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S. HRG. 110–1101 

EXAMINING GLOBAL WARMING ISSUES IN THE 

POWER PLANT SECTOR 

HEARING 

BEFORE THE

COMMITTEE ON 

ENVIRONMENT AND PUBLIC WORKS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

JUNE 28, 2007 

Printed for the use of the Committee on Environment and Public Works 

( 

Available via the World Wide Web: http://www.gpo.fdsys.gov 
(II) 

COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

BARBARA BOXER, California, Chairman 

MAX BAUCUS, Montana 

JOSEPH I. LIEBERMAN, Connecticut 

THOMAS R. CARPER, Delaware 

HILLARY RODHAM CLINTON, New York 

FRANK R. LAUTENBERG, New Jersey 

BENJAMIN L. CARDIN, Maryland 

BERNARD SANDERS, Vermont 

AMY KLOBUCHAR, Minnesota 

SHELDON WHITEHOUSE, Rhode Island 

JAMES M. INHOFE, Oklahoma 

JOHN W. WARNER, Virginia 

GEORGE V. VOINOVICH, Ohio 

JOHNNY ISAKSON, Georgia 

DAVID VITTER, Louisiana 

LARRY E. CRAIG, Idaho 

LAMAR ALEXANDER, Tennessee 

CHRISTOPHER S. BOND, Missouri 

BETTINA POIRIER, Majority Staff Director and Chief Counsel 

ANDREW WHEELER, Minority Staff Director 
(III) 

C O N T E N T S 

Page 

JUNE 28, 2007 

OPENING STATEMENTS 

Boxer, Hon. Barbara, U.S. Senator from the State of California ........................ 1 

Inhofe, Hon. James M., U.S. Senator from the State of Oklahoma .................... 2 

Lieberman, Hon. Joseph I., U.S. Senator from the State of Connecticut ........... 4 

Voinovich Hon. George, V., U.S. Senator from the State of Ohio ........................ 6 

Carper, Hon. Thomas R., U.S. Senator from the State of Delaware ................... 7 

Craig, Hon. Larry E., U.S. Senator from the State of Idaho ............................... 7 

Sanders, Hon. Bernard, U.S. Senator from the State of Vermont ....................... 9 

Alexander, Hon. Lamar, U.S. Senator from the State of Tennessee ................... 11 

Klobuchar, Hon. Amy, U.S. Senator from the State of Minnesota ...................... 12 

Warner, Hon. John W., U.S. Senator from the Commonwealth of Virginia ....... 13 

Feinstein, Hon. Dianne, U.S. Senator from the State of California .................... 179 

WITNESSES 

Darbee, Peter A., Chairman, CEO and President, PG&E Corporation ............... 13 

Prepared statement .......................................................................................... 15 

Responses to additional questions from: 

Senator Boxer ............................................................................................ 21 

Senator Inhofe ........................................................................................... 25 

Grumet, Jason, Executive Director, National Commission on Energy Policy .... 25 

Prepared statement .......................................................................................... 27 

Response to an additional question from Senator Sanders .......................... 33 

Hay, Lewis III, Chairman and Chief Executive Officer, FPL Group .................. 34 

Prepared statement .......................................................................................... 35 

Responses to additional questions from: 

Senator Boxer ............................................................................................ 98 

Senator Inhofe ........................................................................................... 102 

Hawkins, David G., Director, Climate Center, Natural Resources Defense 

Council .................................................................................................................. 104 

Prepared statement .......................................................................................... 106 

Rogers, James E., Chairman, President and CEO, Duke Energy Corporation .. 121 

Prepared statement .......................................................................................... 122 

Responses to additional questions from: 

Senator Boxer ............................................................................................ 133 

Senator Inhofe ........................................................................................... 135 

Donohue, Thomas J., President and CEO, U.S. Chamber of Commerce ............ 136 

Prepared statement .......................................................................................... 137 

Responses to additional questions from: 

Senator Boxer ............................................................................................ 141 

Senator Inhofe ........................................................................................... 143 

Lewis, Marlo, Senior Fellow, Competitive Enterprise Institute .......................... 144 

Prepared statement .......................................................................................... 146 

Responses to additional questions from Senator Inhofe ............................... 161 

Murray, Robert E., Chairman, President and Chief Executive Officer, Murray 

Energy Corporation .............................................................................................. 163 

Prepared statement .......................................................................................... 164 

Responses to additional questions from Senator Inhofe ............................... 172 

Borelli, Thomas J., Ph.D., Portfolio Manager, Free Enterprise Action Fund ..... 180 

Prepared statement .......................................................................................... 182 
Page

IV 

Borelli, Thomas J., Ph.D., Portfolio Manager, Free Enterprise Action Fund 

—Continued 

Responses to additional questions from: 

Senator Boxer ............................................................................................ 184 

Senator Inhofe ........................................................................................... 186 

Newspaper Article, The Columbus Dispatch, January 15, 2006, Safety still 

an issue in Ohio coal mines; Five killed in underground accidents during 

past decade, by Randy Ludlow ............................................................................ 193 

Letter from John Bruton, Ambassador, European Union, Delegation of the 

European Commission ......................................................................................... 215 
(1) 

EXAMINING GLOBAL WARMING ISSUES IN 

THE POWER PLANT SECTOR 

THURSDAY, JUNE 28, 2007 

U.S. SENATE, COMMITTEE ON ENVIRONMENT AND PUBLIC WORKS, Washington, DC. 

The committee met, pursuant to notice, at 10 a.m. in room 406, 

Dirksen Senate Office Building, Hon. Barbara Boxer (chairman of 

the committee) presiding. 

Present: Senators Boxer, Inhofe, Lieberman, Carper, Cardin, 

Klobuchar, Whitehouse, Warner, Voinovich, Craig, and Alexander. 

STATEMENT OF HON. BARBARA BOXER, U.S. SENATOR FROM 

THE STATE OF CALIFORNIA 

Senator BOXER. Welcome, everybody. We are really looking forward to your testimony. 

We are starting right on time, we have a busy morning. We are 

going to have to take a break an hour from now, so we are going 

to get through as much as we can in that time. Therefore, I am 

limiting the opening statements for all of us to 2 minutes each. 

Hopefully you can do your statements in 5 minutes. 

Before we start today, I want to talk about two wonderful pieces 

of news. First of all, today the bald eagle is being de-listed from 

the Endangered Species List. In 1968, there were 417 mating pairs, 

and now there are 10,000 mating pairs. I think what it shows is 

that the Endangered Species Act works, that environmental laws 

work, and we are better for it. 

Also, I want to call attention to yesterday’s groundbreaking announcement by Senators Warner and Lieberman to jointly craft an 

economy-wide cap and trade global warming bill. It is an important 

step forward, and I look forward to the results of their efforts. Then 

we will move forward in the full committee as soon as possible. 

I also want to thank Senator Alexander, who has addressed the 

power plant sector’s contribution to global warming, both in his 

power plant legislation and in the Capitol Power Plant bill that 

passed as part of the energy bill last week. I have asked Senator 

Carper to sit close to me today, because he has been such a leader 

in looking at this particular sector. His work has made a tremendous difference already. 

I want to welcome from my home State of California Peter 

Darbee, the CEO of PG&E, as well as the other utility CEOs here 

today: Mr. Lewis Hay, of FPL Group and Mr. Jim Rogers of Duke, 

and all of our other distinguished witnesses. With the announcement by Senators Lieberman and Warner, we are on our way to-
2 

ward reporting economy-wide global warming legislation, which is 

the most efficient way to deal with this issue. 

However, this hearing is key, because power plants are the single 

largest CO2 emitting sector in the U.S. economy. They account for 

40 percent of all emissions. The single largest source of fuel for 

power plants is coal, which accounts for 50 percent of our electricity generation. 

In the fight against global warming, the electricity sector will 

play a critical role, both as a source of emissions and as a source 

of emission reductions. In other words, the utility sector can be a 

huge part of solving our problem. That is what we hope, that is the 

spirit in which I have invited you here today. 

The technological choices we make in this area will affect our 

ability to combat global warming for many years to come. These 

choices can lead to large decreases in emissions or commit us to 

large increases in emissions. These choices can commit us to low 

cost solutions or to high cost solutions later. We need to act wisely 

and decisively. 

With the help of the experts and CEOs who are here today, and 

with my colleagues from both sides of the aisle, I am confident we 

can find such a solution. I look forward to hearing all of the witnesses’ testimony and to learn more about these important issues. 

Senator Inhofe, you are recognized for 2 minutes. 

STATEMENT OF HON. JAMES M. INHOFE, U.S. SENATOR FROM 

THE STATE OF OKLAHOMA 

Senator INHOFE. Well, before you start the 2 minutes, let me on 

behalf of my people who are calling in to register our objection to 

the way this is being run, it is my understanding just late last 

night you decided that everyone would have just 2 minutes. I don’t 

mind that, really. In fact, we have had so many of these hearings, 

I don’t think that there is a lot more we can talk about in opening 

remarks. 

Senator BOXER. Would you start the 2-minute clock, because I 

had 2 minutes? 

Senator INHOFE. OK. First of all, I think this is what, the 14th 

hearing we have had now on global warming. This is really a lot 

of fun, I know that. But sooner or later, I would recommend to my 

distinguished Chairman that we had better start getting some bills 

out there. We are not doing anything in this committee. We haven’t 

done anything since January. We have hearing after hearing after 

hearing. 

Let me suggest also that you should get some bills out, because 

time is not your friend. It is not every month or every week, but 

every day that goes by there are more and more scientists who are 

coming over who were in the other camp, coming over now and saying, the science is flawed and it is not real. I have talked about all 

the universities here in the United States in the last hearing that 

we have had the professors that come over. But we have another 

list right now that I will submit for the record. It includes professors from the University of Ottawa, from the Australian government and from the University of Auckland in New Zealand. 

So it just seems to me that one of the things that you folks, and 

I know there are a lot of you, and we will have a chance to talk 
3 

to you, that are in the utility business, you are going to have to 

understand that there is going to be a huge cost. The science is in 

question, the cost is not. Just recently, in looking at the only two 

bills that are up for consideration right now, the Boxer bill and I 

believe the Lieberman-McCain bill, MIT recently came out and said 

that the cost of the Lieberman-McCain bill to our energy consumers is about $3,500 a family; the Sanders-Boxer bill would be 

about $4,500 per family. 

What that constitutes is a tax increase 10 times greater than the 

largest tax increase in history to the American people. I know that 

you folks have boards of directors and some of you are going to 

have to do what you can to your bottom line. But my board of directors are the taxpayers. 

Thank you, Madam Chairman. 

[The referenced information was not received at time of print.] 

[The prepared statement of Senator Inhofe follows:] 

STATEMENT OF HON. JAMES M. INHOFE, U.S. SENATOR FROM THE

STATE OF OKLAHOMA

Madame Chairman, we have never had a legislative hearing to examine the many 

proposed climate bills, and this hearing is no exception. But at least today we are 

discussing some broad concepts. So I would like to thank you for taking a half-step 

forward and urge you to take the next half-step. To date, we have had a dozen hearings talking endlessly about how urgent and important this issue is, and I believe 

that they have been useless and a complete waste of time. 

For instance, we had a hearing to examine perspectives of religious leaders and 

little was learned. Indeed, you used the hearing to imply one of our witnesses of 

misrepresenting the views of the Southern Baptists Convention. But in a direct vindication of his statements, on June 13th, the Southern Baptist Convention (SBC) 

approved a resolution on global warming that questions the belief that humans are 

largely to blame for the phenomenon and also warns that increased regulation of 

greenhouse gases will hurt the poor. 

Madame Chairman, you need to hurry if you want to pass legislation and you 

should have hearings on each of the bills. Just last month, it was discovered that 

increasing wind shear from warming will reduce hurricanes, not increase them. Increasingly, prominent scientists are beginning to reject the global warming hype. 

Some recent converts include Paleoclimatologist Dr. Ian D. Clark, professor of the 

Department of Earth Sciences at University of Ottawa, Mathematician & engineer 

Dr. David Evans, who did carbon accounting for the Australian Government, and 

Climate scientist Dr. Chris de Freitas of The University of Auckland, New Zealand. 

But I cannot believe the Senate will pass cap and trade mandates. According to 

MIT, the Lieberman-McCain bill will impose costs on our energy sector that are 

passed onto consumers equal to $3,500 per family. The Sanders-Boxer bill would be 

equal to $4,500 per family. 

Hopefully, today’s hearing will be more constructive than past hearings. I strongly 

disagree with the approach being taken by the 3 utilities represented here today. 

But I want to be clear—as Ronald Reagan used to say, ‘‘my 80-percent ally is not 

my 20-percent enemy.’’ 

I have long been a sturdy supporter of our energy sector and championed legislation that would increase our supplies and minimize regulatory costs. In fact, when 

I chaired this committee, one of the witnesses today, Jim Rogers, testified in favor 

of my Clear Skies bill. Welcome, Mr. Rogers. 

While we disagreed then and now about the need for regulating carbon dioxide, 

we shared the view that 70 percent cuts in air pollution could be achieved if we 

were smart about it. A key aspect of that legislation is something that too often gets 

sugar-coated in this debate—we cannot get ahead of the technology and we must 

not disrupt energy markets. 

I also believe our Nation needs more energy and more diverse energy. While we 

continue to move toward greater efficiency, we will continue to need more energy 

to supply our growing nation. We need more nuclear generation, more natural gas 

exploration, more coal and more hydro. We need clean coal and coal-to-liquids. And 

the legislation I have supported makes it clear that I back up my beliefs with action. 
4 

The Edison Electric Institute has said that any mandatory legislation should be 

economy-wide. I agree with the sentiment that the utility industry should not be 

singled out for special treatment. 

As I go through the list of things where we agree and disagree, when it comes 

to a utility that parts company with me on this issue, I consider it to be my 80 percent ally. Madame Chairman, I guess that means you probably belong in the 20 percent range. 

Energy is the most fundamental ingredient of America’s economic engine. Our Nation has done a poor job in keeping supply up and costs down. I would add that 

the energy bill we just passed does little to increase supply, but much to increase 

costs. Likewise, carbon cap and trade schemes would decrease supply while driving 

costs through the roof. 

Ultimately, that means more costs passed onto the consumer in the form of higher 

prices. That is really what today’s hearing is all about—how much will carbon 

schemes cost and who will bear the burden of these higher costs? 

As each of our utility witnesses speak today, I would like to hear their views as 

to the issue of economy-wide versus utility specific, the differences between regulating carbon where the technologies are in their infancy and regulating something 

such as sulfur dioxide where the technologies are mature? And I would like all the 

witnesses to discuss the elephant in the living room—costs to consumers and jobs 

moving to China, the biggest emitter of greenhouse gases on the planet. 

Senator BOXER. Thank you, Senator. We will put into the record 

the four bills that deal with global warming that have already not 

only passed the committee but passed the Senate. 

[The above mentioned bills may be found in committee files.] 

Senator BOXER. Senator Lieberman. 

STATEMENT OF HON. JOSEPH I. LIEBERMAN, U.S. SENATOR 

FROM THE STATE OF CONNECTICUT 

Senator LIEBERMAN. Thanks, Madam Chair. Obviously, Senator 

Inhofe and I have a difference of opinion on this. I suppose also I 

should say on the record of the committee, we have brought out a 

number of bills, most of which or perhaps all of which were included in the Energy bill, which passed the Senate last week. 

So there is a beginning. I am very proud and grateful that Senator Warner and I have, as Chair and Ranking Member of the subcommittee of this committee on Climate Change have joined together with a clearly stated goal, which is that we want to bring 

to our subcommittee and then hopefully with the support of the 

subcommittee the full committee a bill that really does deal in a 

comprehensive way with the genuine threat of climate change and 

the desire of a lot of people on this panel who have said to me, it 

is time for national leadership on this, it is time to give businesses 

particularly a consistent, predictable environment in which to respond to this problem. Everybody that I talk to says it is coming. 

Let’s not have us picked apart by the various States or others. Let’s 

have, this is a national, it is an international problem. We have a 

national responsibility. Let’s do it. 

Senator Warner and I have agreed on a set of principles. We are 

going to bring forward an economy-wide cap and trade system. Our 

staffs are beginning this week to meet with stakeholders. We invite 

all of you to be in touch with us to do that. We want this to be 

an open process. 

But we have a clear goal, which is to report a bill, to bring a bill, 

a mark to our subcommittee before the August recess, and then 

hopefully that subcommittee to report it on a bipartisan basis. That 

to me is the significance of John Warner, a distinguished member 
5 

of this committee, this Senate, joining together with me on this and 

then hopefully to the full committee. 

I would say, Senator Warner’s support gives us reason to be believe that for the first time in the history of the U.S. Senate, there 

will be a bill on climate change, a real one, reported out of a Senate 

committee to the floor. That is our commitment. 

John said it yesterday, I will just say this in a sentence. Most 

of his career in the Senate has been spent trying to protect America from threats to our security. He sees this effort to deal with 

global climate change as consistent with all that he has done to 

protect American security. 

I thank you for your leadership, Madam Chairman, and I yield 

back to you. 

[The prepared statement of Senator Lieberman follows:] 

STATEMENT OF HON. JOSEPH I. LIEBERMAN, U.S. SENATOR FROM THE

STATE OF OKLAHOMA

Thank you, Madame Chairman. Thank you for your kind words. 

As you know, I have the privilege of chairing the Subcommittee on Private Sector 

and Consumer Solutions to Global Warming. I want to take this opportunity to 

thank my esteemed ranking member, Senator Warner, for being willing to embark 

with me on the process within our subcommittee of drawing upon existing bills and 

new ideas to construct a new, bipartisan, economy-wide, cap-and-trade climate bill 

over the weeks ahead. I believe that his commitment to this effort represents a true 

breakthrough. 

In the meetings that we have had already, Senator Warner has impressed me 

enormously—as he always has in our years here together—with his common sense, 

his concern for the long-term well-being of the American people, and his apolitical, 

fact-based approach to problem-solving. I am very fortunate to lead a subcommittee 

with him, and I am confident that the two of us can come to a bipartisan accord 

that will form the basis of broader bipartisan agreement in our subcommittee, and 

then, with the help of all of our colleagues here, in the full committee. 

As all of you know, I am already the author, along with my friend Senator 

McCain, of an economy-wide, cap-and-trade climate bill that we reintroduced earlier 

this year. Senator McCain and I remain close partners on this issue. I think he expects me to use my position on this, the committee of jurisdiction, to help deliver 

to the Senate floor a bill that lives up to the principles around which our Climate 

Stewardship and Innovation Act is built. As Senator McCain and I have noted, that 

bill is not written in stone, and a lot of very promising new ideas have arisen in 

just the last 6 months. I believe the bill that Senator Warner and I construct together will take advantage of those new ideas, including ones that colleagues of ours 

have written into their own climate bills. 

Senator McCain and I have been honored that 10 of our colleagues, including Senators Carper and Clinton on this committee, have co-sponsored the Climate Stewardship and Innovation Act. When Senator Blanche Lincoln became a cosponsor in 

January, she spoke eloquently about the responsibility she feels to protect the economic well-being of low- and middle-income energy consumers in Arkansas. She 

made clear that she was putting her trust in me and others to ensure that, as the 

legislation proceeded and evolved, it preserved and indeed enhanced protections for 

those Americans with little or no disposable income. 

When Senator Norm Coleman honored me and Senator McCain with his co-sponsorship last month, he and I introduced a resolution to memorialize our shared commitment to ensure that the Senate’s climate legislation would not increase the poverty rate in this country, would not drive manufacturing jobs abroad, would ensure 

that other nations did their part too, and would drive investment toward advanced, 

clean energy technologies. Those priorities matter to me, and I know that they matter to Senator Warner very much indeed. I think Senator Coleman can rest assured 

that we will meet the commitments of that resolution. 

And we of course will not do it alone. This committee is a powerhouse of talent 

and commitment. I can’t wait to roll up my sleeves with Senator Warner. And I 

can’t wait to engage with all of my colleagues on my subcommittee and this full 

committee. 
6 

Thank you, Madame Chairman. And thank you for convening this hearing, in 

which we will all roll up our sleeves on this issue together. I thank the witnesses 

for coming and look forward to their testimony. 

Senator BOXER. Thank you, Senator Lieberman, for your amazing, breakthrough work on this committee. 

Senator Voinovich. 

STATEMENT OF HON. GEORGE V. VOINOVICH, U.S. SENATOR 

FROM THE STATE OF OHIO 

Senator VOINOVICH. Chairman Boxer, I hope today’s hearing will 

provide for a well-informed debate on climate change. This is a difficult and polarizing topic, and much of what we hear in the media 

and elsewhere does little to advance a reasonable solution to the 

problem. 

Utilities are one of the most heavily regulated sectors of our 

economy and have unique experiences in addressing environmental 

concerns. There is much we can learn from their experience. I am 

particularly happy to see one current and one former Ohioan here. 

I thank Bob Murray and Jim Rogers for being here today. I have 

known Bob Murray since I was Mayor of Cleveland ran Cleveland 

Public Power, and Jim and I worked together when he was running 

Synergy. 

As we move forward with this debate, we must be realistic about 

our ability to affect the outcome. We contribute to a warming climate. But as most scientists will admit, even the elimination of 

U.S. greenhouse gas emissions would have negligible effects on 

temperature. Assuming we can make a contribution, we must remember this is a global problem and will require a long-term solution. 

We should be deliberate in our actions, but not at the expense 

of our energy security and economy. Again, harmonize our environment, energy and economy. In this regard, I note the vital importance of coal. Coal is our most abundant and affordable domestic 

energy source. Advancing technologies to capture and store carbon 

is the most important way we can address this problem responsibly. Any reduction requirements must be harmonized with the 

pace of technology. 

Unrealistic requirements will encourage fuel switching, drive up 

costs for manufacturers and consumers and move jobs and even 

emissions overseas. These costs are not real to States with little or 

no coal, nor are they real to individuals who can easily afford them. 

Any sacrifice too often is meaningless to them. But it is not meaningless to coal-dependent States like Ohio where our economy is in 

trouble and natural gas prices have increased 300 percent in 7 

years. It is not meaningless to low-income families who are sacrificing an ever-increasing percentage of their income to pay their 

utility bills. 

A solution to one problem must not create another, perhaps larger problem. I look forward to today’s testimony and appreciate this 

panel’s participation. 

Senator BOXER. Thank you, Senator. 

I must apologize to my colleagues, because I didn’t do the early 

bird rule today. So I will just continue going with seniority, since 

it is just 2-minute openings. I do apologize. 
7 

Senator Carper. 

STATEMENT OF HON. THOMAS R. CARPER, U.S. SENATOR 

FROM THE STATE OF DELAWARE 

Senator CARPER. Thanks, Madam Chair. To our witnesses, welcome, thank you for joining us today and helping us in an important undertaking, that is, developing consensus around a subject 

around which we need to develop that consensus. 

I agree with most of my colleagues that global warming is real. 

I agree with my colleagues and the President and I think most 

American citizens that we as individuals, our businesses and otherwise are contributing to the problem and we need to contribute to 

its solution. 

As a former Governor, I know that among the things businesses 

need is they need certainty. They need to know what the rules of 

engagement are going to be and we need to provide that for them. 

The American people need for us to bear down and find common 

ground on this subject. They need for us to do it in a way that harnesses market forces and of course, to do it in a way that doesn’t 

put our economy in a tailspin. They need for us to do it in a way 

that doesn’t cost consumers an arm and a leg. 

There is ironically a whole lot more that we agree on among the 

three pieces of legislation, I think, that are before us: Senator Alexander’s legislation, Senator Sanders’ legislation and my proposal. 

Lamar and I worked actually for the last several years to develop 

that consensus. I think the only major area that divides us is how 

do you allocate the credits. We will have some discussion of that 

today. 

I understand there is actually a new approach that is on the 

table, and we are interested in hearing that fleshed out. 

My preference overall is for an economy-wide bill. I am encouraged with the legislation, Madam Chair, and my colleagues, that 

we passed last week. Because we addressed at least the emissions 

from mobile sources for CO2 and almost a third of our CO2 comes 

from our mobile sources, roughly 40 percent from utilities. If you 

put them together, that is 75 percent of the emissions of CO2 in 

this country. That is mighty substantial. 

The last thing I would say is, the rest of the world needs for us 

to provide some leadership here. This is the United States of America. We shouldn’t be waiting for the Chinese or the Indians or others to decide what to do. We should provide that leadership and it 

starts right here. 

Senator BOXER. Thank you, Senator. 

Senator Craig. 

STATEMENT OF HON. LARRY E. CRAIG, U.S. SENATOR FROM 

THE STATE OF IDAHO 

Senator CRAIG. Congratulations, Madam Chairman, I understand 

you are a new grandmother. 

Senator BOXER. Thank you very much. 

Senator CRAIG. That is exciting. 

Senator BOXER. I do have a picture to show you later. 

[Laughter.] 

Senator CRAIG. I am anxious to see. Boy or girl? 
8 

Senator BOXER. It’s my second grandson. 

Senator VOINOVICH. When? 

Senator BOXER. I will tell you later. 

[Laughter.] 

Senator BOXER. Yes, we will definitely start the clock again. 

Senator CRAIG. The reason I know that is, we were all waiting 

you hopefully to get back for that vote the other evening and you 

missed it. I know none of us like to miss votes on energy bills. 

Then I found out why you had. That was all the right reason. 

Thank you for this hearing today, Madam Chairman. I am always amazed how busy we get here talking about energy. We don’t 

produce one drop of oil nor one kilowatt of electricity. But we can 

sure get in its way. 

Now, we talk a lot about it, because it is the politically correct 

thing to do right now. We wring our hands and stand on street corners and we pontificate beyond anyone’s imagination. 

Now and then we construct policy that gets in the way of its production or partners in it. I would hope, Madam Chairman, that 

anything we do now and into the future shapes a partnership, a 

relationship that doesn’t distort the marketplace, looks at the reality of what is doable and what is not doable, doesn’t set up huge 

obstacles that do two things for the American consumer, either 

deny it energy or cause it to have to pay extremely high costs for 

its energy. 

That is the reality of what we can or cannot do. I am always fascinated in cap and trade schemes, and I underline the word 

scheme. Because I watch Europe play the game, not so well. They 

don’t understand the scheme except for those who can buy it and 

profit from it. They didn’t produce one kilowatt hour of power out 

of it. My guess is they are not much cleaner as a result of it. 

But I am always fascinated in the phenomenal innovative character of the American economy if we help it, if we partner with it. 

This world would become a very clean place over the next three 

decades because of us, not in spite of us, because we are the ones 

that are going to create the technology, we are the ones that are 

going to innovate, and we are the ones that are going to pass it off 

to the rest of the world to use. Why? Because we are rich. Because 

we have the ability to do it. Because we are going to do it, because 

we are committed to do it. 

The only reason we wouldn’t do it is if we decided that our Government was going to stand in its way, not partner, create obstacles and create a less wealthier nation. I have traveled to nearly 

every climate change conference in the world. I have watched the 

cottage industry of climate change grow and prosper over the 

years, and talk about the great problem that the world was beset 

by. None of them could solve it, other than to suggest that we all 

did less, that we move to caves and lighted our reading with candles. 

Well, that didn’t work. The world rejected that. Poor nations said 

no, they weren’t going to put their people through it, even though 

some of our politicians thought it was a neat idea. 

Those concepts all got rejected. I am one who early on said yes, 

our world is warming and we ought to know why. If we are contributing to it, we ought to stop. 
9 

We are not quite sure yet why it is. 

Senator BOXER. Senator, you have gone a minute over your time. 

Senator CRAIG. Oh, I am so sorry. Well, do I get a little 

grandbaby time? 

Senator BOXER. I gave you that grandbaby time. 

[Laughter.] 

Senator BOXER. I gave you so much extra time because you were 

so nice about my grandson. But your time is running out. 

Senator CRAIG. All right. Enough said. My point is this, Madam 

Chairman. Let’s partner, let’s don’t stand in the way, let’s don’t 

play politics with the consuming public and a wealthy nation’s ability to create and pass those technologies through to less capable 

countries. Thank you. 

Senator BOXER. Thank you so much. 

Senator Sanders. 

STATEMENT OF HON. BERNARD SANDERS, U.S. SENATOR 

FROM THE STATE OF VERMONT 

Senator SANDERS. Thank you, Madam Chair. If I say nice things 

about your grandchildren, will I get extra time, too? This is a cap 

and trade situation. 

[Laughter.] 

Senator SANDERS. First, let me say that I look forward to working with Senator Lieberman and Senator Warner as a member of 

that committee. We have a major responsibility and we look forward to coming up with very strong legislation. 

I would say also, I am delighted to welcome our guests here 

today. I would say to my friend, Senator Craig and others, frankly, 

I think we in the Congress are way, way, way behind the American 

people. I think the American people understand that in many ways 

the debate over global warming is over. The scientific community, 

with almost unanimous belief, believes that global warming is real 

and with almost unanimous belief believes that it is man-made, understands that the impact of global warming is taking place today, 

and that if we don’t get a handle on it, it will be catastrophic in 

years to come. Our job is to catch up to the American people, reverse global warming, cut greenhouse gas emissions significantly. 

I happen to believe that the genius of our society, the society that 

put a man on the moon, that rebuilt our war-time economy in the 

early 1940s in a short period of time and then defeated Nazism, 

certainly has the capability, with all of the technology that is out 

there, to break our dependence on fossil fuel, to move in a very, 

very significant way forward in terms of energy efficiency, to move 

to solar energy, to move to wind technology, to move to geothermal 

technology and other technologies that are sitting out there right 

now. 

A month ago, I drove in an automobile that got 150 miles per 

gallon. It is sitting out there waiting to happen. I must respectfully 

disagree with my friends, who say that there will be terrible economic implications if we do those things. The truth is, the Congress, if we do not act boldly, there will be terrible economic implications. If we act boldly, we can create millions of good-paying jobs, 

breaking our dependence on fossil fuel. 

Thank you, Madam Chair. 
10 

[The prepared statement of Senator Sanders follows:] 

STATEMENT OF HON. BERNARD SANDERS, U.S. SENATOR FROM THE

STATE OF VERMONT

Madam Chair, Ranking Member Inhofe, thank you for holding today’s hearing on 

global warming issues in the power plant sector. 

As members of this committee know, I am a strong believer in the need for the 

Federal Government to be very bold in reversing global warming—the largest environmental challenge humanity has ever faced. I have an economy-wide global warming bill, S. 309, that many members of this committee, including the Chair, support. 

That legislation lays out a path for reducing our greenhouse gas emissions in a way 

that will give us at least a 50–50 chance to avoid the catastrophic effects that the 

best scientists in the world tell us we can expect if we increase global temperatures 

by over 2 °C. And, I note with extreme interest that just yesterday Senator 

Lieberman and Senator Warner, the leadership of the Subcommittee on Private Solutions to Global Warming, announced their intent to craft an economy-wide global 

warming bill based on already-introduced proposals as well as new ideas. 

I will continue to stand firm for the need for an economy-wide approach, and I 

look forward to working with Senator Lieberman and Senator Warner as a member 

of their subcommittee, but it does seem appropriate to be thinking about the various 

individual sectors that would need to be addressed in such an approach. Power 

plants are responsible for roughly 40 percent of U.S. global warming emissions. 

That’s a significant amount of our problem. Along with Senators Carper and Alexander, I recognized the need for attention to reductions in power plant emissions 

of CO2—and three other harmful pollutants: nitrogen oxide, sulfur dioxide, and mercury, and introduced a power plant bill, S. 1201. While I know that today’s hearing 

is focused on global warming emissions from power plants, I do want to go on record 

as saying that this committee needs to stand up and address the other three pollutants too, given the clear public health threats posed by air pollution. 

I think that there is much promise as we look to the power plant portion of our 

global warming emissions. The targets and timelines for CO2 reductions in Senator 

Alexander’s bill are identical to the targets and timelines for CO2 reductions in my 

bill. Our targets and timelines are consistent with reducing the emissions from 

power plants to 1990 levels by 2020. While Senator Carper’s targets and timelines 

are a bit different, they are close—so it is clear we have much in common. 

While there is much promise for agreement, part of our responsibility is to use 

hearings like today’s to learn more about the places we have yet to come to agreement and to that end, I want to at least mention a few areas of particular interest 

to me. 

First off, while there is widespread agreement that we need a firm cap on emissions and that a cap and trade system will serve the purpose, especially for the 

power plant sector, there are other steps that we should be taking to reduce our 

emissions of greenhouse gases. For example, wider use of renewables as well as 

more efficient products will go a long way. 

I would like to see households across the country generating their own energy 

from photovoltaic panels on their roofs and had the Finance Committee’s renewable 

energy tax incentives legislation not been derailed by some of my colleagues on the 

other side last week, we would have been one step closer to extending the financial 

incentives for such investment. I would also like to see family farmers generating 

electricity from small wind sources—and again, I sure hope we can reinvigorate the 

Finance Committee package so that, for the first time, we will provide financial incentives for residential installation of wind power. 

On the efficiency front, Philips Lighting has told me that by adopting much more 

efficient lighting we could save the energy equivalent of what is generated by 30 

nuclear power plants or up to 80 coal burning power plants—not to mention save 

consumers and businesses approximately $18 billion annually in their electricity 

bills! 

But, the point I am trying to make is that reduction of our emissions from the 

power plant sector can come through greater use of renewables, both by the utilities 

as well as by individual Americans who want to stand up and make a personal contribution to solving global warming, and of course, through better energy efficiency 

efforts. So, it is with some concern that I note, to my best knowledge, that my bill 

is the only one of the power plant bills to include a renewable portfolio standard 

and an energy efficiency performance standard. While we clearly need an overall 

cap on emissions, I think that we can help move the ball forward by taking concrete 

steps to increase our use of renewables and to be more efficient. 
11 

Second, the issue of how we decide to distribute allocations is tremendously important. My power plant legislation calls for an auction of at least 50 percent of the 

allowances, with a 100 percent auction within 15 years of enactment. I want to be 

very careful as we move forward to not make some of the mistakes that others have 

made. I want to be sure that we don’t give companies windfall profits through free 

allocation of allowances. Additionally, I believe that the proceeds of an auction 

should be used to help low income families and others who might need assistance 

as we reduce our use of fossil fuels. 

Finally, I want to quickly mention that my power plant bill is the only one that 

makes an explicit connection to the economy wide reductions of global warming 

emissions that are required to avert catastrophic changes in our climate. While I 

understand that the provision wouldn’t be popular with many of the witnesses here 

today, my bill states that if Congress fails to pass legislation affecting at least 85 

percent of manmade sources of global warming pollutants by 2012, then emissions 

from power plants must be decreased each year by 3 percent through 2050. I mention this here today because I am committed to seeing the needed reductions occur 

on an economy wide basis, however, I must be very clear that getting the actual 

reductions must be our overall goal—it is what the future of the planet demands 

from us. 

I appreciate your determined leadership of the Chair to tackle global warming 

and look forward to hearing from our witnesses. 

Senator BOXER. Thank you, Senator. 

Senator Alexander. 

STATEMENT OF HON. LAMAR ALEXANDER, U.S. SENATOR 

FROM THE STATE OF TENNESSEE 

Senator ALEXANDER. Thank you, Madam Chairman. 

I am very pleased with the steps that we have taken in Congress 

this year to reduce emissions of greenhouse gases. My message is 

that the best way to get to a so-called economy-wide proposal I believe is sector by sector. First, we have already acted to reduce 

greenhouse gas emissions from the transportation sector. Senator 

Carper mentioned that. By 2020, the new fuel economy standards 

that the Senate passed are estimated to save 1.2 million barrels of 

oil a day and will remove 206 million metric tons of CO2 from the 

atmosphere. We also increased the renewable fuel standard, which 

would reduce greenhouse gases. So that is the fuel part. 

On the efficiency part, the Senate and this Congress has taken 

many initiatives to increase energy efficiency in buildings, lighting 

and appliances, with estimates to save 1.2 million metric tons of 

carbon dioxide. So as Senator Carper indicated, if you add up fuel 

and efficiency and then if you put making electricity in there, too, 

which is 40 percent of the carbon, you get most of the economy. 

You add the stationary sources, you get most of what is left. I don’t 

believe you will ever come up with a real economy-wide cap and 

trade, because you won’t end up wanting to put in the service stations and the small businesses, et cetera. 

Senator Carper and I worked for a long time on a cap and trade 

system for the electricity sector, which we believe is reasonable. 

The only difference we ended up with it on was allocation. I went 

from one view to another view during the time I started. So I am 

very interested in learning from you how to allocate costs. 

I believe, Madam Chairman, in conclusion, that the best way to 

deal with, in a practical and cost-effective way, with carbon emissions, is sector by sector. I hope to learn a lot today about how to 

allocate that cost in the most efficient way at the lowest cost to the 

ratepayer. 

Senator BOXER. Senator Alexander, thank you very much. 
12 

Senator Klobuchar has been a real leader in trying to get us to 

count the carbon, with the carbon registry. Welcome. 

STATEMENT OF HON. AMY KLOBUCHAR, U.S. SENATOR FROM 

THE STATE OF MINNESOTA 

Senator KLOBUCHAR. Thank you, Senator Boxer. I heard from my 

staff that everyone has been congratulating you on your grandchild. I am going to congratulate you instead on your work on the 

energy bill. 

But I think that was a good start. I believe there is a lot more 

work that needs to be done. I think the fact that I am on the Commerce Committee, that we were able to, on a bipartisan basis, get 

the increased gas mileage standards in place, should be a good 

model for us on this committee. I appreciate the work that Senator 

Lieberman and Senator Warner are doing together, as well as the 

work that Senator Carper and Senator Alexander have done. I 

think that this could be in the same model. It is actually one of the 

more bold things we did with the gas mileage standards. It came 

out of the Commerce Committee on a bipartisan basis. 

I have said many times that in my State, people have seen global 

warming. They have seen climate change, whether it is people who 

ice-fish or people who own ski resorts, they are starting to see the 

effects and they are very concerned about it. So it is not just the 

scientists talking about it any more. 

We also have a thriving business community in my State that 

sees the technological possibilities of what Tom Friedman of the 

New York Times has called the Green New Deal if we do this right. 

That we should be, in our country, developing the technology instead of letting China and Indian and other countries on the front 

line. 

So I look at this as not only a potential, huge potential hazard, 

as Senator Sanders expressed, but also as an opportunity if we do 

this right. I will say that I have been impressed by the numbers 

of businesses and CEOs that have come before them. I would have 

liked to have seen them, Senator Boxer, as vocal as they were 

when they do appear before a committee when we had the carbon 

counter bill come up. But I know there will be other opportunities 

for that. 

