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34–079 PDF 2007

S. HRG. 110–9

EIA ANALYSIS OF DRAFT CLIMATE CHANGE

LEGISLATION

HEARING

BEFORE THE

COMMITTEE ON 

ENERGY AND NATURAL RESOURCES 

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

ON

ANALYSIS RECENTLY COMPLETED BY THE ENERGY INFORMATION ADMINISTRATION, ‘‘ENERGY MARKET AND ECONOMIC IMPACTS OF A 

PROPOSAL TO REDUCE GREENHOUSE GAS INTENSITY WITH A CAP 

AND TRADE SYSTEM’’

JANUARY 24, 2007

(

Printed for the use of the 

Committee on Energy and Natural Resources 

(II)

COMMITTEE ON ENERGY AND NATURAL RESOURCES 

JEFF BINGAMAN, New Mexico, Chairman 

DANIEL K. AKAKA, Hawaii 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

TIM JOHNSON, South Dakota 

MARY L. LANDRIEU, Louisiana 

MARIA CANTWELL, Washington 

KEN SALAZAR, Colorado 

ROBERT MENENDEZ, New Jersey 

BLANCHE L. LINCOLN, Arkansas 

BERNARD SANDERS, Vermont 

JON TESTER, Montana 

PETE V. DOMENICI, New Mexico 

LARRY E. CRAIG, Idaho 

CRAIG THOMAS, Wyoming 

LISA MURKOWSKI, Alaska 

RICHARD BURR, North Carolina 

JIM DEMINT, South Carolina 

BOB CORKER, Tennessee 

JEFF SESSIONS, Alabama 

GORDON H. SMITH, Oregon 

JIM BUNNING, Kentucky 

MEL MARTINEZ, Florida 

ROBERT M. SIMON, Staff Director 

SAM E. FOWLER, Chief Counsel 

FRANK J. MACCHIAROLA, Republican Staff Director 

JUDITH K. PENSABENE, Republican Chief Counsel 

JONATHAN BLACK, Professional Staff Member 

KATHRYN CLAY, Republican Professional Staff Member 

(III)

C O N T E N T S 

STATEMENTS 

Page

Bingaman, Hon. Jeff, U.S. Senator from New Mexico .......................................... 1

Domenici, Hon. Pete V., U.S. Senator from New Mexico ..................................... 2

Gruenspecht, Howard, Deputy Administrator, Energy Information Administration, Department of Energy ............................................................................ 3

Grumet, Jason S., Executive Director, National Commission on Energy Policy 28

Lashof, Daniel A., Ph.D., Climate Center Science Director, Natural Resources 

Defense Council .................................................................................................... 14

Smith, Anne E., Ph.D., Vice President, CRA International ................................. 21

Sterba, Jeffry E., Chairman, President and CEO, PNM Resources .................... 10

APPENDIX 

Responses to additional questions .......................................................................... 53

(1)

EIA ANALYSIS OF DRAFT CLIMATE CHANGE 

LEGISLATION 

WEDNESDAY, JANUARY 24, 2007 

U.S. SENATE, COMMITTEE ON ENERGY AND NATURAL RESOURCES, Washington, DC. 

The committee met, pursuant to notice, at 9:45 a.m., in room 

SD–366, Dirksen Senate Office Building, Hon. Jeff Bingaman, 

chairman, presiding. 

OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. 

SENATOR FROM NEW MEXICO 

The CHAIRMAN. Alright, why don’t we go ahead and get the committee hearing started. Let me indicate that today we are going to 

have testimony on the Energy Information Administration’s report 

on Draft Climate Change Legislation. Also, we are going to take action on three routine business matters. 

In the interest of time, rather than waiting to get a reporting 

quorum, I think we need to just start with our hearing and advise 

everybody that if we get 12 Senators in the room we are going to 

interrupt everyone at that point and do these three business items 

which need to be done with the 12 Senators, but that may be a 

while. So, let me just welcome all the witnesses and make a short 

statement here and then ask Senator Domenici for the statement 

that he has and then introduce the witnesses. 

Thank you all for being here. This hearing will focus on this Energy Information Administration Analysis of the Draft Global 

Warming Legislation and the economic impact that that would 

have on our country. Last year several of us, Senators Specter and 

Lugar as well as Senators Landrieu, Salazar, and Murkowski here 

on this committee, submitted draft legislation to the EIA asking 

them to look at it and I appreciate those members joining in that 

request. The draft was the culmination of over a years worth of 

work. It began with an EIA analysis of the Climate Proposal by the 

National Commission on Energy Policy which was 18 months or 

more ago. 

Over the past Congress we visited the issue on the floor; we had, 

under Senator Domenici’s leadership, a day-long workshop here in 

this committee with 29 participants to explore the design features 

of a cap and trade proposal. We received this EIA analysis as a 

next step. We asked for it as a next step in trying to craft legislation that would be appropriate to deal with this issue. We circulated this draft. Senator Specter and I have initiated the process 

of trying to improve on the draft and having this hearing, which 

2

I think gets us started in that process. We also hope to have more 

hearings on the issue of climate change. Sir Nicholas Stern is 

scheduled to testify before our committee next month. I hope that 

will give the committee another chance to review the impacts of 

global warming and the impacts of delaying action on global warming. 

There are obviously a lot of different parts to this issue. It is a 

complex issue. I hope that as many members as are willing to, will 

engage themselves and take the time to try to understand and settle on their views on the various issues that are raised, so I appreciate very much the time and the effort that Senator Domenici and 

his staff have committed to this very difficult set of issues, as well 

as other members of the committee. I call on Senator Domenici for 

his statement before we hear from the witnesses. 

STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR

FROM NEW MEXICO 

Senator DOMENICI. Thank you very much, Senator Bingaman. I 

note that we might let it be known to the staff that if we get a couple of more Senators, we have 12, and that whenever there’s 12, 

we will stop and turn it back over to you so you can have the business meeting and pass the three business items that are sitting 

around and I think that would be good. 

I want to add my thanks to yours regarding the witnesses for 

taking time out of their busy schedules for participation in this 

hearing today. I thank each one of you. I did not get a chance here 

this morning yet, but I do now. 

In his State of the Union address last night, the President laid 

out an ambitious, but worthy, goal to reduce the consumption of 

gasoline by 20 percent in 10 years. I applaud the President’s leadership in emphasizing the importance of alternative fuels and vehicle fuel efficiency. The efforts will enhance our National Energy Security, as well as decrease emissions from greenhouse gases. However, I was disappointed that the President gave little attention to 

the tremendous promise that nuclear energy holds for this Nation. 

Expanding our use of nuclear power is the single most significant 

thing we can do to confront climate change. In the last Congress, 

Senator Bingaman and I started a bipartisan discussion in this 

committee to consider the climate change issues. I am pleased that 

we are continuing the discussion into the 110th Congress. Another 

Senator has arrived. Senator Bingaman and I released a white 

paper on climate change which laid out the key questions and the 

design challenges for a mandatory program for limiting greenhouse 

gas emissions. At our Climate Conference last April, we received 

more than 150 submissions at our Climate Conference, excuse me, 

that contained more than 500 individual documents. Imagine that, 

people truly are interested and go a long way and give a lot of their 

time and energy to help us understand what is happening. We 

have had a very productive discussion on climate, and we have 

learned a lot so far. 

I am aware that many in the scientific community are warning 

us that something needs to be done. We still have a lot of questions 

before us, though. With this hearing we are continuing a search for 

answers that are meaningful, economically feasible and that will 

3

produce real reductions in greenhouse gas emissions. It is clear to 

me that developing a system of mandatory controls on carbon emissions could be a daunting task. Controls must be effective. They 

must produce significant emission reductions to be meaningful. The 

cost of such controls should have the least possible overall negative 

effect on our economy and any burdens must be quite as equitable 

as they have been, as they can possibly be. And we must be sure 

that we do not impose costs on our industry that will drive them 

to impose costs that will drive them to relocate in countries such 

as India and China that do not have similar controls on carbons. 

I believe an essential part of any response to climate change is to 

double, maybe triple, our commitment to developing new technologies. Research and development funding, both public and private, is vital to addressing any of our Nation’s energy challenges, 

and the climate change issue is no exception. I look forward to 

learning more from today’s hearings. 

Thank you Mr. Chairman and thank the Senators who are here 

and the others who will be coming that are interested in this issue. 

The CHAIRMAN. Thank you very much. Why don’t we just start? 

Let me introduce the panel of witnesses here and then we will 

start from the left and just go across and hear the testimony of 

each. Our first witness is Howard Gruenspecht, who is the Deputy 

Administrator with the Energy Information Administration in the 

Department of Energy and he is the person who has been the lead 

on this analysis that we have asked for. In addition, of course, Jeff 

Sterba is chairman and president and CEO of the PNM Resources 

in New Mexico, a company we are very proud of in our State. We 

appreciate Jeff’s leadership and willingness to testify today. Daniel 

Lashof who is the climate center deputy director for the Natural 

Resources Defense Council, we very much appreciate you being 

here. Anne Smith who is the vice president for CRA International 

here in Washington, thank you for being here and Jason Grumet 

who is the executive director for this National Commission on Energy Policy that the Hewlett Foundation established a couple of 

years ago and has been the moving force behind getting the draft 

legislation that is being analyzed by the Energy Information Administration prepared. 

Why don’t we do this, Howard, would you go ahead and take 

whatever time you need to give us the analysis you went through 

and then your conclusions and then I will ask each of the other witnesses to take 5 minutes or so and summarize their comments, either about the analysis or any other point they want to make and 

then we will take questions. Howard, go ahead. 

STATEMENT OF HOWARD GRUENSPECHT, DEPUTY ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION, DEPARTMENT OF ENERGY 

Dr. GRUENSPECHT. Thank you Mr. Chairman, Senator Domenici 

and members of the committee. I appreciate the opportunity to appear before you today. 

The Energy Information Administration is the independent statistical and analytical agency in the Department of Energy. We do 

not promote, formulate or take positions on policy issues and our 

views should not be construed as representing those of the DepartVerDate 0ct 09 2002 11:57 Mar 22, 2007 Jkt 001109 PO 34079 Frm 00007 Fmt 6633 Sfmt 6633 H:\DOCS\34079.TXT SENERGY1 PsN: RSMIT
4

ment or the administration. As requested, my testimony focuses on 

EIA’s recent analysis of the energy and economic impacts of a capand-trade program for greenhouse gas emissions. Our report compares energy and economic outcomes incorporating the proposal 

provided to us by the chairman and five colleagues to those of the 

reference case of the Annual Energy Outlook 2006. As noted in my 

written testimony there are many uncertainties inherent in any 

long term projection, particularly over a 25-year period, but the examination of differences across cases can provide some robust insights. Also, while EIA has recently updated its reference case in 

the Annual Energy Outlook 2007, an analysis starting from the 

new outlook would likely produce results that are very similar to 

those in our report, given the relatively modest changes between 

the 2006 and 2007 outlooks. My discussion of key findings will 

focus on the Phased Auction case, which was one of the cases we 

were asked to look at, which provides for the direct allocation of 

some emissions allowances and the auctioning of others with the 

share that would be auctioned rising over time as specified in the 

proposal. 

Starting with energy price impacts, the cap-and-trade proposal 

requires fossil fuel suppliers to submit emissions allowances that 

reflect the carbon dioxide emitted when the fuel is burned. The cost 

of the allowances raises the energy prices paid by the end users. 

Figures 1 and 2 of my written testimony summarize the price impacts, which are all expressed in real 2004 dollars and include the 

value of allowances. The average retail gasoline price under the 

program is 3 percent higher in 2020 and 5 percent or 0.11 cents 

higher in 2030 compared to the reference case. The price impact in 

2030 reflects the operation of the safety valve feature of the program. In terms of natural gas, the program is projected to increase 

the average delivered natural gas price by about 6 percent in 2020 

and by 11 percent in 2030. 

The projected percentage increase in delivered coal prices to electric generators, 48 percent in 2020 and 81 percent in 2030, is significantly larger than those expected for oil products and natural 

gas. This result reflects coal’s higher carbon content per unit of energy and its lower price in the reference case compared to both oil 

and natural gas. 

In the Phased Auction case, where significant quantities of allowances are given free of charge to electricity generators, electricity 

prices are estimated to be 4 percent higher than in the reference 

case in 2020 and 11 percent higher in 2030. Projected electricity 

price impacts—another sensitivity we were asked to look at—in the 

Full Auction case, where all allowances are auctioned, are somewhat greater. The difference in impacts reflects the assumed passthrough to ratepayers of the value of allowances given to electric 

generators who are subject to State-level, cost-of-service regulation 

in the Phased Auction case. So this is an example where State and 

Federal policies interact. It is also the case that electricity price impacts vary across States and regions, so I am giving a national 

number, but there is definitely a different impact across different 

parts of the country that we can talk about. 

Projected effects on oil and natural gas use are limited by the 

modest changes in their delivered prices and the limited availVerDate 0ct 09 2002 11:57 Mar 22, 2007 Jkt 001109 PO 34079 Frm 00008 Fmt 6633 Sfmt 6633 H:\DOCS\34079.TXT SENERGY1 PsN: RSMIT
5

ability of economical substitute fuels in the transport sector and 

other applications where these fuels are used. However, projected 

coal consumption is reduced relative to the reference case by 4 percent in 2020 and by 20 percent in 2030, due mainly to the shift in 

the generation fuel mix that is driven by higher delivered coal 

prices. The displaced coal generation is largely replaced by generation from nuclear and renewable energy. So, Senator Domenici 

would be happy to hear that given his remarks. 

Figure 4 of my written testimony shows the projected impacts on 

electric generation capacity additions of this program and if you 

look at the Figure you can see that the amount of projected coal 

capacity additions falls rather dramatically, but the projected nuclear capacity additions and renewable capacity additions increase 

rather dramatically. The proposal also significantly reduces the 

economic attractiveness of coal-to-liquids conversions, so again it is 

the coal prices that are mostly affected and it is the new builds of 

coal plants and coal-to-liquids that are affected. However, despite 

the reduction in coal power generation and CTL conversion relative 

to baseline growth estimates, coal use is still projected to remain 

above its 2004 level through 2030. 

Figure 5 of the written testimony shows projected emissions reductions and they consist of a mix of non-energy related reductions 

which play an important, but declining role over time. They account for 57 percent of the reductions that are projected to occur 

in 2020 and 35 percent of the reductions that are expected to occur 

in 2030. So over time, the share that energy-related reductions contributes increases. Because the Safety Valve in the proposal is projected to be triggered in 2026 the specified greenhouse gas intensity targets are not fully attained beyond that date. Emissions rise 

slowly during the first phase of the program, but decline thereafter. 

Turning finally to economic impacts, Figure 6 shows projected effects on the level of real Gross Domestic Product and personal consumption. By 2030, real GDP in the Phased Auction case is projected to be 0.26 percent lower than the reference case level; 0.26 

percent is $59 billion in year-2000 dollars. The economy is very big 

so even small percentage changes are a lot of money. The total reduction in discounted real GDP over the 2009-2030 period is 0.10 

percent, which is $232 billion, relative to the reference case. Should 

I stop? 

The CHAIRMAN. Howard, could I just ask you to interrupt your 

testimony for a minute. We have our 12 Senators to do this business meeting. Let me just get that out of the way. 

[RECESS] 

The CHAIRMAN. Howard, why don’t you continue with your excellent testimony? Now the exit of a few of these members should not 

be seen as any lack of confidence in your testimony. 

Dr. GRUENSPECHT. I have a thick skin, but in any event, I was 

saying that real total reduction in discounted real GDP over the 

2009 to 2030 period is 0.10 percent, relative to the reference case. 

Impacts on projected real consumption—I know there is a lot of 

focus on GDP but consumption is probably a different way to look 

at well-being—shown in figure 6 are somewhat larger. GDP and 

consumption impacts for the Full Auction case are larger than 

those for the Phased Auction case, due to the assumption that the 

6

much higher auction revenues in the Full Auction case—when all 

of the permits, all the allowances, are auctioned, rather than some 

of them being given away—are not re-circulated into the economy 

beyond the $50 billion in expenditures from the proposed Climate 

Change Trust Fund that is part of the proposal. This result could 

change under a different revenue recycling assumption and does 

not imply a general conclusion that a Full Auction will necessarily 

have larger impacts than a Phased Auction. Mr. Chairman, that 

concludes my testimony and I would be happy to answer any questions you might have. 

[The prepared statement of Dr. Gruenspecht follows:]

PREPARED STATEMENT OF HOWARD GRUENSPECHT, DEPUTY ADMINISTRATOR, ENERGY

INFORMATION ADMINISTRATION, DEPARTMENT OF ENERGY

Mr. Chairman, and members of the Committee, I appreciate the opportunity to 

appear before you today. As requested in your invitation, my testimony focuses on 

the Energy Information Administration’s (EIA’s) recent analysis of the energy and 

economic impacts of a cap-and-trade program for greenhouse gas (GHG) emissions. 

The proposal we evaluated, sent to us by Chairman Bingaman and Senators 

Landrieu, Lugar, Murkowski, Salazar, and Specter in September 2006, would set 

specific targets for the reduction of GHG emissions intensity of the U.S. economy 

and incorporate a safety valve to assure that allowance prices remain at or below 

a ceiling that rises over time. 

EIA is the independent statistical and analytical agency within the Department 

of Energy. We are charged with providing objective, timely, and relevant data, analyses, and projections for the use of the Congress, the Administration, and the public. 

Although we do not take positions on policy issues, we do produce data and analyses 

to help inform energy policy deliberations. Because we have an element of statutory 

independence with respect to this work, our views are strictly those of EIA and 

should not be construed as representing those of the Department of Energy, the Administration, or any other organization. 

EIA’s analysis (Energy Market and Economic Impacts of a Proposal to Reduce 

Greenhouse Gas Intensity with a Cap and Trade System (SR/OIAF/2007-1)), released 

earlier this month, compares cases incorporating the cap-and-trade proposal to those 

in the reference case of the Annual Energy Outlook 2006 (AEO2006). AEO2006 is 

based on Federal and State laws and regulations in effect as of October 2005. It has 

recently been superseded by AEO2007, which updates the projections to current 

laws and regulations and our current analysis of market conditions. However, given 

the relatively modest changes between AEO2006 and AEO2007, an analysis starting 

from the new Outlook would likely produce results that are very similar to those 

I will review today. 

The projections included in EIA’s reference and policy cases, which extend 

through 2030, are not meant to be exact predictions of the future but represent likely energy futures, given technological and demographic trends, fixed laws and regulations, and consumer behavior as derived from available data. EIA recognizes that 

projections of energy markets over a 25-year period are highly uncertain and subject 

to many events that cannot be foreseen such as supply disruptions, policy changes, 

and technological breakthroughs. In addition to these phenomena, long-term trends 

in technology development, demographics, economic growth, and energy resources 

may evolve along a different path than expected in the projections. For this reason, 

the AEO includes many alternative cases intended to examine these uncertainties. 

Generally, projected differences between cases, which are the focus of our report, are 

likely to be more robust than the specific projections for any one case. 

EIA’s complete report, which includes a description of the proposal (and its full 

text as an Appendix), our modeling approach and our results, as well as a discussion 

of uncertainties and caveats, has been provided to the Committee and is publicly 

available on our web site. My testimony summarizes key findings, focusing on the 

Phased Auction case, which provides for the direct allocation of some emissions allowances and the auctioning of others, with the share to be auctioned rising over 

time as specified in the proposal. It outlines projected impacts on energy prices, energy use, GHG emissions, and economic activity, as well as the sensitivity of the 

results to technology and other uncertainties. It also provides some comparisons to 

results from other EIA analyses of policies to limit GHG emissions. 

7

* Figures 1-6 have been retained in committee files. 

ENERGY PRICES

The cap-and-trade proposal requires that fossil fuel suppliers submit emission allowances that reflect the carbon dioxide emitted when the fuel is burned. Fuel suppliers would presumably pass on the cost of the allowances to consumers, leading 

to increases in fuel prices. As a secondary effect, however, reduced demand for fossil 

fuels could lower their supply cost at the wellhead or the minemouth, offsetting 

some of the price increase due to allowances. When these effects are taken together, 

however, the cost of allowances tends to dominate, so the energy prices paid by end 

users generally rise. 

Figures 1 and 2 * summarize the program’s impacts on energy prices, which are 

all expressed in real 2004 dollars and include the value of allowances. The average 

retail gasoline price is 6 cents per gallon (3 percent) higher in 2020 and 11 cents 

per gallon (5 percent) higher in 2030 than in the reference case. Because the safety 

valve caps the price of GHG allowances at $5.89 per metric ton of carbon dioxide 

(CO2) in 2012, rising to $14.18 per metric ton in 2030, the maximum direct effect 

of the cap-and-trade policy on the delivered price of gasoline in 2030 is roughly 11 

cents per gallon (2004 dollars). 

The average delivered natural gas price is $0.41 per thousand cubic feet (6 percent) higher in 2020 and $0.88 per thousand cubic feet (11 percent) higher in 2030, 

largely because of the allowance price which is added to the delivered fuel costs. 

The average delivered coal price to electric generators, including the cost of emissions allowances, is $0.67 per million British thermal units (Btu) (48 percent) higher 

in 2020 and $1.22 per million Btu (81 percent) higher in 2030 than in the reference 

case. The much higher percentage change in delivered coal prices compared to the 

other fossil fuels reflects both coal’s high carbon content per unit of energy and its 

relatively low price in the reference case. 

Because electricity consumers capture the economic benefits of the allocation of 

GHG allowances to regulated utilities in areas of the country where electricity rates 

are set under cost-of-service regulation at the state level, projected impacts on the 

average delivered price of electricity are sensitive to decisions made regarding the 

allocation or auctioning of allowances. In the Phased Auction case, where significant 

quantities of allowances are given free of charge to electricity generators, electricity 

prices are estimated to be 4 percent higher than in the reference case in 2020 and 

11 percent higher in 2030. In the Full Auction case, where all allowances are auctioned, electricity prices are estimated to be 6 percent higher than in the reference 

case in 2020 and 13 percent higher in 2030. The difference between the Phased and 

Full Auction cases reflects the assumed passthrough to ratepayers of the value of 

allowances given to electric generators who are subject to state-level cost-of-service 

regulation in the Phased Auction case. Electricity price impacts also vary across 

states and regions. 

ENERGY USE

Impacts on energy use generally reflect both the size of the change in energy 

prices and the availability of substitutes and alternatives for each type of affected 

energy. Figure 3 summarizes projected impacts on energy use. Projected primary energy use is 1.7 quadrillion Btu (1 percent) lower in 2020 and 2.4 quadrillion Btu 

(2 percent) lower in 2030 as the cost of GHG allowances is passed through to consumers, providing an incentive to lower energy use and shift away from fossil fuels, 

particularly in the electric power sector. Relative to the reference case, fossil fuel 

energy consumption is 1.9 quadrillion Btu (2 percent) lower in 2020 and 8.1 quadrillion Btu (7 percent) lower in 2030, with almost all of the change accounted for by 

a reduction in the otherwise expected growth in coal use. 

The reduction in petroleum use relative to the reference case projection is less 

than 1 percent in 2020 and about 3 percent in 2030. Over 70 percent of oil is used 

in the transportation sector, where alternatives are limited. With impacts on retail 

gasoline prices starting at 6 cents per gallon in 2012 and growing to only 11 cents 

per gallon by 2030, only modest changes in vehicle purchase and travel decisions 

are expected, and there is no significant impetus to fuel switching. 

