASSLEY. You testified that requiring emission permits 

for importers would raise serious WTO questions, especially if permits are given away to domestic producers, yet some legislative 

proposals currently on the table would allow that scenario. Would 

you elaborate on ‘‘the serious WTO questions’’ that such a scenario 

would raise? 

Mr. HORLICK. The WTO permits you to treat foreign producers 

the same as your own domestic producers. If you are giving away 

permits to your domestic producers, maybe not all of them, but 

some, and you are requiring permits from foreign producers, that 

is an immediate problem. 

Second, when you start doing things based on sector averages— 

and there is case law on this—some foreign companies in many of 

10 

those sectors will have different emission profiles than other foreign companies. So, you would have potentially some foreign companies that emit less than U.S. companies being treated worse 

than those U.S. companies. 

And, again, I note, we might be the ones raising these challenges 

against other countries’ systems. This is definitely a reciprocal system. 

Senator GRASSLEY. I will follow up with you on another point on 

this. In your testimony, you talk about the risks that, if we impose 

unilateral border measures, the developing countries might impose 

their own measures to block our exports on the grounds that our 

per capita emissions are higher than theirs. Would you elaborate 

on that point about per capita emissions, and particularly, what 

would be the consequences for U.S. exporters? 

Mr. HORLICK. The Indian environment minister, a few days ago, 

announced that India would accept a binding limit of the average 

per capita emissions of developed countries, noting that India has 

one-tenth of the per capita emissions of the U.S. So, you can easily 

imagine India saying, well, we are going to require permits from 

all U.S. exports to India until your per capita emissions are the 

same as ours. Well, that is not going to happen for a long time. 

So, again, I think the best way to avoid this is some sort of international agreement. But doing things unilaterally, particularly border measures—we react negatively when other countries do it to 

us. I have spent most of the last 10 years fighting border measures 

against U.S. livestock exports. 

Senator GRASSLEY. Ms. Claussen, following up on the same point 

that was just made, would you agree with Mr. Horlick that, if we 

include unilateral border measures in U.S. legislation, other countries would likely apply such measures to U.S. exports? 

Ms. CLAUSSEN. Yes. 

Senator GRASSLEY. Thank you. 

Dr. Yager, earlier this year we heard testimony that imposing 

border measures could raise costs to U.S. manufacturers that use 

imported inputs. Mr. Horlick has already alluded to this. What is 

your view of the issue and, for example, what might be the impact 

on manufacturers of steel products? I do not want to limit it just 

to steel products, but I use that as an example. 

Mr. HORLICK. Yes, Senator Grassley. Certainly, some of the industries that we showed in the graphics, there are products that 

are intermediate goods. And so, if those intermediate goods have to 

face a tariff at the U.S. borders, U.S. producers that purchase those 

goods for incorporation into products or into the infrastructure in 

the United States would have to pay the higher price for those 

goods. So, there is some issue about the effect on domestic firms, 

and also on the downstream purchasers in the United States that 

would be, in general, forced to bear the higher costs associated with 

those border measures. 

Senator GRASSLEY. To you, Ms. Claussen, and to Dr. Yager. Some 

people have argued that including border measures in U.S. legislation would not create a meaningful incentive for China to enact its 

own emission control regimes. They would point out that most of 

China’s carbon-intensive production remains in China. Only a relatively small portion of that production is exported to this country, 

11 

thus, the potential impact of U.S. border measures on China’s economy is not likely to be substantial. My question, simply: are you 

in agreement or disagreement with that reasoning? 

Dr. YAGER. Senator Grassley, we have a table, actually, on page 

25 of the report that shows the percentage of Chinese output that 

is shipped to the United States, and the industries that we show 

here, iron and steel primarily, aluminum, cement, pulp, and others, 

in no situation is more than 1 percent of their production shipped 

to the United States as U.S. imports. 

So, people can look at with these figures differently, but what we 

try to ask is the extent to which this provides the U.S. leverage 

over China, and we also have other countries in the table. But in 

each case, the share of Chinese output that comes to the United 

States is less than 1 percent. 

Ms. CLAUSSEN. Yes, I agree completely. 

Senator GRASSLEY. All right. Thank you Mr. Chairman. Thanks 

to each of the witnesses. 

Senator KERRY. Thank you very much, Senator Grassley. 

I am going to continue to reserve my time and try to expedite 

for other colleagues here. 

So, Senator Stabenow? 