I think that people need to, if they are going to be talking about 

wanting to do something about climate change, we clearly need to 

collect accurate data nationally. Otherwise we are going to have 31 

States doing it on their own. I think a lot of the business people 

here are nodding their heads about that. Then I think we need to 

act. I think it is going to come out of this committee. Thank you 

very much. 

Senator BOXER. Thank you so much. 

Before I call on you to add your words about Mary Frances, I 

want to say that Senator Carper has reminded me, Mary Francis 

Repko, that this is your last hearing at the committee as you go 

on to meet new challenges in your life. You started in July 1994, 

you joined EPW in December 2003. You started in the Congress in 

1994. You joined EPW in December 2003. 

So we will miss you, and Senator Carper, you wanted to say a 

word. 
13 

Senator CARPER. I think my colleagues will agree, I would say we 

are only as good as our staff. We are hopefully at least as good as 

our staff, but we are strengthened by our staff. Mary Francis 

Repko has been just a terrific member of this committee staff; for 

a number of years before that, she served with Senator Feingold, 

as a member of his team. 

She goes to work with one of my favorite people over in the 

House, she goes to work for Steny Hoyer in the Majority Leader’s 

office, where she will be a senior environmental policy advisor. So 

we will have a chance to work with her and hopefully with him. 

He will be strengthened, and I think the House will be strengthened by her addition. 

Senator BOXER. Mary Frances, stand up a minute, take your applause. 

[Applause.] 

Senator BOXER. OK. Now we are going to get back to the basics 

of this hearing, and we are going to hold you to 5 minutes so we 

can get through. 

Oh, Senator Warner. We are delighted to see you. You have been 

much praised and we wonder if you have an opening statement. 

Senator WARNER. Why don’t I rest my case on what has been 

said and we will proceed. Thank you very much. 

[Laughter.] 

Senator BOXER. Since it was all beautiful. 

Do you want us to put your statement into the record, Senator? 

Senator WARNER. Why not. 

Senator BOXER. OK, we will do that. 

[The prepared statement of Senator Warner follows:] 

STATEMENT OF HON. JOHN W. WARNER, U.S. SENATOR FROM THE

COMMONWEALTH OF VIRGINIA

Good morning, gentlemen, and thank you for participating in this key hearing of 

the Environment and Public Works Committee. I am eager to listen and learn the 

perspective of today’s witnesses, and thank Chairman Boxer and Senator Inhofe, my 

ranking member, for holding this hearing. 

Today’s hearing is all the more important to me, given the announcement this 

week that I made jointly with my good friend, Senator Lieberman, to seek to come 

to agreement on a climate change bill in the near future. We will spend the next 

several weeks hearing from stakeholders, listening to our colleagues in the Senate, 

and analyzing both existing proposals and new ideas. I want all interested parties 

to have an opportunity to weigh in with us, and look forward to this process moving 

forward. 

While I have already stated my support for an economy-wide approach to climate 

change, the power plant sector is going to compose a large portion of the bill Senator 

Lieberman and I craft, thus I will take seriously the testimony I hear today. 

I thank the witnesses. 

Senator BOXER. OK, we will get started now. 

Peter Darbee, PG&E, welcome. 

STATEMENT OF PETER A. DARBEE, CHAIRMAN, CEO AND 

PRESIDENT, PG&E CORPORATION 

Mr. DARBEE. Chairman Boxer, Ranking Member Inhofe and 

members of the committee, thank you for the opportunity to be 

here today. 

I am here today because it is clear that if our country is going 

to step up as a leader on climate change, as we believe we can and 

should, then the U.S. electric industry must also be ready to step 
14 

up and work constructively toward solutions. This belief is consistent with PG&E’s participation as a founding member of both 

the Clean Energy Group and the U.S. Climate Action Partnership. 

It is consistent with our actions to lower PG&E’s emissions while 

helping our customers do the same. 

In fact, today we are launching the industry’s first program that 

allows utility customers to voluntarily offset the emissions associated with their PG&E service. Our written testimony details a full 

set of principles that should guide a national strategy on climate 

change. I will quickly highlight a few of these. 

We strongly support mandatory, flexible market-based solutions. 

We believe emissions reductions must ultimately come from multiple sectors of the economy. We believe companies that have taken 

early action should be recognized. We believe support for energy efficiency and clean technologies is critical, and we believe long-term 

clarity on emissions requirements is needed to help American business plan and invest effectively. 

I want to note that Senator Carper’s and Senator Feinstein’s bills 

incorporate these ideas. We support the cap and trade strategy that 

they would create. It is worth focusing on a few issues addressed 

in these bills, because they especially go straight to the heart of today’s hearing. Indeed, if the goal is to have the electric sector move 

effectively, efficiently and expeditiously, then these are the most 

important areas to consider. 

The first issue is the time horizon for emissions caps. We believe 

caps on emissions should start slowly and then gradually ratchet 

down over several decades. This allows technology to evolve. It also 

provides a long-term price signal which can drive investment in 

low-carbon technologies. In the meantime, the caps can be met 

with existing technologies and strategies. 

Energy efficiency deserves special mention here. In California, 

we meet half of our demand growth through energy efficiency. Over 

the past 30 years, we avoided the need to build 24 large power 

plants and we saved customers money. If we place a full court 

press on energy efficiency nationally, we could offset the need for 

significant investments in conventional power plants in the near 

term while advanced low and zero emitting technologies become 

available and competitive. This is a common sense, cost effective 

resource. It is critical that we take maximum advantage of it. 

The second important issue is controlling costs by allowing flexible compliance options. These bills offer several mechanisms that 

we think are vital. One is utilizing high quality greenhouse gas offsets. This allows companies to invest in reductions outside of our 

sector, and it lowers costs by providing a broader set of reduction 

opportunities. For example, PG&E is partnering with dairy farms 

to produce pipeline quality biogass for natural gas customers. 

Other effective mechanisms include multi-year compliance periods, 

banking of emission allowances and credit for early action. 

The final key issue for our sector is emissions allocations. This 

is perhaps the most complex and controversial aspect of designing 

a cap and trade program. So I would like to take a few principles 

and outline them that we believe are critical. Any effective and equitable allocation strategy has to do the following. First, create a 

smooth economic transition for those who are adversely impacted. 
15 

Second, help advance new technologies. Third, avoid penalizing 

early action. Fourth, recognize and compensate customers for higher costs. Fifth, avoid creating unintended windfalls for companies 

granting allowances whose value exceeds the cost of addressing the 

problem. 

In our written testimony, we have outlined some of the ways we 

think a cap and trade program can be designed to meet these objectives. Thank you again for the opportunity to address this committee and for your leadership on this very important issue. 

[The prepared statement of Mr. Darbee follows:] 

STATEMENT OF PETER A. DARBEE, CHAIRMAN, CEO AND PRESIDENT, 

PG&E CORPORATION

Chairman Boxer, Ranking Member Inhofe, and Members of the Committee, I am 

honored to appear before you this morning to offer my views on global warming and 

options for mitigating greenhouse gas emissions in the power sector. I believe climate change and its implications is one of the most pressing issues of our time. It 

is clear that the link between greenhouse gas emissions and the Earth’s warming 

climate is convincing, the potential consequences serious and the need for action urgent. I am pleased that this Committee is showing leadership on this very important issue by having a hearing on how to address greenhouse gas emissions from 

the electric power sector, as proposed in several pieces of legislation introduced by 

Senators Carper, Feinstein, Alexander and Sanders. 

PG&E Corporation is an energy holding company headquartered in San Francisco, 

California and the parent company of Pacific Gas and Electric Company. Pacific Gas 

and Electric Company is California’s largest utility, providing electric and natural 

gas service to more than 15 million people throughout northern and central California. PG&E is a recognized leader in energy efficiency and has among the cleanest 

electric power delivery mix of any utility in the country. And, today, I am pleased 

to announce that PG&E is formally launching a new program for our customers 

called ClimateSmart. ClimateSmart will allow those customers who choose to participate to make their energy use ‘‘climate neutral,’’ by paying a small premium on 

their monthly bill to be invested in greenhouse gas reduction projects in California. 

Our work on energy efficiency, support of clean generating technologies and 

ClimateSmart are just a few examples of the advanced energy solutions we provide 

to our customers. Through technology and innovation we allow our customers to 

meet their energy needs while providing unique opportunities for them to manage 

their energy use, reduce costs, promote new technologies and address climate 

change. 

PG&E’S POSITION ON CLIMATE CHANGE

As the head of a major energy company—and also as an American and a great 

believer in our nation’s unique place in the world—I believe the United States has 

a responsibility to be at the forefront of and be a leader in addressing global climate 

change. 

The U.S. is among the largest emitters of greenhouse gases, both in terms of absolute emissions and on a per capita basis. And, based on our wealth and prosperity 

relative to other nations, it’s clear that we have the ability to demonstrate leadership and make a difference. 

The U.S. has a tremendous capacity for innovation and it is clear that we have 

the human capital to develop the solutions. By signaling, as a Nation, that we are 

serious about making progress on clean energy, we can stimulate investment and 

engage our best and brightest minds in this effort. 

The longer we wait, the costlier the solutions will likely become. On the other 

hand, by acting now, we preserve valuable response options. We narrow the uncertainties. And we avoid the economic and social dislocation associated with having 

to make drastic changes later. 

From PG&E’s perspective, the risk of inaction on climate change is tremendous, 

while, if structured properly, a program to address climate change can create economic opportunity for us as a nation and elevate the U.S.’s leadership position in 

the world. The nation’s energy infrastructure is aging and also must be expanded 

to meet a growing population and a more demanding economy. Hundreds of billions 

in new investments will be made. We could make the same investments we have 

been making for thirty years, or take the opportunity to make investments to sup-
16 

port the economy as we want it to be, and as it will need to be, thirty years from 

now. These investments can enhance our energy security and advance technology, 

while achieving our climate change goals. 

If we do not act now, the U.S. will miss the opportunity to become a technology 

leader, improving our competitiveness, while at the same time increasing the risks 

that dramatic changes in our climate will occur, stressing both our economy and 

citizens. 

That is why, for more than a decade, PG&E has been actively looking for ways 

to address climate change that provide benefits to our customers and help advance 

technology. In order to effectively reduce greenhouse gas emissions to levels necessary to avoid dangerous climate change, we will need to fundamentally change the 

way we produce, deliver and consume energy in this country and throughout the 

world. We recognized this as a company and determined that it was our responsibility to lead and take action, as have others in our industry and industries 

throughout the economy. The actions by companies like ours have allowed us to advance technologies and understand the possibilities that currently exist, and also to 

understand what needs to be done to move forward. And, it is the investments made 

by our customers, and the customers of others in our industry, that have made this 

possible. 

As climate change is a global issue, policies are needed to both maintain and accelerate these types of actions and investments and to provide a roadmap for 

transitioning to a low-carbon economy and the energy infrastructure to support it. 

PG&E recommends the following principles to guide the development of climate 

policy that achieves these goals: • Mandatory greenhouse gas reductions are necessary. Voluntary programs alone 

are insufficient and will not send the appropriate price signal to U.S. industry to 

make a measurable impact on global climate change. Only a mandatory, national 

reduction program is capable of stimulating sustained action and investment on the 

scale required to meaningfully reduce emissions and establish the U.S. as a leader 

in the response to global climate change. • Market-based programs minimize costs and maximize innovation. Market-based 

strategies—such as cap-and-trade—provide the economic incentive and the flexibility to cut emissions in the most innovative, cost-effective ways. This approach is 

key to driving development of the next generation of clean, highly energy-efficient 

technologies and practices. • Long-term greenhouse gas targets provide a rational basis for action. Addressing 

climate change will ultimately require stabilizing greenhouse gas concentrations in 

the atmosphere at a level that will avoid dangerous climate change. Setting ambitious, but achievable, targets now is important because it establishes a clear objective and sends the appropriate price signals from which incremental objectives and 

action plans can be created, as technologies emerge and scientific understanding 

progresses. 

• Broad-based participation leads to better, more cost-effective results. Multi-sector 

participation creates efficiencies that will be essential to keeping costs low. A national program should eventually encompass all major sectors that emit greenhouse 

gases, with each sector responsible for its fair share of reductions. Sector-specific 

programs can, however, serve as a starting point for creating the infrastructure on 

which to base a broader, economy-wide program and strategy. 

• Energy efficiency must be a top priority. Improving energy efficiency is one of 

the lowest cost options for managing growing energy demand, while eliminating 

greenhouse gas emissions. Policies and incentives should encourage and maximize 

improvements in energy efficiency throughout the economy. For example, utilities 

are empowered to aggressively pursue energy efficiency and demand response programs when regulators ‘‘decouple’’ the link between revenues and earnings by setting fixed revenue levels and eliminating the financial incentive to sell more energy. 

• Investment in low-and zero-emission electric generation and other technologies is 

critical. Policies should lower barriers and create incentives for investment in renewable power, nuclear power, advanced coal technologies with carbon capture and 

storage, distributed generation, advanced transportation options, such as plug-in 

electric hybrid vehicles, and other low-and non-emitting technologies. Driving investment in these technologies, along with aggressive support for energy efficiency 

and demand response, will reduce greenhouse gas emissions, enhance and improve 

the efficiency and reliability of the nations’ energy infrastructure, create economic 

opportunities for American business, reduce reliance on imported fossil fuels, and 

support overall U.S. energy independence and security. 

• Early action deserves to be rewarded—not penalized. Policies must recognize 

and provide credit to responsible parties that have proactively cut emissions before 

being required to do so. Ignoring prior efforts sends a signal that stepping up, tak-
17 

ing risks and taking responsibility is not something valued by policymakers. It also 

puts these parties at a competitive disadvantage, forces them and their customers 

to ‘‘pay twice’’ for emissions reductions, and discourages similarly responsible initiatives in the future. 

• Any climate program must be economically sustainable, achieve the ultimate environmental objectives of the program, and begin to address physical impact and adaptation issues. Some economic sectors, geographic regions and income groups may 

be disproportionately impacted by both climate change impacts and mandatory 

greenhouse gas reductions. Any climate protection program needs to take account 

of these impacts and provide appropriate assistance to those impacted constituencies. At the same time, policies need to recognize that, ultimately, the majority 

of program costs will be born by energy consumers, and policies must therefore be 

structured to address this issue. 

• Near-term opportunities for cost-effective, verifiable greenhouse gas reductions 

should be pursued. Policies should encourage greenhouse gas reductions, regardless 

of their geographic location or from where in the economy these greenhouse gas reduction opportunities originate. At the same time, a rigorous system must be developed to ensure the environmental credibility and integrity of these reductions. Taking this approach can help to encourage actions by other countries, spur technological innovation, reduce overall compliance costs and offer ancillary benefits. 

• Standardized emissions reporting is an essential first step and must form the 

basis of any mandatory program. Developing consistent and coordinated greenhouse 

gas emission inventories, protocols for standard reporting and accounting methods 

for greenhouse gas emissions is fundamental to establishing a credible reduction 

program that is capable of tracking and verifying progress toward emissions goals 

and facilitating a tradable emissions credit system. PG&E was a Charter Member 

of the California Climate Action Registry, which is now working with 30 other State. 

to develop a consistent set of reporting standards and protocol. We believe that this 

effort can serve as a model for a national system and that any national system 

should leverage the work that the State. have already done. 

DEVELOPING A RESPONSE

These principles guide our analysis of legislative proposals and policies and calibrate our participation in various coalitions. For example, PG&E is a founding member of both the Clean Energy Group, a coalition of environmentally progressive 

power companies supporting mandatory, market-based solutions to addressing climate change and air quality, and the U.S. Climate Action Partnership (USCAP), a 

coalition of leading businesses from a diverse range of industry sectors as well as 

leading environmental organizations. Together we support a mandatory, flexible, 

market-based approach to reducing greenhouse gas emissions. 

In terms of legislation, PG&E has supported Senator Carper’s Clean Air Planning 

Act of 2007 and Senator Feinstein’s Electric Utility Cap and Trade Act of 2007. At 

the State level, PG&E was one of a handful of businesses to support Assembly Bill 

32, the Global Warming Solutions Act, California’s landmark greenhouse gas legislation. All of these legislative proposals recognize that market-based programs are 

needed to address climate change, greenhouse gas emission reductions can and must 

come from various sectors of the economy to allow for the most cost-effective reduction options, early actions should be recognized and accounted for, clean energy 

technologies and energy efficiency are key to addressing climate change, and a longterm emissions pathway is needed to allow for investment certainty and a long-term 

price signal. 

With regard to the Clean Air Planning Act, one of the bills being discussed here 

today, PG&E also recognizes the importance for our industry of having long-term 

certainty with regard to emission reduction requirements for other major air emissions, such as sulfur dioxide, nitrogen oxide and mercury. Actions taken and investments made to reduce these emissions from power plants can have an impact on 

a facility’s carbon dioxide emissions. Having a clear emissions reduction pathway for 

these pollutants, in addition to carbon dioxide, particularly in the next 10 to 15 

years, will allow for our industry to make the most prudent and cost-effective investment choices. 

Our industry is on the cusp of making more than $700 billion in investments to 

meet the future electric needs of this country between now and 2020. These are 

long-term investments, whose costs will ultimately be paid by electric consumers. 

It is imperative that our industry be given clear guidance and direction, as soon as 

possible, so that we make the right choices for the environment, for the economy 

and for our customers. 
18 

That is why we support the Clean Air Planning Act of 2007. We believe that taking the approach called for in this legislation will create clarity for business; create 

focus for a comprehensive electric power sector strategy; provide linkages to other 

sectors of the economy and the world; and allow us to begin to change the U.S. emissions trajectory today. This is particularly important given that the power sector accounts for approximately 1⁄3 of total U.S. greenhouse gas emissions. 

I would also like to spend a little time addressing some of the key program design 

elements for reducing carbon dioxide provisions and their importance. These include 

the emissions trajectory, compliance flexibility mechanisms and allowance allocation 

approach. It is these provisions that I believe will most directly impact our sector’s 

ability to address climate change cost-effectively, efficiently and accelerate the transition to the energy infrastructure needed to meet our greenhouse gas reduction responsibilities. For purposes of this testimony, I will focus on how the Clean Air 

Planning Act addresses these elements. 

EMISSIONS TRAJECTORY

The Clean Air Planning Act provides an appropriate glide path for reducing electric sector greenhouse gas emissions by starting slowly, and then gradually 

ratcheting down the cap over several decades. This approach provides opportunity 

for technology solutions to develop, while ensuring a significant contribution from 

the electric sector toward a broader, economy-wide reduction goal. It also provides 

a long-term price signal, which will be vital for driving investment in low-carbon 

technologies. 

Initially, we believe the caps proposed by the Clean Air Planning Act can be 

achieved with existing technologies and investments, including energy efficiency, renewable energy, greenhouse gas offsets and high efficiency coal and natural gasfired generating technologies. Over time, advanced coal technologies with carbon 

capture and storage capability, next generation renewable technologies, like tidal 

and solar thermal, and advanced nuclear technologies will need to play a serious 

and greater role in America’s energy future. 

The European Union’s short-term compliance periods—leaving industry guessing 

about their longer-term reduction obligations—is not a model to emulate. Businesses, particularly in our sector, need to understand what requirements will be for 

decades, as opposed to years, as some technologies, particularly advanced coal with 

carbon capture and storage and nuclear, have long lead times, entail project costs 

on the order of billions of dollars and are meant to serve customers for years to 

come. Again, we recommend a long-term reduction trajectory to guide investment 

decisions. 

I would like to focus for a minute on energy efficiency as a near-term response 

option to climate change. Energy efficiency can and must play a key role in meeting 

the nation’s energy needs. The recent energy legislation passed by the Senate recognized energy efficiency as a resource and asks State. to review existing regulatory 

policies to ensure that they do not impede achievement of this goal. In California, 

energy efficiency is the first resource we look at to meet our customer’s electric demand. In fact, we meet half our demand growth (approximately 1 percent per year) 

through energy efficiency. Over the past 30 years, we have avoided the need to build 

approximately 24 large power plants to meet our customers’ needs and have saved 

them money in the process. 

Placing this type of ‘‘full court press’’ on energy efficiency nationally over the next 

5 to 10 years could allow the Nation to offset the need to make the significant investments in conventional generating technologies that are contemplated, while lowand non-emitting generating technologies become more competitive and are tested 

and proven. This will help our sector to cost-effectively meet our customers’ energy 

needs, slow and potentially stop the growth of emissions, maintain investment flexibility and reduce demand on natural gas—an important feedstock and energy source 

for many U.S. manufacturers. 

PG&E’s customers have seen tremendous benefit from our partnership with them 

on energy efficiency. For example, in partnership with Sun Microsystems, PG&E developed an incentive program for energy-efficient servers. PG&E also announced the 

first-of-its-kind utility financial incentive program for virtualization projects in data 

centers, which enable customers to consolidate IT workloads, using dramatically less 

energy. One major software firm, for example, was able to consolidate workloads 

that were running on 230 servers onto just 13, capturing tens of thousands of dollars in energy savings. 
19 

1 USCAP does not endorse any particular allowance allocation methodology. The members of 

the group have a diversity of opinions on this issue. The allowance allocation language in the 

USCAP’s recommendations provides a framework within which Congress can resolve this important question. 

COMPLIANCE FLEXIBILITY

We all recognize the need to control the costs of achieving our greenhouse gas reduction goals, and the Clean Air Planning Act offers several cost control mechanisms that we think are vital to the success of a cap-and-trade program. These include greenhouse gas offsets, multi-year compliance periods, the banking of allowances and credit for early action. 

Greenhouse gas offsets. High quality greenhouse gas offsets—which allow power 

companies to invest in reductions outside of our sector—reduce the costs of the program by providing a broader array of reduction opportunities, while stimulating innovative compliance solutions. For example, PG&E is partnering with dairy farms 

in California to produce pipeline quality ‘‘biogas’’ to serve our customers. This effort 

will not only reduce greenhouse gas emissions by offsetting fossil fuel use and capturing methane that would otherwise be released to the atmosphere, but it also diversifies our energy supply mix, provides additional economic opportunities to the 

farm sector and advances technology that can be deployed elsewhere in the U.S. and 

abroad. 

Multi-year compliance periods. Cap-and-trade programs for conventional pollutants are typically based on annual compliance periods. At the end of each year, affected sources retire allowances for each ton of emissions they generated. However, 

because of the long-term nature of the climate change problem, multi-year compliance periods, like the 2-year compliance period proposed by the Clean Air Planning 

Act, are perfectly appropriate. This flexibility is particularly useful for the electric 

power sector because our emissions can vary significantly depending on weather and 

precipitation. For example, a dry year reduces hydroelectric capacity and increases 

our reliance on fossil-fired power plants, increasing carbon dioxide emissions in that 

year. Multi-year compliance periods can help manage this variability. 

Banking. One of the most important aspects of the cap-and-trade regulatory approach is the ability to ‘‘bank’’ allowances for future years. By allowing companies 

to, in effect, ‘‘over-comply’’ and carry forward any excess allowances, banking greatly 

encourages compliance, slowing the accumulation of greenhouse gas emissions in 

the atmosphere. Given the long-life of greenhouse gases in the atmosphere and the 

cumulative effect, the more we can avoid releasing now and in the early years of 

a program, the more flexibility we will have in the future. 

Credit for early action. Even before the program gets underway, early reduction 

credits can be used to encourage investments in low-carbon technologies. The Clean 

Air Planning Act creates a limited reserve of allowances to reward companies for 

their early reduction efforts. We think that this sends the right signal to industry 

to act now to begin to slow the growth of emissions. 

ALLOWANCE ALLOCATION

The methodology used for distributing emissions allowances is perhaps the most 

challenging aspect of designing a cap-and-trade program. By capping electric sector 

greenhouse gas emissions, Congress will be establishing a new commodity—the 

emission allowance. These allowances will have tremendous value in the open market, on the order of billions of dollars annually, in aggregate, dwarfing any past 

emissions trading market. It’s no surprise then that companies and other stakeholders have strong opinions about the most appropriate method for distributing 

these allowances. 

Recognizing that there are divided opinions on this subject and multiple objectives 

to serve in allocating allowances, I offer the following principles, which guide 

PG&E’s thinking on the distribution of allowances and which I believe are generally 

consistent with the recommendations of USCAP.1

• Create a smooth economic transition for those that are adversely impacted by 

the program, such as businesses and their employees that face intense, international competition. 

• Use the allowances to accelerate the development and deployment of new technologies, including advanced coal, nuclear and renewable generating technologies 

and carbon capture and storage technologies. 

• Avoid penalizing early actors and their customers. 

• The customer at the end of the energy supply chain—like the households and 

businesses that we serve—will ultimately bear a substantial share the costs associ-
20 

ated with the regulation of greenhouse gas emissions. The allocation system should 

recognize and compensate for these costs. 

• Avoid creating unintended ‘‘windfalls’’ for companies by granting allowances 

whose value is far in excess of the costs of compliance or of mitigating costs for 

those company’s customers. 

We think there are several options for designing a cap-and-trade program to meet 

these objectives. 

For example, the Clean Air Planning Act initially allocates—at no cost—a substantial share of the allowances to the electric power sector (82 percent). Only 18 

percent of the allowances are auctioned initially. Assuming an average allowance 

price of $10 per ton, this translates to the free distribution of more than $20 billion 

in value in the first year of the program alone. 

The bill gradually transitions to a full auction over the course of 25 years with 

the revenues dedicated to various initiatives, including assistance for displaced 

workers and disproportionately affected communities, low-interest loans, loan guarantees, grants, and other financial awards for clean coal technology development 

and deployment and energy efficiency research and development. The bill also establishes a special reserve of allowances to provide incentives for clean coal technology 

projects. These incentives will be critical as we transition to a lower carbon energy 

system that allows the U.S. to continue to use one of our most abundant energy resources—coal. 

In terms of the allowances that are freely allocated to the electric power sector 

(the bulk of the allowances in the early years of the program), the Clean Air Planning Act proposes distributing the allowances based on a company’s proportional 

share of electricity production or output, with the allocations updated each year to 

reflect a company’s current production levels. This approach—known as an updating, output-based allocation—naturally adjusts to the changing dynamics of the industry. Retired units, no longer generating power, are phased out of the allocation, 

and new generating facilities are phased in to the system once they begin generating power. We think that this is a significant improvement over the approach used 

by the Clean Air Act’s Acid Rain program. 

Also, by distributing the allowances based on electricity output, a financial incentive is created for investment in power plant efficiency upgrades and you encourage 

investment in new energy technologies. 

One issue that was not fully addressed in the Clean Air Planning Act, but an 

issue that is gaining increased attention as we unravel the lessons from the European cap-and-trade experience, is the treatment of allowances in regulated versus 

unregulated power markets. In Europe, and we would expect this to be true in unregulated power markets in the U.S. as well, power companies will reflect the cost 

of allowances in their wholesale power prices regardless of whether they initially received the allowances for free. Electricity customers pay more for electricity and 

power companies receive a valuable asset in the form of allowances. 

In regulated power markets, a different set of issues emerges when a large share 

of the allowances are allocated at no cost to generating facilities and energy regulators claim the allowances for the benefit of the energy consumers within their jurisdiction. First, some State. import a significant share of their power and would 

never see the benefit of the allowances allocated to power plants outside of their 

borders. California, for example, imports 22 to 32 percent of its electricity supply 

and most power distribution companies, whether they are investor-owned or municipally owned utilities, purchase power from the wholesale markets on behalf of their 

customers. So while customers in State. that import a large share of their power 

supplies will face higher wholesale power prices, they see no benefit from the free 

distribution of allowances to out-of-State power plants. Again, this raises important 

equity concerns that should be factored into the allocation methodology. 

The National Commission on Energy Policy, the California Market Advisory Committee and the Natural Resources Defense Council in separate reports have each 

outlined an alternative approach that we find compelling to avoid the inequities and 

the inefficiencies that stem from an Acid Rain-style allocation approach, while benefiting electricity consumers. Rather than allocating free allowances to power plants, 

allowances would be allocated to local electric distribution companies on behalf of 

their customers. Local distribution companies would in turn sell the allowances allocated to them to regulated sources, returning the proceeds to their customers 

through rebates, low income assistance programs, economic development rates or 

other programs that help to mitigate costs or reduce demand. In this way, you ensure that the value of the allowances flows to energy consumers who ultimately bear 

the costs of the program. This provides a more equitable and more rational basis 

for distributing the allowances, as compared to an Acid Rain-style, input-based allo-
21 

cation. PG&E has expressed support for this concept in the context of California’s 

AB 32 implementation process. 

THE TIME IS NOW

Our country has an historic opportunity to change the way we produce and use 

energy in ways that will lower the threat of climate change and improve our environment. The optimist in me is certain that we’re going to achieve this goal over 

the course of the next generation. But the realist in me knows that we can’t take 

this outcome for granted. Achieving it will be a very substantial challenge. And that 

is why we are committed to being a pragmatic, responsible participant in this effort. 

On behalf of PG&E, I want to thank you for the opportunity provided today. I 

appreciate the commitment of this Committee to addressing this critical issue and 

I pledge my cooperation and support as this Committee and Congress moves forward. 

Thank you. 

RESPONSES BY PETER A. DARBEE TO ADDITIONAL QUESTIONS FROM SENATOR BOXER

Question 1. As your testimony points out, California has been able to meet half 

its electricity demand growth through energy efficiency. What measures or tools 

have proven useful in encouraging home and business owners to become more energy efficiency? 

Response. California has been a leader in energy efficiency for more than three 

decades, allowing the State to keep per capita electricity consumption flat—that is, 

no growth—over over the time period), while per capita electricity consumption for 

the United States during the same period has increased by approximately 50 percent. Over the next several years, California is poised to build on this success by 

meeting approximately half of its electricity demand growth through energy efficiency. PG&E expects to meet this aggressive goal and will do so through a variety 

of measures and programs, which are supported by established regulatory structures and other efforts. 

The following summarizes what has helped California be successful to date, as 

well as what PG&E is doing to achieve these aggressive energy efficiency goals 

going forward: 

• A supportive regulatory structure and environment.—Many rate designs create 

financial disincentives for utilities to promote energy efficiency. California’s model 

of ‘‘decoupling’’ removes these disincentives: utility revenues and earnings are independent of actual energy sales. Decoupling eliminates the financial incentives that 

are found in some state regulatory schemes for selling ever-increasing amounts of 

energy (i.e., the financial incentives are ‘‘coupled’’ with growth in power sales). 

Under California’s decoupling framework, the state’s utilities collect no more and no 

less than the revenues necessary to run their business and provide a fair return to 

shareholders. If sales rise above these levels, the extra revenues go back to customers, rather than to the bottom line of the company; if sales fall below intended 

levels, utilities are assured they can recover the shortfall going forward. Energy efficiency goals can be achieved even more effectively if decoupling is combined with 

incentives that help motivate utilities to promote and embrace energy efficiency and 

put it en par with similar investment opportunities, such as building new generating facilities. 

In addition to properly aligning incentives for utilities, California has recognized 

the need for long-term commitment to and has established a consistent regulatory 

environment for the development and support of leading energy efficiency efforts. 

For example, PG&E’s current cycle for program development and investment is 3 

years. By providing PG&E with a 3-year energy savings target and the authority 

to fund these efforts over this time period, PG&E is able to establish programs and 

measures, and engage with customers on some high-value efforts that have longer 

lead-times. We are also working on provisions for the next funding cycle that will 

allow us to work with customers who are designing new facilities many years in the 

future. By making commitments to enhanced energy efficiency early in the design 

process, customers can have assurance that the incentives will be available to them 

even though construction will be completed several years in the future. One example 

is the expected reconstruction of a significant number of California hospitals. 

By having an established savings target and consistent level of funding over multiple years, we are also able to work with manufacturers and distributors of products and energy efficient equipment, because we can make multi-year commitments 

to support commercialization and deployment efforts. 
22 

And, finally, California has put significant emphasis on developing evaluation, 

monitoring and verification (EM&V) programs to track and account for these savings. Establishing transparent, consistent and understandable EM&V methodologies 

is critical for energy efficiency to gain broad acceptance by customers and shareholders, and those investing in energy efficiency projects. 

• Partnerships with other utilities, regulators, customers, and other stakeholders.—California’s success with energy efficiency is the result of a cooperative 

working environment at all levels. For example, PG&E has partnered with local 

governments to help them reduce energy usage, save money, achieve environmental 

goals and provide additional community benefits. One example is our partnership 

with Sonoma County, in which we helped to establish the Sonoma County Energy 

Watch program. Through this program, which is one of 20 throughout our service 

area, PG&E will work with county representatives to improve energy efficiency and 

reduce greenhouse gas emissions from residences, schools, colleges, retail stores, office buildings, the high-tech sector and agricultural interests. Some of the key activities include facilitating ‘‘building tune ups,’’ supporting energy efficiency retrofits in 

wastewater and water treatment facilities, conducting outreach to realtors/home inspectors to use building/home inspections to identify energy saving opportunities, 

and conducting targeted energy audits, outreach, and training. Through this partnership, we project savings of approximately 7.6 million kilowatt-hours for the 

2006–2008 timeframe. 

• Efficiency improvements to building codes and appliance standards.—Approximately half of the energy savings achieved over the past three decades in California 

are the result of the States aggressive building codes and energy efficiency standards for end-use equipment and appliances. These codes and standards provide the 

foundation for all other energy efficiency efforts and serve as a platform from which 

new technologies, programs and practices are established. PG&E has dedicated employees that support the efforts of the California Energy Commission, the U.S. 

EPA’s EnergyStar Program and others through our Codes and Standards Enhancement program. The program advocates the inclusion of energy-efficiency measures 

in state codes for buildings and appliances and conducts studies that assess the 

costs and benefits of the proposed changes. 

• Including manufacturers and distributors in efficiency efforts.—PG&E works directly with manufacturers of energy efficient products and equipment as well as distributors to help develop and commercialize energy-efficient technologies. PG&E will 

use part of the nearly $1 billion we will spend to support our energy efficiency efforts through 2008 to ‘‘buy-down’’ the costs of these products and equipment prior 

to them reaching the mass market. For example, PG&E works with both the manufactures of compact-fluorescent lamps (CFLs) as well as the retail outlets, such as 

Costco Wholesale Corporation, that sell the product to reduce the price paid by the 

consumer at the time of purchase. This helps to simplify the process for the consumer and make these highly-efficient bulbs more competitive. As a result of these 

efforts, we expect more than 20 million CFLs to be purchased this year in our service area alone. 

In addition to working to advance the market penetration of existing energy efficient products, PG&E operates an Emerging Technologies program to accelerate 

commercialization of new energy-efficient technologies. The program identifies 

promising technologies for PG&E to promote to our customers by screening and assessing newly-commercialized technologies, and identifying and establishing channels to deploy these new energy efficiency solutions. With a $3.7 million annual 

budget, PG&E’s Emerging Technologies program is targeting more than 60 technologies, including light dimming fixtures for commercial building stairwells that go 

to full brightness when someone enters the stairwell, energy saving cooling systems 

for computer data centers and high-performance lighting for classrooms. 

• Creating targeted customer programs outreach and education efforts.—PG&E 

has more than 900 programs and measures available to provide energy solutions to 

our customers. This allows us to create targeted energy solutions that meet our customers’ needs and maximize energy saving opportunities. These programs are segmented by customer class and type and supported by professionals knowledgeable 

about the customer segment being targeted. Some examples of programs and measures include comprehensive energy audits for industrial customers, refrigerator recycling programs for residential customers to facilitate deployment of more energy 

efficient products, financial incentive programs for virtualization projects in data 

centers, air conditioner refrigerant charge and air flow checks for residential and 

small commercial customers in air-conditioning-intensive regions of our service area, 

and design assistance and incentives for refrigerated warehouses and other aspects 

of the agricultural and food processing sector. 
23 

In addition to these targeted programs, we work closely with the other utilities 

in California, state and federal agencies, energy efficiency and environmental 

groups, manufacturers and retailers, and other stakeholders to educate our customers about the environmental and cost-savings benefits of energy efficiency and 

the programs available to help customers. An aggressive education and outreach 

program is critical to overall success, as we must work closely with our customers 

and provide them with the necessary information so that they can make informed 

choices. We conduct these education and outreach efforts in multiple languages to 

ensure that all of our customers are able to participate fully and realize the benefits 

of these programs and measures. 

Question 2. You recommend that companies that reduce carbon dioxide emissions 

before they are required to do so be given ‘‘early reduction credits.’’ How can we be 

confident that these are actual reductions in advance of any legal requirements governing verification of reductions? 

Response. PG&E believes that recognizing early action is an important principle 

for any environmental program so that industry is encouraged to be proactive in reducing its environmental impact. This is particularly true for climate change, where 

the challenge is to reduce the cumulative build-up of greenhouse gas emissions in 

the atmosphere over many decades. Therefore, actions prior to the start date of a 

program should be encouraged, as should actions taken before enactment of federal 

legislation. 

At the same time, your question raises an important issue regarding the environmental integrity of early reduction credits. We believe that perhaps the most effective and efficient way to recognize early actions and ensure the integrity of such carbon reductions in the power sector is through the so-called allocation methodology. 

Allocating emission allowances based on actual carbon output (i.e., lbs. of carbon dioxide emitted per megawatt-hour (CO2/MWh))—as opposed to allowances tied to levels of historic emissions or the fuel consumed—will inherently take into account the 

investments that have already been made by companies, and their electric power 

consumers, in lower-emitting technologies. Those companies with an emissions rate 

that is below the national average will essentially have excess credits to sell, while 

those with emissions rates above the national average will need to purchase credits. 

This is one method for recognizing early reduction investments and encouraging 

companies to continually make investments to reduce their carbon ‘‘footprint’’ prior 

to the start of a program. In contrast, if a company believes that it will receive a 

higher share of allowances if it defers making investments in lower emitting technologies, then it will continue to emit at current levels, or potentially increase its 

emissions levels, depending on the baseline year selected for determining the allowance allocation. 

There are other mechanisms available as well, including creating a limited ‘‘setaside pool’’ of allowances available for early reduction credits or limiting the distribution of credits to entities that have reported reductions under specific programs 

such as the California Climate Action Registry, EPA’s Climate Leaders and other 

voluntary programs, or the 1605(6) reporting Program. Requiring such reductions to 

be verified through one of these established programs will help ensure that early 

reduction credits are distributed for actual reductions. 