Impacts on projected natural gas use are also small. Natural gas consumption is 

0.3 quadrillion Btu (1 percent) lower in 2020 and 0.3 quadrillion Btu (1 percent) 

higher in 2030. The electric power sector reduces its use of natural gas in 2020, but 

increases its gas use in 2030, reflecting the impact of the proposal in substantially 

reducing the switch away from gas generation over the 2020 to 2030 period, when 

8

the reference case, by comparison, projects a substantial increase in new coal-fired 

capacity and coal generation. 

Projected coal consumption is significantly affected by the program. Relative to 

reference case projections, coal use is reduced by 1.2 quadrillion Btu, or 4 percent, 

in 2020 and more significantly reduced by 6.8 quadrillion Btu (20 percent) in 2030, 

due mainly to the shift in the generation fuel mix that is driven by higher delivered 

coal prices. In contrast to the situation in the transportation sector, a program that 

places even a modest value on GHG emissions encourages a significant shift towards alternative technologies such as nuclear and renewables in the electric generation sector. The proposal also significantly impacts the economic attractiveness 

of coal-to-liquids (CTL) conversion. Almost all of the CTL capacity that is projected 

to be built and operated in the reference case is not expected to be built if the capand-trade proposal is implemented. 

Figure 4 shows how the cap-and-trade proposal affects projected electric generation capacity additions over the 2004 to 2030 period. The projected capacity additions of conventional coal-fired technology decline to less than a third of the reference case level. Notwithstanding the decline in coal generation relative to the reference case, overall use of coal is expected to increase from its 2004 level, mainly 

due to increased utilization of existing coal plants. Thus, although allowance prices 

under the proposal are high enough to dissuade much of the construction of new 

coal plants that would otherwise occur in the 2015 to 2030 period, they are low 

enough that it is still attractive to use available coal capacity through 2030. As the 

program continues beyond 2030, allowance prices would likely continue to rise as 

the GHG emissions cap tightens and the price trigger for the safety valve increases, 

eventually resulting in the retirement of significant amounts of existing coal plants 

for economic reasons. Under such a scenario, the level of coal use beyond 2030 

would likely be sensitive to the future competitiveness of coal with carbon capture 

and sequestration relative to other very-low-carbon or carbon-free generating technologies. 

EMISSIONS

As shown in Figure 5, reductions in emissions of non-CO2 GHG emissions in the 

proposed program, which are not represented in a detailed fashion in the EIA National Energy Modeling System, are projected to account for 57 percent of the covered GHG emissions reductions in 2020 and 35 percent of the covered GHG emissions reductions in 2030. Estimates for non-CO2 GHG emissions were developed 

using emissions baselines and abatement cost curves based on engineering cost estimates that were supplied by the U.S. Environmental Protection Agency. Real-world 

factors affecting the behavior of decisionmakers and the use of incomplete cost information may result in an overstatement of the actual level of non-CO2 abatement 

achieved at each level of the allowance price. However, due to the safety-valve feature of the proposed cap-and-trade program, the projected energy sector and economic impacts would not change significantly even if the assumptions used regarding the supply of GHG abatement opportunities were too optimistic. Rather, such 

a situation would tend to drive the allowance price up to the safety-valve level earlier than projected in our analysis. 

Because the safety-valve in the cap-and-trade program is projected to be triggered 

in 2026, the specified GHG intensity targets in the proposal are not fully attained 

beyond that date. Total emission reductions in 2030 are estimated to be 654 million 

metric tons CO2 equivalent short of the level that would satisfy the GHG intensity 

reduction goal. 

ECONOMIC IMPACTS

Figure 6 shows the projected effect of the cap-and-trade policy on the projected 

level of real gross domestic product (GDP) and personal consumption for both the 

Phased Auction and Full Auction cases. By 2030, real GDP in the Phased Auction 

case is projected to be 0.26 percent ($59 billion in year-2000 dollars) below the reference case levels. The total reduction in discounted real GDP over the 2009 to 2030 

period is 0.10 percent ($232 billion) relative to the reference case. Impacts on projected real consumption, also shown in Figure 6, are somewhat larger, reaching 0.36 

percent ($55 billion) in 2030. The reduction in discounted real consumption over the 

2009 to 2030 period is 0.14 percent ($236 billion). 

As requested, EIA’s analysis also included a Full Auction case in which 100 percent of emissions allowances are auctioned beginning from the start of the cap-andtrade program in 2012. GDP and consumption impacts for this case are larger than 

those for the Phased Auction case, due to the assumption that the much higher auction revenues are not re-circulated into the economy beyond the $50 billion in exVerDate 0ct 09 2002 11:57 Mar 22, 2007 Jkt 001109 PO 34079 Frm 00012 Fmt 6633 Sfmt 6621 H:\DOCS\34079.TXT SENERGY1 PsN: RSMIT
9

penditures from the proposed Climate Change Trust Fund. This result could change 

under a different revenue recycling assumption, and does not imply a general conclusion that a Full Auction will necessarily have larger GDP impacts than a Phased 

Auction. 

TECHNOLOGY SENSITIVITIES

While the AEO2006 reference case used as the baseline in our analysis incorporates significant improvements in technology cost and performance over time, it 

may either overstate or understate the actual future pace of improvement, since the 

rate at which the characteristics of energy-using and producing technologies will 

change is highly uncertain. 

Although the cap-and-trade program includes provisions that allocate a portion of 

the allowance auction revenues for increased federal funding for research, development and deployment, EIA, consistent with its established practice in other recent 

studies, did not attempt to estimate how increased government spending might specifically impact technology development. In previous analyses, EIA has illustrated 

how the use of more optimistic assumptions about the timing and cost of advanced 

energy technologies tends to reduce projected energy use in both baseline and policy 

cases. Under more optimistic technology assumptions, specified emissions reduction 

targets can generally be reached at lower cost, and the safety-valve is less likely 

to be triggered. 

RELATIONSHIP TO PREVIOUS EIA GREENHOUSE GAS ANALYSES

In recent years, EIA has completed several other reports on policy proposals to 

limit or reduce GHG emissions. Our new report builds on these prior analyses (all 

of which are available on our web site), which taken together suggest that the economic impacts are largely determined by the size of the energy market change required to satisfy the policy and the speed with which the change must occur. From 

an energy and economic perspective, one key factor is the extent to which a proposed policy causes the economic obsolescence of existing energy system capital. 

In April 2005, EIA analyzed of the original policy proposal made by the National 

Commission on Energy Policy (NCEP), a nongovernmental, privately-funded entity. 

That proposal included a cap-and-trade program along with other recommendations. 

The emission reduction targets for the cap-and-trade program in the original NCEP 

proposal were less stringent than those evaluated in our new report, but the proposed program began in 2010 rather than 2012. In February 2006, EIA reported on 

the energy and economic impacts of several alternative cap-and-trade options, ranging from less stringent to more stringent than the one considered in our new report. 

Two EIA studies issued in 2003 and 2004 considered the original version of the 

Climate Stewardship Act (S. 139), which would cap GHG emissions at the 2000 level 

in 2010 and the 1990 level from 2016 on, and an amended version of that bill (S.A. 

2028) that removed a provision for a tightening of the emissions cap beginning in 

2016. These proposals have the same 2010 start date as the original NCEP proposal 

but they do not have a safety valve, and emissions are capped at a lower level than 

in the proposal analyzed in our new study. The reference cases for all studies completed before 2006, including EIA’s analyses of the Kyoto Protocol, differ significantly from the reference case for the present study, which incorporates significantly 

higher long-term real prices for oil and natural gas. 

Finally, while all reference and policy case projections are inherently uncertain, 

policy design differences can significantly affect the nature of uncertainty surrounding the projected energy and economic impacts of alternative policies to limit 

GHG emissions. Inclusion of a safety-valve feature in a cap-and-trade program 

would allow GHG emissions to rise above the level projected in our report in the 

event that emissions reduction inside or outside the energy sector proves to be more 

costly than we expect, while protecting against the prospect of larger energy system 

and economic impacts in these circumstances. In contrast, policies that impose a 

‘‘hard’’ cap on emissions without a safety-valve price for GHG credits would force 

the fixed GHG emissions target to be met regardless of cost, reducing uncertainty 

surrounding the GHG emissions outcome but increasing uncertainty regarding energy and economic impacts. Policy design differences can also influence the behavior 

of stakeholders after a policy is implemented. For example, interests primarily focused on the achievement of GHG emissions reduction targets are more likely to 

support the broad availability of low-cost options to reduce emissions, rather than 

insist on the use of particular technologies and the avoidance of others if a safetyvalve provision is included in a policy. 

This concludes my testimony, Mr. Chairman and members of the Committee. I 

would be pleased to answer any questions you may have.

10

The CHAIRMAN. Thank you very much. Before we present any 

questions to you why don’t we hear from each of the other witnesses on any points they think we need to understand either 

about this study or otherwise on the subject. Jeff Sterba, why don’t 

we start with you? 

STATEMENT OF JEFFRY E. STERBA, CHAIRMAN, PRESIDENT 

AND CEO, PNM RESOURCES 

Mr. STERBA. Good morning Chairman Bingaman, Senator 

Domenici and members of the committee. Thank you for inviting 

me here today. I am Jeff Sterba, chairman of the board, president 

and CEO of PNM Resources an energy holding company 

headquartered in New Mexico with subsidiaries in New Mexico and 

Texas. We operate in both competitive and regulated markets in 

both the wholesale and the retail arenas. I appreciate this opportunity to discuss what I believe is the single greatest long term environmental and economic challenge facing my industry, climate 

change. I would like to thank Chairman Bingaman and Senator 

Domenici for the bipartisan leadership that you have demonstrated 

on this issue. Previously, I have testified before this committee on 

key architectural details necessary for a comprehensive climate bill 

and I provided additional details in my testimony. 

This morning I would like to use my comment time to focus particularly on technology and certain economic elements associated 

with this issue. I believe the most significant risk facing my industry when it comes to addressing climate change is the duel challenge of meeting the growing electricity demand in an increasing 

cost environment and the state of low and zero emitting technologies and their costs. We need to address climate change in a 

three phase cost effective approach, partially to allow technology to 

catch up that is to slow it, stop it and then reduce the rate of 

growth, or reduce the actual level. The technologies needed to 

achieve the maximum goals in each of these phases have serious 

impediments to full deployment. We need to remove the barriers 

and provide gap funding to allow full deployment of technology that 

is available today such as nuclear and in the near future, such as 

carbon capture and sequestration that can slow greenhouse gas 

emissions and this must include renewables, nuclear energy efficiency, advanced coal and also cross over technologies, like plug-in 

hybrids. We must more rapidly advance the capacity to and the 

policy for capturing and storing CO at a much larger scale than is 

currently planned. This is integral to enabling coal to remain a viable fuel source for both economic and energy security reasons. 

Senator DOMENICI. Can we go back again in your testimony and 

talk again about the concept of slow it, stop it and then what else 

Mr. STERBA. And reduce. This is a concept that we have spoken 

of before in the last hearing and one that I strongly support. We 

must first work on slowing the rate of growth of carbon dioxide 

emissions and the key to that is increases in efficiency. For example, there are technologies where we can take existing coal fired 

powerplants and make them more efficient by for example, reblading the turbines which will effectively allow us to produce more 

energy for the same amount of fuel input. So the amount of carbon 

dioxide being emitted related to the amount of energy we are proVerDate 0ct 09 2002 11:57 Mar 22, 2007 Jkt 001109 PO 34079 Frm 00014 Fmt 6633 Sfmt 6602 H:\DOCS\34079.TXT SENERGY1 PsN: RSMIT
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ducing goes down. Alternatively, energy efficiency, the use of renewables, so we can slow the rate of growth then bring the rate 

of growth to zero and then decline so we reduce the emissions, that, 

the actual declination, must occur. But the question is, when must 

it occur and what are the technologies and their cost that we can 

use to get it to reduce and this slow, stop and reverse strategy 

which has been put forward by this piece of legislation that has 

been evaluated by EIA is a critical component to it Senator. 

Senator DOMENICI. Alright, thank you. Thank you for your time. 

Mr. STERBA. We also need a long term price signal to promote 

investment in cutting edge major capital projects such as clean coal 

and advanced nuclear so we can stop emissions growth while fueling our nation’s economic growth. I believe this is consistent with 

the application of a safety valve to mitigate economic impacts while 

low and zero carbon alternatives are limited and expensive. We 

need sufficient financial support for basic research but more importantly development, demonstration and deployment. The biggest 

gap we must address is from promising technology in the lab to the 

ability to purchase commercialized technology. Funding for near 

and mid-term technology initiatives, needs to begin occurring well 

in advance of mandated reductions so that cost effective means to 

achieve reductions are available when they are required. 

Let me recommend four specific actions that Congress and this 

committee can begin to take action on. First is the authorization 

and full funding of research, but particularly development, demonstration and deployment of more climate friendly technologies 

and applications; second, the development of large scale carbon 

capture and storage demonstration projects and addressing the licensing and liability issues of such facilities so we can maintain the 

viability of coal for the future. The current projects that we have 

are at best 25,000 metric tons. The deployment of the regional 

partnerships that are underway are in the range of 100,000 tons. 

A 500 mega watt single coal unit will produce about 4 million metric tons a year. There is a huge gap between what we are exploring 

and what we have got to be ready to implement. Third, promote 

and facilitate aggressive deployment of renewable energy and energy efficiency programs of which the simplest and most important 

steps can be authorizing the production tax credit for a 7 to 10 year 

period instead of the 2 year extensions that we have had to live 

with. And second, to encourage the decoupling and other incentive 

mechanisms to fully use and develop energy efficiency alternatives 

at the State level. Last, moving toward a rational climate legislation that is capable of gaining essential bipartisan support for most 

the development of climate friendly technologies that could be 

achieved with existing and affordable technology in the short term 

and emerging and new technologies as they become available and 

economically viable and it also mitigates adverse economic impacts 

that may occur in the interim. I do believe that there is adequate 

information to move forward on all three, on all four of these 

points. I believe that we must have a long term market price signal 

but that does not impair the ability or is not impede the ability in 

effectiveness of short term mitigation that can come in the form of 

a safety valve or something of that nature. 

12

I believe the committee draft to address climate change is a very 

good start to this process. It provides many of the elements that 

I think are integral to being able to address this issue and that it 

can be the focal point for climate debate in the Senate. Thank you 

for your time and consideration. 

[The prepared statement of Mr. Sterba follows:]

PREPARED STATEMENT OF JEFFRY E. STERBA, CHAIRMAN, PRESIDENT AND CEO,

PNM RESOURCES

INTRODUCTION

Good morning Chairman Bingaman, Senator Domenici, and distinguished Members of the Committee on Energy and Natural Resources. Thank you for inviting me 

here today. I am Jeffry Sterba, Chairman of the Board, President, and Chief Executive Officer of the PNM Resources. 

I appreciate this opportunity to discuss what I believe is the single greatest longterm environmental and economic challenge facing the utility industry: climate 

change. Rather than critiquing what I expect is a thorough economic analysis by 

EIA, I will share with you my views on what legislative design elements are required to forge a political consensus on climate change legislation during the 110th 

Congress. 

PNM RESOURCES

But first, let me be clear that I am here today representing PNM Resources. PNM 

Resources is an energy holding company based in Albuquerque, N.M., with consolidated operating revenues of $2.3 billion. Our electric generation is primarily a mix 

of coal, nuclear, wind and natural gas. Through its utility and energy service subsidiaries, PNM Resources supplies electricity to 738,000 homes and businesses in 

New Mexico and Texas, natural gas to 470,000 customers in New Mexico, and electricity to numerous wholesale customers throughout the southwest. Its utility subsidiaries are PNM, Texas-New Mexico Power and First Choice Power, a deregulated 

competitive retail electric provider in Texas. In November 2006, we announced a 

Joint Venture with Cascade Investments for the purpose of long-term investment 

in both in wholesale and retail electricity sales, electricity generation and energy 

trading. 

As the CEO of an electric and gas utility holding company, I believe that prudent 

risk management dictates that deliberate steps be taken to position PNM Resources 

and its subsidiaries to operate in a carbon-constrained world. For example, in 2003 

our Board of Directors adopted the goal of reducing the intensity of greenhouse gas 

emissions from our utility operations in New Mexico by 7 percent by 2009. Other 

actions we have voluntarily undertaken to manage and reduce emissions of greenhouse gases at PNM and our other utility subsidiaries include:

• Greenhouse Gas Emissions Inventory: We have completed an inventory of GHG 

emissions for our New Mexico operations and in 2007 will complete a similar 

company-wide inventory for all of our operations. 

• Pricing Carbon in Resource Planning: We are internalizing the costs of carbon 

dioxide emissions into our electric supply planning processes to account for potential future greenhouse gas regulations. This will enable us to make more informed resource decisions and allocate capital based on expected future costs of 

compliance with greenhouse gas regulation. 

• Diversifying Our Generation: We have created a diverse portfolio of generation 

assets that include pulverized coal, pressurized fluidized-bed technology, natural gas combined-cycle, nuclear, wind, distributed solar, and demand-side resources to provide our customers with a cleaner, less carbon-intensive portfolio 

of resources. 

• Renewable Energy: We have a 25-year power purchase agreement for all of the 

output from the New Mexico Wind Energy Center. The 204 MW of capacity 

from this facility represents over 8% of our generation capacity. In 2005, we 

issued an RFP for non-wind renewable energy and a deal for independent developers to supply power to PNM Resources from a 32 MW biomass project, which 

has been signed. We have also launched a program that pays customers $.21 

per kWh in incentives payments and credits for power produced from customerowned solar PV systems. 

• Biodiesel: We have switched to using biodiesel fuel in 57 percent of our dieselpowered vehicle fleet in New Mexico. 

13

• Carbon Sequestration: We have participated in a number of programs aimed at 

reducing or sequestering greenhouse gasses, and • Energy Efficiency: We have made significant investments in energy efficiency 

to offset 10% of annual energy demand growth in our Texas service territory. 

In 2006, we introduced natural gas efficiency programs to our New Mexico customers and will be filing a suite of electric energy efficiency programs in January 2007. 

SENATE ENERGY AND NATURAL RESOURCES COMMITTEE WORKSHOP ON

CLIMATE CHANGE

Nine months ago, I appeared before this Committee and testified on the Committee’s thought-provoking white paper, Design Elements of a mandatory Market-Based 

Greenhouse Gas Regulatory System. Today, I want to thank both Chairman Bingaman and Senator Domenici for that hearing and for your bipartisan leadership on 

this vital national issue. You demonstrate the kind of political leadership needed to 

steer our country during this important debate towards an environmentally sound, 

economically viable and equitable legislative solution to climate change. 

In addition to your leadership, the workshop was also timely as it created a public 

dialogue around what politicians, utilities, environmental organizations, energy producers and manufacturers and industry believed were very polarizing issues. But 

it also became clear there were potential areas of agreement among these diverse 

stakeholders. 

THE ELECTRIC UTILITY INDUSTRY

As I am sure you are aware, there are varying opinions within the electric utility 

industry on mandating reductions and genuine concerns about cost impacts on consumers and the availability of low and non-greenhouse gas emitting technologies 

that can deliver electricity at affordable prices and provide reliable service. Yet, I 

think there is agreement that significant greenhouse gas emission reductions are attainable only with a full suite of technology options, including continued development of renewable resources, advanced clean-coal technologies including but not 

limited to IGCC, carbon capture and storage, advanced nuclear and increased energy efficiency and the potential of plug-in hybrid vehicles. While a few of these options currently are commercially available—though at a higher cost—many are not. 

Making all of these technologies commercially available at a reasonable cost is critical to addressing climate change in both the short and long term. 

NEXT STEPS

Our legislative process is famously characterized as ‘‘deliberative’’ and there are 

many excellent reasons for that, but deliberative can also mean terribly slow. I urge 

this Committee and Congress to begin taking immediate action, including:

1. We need authorization and full funding of research, development, demonstration, and deployment of more climate friendly technologies and applications; 

2. We must develop large-scale carbon capture and storage demonstration 

projects and address the licensing and liability issues of such facilities, as it is 

essential we maintain the viability of coal to meet our country’s energy needs; 

3. We need to promote aggressive deployment of renewable energy and energy 

efficiency programs, including smart metering and plug-in hybrids; and 

4. We need to move toward rational climate legislation that is capable of gaining essential bipartisan support and promotes the development of climate 

friendly technologies that can be achieved with existing and affordable technology in the short term, and emerging and new technologies as they become 

available and economically viable.

In the past, we have seen numerous climate bills that—based on the state of current technologies—are unrealistic approaches to addressing climate change on a national level. We will not make real progress in addressing this critical issue if we 

continue to spend valuable time on legislation that only works in one region or 

state, only addresses one sector or only promotes one or a few technologies. 

Chairman Bingaman, the Committee has devoted significant time and careful 

thought in the development of a comprehensive proposal to address climate change. 

More than any other proposal, the Committee draft recognizes the limits of today’s 

commercial technology and the economic risks currently associated with addressing 

climate change for my industry and our ratepayers. It begins with modest reductions but through the five-year review has the flexibility to implement more aggressive emission reductions made possible by technology advancement. The draft creVerDate 0ct 09 2002 11:57 Mar 22, 2007 Jkt 001109 PO 34079 Frm 00017 Fmt 6633 Sfmt 6621 H:\DOCS\34079.TXT SENERGY1 PsN: RSMIT
14

ates and allocates funds for critical technology advancement, though we need to find 

means to advance the availability of such funding. And, it utilizes a cost control 

mechanism that avoids adverse economic impact while enabling a long-term price 

signal for major capital projects. For all of these reasons, I believe the Committee 

draft to address climate change should be the focal point of the climate debate in 

the Senate. 

CONCLUSION

Thank you for your time and consideration. I would be pleased to answer any 

questions you might have and I look forward to being of service in any way I can 

to this Committee.

The CHAIRMAN. Thank you very much. 

Mr. Lashof, thank you for being here. 

STATEMENT OF DANIEL A. LASHOF, Ph.D., CLIMATE CENTER 

SCIENCE DIRECTOR, NATURAL RESOURCES DEFENSE COUNCIL 

Dr. LASHOF. Thank you. Thank you, Mr. Chairman. I appreciate 

the opportunity to be here, Senator Domenici and members of the 

committee. I am Daniel Lashof. I am the science director and deputy director of the Climate Center at NRDC and I want to start 

by just underlining what has been said before appreciating your 

leadership and working on the critical details of global warming 

legislation that are going to be needed to move the legislative process forward. 

I believe that with Monday’s call to action from the U.S. Climate 

Action Partnership that Mr. Sterba is part of along with NRDC 

and many other leading organizations and companies that that 

really changes the political landscape on global warming and I 

think we have a real opportunity to enact effective climate legislation this year so I look forward to working with you and members 

of this committee to seize that opportunity. 

In summarizing my testimony I would like to make three points 

about the EIA analysis and then three more general points about 

emission allowance allocation. First, EIA’s analysis clearly shows 

that the discussion draft proposal would have minimal macro-economic impacts on the U.S. economy. EIA projects that GDP would 

grow from $10.8 trillion in 2004 to $17.5 trillion in 2020 and over 

$23 trillion in 2030 with or without the emission caps and the discussion draft and regardless of how the emission allowance is allocated so robust economic growth, very small deltas which get magnified in some of the charts, but we need to keep it in mind. This 

is a growing economy under all of these cases. The analysis also 

indicates however, that the proposal would not reduce greenhouse 

gas emissions below current levels even through 2030, and there 

are two reasons for this, one is the intensity targets themselves 

don’t decline fast enough to get emissions down below current levels over that time frame and second, the safety valve part of the 

proposal means the actual emissions that are projected by EIA 

would be higher than the nominal caps in the proposal. While in 

my view the discussion draft contains many valuable proposals regarding emission allowance allocation, faster and deeper emission 

reductions, such as those proposed in the U.S. Climate Action Partnership, are essential to prevent dangerous global warming. 