Senator STABENOW. Thank you very much, Mr. Chairman, and 

welcome to our guests this morning. 

When we look at all of these issues—— 

Senator KERRY. You know what? I have reversed the order between you and Senator Bunning. 

Senator STABENOW. Oh no, that is fine. 

Senator KERRY. I apologize, Senator Bunning. 

Senator STABENOW. All right. Thank you. Thank you very much. 

I think Senator Bunning and I share many of the same issues 

around trade enforcement and how to help manufacturers, and so 

on. 

Certainly, coming from the State that I do, obviously these issues 

are incredibly important, and I believe, absolutely, that we have to 

do a number of things in the context of passing global warming legislation and that, in fact, the question of free allowances and what 

we do at the border to level the playing field—not to give advantage, but just to try to level the playing field—is very important in 

all this. 

Senator Brown and I are working on a number of things. Senator 

Bingaman and I have put a couple of important things in the energy bill that relate to funding technology, which is the other piece, 

not before this committee, but other countries are aggressively 

funding and subsidizing the development of technology, and we 

need to be providing better financing mechanisms for that as well. 

But I guess my question goes more to the question of compliance, 

as we are looking at all of these things in theory. 

When we talk about, we do not want other countries doing things 

that we would not want them to do, they already do that. They already do that. I mean, I can give you case after case. We had counterfeit auto parts coming into the United States for 2 years before 

we even filed the case before the WTO, another 2 years before anything ever happened. In the meantime, I had several auto suppliers 

declare bankruptcy, major suppliers in the United States, because 

12 

of what China was doing and we were not taking any kind of action. 

We can go piece by piece, action by action. And my questions relate to compliance as we look at all of these things. As we are looking at being concerned about WTO compliance, which I understand 

we need to do, there are two sides of that, and whether or not other 

countries are going to be as well. 

One concern that I have, as it relates to China, is that while 

their policies right now—and I have met with the head of their climate change initiatives—their policies are ambitious, but they have 

a very poor record of implementing their policies. That is a concern 

of mine. And right now, Wang Canfa, China’s top environmental 

lawyer, estimates that only 10 percent of China’s environmental 

regulations and laws are actually implemented. 

A recent MIT study that surveyed 85 coal-fired power plants in 

China discovered that, although many of them installed state-ofthe-art emissions reduction equipment, they were not using them. 

And on top of that, they subsidized heavily, if not owned, their 

manufacturers. 

And just for the record, they have now instituted a ‘‘buy China’’ 

policy, where they are requiring certificates to be able to do business with the government, and only Chinese businesses are getting 

the certificates. 

So, while I appreciate the concern about whether they will retaliate against us, Mr. Chairman, I think we are the only ones who 

do not stand up for our businesses, quite frankly. We do not make 

sure that other countries are fair to us, and that is a real concern 

of mine in the context of going into this, that we have in fact, a 

system that enforces these items. 

So, if we are not talking about it, if there is a concern about a 

border tariff or concern about these other things, what would you 

do, instead, and how do we make sure that other countries are, in 

fact, living up to what they have on paper at this point in time and 

that we are not continuing a series of policies that have cost American jobs over the last couple of decades? 

Anyone? Yes. 

Mr. HORLICK. I am all in favor of better compliance mechanisms. 

One of my clients is America’s largest agricultural organization, 

and we lose about $3 billion a year in beef sales because other 

countries are not complying. But one of the things we run into is 

other countries say, well, you keep out our poultry. I am not saying 

we are wrong and they are right, I am just saying, if everyone complies, it would be great. 

Now, in the climate change context, the best place to do this is 

going to be an international negotiation, and the concern I raised 

is making sure we have mechanisms that do not screw up trade by 

bureaucratic means. 

I do not think enough work has been done yet in that arena as 

to how we are going to make all the parts fit—if every country has 

its own system, how are they going to mesh? But every country is 

going to have to do something, because, if one country cleans up 

its emissions and no one else does, it will not matter. So everyone 

is going to have to do something. 

Senator KERRY. Senator Bunning? 

13 

Senator BUNNING. Thank you, Mr. Chairman. 

Mr. Horlick, I have, more than once, or often, pointed out that 

any action to reduce U.S. greenhouse gas emissions will be pointless if there are not similar limits on emissions in China, India, 

Russia, and other countries. 

Mr. HORLICK. Correct. 