However, unlike using the allocation methodology for recognizing early carbon reductions, many of these programs are unlikely to capture investments made by electric power customers in things like energy efficiency and renewable generation technologies. California’s energy consumers have paid for deploying these technologies 

and helped the state to achieve significant emissions reductions in the process. 

Many of these early actions would not be fully captured under these other methods 

and therefore must be captured in some other way to ensure that these customers 

do not ‘‘pay twice’’ for emission reductions. 

Question 3. If utilities are given allowances for free, will utilities pass along the 

savings to consumers or will they increase the price of electricity to reflect the market value of the allowances? 

Response. If allowances are given to utilities (or perhaps, more appropriately, generators of electric power) for free, their treatment will depend on whether the company is subject to cost-of-service regulation or whether the company is a competitive 

supplier. In competitive electricity markets, where electricity rates are set by marginal costs, the generators will generally pass on the cost of the allowances regardless of whether they were initially allocated for free and customers would experience 

electricity rate increases reflecting the market value of the allowances. In contrast, 

generators subject to cost-of-service regulation will generally not be able to reflect 

the value of the allowances in their customer rates because electricity regulators 

will not allow them to pass through the cost of the free allowances. 
24 

In response to these dynamics, PG&E and others have been considering an alternative emissions allowance allocation approach that would both preserve the carbon 

‘‘price signal’’ needed to stimulate demand side responses, while at the same time 

helping consumers (i.e., the households and businesses that ultimately pay the cost 

of the program). This approach involves allocating allowances to local electricity distribution companies on behalf of their customers. Local electricity distribution companies would be required to sell the allowances allocated to them to regulated 

sources at a fair market-value, returning the proceeds to their customers through 

rebates, low-income assistance programs., or other programs that help to mitigate 

costs and reduce demand. In this way, the value of the allowances flows more directly to the energy consumers who will ultimately bear the costs of the program. 

This allocation approach provides a more rational and equitable basis for distributing allowances, as compared to an Acid Rain-style, input-based allocation system. 

As explained in my testimony before the Committee, PG&E has expressed support 

for this concept in the context of California’s AB 32 implementation process. 

Question 4. I understand the merits of your allocation preference, but I would like 

your response to the rationale of other approaches. For example, if power plants are 

given emission allowances that do not reflect how much carbon dioxide they emit, 

won’t that make it harder for plants that run on coal or other fossil fuels to afford 

the emissions reductions they will need to achieve? 

Response. An allocation approach that reduces the amount of allowances provided 

to fossil fuel-fired power plant—whether it is otherwise allocating allowances to 

clean or renewable energy facilities, or auctioning the allowances—may impact the 

profitability of a CO2 emitting facility (simply because they would receive fewer valuable allowances), however this will not necessarily make it harder for these facilities to continue operating. Power plants are dispatched (or called upon to operate) 

based on their relative operating costs, with the lowest cost facilities dispatched 

first. Because coal is an inexpensive fuel source, CO2, allowance prices would need to exceed $20 per ton before the operating costs of a coal-fired power plant would 

approach the costs of a natural gas-fired power Plant—a much lower carbon-emitting, but more expensive fuel option. In general, a coal-fired power plant will remain 

economic even if it were required to purchase 100 percent of its allowances. 

We think this provides policymakers with the flexibility to use the distribution of 

emissions allowances to serve a broader range of public policy objectives, rather 

than simply allocating allowances for the economic benefit of coal-based generators 

and their shareholders. Several of these broader public policy objectives were outlined in my testimony, including the following: • Create a smooth economic transition for those that are adversely impacted by 

the program, such as businesses, and their employees, that face intense, international competition. • Use the allowances to accelerate the development and deployment of new technologies, including advanced coal, nuclear and renewable generating technologies 

and carbon capture and storage technologies. 

• Avoid penalizing early actors and their customers. 

• The customer at the end of the energy supply chain—like the households and 

businesses that we serve—will ultimately bear a substantial share the costs associated with the regulation of greenhouse gas emissions. The allocation system should 

recognize and compensate for these costs. 

• Avoid creating unintended ‘‘windfalls’’ for companies by granting allowances 

whose value is far in excess of the costs of compliance or mitigating costs for those 

company’s customers. 

Many of these public policy objectives can be accomplished through a combination 

of the following: allocating allowances to local electricity distribution companies on 

behalf of their customers; allocating allowances to generators using an updating, 

output-based methodology; allocating allowances to states for use to support public 

purpose programs or to help disproportionately impacted communities or constituencies; and auctioning a portion of the allowances and using the proceeds to support 

various objectives, such as technology development and deployment, adaptation assistance, and/or support for low-income energy consumers. 

Question 5. Can an allocation system both encourage the use of cleaner technologies and help coal-fired power plants reduce their carbon dioxide emissions? 

Response. Yes. There are two basic mechanisms by which the allocation approach 

can encourage the use of cleaner technologies and help coal-fired power plants reduce their carbon dioxide emissions. First, allowances can be allocated to all forms 

of generation based on their proportional share of electricity output, including coalfired power plants equipped with carbon capture and storage technology. By issuing 

allowances based on output, an incentive is created—much much like the way the 
25 

existing production tax credit works—that will encourage investment in new, higher 

efficiency generating technologies. Second, proceeds from the auction of emissions 

allocations—if that approach is selected—can be used to defray the costs of clean 

coal technologies through grants, loan guarantees, and other financial mechanisms. 

RESPONSES BY PETER A. DARBEE TO ADDITIONAL QUESTIONS FROM SENATOR INHOFE

Question 1. What business risks are associated with potential climate change legislation and have these risks been documented in your 10-K filings with the U.S. 

Securities and Exchange Commission (U.S. SEC) and appropriate disclosure to 

shareholders? 

Response. PG&E Corporation’s and Pacific Gas and Electric Company’s joint 2006 

Annual Report to Shareholders included a discussion of the potential operational 

and financial risks associated with climate change and with potential federal and 

state legislation to address climate change. Both the 2006 Annual Report to Shareholders and the joint 2006 Annual Report on Form 10-K included a discussion of 

Assembly Bill 32, California’s landmark climate change legislation, and Senate bill 

1368, which impacts long-term power purchase agreements in California, and the 

risk of increased compliance costs and electricity prices. 

Question 2. If a cap-and-trade program such as the 2007 Bingaman-Specter bill 

and the 2007 McCain-Lieberman bill were implemented, what would be the gross 

costs imposed in your business operations? What would be the gross revenue? What 

would be the net cost/revenue? 

Response. PG&E has not conducted a formal financial analysis of either the 

Bingaman-Specter bill or the Lieberman-McCain bill. We expect that it is likely that 

some provisions in these bills will be modified over the course of the legislative process, and that other legislative proposals on this subject are likely to be introduced 

and considered as well. In addition, several key aspects of the cited pending bills 

are not fully defined or left to the discretion of the administrative agencies to make 

determinations subject to notice and comment rulemakings. Therefore, providing a 

definitive assessment is not possible at this time. 

Senator BOXER. Thank you so much, Mr. Darbee, from Pacific 

Gas and Electric. How many customers do you serve? 

Mr. DARBEE. We serve about 15 million customers. 

Senator BOXER. Thank you. 

Our next speaker, we are going to right down, is Jason Grumet, 

executive director of the National Commission on Energy Policy. 

STATEMENT OF JASON GRUMET, EXECUTIVE DIRECTOR, 

NATIONAL COMMISSION ON ENERGY POLICY 

Mr. GRUMET. Madam Chairman, it is a pleasure to be here, Senator Inhofe and committee members, on behalf of the National 

Commission on Energy Policy. 

The National Commission on Energy Policy, as you may know, 

is a professionally and ideologically diverse group of 21 leaders 

from environmental organizations, business groups, globally known 

scientists, labor leaders, former legislators and Government officials. We came together in 2002 with an aspiration that we could 

seek to develop consensus policy agreements that might help to 

forge a more constructive center in what we all know too well to 

be a rather polarized debate on energy policy. 

On climate change, Madam Chairman, our Commission embraces 

the recent scientific descriptions offered by the IPCC. We believe 

that it is fundamentally imperative that the United States act urgently to reduce our own emissions and to lead the rest of the 

world with true resolve so that we can in fact achieve an equitable 

and effective global program that includes all major emitting nations, India, China, Brazil and down the line. 
26 

In April 2007, Madam Chairman, we strengthened a number of 

our recommendations and offered some specifics on allocation. We 

have provided those to the committee and we just recently completed some economic analyses of those recommendations, which 

we will provide today. 

We fundamentally chose to maintain the basic architecture of our 

recommendations, which we think are critical to maintain the economic protection necessary to forge the bipartisan compromise that 

is going to be ultimately necessary to legislate on this issue. 

I am going to focus the balance of my remarks on the issue of 

allocation. I would just like to note with some optimism that we believe there are three other architectural elements of climate change 

program that hold the key to bridging what has been such a contentious and divisive issue. I would like to note with greater optimism, Senators Lieberman and Warner, that I think they are the 

same issues that you both identified the other day, and we are very 

eager to work with you to try and build that consensus together. 

First and foremost, our commission believes we must overcome 

this false choice between limits on emissions versus technology programs. We fundamentally have to have a program that balances 

both. We are going to have to move forward quickly with a price 

that is going to inspire innovation, but recognize that we can’t set 

that price at $80 a ton at the outset without harming the economy. 

What we can do is very thoughtfully and robustly direct incentives toward the key technologies, like carbon sequestration, like 

renewables, that will allow us to both advance those technologies 

quickly while protecting the overall economy and allowing time for 

a transition. 

Second, and I think it is obvious from the opening statements 

today, it was obvious from our experience, we have to accept that 

reasonable, informed and well-intended people are going to continue to disagree about whether it is going to be cheap and easy 

or incredibly difficult and costly to reduce the carbon intensity of 

our economy. We have been suffering this my ‘‘modeler is smarter 

than your modeler’’ fight for about a decade without a lot of 

progress. It is an insoluble problem, because it is based on your 

projection of the future, how fast you think technology will 

progress. 

It is on this basis that our commission has argued that we have 

to have cost certainty at the outset of this proposal. It is going to 

be controversial. We recognize that. We think there are different 

ways you can do it. At the end of the day, though, it can’t depend 

on someone saying, trust me. We have to be able to say with absolute surety that the cost can’t be worse than X. 

Over time we believe that we will evolve and we will have more 

confidence and we will transition to an emissions-based certainty. 

We think that is key. Finally, we have to focus on international 

linkages. America must lead. But at the same time, we recognize, 

as has been said, that this is global warming, not American warming. There is going to have to be an interactive set of relationships 

between what the United States does and other countries do over 

time. 

Turning to allocation, let me just start and save some time by 

basically embracing the principles that Peter Darbee articulated. 
27 

1The full report, titled Ending the Energy Stalemate, can be found at 

www.energycommission.org. The Commission’s updated April 2007 recommendations are also 

available at the website. 

We think that they are essentially consistent with the commission. 

I would like to focus for a moment on what allocation is and what 

it isn’t. Allocation of permits has dramatic effects on the distribution of burdens and the benefits of a greenhouse gas program. It 

does not affect the overall cost to society, and at most it has marginal effects on the emission performance. This is about how we 

split up the pie at the outset of an emissions trading system. 

Second, contrary, I think, to popular expectation, the measure of 

the costs that a country or a sector bears is not a function of their 

emissions, their fossil fuel input or how many permits they have 

to buy. It is fundamentally a function of their ability to pass along 

increased fuel costs. Many sectors of the economy are quite good at 

that. The petroleum sector passes it along with great effect. The 

coal sector is going to have a little more trouble with that. 

Our commission believes that the purpose of allocation should be 

to try to mitigate those near-term transitional costs so that we 

have an equitable distribution, encourage technology development, 

protect consumers and address the costs of adapting to climate 

change that is going to be unavoidable. 

Bottom line, in my last 30 seconds, we believe to fully and fairly 

compensate everybody in the energy sector, you have to essentially 

at the outset of the program allocate about half of the permits at 

no cost. With that, it doesn’t mean everyone gets 50 percent, some 

sectors more, some sectors less. But 50 percent is the most that we 

need to fully mitigate those near-term costs. 

It should not be an allocation forever. We believe that over time 

there should be a gradual transition to a full and complete auction, 

and that with an effective approach and allocation identifying the 

balance of market signals, technology programs and addressing 

international issues, we hope this committee can bring forward an 

ecologically and economically responsible effort that could become 

law this Congress. 

I thank you for your time. 

[The prepared statement of Mr. Grumet follows:] 

STATEMENT OF JASON GRUMET, EXECUTIVE DIRECTOR, NATIONAL COMMISSION ON

ENERGY POLICY

Good morning Chairman Boxer and Members of the Committee. I am Jason 

Grumet, Executive Director of the National Commission on Energy Policy—a bipartisan group of energy experts that first came together in 2002 with the support of 

the Hewlett Foundation and several other private, philanthropic foundations. The 

Commission’s ideologically and professionally diverse 21-member board includes recognized energy experts from business, government, academia, and the non-profit 

sector (see attachment). In December 2004, we issued a comprehensive set of consensus recommendations for U.S. energy policy, which included a proposal for a 

mandatory, market-based program to limit economy-wide U.S. greenhouse gas emissions.1 More recently, in April of this year, the Commission published updated recommendations that called for strengthening several key parameters of our original 

climate-policy proposal. 

The fact that we are here today, discussing the arcane issue of allowance allocation, shows how far the political debate on climate change has moved in the last 

few years. Increasingly, the real question for all parties to this debate is not whether we should act, but how. What program design will achieve meaningful results, 

prompt wider international cooperation, and set this nation on an economically responsible path to a lower carbon future? The proposals now under discussion by this 
28 

2 APCC, 2007: Summary for Policymakers. In: Climate Change 2007: The Physical Science 

Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change [Solomon, S., D. Qin, M. Manning, Z. Chen, M. Marquis, K.B. 

Averyt, M. Tignor and H.L. Miller (eds.)]. Cambridge University Press, Cambridge, United Kingdom. This and other IPCC reports are available at http://www.ipcc.ch/. 3 Based on reference case forecast in EIA’s 2007 Annual Energy Outlook. Available at: http:// 

www.eia.doe.gov/oiaf/aeo/aeoref—tab.html. 4 Note that although carbon dioxide is the predominant greenhouse gas, there are other gases 

that contribute to climate change. These include methane, nitrous oxide, and some industrial 

fluorinated gases. These gases would all be covered in the Commission’s climate proposal. 

Congress contain, in our view, many of the necessary elements of a sound solution. 

At the same time, we are under no illusions about the difficulty of building the consensus needed to pass legislation. And in that process, we expect few issues will 

prove more important than allocation. Before turning to this critical subject, however, I’d like to briefly outline the Commission’s broader views concerning climate 

policy and the reasons for urgency in moving forward. 

THE SCIENCE POINTS TO MANDATORY ACTION

Two years after the Commission released its original report, the scientific case for 

mandatory action to reduce greenhouse gas emissions is more urgent and more compelling than ever. Over the last several months, the United Nations Intergovernmental Panel on Climate Change (IPCC) has been releasing portions of its latest 

(fourth) assessment concerning the science, potential impacts, and mitigation options for global warming. The IPCC assessment, which represents the consensus 

view of hundreds of scientists around the world, tells us that evidence of global 

warming from the last 6 years of climate research is now ‘‘unequivocal.’’ It points 

to multiple lines of evidence, from ‘‘observations of increases in global average air 

and ocean temperatures’’ to ‘‘widespread melting of snow and ice, and rising global 

mean sea level’’ and confirms that the current level of carbon dioxide (CO2) in the 

atmosphere ‘‘exceeds by far the natural range over the last 650,000 years.’’2

This increase has already led to warming—11 of the last 12 years rank among 

the 12 hottest years on record. And because of the long-lived gases already in the 

atmosphere, this warming will continue. In fact, after reviewing the likely impacts 

of further, unchecked warming, the IPCC estimates the onset of many of the most 

serious consequences—from damage to coasts from floods and storms, to impacts on 

water supply, disease vectors, and large-scale risk of species extinction—at somewhere between a 2°C and 3°C increase in global mean temperature. To limit warming to this level, it is now clear, will require that we begin to achieve significant 

reductions in global emissions by mid-century. It’s an enormous challenge to be 

sure, since current trends are going in the wrong direction. In fact, if nothing is 

done we can expect global emissions to increase by as much as 50 percent in just 

the next 25 years (by 2030). In that case, climate scientists estimate that twice as 

much warming will occur over the next two decades than if we had stabilized heattrapping gases at 2000 levels. 

So to sum up: it is clear that we must begin to face this challenge. It is also clear 

that voluntary action will not be enough. That has been the policy of the United 

States for the last decade or more. And while we’ve seen admirable initiatives from 

several large companies and while important progress has been made in advancing 

new technologies, we are still headed in the wrong direction: down a path of continued emissions growth. In fact, U.S. energy-related CO2 emissions were 13 percent 

higher in 2005 than they were a decade earlier, in 1995, and 19 percent higher than 

they were in 1990. According to the Energy Information Administration (EIA), our 

nation’s energy-related CO2 emissions are likely to grow another 34 percent by 2030 

if current trends continue.3 At the same time, we know the costs of further delay 

in initiating reductions are likely to be substantial. The faster we can get started, 

the smaller the burden of future mitigation and adaptation efforts and the smaller 

the human suffering and long-term environmental damage. 

ELEMENTS OF AN EFFECTIVE CLIMATE CHANGE POLICY

With the potential risks of climate change no longer in doubt, it is imperative that 

the United States engage this issue, act responsibly, and provide leadership. Ours 

is the world’s largest economy and it accounts for 25 percent of global CO2 emissions.4 Without our participation and leadership, the rest of the world cannot effectively address what could be the most difficult and far-reaching environmental problem we have yet faced. The Commission believes that the U.S. can best provide lead-
29 

5See http://select.nytimes.com/search/restricted/article?res=F50B12F83A5B0C748CDDA80994

DE40 4482 

ership by adopting approaches that do not significantly harm our economy and that 

encourage other nations to take comparable action. 

As I have already said, the first requirement of an effective policy is that it be 

mandatory. In a competitive market economy, where companies are expected to 

maximize shareholder value, it is unrealistic to expect them to invest significant resources absent a profit motive. As importantly, if the world’s largest economy continues to rely on voluntary action alone it is very unlikely that countries like China, 

India, and Brazil will take serious action aimed at limiting their own rapidly growing emissions. 

What are the critical components of a mandatory approach? First, we believe that 

the immediate goal should be to put in place a policy architecture or framework that 

can last many years and be adjusted as we learn more about the evolving science, 

economic impacts, technological developments, and actions of other nations. We 

must get started with a clear signal to investors, consumers, and other nations. 

Second, a climate change program should be market-based and economy-wide. We 

are convinced that market-based approaches, like the landmark Acid Rain Program, 

are the most effective way to marshal the least cost emissions-reduction options and 

create powerful technology incentives. And although the focus of today’s hearing is 

the power sector, we believe that a climate program should cover the entire economy. CO2 emissions arise from fossil-fuel consumption throughout the economy; 

hence only an economy-wide program can deliver maximum emission reductions at 

the lowest possible cost. The Commission believes that the most efficient way to implement an economy-wide program is to make the point of regulation upstream (i.e., 

with fuel producers or processors). 

Third, we continue to believe that cost certainty is critical to forging the political 

consensus needed to move forward without further delay. Debates about economic 

impact usually bog down in fruitless disagreements over whose economic model uses 

the right assumptions about technology change, fuel prices, and other factors. Different assumptions can produce wildly different estimates of the costs of reducing 

emissions. The safety valve feature in our proposal—which would make additional 

emissions allowances available for purchase from the government at a predetermined, but steadily escalating price—helps to cut through that debate by assuring 

that the per-ton cost of emissions reductions required under the program cannot rise 

above a known level. 

The Commission recognizes that the ‘‘safety-valve’’ feature is highly controversial 

because it favors cost certainty over emissions certainty. But we continue to feel this 

tradeoff is justified in the interests of overcoming political gridlock and allaying the 

legitimate competitiveness concerns of U.S. workers and industry. At the same time, 

the Commission recognizes that the need for environmental certainty is likely to 

outweigh the need for cost certainty at some point in the future. Indeed, once there 

is greater international consensus about the policy commitments needed to address 

climate change it will likely be appropriate to transition away from the safety valve 

toward firm emission caps. Meanwhile, we are also aware that other legislative proposals provide alternative cost-containment mechanisms and welcome further debate and analysis to determine which approach best addresses the cost concerns 

that might otherwise stand in the way of timely action. 

Fourth, the Commission believes 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 10 days and is set to surpass the United States in total carbon emissions in the next year or two.5 We continue to believe that the United States should 

lead and that once the United States takes action, it is imperative that our major 

trade partners and other large emitters follow suit. We have therefore proposed that 

the United States (a) review its policy every 5 years in light of international and 

scientific developments, (b) explicitly link continued tightening of program goals and 

escalation of the safety valve to progress in other countries, and (c) signal its intent 

to work with other countries to forcefully address trade and competitiveness concerns if other major emitting nations fail to act within a reasonable timeframe. 

Fifth, the Commission believes that market-based efforts to limit greenhouse gas 

emissions must be accompanied by a major technology push to develop and deploy 

the low-carbon alternatives that will allow us to meet our environmental objectives 

while maintaining secure, reliable, and affordable means of meeting our energy 

needs. 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 
30 

emissions mitigation among shareholders and taxpayers. Our approach therefore 

calls for a complementary package of policies and public incentives to accelerate the 

development and early deployment of promising energy-efficiency and low-carbonsupply technologies. Incentives would be funded from revenues generated by an auction of emission allowances, thus avoiding additional burdens on the Federal Treasury. I will elaborate on this point later in my testimony. 

Finally, the Commission continues to believe that solutions to climate change 

must be pursued in concert with other critical energy policy objectives such as improving America’s energy security, reducing oil dependence, and ensuring that the 

nation’s energy systems are adequate and reliable to meet future needs. Thus, our 

recommendations in 2004 and again in 2007 called for concerted efforts to improve 

vehicle fuel economy; promote cost-effective energy efficiency investments; develop 

promising renewable energy resources, including biofuels; diversify available supplies of conventional fuels, especially natural gas, in an environmentally responsible 

manner; address obstacles to nuclear power; develop the technologies needed to preserve a major role for coal, especially technologies for carbon capture and storage; 

and invest in critical energy infrastructure. 

ALLOWANCE ALLOCATION

As I have already noted, the question of how government distributes allowances 

at the outset of an emissions trading program is likely to emerge as one of the most 

important and contentious issues in developing viable legislation. It is contentious 

precisely because allowances represent a valuable financial asset—one that could be 

worth, in aggregate, tens of billions of dollars under an economy-wide greenhouse 

gas trading program. How that asset gets divvied up obviously matters enormously 

to the many stakeholders in this debate. 

In past emissions trading programs, notably the U.S. Acid Rain Program and 

more recently, the European Union Emission Trading Scheme, the great majority 

of allowances has been distributed for free to the entities that appeared most directly affected by regulation (this happened to be electric power generators in the 

Acid Rain Program and both power plants and other large industrial emitters in the 

European program.). The Commission has concluded, however, that these precedents do NOT provide a good model for allocating allowances under an economywide U.S. greenhouse gas trading program. Rather we recommend that roughly half 

of the total pool of available allowances be distributed for free to industry in the 

early years of program implementation, while reserving the remaining half of the 

allowance pool to be directed for public purposes. Over time, we believe the share 

of allowances distributed for free should diminish gradually and in a predictable 

manner in favor of a more complete auction that would make additional resources 

available for more productive and widely shared societal investments. 

Economic analyses conducted by the Commission to explore the distribution of 

costs under its original program proposal suggest that this approach will provide 

adequate allowances to compensate major energy-related industries (including suppliers of primary fuels, the electric power sector, and energy-intensive manufacturers) for any short-term economic dislocations incurred in the transition to a lowercarbon economy. At the same time, it will reduce the potential for large windfall 

profits and generate substantial public resources to assist low-income consumers 

and to invest in low-carbon technologies and end-use efficiency. 

The rationale for this approach is detailed in a recent White Paper on allowance 

allocation developed by Commission staff. The White Paper develops a number of 

crucial points that are important for understanding how allowance allocation does 

and does not affect the way an emissions trading program works. Indeed, it is worth 

repeating some of the key conclusions from that report’s Executive Summary here: 

(1) Allocation affects the distribution of benefits and burdens among firms and industry sectors—it does not change program results or overall costs. Under a trading 

program, using an allowance is always costly—even for a firm that got the allowance for free—because it means giving up an asset that could otherwise be sold in 

the marketplace. Thus the incentive to reduce emissions is the same for all firms, 

regardless of allocation. Since allowances have real monetary value, they can be 

used to compensate firms or consumers without changing how different entities respond to the policy or what measures are taken to reduce emissions going forward. 

(2) The sum value of allowances is not a measure of the program’s cost to society. 

The market value of allowances in circulation will far exceed the costs incurred by 

society to actually reduce emissions. This is simply because the number of tons 

being reduced or avoided is much smaller than the number of tons for which allowances are issued. Trade in allowances generates costs for allowance buyers, but 
31 

equal and offsetting gains for allowance sellers. It does not represent a cost to society. 

(3) The economic burden imposed on a particular firm or industry sector under a 

greenhouse gas trading program is not a direct function of its emissions or fossilfuel throughput. Rather, the burden depends on ability to pass through costs, available emission reduction opportunities, and other factors. Available analyses suggest 

that consumers and businesses at the end of the energy supply chain will bear the 

largest share of costs under a trading program, while primary producers or suppliers of fossil fuels (oil, coal, and natural gas) will bear a smaller share. Certain 

firms or industries, however, may encounter more difficulty than others in passing 

through costs and may bear a disproportionate burden as a result. 

(4) Because they do not bear most of the cost, allocating most allowances for free 

to energy producers creates the potential for large windfall profits. Economic analysis 

suggests that energy companies can and will pass most program costs through to 

consumers and businesses at the end of the energy supply chain. Allocating a large 

share of free allowances to these firms would likely result in windfall profits. This 

occurred under the EU trading program and caused considerable political outcry. 

(5) Allocation provides an opportunity to advance equity and other broad societal 

interests without diminishing the price signal necessary to elicit cost-effective, economy-wide emissions reductions. A trading program works by creating market incentives—effectively attaching a price to every ton of carbon emitted. Giving away allowances won’t shield firms or consumers from this price signal (indeed, this would 

not even be desirable since the program will generate efficient outcomes only if all 

parties face the same incentive to reduce emissions). But allowances can be used 

for a variety of productive purposes: to compensate those who bear a disproportionate burden under the policy, to advance other public policy objectives (such as 

supporting energy R&D), or to provide broad societal benefits (for example, making 

it possible to cut taxes on income or investment). 

Several important implications flow from these conclusions. One is that—because 

cost burdens vary across different sectors and industries—there should be no presumption that different sectors are entitled to equal shares of allowances, either in 

absolute terms or as a fraction of their emissions or fuel use. Thus, the recommendation that 50 percent of the total allowance pool be distributed for free to 

affected industry should not be misconstrued to imply that every sector is entitled 

to 50 percent of its emissions obligation in free allowances. Rather, an allocation 

guided by equity considerations would award some sectors significantly more than 

50 percent because they face substantial un-recovered costs, while it would award 

other sectors that could pass through the great majority of their costs significantly 

less than 50 percent. 

A second very important finding in the NCEP staff White Paper is that intra-sector allocation—that is, deciding how allowances should be distributed to individual 

firms from within the share dedicated to a particular sector under the broader allocation—may be as difficult and contentious in some cases as inter-sector allocation. 

A particular challenge for policymakers in this regard—and one that merits careful 

consideration—is allocation within the electric power sector. Equity considerations 

in this case are complicated by the various regulatory structures that govern the 

electric industry in different State. and regions. One concern is that program costs 

would be largely passed through to customers in competitive retail markets (allowing generators to ‘‘keep’’ most of the asset value of a free allocation), while companies operating in regulated markets could be required by regulators to use free allowances to offset price impacts to consumers. Since retail markets in the most coalintensive regions tend to be regulated, this creates the potential for a perverse outcome in which consumers that rely on a more carbon-intensive generation mix see 

a weaker price signal than consumers that rely on a lower-carbon mix. 

In response to these concerns, some have proposed allocating directly to electric 

distribution companies (and providing specific guidance to State regulators about 

the proper treatment of these allowances), rather than allocating directly to generators. In this way all electric sector allocations would come under the purview of economic regulators—State public utility commissions in the case of investor-owned 

utilities, and local boards in the case of publicly owned utilities and cooperatives. 

Proponents argue that these authorities are in the best position to sort out the equity implications of different allocation schemes, direct appropriate levels of compensation to adversely affected firms, and ensure that end-use customers, who bear 

the largest share of the program costs, receive an equitable share of the asset value 

associated with free allowances. Others have argued for a hybrid approach that 

would divide the utility sector’s share of direct allowances between generation and 

distribution companies. 
32 

In addition, as mentioned above, allowances can be used to advance other public 

policy objectives such as providing incentives for carbon capture and storage (CCS). 

The Commission believes that CCS systems should be provided with deployment incentives that are at least equal to those currently available under EPAct05 for new 

nuclear power plants and (via the Federal production tax credit) for renewable energy resources. In particular, the Commission strongly supports the concept of 

awarding bonus allowances under a greenhouse-gas trading program for projects 

with CCS. The financial incentives generated by such provisions could substantially 

exceed any direct increase in public R&D spending on CCS. 

In sum, allowance allocation is extremely important and can be complicated. But 

I don’t want to leave the impression that it’s too complicated. It is neither possible 

nor necessary to precisely estimate net cost burdens for different sectors, let alone 

individual firms. But available economic models do provide a tool for assessing the 

rough distribution of costs and tailoring allocation decisions accordingly so that the 

overall result is generally transparent and can be accepted as fair by most parties. 

The Commission is confident that the initial approach we have proposed—by combining a 50 percent free allocation with a 50 percent auction—strikes a reasonable 

balance between the interests of consumers and taxpayers and the legitimate cost 

concerns of some industry stakeholders. By providing adequate resources to compensate firms that lose under the policy without risking significant windfall profits 

and while also generating resources to assist in the transition to low-carbon technologies, we believe this approach will help to ensure the success of the overall policy and advance the prospects for reaching political consensus. 

Clearly, important debates on allocation and other important aspects of climatepolicy design lie ahead. In closing, I would like to re-iterate that the urgent imperative to act—and to act soon—must not get lost as these debates unfold in the 

months to come. Getting it right is important. But so is getting started. 

Thank you for the opportunity to testify today. We hope that the suggestions we 

have put forward will be helpful, even as we recognize that ours is not the only approach and that there are many worthwhile ideas that the Committee will consider 

as it moves forward. The Commission and its staff will be happy to provide whatever assistance we can offer as you continue to engage these issues in the weeks 

and months ahead. 

SUMMARY

The National Commission on Energy Policy is a diverse and bipartisan group of 

energy experts that first came together in 2002 and issued a comprehensive set of 

consensus recommendations for U.S. energy policy in December 2004. Those recommendations included a proposal for a mandatory, market-based, economy-wide 

program to reduce U.S. greenhouse gas emissions in a manner that is economically 

responsible and encourages action by our major trade partners. More recently, in 

April 2007, the Commission issued a set of updated recommendations that called 

for strengthening several aspects of our original climate proposal. 

These updated recommendations reflect our conviction that the case for mandatory action to limit U.S. greenhouse gas emissions has become more compelling and 

more urgent than ever. In our view, the most effective approach would: 

• Establish a policy architecture that is robust enough to be sustained for many 

years while retaining the flexibility to adjust over time as scientific, economic, and 

technological developments, as well as actions by other nations, warrant. 

• Be market-based and economy-wide. 

• Provide cost certainty as a means of forging the political consensus needed to 

move forward without further delay. 

• Create compelling positive incentives for wider international cooperation by conditioning future U.S. efforts on comparable action by other nations. 

• Include a major technology program to spur the development and deployment 

of affordable, low-carbon technologies as a means of reducing the costs associated 

with achieving emissions goals while simultaneously advancing energy-security objectives and ensuring U.S. competitiveness in future global markets for clean technologies. 

• Fairly distribute the burden of regulation among major stakeholders—including 

consumers and taxpayers as well as energy-intensive industries—while maximizing 

benefits to society as a whole through a thoughtful approach to key design issues 

such as allocation. 

• Place the compliance obligation at or near primary fuel producers or suppliers 

to reduce administrative complexity and the potential for emissions ‘‘leakage’’ while 

facilitating efficient pass-through of the carbon price-signal 
33 

1 A detailed description of the NEMS model can be found at http://www.eia.doe.gov/oiaf/aeo/ 

overview/index.html. 2To simulate the bonus allowance program for CCS recommended by the Commission, all advanced coal generation with CCS built by 2030 receives a 1.9 cent per kilowatt-hour production 

tax credit. As with the renewable production tax credit, plants receive the credit for the first 

10 years of operation. 

Allocation—that is, how government distributes allowances at the outset of an 

emissions trading program—is a contentious issue and one that is especially important, for reasons both substantive and political, to the success of a mandatory policy. 

The Commission’s current position on allocation is informed by several years of 

analysis and debate, the results of which are described in a Commission Staff White 

Paper. Our chief conclusions can be summed up as follows: • Allocation should primarily be used to promote a more equitable distribution of 

cost burdens, recognizing that the overall burden imposed by regulation is likely to 

be small in the context of the economy as a whole and that allocation does not affect 

program incentives or outcomes. • Compensating major energy-related industries (including suppliers of primary 

fuels, the electric power sector, and energy-intensive manufacturers) for any shortterm economic dislocations incurred in the transition to a lower-carbon economy 

should require no more than roughly 50 percent of the total pool of allowances initially available on an economy-wide basis under a trading program. • Remaining allowances should be used to generate funds for public purposes, 

such as mitigating impacts on low-income consumers and investing in low-carbon 

energy technologies and end-use efficiency. • Over time, the share of allowances distributed at no cost should diminish in a 

predictable manner as part of a gradual transition to a more complete auction. • Within the pool of allowances distributed for free to industry, inter-sector allocation decisions should be guided by the incidence of actual cost burdens. Because 

the ability to pass through costs varies across different industries, there should be 

no presumption that industry sectors are entitled to equal shares of allowances, either in absolute terms or as a fraction of their emissions or fuel use. • Careful consideration will need to be given to intra-sector allocation within the 

electric utility industry where different regulatory structures create the potential for 

price distortions across regulated versus competitive markets. Policymakers should 

therefore explore a variety of allocation options within this sector that would assure 

equitable outcomes for consumers and companies in different parts of the country. 

The Commission is well aware that reaching consensus on the issue of allocation 

will not be easy: the subject is inherently complex and many of the decisions involved are fundamentally distributional in nature, which makes them difficult to adjudicate in a manner that satisfies all parties. Nevertheless, few other nuts-andbolts aspects of designing a greenhouse-gas trading program are likely to be more 

important to the ultimate goal of advancing meaningful and comprehensive climate 

policy in the United States. 

RESPONSE BY JASON GRUMET TO AN ADDITIONAL QUESTION FROM SENATOR SANDERS

Question. Your organization has spent a lot of time modeling the impacts of the 

Commission’s original and new recommendations, released this April. Based on your 

new recommendations, what happens to the traditional coal boom, meaning coal 

plants that do not capture carbon? Does it go away, shrink or do companies continue 

to build antiquated coal plants? 

Response. To analyze the combined impact of the updated recommendations 

issued by the National Commission on Energy Policy in April 2007, the Commission 

used the National Energy Modeling System (NEMS), a detailed model of energy production and consumption used by the U.S. Energy Information Administration (EIA) 

to develop forecasts and assess policy options.1

Our analysis shows that if the Commission’s April 2007 recommendations were 

implemented no new conventional coal generating capacity is built between 2012 

and 2030. In addition, during that period nearly 38 thousand megawatts of conventional coal generating capacity is retired. The combination of the Commission’s proposed CO2 price signal and deployment incentives for carbon capture and storage 

(CCS)2 result in approximately 81 thousand megawatts of new coal generating capacity with CCS during the period from 2012 to 2030. 

These figures contrast with the EIA’s ‘‘business as usual’’ forecast, which estimates that 58 thousand megawatts of new conventional coal generating capacity 

will be added between 2012 and 2030. During this same period 7 thousand 

megawatts of conventional coal generating capacity are expected to be retired, re-
34 

sulting in a net increase in conventional coal generating capacity of 51 thousand 

megawatts. The ‘‘business as usual’’ forecast does not report any new coal generating capacity that is equipped with CCS technology. 

Senator BOXER. Thank you, sir. 

Our next speaker is Lewis Hay, chairman and chief executive officer of FPL Group, Florida Power and Light. 

STATEMENT OF LEWIS HAY III, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, FPL GROUP 

Mr. HAY. Madam Chairman, Ranking Member Inhofe, members 

of the committee, thank you for the opportunity to be here today. 

My company provides electric service to over 8 million people in 

Florida. We are also one of the top four generators of electricity in 

the country. Our generation fleet is one of the cleanest in the country and one of the lowest emitters of carbon dioxide. We are by far 

the largest wind energy producer and solar energy producer in the 

country. 

If the rest of the industry were emitting carbon dioxide at the 

same rate as we do, U.S. carbon emissions would drop by 1.6 billion tons per year, or over 65 percent of our sector’s emissions. This 

alone would allow our country to be below Kyoto standards. That 

is without any other industry taking any other action. 

We are also ranked first in the Nation in energy conservation. In 

fact, if the rest of the industry had our conservation efforts, CO2

emissions would be reduced by about 240 million tons per year, or 

nearly 10 percent of the emissions of the entire electric utility sector. These are just two examples of what is possible with today’s 

technology. 

Our exceptional environmental performance has not come without a cost, however. Our customers in Florida clearly pay more for 

electricity than they would if we had a higher percentage of coal 

in our fuel mix. 

Let me summarize our views on global climate change. We believe man-made global climate change is real and requires prompt 

policy attention, but that it is not yet a crisis. We must take action, 

but the wrong actions can be worse than doing nothing at all. To 

be effective, any program must set a clear market price on carbon. 

It needs to apply throughout the economy. We need to protect export and import sensitive industries, or production will simply flee 

offshore. We need to recycle the dollars that consumers will pay in 

higher prices back to their pockets or we will do serious damage 

to the economy. Finally, we need to fund new technologies. 