My second point is that the small differences in GDP that EIA 

projects under the Phased Auction verses the Full Auction apVerDate 0ct 09 2002 11:57 Mar 22, 2007 Jkt 001109 PO 34079 Frm 00018 Fmt 6633 Sfmt 6602 H:\DOCS\34079.TXT SENERGY1 PsN: RSMIT
15

proach as I think, Mr. Gruenspecht indicated are primarily related 

to the assumptions the EIA made about deficit reduction verses tax 

cuts. They assume that under the Full Auction the extra revenues 

would be dedicated to deficit reduction. In their model that tends 

to dampen current consumption over this time frame. If they had 

made a different assumption holding say the deficit constant, and 

using the extra revenue for tax cuts, I think they would have found 

the opposite, that the Full Auction would actually have a slightly 

higher GDP than under the Phased Auction approach. 

My third point and this is probably the most important one on 

the EIA analysis is that it does not reflect important provisions of 

the discussion draft designed to promote energy efficiency and deployment of advanced technology. Appropriate analysis of these 

provisions would show that I think much deeper emission reductions could be achieved with minimal macro-economic impacts or 

possibly with an economic benefit. The two primary ways in which 

the proposal would achieve this, first, their provisions promote increases in energy efficiency by overcoming barriers in the marketplace to energy efficiency and provisions to advance the deployment 

of low and zero emission carbon technologies. For example, the proposal includes a Climate Change Trust Fund, funded through the 

allowance allocation system as well as proposing dedicating allocating allowances to States or the President to use the revenues for 

similar purposes. I particularly favor the idea of allocating a substantial portion of the allowances to States. We are in a very good 

position to particularly promote energy efficiency. EIA’s analysis 

does not incorporate the benefits of those critical parts of this proposal and I think it is important that as this committee looks at 

this and other proposals that include deeper emission reductions 

those benefits need to really be fully taken into account. 

Now let me turn to a couple more general points. First, the emission allowances created under any Greenhouse Gas Cap and Trade 

program are a valuable public asset. Deciding how to use that asset 

and how to allocate it is a critical public policy decision that Congress has to wrestle with. The stakes are very high. If you look at 

EIA’s projection for this proposal in 2020 the value of emission allowances allocated just in that year would be over $50 billion. That 

is a lot of money by anybody’s calculation. That is not the cost of 

the program. That is the value of the allowances. So it is a distributional question how those are used. I think the allocation of 

these resources should start from the principle that no one has an 

entitlement to put carbon dioxide emissions into the atmosphere. 

Economists widely recognize that most efficient and fair way to allocate emission allowances is through a public auction and I believe 

the revenues from that auction should be dedicated to the purposes 

of the program in protecting climate change and to other public 

purposes and this is precisely the approach that New York and 

Massachusetts have announced that they are planning to take in 

implementing the Regional Greenhouse Gas Initiative in their 

States. 

Second, I think that most allowances should be allocated in a 

way that lowers the cost of implementing the program both to consumers and to businesses by strategically promoting increases in 

energy efficiency and widespread use of the new technology as this 

16

1 Energy Information Administration, 2007. Energy Market and Economic Impacts of a Proposal to Reduce Greenhouse Gas Intensity with a Cap and Trade System. U.S. Department of 

Energy, Washington, DC. SR/OIAF/2007-01 (January). 

discussion draft indeed does, I think that it can go further in that 

direction, more of the allowances could be allocated to those programs. As you know Mr. Chairman, these benefits are not just theoretical, we have realized in practice where energy efficiency is effectively promoted major benefits. For example, in California where 

there have been robust programs for many years, the per capita 

electricity consumption has been stabilized over the last 30 years 

while in the rest of the Nation it is increased by 50 percent. So 

these types of programs make a real difference and it would make 

it much less expensive to achieve emission caps at any level. 

Third, I would suggest a slightly different approach to allocating 

allowances in the electricity industry. Allocating allowances to generating companies is likely to provide some inequitable outcomes 

that depend on whether a particular jurisdiction is under cost of 

service regulation or in a competitive market and we know about 

40 percent of the country has competitive wholesale markets, the 

rest under more traditional cost of service regulation and this problem has already surfaced in European markets where the United 

Kingdom authorities have concluded that their allocation system 

which was to generators on a grandfathered basis has produced a 

significant windfall profits and they are looking to change that. 

Electricity distribution companies on the other hand, are under 

continuous cost of service regulation in all jurisdictions. This would 

give regulators a way to ensure that the value of the allowances 

is used to benefit customers through both energy efficiency and adjustments in rates. Now for some companies like Mr. Sterba’s at 

least in New Mexico there is no difference between the two, it is 

the same thing but in other jurisdictions where there is wholesale 

competitive markets it would make a difference and so I urge you 

to consider that. Exelon proposed something similar in the workshop that you held earlier last year. 

So in conclusion, let me just finish by saying I think EIA’s analysis provides an upper bound on the cost of implementing the discussion draft but it fails to account for important provisions designed to promote increases in efficiency and deployment of low 

carbon technologies. Congress should allocate emission allowances 

strategically to reduce compliance costs and account for the benefits of this approach in the analysis that it considers of proposals. 

This will be particularly important for proposals that would require 

emissions to be reduced substantially below current levels which I 

believe is necessary to prevent dangerous global warming. Thank 

you, Mr. Chairman. 

[The prepared statement of Dr. Lashof follows:]

PREPARED STATEMENT OF DANIEL A. LASHOF, PH.D., CLIMATE CENTER SCIENCE

DIRECTOR, NATURAL RESOURCES DEFENSE COUNCIL

INTRODUCTION

Thank you for the opportunity to share my views regarding the Energy Information Administration’s analysis of Chairman Bingaman’s greenhouse gas cap-andtrade discussion draft proposal.1 My name is Daniel A. Lashof, and I am the science 

director of the Climate Center at the Natural Resources Defense Council (NRDC). 

17

2www.us-cap.org. 

NRDC is a national, nonprofit organization of scientists, lawyers and environmental 

specialists dedicated to protecting public health and the environment. Founded in 

1970, NRDC has more than 1.2 million members and online activists nationwide, 

served from offices in New York, Washington, Los Angeles and San Francisco. 

My testimony will discuss EIA’s key findings and shortcomings of EIA’s analysis, 

particularly with respect to the treatment of energy efficiency and technology deployment programs. I will then turn to more general comments on the emission allowance allocation system proposed in the discussion draft. 

EMISSIONS RISE INSTEAD OF FALL

The Energy Information Administration (EIA) analysis of Chairman Bingaman’s 

greenhouse gas cap and trade discussion draft demonstrates that the proposal would 

have minimal macroeconomic impacts on the U.S. economy regardless of how emission allowances are allocated. The analysis also indicates, however, that the proposal would not reduce greenhouse gas emissions below current levels through at 

least 2030, although it would slow the rate of emission growth. Emissions grow 

under the proposal for two reasons: First, the specified reductions in emissions intensity are not rapid enough to reduce emissions below current levels by 2030, and 

second the ‘‘safety valve’’ provision of the proposal allows emissions to substantially 

exceed the nominal cap. 

While the discussion draft contains many valuable proposals regarding the allocation of emission allowances, faster and deeper emission reductions, such as those 

proposed by the U.S. Climate Action Partnership in its January 22nd Call for Action,2 are essential to prevent dangerous global warming. 

MACROECONOMIC IMPACTS ARE MINIMAL

EIA’s conclusion that there would be minimal macroeconomic impacts from a 

greenhouse gas emissions cap and trade program such as the Bingaman discussion 

draft is robust. Regardless of how emission allowances are allocated EIA finds that 

the impact on the present value of Gross Domestic Product (GDP) would be less 

than 0.2 percent, not accounting for the health and environmental benefits the program would produce. 

EIA’s analysis suggests that macroeconomic costs would be somewhat higher if all 

the emission allowances issued under the program are auctioned than under the 

‘‘Phased Auction’’ approach outlined in the discussion draft. This conclusion appears 

to be primarily related to the way EIA analyzed the ‘‘Full Auction’’ case, rather than 

the inherent merits of this approach relative to the Phased Auction alternative. In 

particular, EIA assumes that all of the additional revenue generated under the Full 

Auction would be devoted to deficit reduction, which has a dampening effect on consumption in EIA’s model over the analysis time horizon. This result is not primarily 

related to the cap-and-trade program, however. Any deficit reduction policy considered in this model would likely yield similar results. Conversely, had EIA assumed 

that the additional revenue from the Full Auction was used to cut taxes, holding 

the deficit constant, the model would likely project slightly more economic output 

under the Full Auction compared with the Phased Auction. 

This does not imply that allowance allocation is unimportant. To the contrary, 

emission allowances created under any greenhouse gas cap and trade program will 

be a valuable public asset and deciding how to use this asset fairly and effectively 

is a critical part of Congressional deliberation on global warming legislation. 

ALLOWANCES ARE A VALUABLE PUBLIC ASSET

Policy decisions about how allowances will be allocated should start from the principle that no one has an entitlement to pollute the atmosphere with heat-trapping 

gases. An emission allowance represents a limited permission to release one ton of 

carbon dioxide into the atmosphere. This is not a property right and there is no inherent policy rationale for allocating allowances based on historic emissions. Rather, 

the atmosphere’s limited capacity to accommodate emissions is a public asset, much 

like the radio frequency spectrum. Economists widely recognize that the most efficient and fair way to allocate this asset is through a public auction. Revenues from 

such an auction should be used to further the goal of solving global warming and 

for other public purposes. This is precisely the approach that New York and Massachusetts are adopting to allocate emission allowances under the Regional Greenhouse Gas Initiative. While there may be a number of policy and practical reasons 

to deviate from this principle by allocating some emission allowances without 

18

3http://www.rff.org/Documents/RFF-DP-05-55.pdf. 

4www.hmtreasury.gov.uk/independentlreviews/sternlreviewleconomicslclimatelchange/

sternlreviewlreport.cfm. 5http://www.mckinsey.com/mgi/publications/GloballEnergylDemand/index.asp. 6http://docs.nrdc.org/globalwarming/glol07011701A.pdf. 7http://www.nrdc.org/air/energy/fcagoals.asp. 

charge, any free allocations to the private sector should be limited and phased out 

over time, and the burden should be on those proposing free allocations to justify 

this approach. 

The stakes are considerable. EIA projects that covered greenhouse gas emissions 

under the discussion draft proposal would be 7.1 billion tons in 2020. For each ton 

emitted covered entities will have to retire one emission allowance, which EIA 

projects will have a market value of $7.15 in that year. Thus the total value of emission allowances used in 2020 would be over $50 billion. Analysis by Dallas Burtraw 

and others at Resources For the Future,3 as well as experience with the pilot phase 

of the European Union Emissions Trading Scheme, shows that the value of emission 

allowances greatly exceeds the impact of the emissions cap on the profitability of 

firms covered by the program. Hence, there would be substantial windfall profits 

were all of the emission allowances to be distributed for free to the private sector, 

particularly for firms operating in competitive markets in which increased marginal 

costs will be passed through to consumers. 

ALLOWANCES SHOULD BE ALLOCATED STRATEGICALLY

In addition to being fair, the allowance allocation approach should strategically 

promote increases in energy efficiency and widespread use of available low carbon 

technologies. NRDC recommends devoting most of the value of emission allowances 

to these purposes in order to reduce costs for both. consumers and businesses. While 

the discussion draft proposal stops short of this, it does appropriately devote a substantial portion of the value of allowances to promoting increased energy efficiency 

and deployment of advanced zero- and low-carbon technologies. This includes not 

only the $50 billion Climate Change Trust Fund, but also the value of the portion 

of allowances allocated to States or the President. Unfortunately, EIA did not analyze the impact of these important provisions of the proposal. While analyzing these 

provisions is challenging, ignoring them is misleading. 

Appropriate analysis of the energy efficiency and technology deployment provisions of the proposal would show that much deeper emission reductions could be 

achieved with minimal macroeconomic impacts or even with net economic benefits. 

There are two primary ways in which these provisions would promote low cost emission reductions: First, by overcoming market failures that prevent cost-effective increases in energy productivity, and second by accelerating technology innovations 

that reduce costs and improve performance as a function of learning-by-doing. Neither of these effects is appropriately reflected in the EIA analysis. 

EIA NEGLECTS ENERGY PRODUCTIVITY GAINS FROM ALLOWANCE ALLOCATION

The proposed incentives for energy efficiency would overcome barriers to cost-effective energy productivity improvements. Satisfying energy service demands with 

less primary energy is the fastest, cheapest, and cleanest way to reduce global 

warming pollution, and will make it much less expensive to achieve any greenhouse 

gas emission cap. This opportunity is large and consequential, as documented recently at the global level in the Stem Review of the Economics of Climate Change 4

and the McKinsey Global Institute report on energy productivity.5 Numerous reports have reached similar conclusions for the United States at both the state and 

federal level. For example, last week NRDC released a report prepared by Optimal 

Energy which shows that cost-effective energy efficiency, demand response, and 

combined heat and power investments in Texas could eliminate projected electricity 

demand growth and obviate the claimed need for more than a dozen new high-emitting coal fired power plants in the state, avoiding 400 million tons of CO2 emissions 

over the life of the efficiency measures.6 I have attached a copy of this report to my 

testimony and ask that it be included in the record of this hearing. 

The benefits of robust energy efficiency policies are not just theoretical. They have 

been demonstrated in practice. In California per capita electricity consumption has 

been held constant over the last 30 years while the rest of the nation’s per capita 

consumption increased by more than 50 percent.7 This is no accident: over the period California has had the nation’s strongest building and appliance efficiency 

standards and most aggressive utility efficiency programs. Nonetheless, EIA only 

considered energy demand changes related to their projections of small changes in 

19

8This is the estimate of the Electric Power Supply Association, which represents competitive 

power suppliers. 

retail prices associated with the discussion draft proposal, and made no attempt to 

analyze the effects of federal or state incentives provided through the Climate 

Change Trust Fund or through the allowances allocated to States. As a result EIA 

projects that residential energy consumption in 2020 under the discussion draft proposal (Phased Auction case) would be only 0.4 percent lower than in the Reference 

case. Similarly, EIA projects just 1 percent less transportation sector energy consumption in 2020 due to the proposal. 

EIA NEGLECTS TECHNOLOGY DEPLOYMENT DRIVEN BY ALLOWANCE ALLOCATION

EIA’s analysis also fails to account for the deployment of zero- and low-emission 

energy technologies induced by the Climate Change Trust Fund and State efforts. 

There are two important mechanisms that should be considered. First, the low-emission facilities that would be built as a direct result of the proposed deployment incentives. Second, early deployment will result in technological learning that would 

improve the performance and reduce the cost of next generation facilities, making 

these technologies more competitive with higher-emitting competitors regardless of 

the availability of additional incentives. Because EIA did not consider these effects, 

and because allowance prices are relatively low under the discussion draft proposal, 

EIA does not project any use of carbon capture and geologic disposal technology for 

power plants during the timeframe of their analysis. (It also appears that EIA did 

not consider the opportunity to use industrial CO2 for enhanced oil recovery in conjunction with geologic disposal, or they likely would have found that at least some carbon capture and disposal would be cost effective at the allowance prices they 

forecast). 

ALLOCATE A PORTION OF ALLOWANCES TO STATES

NRDC supports the idea of allocating at least 30 percent of the available allowances to States as proposed in the discussion draft. States are in the best position 

to address specific equity concerns and promote energy efficiency and infrastructure 

investments that will help achieve the cap at the lowest possible cost. For example, 

States are primarily responsible for enforcing building codes and planning transportation infrastructure, both of which can have a substantial impact on carbon dioxide 

emissions. 

EFFECTIVELY ADDRESSES COMPETITIVENESS CONCERNS

Special consideration is needed to ensure that energy-intensive industries facing 

international competition are not put at a significant disadvantage by the program. 

A grandfathered allocation to these firms will not necessarily achieve this goal, however, because their most profitable course may still be to shut down domestic production and sell their allowances. To prevent this without creating a perverse incentive to keep operating the least efficient, highest polluting plants, the allocation to 

energy intensive firms could be reduced in proportion to any reductions in their regional employment. (From a broader perspective, the most efficient policy for addressing this concern is border tax adjustments for energy intensive products traded 

with countries that don’t have equivalent emission reduction programs). 

ALLOCATE TO ELECTRICITY DISTRIBUTION COMPANIES RATHER THAN GENERATORS

The discussion draft proposes to initially allocate 30 percent of the total allowance 

pool to electricity generators based on their share of emissions during 2004-2006. 

Although this free allocation begins to decline in 2017, nearly 15 percent of allowances would still be allocated on this basis in 2030. This appears to be substantially 

in excess of the amount that can be justified on the basis of mitigating economic 

transition costs to relatively more adversely affected firms. As a result, allocating 

allowances in this manner would likely result in substantial inequities. This is because about 40 percent of ITS generation sells its output at market prices into various largely unregulated wholesale markets, while the rest remains subject to diverse forms of cost-of-service price regulation.8 Impacts of allocations on consumers 

and shareholders will vary widely and state regulators will not be able to respond 

to real or perceived inequities. In many cases, generators can be expected to pass 

through the increased price of carbon regulation in their wholesale prices, and also 

to keep the proceeds from the sale of allowances allocated to them initially. Consumers obviously will see the price signal, but not the benefits from the allowance 

allocation. The problem has already surfaced in European markets, leading United 

20

9 House of Commons, Environmental-Audit Committee, ‘‘The International Problem of Climate 

Change: UK Leadership in the G8 and EU,’’ p. 17 (Mar. 16, 2005). 

Kingdom authorities to conclude that initial allocation to electric generators serving 

competitive markets resulted in large windfall profits.9

Electricity distribution companies, by contrast, provide service under continuous 

price regulation from either state commissions (for investor-owned utilities, accounting for about three-fourths of retail sales) or local boards (for publicly owned utilities and cooperatives, which serve the rest of the nation). Regulators can therefore 

ensure that consumers benefit from any allowances allocated to distribution companies by directing funds to energy efficiency investments and long-term emissions reductions, and by adjusting rates. Many in the utility industry and its regulators are 

likely to prefer distribution company allocation to a generator-based system (e.g., 

see Exelon’s comments on the Energy Committee White Paper). 

Congress would have a wide range of options in making allocations to distribution 

utilities, ranging from the carbon content of electricity delivered by distribution 

companies to the volumes of electricity delivered (with numerous intermediate compromise possibilities). Utilities that distribute mostly coal-fired electricity are likely 

to advocate an emissions-based formula on the grounds that they will see the largest increase in electricity costs as a result of the CO2 emissions cap. Utilities that 

distribute mostly low-emission resources are likely to advocate a formula based on 

electricity sales on the grounds that their customers are already paying higher 

prices for a cleaner generation portfolio. 

Whether or not the allocations should be updated over time is an independent 

question. The proposed phase-out of free allocations to the private sector diminishes 

the case for updating in general (the more rapid the phase-out the less need to update the free allocation). Any allocation based on carbon content should definitely 

not be updated because that would create a perverse incentive to increase emissions 

in order to obtain a larger allocation, raising the overall cost of achieving the emission cap (or increasing actual emissions if the safety valve is open). There is a 

stronger argument for updating a sales-based formula as a matter of equity between 

high-growth and low-growth areas. 

Such an approach would need to include an adjustment for independently verified 

energy efficiency to ensure that updating does not create a disincentive for additional energy efficiency improvements. 

The simplest approach would be to allocate based on electricity sales during the 

same historical period used for allocating to other sectors. If Congress decides to allocate (in part or in whole) based on historical emissions, however, calculating the 

carbon content of those electricity sales is certainly feasible and should not be seen 

as an obstacle to allocating to distribution companies. As long as the allocation is 

to distribution companies (to avoid windfall profits) and is not updated in a way 

that creates perverse incentives (to avoid raising costs or emissions), then the specific allocation formula is a matter of regional equity and an appropriate subject for 

negotiations during the legislative process. 

To prevent state regulators from masking price signals to consumers through 

their regulation of distribution companies, it would be appropriate for Congress to 

condition the grant of free allowances on a requirement that a portion be used to 

promote energy efficiency and that they not be used to mask the cost of carbon emissions in the form of directly offsetting subsidies for retail electricity costs. 

Of course state regulators cannot change or hide a very potent price signal, which 

is the added cost of carbon-intensive generation to its utility purchasers (and to 

other entities that buy power in wholesale markets to serve retail customers). This 

is the most important economic element of any cap-and-trade system for the generation sector, because it shapes the long-term investment and operational decisions 

that drive the sector’s total emissions. Carbon-intensive generation will increase in 

price to these decision-makers as the cap takes effect and tightens, regardless of 

how retail-price regulators decide to deal with proceeds from the sales of allowances 

allocated initially to their distribution companies. 

CONCLUSION

EIA’s analysis provides an upper bound on the costs of implementing Chairman 

Bingaman’s discussion draft proposal, but it fails to account for important provisions 

designed to promote increases in energy efficiency and deployment of zero- and lowcarbon technologies. Congress should allocate emission allowances strategically to 

reduce compliance costs and account for the benefits of this approach as it considers 

a range of legislative proposals. This will be particularly important for proposals 

21

that would require emissions to be reduced substantially below current levels, which 

is essential to prevent dangerous global warming.

The CHAIRMAN. Thank you very much. 

Anne Smith, we are very glad to have you today. Go right ahead. 

STATEMENT OF ANNE E. SMITH, Ph.D., VICE PRESIDENT,

CRA INTERNATIONAL 

Dr. SMITH. Thank you Mr. Chairman and members of the committee. Thank you for inviting me to participate in today’s hearing. 

My name is Anne Smith. I am an economist and vice president at 

CRA International. The opinions I present are my own and not 

those of CRA. 

EIA’s analysis of the draft bill finds a small but not cost lest impact on the U.S. economy. The 0.1 percent reduction in GDP that 

we have heard about implies a present value cost per person to 

every person in the United States of $800. The bill also finds, the 

analysis also finds, significant shifts in certain parts in the economy. EIA reports that coal demand remains stable under the bill 

but this also says that the bill would almost entirely eradicate this 

sectors prospects for growth. For a business plan, that is a devastating outcome. Nevertheless, the draft bill probably would not 

have devastating impacts to the economy as a whole. This is directly attributable to its safety valve feature and to the specific 

price level associated in this bill with the safety valve. In earlier 

EIA analysis showed that carbon prices would be two to four times 

higher if the safety valve were to be removed and we have every 

reason to expect that the current draft bill’s costs would balloon upwards in the same way if the safety valve were to be removed from 

it. So if Congress wants to keep the costs of this policy low it must 

keep the safety valve price low. 

EIA’s analysis also tells us that the emission reductions achieved 

on the proposed safety valve are small. In fact, emissions continue 

to rise even through 2030 in the projections. If this is all that the 

draft bill would accomplish does it make sense to pay even the 

small amount for it. The emissions reductions needed to stabilize 

climate change are huge. Many, many times more than this draft 

bill is projected to accomplish and they have to accomplished on a 

global scale. EIA’s analyses shows that this simply cannot be done 

at a low cost with all of our current technological options. An affordable reduction in climate change risks will require revolutionary transformation of energy technology through intensive and 

reformed R&D policy. The current draft bill misses this need all together and for that reason I do not feel it is a good first step in 

developing a reasonable climate policy. Some people will argue 

back that the draft bill’s Climate Change Trust Fund is an R&D 

provision including someone sitting directly to my right who has 

just made that point. It is not an R&D provision. It only provides 

deployment incentives which are subsidies to technologies that are 

already, almost ready, to enter the market. These trust fund subsidies also are redundant. The carbon price serves as the deployment incentive in this bill and by offering a second subsidy for 

technologies that are going to enter the market anyway, the draft 

bill creates free rider-ship at its worse. It makes the subsidies a 

waste of the valuable allowance auction revenues. 