Senator BUNNING. China plans to build 500 coal-fired generating 

plants over the next 2 years and has already overtaken the U.S. 

as the largest emitter of greenhouse gas. Is it possible that border 

measures, such as the tariffs in the House-passed bill, will actually 

make it more difficult to reach an international agreement by inviting a series of WTO disputes in trade retaliations? 

Mr. HORLICK. That is a good question. I do not envy the U.S. negotiators or you Senators who have to do this. It is, in a sense, a 

tactical issue of when you pass legislation and what is in the legislation against what is negotiated internationally. 

Senator BUNNING. Well, let us just say what we presently have 

negotiated. Senator Stabenow brought out the fact that China does 

not enforce some of the agreements that we have had with them, 

and even Senator Kerry, in his visit to China, said that they were 

negotiating and there would not be a global agreement coming out 

of Copenhagen. 

Mr. HORLICK. Five hundred coal-fired plants is a lot. 

Senator BUNNING. You bet it is. 

Mr. HORLICK. As Dr. Yager pointed out, though, the largest emitting industries ship a relatively small percentage of what they 

sell—— 

Senator BUNNING. Less than 1 percent, or 1 percent. 

Mr. HORLICK. I would guess, and I do not know this but it is a 

safe guess, China’s largest export to the U.S. is probably clothing, 

which does not have a very high carbon footprint. So, I cannot give 

you a firm answer. I do not know what will motivate them. 

At some point, from all the maps I have seen—and I defer to Ms. 

Claussen—China is going to have desertification problems from climate change much worse than we will. Something is going to have 

to be done, but you are right. Something is going to have to drive 

China, and every other country, including the U.S., to reach an 

agreement that will—— 

Senator BUNNING. Globally enforced. 

Mr. HORLICK [continuing]. That will be enforced, because, otherwise, it is not worth doing. 

Senator BUNNING. To the same person. Would it make any sense, 

from an international trade perspective, to have an international 

agreement in place before we pass legislation with border measures? 

Mr. HORLICK. I would defer to the U.S. negotiators. As it happens, I worked with the U.S. negotiator, Todd Stern. I have great 

respect for him and his team. I think that is going to be a really 

interesting negotiating question. I am not sure. I think my guess 

is, going into Copenhagen, having a House-passed bill but not a 

Senate bill actually gives them some flexibility. But I would defer 

to what he tells you, to be honest. One person has to make the call. 

14 

Senator BUNNING. If the import tariffs in the House bill are imposed, could China retaliate by imposing tariffs on U.S. goods 

based on our per capita emissions? 

Mr. HORLICK. There are two answers to that. One, China could 

challenge what we did in the WTO and, if it won and we did not 

comply, retaliate. 

Second, in practical terms, China could pass legislation based on 

per capita emissions and say, if what you did is all right, what we 

did is all right. As I said, and it is pretty obvious, it is much better 

if both countries agree fairly soon on something. Litigation is not 

usually the answer to stuff. 

Senator BUNNING. Ms. Claussen, according to your testimony, 

the EPA estimates that complying with the House bill’s emission 

targets will shrink our GDP by only 0.37 percent, the same EPA 

that recently suppressed an internal report that was skeptical of 

the dangers of greenhouse gas emissions. I remember hearing outrage when the Bush administration was accused of suppressing scientific evidence for political purposes, and now the Obama administration appears to be doing the same thing. How can we trust the 

information from any agency that selectively suppresses findings 

from its own career employees? 

Ms. CLAUSSEN. Let me try to answer that in two ways. I think 

the EPA analysis of the House bill is by far the most honest and 

the best economic assessment, because it actually looked at the bill 

and did an assessment, whereas a lot of the other economic analyses where the numbers are thrown around actually did not look 

at and analyze the bill. 

Senator BUNNING. All 14 pages? 

Ms. CLAUSSEN. No. The draft before them. So, yes, they are going 

to do a re-assessment. There was at least an attempt to be honest 

about what the bill did and did not do, and to do an economic analysis based on that. 

Second of all, I mean, I actually was a career employee at EPA 

for about 20 years. There are always differences of opinion. I am 

not sure I would call it suppressing it if one analyst, or two analysts, or five analysts have one point of view and the preponderance of the analysts have a different point of view, which I believe 

is what happened in the endangerment finding. 

Senator BUNNING. Thank you. 

Ms. CLAUSSEN. There are always different points of view. 

Senator KERRY. Thank you very much, Senator Bunning. 