In our minds, the simplest, most effective way to do this is 

through a carbon fee. We are not alone in this view. Most economists, the Los Angeles Times, The Washington Post, The Economist 

magazine, former Federal Chairman Alan Greenspan and many 

others endorse the concept of a fee. A carbon fee is administratively 

simple; it can be implemented quickly across our economy; it is immune from market manipulation; it rewards those who have taken 

prior action; its costs are certain and, crucially, it provides us in 

the industry with clear price signals, which we need to make appropriate long-term capital decisions. 

We suggest that the price starts out at a very modest level, such 

as $10 per ton of CO2 emitted, and then rise predictably, something 
35 

like $2 per ton per year. To be effective, a carbon fee must be recycled, and we believe it should be recycled three ways. First, return 

the bulk of the money back to the consumers. Second, protect those 

industries that are genuinely exposed to direct competition from 

foreign firms located in countries without a carbon program. Third, 

fund research into carbon reduction capture and storage technologies as well as conservation and other low to no carbon power 

sources, such as nuclear and renewables. 

Many people will tell you a fee is just a tax and a tax is politically infeasible. Senators, let me be quite clear: any action you take 

to constrain carbon will effectively impose a tax on our economy. 

With a fee, we have cost certainty. However, with unconstrained 

cap and tarde, we don’t. There are important differences between 

a carbon fee and a tax. These differences are explained in my testimony. 

However, if a fee really is politically infeasible, then the next 

best alternative is the right type of cap and trade program. But not 

all cap and trade programs are created equal. One simple example 

involves the allocation of free allowances. Allowances represent a 

very valuable financial asset worth between $70 billion and $300 

billion per year. The specific method by which free allowances are 

allocated is very important and is likely to be highly politicized. 

Consider two different ways of allocating allowances to electric 

generation sources. In the first, every megawatt hour produced receives the same number of allowances, while in the second, allowances are allocated based on historical emissions. The first approach rewards efficient, low-emitting generators, as they will have 

to buy fewer credits than inefficient, higher-emitting generators. 

The second approach rewards those who have taken no action 

and who have old, inefficient and for the most part fully depreciated plants. Which would you rather reward, companies that 

have planned ahead and sought to anticipate policy trends and who 

have low emission profiles today, or firms that have sat back and 

done very little? We believe the answer is obvious. 

This is just one of the practical issues with cap and trade. Close 

study of the problems encountered in the early days of the European carbon trading scheme have revealed many other problems, 

including the volatility of carbon prices, market manipulation, regressive impacts on the poor and windfall profits. 

For every problem there is a proposed fix. But each fix makes it 

look more and more like a carbon fee. That said, our analysis suggests that the best cap and trade approach is to auction the majority of allowances, give away the remainder for a short period of 

time, and the free allowances should be allocated on an output 

basis, not the amount of BTUs consumed. 

Most importantly, it is critical that we have a safety valve. 

I see my time is up, so that pretty much summarizes our position. 

[The prepared statement of Mr. Hay follows:] 

STATEMENT OF LEWIS HAY III, CHAIRMAN AND CEO, FLORIDA POWER & LIGHT

COMPANY AND FPL ENERGY

Madam Chairman, Members of the Committee, thank you for the opportunity to 

be here today. My name is Lew Hay, and I am the Chairman and CEO of FPL 

Group, the holding company for Florida Power & Light Company and FPL Energy. 
36 

Through Florida Power & Light. we provide electricity service to roughly half the 

State of Florida, the fourth largest State in the Nation, or over eight million people. 

Through FPL Energy we operate in competitive generation markets In roughly half 

the State. outside of Florida. Together, these businesses operate a fleet of over 

35,000 megawatts of capacity. making us one of the top four generators in the country. Our generation fleet is one of the cleanest in the country and among the lowest 

emitters of carbon dioxide. FPL Energy is by far the largest wind energy producer 

in the country. We own and operate approximately one-third of all the wind capacity 

in the country, and our capacity exceeds that of the next eight largest players combined. No company anywhere on the globe has developed and built more wind capacity than we have. We are also the largest solar energy producer in this country and 

the operator of the two largest solar fields in the world. And we have experience 

with a number of other farms of renewable energy production. Thus, I think we can 

fairly claim to know a bit about renewable energy. 

We also know a bit about conservation and energy efficiency. In Florida, with the 

support and leadership of the Florida Public Service Commission, we have been actively engaged with conservation and demand side management programs for over 

25 years. In fact, according to the Department of Energy statistics, Florida Power 

& Light is first in the Nation in energy conservation programs among electric utilities. Energy efficiency is not something that has just occurred to us recently as the 

right thing to do. Over the years, our demand side management programs have enabled us to avoid building the equivalent of 11 major power plants and thus to avoid 

all the emissions that would otherwise have resulted. We have calculated that if the 

rest of the industry had conservation efforts roughly as effective as ours it would 

be as though the single largest emitter of CO2 in the U.S. electric utility sector did 

not exist from an emissions standpoint. CO2 emissions would be reduced by about 

240 million tons per year, which is equivalent to 9.5 percent of the emissions of the 

entire electric utility sector. 

We have had a track record of focusing on environmental issues for many years. 

and it has been an explicit part of our strategy to seek to build Into our future expectations our view of where future environmental constraints will take us. We have 

sought to look ahead and anticipate rather than to wait and react. Because of our 

past actions, our emissions profile today is among the best in the industry. To put 

this in perspective, we have calculated that tithe rest of the Industry were today 

operating at our emissions intensity for Carbon dioxide—that is emitting the same 

amount of carbon for every megawatt hour they produced as we do—the U.S. today 

would be under its Kyoto target for total carbon emissions—even without any contribution from other sectors. And we know we can do better. So can the rest of our 

industry. But to do better will require the right kind of public policy framework. 

We have been able to combine exceptional environmental performance with strong 

financial performance. For 5 years in a row we have been named the most sustainable electric utility in the country by Innovest Strategic Value Advisors. We are one 

of 19 U.S. companies that Corporate Knights rated in the top 100 sustainable companies in the world. And just this year we were named by Fortune magazine as the 

most admired electric utility in that magazine’s annual survey of our industry. We 

are proud of our accomplishments and our track record. However, our environmental performance has not come without a cost and I would be remiss if I did not 

point that out. 

Today, although our retail rates are below industry averages, our customers in 

Florida clearly pay more for electricity than they would if we had a higher percentage of coal in our fuel mix. Conversely, the customers of many utilities elsewhere 

in the country are in our view paying prices that are attractively low only because 

the true cost of their environmental impact is not reflected in those prices. We tinny 

believe that the single most impatient step Congress can take is to ensure that as 

we move forward, the cost of emitting carbon into the atmosphere becomes fully reflected in the market prices of all products and services. 

Major corporate carbon emitters, including electric generators, can reduce their 

carbon footprint by Improving their energy productivity, relying more on renewable 

forms of energy like wind, solar and geothermal, burning cleaner fuels and working 

with their customers to encourage more conservation and improve their efficiency 

(e.g., use more efficient air conditioners). But they have little incentive to do so because they are not required to pay for their carbon emissions or global warning’s 

effects. 

Turning to the specifics of how to deal with global climate change, we have dear 

views. I expect they will in some way challenge every member of this Committee. 

In brief, we believe anthropogenic (man-made) global climate change is real and requires prompt policy attention, but that it is not yet a crisis. We must take action, 

but the wrong actions can be worse than doing nothing at all. Getting the U.S. econ-
37 

1Pizer, William, ‘‘Choosing Price or Quantity Controls for Greenhouse Gases.’’ Climate Issues 

Brief No. 17 (Washington, DC; Resources for the Future), July 1999. A copy of this paper is 

attached. 2 Copies of these editorials are attached to our written testimony. 

3These values can be adjusted upwards each year for general Inflation, in order to maintain 

the desired level of increasing real burden. 

omy on a path to lower carbon intensity and ultimately reducing carbon emissions 

will got be cost free—but if done correctly it does not need to wreck the economy 

either. The devil is in the details. 

To be effective, any program must 

• Set a market price on carbon which will be reflected in the price of every good 

and service throughout the economy; 

• Apply throughout the economy, not just for reasons of fairness but more Importantly for effectiveness. Carbon is pervasive throughout the economy and programs 

that focus on just one sector, such as our own, will not effectively address the problem; 

• Protect import-and export-sensitive industries, otherwise production simply flee 

offshore to locations that do not price Carbon into their output and, 

• Recycle the dolled that will be extracted from end consumers through higher 

prices back into their pockets, or we will do serious damage to the economy. 

Our analysis has led us to conclude that the simplest, most effective way to do 

this Is through a carbon fee. As many of you know, this view is shared by numerous 

others who have analyzed the problem, including most economists. William Pizer, 

an economist for Resources for the Future and who has studied greenhouse gas controls for more than a decade, concludes that, ‘‘find that price mechanisms produce 

expected net gains five times higher than even the most favorably designed quantity 

target.’’1 Editorials published in The Economist,2 the Los Angeles Times2 and The 

Washington Post2 have all endorsed the use of a fee, as has former Federal Reserve 

Board Chairman, Alan Greenspan, and former Vice President, Al Gore. A carbon fee 

is administratively simple; it automatically becomes economy-wide; it is easy to recycle to consumers; and, crucially, it provides us in the industry with the price signals we need to make long term capital decisions—the very capital decisions that 

will ultimately determine whether or not we bring down our national emissions profile over time. We have suggested that the price start out at a modest level—say 

$10 per ton of CO2 emitted—and rise predictably each year by, say, $2 per ton?3

Many people will tell you that a fee is just a tax, and a tax is politically infeasible. 

In fact, I’m sure you will hear the old witticism about waterfowl—if it quacks like 

a duck, etc. That is a good sound bite; but frankly, it’s a bit silly. Senators, let me 

be quite dear-any action you take to constrain carbon will effectively impose a tax 

on our economy; that is a simple matter of economics. In our view, however, there 

are Important differences between a carbon fee and what most people think of when 

they think of a tax. 

A tax is designed to raise revenue to fund common needs and social services; a 

carbon fee is designed to change relative prices and to be revenue neutral. Taxes 

are generally designed to be unavoidable. Companies can avoid paying a carbon fee 

by not emitting carbon—exactly the behavior we need to encourage. Moreover, if it 

is effective, in time a carbon fee will be self-extinguishing. 

To be effective, a carbon fee must be recycled, and we believe it should be recycled 

three ways. First, the bulk of the fee should be returned to consumers directly, and 

the simplest way to do the is through a per capita allowance. Think of it as your 

personal allowance for your carbon footprint. Each year, every adult would receive 

a proportionate share in the proceeds of the aggregate fee, economically offsetting 

the typical emissions profile while preserving the pried signal that will discourage 

the use of carbon intensive products or production methods. Second, some of the fee 

needs to be reserved to protect those few industries that are genuinely exposed to 

direct competition from foreign firms that do not have an equivalent cost of carbon 

embedded in their cost structures. Third, a portion of the fee needs to be reserved 

for fundamental research into carbon reduction and elimination technologies, such 

as carbon capture and sequestration, without which in the long run we simply will 

not address the issue. ERR’ estimates that in order to develop technologies necessary to address climate change in the electrical sector alone, RD&D funding will 

need to increase by roughly $1.3 billion per year over the next 25 years—or a total 

of $33 billion. I suspect the actual amount needed will be at least twice that 

amount. The balance among the three ways for recycling carbon fees back into the 

economy can be adjusted over time, with the allocations to R&D and industry protection diminishing as the global economy adjusts to a new State. 
38 

1 In a recently issued white paper, Clean Air Watch estimates that with an input based approach, the top 10 carbon emitting electric usury companies would reap a windfall of a range 

from at least $4.5 to $9 billion per year (assuming allowance prices ranged from between $5 

to $10 per ton). 

Finally, critics of a carbon fee will say it is not market based while cap and bade 

is. This is just not true—both approaches are market based. Under a cap and trade 

approach, volumes of CO2, emissions are established and the market establishes a 

price, while under a carbon fee approach, the price for emitting carbon is established and market forces determine the corresponding volumes of CO2 emissions. In 

both cases, market forces determine which specific forms of carbon reduction activities in what proportions are undertaken by private economic actors. 

A fee is very different from a tax, but in one way it is similar It will require real 

political courage to implement. I believe our government has the courage to address 

this problem the right way. However, if a fee really is politically infeasible, then the 

next best alternative is the right type of cap and trade program. But Senators, I 

must caution you that not all cap-and-trade systems are created equal. In fact, there 

are tremendous differences across the array of cap and trade proposals that are 

being discussed. If you pursue cap-and-trade I urge you to become personally Involved In understanding the details of how it will work and how it will be administered. This is too important an issue for it to be delegated to an executive agency 

without considerable guidance from Congress. We support cap-and-trade proposals 

such as Senator Carpets and Senator Feinstein’s, which have sought appropriately 

to address some of the practical issues of this approach. 

Let me give you one simple but critical example of the practical issues you must 

address in cap-and-trade. Under a cap-and-trade approach, each year a fixed quantity of allowances are created-each allowance representing the right to emit a fixed 

amount of carbon dioxide or other greenhouse gas. Unless most of, if not all those 

allowances are auctioned off, which incidentally is an approach that we endorse, the 

specific method by which those allowances are allocated across industries and to 

firms or production sources within those industries becomes very important. Allowances represent a valuable financial asset. We estimate the total value of allowances 

per year to be between $70 billion and $300 billion—or between $2 trillion and $9 

billion over the first 30 years of a carbon regulatory program—suggesting that the 

allocation process will be highly politicized and highly susceptible to rent seeking 

influence in Washington. The initial stages of the European carbon trading scheme 

show how significant the allocation question can be. It is widely agreed that allowances were over-allocated In some instances, leading to windfall profits for some 

market participants, particularly those participants who were the largest emitters 

of CO2. Whatever approach is taken, you can be sure that someone will be unhappy, 

and In our society that is likely to mean litigation, and litigation is likely to sew 

down the pace at which real emission improvements are actually made. 

Consider two different ways of allocating allowances to electric generation sources: 

In the first, every megawatt hour produced receives the same number of allowances, 

a so-called output-based approach; while In the second allowances are allocated 

based on fuel input where every BTU of enemy input receives the same number of 

allowances—a so-called input-based approach, Under the first, every generator has 

to reach the same goal, or pay the consequences; under the second, every generator 

has to improve by the same proportional amount or pay the consequences. The first 

rewards those who have already moved to become efficient, low emitters, since they 

will have to buy fewer allowances to reach the common goal; while the second rewards those who have taken no action and who have old. inefficient and, for the 

most part, fully depreciated plants. As you think about carbon policy proposals, Senators, I urge you to consider this issue. Which would you rather reward: companies 

that have planned ahead and sought to anticipate policy Vends and who have low 

emissions profiles today? Or firms that have sat back and taken advantage of low 

cost but high emissions technologies like traditional coal generation? We believe the 

answer should be obvious—you should not reward the worst emitters. But that is 

one of the many practical consequences that the exact form of a cap and trade program will have, and it is one that I urge you to think carefully about4 I know you 

will follow your consciences; I hope my testimony will cause you to dig further into 

these practical issues. 

The illustration I have just given you is but one of many practical issues with 

cap-and-trade, Close study of the problems encountered In the early days of the European carbon trading scheme reveal many others. These problems include: 

• How to address differing regional growth rates. Non-updating allowance allocations, such as an input-based allocation based on historical BTU consumption, would 
39 

impose large penalties on faster growing States, such as California, Arizona, Nevada 

and Florida, 

• How to avoid unnecessary economic damage associated with highly volatile permit prices. Even under the highly praised SO2, program, the price of SO2 allowances 

has varied, on average, by more than 40 percent Per year and has increased over 

80 percent per year over the past 3 years. Given CO2’s importance to the economy, 

this could have devastating impacts ranging from higher inflation, reduced consumer spending and reduced investments In green technology. 

• How to prevent boarding of credits and other attempts to manipulate the market. 

Each proposed ‘‘fix,’’ such as including price floors and ceilings, adds complexity 

and possibly other unintended consequences, and, in effect, makes a cap and trade 

system work more and more like a carbon fee, albeit without the benefits that a 

carbon fee brings such as predictable pricing, fairness and administrative simplicity. 

That said, we believe that market-based trading schemes can be made to work, 

but the right way to implement them is to auction the majority of allowances and 

give away the remainder for a short transition period. Our analysis has convinced 

us that it is neither necessary nor desirable to give away for free any large proportion of the total allowances created saga year. In most cases utilities and independent generators will recover the costs of purchasing allowances through charging 

higher prices. It is the end consumer who will ultimately bear the burden. An auction-based system, with the proceeds of the auction recycled direct to end consumers 

on a per capita basis, best protects against unintended windfalls for producers. To 

the extent that there are free allowances, they should be allocated on an output 

basis (per MWH) (with the possible exclusion of nuclear and renewable generation, 

which have already received plenty of government support). The proceeds of the auctions should be recycled back into the economy in the same three ways as I have 

described for a carbon fee. Even then, with a cap-and-trade approach you will face 

the difficult choice of deciding exactly how tight the caps should be each year. Too 

loose, and we don’t make the progress we could make too tight and you surely will 

do serious damage to the economy. Unfortunately, as the Intergovernmental Panel 

on Climate Change’s own reports acknowledge, no one today can tell you what those 

caps should be so you wit be left to guesswork This is another reason why we have 

concluded that a fee-based approach is superior. While there is still some guesswork 

involved, it is much easier to set a path for the future price of carbon than for the 

future volume of emissions reductions that will be manageable without major economic damage. And the future price of carbon—a so-called forward price curve-is the 

most crucial piece of information that all of us in business need to know in order 

to make the long-term investment decisions without which we will never succeed in 

bringing doom our national emissions profile. If a cap-and-trade approach is used, 

it is critical that a pre-determined ceiling price, or ‘‘safety valve,’’ be included, in 

order to avoid the threat of significant economic disruption in the event of very volatile allowance pricing. 

Senators, I know that there are some who do not believe that the science of climate change is conclusive, or that the consequences are certain. We agree. But we 

know enough to warrant taking action today. We know enough to know there is risk 

of severe consequences, and just as we buy insurance or wear seat belts, we need 

to address that risk But just as we don’t give up all our income to purchase insurance, we need to be balanced in our approach to addressing that risk. A moderate 

carbon fee, escalating steadily and predictably, and recycled directly back into the 

economy, will have only a modest drag on the economy, but it will over time induce 

massive change in our carbon emissions profile especially when it is supported by 

adequate R&D. The same effect can be produced, though with greater complexity 

and less effectiveness, through a properly designed cap-and-trade system with a 

high percentage of allowances auctioned and a pre-determined safety valve built in. 

But a pearly designed scheme, or one that does not force a price on carbon throughout the economy, will not address the real environmental issue, and a will risk 

major economic dislocation. 

Thank you for the opportunity to contribute to this critical public dialog. 

ATTACHMENTS

‘‘Doffing the Cap,’’ The Economist, June 14, 2007. 

Eilperin, Juliet and Mufson, Steven. ‘‘Tax on Carbon Emissions Gains Support; 

Industry and Experts Promote It as Alternative to Help Curb Greenhouse Gases,’’ 

The Washington Post April 1, 2007. 
40 

Green, Kenneth P., Hayward, Steven F., and Hassett, Kevin A. ‘‘Climate Change: 

Caps vs. Taxes’’ Environmental Policy Outlook No. 2. Washington, DC: American 

Enterprise Institute for Public Policy Research, June 2007. 

‘‘Time to Tax Carbon: A Carbon Tax is the Best, Cheapest and Most Efficient Way 

to Combat Cataclysmic Climate Change,’’ Los Angeles Times, May 28, 2007. 

Pizer, William, ‘‘Choosing Price or Quantity Controls for Greenhouse Gases,’’ Climate Issues Brief No. 17, Washington, DC: Resources for the Future, July 1999. 

‘‘Should Big Polluters Own the Sky?,’’ Clean Air-Watch, June 2007 
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RESPONSES BY LEWIS HAY III, TO ADDITIONAL QUESTIONS FROM SENATOR BOXER

Question 1. You advocate a carbon fee as the simplest, most effective way to reduce carbon emissions. How can we be sure that a fee will achieve the needed level 

of emission reductions? Couldn’t companies just decide to pay to pollute? 

Response. Unfortunately, no program design will guarantee a certain result, not 

even a cap and trade. A cap can be missed—there’s absolutely nothing to guarantee 

that it won’t be—and in fact, the European experience suggests that this is quite 

possible. Although it may seem as though a cap gives certainty, we believe this is 

an illusion. Clearly, there is no certainty if the cap and trade system includes a 

safety valve. Furthermore, from a pragmatic perspective, there is simply no way a 

future Congress will not provide relief (in the form of deferrals or re-set targets) if 

it turns out that the expected levels of CO2 reduction cannot be achieved at reasonable cost. This is exemplified in the recent proposal by Senators Landrieu, Graham, 

Lincoln and Warner in which they propose a Carbon Market Efficiency Board. Unfortunately, with a cap, the way this will come about is through a rapid, intense 

run-up in the price of allowances, with potentially devastating economic effects and 

little time for industry to anticipate and react, leading to a political reaction in the 

face of economic distress. In contrast, with a fee, if the originally set path of future 

costs does not appear to be generating enough CO2 reduction, the future fee path 

can be gently and progressively ratcheted up—but always with direct observation 

over the level of economic hardship imposed by pricing carbon directly. 

In addition, we believe this question contains a false premise. We do not know 

today what the ‘‘needed’’ level of emissions reduction is. In other words, we do not 

know the exact relationship between atmospheric CO2 concentrations and global 

temperature. Currently, there is insufficient scientific evidence to determine this (as 

the most recent IPCC report explicitly acknowledges). Until more work can be done 

and the uncertainty narrowed, the issue is less scientific than economic. Global climate change presents the risk of future severe economic damage and addressing it 

will require some degree of economic sacrifice. Exactly what the tradeoff should be 

is not yet a matter of science but rather a policy judgment. 

This may seem to be a problem, but we believe it is actually a ‘‘silver lining’’ from 

a policy perspective. Because climate change is a result of the long-term accumulation of greenhouse gases and since CO2 remains in the atmosphere for many years, 

it doesn’t matter greatly whether we meet a particular annual emissions target in 

1 year or the next. This is especially true in the short-term. What is important is 

that we accomplish long-term goals by setting the economy on a new path toward 

lower carbon intensity and that we do so without inflicting major economic damage. 

Setting volume caps (or targets, as they really are) gives us the illusion of certainty, 

but it does not provide certainty. In contrast, a fee, as long as it is not arbitrarily 

shifted over the short term (which it does not need to be), provides a much greater 

measure of predictability to individuals and firms trying to make decisions about 

long-lived assets. Thus, it is far more likely to elicit major behavioral change based 

on sound investment decisionmaking. 

The entire question of whether it is better to attempt to control price or volume 

has been extensively studied. One of the best analysts, we believe, is Billy Pizer of 

RFF, who argues that price controls induce behavioral changes that can achieve results five times higher than quantity targets. A carbon fee can be implemented 

gradually, thus avoiding any economic disruption. That said, since the fee continues 

to escalate and can be anticipated, there’s a point when the fee will become too expensive to pay. This is the point at which emitting carbon becomes economically impracticable, and is also the point at which the fee becomes anachronistic, or self extinguishing. 

Advocates of cap and trade argue that the economic models are sufficiently robust, 

that they ‘‘know’’ the impact on our economy of various caps and the likely resultant 

CO2 price. While we have our doubts about the precision of such models, especially 

in regard to site impacts, if the relationship between carbon limits and carbon prices 

is that well understood, then the impact on CO2 emissions levels should be the same 

regardless of whether a price is set or a certain level of carbon emissions is set. In 

other words, if these advocates are correct about the accuracy of their models, they 

should be pleased with a fee and be very confident with the end result. If, however, 

the converse is true—and they are wrong about their models—then we will have 

played Russian roulette with our economy by setting a hard cap. 

All programs to control carbon will have both costs and uncertainties. No program 

will provide absolute certainty over either price or volume. The best program will, 

however, reduce the uncertainties as much as possible. Both cap and trade and a 

fee provide uncertain results, but since the fee provides a higher degree of predict-
99 

ability to guide consumers and producers in their immediate economic decisions, the 

fee is obviously preferred. 

Question 2. How would we know how much to charge for a carbon fee? Could we 

be sure it would stimulate the investments needed to spur essential technological 

developments? 

Response. The most important issue when setting the price for carbon is the balance between the need for technological investment to bring long-term emissions reductions and the need to avoid economic disruption. Emissions reduction is a longterm problem that will take many decades to solve. Thus, if we start with a reasonable and steadily increasing price, a fee is going to attain a level whereby investments and, subsequently, behavioral changes, are imminent. At some level—a level 

that will in due course, though not immediately, become knowable to businesses, industries, and innovators—it will simply become too expensive to emit carbon into 

the atmosphere. Prior to this, investments will be made and changes will result. Unfortunately, the same cannot be said for a cap and trade since it doesn’t set a floor— 

or guaranteed cost for carbon—and consequently doesn’t ensure a specified or certain level for returns on investment. As such, not only is behavior modification not 

certain, neither is technological advancement. In other words, setting a floor is just 

as important as setting a ceiling. 

In practical terms, a degree of judgment is required in setting the price path, 

since it is desirable not to have to change this with any frequency. With carbon, 

the critical challenge is to estimate what the cost of future technology with zero net 

emissions may be and then to set the target price at that level in the timeframe 

when those future technologies are expected to be broadly available. For example, 

if we believe that there is a reasonable probability that carbon capture and sequestration could be feasible at commercial scale for a cost of $50 per ton by about 2030, 

then the price path should be set to reach $50 per ton about 2030. It should start 

out at modest levels, and it should rise predictably and progressively. That is why 

we have proposed starting at $10 per ton, which will send a clear price signal but 

will not be massively economically disruptive, and escalate at $2 per ton (all values 

in 2007 dollars, i.e., the actual nominal prices will be increased for inflation). 

Such a price profile, if understood and believed, will absolutely spur technological 

development, just as it will spur behavioral change. This is particularly true if one 

believes that the cost to society of reducing greenhouse gases will be modest. Importantly, a reasonable and progressive price profile will give all economic actors time 

to respond. Investors and consumers will both be able to judge what actions to take, 

and the prospect of earning a predictable return for every ton of carbon that a new 

technology or change in behavior might avoid would be an extremely powerful inducement. We know from centuries of experience that there is no more powerful incentive to large-scale behavioral change than economics. 

A cap and trade, on the other hand, almost entirely ignores the economics, focusing instead on forcing a political solution to an economic problem. The proponents 

of certain cap and trade programs often point to various economic models as bases 

for their position, but even if these proponents have confidence in the models that 

support their conclusions, they should certainly understand that they can apply the 

same conclusions to a fee and support a much more economically efficient means 

of arriving at the same result! The politically convenient support for cap and trade 

programs is, as The Economist notes, quite frankly ‘‘a pity, because most economists 

agree that carbon taxes are a better way to reduce greenhouse gases than cap-andtrade schemes. That is because taxes deal more efficiently than do permits with the 

uncertainty surrounding carbon control. In the neat world of economic theory, carbon reduction makes sense until the marginal cost of cutting carbon emissions is 

equal to the marginal benefit of cutting carbon emissions. If policymakers knew the 

exact shape of these cost and benefit curves, it would matter little whether they 

reached this optimal level by targeting the quantity of emissions (through a cap) or 

setting the price (through a tax)’’ [‘‘Doffing the Cap,’’ The Economist, 14 June 2007]. 

In other words, if we knew either the marginal benefit or the marginal cost, then 

we’d be entirely indifferent to the policy solution. But, since we know neither the 

benefit nor the cost—every model, to this point, is at best a rough approximation— 

then we should be obligated to take the path that provides cost certainty. This 

seemingly simple fact is ignored by politicians because, as that same Economist article notes, a fee is prone to ‘‘ideological caricature.’’ Economists, like Alan Greenspan, 

Paul Volcker, Robert Shapiro, and William Pizer understand that the solution 

shouldn’t be political, but should be efficient and certain and thus all support a carbon fee. For their part, entrepreneurs, industrialists and markets respond best to 

price signals. If there is a price on carbon, you can bet safely that they will respond 
100 

with new, lower cost technologies, which in turn helps the overall economy and 

spurs the carbon-free paradigm that any program should aspire to. 

While the exact price profile of the fee is less important than its general shape, 

it is very important that we not err too much to one side or the other. For example, 

if we set the price at $50 in the first year or two it will make little difference to 

the speed with which necessary new technologies can be developed and commercialized, but it will exact a huge economic cost. This is the great danger with a cap 

and trade system—it will be very easy to inadvertently set a cap that cannot practically be met within a particular timeframe. The consequence will be that allowance prices will skyrocket unpredictably, but too late to induce additional action, 

and the only possible response will be to relax the caps. By then, however, the economic damage will have been done. 

It is worth noting that a modern, free enterprise economy like our own can adapt 

very well to moderate, predictable changes in relative prices without significant loss 

of net output. It cannot adapt nearly so well to short, sharp shocks (for example, 

the oil shocks of the 1970s). A fee system provides predictable, moderately changing 

prices, allowing the economy gradually to adapt to a new, lower carbon intensity 

state. A cap approach runs the risk of inadvertently inducing unanticipated and unnecessary economic shocks. 

At its most basic form, a carbon fee creates a supply curve. This is key to stimulating the kind of behavioral changes and investment decisions that will ultimately 

abate carbon emissions. Generation technologies cost hundreds of millions of dollars, 

and in some cases—nuclear, for example—billions of dollars. And, the decisions and 

technologies last a long time. Long-term investment decisions require price certainty 

for justification, not economic models. 

Question 3. How would you recommend recycling some of the proceeds from a carbon fee or auction back to consumers? 

Response. It’s important to remember that the point of a carbon fee or auction 

is not to raise treasury revenue, but to modify behavior and reduce carbon emissions. It should be, in effect, revenue neutral, with all proceeds recycled directly 

back into the economy. 

The proceeds should be employed in three ways: 

1. To abrogate the inherent regressivity of a carbon cost and its consequent impact 

on energy costs, the bulk of the fee should be returned to consumers directly through 

a per capita allowance, a de facto personal allowance for carbon. To this end, each 

year, every adult would receive a proportionate share in the proceeds of the aggregate fee, economically offsetting the typical emissions profile while preserving the 

price signal that will discourage the use of carbon intensive products or production 

methods. While other methods are possible, it is crucial that the return to consumers be independent of their carbon footprint, otherwise the price signal effect 

will be lost. Thus, for example, if credits were given to electric load serving entities, 

there is a high likelihood that state-level utility regulation would pass these through 

to consumers based on their kilowatt-hour consumption. This would nullify the desired price signal. Overall, we believe a simple per capita allowance makes most 

sense. To reflect the inherent efficiencies of families, we suggest that dependent 

children receive a partial allowance (one-third or one-half of the adult allowance). 

2. Some portion of the resultant proceeds needs to be reserved to protect those few 

industries that are genuinely exposed to direct competition from foreign firms that 

do not have an equivalent cost of carbon embedded in their pricing structures. Similarly, U.S.-based industries and firms that export to non-carbon controlled countries 

that are negatively impacted also merit protection. 

3. A portion of the fee needs to be reserved for fundamental research into carbon 

reduction and elimination technologies, such as carbon capture and sequestration. 

Without these technologies, we simply will not be capable of adequately addressing 

carbon abatement. EPRI estimates that in order to develop technologies necessary 

to address climate change in the electrical sector alone, RD&D funding will need 

to increase by roughly $1.3 billion per year over the next 25 years—or a total of 

$33 billion. We believe the actual amount needed will be at least twice that amount. 

The balance among the three ways for recycling carbon fees back into the economy 

can be adjusted over time, with the allocations to R&D and industry protection diminishing as the global economy adjusts to the new paradigm. We believe that the 

vast majority of the dollars should go directly to consumers. 

Question 4. How can we encourage utilities to encourage energy efficiency on the 

part of their customers? 

Response. While energy efficiency isn’t the only solution, it’s clearly an important 

part of the solution. And, importantly, as a country—and, in particular, as an indus-
101 

try—we’ve only scratched the surface. There’s an enormous potential for more energy efficiency measures to be implemented. For example: 

1. Do what Florida does. As a first step, you need look no further than to the best 

of what has already been done. We don’t build new generation until we’ve proven 

that we’ve exhausted all economical conservation and efficiency measures. Consequently, FPL is first in the Nation in conservation (our peak demand is just 2 percent of America’s peak demand, but we’ve implemented 13 percent of the country’s 

energy efficiency and 6 percent of the load management). If the rest of the nation’s 

utilities adopted our efficiency standards, it would avoid completely the same about 

of carbon emitted by the nation’s largest electric utility emitter. 

2. Create economic incentives to do more. Utilities can play a big role, but they 

need an incentive to reduce their existing sales and source of profits. 

3. Support infrastructure investments and new rate structures. Smart meters and 

time of day pricing will clearly make energy delivery and use more efficient. Such 

effectual structures, coupled with smarter end-use appliances will drive behavioral 

changes and efficiency. 

4. Ensure that the cost of CO2 is fully reflected in the rates that customers are paying. To this point, a carbon fee is the clearest and most efficient means to ensure 

that the price of carbon is reflected in the costs of goods and services. Importantly, 

because they would actually hide the cost of carbon, free allowances in a cap and 

trade scheme would have the opposite effect and would actually undermine efforts 

to encourage drive efficiency and behavioral changes. 

5. Implement programs to educate consumers and create awareness. 

Despite our best efforts, energy efficiency is not always top of mind for our customers. Many times the most efficient alternative is not selected because the customer simply doesn’t have the information to make an informed decision. Raising 

public awareness on conservation is very costly; education on the best alternatives 

increases that cost even more. Over the last 25 years FPL has worked hard to raise 

the awareness level of energy efficiency and has accomplished an industry-leading 

level of success, but meeting the reduction targets that are contemplated in most 

carbon reduction measures would require a Herculean effort. To even begin to accomplish such an effort would require proactive awareness campaigns from all levels 

of government, a modest but consistent level of funding, and a concerted public/private partnership. A small portion of the proceeds of a carbon fee could be dedicated 

to this role. 

Once customers are made aware, the increased incremental cost of an energy efficient alternative must then be overcome. Today, utilities provide incentives to customers that install energy efficient measures. However, such incentives often pale 

in comparison to the differential cost of the more efficient measure. We need a regulatory mechanism that allows for larger incentives to help cover the cost of the 

measure. The gap between the cost of an energy intensive end point and the cost 

of an efficient device must be narrowed significantly to make a difference. Once 

again, this is one of the virtues of a fee: it translates immediately and directly into 

a price signal and will automatically make any existing potential conservation measure inherently more attractive—and in a predictable fashion. 

Question 5. If utilities are given emission allowances for free, will utilities pass 

along the savings to consumers or will they increase the price of electricity to reflect 

the market value of the allowances? 

Response. We think there is a very real risk that with any allowance program in 

which there are free allocations there will be misappropriations. Free allowances are 

inherently problematic. There are, quite simply, too many things that can go wrong 

to make them worthwhile. 

While we cannot know for sure exactly what will happen, we can make reasonable 

assessments. In deregulated markets, generators are unlikely to pass along any net 

savings to consumers. Prices are set by the market, and the market price will likely 

increase by the marginal producers’ incremental cost of CO2 compliance. Other generators will benefit from this to the extent that their cost of CO2 compliance is less 

than that of the marginal producer. If they receive free allowances, they will keep 

this difference as well. 

In traditional, regulated markets, the amount of savings customers will realize, 

and how they will realize it, will be a function of each utility’s State public service 

commission. It is hard to predict how each PSC will act. Some will likely require 

a pass through to customers based on their electricity consumption. We view this 

as a significant problem, because it will nullify the price signal that is crucial to 

send to customers if they are to be encouraged to change their behavior and become 

more energy efficient. Other PSC’s might implement different pass-through mechanisms, with unpredictable results. 
102 

Of course, it is possible that some utilities will try to convince their PSC’s that 

they have to pay twice to deal with carbon: first by paying for CO2 allowances and 

second by building new low (or no) carbon generation; and as such they should be 

allowed to sell their allowances and keep the proceeds to help recover their costs. 

We have heard this argument used by some generators. It is, however, quite without 

merit. They may choose to pay the cost of carbon for each megawatt hour either of 

two ways: by purchasing an allowance, or by creating new, clean generation. But 

they will never have to pay twice for the same megawatt hour. 

Since free allowances are inherently problematical and somewhat unpredictable 

in their distributional effects, we believe they should be avoided. Clearly, however, 

if there are any free allowances they should be distributed based on efficiency— 

thus, rewarding the very behavior a climate bill would purport to encourage. Some 

companies and sectors argue that allowances should be distributed based on historic 

pollution. We find this unjustifiable for two major reasons: (1) our customers pay 

more already because they’ve already made investments in clean, efficient generation (i.e., this penalizes those who are efficient and/or who took early action) and 

(2) Florida is a rapidly growing State that would be essentially be penalized for 

growth under an input, or historic, scheme. Customers of low-cost traditional coal 

generation enjoy substantially lower rates than customers of cleaner, more efficient 

generation. There’s an obvious correlation between carbon emissions and cost. Even 

after adding the cost of allowances, coal customers will still pay less. It makes no 

sense to subsidize lower rates and higher emissions on the backs on consumers who 

pay higher rates but have lower emissions. Further, there’s no logic whatsoever in 

looking at historic emissions. It doesn’t solve the problem and doesn’t encourage 

technological innovation. Certain regions of the country could meet a mandated reduction simply because their population is declining and thus their energy consumption and resultant emissions are declining. Consequently, they would have no incentive to make investments in new, more efficient technologies. On the other hand, 

certain regions—such as the Southeast and Southwest—would be punished for simply growing in population. 

Since allowances have value and thus create a cost for carbon, it is logical to assume that all electric rates will increase. It follows that if some allowances are free, 

then some consumers will end up essentially paying more for electricity while the 

utilities are held harmless. Of course, if there’s an over-allocation of allowances, 

then those entities can actually sell the allowances and make a profit, while charging the increased market for electricity. This scenario is especially convoluted in deregulated markets where a clearing price is set—likely at an elevated level—and the 

states’ Public Service Commissions have less control over the process. To this point, 

in Germany both E.ON and RWE have been charged with doing exactly this, selling 

electricity to their customers at market price and selling free allowances for profit, 

in effect double charging their customers. 