22

1 EIA, Energy Market and Economic Impacts of a Proposal to Reduce Greenhouse Gas Intensity 

with a Cap and Trade System, SR/OIAF/2007-01, January 2007. 

The Trust Fund also reflects bad R&D policy practice as evidenced in the past. It attempts to pick winners by rigidly allocating 

funding across types of technologies rather than letting all these 

types of technologies to compete for those resources based on their 

successes. Also, the subsidy rules determining which companies 

will win the subsidies do not pick the projects that would provide 

the lowest dollar per ton removed reductions and that should be 

the goal. But most importantly of all, the subsidies fail to address 

the kind of R&D that is needed to start the world down the path 

towards huge, a huge emissions reduction goal without going bankrupt along the way. The kind of R&D that I believe is needed is 

basic research and basic research that seeks breakthroughs in 

science and applications of science’s technologies. The challenges 

for us is to design effective incentives to guide basic science researchers towards those successful outcomes in new energy systems solutions and the draft bill never considers these needs. What 

we need is a bill with provisions for dramatically reforming basic 

R&D institutions, incentives and funding. Carbon pricing provisions should support this core role not supplant it. The low safety 

valve price needs to be paired with a vision and a plan for how we 

will create the astounding degree of technological change necessary 

to reduce emissions at such low prices and without this businesses 

facing this cap will continue to face planning uncertainty, uncertainty that costly caps might be imposed at some point within their 

investment planning horizon. So this kind of R&D policy must be 

initiated immediately. The hope for any new solutions by a time 

frame such as 2030 yet the policy community is transfixed by overly complex cap and trade schemes. They cannot have meaningful 

impact on emissions until decades after such an R&D policy has 

been established. The draft bill has the cart but not the horse. 

Thank you for this opportunity to share my views on this important topic. My written statement makes additional comments that 

I hope will be inserted into the record. 

[The prepared statement of Dr. Smith follows:]

PREPARED STATEMENT OF ANNE E. SMITH, PH.D., VICE PRESIDENT,

CRA INTERNATIONAL

Mr. Chairman and members of the committee, thank you for your invitation to 

participate in today’s hearing. I am Anne Smith, and I am a Vice President of CRA 

International. Starting with my Ph.D. thesis in economics at Stanford University, 

I have spent the past twenty-five years assessing the most cost-effective ways to design policies for managing environmental risks. For the past fifteen years I have focused my attention on the design of policies to address climate change risks, with 

a particular interest in the implications of different ways of implementing greenhouse (GHG) gas emissions trading programs. I thank you for the opportunity to 

share my findings and climate policy design insights with you. My written and oral 

testimony reflect my own research and opinions, and do not represent any positions 

of my company, CRA International. 

The topic of today’s hearing is a proposal to reduce greenhouse gas intensity with 

a cap and trade system that Senator Bingaman’s office has prepared. (I will call this 

the ‘‘Proposed Policy’’ in my testimony). At Senator Bingaman’s request, the Energy 

Information Administration (EIA) has prepared estimates of the energy market impacts and economic impacts of this proposal using its NEMS model combined with 

a macroeconomic model from Global Insight, Inc.1 (I will refer to this as the ‘‘EIA 

report’’ in my testimony.) EIA’s results are widely reported to find only small ecoVerDate 0ct 09 2002 11:57 Mar 22, 2007 Jkt 001109 PO 34079 Frm 00026 Fmt 6633 Sfmt 6621 H:\DOCS\34079.TXT SENERGY1 PsN: RSMIT
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2 EIA, Energy Market Impacts of Alternative Greenhouse Intensity Reduction Goals, SR/OIAF/

2006-01, March 2006. 3 Anne E. Smith, Anders Gjerde, et al., CO2 Trading Issues, Volume 2: Choosing the Market 

Level for Trading, Final report of Decision Focus Incorporated to Office of Policy, Planning and 

Evaluation, U.S. Environmental Protection Agency, EPA Contract No. 68-CO-0021, May 1992. 4 E.J. Balistreri, P.M. Bernstein et al., ‘‘Analysis of the Reduction of Carbon Emissions 

Through Tradable Permits or Technology Standards in a CGE Framework,’’ AERE/Harvard 

Workshop on Market-Based Instruments for Environmental Protection, Cambridge, MA, July 18-

20, 1999. 5 EIA, Impacts of Modeled Recommendations of the National Commission on Energy Policy, 

SR/OIAF/2005-02, April 2005. 

nomic impacts, with one of the most frequently cited results being that GDP would 

be reduced by only 0.1% through 2030. 

While a 0.1% reduction is small relative to total GDP, it is important to keep in 

mind that GDP is a very large number. A small fraction of GDP can still be a quite 

significant cost in absolute terms. For example, this small loss of GDP is equal to 

a present value cost of $800 per person in the U.S. Also, it is possible to affect the 

apparent size of an impact estimate by changing the benchmark that it is compared 

to. For example, one could choose to compare the estimated reduction in GDP to the 

total growth in GDP that would be expected in the absence of the proposed policy. 

The same absolute GDP loss would eliminate about 0.7% of the future anticipated 

growth in GDP. 

None of these alternative ways of stating the estimated costs indicate that the 

Proposed Policy’s impacts are severe, or that one should characterize the Proposed 

Policy as ‘‘unaffordable.’’ Clearly, the Proposed Policy is far less costly than some 

of the other climate policy proposals that are currently in play. However, the primary reason its costs are lower is because the emissions reductions that it offers 

are so much smaller. This unavoidable trade-off between emissions reduction and 

policy cost was made quite clear in the earlier analysis that EIA performed at the 

request of Senator Salazar for a range of different safety valve prices.2 It is also 

apparent in the two safety valve sensitivity cases in the current EIA report. As the 

cost of the policy rises or falls, so too do the emissions reductions achieved. In short, 

‘‘you get what you pay for.’’

Thus, the EIA report offers no epiphany that we have finally found a greenhouse 

gas policy approach that achieves meaningful emissions reductions at an affordable 

cost. The EIA report only shows that the degree of emissions reduction required can 

be reduced to the point where the expected costs of the policy are small. The key 

question, then, is whether this is a good climate policy proposal that is worth the 

cost that it does impose on us. In my judgment, the Proposed Policy can be viewed 

as one of the more efficient ways of imposing a cap on emissions, but this does not 

make it an effective first step to a national policy to manage and mitigate risks of 

climate change. 

IS THE PROPOSED POLICY AN EFFICIENT WAY TO CAP EMISSIONS?

I will first address why the Proposed Policy is one of the more efficient ways of 

imposing a cap on U.S. greenhouse gas emissions:

• The Proposed Policy uses an ‘‘upstream’’ approach, which offers the most comprehensive coverage of national greenhouse gas emissions subject to the policy 

mechanism known as cap-and-trade. Greater coverage of emissions translates 

into greater economic efficiency for each incremental degree of emissions reduction. The policy merits of the upstream approach for greenhouse gas emissions 

have been known for a long time,3,4 but unfortunately have rarely been included 

in proposed policies. 

• An additional advantage of the Proposed Policy is that it relies solely on the 

market-based measures, eschewing costly technology standards such as automobile fuel economy standards (e.g., CAFE). An earlier EIA report found that 

the CAFE standard that was in the 2005-era ‘‘Bingaman Amendment’’ was a 

very costly way of increasing emissions reductions that could be achieved.5 Fortunately, it has been omitted in Senator Bingaman’s current proposal. 

• The Proposed Policy uses a ‘‘safety valve’’ to establish a firm limit on the costs 

of the policy. Hard caps on emissions (whether for greenhouse gases or any 

other emission) inevitably produce high price volatility as well as risks of imposing an unintentionally and unnecessarily costly emissions reduction target. The 

experience with the EU ETS is a prime example. In the case of a stock pollutant 

such as greenhouse gases, there is no need to absorb high costs in return for 

24

6 Richard G. Newell and William A. Pizer 2003, ‘‘Regulating Stock Externalities Under Uncertainty,’’ Journal of Environmental Economics and Management, Vol. 45, pp. 416-432. 7For example, Section 1627(C)(3) calls for awards based on bids into a reverse auction for subsidies stated in terms of dollars per megawatt-hour of electricity generated, rather than based 

on dollars per ton of emissions reduced. 

great specificity in achieving each year’s emissions cap.6 Economists widely 

agree that the cost to businesses of managing the price uncertainty of a hard 

cap is not worth the greater certainty on what greenhouse gas emissions will 

be from year to year. 

It is important that people understand that the analysis method used by EIA 

does not capture the important benefit of price certainty that is associated with 

the safety valve. If it could do so then EIA reports on costs of various greenhouse gas caps proposals would find much greater cost-effectiveness for policies 

with a safety-valve than for policies of a comparable cap stringency but with 

hard caps. It is unfortunate that the analysis method being used by the U.S. 

Government to assess the merits of greenhouse gas cap proposals is unable to 

demonstrate the important efficiency improvements that a safety valve provision provides.

Thus, the Proposed Policy has three important attributes for ensuring that the 

emissions caps are imposed in an efficient manner. It would be more efficient than 

any cap policies that do not embody these attributes. 

IS THE PROPOSED POLICY A GOOD FIRST STEP FOR REDUCING CLIMATE RISKS?

Although the Proposed Policy would achieve domestic emissions reductions in a 

manner that is generally cost-effective, I do not feel that this makes it an effective 

first step towards a national policy to reduce the risks of climate change. Three key 

features that are critical elements of a cost-effective policy to mitigate global climate 

risks are:

• Provisions to address a pressing need for research and development (R&D) to 

transform global energy systems • Consideration of developing country emissions • Long-run business planning certainty

Although the Proposed Policy has provisions that some might argue address each 

of these, I feel that it fails at all three, for the reasons I explain below. 

R&D NEEDS

The Proposed Policy would create a ‘‘Climate Change Trust Fund’’ that is supposed to provide for R&D. However, this Trust Fund only provides subsidies to technologies that are far enough along in the development process to have clear constituencies, yet not far enough along to be cost-effective in the market without a 

subsidy. This is a ‘‘deployment subsidy’’ and should not be confused with the need 

for fundamental R&D that is the central challenge for climate policy. 

Further, the carbon price imposed by the cap in the Proposed Policy provides exactly the type of subsidy that these technologies need; additional subsidies for deployment do not need to be handed out by Congress in the form of the Trust Fund 

provisions. The Trust Fund thus creates a ‘‘double-subsidy’’ that is unneeded and 

wasteful. 

The specific provisions for disbursement of funds under the Trust Fund also reflect some of the worst features of bad R&D policy. A good R&D policy for climate 

policy would establish incentives that align the motivations of researchers with finding the most cost-effective carbon emissions reductions. Once well-aligned incentives 

are established, the incentives would determine the direction of R&D. In contrast, 

the subsidy provisions of the Proposed Policy’s Trust Fund pre-ordain the distribution of funding among technologies. It attempts to ‘‘pick winners,’’ an approach to 

publicly-funded R&D has a long history of waste and failure. The specific allocation 

of subsidies among technology categories appears to have no rationale or basis in 

analysis, and even worse, the award of subsidies is not even nominally aligned with 

achieving the lowest dollar per ton of carbon reduction.7

More importantly, however, the Proposed Policy’s subsidy provisions—whether 

well or poorly constructed—fail to address the kind of R&D needs that are requisite 

to begin to actually reduce greenhouse gas emissions in meaningful amounts. 

It is known, but not widely appreciated, that stabilization of atmospheric concentrations of greenhouse gases will require the world (not just the U.S.) to reduce 

greenhouse gas emissions intensity to near-zero levels. While small greenhouse gas 

reductions may be cost-beneficial, they cannot halt or even dramatically slow cliVerDate 0ct 09 2002 11:57 Mar 22, 2007 Jkt 001109 PO 34079 Frm 00028 Fmt 6633 Sfmt 6621 H:\DOCS\34079.TXT SENERGY1 PsN: RSMIT
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8For example, if all of the existing U.S. natural gas-fired combined cycle generating capacity 

were to suddenly be fully utilized, we estimate based on our models of the U.S. power sector 

that current annual U.S. CO2 emissions would be reduced by about 80 MMTC—about a 4% re- duction in total US GHG emissions—and it would come at a cost of about $80/tonne C, even 

if gas prices would not be inflated by the sudden surge in natural gas demand. 9M.I. Hoffert et al., ‘‘Advanced Technology Paths to Global Climate Stability: Energy for a 

Greenhouse Planet’’ Science, Vol. 298, Nov. 1, 2002, p. 981. 10These points are developed in a more rigorous fashion in W.D. Montgomery and Anne E. 

Smith ‘‘Price, Quantity and Technology Strategies for Climate Change Policy,’’ in M. Schlesinger 

et al (eds.) Human-Induced Climate Change: An Interdisciplinary Assessment, Cambridge University Press, forthcoming 2007. 11Further, the ‘‘safety valve’’ in the Proposed Policy is designed to provide assurance that the 

price of emission allowances will not reach economically unsustainable levels. But that causes 

the carbon prices to be set at a level far too low to provide an adequate incentive for private 

investors to develop radically new technologies. Removal of the safety valve provision also is not 

an option, as a hard cap would impose a degree of market risk that would be unsustainable 

politically. 

mate change. Halting climate change is possible only if the large-scale greenhouse 

gas emission reductions can be implemented at costs that are both politically and 

economically acceptable. Incremental cost improvements in currently developed 

technologies, and more rapid deployment of technologies just now becoming affordable will not meet this need. The magnitude of possible reductions in the next decade or two achievable with today’s technology is dwarfed by the magnitude of reductions that successful innovation would supply through these routes.8

Hoffert et al. report that ‘‘the most effective way to reduce CO2 emissions with 

economic growth and equity is to develop revolutionary changes in the technology 

of energy production, distribution, storage and conversion.’’ 9 They identify an entire 

portfolio of technologies requiring intensive R&D, suggesting that the solution will 

lie in achieving advances in many categories of research. They conclude that developing a sufficient supply of technologies to enable near-zero carbon intensity on a 

global scale will require basic science and fundamental breakthroughs in multiple 

disciplines. 

Therefore, Herculean technological improvements beyond those that are already 

projected and accounted for in cost models appear to be the only way to hope to 

achieve meaningful reduction of climate change risks. As a result, no cap and trade 

scheme should be placed into law that does not simultaneously incorporate specific 

provisions that directly support a substantially enhanced focus on energy technology 

R&D. I use the term R&D as a distinctly different concept from providing subsidies 

for the initial uptake of existing but yet-to-be deployed technologies. By R&D, I mean 

investment to create technologies that do not exist today, and which would require 

major new scientific breakthroughs before they could become an option that any private entity might consider proposing in a competition for actual implementation 

under a subsidy program. The R&D may entail basic science as well as work that 

is identifiably on an energy technology with low or zero carbon emissions. Subsidies 

aimed at bringing existing technologies into the market, and achieving incremental 

improvements in their costs, do not fit my definition of the term R&D. 

Placing a price on carbon emissions, as a cap and trade program would do, would 

affect the pattern of private sector R&D. However, this so-called ‘‘induced-innovation effect’’ would be small. Economic analysis shows that market forces produce a 

less than socially optimal quantity of R&D. Once a private sector innovator demonstrates the feasibility and profitability of a new technology, competitors are likely 

to imitate it. Copycats can escape the high fixed costs required to make the original 

discovery. Therefore, they may gain market share by undercutting the innovator’s 

prices. In that case, the initial developer may fail to realize much financial gain. 

Foreseeing this competitive outcome, firms avoid investment in many R&D projects 

that, at the level of society as a whole, would yield net benefits.10

The task of developing new carbon-free energy sources is likely to be especially 

incompatible with the private sector’s incentives. With no large emissions-free energy sources lying just over the technological horizon, successful innovation in this 

area will require unusually high risks and long lead times. As Hoffert et al. pointed 

out, developing the needed technologies will entail breakthroughs in basic science, 

placing much of the most essential R&D results beyond the boundaries of patent 

protection. These are precisely the conditions under which for-profit firms are least 

likely to rely on R&D as an approach to problem-solving. Thus, greenhouse gas caps 

on their own would insufficiently increase private sector R&D directed toward technological solutions to abatement.11

Realistically, then, government must play an important role in creating the correct private sector incentives for climate-related R&D, as well as in providing funding to support such incentives. This role must be built into any cap and trade policy, 

26

12Such policies are discussed at greater length in W. David Montgomery & Sugandha D. 

Tuladhar, ‘‘Impact of Economic Liberalization on GHG Emission Trends In India,’’ Climate Policy Center, May, 2005. 

in order to avoid establishing an emissions policy that cannot fulfill expectations, 

and to avoid wasteful diversion of key resources for the requisite forms of R&D. The 

Proposed Policy does not appear to recognize the need for enhanced emphasis on 

basic research rather than additional subsidies for specific technologies that are already far along in the development process. It also does not clearly define government’s role or an appropriate division of labor or risk between the public and private sectors in the development of new technologies, whether as commercialization 

and incremental improvement of existing low-carbon technologies, or R&D for new, 

breakthrough technologies. Creating an effective R&D program will not be easy, but 

it ultimately has to happen if climate risks are to be reduced. The difficult decisions 

are how much to spend now, and how to design programs to stimulate R&D that 

avoid mistakes of the past. 

DEVELOPING COUNTRY EMISSIONS

As discussed above, the most important feature of any policy initiative is the impact it will have on investment in effective forms of R&D and the successful development of radically new technologies to provide large quantities of carbon-free energy at an affordable cost. However, that critical attribute of a sound climate policy 

only addresses emissions in the long-term. Near-term emissions reductions are also 

an interest (although they should not be the primary interest, as in most current 

policy proposals). 

For near-term emission reductions, developing countries offer far larger and more 

cost-effective opportunity for emission reduction that mandatory emission limits on 

U.S. businesses and consumers. Thus, a sound national policy for managing climate 

risk would place a high priority of its near-term control policies to bring about 

changes in how energy is used in developing countries. The Proposed Policy fails to 

make clear linkage of its near-term reduction requirements with the critical need 

to reduce emissions growth in developing country emissions. 

There are a number of ways in which the U.S. Congress could act to increase technology transfer and encourage foreign investment in developing countries, and these 

actions could lead to near-term reductions in emissions larger than any of the mandatory limits on U.S. emissions under considerations. A great deal of the difference 

in greenhouse gas intensity between developing countries and industrial countries 

can be explained by fundamental failures of markets and institutions in developing 

countries. Although the most cost-effective near-term emission reductions can be 

found in developing countries, fundamental institutional and market reforms are 

prerequisites to create the property rights and investment climate required for private foreign direct investment and technology transfer.12 These important needs are 

already a focus of the Climate Change Title (Title XVI) of the Energy Policy Act 

of 2005; the Proposed Policy would be improved if it were contain provisions to further the goals of Title XVI. 

LONG-RUN PLANNING CERTAINTY

The Proposed Policy attempts to address the need for business planning certainty. 

However, the certainty it offers covers only what Federally-imposed carbon prices 

will be. The Proposed Policy contains no provision to preempt state greenhouse gas 

caps that are starting to proliferate. This omission undermines any ability for its 

stable Federal carbon price expectations to offer U.S. businesses any true planning 

certainty. 

Even if preemption of state cap policies were included, another attribute of the 

Proposed Policy undermines the effectiveness of the long-run planning certainty 

that its safety valve provides. The proposal itself does not expect—even by 2030—

emissions reductions that begin to match the large reductions that are viewed as 

necessary by mid-century for greenhouse gas stabilization by the end of the century. 

As noted at the outset, the Proposed Policy does not promise large reductions in 

emissions so that it can keep its costs ‘‘low.’’ Unfortunately, as noted in my section 

on R&D, the Proposed Policy also fails to include any measures to address the central challenge of reducing the cost of large reductions, which would at least provide 

a vision of eventual long-run emissions reductions. Thus, supporters of the Proposed 

Policy will be hard pressed to characterize this specific policy as a first step towards 

a meaningful policy to manage climate change risks. Because of this, if enacted, 

there would probably be little relief in pressures to impose yet more stringent emisVerDate 0ct 09 2002 11:57 Mar 22, 2007 Jkt 001109 PO 34079 Frm 00030 Fmt 6633 Sfmt 6621 H:\DOCS\34079.TXT SENERGY1 PsN: RSMIT
27

13 EIA Report, p. 85. 14 EIA Report, p. 17. 15Smith, Anne E., Martin T. Ross, and W. David Montgomery, Implications of Trading Implementation Design for Equity-Efficiency Trade-Offs in Carbon Permit Allocations (Charles River 

Associates, December 2002). 16Smith, Anne E. and Martin T. Ross, Allowance Allocation: Who Wins and Loses Under a 

Carbon Dioxide Control Program? Prepared for the Center for Clean Air Policy (Charles River 

Associates), February 2002. 

sions limits within the U.S. These continued pressures would leave businesses with 

much less long-run planning certainty than the Proposed Policy wishes to provide. 

SUMMARY

In summary, the Proposed Policy does not offer any of the critical attributes of 

an effective policy to reduce climate change risks. It does not impose much cost on 

the economy, but that does not make it worth that small cost. To nudge the Proposal towards being a low cost policy that is worth its cost, I would recommend at 

least the following steps:

1. Replace the current provisions for subsidies for nearly-commercialized technologies with provisions to initiate of a research program focused on expanded 

basic scientific inquiry with relevance to energy system applications. Such provisions should also call for a careful evaluation of the best ways to establish effective R&D incentives for both public and private sector spending. 

2. Provide support for further efforts to promote technology transfer to developing countries. 

3. Add a provision that would cause the Federal policy to preempt all present 

and future greenhouse gas caps in the U.S. 

4. Maintain the provision for a carbon price ceiling, and an upstream imposition of that carbon price to offer the widest possible regulatory coverage within 

reasonable administrative bounds.

Even if the proposal were to be substantially revised to focus on true R&D needs, 

one might still reasonably question the need for imposing a cap and trade form of 

policy. A modest carbon tax could provide the same stable carbon price expectations 

and a source of funding for enhanced R&D. A carbon tax would provide identical 

emissions reduction incentives at identical costs to those of the safety valve proposal 

without the political, institutional, and analytical complications apparent in today’s 

safety valve proposals. The inherent complexity of a safety valve approach does not 

appear to me to be justified compared to a simpler carbon tax. 

DOES THE PROPOSED POLICY DISTRIBUTE ALLOWANCES ‘‘FAIRLY’’?

The complexity of setting up a cap and trade scheme is evident in the detailed 

provisions of the Proposed Policy for how carbon permits would be allocated. The 

language of the Proposed Policy does not suggest that these allocation rules are 

‘‘fair’’ or that they offer any particular degree of compensation to those bearing the 

cost of the policy. However, Appendix C of the EIA report contains a ‘‘Discussion 

Draft’’ by Senator Bingaman’s staff that explains the rationale for the various provisions in the Proposed Policy. It describes the distribution of allowances as ‘‘an approach that fairly compensates sectors for past investments in carbon-intensive 

technologies.’’ 13 The following pages then discuss the specific numerical allocations 

proposed for each sector as if they were a computed estimate of the relative needs 

for compensatory values of each sector. 