Let me just clarify one thing that I said about China. China is 

willing to have mutual, have verifiable reductions, and reportable 

reductions. What they made clear is that, if the United States is 

not prepared to reduce, we are not going to get them to reduce. So, 

it is a question of who goes first here, and our bonafides are not 

great on this. That is all I said. It is not that there will not be 

agreement at all. 

Senator BUNNING. But you did say there would not be one. 

Senator KERRY. Unless, no, I did not say that. I said, unless we 

take steps here to reduce. If we reduce, if we show them our willingness to proceed forward, then we have the opportunity to get 

the agreement in Copenhagen. If the United States is unwilling to 

15 

participate, and we defeat an effort to do it here, then we are not 

going to have a global agreement, and we are all in trouble. 

China is now looking at the loss of their major rivers. They estimate that they could lose the glaciers in the Himalayas by the year 

2035. They have major silting now; boats are running aground in 

the delta of the Yangtze River—the Yellow River. They have huge 

fears. They have 800 million people living in agriculture still, making less than $2 a day. If they lose that water, they are in trouble. 

The same thing is being felt in India on the other side of the 

Himalayas. 

So, there are huge implications now. That is what Mr. Horlick 

was just referring to. We are going to have to do something here. 

So, China assured me that they intend to be a constructive, positive force in Copenhagen, and that they will meet the standard 

that was set up in the prior negotiations at Bali and at Poznan, 

which require them to have verifiable, reportable, measureable reduction. 

Senator BUNNING. All well and good, if they enforce it. 

Senator KERRY. If they enforce. That is the scheme that has to 

be arrived at in Copenhagen, and we will ratify—— 

Senator BUNNING. We have experienced the fact that she has 

some industries, Senator Stabenow does, and I do in Kentucky, 

that are being injured seriously by not having the enforcement in 

China. 

Senator KERRY. And Senator, I could not agree with you more. 

We are all concerned about that. 

We have industry, different kinds in many cases, in Massachusetts that get injured. We lose a lot of money because of market 

manipulation and other games that they play. We all understand 

that. That is the key to the negotiation. We need a mechanism. 

I would assume that you would agree, Mr. Horlick, that, if you 

have a global agreement, and 160 or whatever nations sign on to 

a reduction target, but China were to stay out, or India were to 

stay out, you then have a kind of global renegade. At that point, 

we can set up a mechanism whereby, within the WTO or somewhere else, we can take measures. Is that not accurate? 

Mr. HORLICK. I think it would be difficult. It is not impossible. 

Changing the WTO is not easy, and indeed the U.S. wanted it that 

way, but I think in practical terms you are going to need a China 

or India in. 

Senator KERRY. We all agree. 

Mr. HORLICK. And they are going to do it for their own motives. 

The one you addressed, of running out of water, is a strong motive. 

The good news is that, as I understand it—I am not an expert in 

this—they run out before we do. That is a really crude way of putting it. 

Senator STABENOW. Mr. Chairman, I realize my colleagues want 

to speak. Could I just make one comment on this? And that is, Mr. 

Chairman, I agree with you totally. We have to do something. I 

just think in the context of this hearing, as it relates to the border 

tariffs, the allowances are absolutely critical. 

Senator KERRY. I could not agree more. How do we do it? 

16 

Senator STABENOW. We cannot just take it on face value. We 

have to have in place, not later, but in the context of whatever we 

do, the ability to enforce it. 

Senator KERRY. Right. We all agree with that. The key is getting 

the global agreement to be able to do that, and we cannot get a 

global agreement if we are not willing to take some steps. 

Let me just say for the knowledge of our colleagues, that we are 

going to be very careful in the formulation of the Senate bill. We 

are reaching out to all of our colleagues, have met with Senator 

Conrad, Senator Dorgan, Senator Bayh, and a lot of folks. 

We are meeting now to discuss it. But we are going to hew pretty 

closely to a lot of what they did in the House, because a lot of coal 

State interests were taken into account, manufacturing interests 

taken into account; people who have been through this effort. We 

have some notions where it could be legitimately improved, but we 

are going to try to approach it in a thoughtful way. 

Senator Cantwell? 

Senator CANTWELL. Thank you, Mr. Chairman. I welcome all the 

discussion this morning about China, because I really do believe 

that we need a U.S.-China energy bilateral. And I know the chair 

traveled there recently and saw the work and effort that people are 

putting into trying to come up with an agreement. 