Even if this does not happen, however, there is a perverse effect from free allocation of allowances. If the value of the allowances is passed through to consumers 

as a reduction in the price of a kilowatt hour of energy, then the consumer promptly 

loses the price signal that we need to send if the large reductions in carbon intensity 

that are possible through end user efficiency and conservation are actually to be 

achieved! Either way there is a problem. 

These problems are inherent in the approach of free allocations. They are avoided 

if we choose a carbon fee with per capita recycling. Regulated utilities will pass on 

their costs directly, while the wholesale price of electricity will rise in de-regulated 

markets, so end-use consumers will see the right price signals and will have appropriate incentives to conserve and be efficient, but because the vast bulk of the dollars will be recycled directly into consumers’ pockets the economy will not be hurt 

significantly. Again, the superiority of the fee approach is clear. 

If a cap and trade system is used, allowances should be auctioned, with the proceeds recycled as we have discussed for the fee approach. 

RESPONSES BY LEWIS HAY III, TO ADDITIONAL QUESTIONS FROM SENATOR INHOFE

Question 1. What business risks are associated with potential climate change legislation and have these risks been documented in your 10–K filings with the U.S. 

Securities and Exchange Commission and appropriate disclosures to shareholders? 

Response. The business risks associated with climate change legislation generally 

fall into three categories. 

1. Climate change legislation can result in higher operating costs that may not be 

recovered in prices paid by customers. This is particularly a possibility for generation 

units in competitive markets, but it could also happen for regulated generation. 
103 

2. Climate change legislation can mean higher capital expenditures resulting from 

the investments necessary to comply with the new rules (e.g., improvements to plant 

efficiency, CO2 capture and storage technology). Again, these costs may or may not 

be recoverable in rates. 

3. Climate change legislation can render current generation assets obsolete and, 

therefore, create the risk of unrecoverable, or stranded, capital costs. Further, current 

generation assets might have their output materially reduced, which would likewise 

create the risk of unrecoverable, or stranded, capital costs. 

We believe that we have made the appropriate disclosures to investors in Part 1, 

Item 1A: Risk Factors of our 2006 10–K filings. The commensurate excerpt from this 

section is noted below. 

‘‘FPL Group and FPL are subject to extensive Federal, State and local environmental statutes as well as the effect of changes in or additions to applicable 

statutes, rules and regulations relating to air quality, water quality, climate 

change, waste management, wildlife mortality, natural resources and health 

and safety that could, among other things, restrict or limit the output of certain 

facilities or the use of certain fuels required for the production of electricity and/ 

or require additional pollution control equipment and otherwise increase costs. 

There are significant capital, operating and other costs associated with compliance with these environmental statutes, rules and regulations, and those costs 

could be even more significant in the future.’’ 

In addition to the risk factors section above, which is designed to provide investors a high level view of the broad array of risks to which the business is exposed, 

FPL Group also includes discussion of environmental matters in Part 1, Item 1: 

Business. An excerpt from this section specific to climate change is noted below. 

‘‘Climate Change—As a participant in President Bush’s Climate Leader Program 

to reduce greenhouse gas intensity in the United States by 18 percent by 2012, FPL 

Group has inventoried its greenhouse gas emission rates and has committed to a 

2008 reduction target of 18 percent below a 2001 baseline emission rate measured 

in pounds per megawatt-hour. FPL Group believes that the planned operation of its 

generating portfolio, along with its current efficiency initiatives, greenhouse gas 

management efforts and increased use of renewable energy, will allow it to achieve 

this target. In addition, FPL Group has joined the U.S. Climate Action Partnership, 

an alliance made up of a diverse group of U.S.-based businesses and environmental 

organizations, which in early 2007 issued a set of principles and recommendations 

to address global climate change and the reduction of greenhouse gas emissions. 

The U.S. Congress is considering several legislative proposals that would establish 

new mandatory regulatory requirements and reduction targets for greenhouse gases. 

Based on the most current reference data available from government sources, FPL 

Group is among the lowest emitters of greenhouse gases measured by its rate of 

emissions to generation in pounds per megawatt-hour. However, these legislative 

proposals have differing methods of implementation and the impact on FPL’s and 

FPL Energy’s generating units and/or the financial impact (either positive or negative) to FPL Group and FPL could be material, depending on the eventual structure 

of any legislation enacted and specific implementation rules adopted.’’ 

For a full list and description of all of the risk factors impacting our business, 

please see our full 10–K filing which can be accessed via the Internet at 

www.FPLGroup.com. 

In addition to this formal documentation, our regular communications with investors frequently include discussion of the specific topic of climate change, which is 

increasingly of interest to many investors. Because the range of alternatives for addressing climate change is so wide, at this stage it is impossible to provide specific 

guidance on the impact that legislation might have. As the above excerpt notes, the 

impact on FPL Group could be materially positive or negative, depending upon the 

specifics of the program, if any, eventually adopted. 

Question 2. If a cap-and-trade program such as the 2007 Bingaman-Specter bill 

and the 2007 Lieberman-McCain bill were implemented, what would be the gross 

costs imposed in your business operations? What would be the gross revenue? What 

would be the net cost/revenue? 

Response. It is impossible to provide specific answers to these questions, as the 

results depend both on presently unspecified but important details of how these proposals might be implemented and on how markets in different parts of the country 

react. Generally speaking, we can say that we would incur significant costs to purchase needed allowances, and these costs would likely be higher with the 

Lieberman-McCain bill over time, because of its more aggressive emissions targets, 

but we have no way of estimating how much these costs would be. Similarly, we 

have no way at present of knowing whether or to what extent any of the FPL Group 
104 

companies might receive allocations of allowances, and even if they did, what the 

value might be. Finally, we have no way of knowing how much the price of electricity would rise in markets in different regions of the country in response to the 

additional cost of required purchases of allowances. 

All these uncertainties, which are very large, emphasize some of the reasons we 

believe a carbon fee is the best way to address climate change. Not only are there 

inherent uncertainties, but in a cap-and-trade regime these uncertainties will be reflected in volatility of carbon prices. This greatly complicates, and likely delays, investment decisionmaking, and it is only through long-lived investments, involving 

huge amounts of capital, that we will eventually be able to address the problem of 

climate change. 

For all these reasons, we believe a fee is superior to cap-and-trade. We don’t support or advocate for the passage of either the Bingaman-Specter bill or the 

Lieberman-McCain bill. We do believe that climate change is a real long-term threat 

to our economic welfare and we do believe it warrants action in the near term. But 

we share Senator Inhofe’s concern that poorly implemented legislation risks inflicting economic damage without helping the longer term environmental issue. Like 

Senator Inhofe, we believe that significant scientific uncertainty remains and that 

some of the more extreme scenarios painted by climate change alarmists simply 

aren’t supported by the evidence. A prudent middle ground is warranted, in our 

view. 

A carbon fee that starts at a moderate level and escalates progressively and predictably, as I discussed in my testimony, can address the real concern with climate 

change without inflicting economic damage. It is worth noting that a modern, free 

enterprise economy like our own can adapt very well to moderate, predictable 

changes in relative prices without significant loss of net output. It cannot adapt 

nearly so well to short, sharp shocks (for example, the oil shocks of the 1970s). A 

fee system provides predictable, moderately changing prices, allowing the economy 

gradually to adapt to a new, lower carbon intensity state. A cap approach runs the 

risk of inadvertently inducing unanticipated and unnecessary economic shocks. 

Senator BOXER. Thank you very much, sir. 

Our next speaker is David Hawkins, director, Climate Center, 

Natural Resources Defense Council. Welcome. 

STATEMENT OF DAVID G. HAWKINS, DIRECTOR, CLIMATE 

CENTER, NATURAL RESOURCES DEFENSE COUNCIL 

Mr. HAWKINS. Thank you very much, thank you for inviting 

NRDC to testify today. It is gratifying that the committee is meeting to discuss how to develop protective climate legislation, not 

whether. 

I would like to just touch on four questions. First, what emissions targets do we need? In my view, and in the view of the scientific community, to have a 50–50 chance of preventing really calamitous changes in the climate, we need to cut global emissions 

by the year 2050 by about 50 percent. Now, since developing countries’ emissions are going to grow somewhat before they start to 

turn down, that implies that industrialized countries, including the 

United States, really need to be planning for cuts in emissions from 

today’s levels by about 80 percent by the year 2050. 

To reach such levels by 2050, we have to have interim reductions 

that get us well along the way. We think that reductions of about 

40 percent by 2030 are going to be needed in order to make the 

80 percent by 2050 achievable. Now, for the electric power sector, 

this suggests cuts on the order of those in Senator Sanders’ bill, S. 

1201, which is about 35 percent below today’s levels in the year 

2025. 

The second question is, are reductions of that magnitude achievable? Yes, they are. In the power sector, in particular, we have 

largely untapped potential in efficiency and renewables, and in the 

ability to deploy CO2 capture and geologic disposal. 
105 

A recent study of the potential of just efficiency and renewables 

alone based on DOE laboratory reports and other sources indicates 

that power sector CO2 reductions of about 37 to 50 percent from 

today’s levels by the year 2030 are achievable. 

The next question is one that has been touched on by the previous witnesses; how to distribute emission allowances. NRDC believes that the optimal approach here is to recognize that permission to emit pollutants is a public resource. Allowances should be 

held in trust for the public and distributed in ways that will 

produce public benefits. This can be done through an auction, as 

Mr. Hay just described, with the revenue disbursed according to 

statutory formula and criteria, or it can be done by distributing allowances directly for certain uses, according to the same formula 

and criteria. 

In either approach, the legislation should provide for a public 

trustee to administer the statutory program. The resources should 

not go to the Treasury. 

The overarching goals of any allowance allocation program, in 

addition, obviously, to reaching the emission reductions, should be, 

one, to keep the cost of the program as low as possible for residential and other customers by encouraging investment in end-use efficiency and by avoiding wealth transfers from consumers to upstream entities; to encourage deployment of technologies needed to 

significantly reduce emissions in key sectors, such as 

mainstreaming carbon capture and disposal in the electric sector, 

retooling the auto industry to produce hybrids and other low-emitting vehicles, and accelerating the deployment of sustainable, lowcarbon motor fuels and renewable energy. 

How to prevent high costs, the last topic. The best measure to 

control costs, in our view, is broad availability for trading to 

achieve compliance under the cap. Now, some are advocating that 

the emission reduction program should be called off or suspended 

if the compliance price exceeds a congressionally set price ceiling. 

This so-called safety valve concept would allow emissions to increase above permitted levels and thus would undermine the purpose of the law, which is to set us on a course to achieve predictable reductions in emissions over the next several decades. 

A price ceiling would also undermine innovation by creating a 

risk that investments in low-emitting technologies might be worth 

a lot less if they came in with initial costs even slightly above the 

price ceiling. For these reasons, we strongly oppose the price ceiling 

approach. We believe that banking of emission reductions allows 

firms to hedge against possible high-cost periods and combined 

with trading for compliance, should provide adequate protection 

against price spikes. 

If Congress does consider additional cost control provisions, they 

should be designed to not undercut the required emission reductions and the market mechanisms that drive those reductions. One 

approach that should be considered is authorization to borrow allowances from future years and repay them with interest. Together, banking and borrowing can stabilize long-term costs and 

eliminate the risk of price spikes while preserving the environmental integrity of the long-term caps on emissions. 

That concludes my testimony. Thank you. 
106 

[The prepared statement of Mr. Hawkins follows:] 

STATEMENT OF DAVID G. HAWKINS, DIRECTOR, CLIMATE CENTER, NATURAL

RESOURCES DEFENSE COUNCIL

Mr. Chairman and members of the Committee, thank you for providing the Natural Resources Defense Council (NRDC) the opportunity to present its views on 

Global Warming Issues in the Power Plant Sector. NRDC is a national, non-profit 

organization of scientists, lawyers, and environmental specialists, dedicated to protecting public health and the environment. Founded in 1970, NRDC serves more 

than 1.2 million members and supporters from offices in New York, Washington, 

Los Angeles, San Francisco, Chicago and Beijing. 

NRDC strongly supports enactment of legislation to achieve major reductions in 

global warming emissions from the key emitting sectors in the U.S. economy. NRDC 

is a member of the U.S. Climate Action Partnership, which has urged Congress to 

enact such legislation. Electricity production is a critical feature of our economy and 

addressing global warming emissions from this sector and others is essential if we 

are to avoid the worst damages from a radically disrupted climate system. 

Electricity has brought us an unequalled quality of life and a thriving economy 

but it continues to be produced in ways that also bring us large and unnecessary 

harm to human health and to the environment. The electric generating sector remains the largest single polluting activity in the United States. Electric generators 

are responsible for two-thirds of America’s sulfur dioxide pollution, nearly one-third 

of its nitrogen oxides, forty percent of carbon dioxide and more than one-third of 

remaining mercury emissions. 

Together these ‘‘four horsemen’’ of power plant pollution cause tens of thousands 

of premature deaths each year and hundreds of thousands of respiratory illness 

cases. They also kill lakes and threaten forests, contaminate fish, and fill the skies 

over national parks with haze. Carbon dioxide from the electric generating industry 

traps heat in the atmosphere, leading to disruption of the climate that we all depend on to maintain life as we know it on this planet. 

If these words strike any of you as familiar, it is because they are the opening 

paragraphs from my testimony to this Committee on the same subject in 2001. I 

decided to repeat them here as a reminder that all of us have failed in the past 

to address this issue with the urgency that is warranted. NRDC is gratified that, 

in recent months, the sense of urgency has increased in America and we applaud 

this Committee for its efforts to move forward with greater dispatch. 

Legislation that is effective in achieving emissions from all major emitting activities in the U.S. is essential but this hearing focusing on the electric sector is helpful 

in illuminating a number of issues that are relevant both to the electric sector and 

to other industries that would be included in multi-sector legislation. 

THE IMPORTANCE OF THE POWER SECTOR

Several factors make it critical to address the electric power sector in any global 

warming bill. First, there is the sheer size of power’s contribution to global warming 

emissions: in the U.S. electric power emits about 40 per cent of our total carbon dioxide (CO2) emissions and the global share is similar. Once emitted, this CO2 pollution load remains in the atmosphere for centuries. Half of the CO2 emitted during 

World War I remains in the atmosphere today. A second feature of the power sector 

is the very long life of power generation plants. Some power plants built at the start 

of World War II are still operating and plants built in the last couple of decades 

will likely operate for 60 to 80 years. A third feature is that we do not today possess 

low-cost commercially demonstrated systems for removing CO2 from our existing 

fossil power station designs. That may change and might even change rapidly but 

we cannot ignore the risk that new power plants built today might operate for decades without meaningful reductions in their CO2 emissions if they are not designed 

with the need for carbon management in mind. 

These facts put a premium on prompt adoption of legislation that will cause electric sector investments to be made in a manner that favors low CO2 options. Our 

dependence on coal to generate power, both in the U.S. and globally, makes this 

challenge even greater. The very attribute of coal that has made it so attractive— 

its abundance—magnifies the problem we face and requires us to act now, not a decade from now. Until now, coal’s abundance has been an economic boon. But today, 

coal’s abundance, absent corrective action, is more bane than boon. 

Since the dawn of the industrial age, human use of coal has released about 150 

billion metric tons of carbon into the atmosphere—about half the total carbon emissions due to fossil fuel use in human history. But that contribution is the tip of the 

carbon iceberg. Another 4 trillion metric tons of carbon are contained in the remain-
107 

ing global coal resources. That is a carbon pool nearly seven times greater than the 

amount in our pre-industrial atmosphere. Using that coal without capturing and 

disposing of its carbon means a climate catastrophe. 

And the die is being cast for that catastrophe today, not decades from now. Decisions being made today in corporate board rooms, government ministries, and congressional hearing rooms are determining how the next coal-fired power plants will 

be designed and operated. Power plant investments are enormous in scale, more 

than $1 billion per plant, and plants built today will operate for most of this century. The International Energy Agency (IEA) forecasts that more than $5 trillion 

will be spent globally on new power plants in the next 25 years. Under IEA’s forecasts, over 1800 gigawatts (GW) of new coal plants will be built between now and 

2030—capacity equivalent to 3,000 large coal plants, or an average of ten new coal 

plants every month for the next quarter century. This new capacity amounts to 1.5 

times the total of all the coal plants operating in the world today. 

The astounding fact is that under IEA’s forecast, 7 out of every 10 coal plants that 

will be operating in 2030 don’t exist today. That fact presents a huge opportunity— 

many of these coal plants will not need to be built if we invest more in efficiency; 

additional numbers of these coal plants can be replaced with clean, renewable alternative power sources; and for the remainder, we can build them to capture their 

CO2, instead of building them the way our grandfathers built them. 

If we decide to do it, the world could build and operate new coal plants so that 

their CO2 is returned to the ground rather than polluting the atmosphere. But we 

are losing that opportunity with every month of delay—10 coal plants were built the 

old-fashioned way last month somewhere in the world and 10 more old-style plants 

will be built this month, and the next and the next. Worse still, with current policies 

in place, none of the 3,000 new plants projected by IEA are likely to capture their 

CO2. 

Each new coal plant that is built carries with it a huge stream of CO2 emissions 

that will likely flow for the life of the plant—60 years or more. Suggestions that 

such plants might be equipped with CO2 capture devices later in life might come 

true but there is little reason to count on it. While commercial technologies exist 

for pre-combustion capture from gasification-based power plants, most new plants 

are not using gasification designs and the few that are, are not incorporating capture systems. Installing capture equipment at these new plants after the fact is implausible for traditional coal plant designs and expensive for gasification processes. 

If all 3,000 of the next wave of coal plants are built with no CO2 controls, their 

lifetime emissions will impose an enormous pollution lien on our children and 

grandchildren. Over a projected 60-year life these plants would likely emit 750 billion tons of CO2, a total, from just 25 years of investment decisions, that is 30 percent greater than the total CO2 emissions from all previous human use of coal. 

WHAT EMISSION TARGETS DO WE NEED?

A central question that faces drafters of all environmental legislation is what 

should the targets be? Because of the long life of greenhouse gases, especially CO2, 

in the atmosphere, the long life of energy producing investments and buildings that 

use energy and the rapid growth in the global economy, we need to design legislation that will set a path that brings emissions down starting soon and persisting 

over decades in a predictable fashion. 

As detailed more fully in Appendix 1 of my statement, to have better than even 

odds of avoiding truly catastrophic disruption of earth’s climate, the United States 

and other industrial nations need to adopt a declining emissions cap that starts reducing emissions soon and reaches 80 percent below current emission levels by 

2050, and developing countries need to promptly reduce their emissions growth and 

follow suit with similar reductions later in the century. 

As discussed in Appendix 1, if national emission reductions start soon, we can 

stay on a prudent climate protection path with an annual emission reduction rate 

that gradually ramps up to 3.2 percent per year. But if we delay a serious start by, 

for example, 20 years and allow continued emission growth at nearly the businessas-usual rate, the annual emission reduction rate required to stay on this path 

jumps to 8.2 percent per year (see Figure 1 in Appendix 1). In short, a slow start 

forces a crash finish. 

Some analysts argue that delay is cheaper because we will develop breakthrough 

technologies in the interim. But that outcome is implausible for three reasons. 

• First, delay dramatically increases the emission reduction rate required later. 

Cutting emissions by more than 8 percent per year would require deploying ad-
108 

1 Hawkins, D. ‘‘Policies to Promote Carbon-less Energy Systems’’ Proceedings of the 7th International Conference on Greenhouse Gas Control. Technologies (GHGT7). September 5–9, 2004, 

Vancouver, Canada. 2 Notwithstanding their low-carbon advantages, the complete cradle-to-grave fuel cycles for 

nuclear and coal-or natural gas-fired plants with carbon capture have other serious non-carbon 

environmental drawbacks that make them inherently less sustainable than increased efficiency 

and wind, solar, geothermal, combined heat and power, and industrial waste-heat cogeneration 

options. So our energy strategy should prioritize large-scale deployment of these carbon-displacing options, with fossil energy with CCD and nuclear competing under a cap to supply the 

remainder of our future electricity requirements. 

vanced low-emission technologies several times faster than conventional technologies have been deployed over recent decades.1

• Second, without meaningful near-term market signals, there will be little incentive for the private sector to direct significant R&D resources toward developing the 

breakthrough technologies. Hope will rest entirely on the Federal R&D program, 

which now is far too small to yield the required results. • Third, without different market signals, a new generation of conventional power 

plants, vehicles, and other infrastructure will be built during the next two decades. 

Our children and grandchildren will then have to bear the costs of prematurely retiring an even bigger stock of highly emitting capital than exists today. Even with 

a substantial discount rate, it is virtually impossible that delaying emission reductions will be cheaper than starting now. 

Given the power sector’s large contribution to annual and cumulative CO2 emissions, it will be necessary to achieve large reductions in total power sector emissions 

if we are to achieve reductions in total emissions on the order of 80 percent by 2050. 

That said, it is worth noting that the question of where reductions must be achieved 

is not necessarily identical to the question of how emission reduction costs are best 

distributed in our society. However, legislation that proposes targets for particular 

sectors, such as Senator Sanders’ bill, S. 1201, which contains targets for the power 

sector, should specify targets that are sufficiently ambitious to be consistent with 

where total U.S. emissions need to go. S. 1201 would cap power sector emissions 

at current (2006) levels in 2011, with emissions declining to approximately 10 percent below current levels by 2015, approximately 25 percent below current levels by 

2020, and approximately 35 percent below current levels by 2025. 

Are reductions like these achievable? Yes, they are. A robust portfolio of energy 

efficiency, major expansion of renewable generating resources and deployment of 

CO2 capture and geologic disposal (CCD) at fossil generating plants can achieve 

these targets in our view. Some would add increased reliance on nuclear energy to 

this mix, although the recent Keystone Center report on this subject suggests that 

high cost of new nuclear power plants, their lengthy construction period, the current 

dependence on large Federal subsidies and incentives to stimulate private investment in the sector, unresolved waste management and disposal issues, and a massive requirement to replace the current installed base of nuclear plants before 2050, 

will all make it difficult for nuclear to make a significantly greater contribution to 

carbon reductions than is already being contributed by today’s fleet of nuclear power 

plants.2

We also believe these reductions are affordable. For example, NRDC and colleagues at Princeton estimate that all of the new coal plant capacity forecast to 

come on line in the U.S. between 2012 and 2020 could be equipped with CO2 capture and disposal systems at a cost equal to a 2 percent increase in average retail 

electricity rates in 2020. 

For a strategic sector like power generation, NRDC believes that it is important 

to combine the driver of broad cap and trade permit program that delivers economic 

and planning signals to all players with well-designed performance requirements to 

accelerate the use of low carbon generating technologies. Both S. 1201 and S. 309, 

an economy-wide measure sponsored by Senator Sanders and 17 other Senators, 

contain provisions for a minimum emission performance standard, ‘‘birthday’’ provisions to assure that aging plants cleanup or be replaced, and a low-carbon generation requirement. These provisions all would stimulate deployment of CO2 capture 

and disposal systems faster than would occur in a cap and trade program alone. 

NRDC believes that U.S. leadership in this area is an important business opportunity and is essential to shape investment decisions in fast-growing developing 

countries that plan to use substantial amounts of coal. 

DISTRIBUTING ALLOWANCES

Another issue of great interest to the power sector and of even greater public policy importance concerns how pollution allowances are allocated or distributed under 
109 

3Morgenstern et al., ‘‘The Distributional Impacts of Carbon Mitigation Policies,’’ Issue Brief 

02–03 (Resources for the Future, Feb. 2002), http://www.rff.org/Documents/RFF–IB–02–03.pdf. 4Morgenstern et al., supra. 

5See e.g., Terry Dinan, ‘‘Shifting the Cost Burden of a Carbon Cap-and-Trade Program,’’ (Congressional Budget Office, July 2003); CBO, ‘‘Issues in the Design of a Cap-and-Trade Program 

for Carbon Emissions,’’ (Nov. 25, 2003). 6 House of Commons, Environmental Audit Committee, ‘‘The International Problem of Climate 

Change: UK Leadership in the G8 and EU,’’ p. 17 (Mar. 16, 2005). 7This is the estimate of the Electric Power Supply Association, which represents competitive 

power suppliers. 

a cap and trade program. NRDC believes pollution allowances are a public trust. 

They represent permission to use the limited capacity of the atmosphere, which belongs to all of us, to dispose of global warming pollution. This limited carrying capacity is not a private resource owned by historical emitters. 

Emissions allowances will be worth tens of billions of dollars per year, and their 

value will increase over the first decades of the program as the pollution cap declines. Providing more than a small fraction of the allowances for free to pollution 

sources would give their shareholders an enormous and undeserved financial windfall. 

For these reasons, NRDC opposes grandfathering of emissions allowances to firms 

based on historical emissions, heat input, fuel sales, or other factors. Grandfathering 

the allowances would generate huge windfalls and transfers of wealth. Economists 

at the Congressional Budget Office, Resources for the Future (RFF) and other institutions have determined that grandfathering all emissions allowances would give 

the recipient companies an asset worth seven times the costs that they could not 

pass on to energy consumers. 

Stanford University and RFF economist Larry Goulder has shown that in an economy-wide upstream cap and trade program, it would require only 13 percent of the 

allowances to cover the costs that fossil-fuel providers would not be able to pass on 

to consumers.3 Dallas Burtraw and RFF colleagues have shown similar results for 

a cap and trade program on electricity generators.4 The Congressional Budget Office 

has reached the same conclusion.5 In the United Kingdom, the Government has determined that free allocation of allowances to electric generators has resulted in 

windfall profits of over $500 billion.6

To avoid these windfalls, allowances should be held in trust for the public and 

distributed in ways that will produce public benefits. This can be done through an 

auction, with the revenue dispersed according to legislated formulae and criteria, or 

by distributing the allowances themselves according to the same formulae and criteria. In either approach, the legislation should provide for a public trustee to administer the allowances. 

The overarching goals should be (1) to keep the cost of the program as low as possible for residential, commercial and industrial consumers (especially low-income 

consumers), by encouraging investment in end-use energy efficiency measures and 

by avoiding wealth transfers from consumers to upstream entities, and (2) to encourage deployment of the technologies needed to significantly reduce emissions in 

key sectors (e.g., mainstreaming carbon capture and disposal in the electric sector; 

retooling the auto industry to produce hybrids and other low-emitting vehicles; accelerating deployment of sustainable low-carbon motor fuels and renewable electricity). 

NRDC believes the allowance resources should be used for four broad objectives 

(elaborated in Appendix 2): 

(1) To reduce overall costs for individual and business consumers (especially lowincome consumers) through energy efficiency investments (50 percent). 

(2) To accelerate deployment of the ‘‘big change’’ technologies that we will need 

to cut emissions in key sectors (25 percent). 

(3) To provide transition assistance to impacted workers and heavily affected 

firms, and adaptation assistance to communities, farmers, wildlife managers (20 

percent). 

(4) To encourage carbon reductions outside the cap, and early reductions, while 

preserving the cap (5 percent). 

To the extent that any emission allowances are allocated to the electricity industry, rather than auctioned, NRDC recommends that distribution companies receive 

these allowances rather than generators. The problem with allocating allowances to 

generators is rooted in equity concerns: about 40 percent of U.S. 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.7 Impacts 

of allocations on consumers and shareholders will vary widely and State regulators 

will not be able to respond to real or perceived inequities. Generators can be ex-
110 

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

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

pected 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 Kingdom authorities to conclude that initial allocation to electric 

generators serving competitive markets resulted in large windfall profits.8

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). The regulators can ensure 

that the value of these allowances is used for designated public purposes, including 

energy efficiency programs and rate adjustments. 

Congress would have a wide range of options in making allocations, 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 emissionsbased 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. A phaseout of any free allocations to the private sector diminishes the case 

for updating in general (the more rapid the phaseout 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 a safety valve is in effect). There is a better 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. 

ADDRESSING CONCERNS ABOUT UNEXPECTED COSTS

Defects of the safety valve. While the cap-and-trade model has worked well for acid 

rain control, some observers are pushing for a ‘‘safety valve’’ as a safeguard against 

permit costs exceeding a predetermined level. 

The fundamental problem with the safety valve is that it breaks the cap without 

ever making up for the excess emissions. Simply put, the cap doesn’t decline as 

needed or, worse, keeps growing. A better approach to cost-control is possible. 

‘‘Safety valve’’ is actually a misleading name. In boiler design, the role of a safety 

valve is to allow pressures to build within the vessel to working levels, well above 

atmospheric pressure. A safety valve’s function is to open in the rare occasion when 

the boiler is pressured beyond its safe operating range, to keep it from exploding. 

In the life of a well-run boiler, the safety valve may never open. 

Imagine, however, a boiler designed with a valve set to open just slightly above 

normal atmospheric pressure. The valve would always be open, and the boiler would 

never accomplish any useful work. 

That is the problem with the safety valve design in two other proposals advanced 

by Senator Bingaman and by Representatives Udall and Petri. The valve is set at 

such a low level that it could be open more than it is closed. 

A safety valve also would prevent U.S. participation in international trading systems. The market price of CO2 in the European Union’s emissions trading scheme, 

for example, has already exceeded the U.S. safety valve price proposed in the Bingaman and Udall-Petri proposals. If trading were allowed between the EU and the 
111 

U.S., a major distortion would occur. European firms (acting directly or through brokers) would seek to purchase U.S. lower-priced allowances. Their demand would almost immediately drive the U.S. allowance price to the safety valve level, triggering 

the ‘‘printing’’ of more American allowances. European demand for newly minted 

U.S. safety valve allowances would continue until the EU price dropped to the same 

level. The net result would be to flood the world market with far more allowances— 

and far less emission reduction—than anticipated even under the National Commission on Energy Policy recommendations. 

Much like other forms of trade barriers, a safety valve distorts the free flow of 

allowances in an international trading system. A safety valve distorts trade in the 

same way as when a country fixes the price of its currency and avoids letting its 

currency find its appropriate exchange rate based on market forces. 

A new approach: borrowing. NRDC has proposed a new approach to controlling 

unexpected costs. In our estimation, the greatest fear of many in industry is that 

short-run costs will fluctuate unexpectedly, much as natural gas prices have spiked 

in recent years. Setting a long-term declining emissions cap opens the door to an 

innovative way to avoid short-term cost volatility: Firms could be allowed to borrow 

emissions allowances from future years, using them early in times of unexpected 

cost pressure, and paying them back when short-term spikes recede. 

Current legislative proposals already allow firms to make reductions in advance 

when prices are lower than expected and bank allowances for future use. Borrowing 

would open the opposite possibility. 

Absent borrowing, firms can comply only with current or banked allowances. Allowance prices thus reflect the current marginal cost of compliance, and that price 

can spike in response to short-term conditions (e.g., a delay in bringing on a new 

technology, or a surge in economic activity). Borrowing would let firms use emissions allowances from future years, stabilizing prices against unexpected short-term 

fluctuations. The long-term cap will be maintained, because borrowed allowances 

will be repaid, with interest, by releasing fewer emissions later when the short-run 

pressures are relieved. Together, banking and borrowing can stabilize long-term 

costs and eliminate the risk of price spikes while preserving the environmental integrity of the long-term caps. 

The combination of a long-term emissions pathway and borrowing has a clear advantage over the safety valve because it does not break the cap and permanently 

allow excess emissions. (Proposals allowing unlimited ‘‘offsets’’—credits for emission 

reductions not covered by the cap—also have the potential to break the cap if credits 

are awarded for actions taking place anyway, a problem endemic to past offset programs.) 

Legislation to permit borrowing will need to include certain safeguards. First, 

there needs to be an interest payment pegged to be slightly higher than commercial 

lending rates in order to discourage businesses from treating allowance-borrowing 

as a no-interest alternative to regular financing. Second, there need to be appropriate mechanisms to secure repayment and guard against defaults. One option is 

to limit borrowing to 5 years in advance, with the option to borrow again if repayments are completed. A second option is to require that borrowers be bonded or otherwise secured against defaults. 

In summary, it is urgent that we develop and adopt legislation in this Congress 

that will put the United States on a predictable and manageable path toward greatly reduced global warming emissions. Such a path is completely compatible with a 

growing economy. Indeed, failure to address global warming now will expose our 

economy to threats of an unprecedented magnitude as our country and the rest of 

the world attempt to deal with an unraveling of the hospitable climate that has allowed civilizations to flourish over the past 20 millennia. We know how to design 

legislation that works for the electric power sector and for the economy as a whole. 

It is time to begin. 

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

happy to answer any questions you may have. 
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Senator BOXER. Thank you very much, Mr. Hawkins. 

Our next speaker is Jim Rogers, chairman, president and CEO 

of Duke Energy. Welcome, sir. 

STATEMENT OF JAMES E. ROGERS, CHAIRMAN, PRESIDENT 

AND CEO, DUKE ENERGY CORPORATION 

Mr. ROGERS. Thank you. Madam Chair Boxer, Ranking Member 

Inhofe and members of the committee, I want to thank you all for 

inviting me here to share my views on how we can work together 

to slow, stop and reverse the country’s greenhouse gas emissions. 

One of my first jobs after law school was as a consumer advocate 

in Kentucky. I challenged the increases proposed by utility companies in the 1970s. Today, I am here as an advocate for Duke Energy’s 4 million electricity customers in five States in the Midwest 

and the Carolinas. These customers rely upon coal-fired generation 

for 70 percent of their electricity. 

I am also here to advocate for the tens of millions of electric customers in the 25 States where more than 50 percent of the electricity is generated using coal. You can see the chart over there, 

in the green are the 25 States where more than 50 percent of the 

electricity comes from coal. 

To address climate change, we must have a bridge. I want to underscore that, a bridge, to a low-carbon economy. To cross that 

bridge, I have advocated for many years that we need an economywide cap and trade program for CO2. A cap and trade program 

with an appropriate allocation of allowances will protect consumers 

as we develop technologies to reduce carbon dioxide emissions. 

In 1990, Congress provided a similar bridge when it passed the 

Clean Air Amendments, legislation that has dramatically reduced 

SO2 emissions. This bridge has been a transition mechanism of allowance allocations. As CEO of a legacy Duke Company in Indiana 

in 1989, I advocated for SO2 cap and trade legislation. I can tell 

you from first-hand experience, it is delivering extraordinary results. By 2010, Duke Energy and its predecessor companies will 

have invested $5 billion to retrofit our plants, to reduce SOX and 

NOX by more than 70 percent, and all of this is done at a lower 

cost than we were predicting in 1990. 

During this period, we were given permission to emit SO2 from 

our existing generation fleet. This allowed us to use these plants 

to produce electricity while advanced emissions technology was developed and installed. As demand grew over the years, we purchased allowances to serve our customers. 

Also over time, as our allowances were reduced, we purchased 

additional allowances. While customers bore the cost of buying 

these allowances and paying for the SO2 retrofits, the cap and 

trade program protected them, and importantly, protected them 

from major rate shock and unnecessary economic harm. 

Some have suggested that CO2 allowances should be auctioned, 

you have heard that here today. But an auction approach would 

unfairly and disproportionately harm regions that depend on coal, 

especially the 25 States in the Midwest, Southeast and Great 

Plains, forcing customers from these regions to bear the cost of 

buying allowances for existing plants, while at the same time bearing the cost of retrofitting and replacing existing plants would re-
122 

sult in a double hit, paying twice for the bridge. Also, it would be 

counterproductive to the long-term goals of climate change legislation. 

Additionally, it is unfair to allocate allowances based on megawatt output, as some suggested even here today. This would give 

permits to power plants such as nuclear or hydro that have no CO2

emissions. These plants were conceived and built decades ago, long 

before anyone raised carbon concerns. 

Duke Energy is the third largest coal generator. We are the 

fourth largest nuclear generator. We are planning to build two nuclear units. From our perspective, there is simply no economic justification to give allowances to nuclear and hydro plants that will 

not incur any cost to comply with the program. Doing so would be 

like giving these companies a printing press to make money at the 

expense of other regions of our country. There is no justification for 

such a windfall. 

It is also important for us to acknowledge that if we are not serious about building more nuclear generation in this country that we 

are not serious about climate change. Nuclear energy has a demonstrated safety record. It is efficient, economical and the basic 

technology is available today. There is no way that we can realistically obtain significant levels of carbon reduction and achieve our 

country’s future economic goals without expanding its use. 

Climate change is one of the most important issues of our time. 

Getting it right for our customers and your constituents will be a 

marathon, not a spring. But Chair Boxer, let me, if I may, tell you 

how I judge my decisions. I am judged quarterly by investors and 

annually. But I apply the grandchildren’s test, particularly on important issues about environment, important issues about supplying and balancing these competing needs. Because when I apply 

the grandchildren’s test, the grandchildren’s test to me is this. My 

hope is, and I have seven grandchildren, when my grandchildren 

look back and they are my age, at the decisions I made about the 

environment, I want them to say, my granddaddy’s decision is still 

a good decision, even today. 

So I think as we work our way through this, applying that test 

is important. Because we are ready to cross the bridge. We need 

to go to work now and we do not need to delay, the sooner, the better. Thank you very much. 

[The prepared statement of Mr. Rogers follows:] 

STATEMENT OF JAMES E. ROGERS, CHAIRMAN, PRESIDENT AND CEO, 

DUKE ENERGY CORPORATION

Chairwoman Boxer, Ranking Member Inhofe and members of the Committee. 

Thank you for inviting me to share my thoughts with you this morning on how we 

as a nation should address the issue of global climate change. I believe this can be 

done with appropriate design of a comprehensive, long-term program that caps 

emissions, provides the right cost-control tools and supports the development, demonstration and deployment of new technologies. Both cost containment and technology development are critical if Congress is to craft and enact a workable climate 

change protection act. 

For today’s discussion, I want to focus on four very important aspects of a climate 

change policy—allowance allocations in a cap and trade program, carbon capture 

and sequestration, energy efficiency and, last, nuclear power generation. But before 

I get into the specifics, I believe there are some core principles we must keep in 

mind as we move forward on climate change legislation: 
123 

1 United States Climate Action Partnership, ‘‘A Call to Action’’ (January 2007). 

1. Flexibility. Legislation should recognize the successes of past environmental 

programs by enacting a cap that features flexibility through the inclusion of a 

tradable allowance market. But Congress must also recognize the need to contain 

costs—especially to those living in areas of the country that rely on coal. Congress 

should not penalize past fuel choices. 

2. Broad Coverage. The program should apply economy-wide, resisting the urge 

to focus solely on the electric sector. A broad program is the most cost-effective approach and will set the country on a course of greenhouse-gas emission reductions. 

Programs that focus on only one sector will fail to reach emission reduction goals. 