Although the staff Discussion Draft makes several allusions to estimates ‘‘provided by EIA’’ as a basis for the allocation shares selected, there appears not to have 

been any true analysis of compensation needs by sector. In fact, EIA states in the 

EIA report itself: ‘‘NEMS is not designed to evaluate the distributional impacts of 

whether industries are better or worse off under a given allocation scheme.’’ 14

As someone who has performed quantitative analyses of compensation needs 

under different greenhouse gas policies,15,16 I do not think that the allocation formulas in the Proposed Policy appear to even roughly approximate the relative needs 

for compensation of the various sectors. As an example, the EIA report establishes 

that railroads will suffer the most concentrated impacts to demand of all the transportation activities because of the linkage of its business outcomes to the delivery 

of coal, yet the Proposed Policy does not appear to offer any allocation at all to the 

transportation sector. At the same time, the Proposed Policy would give 2/55 of the 

allowance pool to natural gas processors (a value of about $1.5 billion per year in 

28

2012 alone), even though there is no clear reason why natural gas processors would 

suffer any financial impact under a greenhouse gas cap. 

I could continue the list of inconsistencies between the allocation formulas in the 

Proposed Policy with likely requirements for ‘‘fair compensation,’’ but the more important point is that people should not be misled into thinking that the allocation 

formulas in the Proposed Policy are ‘‘fair’’ in light of any specific objective. Their 

specificity does not reflect precision in, or indeed any formal estimation of, the relative compensation claims of various sectors, or of businesses within sectors.

The CHAIRMAN. Thank you very much. 

Jason Grumet, we are glad to have you here and thank you for 

all your good work in getting this proposal to where it is at this 

point. 

STATEMENT OF JASON S. GRUMET, EXECUTIVE DIRECTOR, 

NATIONAL COMMISSION ON ENERGY POLICY 

Mr. GRUMET. Thank you Chairman Bingaman. This new technology, I guess I am just not quite up to it. Chairman Bingaman, 

I thank you and also Senator Domenici for the opportunity to be 

here on behalf of the Energy Commission. Chairman Bingaman, I 

think what I would like to do is just speak for a moment upon the 

world in which we find ourselves in which means the opportunities 

to advance this discussion and then focus on the EIA analysis and 

on some of the comments that we have just heard to inform the discussion on how to move ahead. 

This committee, Chairman Bingaman, has done a great service 

by advancing the discussion on the specific aspects of what it will 

take to move legislation forward in a bipartisan fashion that could 

generate the kind of support necessary to act. The sense of the Senate resolution passed in the summer of 2005 did two very important things. First of all, it asserted that we have an imperative to 

act that as long as the price of venting a ton of carbon into the atmosphere is zero there will not be incentives for the very kind of 

logical things that Mr. Sterba was suggesting should take effect. At 

the same time that resolution identified some obvious parameters 

that would be necessary in order for this country, I think, to move 

forward in a mandatory way and those are that we have to have 

a mandatory economy wide market based program that does not 

harm the economy and that is linked to actions in developing countries. Most significant, I believe what we hear today is that the EIA 

analysis confirms that while certainly imperfect, I think Dr. Smith 

and Dr. Lashof have both made very good points about opportunities to improve the legislation that the basic structure of the bill 

fulfills that mandate in the sense of the Senate resolution and I 

think just pausing for a moment, that is a very important realization. We are now at the point of trying to figure out very important 

details, but the basic framework has been established. 

Also important to recognize is there are very different approaches being put forward in the U.S. Congress for dealing with 

climate change and they all are supported by good science. There 

are those supported by good atmospheric science which indicate as 

the Commission believes, that we must achieve a 60 to 80 percent 

reduction in global emissions and then we must do so with urgency 

and those bills therefore assert that we have to have absolute hard 

caps that achieve those reductions. Those are consistent with good 

atmospheric science. There are bills that have good economic 

29

science behind them. Those are bills that understand the uncertainties inherent in technological progress and the inability to 

know exactly what those costs will be and they also recognize the 

uncertainty and actions of other nations and recognize the competitive issues that Senator Domenici mentioned early on. So when, 

when our Commission sat back and kind of reflected on good political science we came to the conclusion that what was necessary was 

a first step that was designed to address those very real and serious economic uncertainties while providing an architecture on a robust basis for moving a country forward and I think that is really 

what the EIA results suggest is possible. Now sadly, this approach 

wins enthusiasm from very few. It is neither absolutely protective 

enough to satisfy those who rightly recognize the urgency of the environmental challenge nor is it absolutely clear that it will have no 

costs or will have no negative impacts on industries that many of 

us care deeply about. But, we believe it is ultimately the only way 

to move the Nation forward, not only to reduce our own emissions 

but to bring us back into a posture where we can act effectively to 

get China and India and the rest of the world to join us in an effective approach. 

So let me comment for a moment on the specifics of the EIA 

analysis. There was a certain intent to make sure that this proposal would not harm the economy and some of our mutual friends, 

Senator, I think that we outdid ourselves. It is clear that these 

costs are extremely low. Dr. Lashof indicates that EIA also has not 

incorporated certain aspects of the technological benefits that could 

bring prices lower and for that reason I think we share the sense 

that there are opportunities to strengthen aspects of the legislation 

while still abiding by the requisite requirement, not to harm the 

economy. 

Our Commission is meeting on Friday actually. We are going to 

be evaluating options and looking at questions whether we could 

suggest strengthening the reduction targets, strengthening the cost 

cap or I think most significantly trying to speed the transition from 

the slow to the stop phase. We very much believe there has to be 

a slow phase. We have a lot of momentum in the system and if we 

try to throw it in reverse right away there could be some disruption. We initially had proposed a 10 year slowing of emissions but 

I think now we are believing that something shorter than that, possibly a 5 year transition from slow to stop may be more appropriate. We hope to come back to you with suggestions, but Mr. 

Chairman, no matter how we move forward we think there are 

three fundamentals that have to be sustained if we are going to 

have real progress. 

The first is that this has to be a gradual approach initially and 

it has to be supported by real technological support, both to bring 

commercialization forward more quickly and I think as Dr. Smith 

suggests for that longer term goal. It is that combination of a modest reduction target and real support for technology that brought 

unusual organizations like the United Mine Workers, the United 

Steel Workers, the United Auto Workers to support our proposal 

and the legislation you were considering because they recognize 

that there was an opportunity if things were done thoughtfully to 

provide new technology that would allow those industries to move 

30

forward and succeed before the costs of the emission reductions became really damaging to their future. 

Second Mr. Chairman, we believe that this has to be an iterative 

approach. The collective action nature of the problem is this me, 

Mr. Chairman or is this the vote? I have this effect on people. Well, 

maybe that did it. We believe that this has to be an iterative approach. The collective action nature of the problem, the fact that 

we can not solve the problem unless we have action by all developed and developing countries leads us to believe that no matter 

how much we desire a 50 year certainty, it is just not realistic. I 

think it is more political cosmetics than reality whether you are articulating a 10 or 15 year path saying that you are going to iterate 

or whether you are asserting a 50 year path and asserting that it 

is locked in. The truth is that this is an issue that Congress is 

going to have to revisit on a regular basis and we believe that that 

should be understood and explicit from the outset. 

And finally, we believe that the program has to be cost certain. 

This is still a rather polarized debate going from one camp to the 

other and saying trust me, it is going to be cheap, does not tend 

to have a lot of beneficial impact. 

I think we heard from all of the folks speaking today that there 

are differences of opinion about how quickly technology will advance. Those are the differences that lead you to believe that the 

program will either be expensive or cheap. I personally tend to be 

more of a technology optimist. I do not think that a safety valve 

is going to in fact reduce the ultimate impact of the programs significantly but I also recognize that the person I am trying to convince is not myself and we have found that when we have tried to 

move this discussion forward and broaden the coalition, the ability 

to say that absolutely under no circumstances can the cost of the 

program be higher than a set, you know, predetermined price has 

been incredibly important to bring this discussion, I think, closer 

to a central point from which you can actually now try to come up 

with some details. 

So let me close by simply saying that we continue to greatly appreciate the opportunity for this discussion. We think this committee is having the kind of discussion that is necessary to really 

advance the debate and in particular, the decision to submit the 

draft proposal for the rigorous analysis EIA has done allows us to 

have a public discussion where you have equal attentions of the 

costs and benefits on the table at the same time and we think that 

is the kind of discussion that is going to, that will ultimately allow 

us to build the coalition necessary for action. Thank you. 

[The prepared statement of Mr. Jason Grumet follows:]

PREPARED STATEMENT OF JASON S. GRUMET, EXECUTIVE DIRECTOR, NATIONAL

COMMISSION ON ENERGY POLICY

Good morning Chairman Bingaman and Members of the Committee. I speak to 

you today on behalf of the bipartisan National Commission on Energy Policy. The 

Commission is gratified that our recommendations on climate change continue to inform this Committee’s deliberations and I appreciate the opportunity to speak with 

you today regarding the Energy Information Administration’s analysis of Chairman 

Bingaman’s draft legislation. In the summer of 2005, this Committee played a critical role in moving the Congressional debate on climate change forward by winning 

Senate adoption of a landmark resolution recognizing the importance of the climate 

problem and, for the first time, putting this body on record in support of the need 

31

for mandatory efforts to reduce greenhouse gas emissions. I continue to believe that 

in years to come, passage of this resolution will come to be seen as a pivotal moment 

in the evolution of our collective response to the risks posed by climate change. I 

commend Chairman Bingaman, Senator Domenici and many others on this Committee for their leadership on this issue. 

The Sense of the Senate resolution represents a critical milestone because it recognizes the urgency of taking mandatory action on climate while also establishing 

conditions that must be met to craft an effective, responsible, and politically viable 

path forward. The resolution calls for an approach that will slow, stop, and reverse 

the growth of greenhouse gas emissions. But it also emphasizes the need to adopt 

an approach that is market-based, will not significantly harm the U.S. economy, and 

encourages comparable action by other nations that are major trading partners and 

key contributors to global emissions. 

We are now moving to the next phase of the legislative process, in which the laudable goals of the Senate resolution must be translated into specific language that 

can win the support of Congress. The Commission is very supportive of the process 

this Committee is pursuing to reduce the polarization that has dominated past climate-change debates and build the bipartisan consensus necessary to enact legislation. It is clear that the draft bill analyzed by EIA benefited greatly from detailed 

input received as a result of the program design workshop this Committee conducted last year. New provisions that address key issues such as permit allocation 

and emissions offsets with greater specificity than ever before will add much to the 

continuing discussion. It should also be noted that the bill under discussion proposes 

somewhat stronger emission reduction targets than the similar legislation EIA analyzed in 2005. The Commission believes that further opportunities exist to strengthen this legislation while still abiding by the requirements of the Sense of the Senate 

Resolution and we hope to share more specific suggestions—as well as our current 

thinking on other key design issues such as allocation, point-of-regulation, and emission offsets—with the Committee in the coming weeks. 

Chairman Bingaman, the Commission is very encouraged by your and Senator 

Specter’s decision to circulate a discussion draft and initiate an ongoing series of 

staff working sessions to hammer out the tough questions that remain. Submitting 

your legislation for detailed economic analysis prior to entertaining a larger public 

discussion reflects a continued commitment to serious engagement with the concerns that must be overcome to advance this debate. We hope that advocates of 

other climate proposals will also see the value of subjecting their ideas to a similar 

degree of scrutiny. 

For the remainder of my testimony, I would like to focus first on the substance 

of EIA’s findings and then on the implications of these findings as Congress goes 

forward to design an effective legislative approach, on climate change. 

SUMMARY OF IMPACTS

The EIA analysis of Senator Bingaman’s proposal allows us to directly address 

one of the questions at the heart of the debate over climate legislation: Is it possible 

to take a meaningful first step to limit greenhouse gas emissions without harming 

the economy? EIA’s most recent analysis again demonstrates that the answer is yes. 

This conclusion is in line with EIA’s assessment of a similar proposal from NCEP 

that was analyzed at the request of Senator Bingaman in 2005. EIA said of that 

proposal that the overall growth rate of the economy during the period of analysis 

was ‘‘not materially altered.’’ For Senator Bingaman’s current proposal, EIA found 

similarly minor impacts: according to its analysis, U.S. GDP in 2030 is reduced by 

only one quarter of 1 percent compared to the baseline case. This is equal to slowing 

the rate of economic growth by roughly one month over the next 20+ years. 

It is also important to emphasize that EIA’s analysis does not include positive 

benefits from the $50 billion the current proposal would generate over the next 20 

years for technology incentive programs. These funds would accelerate the development and deployment of the breakthrough technologies—such as advanced coal gasification with carbon sequestration, cellulosic ethanol, and renewable energy—that 

will be necessary to achieve significantly deeper emissions reductions in the future. 

In other words, if EIA had used more optimistic technology assumptions to reflect 

the bill’s significant technology incentives, the analysis would likely have shown 

larger emission reductions at even lower cost. 

EIA’s analysis also shows modest impacts on energy use and prices. While growth 

in coal use is projected to slow by more than 50 percent compared to the businessas-usual (BAU) baseline case, EIA predicts that overall coal use will continue increase under the proposed policy even without accounting for the new markets that 

will be created by IGCC and sequestration. When crafting its recommendations, the 

32

Commission worked closely with the United Mine Workers to develop a strategy 

that would initiate the transition toward a low-carbon future while providing an opportunity for carbon sequestration and other carbon management approaches to mature before rising carbon prices would render coal-based energy uneconomic. By 

pairing initially modest emission reduction targets with a robust package of technology incentives, this legislative draft aims to effectively address the legitimate 

concerns of the coal sector. 

Another important concern addressed in the EIA analysis is the impact of carbon 

constraints on already tight U.S. natural gas markets. Here again, the new results 

are reassuring: natural gas consumption remains essentially unchanged despite 

somewhat more stringent program targets. Throughout the forecast period, natural 

gas use ranges from 2 percent below the BAU level to 1 percent above the BAU 

level. 

Of course, a very small fraction of a very large economy can still look like a lot 

of money if taken out of context. You will undoubtedly hear from critics that the 

proposal will cost $232 billion in lost GDP between 2009 and 2030. What the critics 

are less likely to mention is that this is just a tiny fraction (one-tenth of 1 percent) 

of the more than $240 trillion of cumulative growth in GDP the economy is expected 

to generate over the same time period. 

To say that greenhouse gas limits can be imposed without harming the economy 

is not to claim that the program is costless. Any honest debate will need to acknowledge that there are costs and that—as with any public policy intervention—there 

will be winners and losers. We do not doubt that innovative and efficient companies 

can prosper under a carbon mitigation regime. Moreover we believe that the technological innovation sparked by a carbon price signal could well produce net benefits 

for our entire economy in the long run. In the near term, however, the same price 

signal will impose new costs on fossil fuel consumption and reduce the value of carbon-intensive capital stock. So yes, there will be costs. But as always, the real choice 

is not between some cost and no cost. Rather the relevant question is whether the 

costs of action are reasonable and justified when compared to the liabilities of inaction. Two years after the Senate adopted its landmark resolution we think the answer to that question is clearer than ever. We also remain convinced that the quite 

modest economic impacts of the approach we have proposed can be effectively mitigated by thoughtful program design and through the equitable allocation of emission permits. 

IMPLICATIONS OF THE EIA ANALYSIS

The trade-off for the modest costs found by EIA is that the program being analyzed also achieves relatively modest emission reduction benefits, at least in its 

early stages. In light of recent scientific developments and the time that has passed 

since NCEP’s 2004 recommendations, the Commission has begun evaluating opportunities to strengthen its original proposal and still meet the criteria of the Sense 

of the Senate resolution. In particular, we are analyzing modifications that would 

strengthen program targets as well as possibly increase the starting price of the 

safety valve and/or the rate at which that price rises over time. We are also evaluating options for speeding the transition between the slow and stop phases of the 

program’s target emissions trajectory. Our original report recommended a ten-year 

period aimed at slowing emissions growth, followed by a ten-year period designed 

to stop further growth. We are presently examining approaches that would stop 

emissions growth within five years and reduce overall emissions no later than ten 

years after program implementation. It is important to stress that any changes in 

our recommendations will be predicated on the conclusion that a moderate strengthening of the program can be achieved while still meeting the test of no significant 

harm to the economy. 

Even as we examine opportunities to strengthen our original recommendations, 

the Commission remains firmly convinced that certain elements are essential to the 

economic and political viability of any climate proposal. We start with an acknowledgment that trade-offs between the timeliness and stringency of action are unavoidable. It’s clear that significant reductions in absolute emissions will eventually 

be necessary to stabilize atmospheric greenhouse gas concentrations. But faced with 

a disconnect between what is required and what is politically feasible in the nearterm, we conclude that timely adoption of a policy that sets initially modest targets 

while establishing a robust basis for long-term progress is more ecologically protective than continued delay in pursuit of more aggressive targets. Simply put, there 

is no time to lose, especially when one considers that mandatory action by the 

United States remains the necessary predicate for action by other major emitting 

nations such as China and India. 

33

1See http://select.nytimes.com/search/restricted/article?res=F50B 12F83A5B0C748CDDA 

80994DE404482. 

The Commission’s emphasis on the necessity of a major technology program to 

spur the development and deployment of lower-carbon technologies follows directly 

from our judgment that near-term progress demands a policy with modest initial 

costs. The $50 billion package of technology incentives created and funded by the 

draft legislation provides a critical complement to the long-term market signal created by the emissions trading program. We strongly believe that a combined strategy of market signals and robust technology incentives is the most effective and 

least costly way to achieve a meaningful shift from business-as-usual trends, while 

equitably sharing the burden of emissions mitigation among shareholders and taxpayers. 

We also continue to believe that cost certainty is critical to forging the political 

consensus needed to move forward without further delay. The Commission recognizes that the decision to include a ‘‘safety-valve’’ to cap costs under an emissions 

trading program is highly controversial. Nevertheless, we remain convinced that 

this approach provides a uniquely effective response to the economic and competitiveness concerns that continue to motivate opposition to mandatory action. At some 

point in the future, we anticipate that the need for environmental certainty is likely 

to outweigh the need for cost certainty. Indeed, once there is greater international 

consensus about the ultimate goal of emission reduction efforts and about the means 

necessary to achieve that goal it will likely be appropriate to transition away from 

the safety valve toward firm emission caps. Again, our hope is that near-term action 

by the United States will hasten progress toward a truly effective and equitable 

global response to the climate problem. Meanwhile, we recognize that other legislative proposals propose alternative approaches to containing program costs and welcome further analysis and debate on which mechanisms best address the cost and 

competitiveness concerns that have been raised by labor unions, energy-intensive industries, consumer groups, and others. 

Finally, although it is not specifically the subject of this hearing, we continue to 

believe that any successful national policy must place considerable emphasis on promoting wider international cooperation. By some accounts, China is now adding new 

coal capacity at the rate of one large power plant every week to ten days and is 

set to surpass the United States in total carbon emissions as early as 2009.1 Though 

some will argue that this sobering development weakens the case for unilateral action by the United States, the Commission draws the opposite conclusion. In our 

view, the current trajectory of global emissions instead underscores the liabilities of 

continued paralysis. If one accepts that rapidly industrializing countries like China 

and India are likely to accept emissions limits only after the United States and 

other wealthy nations have demonstrated a willingness to take the lead, it follows 

that postponing action will come at a high price—not just in terms of U.S. emissions 

but in terms of prolonging business-as-usual trends in other countries. At the same 

time, we continue to believe that once the United States takes action, it is imperative that our major trade partners and other large emitters follow suit. We therefore 

support the five-year review provision in the Bingaman proposal, which would link 

continued tightening of the emissions target and further increases in the safety 

valve price to significant action by these countries. 

In closing, the Commission believes that the discussion draft you have circulated 

presents a sound framework for legislative action. The results of the EIA analysis 

are very helpful and give grounds for optimism that a viable policy consensus is in 

reach. Indeed, as we have indicated in this testimony, the EIA results suggest to 

us that there is room to further improve the bill consistent with the requirements 

of the Sense of the Senate Resolution. We look forward to exploring those opportunities and addressing other key details of program design with the Committee and 

other stakeholders as this process moves forward.

The CHAIRMAN. Thank you very much. 

Let me ask a few questions, then we will have 5 minute rounds 

and Senator Domenici will follow me. 

Howard, let me ask you first. One issue that I believe Ms. Smith 

raised is whether or not it is really worth doing this considering 

the modest benefit that would be achieved. You, EIA did an analysis this last year I believe of the impact of EPAct, the 2005 energy 

bill on carbon dioxide emissions and I have that in front of me. It 

says in sum, EIA’s analyses suggest that roughly 30 EPAct 2005 

34

provisions that were explicitly modeled are projected to reduce energy related CO emissions by approximately 90 million metric tons 

in both 2020 and 2030. That is your conclusion? 

Dr. GRUENSPECHT. Yes, that is correct. 

The CHAIRMAN. Now, as I understand this analysis you testified 

on today, you say that this draft proposal instead of reducing the 

90 million metric tons, would reduce greenhouse gases during that 

same period well in 2020. I think the figure you got is that it would 

reduce it to 562 million metric tons and in 2030 it would be 1,259 

metric tons. Am I right about that? 

Dr. GRUENSPECHT. That is correct, 1,259 million metric tons. 

The CHAIRMAN. Yes, 1,259 million. So that by 2030 if this provision were adopted your best guess is that we would be reducing 

greenhouse gas emissions by somewhere in the range of 12 to——

Dr. GRUENSPECHT. 15. 

The CHAIRMAN. 12 to 15 times as much reduction as would be 

the case in absence of some kind of cap and trade system. Is that 

a fair statement or not? 

Dr. GRUENSPECHT. That is a very fair statement, sir. 

The CHAIRMAN. Okay. Maybe you would want to respond and 

give your thoughts on Dr. Lashof’s comments about how you did 

not take into account some of the energy efficiency benefits as I understood what he said that there are energy efficiency benefits to 

be realized from the investment of research dollars in this fund. I 

think that was the point that he was making and maybe other benefits as well. Maybe you could respond to that. 

Dr. GRUENSPECHT. I could do that, sir, thank you. I guess the 

easiest and cheapest response would be a Goldilocks answer. I 

know there was a press release I saw yesterday that some other 

group criticized us for low-balling the cost and I guess with Dan 

saying we are high-balling the cost I could say gee, we must be just 

right if we are being criticized from both sides, but that is not a 

substantive answer. I do not want to say that. I actually think 

Dan’s comments raised some interesting issues, but I really do disagree with their implication that EIA’s study is biased. Our analysis is very clear about what is included and what we do not include and why. Without doubt, there are many cross-cutting forces 

and additional complexities we do not address, and we state that 

clearly in the study, but these do not all cut in one direction as I 

think Dan’s testimony suggests. Starting first with technology, our 

report prominently 

The CHAIRMAN. Give us the short version here because I wanted 

to ask another question. 

Dr. GRUENSPECHT. I will give you the pretty short version. 

The CHAIRMAN. Good. 

Dr. GRUENSPECHT. Basically we have done a lot of work on technology in our previous reports—both the one done in response to 

your original request and Senator Salazar had a request last year. 