We in the Northwest look at China as a market. We already sell 

them software and airplanes and coffee, and we would like to sell 

them some clean energy technology. 

And the fact that our State Department is working with our national laboratories to help China on their building compliance—half 

of all the buildings in the next 10 years built on this planet are 

going to be in China. And, if the United States was supplying them 

with some of the energy efficiency tools that we have already implemented in the United States, it would be a big boon to our economy. 

So I hope that, when the President goes there in November, that 

we really are seriously looking at this as an agreement and an opportunity for a market. Energy is a $6-trillion market. It is the 

mother of all markets. The internet, by comparison, is only $1 trillion. If we were working together on a streamlined approach, it 

would be a big economic boost. 

I want to ask a question about the output-based allowances that 

are kind of under consideration in one of the proposals. On the face 

of this, this seems to be a very difficult thing to implement effectively and equitably. Where does the money come from for refunds 

to consumers paying higher prices or to impacted industries? Ms. 

Claussen or Mr. Horlick? 

Ms. CLAUSSEN. Maybe I can deal with the household thing in the 

House bill a little bit. What households will face most of all is an 

issue of electricity prices. The way the House bill is structured, the 

money goes to the local distribution companies in most cases, and 

particularly where it is coal-fired power that we are talking about, 

which is where the price increases would invariably be the greatest, those local distribution companies are regulated at the State 

level. 

The basis of that regulation is to make sure that consumers do 

not pay high prices, pay the lowest possible prices. So I think by 

17 

giving the allowance value to the local distribution companies, you 

are essentially protecting consumers from price spikes and high 

price increases. We think that is the best way to protect consumers. 

Now, industries are different. I think the way we deal with that 

for energy-intensive industries, which is really the subject of this 

hearing, is to give them allowances. And, actually, it is a substantial amount of money. It is $9.4 billion in the House bill, 15 percent. So, this is quite significant, and we believe that will cover 

competitiveness impacts for a pretty substantial period of time. 

Senator CANTWELL. Mr. Horlick? 

Mr. HORLICK. Just to add one thing. As I understand it, and obviously people differ on the numbers, industrial manufacturing use 

or manufacturing emission of greenhouse gases in the U.S. is only 

about 6 percent of the total, so this is not an unsolvable problem, 

an unsolvable problem in terms of giving them allowances, et 

cetera. Once you get into energy and transportation, it gets a lot 

harder, because the numbers are bigger. 

Senator CANTWELL. Where does the money come from to pay for 

the allowances? 

Mr. HORLICK. Well, the allowances—in effect, the government— 

I should not say this—is creating money by—they are printing—— 

Senator CANTWELL. Mr. Horlick, I think you have said it exactly 

right. [Laughter.] 

Mr. HORLICK. Sorry. By creating allowances, which is something 

of value, they will be giving them to some people. And that is not 

automatically bad, as I said, on the manufacturing side, it is just 

not that big a number. 

The minute you get to household use and transportation use in 

the U.S., as I understand it—and I would defer certainly to both 

of the other witnesses—it becomes a much harder number. The 

only thing I would add is the need to learn from experience. As I 

understand it—and I believe there is a later hearing at a different 

committee today—the European Union’s initial attempt at this 

was, they gave utilities the allowances, and the utilities raised the 

prices anyhow. 

Senator CANTWELL. That is because they were not regulated. But 

the proposal here is not to regulate them either, and we already 

had the hearing with the EU representatives. This is exactly what 

they told us, that we made mistakes in giving away too many allowances, and prices still went up and consumers were not protected. To say, all right, UTCs, you go do that, I think is problematic. 

I did want to ask, quickly, about the exporters of energyintensive commodities, because we are asking the other question, 

which is the import issue. But if carbon controls make energy more 

expensive, will that not impact the competitiveness of some of our 

exporters? 

Mr. HORLICK. I am glad you asked that, because competitiveness 

is both sides, it is exporters as well as importers. You could well 

be penalizing U.S. exporters substantially. To go back to basics, 

under WTO rules, if you had a pure VAT-like energy tax—I am not 

saying I advocate it, I am just using it as a baseline—then you 

could rebate that on exports. It is what every VAT system does. 

18 

Once you get into permits, that gets really hard to do, and you 

run the risk, which is why the committee obviously should be concerned, of raising the cost for exporters, possibly several times if 

they are buying imported inputs, and you cannot give them export 

subsidies under WTO. This is really complicated. 