3. Cost Containment. Because a cap-and-trade program for greenhouse gas emissions will impact all sectors of the economy, we believe that, in order to alleviate 

concerns over implementation costs, the program should contain provisions that create an escalating allowance price cap or that cap the allowance price for a period 

of time. 

4. Meaningful reductions that track technology development. It is important to 

start a cap now, and to gradually reduce that cap so that technologies have time 

to develop and deploy. Recognizing that it is difficult to set a course for 50 years 

or more, Congress should mandate periodic reviews to ensure that projected technology development and the cap trajectory are in sync. 

5. Customer Impacts. Replacing our energy infrastructure will take time and 

money. We did not build it overnight, and we will not replace it overnight. Consumers should not be penalized for fuel choices that were made 40-plus years ago. 

Areas of the country facing the largest increases in electricity rates due to climate 

change policy also represent the nation’s industrial heartland. How allowances are 

allocated will directly impact the cost of electricity and the prices these consumers 

pay. We must get that right. 

6. Technology Innovation. The program must actively support the development 

and deployment of low-carbon baseload generation technologies (including coal with 

carbon capture and sequestration). Widespread availability and deployment of such 

technologies will be key to managing GHG emissions in the power sector without 

disrupting the economy. This will require substantial near-term Federal financial 

support—the carbon price signal will not by itself be able to drive the needed technology revolution quickly enough. 

7. Nuclear Expansion. Climate change policy must address and remove barriers 

associated with nuclear energy production. We cannot meet our greenhouse gas reduction goals without expanding the role of nuclear in this country’s energy mix. 

8. Diversity in energy supply. Congress must recognize that no single energy 

source will address the climate change challenge and at the same time meet growing demand. We will need all five fuels—nuclear, coal, natural gas, renewables and 

the ‘‘fifth fuel,’’ energy efficiency. We will need to use existing technologies as well 

as develop new ones on all fronts. 

DUKE ENERGY’S ROLE IN THE DEBATE

Duke Energy Corporation is one of the nation’s largest generators of electricity. 

We serve nearly 4 million customers in North Carolina, South Carolina, Indiana, 

Ohio and Kentucky. Duke Energy has approximately 37,000 megawatts of generating capacity in the U.S., about half of that in coal-fired power plants. More importantly, in 2006 Duke Energy produced nearly 150 million megawatts-hours of electricity, 71 percent from our coal plants and 27 percent from our three nuclear plants 

in the Carolinas. 

I am often asked why, as the CEO of the third-largest consumer of coal in the 

U.S., I am so outspoken on the need to address climate change through legislation. 

For several years now, I have been talking about the need to regulate greenhouse 

gas emissions. In my judgment, the science, as expressed by the Intergovernmental 

Panel on Climate Change and the National Academy of Science, is persuasive, and 

the call to action is compelling. This call to action led Duke Energy to join nearly 

two dozen other leading companies and environmental organizations to form the 

United States Climate Action Partnership (USCAP). The members of USCAP are 

united in calling on the government to enact Federal legislation to limit greenhouse 

gas emissions, and we have developed a set of high-level recommendations for the 

design of such legislation. 1

As the leader of an electric utility, my first obligation is to make sure that the 

lights come on when our customers flip a switch. And I don’t mean to sound glib 

with that statement. Electric production and delivery require a complex network of 

power generation, transmission and distribution capability. Until we develop ad-
124 

vanced storage technology we must generate electricity the instant it is required— 

constantly and simultaneously matching supply with demand. In addition, this discussion of climate policy is occurring as we are beginning a new building cycle, as 

well as investing significant dollars in controlling sulfur dioxide, nitrogen oxides and 

mercury emissions. 

We are facing significant capital decisions based on increased energy demand, 

along with rising prices, environmental challenges and a national yearning for energy independence. There is no ‘‘silver bullet’’ that will address all of those concerns. 

It is our responsibility as electric utilities to balance four criteria in meeting our 

customers’ needs—to provide them with energy that is available, affordable, reliable 

and clean. 

In striking that balance, it is critical that we understand the environmental expectations of those who regulate us. In short, we ask that Congress replace uncertainty with clarity, and carefully consider the needs of the environment, the economy and growing customer demand in crafting climate change policy. In the electricity sector, where capital investments are large and long-lived, clear signals on 

the approach to climate change are critical. 

With the recent Supreme Court decision on climate, which makes the future of 

U.S. climate regulation even murkier, the need for certainty through congressional 

action is more critical than it was just a few months ago. And I believe that providing that clarity, particularly in recognition of the immense capital costs associated with changing out our current fleet of power plants to become a less carbonintense society, is one of the most important tasks that Congress will tackle in the 

months ahead. 

I believe the best way to accomplish that critical task is (1) to control greenhouse 

gas emissions through an economy-wide, market-based cap-and-trade program that 

utilizes a safety-valve price mechanism, (2) to support the development, demonstration and deployment of new technologies that will enable us to reduce greenhouse 

gas emissions over the long term, and (3) to remove barriers to the deployment of 

zero-emission nuclear energy. For our discussion today, I would like to emphasize 

a few specific items—an allowance allocation approach, carbon capture and sequestration challenges, energy efficiency incentives and the removal of barriers associated with nuclear power. 

ALLOWANCE ALLOCATIONS: A FAIR, EFFECTIVE AND TESTED APPROACH

The more than 1,500 pulverized coal units in the U.S. today provide just under 

336 gigawatts of generating capacity to consumers in 47 states. As reflected in the 

chart below, many states are highly dependent on coal generation, and the consumers in those states will bear the largest costs of climate change regulation. More 

than 50 percent of the electricity in 25 States comes from coal generation. 
125 

2More recently, EPA adopted a similar yet improved approach for allocating NOx allowances 

in the Clean Air InterState Rule and for allocating mercury allowances in the Clean Air Mercury Rule. 

Congress must recognize that this fuel mix cannot change overnight. Coal is the 

most abundant energy resource in this country, and historical decisions have led us 

to power half of our country with this natural resource. We will have to transition 

gradually to a less carbon-intensive economy, and consumers in these states should 

not be disproportionately impacted as we move forward. 

Therefore, it is essential that Congress put forward a clear trajectory that allows 

companies time to invest and build. That means companies must be able to change 

out their current fleets in a timeframe that does not stretch capital expenditures 

to a point where Wall Street reacts by increasing capital costs and downgrading 

companies. In addition, customers must have time to absorb those huge capital expenditures. Even though utilities build power plants and depreciate them over a 30- 

year period, the massive transformation that climate change legislation will require 

will mean an impact on rates in the near and long term. 

Much of the climate debate is centering on how an allowance to emit carbon dioxide will be allocated to companies. Under a cap-and trade program, for every ton 

of carbon that is emitted there must be an allowance surrendered. While the design 

of an allowance allocation system can be complex, we have the benefit of experience 

with the effective process that Congress put in place for the electric sector under 

the Clean Air Act Amendments of 1990. In fact, many of the members of this committee played an important role in that landmark legislation. 2 This successful approach provided for the granting of allowances based on the amount of emissions 

or heat input in a historical period. Some refer to this as an ‘‘input’’ based approach 

where the allocation of allowances is based on the average fuel-adjusted heat-input 

(or emissions) in a recent historical period. 

Two primary issues have emerged regarding allowance allocations. Some have 

taken the position that all or most allowances should be auctioned rather than 

granted. Some also argue that the allowances for the electric power industry should 

be allocated based on the amount of energy or megawatt—hours being produced 

rather than the amount of emissions or heat input. This is referred to as an ‘‘out-
126 

3 Under the Clean Air Act, approximately 3 percent of the allowances were auctioned, primarily to assure liquidity of the emissions market. 4Thus, one of the key USCAP recommendations is that a significant portion of allowances 

should be initially distributed free to economic sectors particularly disadvantaged by the price 

effects of a cap. USCAP, ‘‘Call to Action,’’ at p. 8. 

put’’ based approach. Both the significant auction 3 and output approaches are contrary to the methods Congress and the EPA have successfully used in the past to 

reduce emissions, and both should be avoided in climate change legislation. 

I would like to take a moment to remind the Committee what allowances stood 

for when they were first adopted by Congress in 1990. Title IV, Section 403 (f) of 

the Clean Air Act Amendments of 1990 stated that ‘‘an allowance allocated under 

this title is a limited authorization to emit sulfur dioxide in accordance with the provisions of this title. Such allowance does not constitute a property right.’’ The Act 

makes it very clear that an allowance represents an emission. It does not represent 

cash for hedge funds or nuclear owners or investment bankers to play with. It is 

a method for tracking emissions and transferring permits when a company is able 

to more economically reduce emissions at one plant than at another. 

According to recent testimony by career EPA staffer Brian McLean, Director of 

the Office of Atmospheric Programs, Office of Air and Radiation, before the House 

Energy and Commerce Committee, Subcommittee on Energy and Air Quality, March 

29, 2007, ‘‘Emissions cap and trading is an alternative to traditional regulation and 

credit trading, not simply a trading feature added to existing regulation . . . . Individual source control requirements are not specified but each source must surrender 

allowances for compliance equal to its actual emissions.’’ Mr. McLean goes on to 

point out how effective the program has been both in its simplicity, and in controlling costs of the program. He notes that the program resulted in earlier emission 

reductions than required and reduced compliance costs by more than two-thirds of 

initial EPA and industry estimates. And, finally, he points out that the method of 

distributing allowances is critical to the distribution of economic impacts and is 

therefore an important design feature. Putting a price on allowances directly increases compliance costs and the economic impact on consumers. 

Again, several members of this committee played an important role in 1990 Clean 

Air Act landmark legislation and I ask you and the rest of the Committee to think 

about the important steps you took to reach an agreement to make historic reductions in air emissions. You have that same responsibility before you today. The way 

in which you design legislation will directly affect consumers and businesses in this 

country. I caution you to resist the call of those who would make this equally historic environmental legislation significantly more expensive than it has to be. 

AN AUCTION APPROACH REMOVES THE BRIDGE TO THE FUTURE

Any allocation approach should be viewed as a transitional program. It is simply 

a bridge to the point in time at which we can de-carbonize our economy. Keep in 

mind—our electric power system has been more than a century in the making—and 

we won’t revamp it in a decade. But over time, advanced new technology will be 

the key to virtually de-carbonizing our country’s energy system. As we approach 

that point, the granting of allowances can be phased out. 

An auction approach takes away the bridge. It would disproportionately and unfairly burden those regions that are most dependent on coal—the Midwest, Southeast and Great Plains states. Forcing customers in the 25 States that currently depend on coal-fired generation for most of their electricity to bear the cost of buying 

allowances, while at the same time bearing the cost of replacing the existing carbon 

intense generation with lower carbon alternatives, would result in a double hit to 

those customers. That double hit simply is not equitable, and there is no reason to 

penalize those customers while rewarding hedge funds and others who would like 

to have a new commodity to play with. It serves no environmental purpose and that 

was never the purpose of emission permits in the first place. 4

Using my company as an example may help to clarify the issue. Duke Energy’s 

customers depend on coal-fired generation for most of their electricity. Those plants 

were built decades ago, long before anyone raised carbon concerns. A carbon cap 

that becomes more stringent over time will require us to reduce the amount of carbon our plants emit. That will require us to build new, low-and non-emitting plants, 

and install carbon capture and sequestration technologies. Our customers will bear 

the burden of the cost to de-carbonize our generation fleet. And, because our current 

fleet is more carbon-intensive than those found in some other regions of the country, 

the costs to build and install this equipment will be proportionately higher than in 

areas that are less dependent on coal. Until new technology becomes available and 

new plants can be built, we have to run our coal plants to meet the needs of our 
127 

5The effect on customers of companies smaller than Duke Energy could be even worse. If Congress makes the decision to charge companies for the right to operate their current fleets of 

power plants, you will be greatly reducing the capital available to de-carbonize their fleets. For 

smaller companies, you may be removing that capability all together. 

customers. To run those plants, we will need allowances. Again, requiring our customers to pay disproportionately higher fleet modernization costs, and at the same 

time pay the cost of allowances until the fleet can be de-carbonized, is an unfair 

double punch. 5 The rate shock to customers and the disproportionate damage to the 

economies in the 25 States that depend on coal are neither reasonable nor equitable. 

AN EMISSIONS-BASED ALLOCATION APPROACH IS FAIR AND EFFECTIVE

Allocating allowances using an average fuel-adjusted heat-input approach mitigates rate hikes and other associated costs that otherwise would be felt by the customers in states heavily dependent on coal. But it is important to note that this approach would not totally block the policy price signal from reaching the customer, 

as is sometimes claimed. Rather, it dampens the rate impacts—rates will still increase owing to the fact that: (1) allowance prices will increase over time, (2) generators will change the order in which they dispatch their plants in response to market 

forces, and (3) generators will make very large investments in new low-and nonemitting plants, which show up in electricity prices one way or another. 

Some suggest that a better approach is to allocate allowances on a total energy 

output basis (based on megawatt-hours produced). Allocating allowances on an output basis would do two things. First, it would provide firms which have significant 

non-emitting generation (nuclear and renewable) with a windfall gain. We understand this, because we own and operate a sizable nuclear fleet in the Carolinas. 

These assets will already be advantaged in the market under a cap-and-trade program, with no compliance obligation; they need no allocation. Second, it would take 

allowances away from coal-fired generation that would incur the greatest compliance cost, ultimately impacting the customers who depend on that coal generation. 

This would place a disproportionate share of the program’s costs on states that are 

more heavily dependent on coal. 

Suggestions that output-based allocations will encourage the deployment of nonemitting generation are without merit and miss the point of the allocations. What 

we’re talking about here is the generation on the ground—existing assets that serve 

our nation’s electric needs, powered by fuels and technologies that made the most 

economic sense at the time in accordance with our State regulations, and which cannot be shut down and replaced overnight. As in the Clean Air Act, which used an 

input-based approach, all new entrants must purchase allowances if they want to 

build plants that emit. 

Accordingly, under both input-and output-based approaches, market forces and 

the cost of carbon apply equally to all new generation decisions. In the future, new 

technologies will be deployed because the changed regulatory environment and a rising carbon price signal will make them the most economic choices, regardless of how 

Congress allocates allowances to existing units. 

In any event, we believe that Congress should make the decisions on allowance 

allocations and spell out the details in legislation, rather than leave those critical 

policy decisions to the discretion of an administrative agency. The allocation of allowances will have critical, multi-billion-dollar impacts on the distribution of compliance costs associated with a cap-and-trade program. 

ENCOURAGING AND FUNDING INNOVATION

As the door opens to what will become a carbon-constrained economy, we face a 

clear challenge. No technological solutions are available today to scrub carbon out 

of the flue gas or to generate large amounts of emission-free electricity from coal. 

Promising new technologies are being researched and developed, but right now no 

reliable technology is available that we can add to the back or front end of our coal 

plants to eliminate carbon dioxide emissions. 

This has two implications for the nation’s climate policy. First, before such technologies are widely available, a cap-and-trade program must be carefully calibrated 

so that allowance prices are high enough to pull technology off the shelf, but not 

so high as to be onerous. This requires careful attention to the trajectory of the 

emissions cap and safety valve—and a clear ability to adjust the trajectory of each, 

in response to technology developments. 

Second, the prospect of future CO2 allowance prices is not, by itself, a sufficient 

driver for developing technology quickly enough, and thus an affirmative technology 

policy must be part of the larger climate change policy. One of the principal rec-
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6 USCAP, ‘‘Call to Action’’ at p. 7 (‘‘[A]n effective climate change program must include policies 

to promote significant research, development and deployment of hyper-efficient end use technologies, low-or zero-GHG emitting technologies, and cost-effective carbon capture and storage, 

which will be particularly important in the deployment of advanced coal technologies.’’); see also 

p. 9. 7 USCAP, ‘‘Call to Action,’’ at p. 9. 

8Massachusetts Institute of Technology, ‘‘The Future of Coal: an Interdisciplinary MIT 

Study,’’ (2007), at pp. 53–54, 97. 

ommendations of USCAP is that a climate change program should couple a carbon 

price with a targeted set of policies to promote development and deployment of lowcarbon technologies. 6 For carbon capture and sequestration, this means the development of a substantial and reliable source of funding for large-scale demonstration 

of technologies. I encourage Congress to closely review the long-term funding programs that help promote the development of IGCC, oxyfuel combustion and other 

advanced-coal technologies. You should look for research programs that can be combined and where efficiencies can be gained, as well as creative ways to further reduce risk taken on by utilities that are using new or emerging technologies. 

CARBON CAPTURE

Much work remains to develop the technologies for carbon capture, a technology 

still in its infancy when applied to utility operations. Ninety percent carbon capture, 

for instance, installed at a 600-megawatt IGCC plant, would consume about 13 percent of the net power output; installed at a 550-megawatt pulverized coal plant, it 

would consume approximately 30 percent of the net power output. Clearly, considerable work lies ahead to reduce those power requirements. 

As importantly, we need as strong a commitment to develop technology that can 

capture carbon from our large fleet of already-existing coal plants. There are more 

than 1,500 pulverized coal units in 47 states. Most of these plants are not yet near 

the end of their useful lives. Clearly, retrofit technologies must be developed to mitigate carbon emissions from these facilities. We cannot ignore these plants as we 

build the next generation of shiny new plants using advanced technologies. In my 

view, it is risky to place your bets on just one technology, which is why I believe 

we need to develop carbon capture technologies to keep these plants operating. 

CARBON SEQUESTRATION

Carbon capture and storage (CCS) for coal-fired power plants is a critical technology if we are to achieve our environmental goals while continuing to use our 

abundant domestic coal resources. CCS captures the CO2 from the power plant and 

channels it underground for permanent storage in deep geological formations. However, this storage capacity is not available everywhere and, contrary to some statements I’ve seen recently, the technology itself is not fully developed and ready for 

deployment. 

We believe CCS ultimately will prove to be one of the least-cost ways to reduce 

CO2, and we are actively involved in projects to advance the research. Duke Energy 

is hosting a small-scale Phase II sequestration demonstration project at its East 

Bend power plant in Kentucky, which will involve injection of CO2 into deep saline 

reservoirs in the area, between 3,000 and 4,000 feet below the surface. If the site 

is determined to be suitable, about 10,000 tons of CO2 would be injected in 2008. 

The sequestration will be subject to monitoring, measurement and verification. 

Duke Energy’s commitment to CCS also includes membership in three DOE-funded carbon sequestration regional partnerships (the Midwest Regional Carbon Sequestration Partnership, the Midwest Geological Sequestration Consortium and the 

Southeast Regional Carbon Partnership) which are collecting, sharing and assessing 

data. DOE’s National Energy Technology Laboratory (NETL) manages a number of 

regional sequestration consortia, creating a nationwide network to help identify the 

best technologies, regulations and infrastructure needed for carbon capture and storage. These partnerships will support multiple small-scale projects that will provide 

invaluable information on siting, monitoring, evaluation and public acceptability of 

carbon sequestration. 

Expanded Federal financial support will be necessary to continue the process of 

demonstrating geologic sequestration. USCAP has advocated that Congress fund at 

least three full-scale CO2 injection demonstration projects, each at a scale equivalent 

to the CO2 emissions produced by a large coal-fired power plant. 7 The MIT Future 

of Coal study calls for three to five demonstration projects at a projected cost of $500 

million to $1 billion over 8 years. 8

In addition to proving the technology and geology for sequestration, a number of 

critical regulatory and legal issues will need to be resolved. As USCAP has stated, 
129 

9 Id. MIT’s Future of Coal report makes similar recommendations. MIT, ‘‘The Future of Coal,’’ 

at p. 98. 

‘‘Congress should require the EPA to promulgate regulations promptly to permit 

long-term geologic sequestration of carbon dioxide from stationary sources.’’ 9 In addition to developing an appropriate regulatory system that will specify the ground 

rules for sequestration projects and enhance public acceptability, Congress should 

also provide appropriate protections against costly litigation and liability claims. 

The potential for significant liability claims and litigation defense costs, even when 

facility operators comply with all regulatory requirements, will be a significant 

damper on the commercial development of sequestration facilities. Given the speed 

with which we will need to put sequestration capacity into operation, we cannot 

simply wait to see if the common law in each State develops in a way that acceptably moderates these liability and litigation risks. Instead, I expect that the legal 

and liability issues must be settled before any company will feel comfortable moving 

forward with a large-scale CCS project. 

Finally, despite all the seeming activity described above, CCS development needs 

a much greater sense of urgency if we are truly to respond to the climate problem. 

To paraphrase an MIT economist who has looked at this problem—if CCS doesn’t 

work, we are in big, big trouble. I would characterize the current focus on CCS as 

something of a hobby. It should be an obsession, and receive a great deal more attention and resources. 

ENERGY EFFICIENCY

While the deployment of carbon capture and sequestration technologies and the 

buildout of new nuclear generation will take several years, we have other opportunities to reduce our carbon emissions in the short term. One of those opportunities 

is to revisit the way we as a nation think about and use energy. 

Electric utilities have the expertise, the infrastructure, the customer relationships—and a responsibility as well—to make efficiency a significant part of the energy mix. We call it our ‘‘fifth fuel’’ —as important as coal, nuclear, natural gas and 

renewables in meeting our customers’ energy needs. 

Energy-saving programs can range from simple onsite energy audits, to the use 

of sophisticated technologies to monitor and control customers’ own energy use. 

The key for the success of these programs is to compensate utilities for meeting 

demand—whether we do that by producing electricity, or conserving it. As the fifth 

fuel, we believe energy efficiency should be treated like any other type of production. 

Most State regulatory regimes include inherent disincentives for energy efficiency 

efforts. Some regulatory innovations, such as decoupling, are aimed at taking away 

disincentives, rather than creating incentives. We’re working to change that paradigm, by encouraging our regulators to allow utilities to earn a return on their investments in saving watts, just as they would for generating watts. This new paradigm would give us an incentive to fully develop all economically sound energy efficiency programs. 

Taking variable costs such as fuel and emission costs into account, the energy efficiency model we are proposing produces a triple win—for customers, for companies 

and for the environment. 

Last month we took the first step at Duke Energy. We filed our energy efficiency 

plan with the North Carolina Utilities Commission. This proposal is designed to 

help our customers conserve energy and reduce their power bills, without sacrificing 

comfort or convenience. New energy efficiency technologies are available now to help 

us do just that. 

While State public service commissions must take the lead, Congress can encourage the states to review their ratemaking policies as they relate to energy efficiency. 

I encourage you to include such considerations in any climate or ‘‘pre-climate’’ legislation. 

NUCLEAR

It is imperative that we have multiple options for reducing greenhouse gas emissions. Energy efficiency plays a role and the importance of developing new technologies to capture and sequester carbon cannot be underestimated. However, there 

is no way this country will meet long-term emission reduction goals without nuclear 

power. 

Expansion of our nuclear power generation will be critical to meeting our longterm emission reduction goals as well as maintaining our country’s diverse energy 

supply mix. Today, 104 reactors produce 20 percent of U.S. electricity, and nuclear 

energy represents nearly three-quarters of all non-emitting electric generation. In 
130 

10 Intergovernmental Panel on Climate Change, Working Group III Report: ‘‘Mitigation of Climate Change’’ (May 2007) (pre-copy edit version), available at http://www.mnp.nl/ipcc/pages— 

media/AR4-chapters.html, at p. 26. 11 Id., at p. 66. 12The need for nuclear energy policies to promote greenhouse-gas emissions mitigation was 

also a conclusion of a major multidisciplinary study undertaken by MIT. See at MIT, ‘‘The Future of Nuclear Power: an Interdisciplinary MIT Study,’’ (2003), at p. 88 (‘‘Our position is that 

the prospect of global climate change from greenhouse gas emissions and the adverse consequences that flow from these emissions is the principal justification for government support 

of the nuclear energy option.’’) 

the Carolinas, nuclear energy provided 47 percent of the electricity to Duke Energy’s 

customers in 2006. By using nuclear energy instead of coal for a portion of our generation, Duke Energy has avoided the release of an estimated 1.1 billion tons of CO2

since our three nuclear stations entered service. 

In its recently issued report on strategies for addressing global warming, the 

Intergovernmental Panel on Climate Change emphasized that nuclear power is ‘‘an 

effective [greenhouse gas] mitigation option.’’ 10 The IPCC further determined that, 

to the extent that new nuclear plants could displace existing and planned fossil fuelfired plants, ‘‘net CO2 emissions could be lowered significantly.’’ 11

It is vitally important that we keep our existing nuclear power fleet running, 

while adding new nuclear capacity. Accordingly, the Federal Government needs to 

meet its commitments and obligations, work to remove barriers toward expansion 

of nuclear power, and help build continued public confidence in nuclear energy and 

the management of nuclear waste. 

To make this possible, we need new energy policies in the nuclear power area. 12

Building new nuclear power assets involves major capital commitments. With every 

new nuclear power plant, however, the public gains a substantial amount of new, 

affordable, carbon-free power. Therefore, I would call on the government to follow 

through on establishing and implementing a workable loan guarantee program, as 

authorized in the Energy Policy Act of 2005, in order to lower the capital costs of 

bringing new nuclear generation on line. 

New capital is not enough, however. We need to have a sound, stable, and certain 

regulatory environment for nuclear power. Most importantly, we need a system for 

handling used fuel and nuclear waste, one that we all can feel confident and secure 

about. This means: 

• Establishing a credible management and governance structure that will be responsible and accountable for management of used fuel and high-level waste. The 

Federal Government has missed one milestone after another, including its obligation 

to begin accepting used fuel by 1998. This has resulted in deterioration in the 

public’s confidence in our ability to manage used fuel. We need a management and 

governance structure, modeled on private-sector principles, to strengthen accountability and to provide program management continuity. 

• Ensuring that there is adequate funding and resources to implement this structure, and providing for independent oversight of the collection and expenditures of 

funds. To date, over $28 billion has been committed to the Nuclear Waste Fund, 

with Duke Energy’s customers contributing over $1.2 billion of this amount. The 

status quo, where these moneys continue to be collected, yet are used for other than 

their intended purposes, does not enhance public confidence in the government’s 

ability to manage this program or these funds. 

• Authorizing the consideration of all feasible options for management of used fuel, 

including fuel recycling as an alternative to direct disposal or a companion strategy. 

When used fuel is discharged from a reactor, it still contains a significant amount 

of recoverable energy value. Used-fuel recycling is not a new concept or technology— 

it is used by many countries including France and Japan as a means of recovering 

and reusing the remaining fissile content. Recycling needs to be further considered 

for the U.S. nuclear fuel cycle. 

• Providing statutory direction on the application of the National Environmental 

Policy Act (NEPA) as it applies to the licensing of new nuclear plants. A NEPA review of environmental impacts of a potential terrorist attack on a nuclear power facility offers no benefit to such a facility’s security—already fully addressed by NRC 

requirements—or the NRC’s consideration of environmental concerns, as NRC regulations already require the agency and licensees to consider the environmental impacts of events that could result in releases of nuclear material or radiation. Clarification and reinforcement of the roles of the various Federal agencies (NRC, Office 

of Homeland Security, etc.) in the assessment of and preparations against potential 

terrorist attacks is needed to ensure individual licensing proceedings for nuclear facilities are not protracted over this issue. 
131 

Duke Energy believes that nuclear power is an indispensable resource for a clean 

energy future. Indeed, our company is moving forward with a major new investment 

in nuclear generation in South Carolina. However, it will take a credible and stable 

regulatory environment to make it possible for this country to achieve its low-carbon 

potential with new nuclear generation. 

COMPREHENSIVE SOLUTIONS NEEDED

In preparing our company to operate successfully under carbon caps, we have 

come to realize that there is no one-size-fits-all approach to reducing greenhouse gas 

emissions. It will take a suite of actions to lighten our nation’s carbon footprint. As 

I’ve often said, ‘‘there is no silver bullet—just silver buckshot.’’ Our industry will 

need to invest in coal with carbon capture and sequestration, nuclear, renewables 

and energy efficiency to tackle the climate challenge effectively and economically. 

I am confident that Congress can structure climate legislation in a way that protects our economy, allows continued use of abundant domestic energy resources and 

leaves a better environment for our grandchildren. That legislation can and should 

be structured in a manner that promotes innovation, encourages investment in new 

and emerging technologies, and fairly distributes the costs. 

I am encouraged that this Committee has begun a thorough examination of this 

critical issue. I thank you for the opportunity to share my views, and I look forward 

to working with you. 
132 
133 

RESPONSES BY JAMES E. ROGERS TO ADDITIONAL QUESTIONS FROM SENATOR BOXER

Question 1. You believe that economy-wide regulation is essential to effectively 

tackling our global warming problem. Can a power sector-only bill be a piece of a 

larger regulatory regime? 

Response. An economy wide cap and trade program that includes all the emission 

sources under the same cap is the best solution because it is the most inclusive— 

meaning, it covers the emissions from the entire economy and ensures that all emissions ‘‘see’’ a single price signal created by the program. Some of these emissions 

cost very little to reduce, so their inclusion in a single program helps lower the overall cost of reducing emissions. In addition, establishing multiple programs to reduce 

emissions adds to the administrative complexity and cost to achieve overall reduction goals. A single program is administratively more efficient. 

A power sector only approach covers only a little more than a third of U.S. greenhouse gas emissions, so additional programs and systems will have to be put in 

place to control the other two-thirds of the emissions adding unnecessary costs to 

consumer products. In addition, if some sectors are not covered under an overall 

program and have less restrictive requirements, consumers would be incentivized to 

move away from the decarbonizing electric sector to the higher emitting sources that 

are not covered under the cap and trade program. Such a result would defeat both 

the environmental goals and the cost-effectiveness Congress seeks. 

Question 2. You recommend that global warming legislation set a cap on the price 

of allowances so that companies could simply buy allowances when the cost of making reductions became ‘‘too high.’’ How could we sure that the price cap was set at 

the right level to spur the technological developments needed to significantly reduce 

greenhouse gas emissions? 

Response. In reality, it isn’t only about costs, but costs and price volatility. A price 

cap is an essential element to control the cost impacts while the energy sector transforms to lower emitting technologies. Providing compliance cost certainty protects 

against the risk of high costs and/or price volatility rendering the program unacceptable to the American public. The levels of an economy-wide emissions cap and safety 

valve price must be calibrated to the expected demonstration and commercial viability and availability of Carbon Capture and Storage and advanced nuclear technologies. Setting the emission reduction path on a slow, stop and reverse trajectory 

while using a safety valve price guards against unacceptably high rate shocks or 

high price volatility (swings between high and low prices) on consumers. 

Allowance markets are often volatile, moving sometimes rapidly from high to low 

prices. These fluctuations make it much more difficult to time the expenditures of 

large sums of capital, which, in turn, acts as a disincentive to more rapid deployment of new technologies. A strong, consistent and predictably increasing CO2 price 

will do two things: First, it will protect customers from unforeseen energy price 

shocks, particularly in the early years of the program when many low-carbon technologies, including carbon capture and storage have yet to be demonstrated at a 

utility-scale. And second, it can arrest the volatility that not only adds uncertainty 

to the consumers’ energy choices and costs but also discourages the technology development and deployment you seek. 

Also, concern remains that tackling climate legislation for the first time will result 

in costs rising very quickly and causing severe economic hardship. And, because 

many consumers reside in the industrial heartland of our country—the fear is compounded by the fact that consumers will be hit by rising electric costs and the flight 

of large industrials to overseas markets that are not burdened by climate regulations. One mechanism to help curb those fears is to place a cap on costs. As the 

emissions cap declines, industries will be looking for methods of changing out old 

technology for newer lower emitting technologies, but allowing that change to happen on a trajectory that the economy can absorb is of utmost importance. A mechanism that recognizes when that trajectory is following an economically unforgiving 

upward curve is something that will be necessary to help those Members concerned 

about cost controls be more comfortable with climate legislation. In addition, unlike 

with the Clean Air Act where technology to remove the regulated pollutants was 

available; no specific carbon dioxide removal technology exists today. If that technology does not become available as the cap declines, then protections must be in 

place to deal with that possibility. 

Question 3. I understand the merits of your allocation preference, but I would like 

your response to the rationale for other approaches. For example, if emission allowances are allocated largely based on power plants’ current carbon dioxide emissions, 

doesn’t that reward the power sector’s highest emitters—coal fired power plants— 

and penalize those utilities that have invested in cleaner technologies? 
134 

Response. Emissions control programs have never been and shouldn’t in the future be a matter of rewarding or punishing anyone. Carbon dioxide emissions are 

currently unregulated and the goal of climate legislation should simply be to reduce 

those emissions over a period of time that is doable and that does not hurt consumers. 

As I stated in my testimony, as many as 25 States for historical reasons and the 

availability of local resources, use coal to produce the majority of their energy. While 

the goal of climate legislation is to move the country toward lower emitting sources, 

that can’t happen overnight. These regions still have a large amount of heavy manufacturing (which tends to be more energy intensive than other sectors). 

The method of distributing allowances will be critical to the distribution of the 

economic impacts of climate change legislation. Consumers in states that are highly 

dependent upon coal will bear the largest cost of climate change legislation. Providing allowances to non-emitting generation and a disproportionately large allocation to natural gas generation will simply increase the costs that consumers in these 

coal-dependent states must bear. Coal units can’t be turned off tomorrow. They’ll 

need to continue to operate for many years until new lower and non-emitting generation technologies can take their place. A fair allocation of allowances must be 

provided to help transition the affected regions to lower emitting generation technologies over time without imposing on them an unreasonable and unfair economic 

burden. 

An input-based allocation approach is simple and economically the fairest way to 

allocate allowances for both generators and consumers. It allocates allowances to 

each emitting source based on their recent CO2 emissions (i.e. their compliance burden.) It doesn’t give allowances to non-emitting generation facilities that do not need 

them (as would occur with an output-based allocation approach) and it doesn’t give 

a disproportionately large allocation to natural gas generation as would also occur 

under an output-based approach. Allocating allowances to non-emitting generation 

would result in a windfall for these sources at the expense of coal-fired generation 

and its customers. And given that combined-cycle natural gas generation on average 

emits about 60 percent less CO2 per mwh than coal, it doesn’t make economic sense 

to give allowances to each type of generation at the same rate, as would occur with 

an output-based approach. An emissions-based approach is similar to the approach 

used by EPA in several electric sector cap-and-trade programs and it is the approach best suited to moderating the impacts of regulation on electricity users. 

Question 4. If utilities are given emissions allowances for free, will utilities pass 

along the savings to consumer or will they increase the prices of electricity to reflect 

the market value of the allowances? 

Response. For power companies like Duke—which serves millions of customers 

with electricity generated substantially from coal-fired power plants—the most reliable approach for moderating electricity price impacts is to allocate allowances at 

no cost within the electric sector to fossil-fueled generation on the basis of historical 

emissions. Whether an allowance allocated at no cost is sold in the market or used 

to cover emissions, the value of that allowance to regulated generators will flow directly to the electricity customers, mitigating some of the costs that consumers 

would otherwise have to bear. Such an approach will not shield customers from 

higher electricity prices completely, but will act to dampen price increases, spreading out the impacts over several years as opposed to impacting customers hard in 

the first year of the program. 

Past history is the judge. Allowances to emit were awarded to the emitting facilities. Those allowances were turned in at the end of the year and matched the cap. 

The awarding of allowances simply protects consumers in coal dependent states 

from the huge price spikes that would occur if companies had to purchase all the 

allowances needed to continue operating existing plants, while also having to invest 

in new technologies. In fact, most companies would have a very difficult time from 

a capital perspective being able to invest in new technologies if they had to purchase 

the right to run their existing generation. 

Duke Energy recognizes that the plan we support for allocating allowances within 

the electric sector is not necessarily applicable for generators located in deregulated 

electricity markets. Prices in deregulated markets would increase regardless of the 

allocation level to generators because the price is set by the bid of the next least 

costly plant needed to operate to meet demand. In these markets, such an allocation 

may indeed result in windfall profits while providing no benefit to consumers. Duke 

is working on a companion allocation methodology that may be appropriate for these 

markets that we would be happy to discuss. 
135 

RESPONSES BY JAMES E. ROGERS TO ADDITIONAL QUESTIONS FROM SENATOR INHOFE

Question 1. What business risks are associated with potential climate change legislation and have these risks been documented in your 10–K filings with the U.S. 

Securities and Exchange Commission and appropriate disclosures to shareholders? 

Response. The business risks to Duke Energy Corporation of potential climate 

change legislation clearly depend on the specifics of the legislation itself. Broadly, 

Duke Energy Corporation is subject to numerous environmental laws and regulations and compliance with these environmental laws and regulations, and potential 

additional laws and regulations, can require significant expenditures. Legislation associated with the regulation of greenhouse gas emissions could result in the creation 

of additional costs in the form of taxes or emission allowances. 

Duke Energy has provided such disclosure to shareholders in the Duke Energy 

Corporation Form 10–K filing for the year ended December 31, 2006. See ‘‘Risk Factors’’ at page 30 and ‘‘Management’s Discussion and Analysis of Financial Condition 

and Results of Operations’’ at page 83. 

Question 2. If a cap-and-trade program such as the 2007 Bingaman-Spector (sic) 

bill and the 2007 Lieberman-McCain bill were implemented, what would be the 

gross costs imposed in your business operations? What would be the gross revenue? 

What would be the net cost/revenue? 

Response. The economic impacts of any greenhouse gas cap-and-trade policy on 

Duke Energy will depend on numerous factors, including the design features of the 

cap-and-trade program, the changes in fuel prices and electricity prices that result 

from implementation of the program, the demand response to higher electricity 

prices, the availability and cost of new lower and zero emitting generation technologies, and the regulatory treatment of costs resulting from the program. The design features of a cap-and-trade program that will have the greatest impact on costs 

include the level at which the cap is set, the method(s) used to distribute allowances, whether the policy includes a safety valve, and if so, the level at which it 

is set. 

With all these factors and the uncertainty of how the design features will be 

drafted, if included at all, it is not possible to calculate a meaningful estimate of 

cost, etc. This illustrates how critical it is that the design features be drafted in a 

responsible manner and a greenhouse gas cap-and-trade policy provide for a large 

allowance allocation and include a safety valve on the price of allowances. These two 

policy tools will have a tremendous impact on controlling program costs, and ultimately the cost to consumers. 

Senator BOXER. Thank you so much, sir, for your eloquent testimony. 

Just because Senator Inhofe was asking, this is the plan that we 

are going to follow today. I want to get through as many as I can 

before the votes start, so we will just keep going and I think once 

we get down to the floor, we might want to stay there for a few 

minutes to see what is happening. What we will do is we will get 

as many speakers as we can in. We will take a break, we will go 

to the floor. We will return within 15 to 30 minutes of our departure time. So if you can talk among yourselves and maybe bond 

and come up with a great plan for Senators Warner and 

Lieberman. 