Clearly, more advanced technology lowers the cost of achieving 

emissions reductions but we really cannot see any correct way to 

link increased Federal expenditures to the state of energy technology. So we have looked at the effect of better technology and it 

is to reduce the cost of reductions. We also agree on energy efficiency, but I would say that some of the policies that NRDC sugVerDate 0ct 09 2002 11:57 Mar 22, 2007 Jkt 001109 PO 34079 Frm 00038 Fmt 6633 Sfmt 6602 H:\DOCS\34079.TXT SENERGY1 PsN: RSMIT
35

1For example, electricity markets are represented for 13 regions based on the regions and 

subregions of the North American Reliability Council (NERC). 

gests have a decidedly mixed historical experience. For example, 

some demand-side management programs and some, I guess what 

is called, strategic promotion of technology programs, I am sure 

many of you in this committee are familiar with something called 

PURPA, which I think you repealed last year. There was a lot of 

strategic technology promotion in that statute. Some of that strategic technology promotion ended up being quite expensive, and I 

recall that some of the States that took the strongest efforts under 

PURPA actually were some of the States that had the highest, that 

ended up with the highest electricity prices and because of that got 

led into restructuring in the late 1990’s. That had problems of its 

own, frankly, but the notion that all this strategic promotion and 

targeting is going to make things work better is not necessarily the 

case. Again, their testimony talks about allocating allowances 

based on moving off the historical allocation to some kind of incentive or strategic allocation, to the extent that allocations are used 

to buy down consumer costs. You are going to attenuate the consumption response to the extent that you tie allowances to specific 

technologies; you may not get the lowest-cost responses. So there 

are a lot of issues here. The bottom line—in my world, when you 

want to make an omelet you break some eggs, although you try to 

do as careful a job as you can to hold down the number. Dan’s sort 

of suggesting that when he makes an omelet he finds more eggs 

in his refrigerator than he started with. Again it is a nice thought, 

but there is a lot going on here. It is difficult to see how reducing 

use of technologies and processes that the market finds economically attractive, like burning coal, and replacing them with more 

expensive options is likely to raise overall economic performance. 

That does not say we should not do it. 

Even if limiting emissions engenders some cost, it can still be 

very desirable public policy if the environmental benefits are such 

that the limitations serve to increase overall social welfare. You 

guys all have a hard task in front of you. EIA does not look at benefits. We have a very limited role in this. We try to do that role 

well. We think we have done it well. It is not easy. 

The CHAIRMAN. Thank you very much. Let me stop with that and 

call on Senator Domenici for his questions. 

Senator DOMENICI. Well, with all of that I don’t know whether 

I have any but, let me go with you, Doctor, a little bit more if you 

can stand it. The EIA analysis projects a small decrease in the 

Gross Domestic Product under the proposal and the EIA model tell 

us more about the impacts, specific industries, for example which 

U.S. industries would see job loses. Can the EIA model tell us anything about regional impacts? I don’t want you to give us the 

whole, the result today; I want you to just tell us, can you? 

Dr. GRUENSPECHT. Yes, we can do some of that. 

[The following was received for the record:]

The National Energy Modeling System (NEMS) used in this analysis does produce 

energy market results at various regional levels 1 and industrial sector economic results at the national level. With respect to the energy sector, significant variations 

in regional results are seen in the electricity and coal markets. In the industrial sector, the most significant impacts occur in the energy-intensive industries. 

36

* Figures 1-4 have been retained in committee files. 

2 Energy-intensive manufacturing industries in NEMS include food, paper, inorganic and organic chemicals, resins, agricultural chemicals, petroleum refining, glass, cement, iron and steel, 

and aluminum. 

ELECTRICITY AND COAL MARKETS

All regions of the country are projected to face higher electricity prices in the 

Phased Auction case of the September 2006 proposal that EIA was asked to analyze 

(Figures 1 and 2).* The largest price increases are projected in regions where electricity prices are set competitively and where coal generation accounts for a large 

share of total generation. In these regions, the costs of holding all the needed emission allowances will be fully reflected in consumer prices. For example, electricity 

prices in the MAAC and ECAR regions are projected to be 17 percent and 14 percent higher, respectively, in the Phased Auction case in 2030. Conversely, the electricity price impacts are projected to be smaller in regions that still have an average 

cost pricing regime and do not depend as heavily on coal. For example, 2030 electricity prices in the California and NWP regions are projected to only be 4 percent 

and 5 percent higher, respectively, in the Phased Auction case. 

The reduced use of coal in the power and liquid fuels (i.e., coal-to-liquids diesel 

production) sectors affects coal production in all areas of the country (Figure 3). In 

absolute terms, western coal production is projected to be most impacted, falling 253 

million tons (24 percent) below the reference case in the Phased Auction case in 

2030. This occurs because, in the reference case, western coal regions, particularly 

the Powder River Basin in Wyoming and Montana, were expected to be the dominate growth areas for coal production. In the Phased Auction case, power companies 

turn to new nuclear, natural gas, and renewable plants to meet growth in the demand for electricity, reducing the need for greater coal production. Even with this 

change, western coal production in 2030 in the Phased Auction case is 30 percent 

higher than 2004 production. Eastern coal production in 2030 is projected to be 142 

million tons (22 percent) below the reference case level in the Phased Auction case, 

about the same level that was produced in 2004. 

IMPACTS ON INDUSTRY OUTPUT

In the Phased Auction case, the price of allowances directly increases the costs 

in emitting sectors and leads to increases in energy prices that raise the factor input 

costs for all industries. This leads to changes in the demand for goods and services, 

as reflected in the final demand categories of consumer spending, investment, government spending and trade, and causes industries to adjust their production accordingly. Figure 4 shows the average annual loss in gross output relative to the 

reference case for the period 2009 to 2030 for the Phased Auction case. The energyintensive manufacturing industries 2 are impacted the most, with output projected 

to be reduced by an average of 0.82 percent. Non-energy-intensive manufacturing 

is reduced by an average of 0.57 percent, non-manufacturing industries by 0.32 percent and services by 0.10 percent. 

Among the detailed energy-intensive industries, aluminum production, which is a 

heavy user of electricity, is expected to fall by 5.0 percent on average. Production 

of glass, iron and steel, cement, agricultural chemicals and basic inorganic chemicals 

are also expected to fall by more than 1 percent. Among the non-manufacturing industries, coal mining is projected to fall by 8.9 percent, with oil and natural gas extraction falling by 0.4 percent.

Senator DOMENICI. Okay, has it been done, or would it have to 

get done, or going on? 

Dr. GRUENSPECHT. Some of the work on electricity has been 

done, the different regional price impacts. 

Senator DOMENICI. We would like you to do that and submit it 

to the record through the chairman. 

Dr. GRUENSPECHT. Be glad to do that, sir. 

Senator DOMENICI. Higher energy prices under the proposal 

drive energy intensive industries to relocate to countries like China 

and India where there are no restrictions on greenhouse gases. Is 

that a true statement? 

37

Dr. GRUENSPECHT. What we looked at was a U.S. model, not a 

global one, so there is logic in what you say, but we have not evaluated it in the context of this study. 

Senator DOMENICI. Alright, you mean you didn’t study it. You 

just kept an American one. 

Dr. GRUENSPECHT. The focus is on United States, yes. 

Senator DOMENICI. Right, thank you. Why do you believe that 

nations like China and India will act to limit greenhouse gas emissions if the United States does it first? Would these large developing countries have an advantage if they kept their energy price 

as low as possible? This is a question for Jason Grumet. Jason? 

Mr. GRUMET. Thanks, Senator Domenici. I guess I would have to 

flip the question around and say that I think that action by the 

United States is certainly necessary to imagine that we can have 

action from other countries, but it is not sufficient. There are absolutely no guarantees that the United States once we re-enter the 

discussion in the postural leadership are capable of moving the 

world, but if you look to history when it comes to our foreign policy 

we are not great followers. We are pretty good at getting other people to follow us and we have had a lot of success with the CFC 

treaty. We have a tremendous opportunity to, I think, to encourage 

other countries to join us in that approach and the last thing that 

I would say is that they see the risks of climate change too. I think 

that they are suffering the same kinds of anxieties about, you 

know, they have a billion people to feed and a billion people who 

need clean drinking water. They are already having a lot of 

stresses there. So my hope and this goes back to I think where the 

first President Bush entered the discussions that we would seek to 

have differentiated commitments. We would not sit back and say 

we are going to wait for China to lead us, nor would we go off 

willy-nilly and say we are going to commit to an 80 percent reduction absent assurance that they are coming with us, but as this bill 

does, we would basically trust and verify. We would take a step; 

we would do everything we can to make that then bring about an 

effective global program. If that happens we would take second and 

third steps. If that does not happen, I think that we would stand 

down. 

Senator DOMENICI. Okay. This last question is of Dr. Anne 

Smith. Dr. Smith, you made an important point that the United 

States industry needs certainty if we are going to put a price on 

carbon. Would a carbon tax give industry more certainty than a cap 

and trade system? 

Dr. SMITH. The safety valve feature, if it goes in as said, is almost the same amount of certainty however it is far more complex 

as you have probably started to realize in setting up a cap and 

trade system with all of the allocations and the issues of the rules 

for the trading and it imposes a lot of costs on businesses to manage that trading and the management, the accounting for the emissions etcetera that could be much more simple under a simple carbon tax. Essentially with a safety valve, if it is stable, you get almost the same outcome but at much greater administrative cost 

and complexity and it might even, I think, hold up the passage of 

the bill, that complexity. 

38

I would also like to point out, Jason mentioned that we need to 

not deal, not even think that we can get certainty with any bill 

that obviously we will have to revisit what the caps are over time 

and I agree with that. There is no way either a tax that would be 

imposed or a cap and trade program with the safety valve would 

really provide true certainty over all time, but what we do need is 

a policy that will eliminate the cause for dramatic new shifts towards a different philosophical approach to dealing with the climate policy into the future, into the next 20 years and that is why 

I am saying pairing the safety valve feature or carbon tax with a 

true R&D plan envisioned for getting technology down is how you 

can get a stable expectations within that general philosophical approach and that is the essential piece that is missing right now, I 

think. 

Senator DOMENICI. I wanted to thank Jeff Sterba in particular 

for coming up here today and testifying and being a leader among 

some industry people who would seek to move us to get started. I 

am not, we normally agree, Sterba, you and I, that isn’t necessary, 

but we normally do for some strange reason. At this point we are 

not in agreement on this bill, but we are moving so I guess as long 

as that is there you can be somewhat satisfied that the number of 

trips you will make to Washington can be minimized in some way 

pretty soon. Thank you. 

Mr. STERBA. Thank you, Senator. 

Senator DOMENICI. Thank you, Senator Bingaman. 

The CHAIRMAN. Thank you very much. 

Senator Akaka. 

Senator AKAKA. Thank you very much, Mr. Chairman. Mr. 

Gruenspecht, thank you for your analysis and hard work on this 

report. In general, I support a cap and trade system to reduce carbon emissions in the United States. However, as you know, Hawaii 

has the highest gasoline and electricity costs in the Nation. Your 

analysis shows increases in gasoline costs over time up 0.11 cents 

by 2030 and also in electricity costs. Can you expand a little bit 

more on the economic effects on the State of Hawaii due to its 

unique circumstances? 

Dr. GRUENSPECHT. Well, thank you, sir. First I should give, it is 

not my hard work it is the work of all the people at EIA because 

it took a lot of people to do this and I want to say that first. We 

do not have really detail into the individual State-level impacts in 

this type of framework. I do not know what to say. What I would 

do if I was thinking about this is draw some analogies to some of 

the recent events. Gasoline prices have changed a lot for other reasons, as we all know. More recently, in a direction that I think a 

lot of us like but over the past couple of years in a direction that 

a lot of us do not like and those changes were a lot bigger than 

0.11 cents. Maybe by comparing how those changes have effected 

things would be a context for thinking about the question that you 

pose. That is not a real formal answer, but I think that is probably 

the best I can do. 

Senator AKAKA. Well, with the new proposals of this committee 

with Jeff Bingaman there may be some other changes that may 

come sooner than we think. Mr. Lashof, I fully agree with your 

point that allowances are a public asset and I am encouraged by 

39

your suggestion that a significant portion that is 30 percent be allocated to States. As you know my State of Hawaii could probably 

use some of the allowances to address concerns in particular sectors that hopefully could benefit families and consumers in Hawaii. 

Is this something that, the State use, can use to help with the impact on gas and electricity prices? 

Dr. LASHOF. Ah, thank you, Senator and first of all I want to say 

that this idea of allocating some, 30 percent of the allowances, is 

not my idea, it is Senator Bingaman’s idea and I think it is a good 

one so I want to endorse it and I think that it is there precisely 

because each State has some different circumstances and the way 

Hawaii would use those resources will be different then the way 

New Mexico will use those resources so I think it makes a lot of 

sense to go down that road and Hawaii could, for example, has 

enormous renewable energy potential that could actually allow 

your State to produce all the electricity it needs without burning 

fossil fuels. I think in the long run that would lower costs to consumers and those resources could be used for that as an example. 

It could be used to help in the transportation. I think you do want 

to be careful not to have States use the resources in a way that 

would subsidize activities that would cause emissions to go up because that would defeat the purpose of the program, and I think 

the provisions here are intended to ensure that States use the resources in ways that further the program. In general I think this 

is a good approach to include in any cap and trade program. 

Senator AKAKA. I look forward to working with Senator Bingaman to explore the possibility. Mr. Grumet, thank you for your 

work with the National Commission on Energy Policy. It has 

launched us in the right direction. I want to follow on Senator Domenici’s question. I agree with your point that we must place a renewed emphasis on promoting wider international cooperation in 

reducing carbon emissions. Are there signs that China and India 

will take action if the United States self regulates carbon emissions 

and if there are what are the next steps for the United States? 

Mr. GRUMET. Well, Senator I have to admit that domestic policies 

are more my expertise than foreign policy but I can suggest a couple of things happening and maybe you can reflect on what you 

think the possibilities are. China, in particular, is actually reducing 

the carbon intensity of its economy at a much faster pace then the 

United States or any developing, of any developed country. What 

they aspire to, of course, is advanced technology and at a very simple level and I think Mr. Sterba has spoken to this in the past and 

moving from very inefficient, largely uncontrolled, small utility coal 

combustion to a modern facility in and of itself has a tremendously 

beneficial impact on reducing the carbon per kilowatt. 

It is also the case that the Chinese government has a very serious appreciation of the perils that can befall China if in fact we 

have the kind of drought and the strong cyclical changes in which 

we have snow melt much faster and all the different varieties of 

anxiety that I think that everyone who looks at these should seriously just starts to feel. So again I think I have to flip the question 

back around and recognize that the United States is responsible for 

about 80 percent in the developed world of the emissions in the atmosphere. We now have China struggling to move from a develVerDate 0ct 09 2002 11:57 Mar 22, 2007 Jkt 001109 PO 34079 Frm 00043 Fmt 6633 Sfmt 6602 H:\DOCS\34079.TXT SENERGY1 PsN: RSMIT
40

oping Nation to a country that has some of the amenities that we 

have come to take for granted and we have to find a way to meet 

them in some kind of iterative approach. I think they look at us 

in kind of aghast to think that we would come to them and say 

please, you, China have to take the exact same steps as we do 

when you compare our GDP’s and relative quality of life, so it is 

going to be an iterative relationship. 

Senator AKAKA. Briefly, what about India? 

Mr. GRUMET. I think that the dynamics are somewhat similar in 

India. India is in fact has the greater ability of making existing 

kind of technological base. They are moving forward with a number 

of rather significant low carbon activities both India and China are 

of course moving as strongly as they can towards nuclear power, 

which they both hold some significant hope and but again, this is 

a question about the United States and our, you know, great international might rejoining this discussion and trying to develop global process that in fact would be equitable and ultimately effective. 

Senator AKAKA. Thank you. Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Craig. 

Senator CRAIG. Well, Mr. Chairman, thank you very much. Let 

me first thank you for the hearing and the effort put forth and I 

must also say your thoughtful approach toward the cap and trade 

concept. I think that is reflected in the testimony we have heard 

today. I must also tell you that I continue to oppose what I think 

is an obsolete approach that is a post Kyoto holdover of a command 

and control type that creates imbalances or disincentives and certain other kinds of abnormal incentives to a market that all of us 

are and should be concerned about. 

As you know I helped co-author the Hagel-Pryor Climate Title, 

title 17 in EPAct that you and Senator Domenici are certainly receiving accolades for as you should and frankly that opposed the 

cap and trade amendment approach. Having said that I think your 

latest draft demonstrates a lot of work on your part and I am encouraged by it. You have included greenhouse gas intensity as a 

measurement of emissions in the terms of the GDP. I guess my 

frustration beyond that because I see a phenomenal opportunity for 

our country to do a good number of things. First and foremost for 

us to lead and help the world, I do not dispute that. I think that 

is in part what Jason is referencing and we can do that not 

through existing technology, but new technologies. We gain very 

little to focus on ourselves and ourselves alone and let China and 

India wander off into the future continuing to be the large emitters 

they are. It is just simply counterproductive. We are investing 

more, we should invest more, I think Anne has it right. This may 

be the cart but there is no horse and I must tell you I am extremely frustrated with an administration that is talking the talk 

right now but they are not administratively, by rule and regulation, walking it and by that I mean we are still lagging dramatically with the implementation of all of the new technology ideas 

and the guaranteed loans and all of that that in part, many of you 

have included in your discussion today on this piece of legislation. 

That does not mean it is all inclusive for the work we have done 

and there should not be more work done and I am certainly willing 

to be part of that, but I am going to jab this administration a little 

41

bit for the very counterproductive discussion between DOE and 

OMB about who is on first and who is on second. 

Now I will take another step forward. The unwillingness of the 

current Senate and House to move forward on an Appropriations 

bill approach to fund these new efforts that we are now going to 

deny ourselves, steps us back another year, in many of the new 

technologies in the advancement of something that we all now generally agree with, nuclear. Here we are attempting to look into the 

future and we are not handling the present very well as it relates 

to the work we have already done and it is not untypical of a Congress to always look at what may be publicly pleasing tomorrow 

but failing to carry through on the very work we have done that 

is phenomenally substantive today. Am I frustrated, yes, I am. Am 

I going to change an attitude that I have grown to be comfortable 

with because I spend a lot of time on this issue with scientists and 

others? I am not surprised with Daniel’s testimony. It is okay, but 

it is not enough we need to do a lot more. We probably do, but I 

am not going to shut down this economy to accomplish it and I am 

not going to create an artificial market in which there are winners 

and losers in a way that distorts it. We ought to be all about 

incentivizing. We ought to be all about new technologies and as I 

have traveled the world to the Climate Change Conferences. I am 

very proud of the fact that what we do is open, transferable as it 

relates to the rest of the world and that is what we ought to be 

about. It is a technology we develop for the coal industry of this 

country that is immediately applied to the coal industry and the 

generating capacity of China. That is a quantum leap for, by all 

measurable amounts. So, I get it. 

I thank you for the work done. I am not sure that I am willing 

to accept a nose under the tent approach to cap and trade when 

in fact it gets us so short a distance, that I think as Anne said, 

we are picking winners and we are picking losers and somebody’s 

going to pay for it and I am not sure it is productive at that point. 

Whereas, coal gasification a whole combination of new things clearly to get this administration off its back and moving on nuclear and 

other areas of new technologies make, to me, a whole lot of sense. 

I guess that is more of a statement than a question. I have used 

up my time, but I think it also demonstrates at least for me, that 

this committee is moving generally in the right direction and I 

thank you very much for that, Mr. Chairman. 

The CHAIRMAN. Thank you very much. 

Senator Sanders. 

Senator SANDERS. Well, thank you very much, Mr. Chairman and 

I want to thank all of our distinguished guests for being with us. 

Let me start off with Dr. Gruenspecht and I know you are not here 

representing the administration per say, but be very brief. Does the 

administration today in the year 2007 recognize global warming as 

a man-made phenomenon? Do they still consider it a hoax? Where 

is the administration, I mean, are they on board in saying it is a 

man-made phenomenon or not? 

Dr. GRUENSPECHT. As you said I am really not here representing 

the administration. 

Senator SANDERS. Give me your best guess on it. 

42

Dr. GRUENSPECHT. You probably know better than I do. I do not 

get the impression that they think it is a hoax. 

Senator SANDERS. OK, OK. Do they see it as a man-made phenomenon? 

Dr. GRUENSPECHT. I think they see both man-made and other 

causes. 

Senator SANDERS. Let me ask Dr. Lashof a question. Obviously 

all of us, I do not think there is any debate up here that we all 

want a strong economy, nobody wants to do anything that is going 

to create more unemployment or lower wages. That goes without 

saying, but on the other hand, I am sure I speak for everybody up 

here that they do not want to see a planetary catastrophe. Nobody 

here wants to see that as well. How much time do we have, I mean, 

there are some people who are saying that if we do not act in a 

very dramatic fashion in terms of reducing greenhouse gas emissions that we are going to reach irreversible situations which will 

permanently damage the entire planet and will result in increased 

drought, flooding, the severity of hurricanes, the loss of agricultural 

land, the rising of the seas, which obviously nobody here wants to 

see. How severe, very briefly, is the problem? How quickly do we 

have to act if we are going to reverse it? 

Dr. LASHOF. Well, very briefly, it is a very severe problem and 

we need to act very quickly. I mean, I am persuaded by Dr. Hanson’s analysis which says that unless emissions are headed sharply 

downwards within the decade, we start to lose our window of opportunity to prevent the most dangerous consequences. 

Senator SANDERS. Now maybe I was a little opportunistic asking 

you that question because along with Senator Boxer and nine other 

of my Senate colleagues, I have introduced S. 309 which is the 

strongest global warming bill introduced in the Senate and this bill 

would reduce U.S. emissions to 1990 levels by the year 2020 and 

by 2050 the level of emissions would be reduced to a level below 

1990 levels. Is that the kind of program that we need, do you 

think? 

Dr. LASHOF. Well, Senator, I think it is. I think that the level of 

reductions that you have in your bill are exactly the kind of leadership that the United States needs to take. That, that is, as Jason 

Grumet said, that the good atmospheric science in this process and 

that is the direction. What I am encouraged by is the fact that we 

now have a growing recognition including in major businesses. 

Senator SANDERS. Right. 

Dr. LASHOF. In the U.S. Climate Action Partnership calling for 

reductions that are consistent with your proposal. 

Senator SANDERS. OK, and I agree with that. Let me ask Mr. 

Grumet a question which, I think ordinary citizens would have a 

hard time understanding, given the severity of the crisis that we 

face, in your judgment, why as a Nation do we still have a situation where today we are driving vehicles that get worse mileage 

per gallon than 20 years ago? How is this comprehensible? How do 

we have a mass rail system, which is far inferior to what exists in 

Japan, exists throughout Europe and in fact, China is in some 

ways moving ahead of us in terms of mass transportation? How is 

it that we continue to provide substantially more funding for fossil 

fuels and nuclear energy than for all of the potential breakthroughs 

43

that are sitting there with solar, with wind, with geothermal and 

so forth and so on? 

Mr. GRUMET. Senator, let me say, I appreciate being able to talk 

about something other than cap and trade for a moment. 

Senator SANDERS. Me, too. 

Mr. GRUMET. Our Commission in another significant recommendation argue that we have to significantly reform and significantly strengthen vehicle fuel economy standards. There is no 

question that the most significant single thing we can do to improve our energy security and address greenhouse gas emissions is 

to increase fuel economy. 

Senator SANDERS. Do you support raising the CAFE standards? 

Mr. GRUMET. Very much, sir and I think that you are absolutely 

right that we have had stagnant standards since 1985 that the Nation of China now actually, Senator Akaka, has fuel economy 

standards stricter than those here in the United States and while 

the fuel economy standards have stagnated, technology sir, has not. 

Vehicles are now 50 percent more powerful, 25 percent larger than 

they were 20 years ago. 

So, the last thing I will note though, and I think this is what 

Senator Domenici referred to early on, despite the fact that the 

President did not make a major announcement on climate change 

or nuclear power. He did make, I think, a very significant statement on fuel economy. Last night the President of the United 

States called upon Congress to both reform and significantly 

strengthen fuel economy standards, asking for direction that the 

fuel economy standards be strengthened by 4 percent a year which 

is a mile per gallon a year. That is a very aggressive increase in 

fuel economy standards. That is equal to the increase that Senator 

Inouye and others are asking for on the Commerce Committee, so 

this is gone a little bit beneath the radar, but I would hope that 

this Congress, in a bipartisan way would send him a bill in the 

next 3 weeks that provide that very authority and that obligation. 

Senator SANDERS. OK, let me ask both Dr. Lashof and you, Mr. 