I would note, again, a note of reality: it is not just the Apple 

iPod. The best example is the U.S. automobile industry, which is 

a fully integrated industry in North America and all three countries. In the Pacific Northwest, there is a regional compact to look 

at this. It is the same land mass. 

Senator KERRY. Senator Conrad? 

Senator CONRAD. Thank you, Mr. Chairman. Thanks to the witnesses who are here today. We appreciate very much your taking 

the time and effort to be here to help the committee in its deliberations. 

I am interested in whether you think the definition of ‘‘tradeexposed’’ should be expanded from industries that have significant 

export components to those that might be vulnerable on an import 

basis? I do not know if anybody else has asked that question, but 

it is of considerable interest to me. 

As I understand Waxman-Markey, they are focused on those that 

have significant export business. But, how about the flip of that? 

How about businesses that would be exposed to imports and be unfairly affected as a result? And, I could just go down the line. Dr. 

Yager? 

Dr. YAGER. Yes. Actually, I think that Waxman-Markey does 

focus on imports and looks at the share of imports. The graphs that 

we have in both the written statement as well as in the report use 

trade intensity, and the basis there is on the importance of imports 

for each of those industries and sub-industries. 

But I think you made a good point, that there are certain industries in the United States that are very strong exporters, and some 

of the issues could be competing with other countries in third markets where there could be that differential, for example, in the cost 

of energy to the U.S. producers that might face a tax and foreign 

producers that may not. I think when we went out and spoke to 

experts about this, as many people have mentioned already in the 

hearing, just about everyone that we spoke to indicated that international agreement is the most preferable method to solving this, 

because otherwise you may assist certain producers, for example, 

in the border measure or with output-based rebates, but by far the 

most comprehensive treatment would be international agreement. 

Senator CONRAD. All right. Ms. Claussen? 

Ms. CLAUSSEN. Senator, that was a great answer. [Laughter.] 

Senator CONRAD. Dr. Yager. I have been here 23 years. I do not 

think I have ever seen one witness complimenting another. 

Mr. Horlick? 

Mr. HORLICK. Let me join the crowd. Yes, we should look at export impacts, as well as import impacts. I just add, for technical 

reasons, in WTO law and lore, it may be better to base permit allocations on energy intensity rather than on trade factors. That 

might help your legal case. 

Senator CONRAD. Let me ask another round with respect to the 

three of you. Is there anything that you have heard from any of the 

19 

other witnesses here that you would take exception to or have a 

different take on? 

Dr. YAGER. No. 

Ms. CLAUSSEN. No. 

Mr. HORLICK. I do not believe there has been much difference 

now. And we did not coordinate in advance. 

Ms. CLAUSSEN. And we come from different kinds of places. 

Senator CONRAD. So, you do not have a disagreement or a different take on any of the issues that have been before us here this 

morning? 

Dr. YAGER. I should mention that, when we did our work to provide the report for the Finance Committee and also for the statement, we interviewed a number of experts, including, of course, 

Pew experts and also other legal advisors. So, we actually believe 

that this does represent the majority of the views that we heard, 

and they are now represented in the GAO report. 

Senator CONRAD. Let me ask this, if I could. Whatever testimony 

you have provided here, separate and apart from that, as somebody 

knowledgeable in the area, what is the thing that most concerns 

you about going forward? In your view, as you were thinking in 

preparation for this hearing, what is the thing that you would want 

to make certain that we are focused on, because it concerns you? 

Mr. Horlick? 

Mr. HORLICK. It was the last point in my testimony, and it is the 

one I do not think enough attention has been paid to—the sheer, 

practical way this is going to work. If one country requires a permit 

and another has a border tax or there is one country that has a 

green permit, another that has a red permit, and they have different requirements. We have spent 60 years trying to simplify 

matters. I am not talking about raising tariffs or lowering them, 

just having the same document or the same categories. So the idea 

that we would have every country that would do its own thing 

without coordinating is scary. 

Senator CONRAD. If I could just follow up, how big a danger is 

that? 

Mr. HORLICK. Quite large, as I mentioned in my testimony. I do 

a lot of work on agricultural exports where, to be blunt, on the BSE 

thing, every country has a different set of requirements—on the 

shop floor, someone is shipping beef to Korea that has a slightly 

different requirement than shipping beef to Japan, and you run 

into problems all the time. 