[Laughter.] 

Senator INHOFE. Madam Chairman, I think it might be worth 

making sure our panel knows what we are voting on, because it is 

the immigration vote. Obviously, we are not going to miss it. 

Senator BOXER. Right. We are not. The vote is supposed to be 

now, but it could slip. 

Let’s just move ahead. Mr. Tom Donohue, we are very pleased 

to have you here, CEO and President of the U.S. Chamber of Commerce. Welcome. 
136 

STATEMENT OF THOMAS J. DONOHUE, PRESIDENT AND CEO, 

U.S. CHAMBER OF COMMERCE 

Mr. DONOHUE. Thank you, Madam Chairman. I am very pleased 

to be here. 

As you and the members of the committee know, the Chamber 

has been very engaged with the members of this committee and 

with members of the House and Senate on the critical energy and 

environmental questions facing our country. We are working hard 

to preserve the best features of the bipartisan Energy Policy Act of 

2005, which if fully implemented will help address many of the 

concerns we share about the security, diversity and cleanness of 

America’s energy supply. 

In addition, you noted we have recently formed the Institute for 

21st Century Energy, led by General Jim Jones, who will lead a 

bipartisan, inclusive effort to shape a thoroughly rational, longterm approach to energy acquisition, efficiency, infrastructure and 

the management of global warming. The Institute’s first product 

has been made available to you today. I hope you will put my comments at the end of the record. You ought to take it home and 

share it with your children, it is really interesting, the myths and 

realities of American energy. 

Achieving energy security while also reducing carbon emissions 

is one of the most critical challenges of our time. The Congress and 

indeed the entire Nation is engaged in a difficult balancing act between meeting our growing needs and protecting the environment. 

The Chamber is deeply concerned with the Congress’ ability to balance these two goals. Failure to strike the right balance can result 

in lost jobs, increase electricity prices and the migration of industries to foreign nations. 

As much as we would like to believe that there is a silver bullet, 

we think it is going to take a whole lot of movement in the right 

direction to deal with the facts and not the myths. The fact is that 

our energy needs will continue to grow, no matter what we do. 

Even with the efficiency gains that have been discussed, and there 

is more that we can do, we must find a way to secure the fuel and 

power we need for a growing country, while also protecting the environment and addressing the risk of climate change. 

Now, today’s witnesses, many of whom are members of the 

Chamber and have a view on what we should think, have offered 

specifics and will offer other specifics to address these challenges. 

You may have noticed that their proposals are not all the same. 

What is clear to me, however, and to the Chamber, is that as the 

Congress considers such policy options as cap and trade or carbon 

taxes or other approaches, we need all the facts, all the experience 

and a real serious consideration of the unintended results. We look 

forward to participating in that debate. We need to study these options carefully and we need to know where we are going before we 

go there. I would be glad to elaborate some more on that in the 

questions. 

Although our members may have differing views, they come together on a serious of principles I think they all agree on. They 

first believe that whatever we do must preserve American jobs and 

international competitiveness of U.S. industries. They believe that 

to be international in scope and encompassing developing nations, 
137 

1 Edmonds, J.A., et al., Global Energy Technology Strategy: Addressing Climate Change (May 

2007), available at http://www.pnl.gov/gtsp/docs/gtsp—2007—final.pdf. 

any plan has to look at China and India and others. The Chairman 

knows that 30 percent, or almost that much of the pollution in her 

own State comes from those countries. 

We need to promote the development and the global deployment 

of greenhouse gas reduction technologies, and we might even make 

a buck on it. We need to reduce barriers to the development of climate-friendly energy sources and we need to promote energy conservation and efficiency. If we follow that list of requirements, we 

are going to make better judgments in our companies, in our Congress and in our country. 

Now, I will as time allows, just quickly say that climate legislation, we have to deal with it, but we need to keep a lot of people 

working. I would also say that any climate legislation has go to be 

international. If we sit around and just do it here, the idea suggested that we would reduce our emissions by 80 percent is a great 

idea. If somebody has that silver bullet, I would like to see it. 

Third, the Chamber believes that all climate change legislation 

has to promote the accelerated development of technology that is 

going to help us reduce climate problems from the traditional fuels 

that we are going to be using in this country until our grandchildren are sitting here. We absolutely believe that whatever we 

do, that we have to make it affordable, diverse and secure and I 

believe your point, Jim, that if you don’t believe in nuclear energy 

after everything we know about its safety, then you are not serious 

about serious climate change. 

I have run that very quickly to my schedule, I know you have 

yours. I look forward to our discussion. Thank you, Madam Chairman. 

[The prepared statement of Mr. Donohue follows:] 

STATEMENT OF THOMAS J. DONOHUE, PRESIDENT AND CEO, 

U.S. CHAMBER OF COMMERCE

Good morning, Chairman Boxer, Ranking Member Inhofe, and members of the 

Committee on Environment and Public Works. My name is Thomas J. Donohue and 

I am President and Chief Executive Officer of the U.S. Chamber of Commerce. The 

Chamber is the world’s largest business federation, representing more than three 

million businesses and organizations of every size, sector, and region. On behalf of 

the Chamber and its members, I thank you for the opportunity to testify here today. 

You have asked me to come before the Committee today to discuss global climate 

change proposals and their relation to the power plant sector. The Committee 

should be commended for exploring the impact of the numerous legislative proposals 

on power plants. If Congress follows through with legislation, but does not carefully 

consider the impact provisions such as mandatory emissions caps, carbon capture 

and sequestration, and mandatory renewable portfolio standards will have on industry, the Chamber believes the economic consequences could be severe. 

The 110th Congress is performing a balancing act, striving to preserve energy security while also limiting energy use and the fuels to be used for the purpose of addressing climate change. On one hand, Congress seeks to place serious limits on energy exploration, but, on the other, continues to push for energy independence and 

carbon-constraining climate change legislation. The Chamber is very concerned with 

Congress’ perceived ability to balance these two goals. If energy independence is 

what we truly want, we can certainly achieve it; we have more than enough energy 

sources (ranging from coal and oil shale to wind and photovoltaic) that, when used 

in conjunction with one another, can make the country energy independent, but not 

any time soon and perhaps not even in this century.1 However, when we add caveats to how that energy independence must be achieved—such as legislation that reduces greenhouse gas emissions without also funding technology, or with a federally 
138 

2 CRA International, ‘‘Costs to the Nation under Proposed Federal Cap and Trade Legislation 

to Limit Greenhouse Gas Emissions,’’ June 21, 2005, available at http://www.accf.org/pdf/ 

statestudies2/US–2005 percent206–21–05.pdf. 3 Id. 

4 Id. 

mandated renewable portfolio standard (RPS), or by limiting oil and gas exploration 

on Federal lands and in the Outer Continental Shelf—the balancing act will give 

way to one extreme or the other. 

What Congress must continue to recognize, as it crafts this legislation, is that 

electricity is the ‘‘juice’’ that runs our country. And this country will depend on the 

sustainability of the ‘‘juicers’’—coal, natural gas, petroleum, nuclear, and hydropower, to name a few—for the foreseeable future. We simply cannot flip a switch 

and power our country exclusively on renewable energy sources. (Even if we could— 

and we cannot—we need energy corridors to move that electricity from rural areas 

to urban regions, and Congress is taking steps to shut down these corridors as well.) 

By promoting renewables at the expense of other energy sources, Congress is picking winners and losers—and the losers will be the power plants that generate the 

electricity to run this great nation. 

As you know, many of this country’s power companies are members of the Chamber. In fact, several companies joining me today on this panel (Duke Energy, Florida 

Power & Light, Murray Energy, and Pacific Gas & Electric) are Chamber members, 

and each has a different view for addressing global climate legislatively. Some advocate for cap-and-trade, RPS, or more nuclear. Others want an international, voluntary program, such as the Asia-Pacific Partnership. For this reason, I believe the 

best place to begin my discussion of how to address climate change is with the five 

core principles the Chamber utilizes to evaluate any proposed climate change solution. The Chamber measures all proposed climate change legislation against the following standards: 

Does the legislation. . . 

1. Preserve American jobs and the competitiveness of U.S. industry; 

2. Provide an international, economy-wide solution, including developing nations; 

3. Promote accelerated development and deployment of greenhouse gas reduction 

technology; 

4. Reduce barriers to the development of climate-friendly energy sources; and 

5. Promote energy conservation and efficiency. 

I urge you to view my testimony today as a valuable resource. The Chamber and 

its members have already had the internal debate on climate change, and our five 

core principles are largely the result of that discussion. The Chamber has not endorsed one specific solution or one specific piece of legislation, but over the years 

has supported legislation that funds research, development and deployment of technology, and that promotes energy efficiency. 

Let’s not turn our backs on the energy companies that made America great. Instead, let us work with those companies to develop the technology to make their energy—indeed, all energy—clean, efficient, and affordable. Only then will we be able 

to solve the global climate challenge. 

I. PRESERVE AMERICAN JOBS AND INTERNATIONAL COMPETITIVENESS OF U.S. INDUSTRY

Any climate change solution, no matter what it is, must preserve American jobs 

and the competitiveness of American industry. Even areas served by large power 

companies (who arguably would be able to afford either the technology or the extra 

credits necessary to stay in business) would feel the strain, both from increased 

costs of doing business and other regions’ inabilities to keep up. A 2005 analysis 

done by CRA International found that, for legislation aimed at reducing greenhouse 

gas emissions to 2000 levels by 2010, and continuing at that rate until 2020, the 

cost to business and society would be substantial while the effects of climate change 

would not be reduced.2 Specifically, CRA found that such legislation would cost the 

average household $450 to $720 per year until 2010, rising to $490 to $810 until 

2020. The U.S. would lose 550,000 to 840,000 jobs by 2010, and 793,000 to over 1.3 

million jobs by 2020.3 Coal production would decline by 22 to 42 percent, electricity 

generation by 7 to 14 percent, and oil refining by 6 to 13 percent.4

These negative effects are within the realm of possibility when considering industry’s inability to meet the aggressive targets set by many of the climate change bills 

currently before the Senate. Assessment of U.S. Cap-and-Trade Proposals, a study 

recently performed by energy experts at the Massachusetts Institute of Technology, 

analyzed three scenarios, which roughly mirrored the targets sought in bills intro-
139 

5Paltsev, S., et al., Assessment of U.S. Cap-and-Trade Proposals, Apr. 1, 2007, available at 

http://web.mit.edu/globalchange/www/MITJPSPGC—Rpt146.pdf. 6 Id. 

7Greg Schneider, Chemical Industry in Crisis: Natural Gas Prices Are Up, Factories Are Closing, And Jobs Are Vanishing, WASH. POST, Mar. 17, 2004, at E01. 8Task Force on Hemispheric Transport of Air Pollution, 2007 Interim Report (June 2007), 

available at http://www.htap.org/activities/2007—interim—report/reading/TF%20HTAP%202007% 

20Exec%20Sum%20070612.pdf. 9 International Energy Agency, World Energy Outlook 2006, available at http://www.iea.org/ 

textbase/weo/index.htm. 10Press Briefing by Senior Administration Officials on the President’s Trip to Europe and the 

G8 Summit, Radisson Hotel, Rostock, Germany, June 6, 2007; available at http:// 

www.whitehouse.gov/news/releases/2007/06/20070606–5.html. 

duced by Senators Bingaman, McCain-Lieberman, and Sanders-Boxer, respectively.5

The forecasted increases in electricity prices found by the MIT panel are simply 

staggering: from 2015 to 2050, Senator Bingaman’s bill will increase prices by 31 

to 59 percent with nuclear in the mix, 34–66 percent without; the McCainLieberman targets will increase prices by 51 to 59 percent with nuclear, 51 to 75 

percent without; and the Sanders-Boxer bill will raise prices by 56 to 59 percent 

with nuclear, and 60 to 78 percent without.6 Faced with such rising energy costs, 

it would be no surprise to see many heavily energy-dependent industries migrate 

overseas and take American jobs along with them. The chemical industry has already done so.7

II. MUST BE ECONOMY-WIDE, INTERNATIONAL IN SCOPE, AND MUST INCLUDE

DEVELOPING NATIONS

Any climate change program must be long-term, international, and economy-wide. 

Domestic emissions constraints, without corresponding long-term cutbacks in greenhouse gas emissions from nations such as China and India, will not only fail to 

make the required impact on levels of greenhouse gases in the atmosphere, but 

could also irreparably harm our country’s ability to compete in the global market. 

As the Task Force on Hemispheric Transport of Air Pollution (HTAP) made clear 

just last week, emissions measured in American cities do not always originate within American borders.8 Climate change legislation must therefore target the citizens 

and businesses of all nations, not simply domestic power plants and fossil fuel producers. If not, the effects on the U.S. economy, consumer prices and jobs could be 

disastrous. 

Similarly, any long-term climate change action plan absolutely must include developing nations such as China and India. Chinese emissions are projected to increase 119 percent and Indian emissions 131 percent between 2004 and 2030.9 Unless developing nations are engaged, domestic emissions controls would penalize domestic businesses that attempt to compete in the world market while non-participating developing nations continue to get a free ride. 

The good news is, we have a mechanism to accomplish an international, economywide solution that has brought developing nations—even China and India—to the 

table: the Asia-Pacific Partnership for Clean Development (APP). The bad news is, 

APP is not receiving the time, attention, or funding it needs to accomplish its goals. 

APP is still in its relative infancy, and needs both (a) time to develop and demonstrate climate-friendly technology, and (b) increased funding from the World Bank 

and the International Monetary Fund. 

The United States is not holding up its end of the bargain with respect to APP 

and technology development and deployment. The Energy Policy Act of 2005 

(EPAct), which contains more than 60 provisions requiring the U.S. Government to 

engage with the private sector and develop innovative climate and energy technologies, is embarrassingly under-funded. To make matters worse, several bills in 

Congress attempt to repeal and/or de-fund those EPAct provisions that have begun 

to make a difference. 

President Bush recently announced plans for an international summit at which 

the 10 to 15 nations responsible for approximately 85 percent of the world’s global 

emissions will begin a dialog on the best way to reduce those emissions responsibly. 

As Council on Environmental Quality Chairman Jim Connaughton recently stated, 

any near-term domestic efficiency gains will be overwhelmed by the rise of coalbased power generation in China, India, South Africa, Mexico, Central and Eastern 

Europe, and Russia.10 Those countries will continue to use coal because they are 

trying to advance their economies, trying to lift people out of poverty, trying to provide clean water, and trying to use energy to run air pollution controls. And energy 

is necessary for all of that. The purpose of President Bush’s proposed summit is to 

find a shared technology-development pathway, to bring the cost of these expensive 
140 

11 Id. 12Paltsev, S., et al., Assessment of U.S. Cap-and-Trade Proposals, Apr. 1, 2007, available at 

http://web.mit.edu/globalchange/www/MITJPSPGC—Rpt146.pdf. 13Deutch, J., and Moniz, E., The Future of Coal: An Interdisciplinary MIT Study, March 14, 

2007, available at http://web.mit.edu/coal. 14 Id. 

technologies down so that they will be used by China, India and other developing 

nations.11

III. PROMOTE ACCELERATED DEVELOPMENT AND DEPLOYMENT OF GREENHOUSE GAS

REDUCTION TECHNOLOGY

The development and deployment of affordable, widely available climate-friendly 

technology is crucial to preserving jobs while controlling emissions. Carbon capture 

and sequestration, next-generation nuclear power, and other cutting-edge technologies must be researched, developed, demonstrated and deployed. Without widespread availability of these and other technologies, the power plant sector may not 

be able to continue producing power to meet local and regional demands while also 

satisfying aggressive carbon emissions caps. 

Although some of these technologies exist, they are by no means cost-effective or 

commercially viable. Current emissions control technologies are too expensive for all 

businesses to utilize under their respective business models.12 Larger businesses 

can arguably afford the high cost of this technology while continuing to turn a profit, but small and mid-sized businesses cannot. 

Similarly, new technologies are far from simple to deploy. Siting, permitting, insurance coverage, and liability exposure concerns will remain major roadblocks, as 

will high costs for materials, labor, and construction expertise. The overall costs of 

wind, nuclear, and liquefied natural gas regasification facilities continue to increase 

due to rising costs of materials. 

Carbon capture and sequestration technology is perhaps the best example of our 

ongoing technological struggle. The Future of Coal, a report released in March 2007 

by a consortium of faculty and energy experts at MIT, found that, even with a high 

price on carbon (due to a legislative or regulatory cap or tax), coal, the leading 

source of carbon-dioxide emissions from electricity generation, will continue to be a 

major source of electricity due to its sheer abundance and an increasing worldwide 

demand for energy.13 However, the report criticizes current efforts by the U.S. Department of Energy (DOE) to research carbon capture and sequestration, and calls 

for a $5 billion, 10-year program to research, develop and (most importantly) demonstrate on a realistic scale the technology necessary to capture and store carbon 

dioxide from coal-fired power plants.14 The MIT report also cites additional hurdles, 

such as (1) coal gasification limitations, (2) near-prohibitive costs of retrofitting existing coal plants to capture and sequester carbon, and (3) DOE’s failure to determine system costs through the FutureGen project. 

The MIT study concludes that coal demand is not going anywhere, yet we are now 

facing imminent legislation that will constrain coal power plants’ abilities to meet 

this growing demand while failing to provide an adequate technological alternative. 

It is for this reason that, if Congress does anything, it must absolutely provide comprehensive research and development incentives to stimulate technological innovation. Without such incentives, emissions controls will likely fail. 

IV. REDUCE BARRIERS TO THE DEVELOPMENT OF CLIMATE-FRIENDLY ENERGY SOURCES

If Congress is truly determined to (a) cap greenhouse gas emissions and reduce 

those levels over time, (b) require mandatory renewables from every state, and (c) 

attempt to achieve some level of energy independence, it must remove all barriers 

to the development of clean, climate-friendly energy sources. It must stop creating 

barriers to ‘‘national interest’’ transmission corridors recently designated by DOE. 

And it must not only provide incentives for so-called ‘‘renewables’’ such as wind, 

solar and geothermal, but also clean energy sources such as coal, hydropower, nuclear power, biofuels, and clean-burning natural gas. If the true policy goal is to encourage energy production, there is no legitimate reason why innovative energy 

technology producers are left standing at the door as they get ready for the marketplace. Congress must be pragmatic about its energy strategy, and any legislation 

should be technology-neutral so that Congress avoids picking technology winners 

and losers. 
141 

15 U.S. Department of Energy, Office of Energy Efficiency and Renewable Energy, ‘‘Highlights 

of Energy Intensity Trends—Total Energy,’’ available at http://intensityindicators.pnl.gov/ 

total—highlights.stm. 16 Energy Information Administration, Annual Energy Outlook 2007, at 79, available at 

http://www.eia.doe.gov/oiaf/aeo/index.html. 17 Id. 18 Chevron Corporation, ‘‘Energy Efficiency and Conservation,’’ available at http:// 

www.chevron.com/social—responsibility/energy—conservation/. 19 ENERGY STAR Awards for Sustained Excellence and Corporate Commitment, 2005, available at http://www.energystar.gov/index.cfm?c=pt—awards.pt—es—winners—2005. 20 3M Corporation, ‘‘Improving Energy Efficiency,’’ available at http://solutions.3m.com/wps/ 

portal/3M/en—US/global/sustainability/s/performance-indicators/environment/energy-efficiency/. 21 United Technologies Corporation, 2006 Corporate Responsibility Report, at 4, available at 

http://www.utc.com/responsibility—reports/2006/2006—utc—corporate—responsibility.pdf. 22The exception to this rule might be businesses that act as ‘‘first movers,’’ such as those seeking to gain technological expertise or establish primacy in intellectual property rights on energy 

efficiency technology. 

V. PROMOTE ENERGY CONSERVATION AND EFFICIENCY

The amount of energy required to produce a dollar’s worth of goods and services 

in the U.S. economy fell by more than 50 percent between 1949 and 2004, as a result of improvements in energy efficiency, structural shifts in industry, and other 

related factors.15 From 1980 to 2004, industrial delivered energy use per dollar of 

industrial value of shipments declined by an average of 1.6 percent annually.16 According to the Energy Information Administration, although energy use generally 

increases as the economy grows, continuing improvement in the energy efficiency of 

the U.S. economy and a shift to less energy-intensive activities are projected to keep 

the rate of energy consumption growth lower than the GDP growth rate.17

Chevron began tracking energy use across all operations in 1992, and reports that 

since beginning company-wide efforts, energy efficiency has been increased by 24 

percent.18 Since the 1992 inception of the Environmental Protection Agency’s Energy Star program, Eastman Kodak Company has reduced its use of energy by more 

than 15 percent.19 3M has improved its worldwide energy efficiency by 29 percent 

since 1998.20 United Technologies Corporation improved its worldwide normalized 

energy consumption performance by 39 percent from 2002 to 2006.21 These are but 

a few examples of how business and industry are seeking out and taking advantage 

of energy efficiency opportunities; there are thousands of other companies doing the 

same. 

Energy efficiency makes good business sense: such practices, where cost-effective, 

often afford sizable reductions in operating costs. The flip side to this argument, 

however, is that companies are typically reluctant to implement cost-ineffective energy efficiency measures.22 Historically, lawmakers have used policy instruments to 

ensure cost recovery for such cost-ineffective measures. This is the absolute wrong 

way to promote energy efficiency. The market should decide which energy efficiency 

technologies are winners and losers, not politicians. Governmental intervention 

should only be considered as a last resort, following careful examination of all longterm benefits and drawbacks. 

This country’s energy goals will be met only by a commitment to technology innovation and to all types of available energy sources. Power plants, the industrial lifeblood of our country, must not be unnecessarily constrained by climate change legislation without first being afforded the technology necessary to meet those controls. 

Just like the American public itself, diversity of domestic energy production is vital 

to continued economic prosperity. If you ignore this truth, you will be turning out 

the lights on our country’s economic future—literally. 

Thank you for the opportunity to testify today. I look forward to answering any 

questions you may have. 

RESPONSES BY THOMAS J. DONOHUE TO ADDITIONAL QUESTIONS

FROM SENATOR BOXER

Question 1. You emphasize the importance of developing climate-friendly technologies. Haven’t we seen that regulation can spur technological development by 

giving businesses a reason to find low-cost ways of reducing pollution? 

Response. In terms of greenhouse gas regulation specifically, we have seen quite 

the opposite. The European Emissions Trading Scheme (ETS), and the flawed regulation behind it, has resulted in permit prices so low that technological innovation 

costs significantly more than it does to purchase credits to cover increased emis-
142 

1 ‘‘International Total Primary Energy Consumption and Energy Intensity,’’ Energy Information Administration, available at http://www.eia.doe.gov/emeu/international/ 

energyconsumption.html. 2See, e.g., Clarke, L., ‘‘CO2 Stabilization in a Heterogeneous World,’’ (July 13, 2007); available 

at http://www.uschamber.com/issues/index/environment/climate—change.htm. 3 Id. 

4 Id. 

5 ‘‘Poor nations vow to do ‘fair share’ on climate,’’ Reuters News Service, June 8, 2007; available at http://www.reuters.com/article/worldNews/idUSL0881479620070608. 

sions. The ETS, in essence, has actually reduced incentives for companies to limit 

their emissions. First among many culprits for this outcome is the allocation system 

used by ETS. As would be the case in the United States, each participating nation 

in the ETS cap-and-trade system was forced to choose winners and losers through 

the allocation process. Participating ETS nations chose to over-allocate credits to its 

regulated entities, which led to reduced permit prices, increased emissions, and virtually no technological innovation. 

American technological prowess is evident from the fact that we have made even 

greater gains than the Europeans without a mandatory emissions trading scheme 

like ETS. In 1980, the United States consumed approximately 19,000 Btu per dollar 

of gross domestic product (GDP); today, that figure is at 8,000 Btu per dollar of 

GDP.1 What these numbers show is that, over the last 30 years, businesses have 

gotten two-thirds of their energy needs from technology-based efficiency gains. The 

will of business to ‘‘do good’’ is very strong, but with rising population and a growing 

economy, Congress should be providing incentives to these businesses to develop 

even more technology instead of punishing them. Regardless of regulation in place, 

business will always have one very large reason to continue to develop climatefriendly technologies: competition from other businesses. 

Global climate change is not simply a domestic issue, and the main problem with 

regulation to address the problem of climate change—at least the type of domestic 

greenhouse gas regulation pondered by this Committee—is its narrow scope. Domestic greenhouse gas regulation will not affect emissions from developing nations, and 

without the participation of these nations, global greenhouse gas levels will not 

change.2 A recent study by Dr. Leon Clarke at Pacific Northwest National Laboratory, entitled ‘‘CO2 Stabilization in a Heterogeneous World,’’ demonstrates that failure to secure participation from all nations—both developed and developing—will 

cause extreme price fluctuations in the price of carbon and will greatly reduce our 

ability to achieve overall global emissions targets.3 Any solution to climate change 

must be international in order to succeed. 

Question 2. If companies aren’t required to reduce global warming pollution, can 

we really expect enough of them to do so on their own, particularly if their competitors aren’t following suit? 

Response. As Dr. Clarke’s research demonstrates, for global greenhouse gas emissions levels to be affected in any meaningful way, international participation is required.4 There is a significant distinction to be made here: reductions in absolute 

greenhouse gas emissions are not the same as reductions in greenhouse gas concentrations. While it is certainly conceivable to reduce our country’s absolute greenhouse gas emissions (i.e., X tons of carbon), local emissions reductions alone will do 

virtually nothing to impact global greenhouse gas emissions concentrations. Therefore, failure to secure international participation, for even ten years, could significantly limit the effectiveness of global greenhouse gas reductions. 

We must deal with reality: China and India have already stated that they will 

not agree to mandatory greenhouse gas emissions caps5 Forced to deal with the 

world as it is, the best way to bring these countries into the fold is not through regulation aimed only at limiting domestic emissions. Rather, we need to engage these 

nations through the mechanisms that continue to work, such as the Asia-Pacific 

Partnership for Clean Development (APP) and the President’s recently-announced 

15-nation summit. 

Question 3. So far, our Nation’s refusal to adopt mandatory limits on our greenhouse gas emissions has not persuaded developing nations to agree to such limits. 

What do you think is the best way to persuade large emitters like China and India 

to reduce their global warming pollution? 

Response. The Chamber respectfully disagrees with your assumption that our nation’s refusal to adopt mandatory greenhouse gas limits has somehow caused developing nations to refuse such limits. These countries have routinely refused to implement mandatory emissions controls, and nothing the United States has done (or will 

do) will persuade these rapidly-developing nations that mandatory controls make 

economic sense. the reason is simple: the governments of China and India are bur-
143 

6Task Force on Hemispheric Transport of Air Pollution, 2007 Interim Report (June 2007), 

available at http://www.htap.org/activities/2007—interim—report/reading/ 

TF%20HTAP%202007% 20Exec%20Sum%20070612.pdf 7 Clark, L., ‘‘CO2 Stabilization in a Heterogeneous World,’’ (July 13, 2007); available at http:// 

www.uschamber.com/issues/index/environment/climate—change.htm. 

dened with rapid economic development for billions of inhabitants, and they do not 

see an economically feasible way to reduce emissions without impeding their ability 

to provide for their citizens. As we stated in the Chamber’s response to Question 

2 above, the best course is to engage these nations through existing partnerships, 

such as APP and the President’s 15-nation summit. 

Question 4. Has the Chamber considered the costs of global warming to its members? Aren’t many of its members already being affected by rising insurance prices 

that reflect the increased risk of extreme weather events that are associated with 

global warming? 

Response. The Chamber’s member companies have many lines of insurance (e.g., 

D&O, E&O, commercial general liability, workers’ compensation) whose premiums 

are unaffected by weather patterns. Only a small portion of most companies’ insurance portfolios—commercial property, and, where applicable, builder’s risk—is even 

remotely affected by the weather. 

At the risk of answering a question with another question, we ask whether the 

Committee has evaluated the impact of international border pollution on its decision 

whether to regulate greenhouse gases in the United States without also securing 

international participation. The recent report by the Task Force on Hemispheric 

Transport of Air Pollution, a joint research group organized by the United States 

and the European Union under the purview of the United Nations Economic Committee for Europe, indicates that emissions emanating from China, India and other 

nations do not simply disappear into the atmosphere; instead, wind carries those 

emissions to the United States, where domestic air quality levels are impacted.6 As 

a result of the global economy, many of the Chamber’s members operate not just 

in the United States but throughout the world. If the United States is over-regulated, those businesses could view such regulation as an incentive to move their operations to a developing nation (such as China or India) where emissions regulation 

is more permissive and less costly. The emissions generated in those countries will 

then be carried over to the United States as a result of international border pollution. It is certainly foreseeable that over-regulation in our country, without cooperation from all other nations, will lead to higher pollution levels in the United States 

and more lost jobs. 

RESPONSES BY THOMAS J. DONOHUE TO ADDITIONAL QUESTIONS

FROM SENATOR INHOFE

Question 1. Can you elaborate why you think rising energy costs will harm businesses? 

Response. All cost increases affect the competitiveness of an industry; rising energy costs are no exception. The impact will be felt both directly and indirectly. Direct costs will be, quite simply, the fact that increased costs to manufacture equipment, produce goods, and maintain an office will further limit profits. Indirect costs 

will come in the form of business migration: the primary goal of a business is to 

make money, and if it is significantly easier to do so in another country, the business will move. 

Dr. Clarke’s report provides a good illustration of the impact U.S.-only climate 

change regulation will have on energy costs, and, therefore, American competitiveness. Should the United States impose limitations on itself while its competitors operate without carbon constraints, the costs to stabilize CO2 levels globally skyrocket.7 Businesses will migrate to new locations with little to no emissions controls 

(such as China or India) and greenhouse gases produced at those locations will carry 

back over to the U.S., forcing even more businesses to leave and making our nation 

even less competitive in the global market. 

Question 2. Can you tell us about the impacts on businesses if we pass cap-andtrade legislation and do not have the technology necessary to meet the targets? 

Response. This is a perfect example of the conflict highlighted in the Chamber’s 

written testimony to the Committee. The United States depends on fossil fuels for 

energy production, and will continue to do so for the foreseeable future. In fact, energy demands continue to rise. Policymakers preach goals of ‘‘energy independence’’ 

and ‘‘energy security,’’ yet repeatedly impose limitations on the country’s ability to 
144 

meet these objectives by: (a) taking steps to limit oil and gas exploration; (b) rolling 

back transmission and other provisions contained in the Energy Policy Act of 2005 

(EPAct); and (c) refusing to site new nuclear power plants, permit Yucca Mountain, 

and reopen spent fuel reprocessing. 

This conflict is typified by the government’s repeated failure to implement technology provisions mandated by EPAct. EPAct contains more than 60 provisions that 

specifically address new energy production and efficiency technologies. The Chamber 

has done extensive research on the status of these 60 provisions, and found an embarrassing number of them to be un-funded, underfunded, or simply not implemented at all. If the goal is to develop new technologies—and to own the intellectual 

property from these technologies—Congress should be focusing its efforts on funding 

and implementing EPAct, not ‘‘reinventing the wheel’’ on energy policy. 

Question 3. How does the Supreme Court’s ruling in Massachusetts v. EPA affect 

your view of climate change? Should EPA be regulating greenhouse gases under the 

Clean Air Act? 

Response. The Chamber is hesitant to speculate as to the scope of the Supreme 

Court’s ruling in Massachusetts v. EPA—the Chamber is a trade federation, not a 

law review—but suggests that more guidance may be necessary to fully interpret 

the scope of EPA’s authority to regulate greenhouse gases under the Clean Air Act. 

However, regulation undertaken by EPA on its own motion poses many of the same 

problems as legislation currently introduced in Congress: none of these regimes adequately address the problem of international participation. The Task Force on Hemispheric Transport of Air Pollution has found that emissions from China, India and 

Southeast Asia substantially affect background air quality levels in the United 

States. Without a truly international climate change solution, as domestic regulation tightens greenhouse gas levels over time, emissions from those developing nations will continue to increase. It is certainly possible, if not probable, that large 

numbers of states will be penalized for substantial emissions emanating from outside their borders. 

Senator BOXER. Thank you, sir, for your contribution to this debate. 

Our next speaker is Marlo Lewis, a senior fellow at the Competitive Enterprise Institute. 

Welcome, sir. 

STATEMENT OF MARLO LEWIS, SENIOR FELLOW, 

COMPETITIVE ENTERPRISE INSTITUTE 

Mr. LEWIS. Thank you, Chairman Boxer and members of the 

committee, for inviting me to testify today. 

Jonah Goldberg, the columnist, notes that the Earth warmed 

about 0.7 °C in the 20th century, while global GDP increased by 

some 1800 percent. For the sake of argument, says Goldberg, let’s 

agree that all of the warming was anthropogenic, the result of economic activity. Let’s further stipulate that the warming produced 

no benefits, only harms. That is still an amazing bargain, Goldberg 

remarks. Average life expectancies doubled in the 20th century. 

The human population nearly quadrupled. Yet per capita food supplies increased. Literacy, medicine, leisure and even in many respects the environment hugely improved, at least in the prosperous 

west. 

This suggests a thought experiment. Suppose you had the power 

to travel back in time and impose carbon caps on previous generations. How much growth would you be willing to sacrifice to avoid 

how many tenths of a degree of warming? Would humanity be better off today if the 20th century had half as much warming but also 

a half or a third or even a quarter less growth? I doubt anyone on 

this committee would say yes. A poorer planet would also be a 

hungrier, sicker planet. Many of us might not even be alive. 
145 

How much future growth are you willing to sacrifice to mitigate 

global warming? That is not an idle question. Some people believe 

we are smart enough now to measurably cool the planet without 

chilling the economy. But Europe is having a tough time meeting 

its Kyoto commitments and Kyoto would have no detectable impact 

on global warming. 

Three of the main climate bills introduced in the Senate this 

year would require CO2 emissions cuts of about 60 percent by 2050. 

Yet the Energy Information Administration projects that in 2030, 

U.S. emissions will be about 33 percent above year 2000 levels. I 

submit that nobody knows how to meet the targets in those bills 

without severe cuts in either economic growth or population 

growth. 

But won’t the bill’s carbon penalties make deep emission reductions achievable by spurring technological change? I doubt it. Europe has been taxing gasoline for decades at rates that translate 

into carbon penalties of $200 to $300 per ton of CO2. Where in Europe is the miracle fuel to replace petroleum? Where are all the 

zero emission vehicles? EU transport sector CO2 emissions in 2004 

were 26 percent higher than in 1990. 

The Energy Information Administration analyzed the market impacts of a relatively modest $7 per ton CO2 emission cap in the 

Bingaman-Spector legislation. The proposed cap decreases projected investment in coal generation by more than half. 

However, it does not make carbon capture and storage economical. Would a bigger regulatory hammer do the trick? No. It would 

just drive more investment out of coal generation. 

Regulatory climate strategies put the policy cart before the technology horse. Not until markets are capable of producing vast 

quantities of affordable energy without emissions would it be reasonable for Congress to consider mandatory emission cuts. 

Policy makers concerned about global warming should do three 

things, CEI believes. First, encourage worldwide R&D investment 

in non-carbon emitting technologies. This should be the focus of 

post-Kyoto diplomacy. Second, eliminate tax and other political barriers to innovation and capital stock turnover. Third, for a fraction 

of Kyoto’s cost, target international assistance on those threats to 

human health and welfare where we know how to do a lot of good 

for each dollar invested. This could not only save millions of lives 

today, it could also help developing countries become wealthier and 

less vulnerable to climate-related risks. 

Thank you again for the opportunity to present my views. I 

would be happy to try and answer your questions. 

[The prepared statement of Mr. Lewis follows:] 
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1William Nordhaus, ‘‘Life after Kyoto: Alternative Approaches to Global Warming Policies’’ 

(NBER working paper no. W11889, December 2005), 15, cited by Kenneth P. Green, Stephen 

F. Hayward, and Kevin A. Hassett, Climate Change: Caps vs. Taxes, American Enterprise Institute, June 1, 2007, http://www.aei.org/publications/filter.all,pubID.26286/pub—detail.asp. 2Green, Hayward, and Hassett, Climate Change: Caps vs. Taxes. 

RESPONSES BY MARLO LEWIS TO ADDITIONAL QUESTIONS FROM SENATOR INHOFE

Question 1. Some people say we can learn the lessons of the failed Kyoto cap and 

trade approach in setting up our system so that we don’t make the same mistakes. 

Do you think that is correct or is the scheme itself fundamentally flawed? 

Response. Cap-and-trade schemes are inherently vulnerable to political manipulation, because emission permits are politically created assets. In international trading systems, each government has an incentive to practice carbon mercantilism— 

skew baselines and allocations to increase domestic firms’ supply of permits vis-a`- 

vis their foreign competition. In Europe’s Emission Trading System (ETS), member 

states handed out permits for more tons of carbon dioxide (CO2) than their firms 

were emitting. When these shenanigans came to light, carbon credit prices cratered. 

Outright cheating—false reporting of emissions data—may also occur in countries 

like Russia, where institutional safeguards for transparency and accountability are 

weak. 

A U.S. cap-and-trade program would undoubtedly be more rigorous and accountable than the ETS. But price volatility would still be a problem, as the history of 

the U.S. sulfur dioxide (SO2) cap-and-trade program shows. Economist William 

Nordhaus observes that, ‘‘SO2 trading prices have varied from a low of $70 per ton 

in 1996 to $1,500 per ton in late 2005. SO2 allowances have a monthly volatility 

of 10 percent and an annual volatility of 43 percent over the last decade.’’1 A recent 

AEI paper also points out that, ‘‘Over the last 3 years, SO2 permit prices have risen 

80 percent a year, despite the EPA’s authority to auction additional permits as a 

‘safety valve’ to smooth out this severe price volatility.’’2

In a forthcoming CEI paper, University of Guelph economist Ross McKitrick explains that reducing CO2 is inherently more difficult than reducing SO2; hence that 

price volatility is likely to be greater under a carbon cap-and-trade program. Sulfur 

dioxide emissions had been trending downward for almost two decades before the 

SO2 trading program was enacted. Technology for removing SO2 (scrubbers) was 

proven and widely available. Utilities had the option to purchase low-sulfur coal. In 

contrast, CO2 emissions have been trending upwards for decades, CO2 scrubbers do 

not exist, and there is no low-carbon coal. 