Grumet. There has been talk obviously about nuclear power and we 

all know the positive and negatives of that but I think there is no 

debate that nuclear, investing in new nuclear powerplants is a 

very, very expensive proposition, not to mention the issue of what 

we do with the radioactive waste. In your judgment, let us start off 

with Dr. Lashof, if we invested similar amounts of money in sustainable energy and in an energy efficiency, would that be in fact 

a better investment and a safer investment? 

Dr. LASHOF. In my——

The CHAIRMAN. Why do not you give us short versions of answers 

to those so we can get the other members to ask some questions? 

Dr. LASHOF. Very briefly our analysis shows that investments in 

energy efficiency is the cheapest, fastest and cleanest way to make 

progress on global warming so I put the most emphasis on that. 

Mr. GRUMET. I would agree that energy efficiencies are more cost 

effective than almost any new generation, but our views, we have 

no option. We have to go after every possible opportunity for low 

carbon energy and so if nuclear can be made cost effective and we 

can deal with the proliferation of waste issues, our group believes 

we have to advance those as well. 

44

Senator SANDERS. OK, thank you. Mr. Chairman, thank you very 

much. 

The CHAIRMAN. Thank you very much. 

Senator Sessions. 

Senator SESSIONS. Thank you, Mr. Chairman. This is a very interesting hearing and I appreciate your thoughtful approach to the 

issue and it is something that we needed to discuss in these kind 

of open forum. With regard to nuclear power, Tennessee Valley Authority is, has assured me that their nuclear production of electricity comes in, considering lifetime capital costs, well below coal 

and far, far below natural gas and that it is economical and it is 

got to be a major part of the mix to me. It just cannot be otherwise 

or it is breathtaking that it is not the number one matter that we 

discuss, but we do have and will have carbon emission problems, 

I guess we say carbon, carbon dioxide, which is not a pollutant, but 

it is a global warming gas. This is what I am thinking and I would 

like to ask each of you if you would comment on it and I will leave 

my questioning at this subject. 

I have come to be a believer, and a bipartisan Congress believes 

that we have unhealthy dependence on foreign energy, particularly 

oil and therefore we have a national security interest in reducing 

that dependency which includes, then we are able to use all sorts 

of things, like, ethanol and bio-fuels and cellulosic ethanol. I think 

we have a national consensus that pollutants are bad, the NO and 

SO and particulates and all of those issues are unhealthy for our 

economy and we want to maintain that, maintain our progress in 

improving the quality of our air and water. We also have a strong 

interest in keeping the cost of energy low. I do not think we need 

to have a national policy to see how high we can make energy be. 

One of the things that makes life healthy in America is low cost 

energy and as I am informed, the life span of countries that have 

readily available power is twice that of the life span of countries 

that do not, so that is important. So, why would not we want to 

develop policies that focus on those goals and if we do so, can’t we 

at the same time positively impact and reduce CO2 emissions and 

get more birds with one stone, so to speak, and not create a system 

that focuses solely on carbon dioxide emissions? 

Dr. Gruenspecht, can you start? 

Dr. GRUENSPECHT. Sure; a very thought provoking question and 

I think there are ways to go about it. Put it this way, energy security, I think, is primarily about oil. Reducing greenhouse gases at 

the lowest cost within the United States, our study suggests, is primarily about coal. Greenhouse gas reduction and energy security 

goals—there are some synergies and I think that is what your 

question is pointing to, but probably if we are honest about it, 

there are also some conflicts and I think that is where you guys 

have a much tougher job that I have. Improved vehicle efficiency 

is one of the things that was mentioned; that one seems to have 

some synergies. It lowers greenhouse gas emissions and it lowers 

oil demand and imports of oil, whether that increases energy security is itself a real complex question. 

Coal-to-liquids conflict—clearly coal to liquids reduces oil imports. You can produce some very high quality diesel by converting 

coal to liquids like they do in South Africa right now. Not very 

45

helpful on greenhouse gases, so that is a scenario where there is 

conflict. There are some where it is even trickier, there are sort of 

synergies and conflicts, such as biomass. Using biomass to back out 

oil in transport fuels: reduces oil imports and it reduces greenhouse 

gases; however you could take the same biomass and get a larger 

greenhouse gas reduction by using biomass to back out coal in electricity generation. I do not want to go on, but, you know, life is 

complicated and it is good to look for a way of killing all the birds 

with one stone and ending up with more eggs in your refrigerator 

at the same time, but it is hard. That is why you guys, you Senators, are here. 

Senator SESSIONS. Any others like to comment on that? 

Mr. STERBA. Senator, if I may, a couple of comments. I generally 

agree with what Howard said, but I would add two other pieces. 

One of the areas where there is a cross-over between the electricity 

generation sector and then transportation is the potential development of plug-in hybrids and we are seeing a significant move in the 

technology front from the regular hybrid to the potential for a plugin hybrid. If we looked at the same kind of penetration of plug-in 

hybrids as we have seen in regular hybrids and we assume that 

plug-in hybrids are available in 2010, we could have a million of 

those on the roads in 2020. That is an enormous amount of two 

things, No. 1, vehicles that have reduced their use of petroleum 

product and No. 2, they also are creating the potential for a distributed energy storage device and the electric grid. So that is one 

cross-over technology where I think the two can go together. 

The second one is just, I agree with Howard that coal is one of 

the main issues, not the only issue, but one of the main issues associated with greenhouse gas emissions, but natural gas is also a 

fundamental fuel that today we do not import that much from 

other countries other than Canada, but that is increasing as we 

move more to having LNG be the natural gas on the margin we 

can be, we can get in a similar position with natural gas on importation and the issues on where is that fuel coming from, so and 

natural gas is a fuel used in generation of electricity and in fact 

got to the point that over 90 percent of all of the generators billed 

through the 1990’s were natural gas fire generation. We have to be 

very careful that we do not do something as we address climate 

change that triggers significant increases in natural gas usage because that will drive us even more to having to import natural gas 

and drive prices up for natural gas which in addition to heating is 

a fundamental input for a lot of feed stock opportunities, whether 

it is fertilizers and plastics and all of that. So, there are points 

where these things come together and when we think about the 

natural gas application across and the plug-in hybrid application 

across that is where, I believe you see strong justification for renewables and energy efficiency and those kinds of things that while 

they focus on the electricity sector they have the indirect benefit 

of addressing petroleum use because of the transportation sector 

and then also on the natural gas sector. 

Senator SESSIONS. My time is up but if nuclear would fit that 

role of a multiple benefit energy source, would it not? 

Mr. STERBA. It, absolutely. 

46

Senator SESSIONS. And it would work; help with the plug-in hybrids and things of that nature? 

Mr. STERBA. Absolutely and one of the things that makes me 

very concerned about the ability to achieve these goals, I personally 

do not see how we get there without nuclear. It is a low cost source. 

The challenge even in this EIA analysis, we have five times the 

amount of nuclear, and that is one of the things that helps hold 

costs down, five times the amount of nuclear then we currently 

have, by 2030. That is a significant, well maybe not quite that 

much. 

Dr. GRUENSPECHT. The increase in nuclear is five times as much 

as——

Mr. STERBA. As the base case——

Dr. GRUENSPECHT [continuing]. We have a small increase in the 

base case of——

Mr. STERBA. Right. 

Dr. GRUENSPECHT [continuing]. About nine gigawatts and capacity——

Mr. STERBA. Right. 

Dr. GRUENSPECHT [continued]. Compared to a hundred gigawatts 

that we have now that increases by nine in the base case and by 

a little bit under 50. So going from a hundred to a hundred and 

ten in the base case, going from a hundred to a hundred and fifty 

in this analysis. 

Mr. STERBA. So, we are having about a 50 percent increase, I 

apologize, but a 50 percent increase in the amount of nuclear and 

frankly we are not moving very far on that. 

Senator SESSIONS. I would agree, thank you. 

The CHAIRMAN. Thank you. 

Senator Lincoln. 

Senator LINCOLN. Thank you, Mr. Chairman and thank you so 

much for your leadership on this issue. I think we have all, certainly, I have, in the last several years, have felt a heightened 

awareness as well as a heightened sense of responsibility that we 

need to do something and to do it sooner than later, so we appreciate your leadership and I am delighted to be back on the committee. 

The CHAIRMAN. Welcome back. 

Senator LINCOLN. Absolutely, thank you. On that last point that 

Senator Sessions, you all were just discussing, if the assumption 

then in this study or in analysis is that there is a 50 percent increase and we have not had a new nuclear facility in 30 years, is 

that about, 30 or more, 30 more years and then we are also seeing 

that the re-licensing of nuclear facilities is becoming more difficult. 

That is over a 10 year period, I believe, isn’t it, the re-licensing? 

Is that a safe assumption? 

Dr. GRUENSPECHT. As I tried to say in the testimony, there is a 

lot of uncertainty about all projections over a 25-year period, but 

I think it is important to note that the proposal we were asked to 

evaluate has a safety valve so, as discussed in my written testimony, the economic effects would not really be much different even 

if that nuclear could not be built. 

Senator LINCOLN. But does not, would with what you have just 

said that with the safety valve and the economic effects not, does 

47

that mean that, quite frankly, that it is going to be a lot easier to 

just, for companies to trade credit as opposed to invest in technologies and in less expensive or more reasonable forms of energy 

production. I mean, I know Ms. Smith has somewhat eluded to a 

little bit of that in your testimony and I, you, at least have stated 

that you feel the emissions reductions that are achieved in the bill 

are short of other proposals being really not an effective first step 

I guess is kind of the words that you used in your testimony. 

Maybe you want to elaborate on that a little bit, I mean, what are 

the long term costs, I guess, kind, my question to you is, the long 

term cost of doing nothing or doing too little verses what we have 

really talked about here today, which are the short term cost. 

Dr. SMITH. The long term costs of doing too little could become 

large if there are significant impacts associated with climate 

change, so there is a risk to be managed. What I was trying to explain in my testimony is that it will be very costly if we try to push 

beyond that safety valve price with the technologies we have today. 

So the first step towards a long run solution is to create new technologies that are simply not in the tool kit, they are not in the list, 

they are not in the models, they are not in anything that has been 

talked about in this room today. 

Senator LINCOLN. Right. 

Dr. SMITH. Those need to be created and those take 20, 30 year 

lead times to get created so we could create a plan to have significant emissions reductions by mid-century at low cost but only if we 

start with a true basic R&D policy reformation of our R&D policy 

for energy. 

Senator LINCOLN. So is it your opinion that the cap is at a level 

that is going to encourage that investment or incentivize the need 

for newer technology sooner? 

Dr. SMITH. A low safety valve price will not provide the appropriate incentives for that kind of R&D and that is the kind of R&D 

that we need. That low safety valve price is very useful for bringing 

new technologies that do exist into the marketplace to reduce carbon emissions where they are cost effective to do so, now, as well 

as on into the future and for establishing some expectations for 

long term investments. 

Senator LINCOLN. So existing technologies as opposed to newer 

technologies. 

Dr. SMITH. It is useful for picking up the low cost reductions that 

are existing today which are meaningful to undertake if they are 

in that cost range. 

Senator LINCOLN. Mr. Grumet, did you have a comment? 

Mr. GRUMET. Yes, thank you, Senator Lincoln. You know we tend 

to have this discussion a lot about whether the answer is technology or a price signal. People tend to feel more comfortable in one 

of those two places and our——

Senator LINCOLN. Kind of got to be both though. 

Mr. GRUMET. Well, exactly, Senator. 

Senator LINCOLN. Yes. 

Mr. GRUMET. And I think that to Senator Craig’s discussion 

about the liabilities of government and the frustration we are having about the inability of government to move forward on these 

specific technology programs. Most people look at that as one of the 

48

liabilities of a program that just depends upon government competence to pick the right technologies. So the technology only approach assumes the taxpayer comes up with the money and government is smart enough to give it to the right people and those are 

incentives that we do not talk about the taxes, we talk about the 

incentives and those feel great. On the other hand, people who just 

talk about strict, strict caps, you know, we are having economic impacts far higher than anything that we would be willing to tolerate 

and if you have just a low cap, you do not get the kind of technologies. So the messy mill, which I think you either love or you 

hate, is that you have a modest carbon price, as Dr. Smith says, 

this brings forward the low hanging good stuff. You get reductions, 

you get energy efficiency, you get people to pay more attention to 

their operations, you get coal mine methane, you get reductions 

and you generate a bunch of cash because one of the real problems 

with our R&D program is we do not have any kind of dedicated 

revenues from it so you have a market signal, you get into the 

game, you start learning your way through the system, you cap the 

costs so that you have some confidence and hopefully you get a bill 

to become law and you generate a bunch of cash. 

Senator LINCOLN. But you know with what you have said there 

and then that superimposed on top the idea that we do not have 

a whole lot of time. I mean, I think there is an anxiousness that 

becoming more prevalent among many people in terms of this issue 

and with all of that considered maybe you could help by telling me 

a little bit more or going a little more in depth and maybe you have 

and I have missed it and I apologize for running late this morning. 

The methods that you used to come up with that safety valve price 

mean, maybe, I think there were probably political considerations, 

cost considerations, but were the time considerations in terms of 

the time that we have or that we are coming to know that we have 

of where there is a break even point of what we do as doctors will 

tell you that if you smoked all your life and you do not quit before 

you are 45 or 50, then, you know, you have pretty much lost your 

shot at it or supposedly, I don’t know, I do not smoke, but it is the 

same thing here that we are beginning to hear that there is a judgment day. 

Mr. GRUMET. It is the right question and I am glad that Senator 

Bingaman, I think in the discussion draft that you have circulated 

has indicated the desire to re-engage this question. I tell you that 

it was some art and some science in our Commission. There was 

a real question about what people think the market could bear, 

look at the price increases that would result, about a 10 percent 

electricity price. When we worked very closely with the mine workers we came to believe and I believe that their support at some 

point will be critical, that they were willing to have the growth in 

coal decrease significantly by the price as long as there was a view 

that there would be resources for things like IGCC and sequestration that could come in and save the industry before the cost got 

so high that they would actually start to really lose in absolute 

terms. A $7 a ton safety valve would basically reduce the growth 

in coal by about half. That is what I think, EIA says, that coal 

growth would be about 20 percent instead of about 50 percent, now 

when you look 2 years later at the urgency of the science, I believe 

49

our Commission’s going to come back and think well, maybe we 

should try and do something better than that, but if you go too 

much farther, I think, and I should not be here telling you about 

politics, but you know, I think we, everyone goes back to their 

Kyoto corners and we keep yelling at each other for another decade 

and that clearly is not going to solve. 

Senator LINCOLN. Yes, that is unacceptable. 

Mr. GRUMET. I think a messy middle that is heroically inadequate is the kind of action that is going to bring, hopefully, the 

Congress together, but that is not the kind of political science you 

like to hear. Go take on every industry in the country and have 

them and the environmental community angry at you, and we will 

clap, but we are very small, little people. 

Senator LINCOLN. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you very much. Let me just ask a couple 

more questions. First, let me just say that when you are in public 

office, it is hard to run for office on a platform that I have championed and messy middle that is heroically inadequate, that is not 

exactly a winning platform. 

Let me ask, Jeff Sterba, you were a part of this U.S. Climate Action Partnership and I believe I heard Dr. Lashof characterize your 

position, the Partnership’s position, as essentially endorsing the 

cuts that were in the Jeffords bill, and now the Boxer and Sanders 

bill, that level of reduction in it, or that intensity targets or level 

of reduction of emissions. I guess I would ask you first of all if you 

think that is an accurate characterization of what the Partnership 

did and second, how much more can we do to get these targets to 

decline, these intensity targets to decline more quickly without 

doing significant damage to the economy? 

Mr. STERBA. Thank you, Senator. First, the U.S. cap is not 

formed to take a position or advocate on any bill, that is not its 

purpose and it is, as far as I am concerned, that group will never 

do that. So I do not believe it is appropriate to apply the U.S. cap 

principles at this stage to any specific bill. I think the principles 

stand on their own and they stand as a collective package. In my 

judgment, there are many pieces of legislation and approaches to 

legislation that can be encompassed within the principles of that 

bill and so I would not agree that that legislation is anyway representative of the U.S. cap. 

Second thing relative to the second piece of your question, Senator, I think there are a number of things that can be done to 

bring, to more rapidly accelerate the action and that, you have hit 

the nail on the head. The first one goes to what Senator Lincoln 

raised. There is a challenge about the raising of money to invest 

in both R&D and only tied to when caps get put in place and we 

start to generate revenues off the auctioning of allowances. That 

money needs to be made available now. We need to find a way to 

fund the technology in advance of the imposition of significant reductions in the emissions, in the allowance of emissions. So that 

would be the first thing is there is more rapid funding associated 

with the technology both on basic research for the next breakthroughs. 

I would take a slightly different view than Dr. Smith did about 

the deployment demonstration and development funding, the need 

50

for that. I agree basic research is a significant piece, but frankly 

there are funding mechanisms within the DOE for that. We need 

to advance those, but it is really getting from the concept out of the 

lab to its commercially available. That is the gap that we do not 

do very well. Part of it is because we have utilities that are regulated who are not incentivized to take an action to take a nascent 

technology and deploy it. It is because by nature, already the notion of having a technology that may have a 60 or 70 percent hit 

rate is not something that regulators want to pay for. So, there is 

a challenge institutionally to making that happen. 

Dr. LASHOF. Senator, may I? 

The CHAIRMAN. Ah yes, Dr. Lashof, why do not you give us the 

final answer here and then if there is still time we will have Senator Craig ask any questions he has, but we do have a vote that 

has started, a cloture vote. 

Dr. LASHOF. So, just quickly, I just wanted to clarify what I was 

trying to say about U.S. cap and Senator Sanders bill because I do 

not want to leave the wrong impression. Jeff’s absolutely right; 

U.S. cap did not review any specific pieces of legislation. We laid 

out some principles and recommendations. What I was trying to do 

and what I think I said is that in my views Senator Sanders targets are consistent with the recommendations of U.S. cap, not that 

the group has endorsed it because we did in this U.S. cap group 

recommend some specific emission reductions that go along with 

this slow, stop and reverse, first phase within 5 years of enactment, 

low emissions limit them to within 100 percent to 105 percent of 

current levels, 10 years after enactment, 10 percent below to current levels and then 15 years after enactment at 10 to 30 percent 

reduction and then looking to a 60 to 80 percent reduction by midcentury. So there is an envelope there and we can look at any bill 

that is introduced and see if it falls within that envelope. The 

Sanders bill is one bill that falls within that envelope. That is what 

I was trying to say. Thank you. 

The CHAIRMAN. Very good. 

Senator Craig, did you have a final question? 

Senator CRAIG. I will be very brief because I am always a little 

frustrated by a sense of urgency that causes us to react in a way 

that maybe is not consistent where we ought to be. I would suggest 

to Senator Lincoln that the sense of urgency is the 2008 election 

for a good many people as it relates to how they express their public policy intent and then once we are past that, then it will be another 2 years and another sense of urgency. I think what has to 

come out of this committee is a pattern of consistency and predictability for industries to make the kind of investment we are expecting they should make and we should make with them to incentivize 

this process. For example I am very pleased to see Howard, who 

in 2005, incrementally hardly recognized nuclear as a growth industry. Today has jumped substantially into the forefront with his 

figures and that is positive. 

The CHAIRMAN. That is only if we pass my bill. 

[Laughter] 

Senator CRAIG. I think that is in part consistent with you know, 

not only your bill. 

51

Dr. GRUENSPECHT. You also get something out of the 2005 Energy Policy Act. 

Senator CRAIG. Thank you, I thought we would and we did, but 

now 

The CHAIRMAN. Bottom line; let us be clear, we go 99,000 mega 

watts——

Dr. GRUENSPECHT. Yes. 

The CHAIRMAN [continuing]. Under the 2005 bill. If this draft legislation we just analyzed——

Dr. GRUENSPECHT. You get a lot for——

The CHAIRMAN [continuing]. 48,000 mega watts. 

Dr. GRUENSPECHT. Right, the coal and the nuclear are alternative technologies for base load. 

The CHAIRMAN. Right. 

Senator CRAIG. Right and having said that, Mr. Chairman, you 

have now found yourself in Jason’s murky middle, whether you like 

it or not. 

[Laughter] 

The CHAIRMAN. Heroically inadequate. 

Mr. GRUMET. Yes. 

The CHAIRMAN. Alright, thank you all very much. It is a very 

useful hearing. 

[Whereupon, at 11:38 a.m., the hearing was adjourned.] 

(53)

APPENDIX 

RESPONSES TO ADDITIONAL QUESTIONS

DEPARTMENT OF ENERGY, 

CONGRESSIONAL AND INTERGOVERNMENTAL AFFAIRS, 

Washington, DC, February 21, 2007. 

Hon. JEFF BINGAMAN, 

Chairman, Committee on Energy and Natural Resources, U.S. Senate, Washington, 

DC. 

DEAR MR. CHAIRMAN: On January 24, 2007, Howard Gruenspecht, Deputy Administrator, Energy Information Administration, testified regarding the Energy Market 

and Economic Impacts of a Proposal to Reduce Greenhouse Gas Intensity with a 

Cap and Trade System. 

Enclosed are the answers to nine questions that were submitted by Senators 

Menendez, Thomas, and you for the hearing record. 

If we can be of further assistance, please have your staff contact our Congressional Hearing Coordinator, Lillian Owen, at (202) 586-2031. 

Sincerely, 

JILL L. SIGAL, 

Assistant Secretary. 

[Enclosures.] 

RESPONSES OF HOWARD GRUENSPECHT TO QUESTIONS FROM SENATOR BINGAMAN

Question 1. Two years ago we passed an energy bill, EPAct 2005. I understand 

that my staff has asked you to model the impacts of the Energy Bill on greenhouse 

gas emissions. I have a document here that I would like to enter to the Record. Can 

you very quickly tell us how the proposed draft’s impacts on GHG emissions compares to the Energy Bill? 

Answer. In April 2006, EIA prepared a brief summary of the impacts of the provisions of the Energy Policy Act of 2005 (EPAct 2005) that we were able to model (see 

below). The key finding was that the modeled provisions of EPAct 2005 reduced CO2

emissions by about 90 million metric tons, roughly 1 percent of total emissions, in 

2020 and 2030. In comparison, the impacts of the September 2006 draft proposal 

that you and 5 other senators asked EIA to analyze are found to be larger, reducing 

CO2 emissions by 193 million tons in 2020 and 727 million tons in 2030. Furthermore, the proposed draft also reduces the emissions of other greenhouse gases by 

369 million tons and 532 million tons in 2020 and 2030, respectively, and establishes a pilot program to stimulate biological carbon sequestration. 

The text of the April 2006 paper outlining EIA’s views on the projected impact 

of EPAct 2005 on energy-related carbon dioxide emissions follows: 

PROJECTED IMPACT OF EPACT 2005 ON ENERGY-RELATED CARBON DIOXIDE

EMISSIONS APRIL 2006

The Energy Information Administration (EIA) has some capability to assess the 

effects of the Energy Policy Act of 2005 (EPAct 2005) on energy-related carbon dioxide (CO2) emissions. However, the extent to which studies or programs authorized 

by EPAct 2005, but not directly implemented by that legislation, might advance the 

timing and/or lower the cost of advanced energy technology represent a key uncertainty in such an assessment. 

54

1 Energy Information Administration, Annual Energy Outlook 2006, DOE/EIA-0383(2006) 

(Washington, DC, February 2006), web site www.eia.doe.gov/oiaf/aeo/index.html. 2 A further discussion of this issue in another context is provided in EIA’s April 2005 analysis 

of the recommendations of the National Commission on Energy Policy, web site 

www.eia.doe.gov/oiaf/servicerpy/bingaman/pdf/sroiaf(2005)02.pdf. 