Senator CONRAD. It is interesting you raise this. I was just home 

during the July 4th break. One of the major agricultural exporters 

in my State raised this specific concern. He said, look, Kent, we 

have a hard enough time dealing with all the different requirements. This is an agricultural exporter that takes identitypreserved grains of different kinds, ships them identity-preserved, 

and of course they get premium pricing for that. And the concern 

that he raised with me is these differential requirements across 

borders. 

Ms. Claussen, what would be your answer? 

Ms. CLAUSSEN. I should say up front that we like a great deal 

that is in the House-passed bill, but when we look at the border 

measures, there are a couple of things that really concern us. 

20 

For one thing, there is no presidential discretion in how they are 

applied. It becomes almost automatic. The test in the end is countries having programs that are as stringent as ours, which I think 

is not helpful, because in the early stages developing countries will 

have different kinds of commitments. I think they should be 

measureable and verifiable and reportable and binding, but I do 

not think they are going to be the same. And yet there is no presidential discretion, so that is one thing that really concerns me. 

The other thing is that it is actually very hard to tell from the 

House language what is included and what is not, what goods this 

would be applied to, or how EPA would determine the carbon footprints of any of those goods. And I realize that can be done in an 

administrative way, but it is totally unclear if you are including everybody, or just a few people, or all kinds of goods, or just a few. 

So, there are lots of things about how this is structured that I 

think give us a lot of pause. 

Senator CONRAD. All right. I am over time. 

Senator KERRY. I appreciate your question. I think it is important. I will just say very quickly, we have already come to the conclusion, in working on the Senate bill, that we are going to try to 

change that provision with great difficulties in it. We have not 

landed yet completely on where we come out, so this is helpful 

today. We need your input, everybody. 

I would say to Senator Cantwell, just quickly, that the Europeans began very ineffectively. I remember in the Kyoto negotiations, they did not believe in trading at all. In fact, they fought it. 

They thought it was an American scheme not to reduce emissions 

at all by allowing this trading to go on. And, so they began reluctantly, and frankly casually, and they gave out allowances and did 

a lot of things. They made mistakes. 

Now they have actually tuned their market and they have made 

a number of corrections that are important as we think about how 

we do it. But we also have lessons from our own SO2 market, the 

SO2 market that we created in the 1990 Clean Air Act. So, we have 

had a market. 

The second thing I would say to you is, we are going to regulate 

on the Senate side. We want to avoid speculation. We know that 

some Senators are concerned about that, so we are going to come 

up with a mechanism. 

And, third, it is not quite accurate or fair to say that we are really just printing money. What we are doing is creating, we are 

commoditizing something that does not exist today, that is sort of 

out there, which is the concept of these reductions. We create the 

commodity by setting up a regulatory structure, so suddenly it has 

value. We do not print any money, we do not take anything out of 

the Treasury, and there is no Federal deficit add-on here. This is, 

in fact, creating a marketplace through the regulatory process. I 

think that we need to think about it in that context. 

Senator Nelson? 

Senator CANTWELL. If I could, Mr. Chairman, respond to that. 

Senator KERRY. Yes. Please. Absolutely. 

Senator CANTWELL. I think the main improvement the EU is 

looking at is going to 100-percent auction. I think that learning 

from the Europeans is something that is very important. I think 

21 

the fact that the Europeans have now had incidents of people taking carbon futures and cutting them up and slicing them up into 

tranches and trying to sell them, similar to what we did with the 

credit default swaps, is something that we should be paying attention to. And so I look forward to the improvements that you 

think—— 

Senator KERRY. Well we want no derivatives, no games,—— 

Senator CANTWELL. Thank you, Mr. Chairman. 

Senator KERRY. I could not agree with you more. 

Senator Nelson? Let me just say to colleagues, the vote has started. There are 14 minutes. So Senator, you should have time, here. 

Senator NELSON. I will make it quick. Paul Krugman has said 

we ought to have a punitive carbon tax against the Chinese goods 

that come in. What do you think about that? 

Mr. HORLICK. Well, just to start, as I understand it, their largest 

export is clothing, which has very little carbon footprint. I suspect 

Professor Krugman was looking for some sort of lever to get the 

Chinese to agree to a binding international agreement. I think that 

there will not be an agreement unless every country comes with 

some sort of motive. 

I have also heard people say that such a tax would lead the Chinese not to participate. So, you can argue it both ways. 