The Annual Energy Outlook 2006 (AE02006) Reference case 1 includes roughly 30 

specific provisions implemented by EPAct 2005. Many of these provisions, which are 

outlined in the Legislation and Regulations section of the AEO2006, are intended 

to increase energy efficiency and encourage use of nuclear power and renewable 

fuels, which have the ancillary benefit of reducing CO2 emissions. Removal of these 

provisions in a No-EPAct 2005 case resulted in projected CO2 emissions that are 90 

million metric tons (1.3 percent) higher than in the Reference case in 2020, and 92 

million metric tons (1.1 percent) higher in 2030. About 90 percent of the CO2 emission reductions directly attributed to EPAct 2005 in 2030 are associated with electricity, some of which result from reduced electricity demand due to efficiency standards and some from incentives for new nuclear power and renewable generation. 

It is important to recognize that many other EPAct 2005 provisions were not explicitly considered in the AEO2006 Reference case. EIA did not try to anticipate policy responses to the many studies required by EPAct 2005, nor did it try to predict 

the impact of research, development, and deployment (RD&D) authorizations and 

loan guarantee programs in the bill that require future appropriations. However, recent EIA technology sensitivity analyses not directly tied to EPAct 2005 show that 

assumptions about the availability and cost of advanced technologies can significantly impact future energy use and emissions.2 For example, the Integrated High 

Technology Case in AEO2006, which assumes reduced costs and accelerated timing 

of advanced technologies, projects CO2 emissions that are 385 million metric tons 

(5.4 percent) lower than in the Reference case in 2020, and 694 million metric tons 

lower (8.5 percent) in 2030. What part, if any, of the accelerated timing and lower 

costs assumed in this case might be realized specifically due to the enactment of 

the research, development and deployment provisions of EPAct 2005 is highly uncertain. 

In sum, EIA’s analyses suggest that the roughly 30 EPAct 2005 provisions that 

were explicitly modeled are projected to reduce energy-related CO2 emissions by approximately 90 million metric tons in both 2020 and 2030. Any impact resulting 

from the non-modeled authorizations, loan guarantees, studies and other miscellaneous provisions that served to advance the availability and cost of advanced energy 

technologies would add to projected reductions in energy-related CO2 emissions. 

Table 1 compares results of the AEO2006 Reference case, the No-EPAct 2005 

case, and the AEO2006 Integrated High Technology Case.

55

Table 1.—COMPARISON OF ENERGY CONSUMPTION AND ENERGY-RELATED CARBON DIOXIDE EMISSIONS IN THE AEO2006 

REFERENCE, NO-EPACT 2005, AND HIGH TECHNOLOGY CASES (2004, 2020, and 2030) 

Indicator 2004 

2020 2030 

Reference 

No 

EPAct 

2005 

High technology Reference No EPAct 2005 High tech- nology 

Consumption (quadrillion Btu) 

Petroleum Products .......................................................................................................... 40.08 48.14 48.16 45.49 53.58 53.59 49.70Natural Gas ...................................................................................................................... 23.07 27.70 27.88 26.43 27.66 27.95 28.72Coal ................................................................................................................................... 22.53 27.65 28.49 25.95 34.49 35.28 30.17Nuclear Power .................................................................................................................. 8.23 9.09 8.59 8.93 9.09 8.59 9.47Renewable Energy ............................................................................................................ 5.74 8.00 8.00 8.34 9.02 9.14 9.59Other ................................................................................................................................. 0.04 0.05 0.05 0.04 0.05 0.05 0.05

Total ............................................................................................................................... 99.68 120.63 121.16 115.19 133.88 134.61 125.70

Carbon Dioxide Emissions by Fuel (million metric tons) 

Petroleum Products .......................................................................................................... 2,595 3,061 3,063 2,899 3,421 3,424 3,178Natural Gas ...................................................................................................................... 1,203 1,455 1,464 1,388 1,452 1,468 1,403Coal ................................................................................................................................... 2,090 2,589 2,668 2,432 3,226 3,300 2,825Other ................................................................................................................................. 11 14 14 14 15 15 15

Total ............................................................................................................................... 5,900 7,119 7,209 6,734 8,114 8,207 7,421

Carbon Dioxide Emissions by Sector (million metric tons) 

Electric Power ................................................................................................................... 2,299 2,835 2,914 2,677 3,318 3,402 2,957Residential ........................................................................................................................ 1,208 1,434 1,477 1,366 1,576 1,631 1,432

Direct Fuel .................................................................................................................... 375 398 398 384 398 397 372Electricity ...................................................................................................................... 833 1,036 1,079 982 1,178 1,234 1,060

Commercial ....................................................................................................................... 1,020 1,339 1,367 1,293 1,620 1,645 1,502

Direct Fuel .................................................................................................................... 229 260 263 260 284 287 283Electricity ...................................................................................................................... 792 1,079 1,104 1,033 1,336 1,357 1,220

Industrial .......................................................................................................................... 1,727 1,924 1,941 1,778 2,184 2,195 1,946

Direct Fuel .................................................................................................................... 1,069 1,222 1,229 1,132 1,400 1,405 1,284Electricity ...................................................................................................................... 658 703 712 646 784 790 662

Transportation .................................................................................................................. 1,945 2,422 2,424 2,297 2,734 2,736 2,541

Direct Fuel .................................................................................................................... 1,929 2,404 2,406 2,281 2,715 2,716 2,525Electricity ...................................................................................................................... 16 18 18 16 20 20 16

Total ........................................................................................................................... 6,900 7,119 7,209 6,734 8,114 8,207 7,421

Source: National Energy Modeling System runs AEO2006.D111905A, NRGBILL0.D041006A, and HTRKITEN.D121905A 

56

* The graph has been retained in committee files. 

Question 2. Also, I understand that my staff asked you to create this chart on the 

impacts of this proposal on GDP. I have that chart here. Did you make this chart? 

Can you quickly explain it? 

Answer. The figure below * was prepared by EIA at the request of your staff to 

put the projected impact of the September 2006 proposal (represented by the Phased 

Auction case on U.S. gross domestic product (GDP) in the context of the overall level 

of real U.S. GDP. U.S. real GDP (measured in 2000 dollars) currently exceeds $11 

trillion, and is expected to grow over time, reaching over $22.5 trillion in 2030. 

Under the proposal, real GDP is estimated to be reduced by $59 billion, or 0.26 percent of its projected level, in 2030. 

Question 3. Dr. Gruenspecht, I recently read a statement from a trade association 

that criticized EIA’s analysis of the Bingaman proposal for underestimating the 

costs of the climate proposal. Specifically, the analysis claimed that natural gas 

prices would rise dramatically due to fuel switching from coal to natural gas caused 

by the mandatory climate constraint. Could you react to that claim? I’m attaching 

the statement and will put it in the Record. Could you please respond to claims 

made about the EIA modeling? 

Answer. EIA stands behind the results of its analysis, and disagrees with the position of the Industrial Energy Consumers of America (IECA) stated in their January 22, 2007, press release that EIA’s analysis ‘‘misinforms the Congress.’’

We do not take issue with IECA’s view that projections of natural gas production, 

increased LNG imports, and increased nuclear capacity over a 25-year period are 

inherently uncertain—in fact, EIA’s report and its January 24th testimony explicitly 

and repeatedly note this. 

The IECA review of EIA’s analysis, however, fails to take account of a key provision of the proposal EIA was asked to evaluate—the safety valve. As discussed in 

the EIA testimony and analysis, inclusion of a safety-valve feature in a cap-andtrade program would implicitly relax the emissions cap in the event that emissions 

reduction inside or outside the energy sector proves to be more costly than expected, 

while protecting against the prospect of larger energy system and economic impacts 

in these circumstances. 

The delivered price for coal under the proposal EIA reviewed is the ‘‘no policy’’ 

delivered price plus the cost of allowances. Under the proposal, the price of allowances will never exceed the safety valve level, regardless of future developments in 

nuclear, renewable energy, or energy efficiency technologies; natural gas production; 

or the rate of economic growth. Therefore, a calculation made using the assumption 

that the cost of allowances is always at the safety valve level sets an upper bound 

on the delivered coal price under the proposal. To the extent that expanded use of 

existing or new coal plants at such a delivered coal price is cheaper than using natural gas, IECA’s concern about ‘‘diversion’’ of natural gas away from their constituents towards the electric power sector, would appear to be unfounded. 

Other considerations also mitigate strongly against the position outlined in the 

IECA press release. For example, IECA legitimately notes the significant uncertainty surrounding EIA’s reference case projections of future domestic natural gas 

production, future LNG imports, and future industrial natural gas demand. EIA certainly recognizes these uncertainties and routinely seeks to address their impact in 

numerous sensitivity cases in our yearly Annual Energy Outlook (AEO) and in the 

service reports we prepare at the request of the Congress, even though the energy 

price, energy availability, and economic impact results for the proposal we analyzed 

are not sensitive to them given the availability of the safety value. EIA, however, 

does not routinely consider uncertainty regarding future policy actions in its AEO 

projections. Ironically, uncertainty regarding future actions to limit greenhouse gas 

emissions, which IECA does not address in its review of the EIA analysis, could 

have exactly the effects on natural gas use for electric power generation that IECA 

states that it is concerned about. For example, to the extent that potential investors 

in long-lived power generation capital are sensitive to uncertainty over future policies that could significantly affect the market value of their projects, they may be 

reluctant to make such investments, which would tend to promote the use of existing capacity and the cheapest possible capacity expansions where new investment 

is unavoidable, until such time as the direction of policy becomes more clear. 

In sum, while EIA takes no position on the desirability of the specific policy proposal we were asked to analyze or on any other policy matter, we strongly believe 

that our analysis of the proposal is both reasonable and informative. 

Question 4. Dr. Gruenspecht, does the EIA modeling account for advances in technology that would result from additional government R&D funded through auctions 

of allowances? 

57

a. If not, would you expect the impact on electricity prices and GDP to be lower 

if those advances were factored into the model? 

Answer. EIA’s analysis of the proposal does not explicitly represent the potential 

impacts of government expenditures associated with revenue collected in the Climate Change Trust Fund. As stated in this analysis, ‘‘All of the analysis cases incorporate the economic and technology assumptions used in the AEO2006 reference 

case. While increased expenditures for research and development (R&D) resulting 

from the creation of the Climate Change Trust Fund are expected to lead to some 

technology improvements, a statistically reliable relationship between the level of 

R&D spending for specific technologies and the impacts of those expenditures has 

not been developed. Furthermore, the impact of Federal R&D is also difficult to assess, because the levels of private sector R&D expenditures usually are unknown 

and often far exceed R&D spending by the Federal Government.’’ (page vi) It is certainly possible that the Climate Change Trust Fund expenditures could lead to technological advances that lower the costs of complying with the proposal. 

Question 5. Dr. Gruenspecht, Some of my colleagues have introduced legislation 

that calls for percentage reductions by specific dates in the future, but leaves the 

implementation details to be determined through regulation. Can you discuss how 

draft legislation that has no specific mechanisms for constraining greenhouse gas 

emissions complicates efforts to model economic impacts? 

Answer. Due to the ubiquitous nature of greenhouse gas (GHG) emissions in the 

US energy-economy, assessing the potential impacts of any proposal to reduce them 

is extremely complex. Details about the emissions target level, the policy instrument(s) to be used, what GHGs are covered, what sectors or entities are covered, 

whether domestic or international offsets are allowed, whether carbon capture and 

sequestration is allowed or limited, whether biological sequestration is allowed or 

limited, and whether the potential costs are limited by a safety-valve mechanism 

are all important in the assessment of any policy proposal. Assessing the potential 

economic impacts of a proposal without these details would be very challenging. 

Question 6. Dr. Gruenspecht, please discuss the limitations, both at EIA and in 

the academic community, of economic modeling scenarios more than 30 years in the 

future. 

Answer. There is enormous uncertainty in any projections that look 25 years or 

more into the future. As stated in EIA’s analysis of the September 2006 proposal, 

‘‘NEMS, like all models, is a simplified representation of reality. Projections are dependent on the data, methodologies, model structure, and assumptions used to develop them. Since many of the events that shape energy markets are random and 

cannot be anticipated (including severe weather, technological breakthroughs, and 

geopolitical developments), energy markets are subject to uncertainty. Moreover, future developments in technologies, demographics, and resources cannot be foreseen 

with certainty. Nevertheless, well-formulated models are useful in analyzing complex policies, because they ensure consistency in accounting and represent key interrelationships, albeit imperfectly, to provide insights.’’

Furthermore, all long-term projections engender considerable uncertainty. It is 

particularly difficult to foresee how existing technologies might evolve or what new 

technologies might emerge as market conditions change, particularly when those 

changes are fairly dramatic. As a result, to comply with the GHG emissions growth 

limits necessary to meet the intensity reduction targets, all energy providers, particularly electricity producers, likely will increasingly rely on technologies that play 

a relatively small role today or have not been built in the United States in many 

years. Sensitivity analyses included in previous EIA studies of cap-and-trade systems for GHG show that estimates of both energy and economic impacts of such programs can change significantly under alternative assumptions regarding the cost 

and availability of new technologies. 

Finally, as noted in my testimony, policy design differences can significantly affect 

the nature of uncertainty surrounding the projected energy and economic impacts 

of alternative policies to limit GHG emissions. Inclusion of a safety-valve feature in 

a cap-and-trade program would allow GHG emissions to rise above the level projected in our analysis in the event that emissions reduction inside or outside the 

energy sector proves to be more costly than we expect, while protecting against the 

prospect of larger energy system and economic impacts in these circumstances. In 

contrast, policies that impose a ‘‘hard’’ cap on emissions without a safety-valve price 

for GHG credits, would force the fixed GHG emissions target to be met regardless 

of cost, reducing uncertainty surrounding the GHG emissions outcome but increasing uncertainty regarding energy and economic impacts. 

58

3For example, electricity markets are represented for 13 regions based on the regions and 

subregions of the North American Reliability Council (NERC). 

* Figures 1-4 have been retained in committee files. 

RESPONSES OF HOWARD GRUENSPECHT TO QUESTIONS FROM SENATOR MENENDEZ

Question 1. Mr. Gruenspecht, the Intergovernmental Panel on Climate Change 

has warned us of the potentially devastating effect that global warming may have 

on our and the world’s economy if we do not act quickly and decisively. In fact, Sir 

Nicolas Stern, head of the British Government’s Economics Service, found that globally the costs of dealing with these effects may amount to 5 percent of global GDP. 

What assumptions, if any, does the EIA report make of these potential costs? 

Answer. The EIA analysis only assesses the impacts on the U.S. energy-economy 

of the specific proposal that EIA was asked to examine. EIA has not examined the 

analysis prepared by Sir Nicolas Stern, nor made an assessment of the global costs 

of dealing with global warming. Furthermore, as stated in the report, ‘‘This report, 

like other EIA analyses of energy and environmental policy proposals, focuses on the 

impacts of those proposals on energy choices made by consumers in all sectors and 

the implications of those decisions for the economy. This focus is consistent with 

ETA’s statutory mission and expertise. The study does not account for any possible 

health or environmental benefits that might be associated with curtailing GHG 

emissions.’’

Question 2. Mr. Gruenspecht, I realize that these costs are difficult to predict with 

certainty. Some have and continue to argue that these costs are exaggerated. Others, as mentioned in the previous question, have a less optimistic outlook. Regardless, could you provide us with a middle ground for what the mitigation costs are 

likely to be? 

Answer. The EIA analysis only assesses the impacts on the US energy-economy 

of the specific proposal that EIA was asked to examine. This focus is consistent with 

ETA’s statutory mission and expertise. As mentioned in the previous answer, EIA 

has not examined the analysis prepared by Sir Nicolas Stern, nor made an assessment of the global costs of dealing with global warming. 

RESPONSES OF HOWARD GRUENSPECHT TO QUESTIONS FROM SENATOR THOMAS

Question 1. Please provide an economic analysis, comparable in detail to that 

which was prepared from a national perspective, of the impact that the proposed 

legislation would have, for each of the 50 states. 

Answer. EIA is not able to provide an analysis at the level of each of the 50 States 

as requested. However, the National Energy Modeling System (NEMS) used in this 

analysis does produce energy market results at various regional levels 3 and industrial sector economic results at the national level. With respect to the energy sector, 

significant variations in regional results are seen in the electricity and coal markets. 

In the industrial sector, the most significant impacts occur in the energy intensive 

industries. 

ELECTRICITY AND COAL MARKETS

All regions of the country are projected to face higher electricity prices in the 

Phased Auction case of the September 2006 proposal that EIA was asked to analyze 

(Figures 1 and 2).* The largest price increases are projected in regions where electricity prices are set competitively and where coal generation accounts for a large 

share of total generation. In these regions, the costs of holding all the needed emission allowances will be fully reflected in consumer prices. For example, electricity 

prices in the MAAC and ECAR regions are projected to be 17 percent and 14 percent higher, respectively, in the Phased Auction case in 2030. Conversely, the electricity price impacts are projected to be smaller in regions that still have an average 

cost pricing regime and do not depend as heavily on coal. For example, 2030 electricity prices in the California and NWP regions are projected to only be 4 percent 

and 5 percent higher, respectively, in the Phased Auction case. 

The reduced use of coal in the power and liquid fuels (i.e., coal-to-liquids diesel 

production) sectors affects coal production in all areas of the country (Figure 3). In 

absolute terms, western coal production is projected to be most impacted, falling 253 

million tons (24 percent) below the reference case in the Phased Auction case in 

2030. This occurs because, in the reference case, western coal regions, particularly 

the Powder River Basin in Wyoming and Montana, were expected to be the dominate growth areas for coal production. In the Phased Auction case, power companies 

turn to new nuclear, natural gas, and renewable plants to meet growth in the demand for electricity, reducing the need for greater coal production. Even with this 

59

4 Energy-intensive manufacturing industries in NEMS include food, paper, inorganic and organic chemicals, resins, agricultural chemicals, petroleum refining, glass, cement, iron and steel, 

and aluminum. 

change, western coal production in 2030 in the Phased Auction case is 30 percent 

higher than 2004 production. Eastern coal production in 2030 is projected to be 142 

million tons (22 percent) below the reference case level in the Phased Auction case, 

about the same level that was produced in 2004. 

IMPACTS ON INDUSTRY OUTPUT

In the Phased Auction case, the price of allowances directly increases the costs 

in emitting sectors and leads to increases in energy prices that raise the factor input 

costs for all industries. This leads to changes in the demand for goods and services, 

as reflected in the final demand categories of consumer spending, investment, government spending and trade, and causes industries to adjust their production accordingly. Figure 4 shows the average annual loss in gross output relative to the 

reference ease for the period 2009 to 2030 for the Phased Auction case. The energyintensive manufacturing industries 4 are impacted the most, with output projected 

to be reduced by an average of 0.82 percent. Non-energy-intensive manufacturing 

is reduced by an average of 0.57 percent, non-manufacturing industries by 0.32 percent and services by 0.10 percent. 

Among the detailed energy-intensive industries, aluminum production, which is a 

heavy user of electricity, is expected to fall by 5.0 percent on average. Production 

of glass, iron and steel, cement, agricultural chemicals and basic inorganic chemicals 

are also expected to fall by more than 1 percent. Among the non-manufacturing industries, coal mining is projected to fall by 8.9 percent, with oil and natural gas extraction falling by 0.4 percent. 

[Responses to the following questions were not received at the 

time this hearing went to press:]

QUESTIONS FOR JASON GRUMET FROM SENATOR BINGAMAN

Question 1. Mr. Grumet, in your testimony, you noted that cost control measures 

other than the safety valve have been proposed. Could you elaborate on that? How 

should we evaluate the pluses and minuses of these different measures? 

Question 2. Mr.Grumet, in your testimony you note that the Commission believes 

that the Safety Valve is instrumental at the outset of a program but may not be 

appropriate in the longer term. Can you please explain? 

Question 3. Mr. Grumet, competitiveness concerns—in particular with regard to 

China—are often raised by those opposing mandatory action to address climate 

change. What are the best ways to address these concerns? 

Question 4. Mr. Grumet, do you have any views on how the President’s announcement last night to promote alternative fuels and CAFE increases bears upon economy-wide approaches to GHG reductions. 

QUESTIONS FOR JASON GRUMET FROM SENATOR MENENDEZ

Question 1. Mr. Grumet, you stated that if the EIA had used a more optimistic 

technology assumption to reflect the hill’s significant technology incentives, the 

analysis would likely have shown larger emission reductions at even lower costs. 

What is your best guess as to the difference in emission reductions and costs that 

would result from a more optimistic view? 

Question 2. Mr. Grumet, you indicated that the Commission has begun evaluating 

opportunities to strengthen its original proposal while still meeting the test of no 

significant harm to the economy. Could you elaborate on any preliminary findings? 

Question 3. Mr. Grumet, the European Union’s Emissions Trading Scheme (ETS) 

is set to enter into its second phase next year. As I’m sure you know, the ETS reduction targets are much more stringent than those found in the proposal that the FIA 

recently analyzed. Additionally, there is no safety-valve price mechanism in the EU 

system. Are you familiar with any statistical analysis that may have been conducted 

of the ETS that have measured or predicted the costs to the EU economy? If so are 

there any valuable lessons that we can take from the EU’s experience thus far? 

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QUESTIONS FOR DAN LASHOF FROM SENATOR BINGAMAN

Question 1. Dr. Lashof you have mentioned target levels that you believe would 

be necessary to reach ecologically necessary levels of greenhouse gas concentrations. 

Have you or your colleagues looked at the costs of those targets and could you compare them to the proposal that we are discussing today? 

Question 2. Dr. Lashof, what would be the impacts on coal use under the low-end 

and high-end reduction ranges. you are supporting? 

Question 3. Dr. Lashof, how do you believe the U.S. can most effectively encourage 

developing countries to join in reducing GHG emissions? 

QUESTIONS FOR ANNE SMITH FROM SENATOR BINGAMAN

Question 1. Dr. Smith, your testimony implies that some level of mandatory price 

signal, either through a safety valve or a carbon tax could be justified as part of 

climate change policy. Could you elaborate? 

Question 2. Dr. Smith, the safety valve is often talked about in largely political 

terms. You make the point that you believe it increases the economic efficiency of 

the program. Can you please explain? 

Question 3. Dr. Smith, in your testimony, you say that the allocation scheme in 

the proposal does not reach the goal of ‘‘fair compensation’’ for the impacts of the 

program. I would like to hear more about that, but could you first tell us whether 

you think this type of compensation approach is a valid way to allocate allowances? 

In your view, is it better or worse that an approach based on historic emissions or 

fuel use? 

QUESTIONS FOR JEFF STERBA FROM SENATOR BINGAMAN

Question 1. Mr. Sterba, you lead a company that gets a significant percentage of 

its generation from coal, Clearly, new coal technologies will be important to your 

company. In your view, how will this proposal help speed the deployment of these 

technologies? Are there ways to improve the bill in this area? 

Question 2. Mr. Sterba, in addition to heading up one of the nation’s leading energy companies, you have a prominent role in the Edison Electric institute which 

represents the majority of investor owned utilities. Do you believe that it is possible 

to design legislation that could win the support of a majority of the utility industry 

this Congress? 

Question 3. Mr. Sterba, your company was one of the signatories to the US Climate Action Partnership announced yesterday. I congratulate you on your leadership role in this important initiative. The report appears to endorse a safety provision similar to the one in the Bingaman proposal. Also, if I’ve understood you correctly, I believe you have just endorsed such a provision in your testimony. On the 

other hand, I have heard statements by some of the organizations involved in US 

CAP that the principles do not allow such a provision. Could you clear this up for 

us?

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