It would have, as I mentioned and the other witnesses mentioned—you also have to see all the other impacts to say it is a punitive tax on the Chinese. To take my Apple iPod example, of the 

$299 retail price, only $4 stays in China, $130 is in the U.S. So, 

as I say, that is just an example. I want to see where the tax winds 

up. It could be here. 

Senator NELSON. All right. Now, one of the things that China is 

trying to do, government directive, is get into energy efficiency and 

the renewable energy, green energy, and so forth. And if they outpace us, as was recently expressed in Tom Friedman’s column, 

what are the implications for all of that for us? 

Ms. CLAUSSEN. Maybe I can answer that. I think there is going 

to be, in the future, a huge market for clean energy. We should 

compete in that market. We should win in that market. I think the 

best way for us to do that is to move some legislation that puts a 

price on carbon, which will provide a great incentive for renewable 

and cleaner energy, so that we can move as fast as possible to fill 

the market demand, and it is going to be a global one. 

Dr. YAGER. I have nothing to add, Senator Nelson. 

Senator NELSON. Thank you, Mr. Chairman. I know we have the 

vote. 

Senator KERRY. I really appreciate your participation. If I can 

just ask you, sort of, give me a summary here. We have to reduce. 

We have to get the world to reduce. We are going to go to Copenhagen, and hopefully, we all come up with an agreement. In your 

judgment, what is the best mechanism by which we can turn to the 

American people and look them in the eye and say, yes, you are 

going to be helping to reduce, but so are they, and, if they do not, 

here is what is going to happen? Mr. Horlick? 

Mr. HORLICK. The trade threats always sound good, but—— 

22 

Senator KERRY. I understand that. You have said that. Everybody gets that here. What is the mechanism that does not just 

sound good, but might be effective? 

Mr. HORLICK. Incentives work better than threats. What incentives do other countries have to reduce their emissions; indeed, 

what incentives do we have? The first one, actually, is the impacts 

on their physical—— 

Senator KERRY. What if the incentive is not working fast enough 

that they meet the goal and we do? What if the incentive is not 

sufficient? I mean, if they build 500 coal-fired plants as you have 

heard described? 

Now, I do not think they are going to do that. What I have heard 

in China is, first of all, they are moving down the nuclear road. 

They have tripled their wind power targets. They are going to be 

doing a huge amount on solar. They are going to lead us in solar. 

If we do not get our act together, we are going to be chasing China 

in 3 or 4 years, and people had better focus on that quickly. 

Ms. CLAUSSEN. I think that is the answer. I mean, the future of 

all of this is in clean energy. Whoever gets there first will have a 

wider share of the market. The best way to get there is by dealing 

with this problem in a constructive energy and climate piece of legislation. That will benefit us, and I think that is the point that we 

have to keep making. 

Senator KERRY. Well, we need to close, and I need to go vote, because I have to chair this other meeting. I will just close by saying 

to you I want to emphasize what Senator Cantwell said. She and 

I were just talking about it a moment ago. The internet, which 

drove the 1990s bubble and created an enormous wealth in our 

country and millions of jobs, is a trillion-dollar market. It has 

about—I forget the numbers of millions of users—about a billion 

users. One billion users for a trillion dollars of market. The energy 

market is a $6-trillion market and has about 4.5 billion eligible 

users. 

Now, as Senator Cantwell said, that is the mother of all markets. 

If you want to talk about Googles, or Microsofts, or whatever, the 

next four or five energy equivalents are going to go to the winners 

here, the people who get there first. 

Ms. CLAUSSEN. Exactly. 

Senator KERRY. And that is why China is moving so aggressively 

to be the world’s number one electric car producer. That is the solution for Senator Stabenow, for Detroit, and so forth. So, I hope we 

can get that appropriate focus in these next months. 

Dr. Yager, thank you. This study is going to be important to us. 

It is helpful. It isolates those industries that will or will not be affected, how they will be, and it will help us to be able to figure out 

some of the allowance component of this as we go forward. 

Dr. YAGER. Thank you, Chairman Kerry. 

Senator KERRY. Senator Conrad, you are recognized. I am going 

to leave the hearing in your hands, if you do not mind. Have you 

voted already? 

Senator CONRAD. The hearing is adjourned. [Laughter.] 

Senator KERRY. That is the best you have ever been. 

Senator CONRAD. I learned that from Joe Biden. 

[Whereupon, at 11:15 a.m., the hearing was concluded.] 

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