For the same reasons, a U.S. carbon cap-and-trade program would raise consumer 

electricity prices even if U.S. utilities behave better than did their German counterparts. Under the ETS, German utilities obtained most of their permits free-ofcharge. They nonetheless raised rates to cover their alleged compliance costs. 

One thing is clear. The allocation rules will reflect special interest politics, not the 

general interest of consumers in affordable energy. The hearing provided a telling 

example. 

Peter Darbee, chairman and CEO of PG&E in California, advocated a cap-andtrade scheme that allocates emissions permits based on each emitter’s historical 

level of energy produced rather than on its historical level of emissions. This would 

favor utilities (like PG&E!) that don’t burn much or any coal and instead already 

rely on higher-priced lower-emitting fuels. 

In contrast, Jim Rogers, chairman and CEO of Duke Energy, advocated a cap-andtrade scheme that allocates permits based on each emitter’s historical level of emissions rather than on its historical level of energy produced. This would favor companies (like Duke!) that burn a lot of coal. They would in effect be paid to switch to 

producing more expensive electricity from lower-emitting fuels. 

Perhaps the only allocation scheme both PG&E and Duke would regard as ‘‘fair’’ 

is one that lets them pass compliance costs onto consumers. 

Some say we could avoid the pitfalls of the ETS by auctioning emission permits 

among the relatively small number of ‘‘upstream’’ firms that sell coal, oil, and natural gas rather than allocating the permits free-of-charge to thousands of large 

‘‘downstream’’ emitters. An upstream cap is administratively simpler. However, an 

auction would take much of the fun and profit out of cap-and-trade. Many firms who 

lobby for cap-and-trade do so in the expectation that they will ‘‘earn’’ credits for actions already taken (‘‘credit for early action’’) or receive credits gratis for doing what 

they do anyway. 

Question 2. Explain further why penalizing fossil fuel use through carbon mandates won’t encourage new technologies. 
162 

Response. Small carbon penalties are unlikely to create profit potentials big 

enough to justify major R&D investment in unproven technology. On the other 

hand, big carbon penalties can stifle the growth on which R&D programs ultimately 

depend. To believe in the technology-transforming power of mandates, one must 

have a strong faith in the wisdom of central planners—their ability to hit the sweet 

spot between penalties that are too light and penalties that are too heavy. 

An example in my written testimony illustrates the point. EIA projects that the 

$7 per ton carbon penalty in the original Bingaman-Specter draft legislation would 

reduce new investment in coal generation by more than half. However, the penalty 

would not make investment in carbon capture and storage (CCS) economical. A bigger regulatory hammer might do the trick—but only if people were still willing to 

invest in coal! If a $7 per ton penalty drives out more than half of all new coal investment, tougher penalties might well kill coal as an electricity fuel. That is especially likely once investors realize that cost ‘‘certainty’’ is impossible, for reasons discussed next. 

Question 3. Additional comment on cost ‘‘certainty.’’ 

Response. The National Commission on Energy Policy (NCEP) argues that a 

‘‘safety valve’’—a statutory ceiling on the per-ton cost of carbon reductions—should 

remove the fear that cap-and-trade would harm the U.S. economy. A safety valve, 

says NCEP, puts an end to years of sterile, my-model-is-better-than-your-model, debate over how much cap-and-trade would cost. We know in advance the maximum 

cost of carbon reductions—it is spelled out in the statute. 

This argument is dubious for three reasons. First, as noted above, a similar ‘‘safety valve’’ did not prevent large price spikes in the SO2 trading program. Second, no 

Congress can bind a future Congress, and once a new form of economic intervention 

is adopted, the door is open for more aggressive interventions of the same sort. The 

Federal income tax, which originally was supposed to apply only to the very rich, 

is the prime example. Another example with immediate relevance is the 7.5 billion 

gallon biofuel mandate, enacted in 2005. Less than 2 years later, Congress was debating mandates five times as large. 

Third, none of the cap-and-trade bills under consideration would prohibit EPA 

from adopting national ambient air quality standards (NAAQS) for CO2. Absent 

such prohibition, a NAAQS rulemaking for CO2 is an almost inevitable outcome of 

the Supreme Court’s decision in Mass v. EPA. The costs of a NAAQS program for 

CO2 are potentially limitless. 

In Mass v. EPA, the Court told EPA to consider regulating CO2 emissions from 

new motor vehicles under Section 202 of the Clean Air Act. This sets the stage for 

a NAAQS rulemaking. 

EPA’s first step in regulating an air pollutant under Section 202 is to make a 

‘‘judgment of endangerment.’’ Such a regulation must be based on an official judgment that emissions of said pollutant ‘‘endanger public health or welfare.’’ Section 

202 directs EPA to take account cost and technological feasibility when setting emission standards for motor vehicles. That is why plaintiffs argued that CO2 emission 

standards for cars would not harm the auto industry. 

What plaintiffs conveniently neglected to mention is that an endangerment finding for CO2 under Section 202 would trigger regulatory action under other Clean 

Air Act provisions. The most important is Section 108, the cornerstone of the 

NAAQS program. Whereas Section 202 sets emission rate (grams per mile) standards, Section 108 sets pollution concentration (parts per million) standards. That is, 

a NAAQS specifies how many parts per million (or billion) of a substance is allowable in the ambient air. The NAAQS program requires states to adopt policies that 

will reduce concentrations of the pollutant of concern to the allowable level. 

And here’s the kicker. In Whitman v. American Trucking, the Court said EPA 

may not take cost and feasibility into account when setting NAAQS. 

In short, Mass v. EPA created a regulatory Pandora’s Box. The Kyoto Protocol 

would barely slow the increase in CO2 levels, yet could cost the U.S. economy hundreds of billions of dollars annually. One prominent scientist guesstimated that it 

would take ‘‘thirty Kyotos’’ to stabilize atmospheric CO2 concentrations at a safe 

level. Plaintiffs in Mass v. EPA argued that current CO2 levels endanger public 

health and welfare. 

So if EPA were to develop NAAQS for CO2, the agency would face enormous pressures to set the standard below current atmospheric levels. However, there is no 

known way to lower atmospheric levels or even freeze them in place short of massive de-industrialization. 

That the winning plaintiffs in Mass v. EPA viewed their lawsuit as a step toward 

economy-wide CO2 controls under the NAAQS program is no mere matter of logical 

inference. In 2003, three of the State AG plaintiffs, including lead attorney Tom 
163 

Reilly of Massachusetts, filed a notice of intent to sue EPA unless it initiated a 

NAAQS rulemaking for CO2. 

House Energy and Commerce Committee Chairman John Dingell’s discussion 

draft legislation would have forestalled a NAAQS rulemaking, perhaps indefinitely. 

Dingell argued—correctly—that vehicular CO2 standards are fuel economy standards by another name, and only one agency has the expertise to administer fuel 

economy standards: the National Highway Traffic Safety Administration (NHTSA). 

By reasserting NHTSA’s sole jurisdiction over fuel economy regulation, Dingell’s bill 

would have denied EPA the opportunity to make a judgment of endangerment about 

CO2. That in turn would have kept EPA from pulling the regulatory trigger that 

starts a NAAQS rulemaking. But under pressure from Chairman Boxer, Speaker 

Pelosi, Chairman Waxman, Governor Schwarzenegger, and others, Dingell shelved 

his bill. 

The bottom line: None of the climate bills Congress is debating can provide even 

the semblance of cost certainty, because none of the bills prohibits EPA from regulating CO2 under the NAAQS program. 

Thank you again for the opportunity to present my views. 

Senator BOXER. Thank you, sir. 

Mr. Murray, we welcome you. You are chairman, president and 

CEO of Murray Energy Corporation. 

STATEMENT OF ROBERT E. MURRAY, CHAIRMAN, PRESIDENT 

AND CHIEF EXECUTIVE OFFICER, MURRAY ENERGY CORPORATION 

Mr. MURRAY. Thank you, Chairman Boxer and members of the 

committee. 

At the outset, I want to congratulate the majority of this party 

and the Senators for picking three electric utilities that are outside 

the mainstream beliefs of the electric utility industry in the country. These three utilities are three of the four that have joined the 

U.S. Climate Action Partnership that advocate cap and trade. Cap 

and trade is a misnomer for people that don’t know what they are 

talking about. It will destroy the American economy and it will depend on an international global trading marketplace, where under 

the Kyoto Protocol, which has been a farce, the other countries of 

this world who want to take economic advantage of us have already 

said they will cheat. 

So I want to make it clear, these three and the other ones that 

belong do not represent the mainstream electric utilities in this 

country. But I congratulate the majority for having them here. 

Climate change, or the so-called global warming issue, is a 

human one for American citizens, as the present courses of action 

being proposed by the U.S. House and Senate members and some 

Republicans will result in little or no environmental benefit, but 

will definitely destroy the lives or quality of life of millions of working American families and citizens on fixed incomes who depend on 

low-cost electricity for the maintenance of their jobs and living 

standards. Frankly, I feel very threatened about this, and afraid 

for these people who only want to work in honor and dignity. 

These global warming proposals will kill; Johns Hopkins says up 

to 150,000 premature deaths every year. Reducing carbon dioxide 

emissions will impact our poorest families the worst. Raising energy costs will cost American jobs. The legislation you have proposed to date will lead to the deterioration of the American standards of living and accelerated exportation of more of our jobs to 

China and developing countries, who have already repeatedly ad-
164 

vised, as recently as last week, June 21, that they were not going 

to do anything about their carbon emissions. 

Remember, Senators, this is supposed to be a global warming 

issue, not a U.S. warming issue. All you are doing with this draconian legislation is destroying the families’ standards of living, the 

ability to have jobs, increase the costs to people on fixed incomes, 

and export jobs to China who have already said they are not going 

to do anything about their emissions. 

I don’t buy that argument that the United States has to take the 

leadership. What? In destruction of more jobs? In the exportation 

of more jobs? Let’s get real. You can’t do this without worldwide 

participation, and you are not going to have it. All you are going 

to do is destroy American families and people on fixed incomes, 

their standard of living. It may not happen today, but they will get 

wise to it. And majority party, it will be the legacy that you leave 

for America. 

The science of global warming is suspect. But there is no question what will happen to people on fixed incomes and American 

working families, 3 million of them to 4 million, according to Penn 

State. You know, Gore touts that Rachel Carson was his role 

model. She led to the banning of DDT, she killed millions of human 

beings around the world, no question about it. Now we have Albert 

Gore out there doing the same thing. 

But is it going to be your legacy? Because I can tell you, Senators, that Lieberman bill, with McCain, destroys the American 

economy. Even the Bingaman-Spector bill will dial out 52 percent 

the lowest cost electricity in the United States, which is coal-fired, 

and destroy our economy. 

It is virtually impossible to create a job today in our economy, 

and I don’t know how many of you have actually created a job, but 

it is hard. But I can tell you that losing high-paying jobs by curtailing coal’s use and the lowest cost 52 percent of electricity in 

America, will be extremely destructive. I don’t need Albert Gore’s 

computer model to tell me this. I saw it under the Clean Air Act 

Amendments of 1990. I saw a families separated, marriages broken 

up, I saw lives destroyed, I saw communities disrupted that will 

never come back in Ohio; 36,000 jobs in Ohio alone with the Clean 

Air Act Amendments. 

Some of the elitists in this country and many in our congressional leadership today, particularly from California and New England, and the entertainment industry, including Mr. Gore, who cannot tell fact from fiction, have demonstrated an Olympian detachment from the impacts of draconian climate change. For them, the 

jobs and dreams destroyed as a result will be nothing more than 

the statistics and the cares of other people. The consequences are 

abstractions to them, but they are not to me. Because I can name 

many of the thousands of Americans whose lives will be destroyed 

by this ill-conceived global goofiness. 

It is a human issue, not just an environmental one. 

[The prepared statement of Mr. Murray follows:] 

STATEMENT OF ROBERT E. MURRAY, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE

OFFICER, MURRAY ENERGY CORPORATION

We thank the Members of the Senate Environment and Public Works Committee 

for the opportunity to provide this testimony today. 
165 

The climate change, or so-called ‘‘global warming’’, issue is a human one for American citizens, as the present courses of action being proposed by the U.S. House and 

Senate Majority Members and some Republicans will result in little or no environmental benefit, but will definitely destroy the lives or quality of life of millions of 

working American families and citizens on fixed incomes who depend on low cost 

electricity for the maintenance of their jobs and living standards. We feel very 

threatened, and frankly afraid, for these people, who only want to work in honor 

and dignity and have an acceptable quality of life, from what is going on in the Congress. 

Raising energy costs, as this Congress seems intent on accomplishing, will kill 

American people. A Johns Hopkins University study revealed that replacing threefourths (3⁄4) of United States coal-based energy with higher priced energy will lead 

to one hundred fifty thousand (150,000) extra premature deaths annually, and with 

no benefit to the global environment. 

Reducing carbon dioxide emissions will impact our poorest families the hardest, 

according to a recent report by the Congressional Budget Office. A 15 percent (15 

percent) reduction in carbon dioxide emissions under a so-called cap and trade emissions system, a euphemism for politicians and many others who do not understand 

the subject and that it cannot work, will cost the poorest of our citizens 3 percent 

(3 percent) of their annual household income. The 15 percent (15 percent) reduction 

will cost the poorest 20 percent (20 percent) of Americans twice as much as the cost 

to the richest 20 percent (20 percent), as a percentage of total income. Usually, you 

congressional leaders in the Majority would condemn this as heartless and unconscionable. 

Rising energy costs will also cost American jobs. The hysterical and out of control 

climate change or global warming issue, and the legislation that you have proposed, 

will lead to the deterioration of the American standard of living and the accelerated 

exportation of more of our jobs to China and other developing countries, which have 

repeatedly advised, as recent as last week, that they will not limit their carbon dioxide emissions. 

According to a Pennsylvania State University study, replacing two-thirds (2⁄3) of 

United States coal-based energy with higher priced energy will cost America three 

million (3,000,000) jobs, with an upward estimate of possibly four million (4,000,000) 

American livelihoods. 

Albert Gore touts that his role model has always been Rachel Carson, with her 

picture on his wall, who led the environmental movement to ban DDT. She and her 

environmental followers killed millions of human beings around the World with the 

ban on DDT, which has since been found by the World Health Organization to be 

very safe to humans in controlling global epidemics. 

It seems to us that the leadership of this Congress, with the support of the Majority of this Committee and some Republicans, are intent in helping Mr. Gore and 

those of his ilk in achieving his unquestionable legacy, which will be the destruction 

of American lives and more death as a result of his hysterical global goofiness, with 

no environmental benefit. This then will be your legacy, also, as our current congressional leadership indicates from your statements and actions to date. 

We do not know how many Members of the Congress, and particularly the Democrat Majority, have actually ever created a job for anyone. I have created three thousand three hundred (3,300) primary jobs and up to thirty-six thousand (36,000) secondary ones, according to The Pennsylvania State University, from a mortgaged 

home, and I can tell you that it is virtually impossible to do so today in our great 

country due to difficulties imposed by our own government at every turn. 

From your statements and actions to date, few of our congressional leaders are 

giving adequate attention to the destruction that we will see for American working 

people and for those on fixed incomes from all of the energy and climate change proposals that have been discussed, introduced, or enacted in the House and Senate 

to date. 

We are losing high paying manufacturing jobs in America to foreign countries at 

a rapid rate. The economic havoc that will be wrought on our country as a result 

of curbing coal’s use, which accounts for the lowest cost and fifty-two percent (52 

percent) of our electric generation, will be beyond comprehension. 

I do not need one of Albert Gore’s computer models to tell me this, as I saw what 

the enactment of the Clean Air Act Amendments of 1990 by this Congress did to 

the lives of many Americans. It resulted in the closure of one hundred eighteen 

(118) mines and the elimination of thirty-six thousand (36,000) primary and secondary jobs in Ohio alone. Some of these impacted communities will never recover. 

Families separated, some were impoverished, and many lost their homes because of 

legislation that the Majority in this Congress and the environmentalists call a ‘‘suc-
166 

cess’’. Again, I did not learn of this destruction from computer models—I lived it 

and saw it firsthand. Climate change is a human issue. 

Some wealthy elitists in our country and many in our congressional leadership, 

particularly from California and New England, and in the entertainment industry, 

including Mr. Gore, who cannot tell fact from fiction, have demonstrated an Olympian detachment from the impacts of draconian climate change policy. For them, the 

jobs and dreams destroyed as a result will be nothing more than the statistics and 

the cares of other people. The consequences are abstractions to them. But, they are 

not to me, as I can name many of the thousands of American citizens whose lives 

will be destroyed by these elitists’ ill-conceived ‘‘global goofiness’’ campaigns. 

It appears that the leadership of this Committee and of this Congress are attempting to export the draconian, so-called ‘‘global warming’’ measures, already enacted in California and proposed in some New England states, to the remainder of 

America. The residents of these states have not yet realized the cost to them of 

these actions. When they do, I would not want the legacy that the politicians from 

these areas, including some from your Majority, seem intent on leaving. The Pennsylvania State University study also shows that if coal production is curtailed by 

two-thirds (2⁄3) in America, California, itself, will lose fifty-eight million dollars 

($58,000,000) annually in economic activity, and households will see an income decline of twenty-two million dollars ($22,000,000) per year. Most especially, three 

hundred thirty-nine thousand (339,000) Californians will lose their jobs. The nearly 

one million (1,000,000) person exodus from California last year is just the beginning. 

No business owner will ever consider choosing to site in California, because we can 

all, including those producing the economic studies, see the devastating economic 

decline that is imminent there, as well as in New England, from their actions and 

proposals. 

While California will be adversely affected, the Central United States will be devastated from the curtailing of coal production, as this same study estimates that at 

least one million five hundred thousand (1,500,000) jobs will be lost in Arkansas, 

Iowa, Kansas, Louisiana, Minnesota, Missouri, Nebraska, Oklahoma, and Texas, 

alone. Also, the survival of the entire railroad industry in our country will be threatened. 

The most ‘‘inconvenient truth’’ is that we do not know how to meet current, much 

less anticipated future, United States and global energy needs with low-and nonemitting technologies. Carbon penalties will suppress economic growth, rather than 

catapult human civilization into a ‘‘beyond petroleum’’ era. Until markets can actually supply large quantities of affordable, emissions-free energy, Congress should 

not be debating carbon caps, carbon taxes, or carbon emissions standards. The Majority seems to have taken the position that we do not need science or technology, 

because we are going to have legislation. Again, we are very threatened and afraid 

for all Americans on fixed incomes and our workers as a result of many of the statements and actions of this House and Senate. It is time that common sense be introduced into this hysterical, out of control, climate change debate, which alleged phenomenon, to our Nation’s best scientists, is based on faulty science. While the 

science is uncertain, the congressional leadership’s proposals and statements to date 

will definitely result in devastating economic hardship to our families’ lives. 

Remember, China announced last winter, and again June 21, just this past week, 

that they are not going to do anything about their carbon dioxide emissions postKyoto Protocol in 2012, nor have they done anything to date. According to a new 

study released by The Netherlands Environmental Assessment Agency, China’s 

emissions surpassed those of the United States in 2006. By 2020 China, alone, notwithstanding the other G–77 nations, will consume five (5) times as much coal as 

the U.S. Thus, all of your proposals will simply export more American jobs to the 

developing countries, destroy the lives of many Americans, particularly those in 

manufacturing and on fixed incomes, and actually add more carbon dioxide emissions to the earth’s atmosphere. China is currently bringing a new, 500 megawatt, 

coal-fired power plant on-line every week, and four hundred fifty-five (455) of them 

are in the planning stages. 

Remember, the U.S. economy is uniquely vulnerable to schemes for capping coal 

use. Europe is not, which explains why Europeans pay little for capping carbon 

emissions and why they are so eager for us to cap ours. I can understand the incentives of European leaders in the competitive global marketplace. What we cannot 

understand is the congressional indifference. 

If climate change is really a global issue, what is needed is the serious public investment of several billion dollars per year of taxpayer money over the next two (2) 

decades in its research. This investment will cost a trifle of any other course of action and will be productive. 
167 

While they are at it, the elitists who propose that we make do with less coal 

should explain the consequences to our national security. We are a country that is 

dangerously dependent on foreign energy—and at a time of fierce new competition 

from foreign rivals for the World’s dwindling supply of oil. A decade ago, China was 

a net oil exporter. Last year, China’s oil imports accounted for forty percent (40 percent) of the entire increase in global oil production. 

Unilaterally restricting our reliance on coal takes us exactly in the wrong direction. It is naive and irresponsible for policymakers to think that an energy-dependent country like ours will not be vulnerable to foreign influence in the decades 

ahead. 

Coal production is fundamental to the United States economy. Another Pennsylvania State University study found that, in 2015, if left alone, coal could contribute 

one trillion dollars ($1,000,000,000) to the United States economy and provide six 

million eight hundred thousand (6,800,000) jobs and three hundred sixty-two billion 

dollars ($362,000,000,000) in household income. 

Unfortunately, there are a number of American companies, through the so-called 

U.S. Climate Action Partnership, that are promoting constraints on coal use and an 

irrational cap on carbon dioxide emissions to achieve greater profits and other competitive advantages, which transparent motivations are not in the best interests of 

American citizens. 

These Companies include: General Electric, DuPont, Caterpillar, American International Group, General Motors, Dow Chemical, Johnson & Johnson, PepsiCo, 

Marsh, Boston Scientific, Alcoa, Alcan, Siemens, British Petroleum, Shell Oil, 

ConocoPhillips, Excelon, Entergy, PG&E, and PNM Resources. 

Their proposed ‘‘cap and trade’’ scheme will not work and will be devastating for 

our country. ‘‘Cap and trade’’ would depend on an honest global emissions trading 

market where other countries will not cheat. It is ‘‘smoking opium’’ to think that 

our competitors will not cheat, as they already have under the farce called the Kyoto 

Protocol. Remember, leaders, the issue here is supposed to be ‘‘global warming’’, not 

‘‘U.S. warming’’. 

Again, these Companies have demonstrated the willingness to devastate the overall American economy for their own short term gains. Americans who are on fixed 

incomes or who depend on low cost electricity for their jobs to be competitive in the 

global marketplace had better be wary of these other American companies and their 

profit and competitive advantage motives. 

In addition to these un-American Companies, we also have (1) nuclear power and 

natural gas producers looking for a larger share of coal’s electricity market; (2) environmental groups hoping deceitful alarmism will scare gullible, guilt-ridden consumers and entertainers into filling their coffers; (3) news media fear mongers seeking higher ratings and newspaper sales; and (4) academics and think-tank knowit-alls eager to climb aboard the latest grant money train no matter where it is 

headed. 

Carbon dioxide is a combustion product vital to how civilization is powered. It 

cannot be legislated or regulated away. Without drastic technological breakthroughs, it is not possible to stabilize atmospheric carbon dioxide emissions, even 

if it were necessary, and meet global energy demands. The only way to reduce emissions over the next two (2) decades, according to the most reliable sources, is to force 

Americans to use less energy than at present, much less. 

Even the Bingaman/Specter legislation proposed will cut U.S. coal-fired electricity 

generation by two-thirds (2/3), according to the Energy Information Administration 

in a report published this year. The policy being advocated to prohibit coal fired 

power plants without carbon capture and sequestration technology will simply result 

in future blackouts and severe job destruction in our country. In a recent study by 

the Massachusetts Institute of Technology entitled ‘‘The Future of Coal’’, it is estimated that it will take eight (8) years and up to two hundred million dollars 

($200,000,000) just to demonstrate the economic, environmental and technical performance of large scale carbon capture and storage technology. The study also shows 

that, at best, coal use will be less than half that of a no-cap case, and this would 

be disastrous. 

We need to be realistic. The one billion five hundred million (1,500,000,000) tons 

of carbon dioxide, which likely is not contributing to any global warming, produced 

in the United States each year is equivalent to three (3) times the weight and onethird (1⁄3) the volume of all natural gas transported by the United States pipeline 

system. Our country does not have, and cannot have, the infrastructure to support 

the carbon capture, transportation and sequestration technology advocated by virtually every bill introduced in the Congress to date. Also, the liability and property 

rights issues that will be generated for the carbon dioxide sequestration will make 

it impossible to implement, again, with no environmental benefit. 
168 

We can tell you for certain that your global warming debate in the Congress, unfortunately for our country, has already very adversely affected the perceptions of 

and investment in the United States coal industry. We are being weakened daily 

by these discussions, and America cannot be without the lowest cost fifty-two percent (52 percent) of our electricity that the industry provides. No doubt, many coal 

producers will not survive the discussions of the draconian regulations that are taking place. You cannot legislate the policy cart before the technology horse, which you 

are trying to do. 

We are already seeing the adverse affects of your global warming policies in the 

ethanol debacle, the use of which this congressional majority, this past week, demanded be drastically increased. Yet, ethanol from corn is twenty-six percent (26 

percent) fuel inefficient, as it takes 1.26 times as much fossil fuel energy to make 

a gallon of cellulosic ethanol than that which we get out of it. Also, it depends on 

a fifty-one cent ($0.51) per gallon subsidy from the taxpayer. As a result, you in 

Congress have now raised the cost of steaks by five and one-half percent (5.5 percent) from a year ago, and chickens are up seven and seven-tenths percent (7.7 percent). According to a new survey by the Food Marketing Institute, more than forty 

percent (40 percent) of American consumers are changing their food buying habits 

in response to high energy prices. People are being forced to make the decision between the purchase of food or heat. The real cost of ethanol is far higher to Americans than the fossil fuels that you are attempting to eliminate and with no environmental benefit. 

The American family is about to be a victim of one of the biggest con jobs in the 

history of this Republic. Congress could soon arbitrarily restrict the use of coal, our 

Nation’s most abundant and affordable fuel for generating electricity. This leadership does not appreciate the pain that such a program will inflict on ordinary Americans, but when they start feeling it, it will be your legacy. 

For the many reasons provided herein, and others that could not be presented 

today, the errant leadership of the U.S. Congress must stop the dishonest, 

hysterical, out of control campaign to enact the currently proposed climate change 

legislation that will result in no environmental benefit, but will destroy the very 

lives of our citizens on fixed incomes and America’s working families. 
169 
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RESPONSES BY ROBERT E. MURRAY TO ADDITIONAL QUESTIONS

FROM SENATOR INHOFE

Question 1. A lot of people seem to think we don’t need coal and we can keep the 

lights on and air conditioners running with natural gas or wind power. In short, 

they think coal is obsolete. Can you tell us why these people are wrong? 

Response. Coal remains the most abundant and affordable energy resource available to the United States. The U.S. Energy Information Administration (‘‘EIA’’) estimates that, by 2030, fifty-seven percent (57 percent) of all electricity generated in 

the United States will come from coal, if the industry is not destroyed by the current intentions of some in the Congress to enact so-called ‘‘global warming’’ legislation. 

The major argument behind coal’s continued use in our country is national population growth and rapid development in the Southeast and West. A growing population demands more energy, and, as a result, the EIA estimates that total U.S. energy consumption will grow by forty-one percent (41 percent) by 2030. Also, electricity consumption is projected to grow to 5.5 billion kilowatt hours from the current 2.1 billion kilowatt hours in this timeframe. 

The average delivered price of coal—owing to its abundance and accessibility in 

the United States—has remained stable while other fuel sources have experienced 

price increases due to increased production costs, larger profit margins, geo-political 

instability, resource availability, and the state of America’s import infrastructure. 

Indeed, electricity manufactured from natural gas now costs at least four (4) to five 

(5) times the cost of electricity from coal, with generation from nuclear, and particularly renewable, sources costing even more. Rightly, coal has underpinned the 

growth of the U.S. gross domestic product since the 1970s. 

Coal’s stability and impact on the economy must be emphasized. Coal is not reliant on the natural fluctuations of wind and sun, and does not generate a harmful 

waste by-product that requires long-term storage. The 240-year supply of coal in the 

United States makes it the ideal energy source to power our homes, our businesses 

and industries and—in the not-too-distant future—our vehicles. 

If coal is constrained through a precipitous climate change or renewable portfolio 

standard policy, energy options become limited. The EIA estimates that in a scenario where coal use is constrained, the consumption of energy from renewable 

sources changes only slightly from current levels. Capital costs, regional characteristics and production limitations combine to limit the use of renewable sources such 

as wind, geothermal or solar. In the EIA base case, the outlook is actually for the 

share of renewable fuels in the power generation sector to remain flat—at nine percent (9 percent)—and for nuclear fuel’s share to actually fall. 

By the end of the EIA forecast period (2030), the percentage of electric power generated by fuel type is as follows: 

Coal—54 percent 

Nuclear—4 percent 

Renewables—6 percent 

Natural gas—36 percent 

There are no other options than coal for low cost electricity generation that will 

allow American’s manufacturers to be competitive with their products in the global 

market place and to hold down electric rates for our citizens on fixed incomes. 

The National Petroleum Council’s (‘‘NPC’’) report, Facing the Hard Truths About 

Energy, which was delivered to the Secretary of Energy on July 18, 2007, indicates, 

among other conclusions, the following finding: Coal, oil, and natural gas will remain indispensable [emphasis added]. I urge all the members of the Committee on 

Environment and Public Works to acquire and examine this report and findings 

therein. Respected authorities such as the National Petroleum Council, the Energy 

Information Administration, the International Energy Agency, the Global Energy 

Technology Program, the Electric Power Research Institute, the Climate Change 

Science Program, the Massachusetts Institute of Technology, and numerous other 

credible sources all indicate that a future without coal is not possible. It is noteworthy that some of these projections carry far into the future—as much as a century or more. Collectively, this work and findings therein represent the thinking of 

some of the best and most respected minds in the country. 

However, every bill addressing so-called global warming that has been introduced 

by the Congress, and now proposed by Senators John W. Warner and Joseph I. 

Lieberman, will eliminate low cost coal-fired electricity from America, our manufacturers and our citizens on fixed incomes. 

What other options do we have? The nuclear industry observes that dozens of new 

reactors must be built over the next twenty (20) years simply to maintain nuclear 

power’s current nineteen percent (19 percent) share of the growing electricity mar-
173 

ket. Assuming that nuclear energy will take a protracted time to develop—which, 

owing to waste storage and local community opposition, is reasonable—the only economical choice becomes natural gas. As stated above, delivered natural gas prices 

have seen great fluctuations since the late 1990s, and it is often imported from unstable regions of the world. 

Liquid natural gas (‘‘LNG’’) is an expensive alternative energy source, but siting 

LNG plants is proving to be very difficult because of local and environmental pressure group opposition. 

Wind power cannot be used to provide electricity base loads and must be backed 

up by a more reliable source of electricity such as a coal—fired power plant. Furthermore, no other source of electricity, except hydropower, can compete with the 

price of coal. Electric rates are the lowest where coal is the primary fuel. 

In summary, America’s growing energy needs, forty-one percent (41 percent) by 

2030, cannot be met without higher coal production. Any alternatives being offered 

are impractical and considerably more expensive than coal. Congress must recognize, which it has not under its recent energy and climate change proposals, that 

coal has an indispensable role in the delivery of low cost energy to our citizens and 

in the economic competitiveness of our country. 

Question 2. You testified about our pipeline limitations in terms of capturing, 

transporting, and sequestering carbon. Can you elaborate? 

Response. Projections of the cumulative amount of carbon dioxide that may in the 

future be required to be captured, transported and sequestered (for example, that 

of Mr. James Dooley, Senior Staff Scientist, Joint Global Change Research Institute, 

Pacific Northwest Laboratory) could be on the order of tens of billions of tons annually. That is nearly 10,000 time the current global carbon dioxide storage industry 

as it exists today. Further, the Massachusetts Institute of Technology (‘‘MIT’’), in 

its report entitled ‘‘The Future of Coal’’, as well as the Battelle Global Energy Technology Strategy Program (‘‘GTSP’’), in their report entitled ‘‘Global Energy Technology Strategy—Addressing Climate Change’’, identify a number of significant 

issues relating to carbon capture and storage even before the consideration of pipeline infrastructure. These include geologic storage capacity; the engineering and 

technological challenges to retrofitting the current fleet of coal-fueled power plants 

with carbon capture equipment; developing technology to the point of an affordable 

per ton emissions price; site selection and liability issues; determining if any markets for carbon exist; minimizing parasitic energy loss at electric power plants, estimated to be about twenty (20) percent; and funding support for carbon capture and 

storage research and development programs. 

Further there are numerous unresolved uncertainties about how to address the 

site-monitoring, insurance, liability and property rights issues involved in carbon 

transfer and storage. A huge pipeline system will be needed to transfer the carbon 

dioxide to locations for sequestration. With American’s current litigious society, 

there is virtually no chance that these pipelines can be sited, or that the liability 

and property rights issues involved in carbon transfer and sequestration can ever 

be resolved for decades, if at all. We often cannot even site an electric transmission 

line in America today. However, once again, these concerns are preceded by the fact 

that, according to the Energy Information Agency, no full scale commercial carbon 

capture technology will be available until 2020. And, the Congress has demonstrated no will to provide the amounts of capital that will need to be expended 

to mature this technology. 

We urge all members of the Committee on Environment and Public Words to acquire the aforementioned reports and examine them. In short, the capturing, transporting and sequestration of carbon remains a virtually impossible task that cannot 

be accomplished for at least twenty (20) years, if at all. Indeed MIT and GTSP do 

not perceive the possible wide spread deployment of carbon dioxide capture, transport and sequestered technology before about 2050. 

Question 3. Are there any points you would like to elaborate on? 

Response. Every so-called ‘‘global warming’’ or climate change proposal of the current U.S. Congress, including the outlined one from Senators Warren and 

Lieberman, will destroy the American economy by eliminating the fifty-two percent 

(52 percent) lowest cost electricity in our country. As a result, more jobs will be exported to manufacturers in foreign countries, such as China and India, which have 

already stated, repeatedly, that they are not going to do anything about carbon dioxide emissions. Furthermore, our citizens on fixed incomes will not be able to afford 

their electric bills under all of the House and Senate proposals. All of this is absolutely for no environmental benefit, according to the vast majority of the most respected climatologists in the World. 
174 

Second, I would like to submit for the record a letter that I wrote to Chairman 

Boxer replying to her ill-informed accusations made against Murray Energy’s mine 

safety record in an attempt to discredit my testimony. This letter to Chairman 

Boxer is attached, which shows that my Companies and my safety records are 

among the best of any mining companies in the World, and I was recently given 

the Chief Executive Officer’s Leadership Award for this by the International Society 

of Mine Safety Professionals. 

In addition, we believe that, if the Senate Environment and Public Works Committee acquires the above noted reports and information, members of the Committee 

will understand better the need for coal. In addition, the production of ‘‘Facing the 

Hard Truths About Energy’’ report, that was recently produced for the Secretary of 

Energy, will be helpful to the Committee in that more than three hundred fifty (350) 

highly knowledgeable participants from energy industries, energy consultants, energy efficiency advocates, financial communities, academia, professional societies, 

environmental groups, nongovernmental organizations and United States government were involved. This report even engaged energy ministers in nineteen (19) 

countries. 

Effort by the Congress to enact so-called ‘‘global warming’’ or climate change legislation should be abandoned in view of the facts set forth in the aforementioned 

begun. Otherwise, we will be driving America to energy starvation and economic 

disaster. 
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179 

Senator BOXER. Thank you, sir. 

I ask unanimous consent to place in the record a statement by 

Senator Feinstein about the utility bills before the Senate. 

[The prepared statement of Senator Feinstein follows:] 

STATEMENT OF HON. DIANNE FEINSTEIN, U.S. SENATOR FROM THE

STATE OF CALIFORNIA

Madame Chairman, members of the Committee, thank you for this opportunity 

to discuss legislation to address the No. 1 environmental issue facing this planet— 

global warming. 

Let me begin by commending my good friend and colleague, Senator Boxer, for 

her leadership on this issue. 

I would also like to thank the members of the Committee for your great diligence 

and hard work on this difficult issue. I have particularly enjoyed working with Senator Carper, with whom I have cosponsored the Electric Utility Cap and Trade Act 

of 2007. 

Last week, the Senate worked out the details of a landmark compromise to aid 

our economy, improve our security, and tackle our nation’s second largest source of 

greenhouse gasses—automotive emissions. 

This legislation broke a stalemate that we have faced for over two decades. It was 

an important first step in a comprehensive effort to reduce greenhouse gas emissions. 

Today, we can take the next step. We have an historic opportunity to build-upon 

this momentum. We are poised and ready to take on an even greater legislative 

challenge—reducing emissions from our nation’s single largest source of greenhouse 

gasses, electric utilities. 

To that end, I have introduced the Electric Utility Cap and Trade Act. This bill, 

which is cosponsored by Senator Carper, establishes a national cap and trade system for electric utilities, which account for one-third of our nation’s greenhouse gas 

emissions. 

The bill has been endorsed by 6 major energy companies, and is the most farreaching bill to garner strong support from the electric power industry to date. 

These companies include: 

• Pacific Gas & Electric (PG&E) Corporation, 

• Calpine, 

• Florida Power & Light, 

• Entergy, 

• Exelon, and 

• Public Service Enterprise Group. 

Together, these companies operate in 42 states, produce approximately 150,000 

megawatts of energy, and provide more than 15 percent of the U.S. electricity. 

Here is how the bill would work. It would establish a cap and trade program for 

the electricity sector. The cap is designed to provide both flexibility and long-term 

regulatory certainty. 

• In 2011, the bill would cap greenhouse gas emissions at 2006 levels—a 6 percent reduction from anticipated emissions from the electric sector. 

• In 2015, it would ratchet the cap down to 2001 levels—a 16 percent reduction 

from anticipated levels. 

• In 2016, the bill would reduce the cap further to 1 percent below 2001 levels. 

And, from 2017 to 2019 it would require additional annual 1 percent reductions. 

• By 2020, emissions would be reduced 25 percent below anticipated levels. 

And after that, emissions will be reduced even further—by an additional 1.5 percent a year and potentially more—if the EPA, based on scientific evidence—believes 

that more needs to be done to avert the most dire consequences of global warming. 

That’s the cap. It is consistent with the best available science, and provides flexibility to alter the pace of future change, in response to future advances in our understanding of the Earth’s climate. 

The bill also establishes emissions credit trading and banking, which gives companies additional flexibility to embrace new technologies, encourage innovation, and 

find the lowest cost reductions across the entire economy. 

Additional flexibility comes through the unlimited use of an offsets program. This 

would include farm, forest, wetland and international offsets to provide significant 

cost control measures without weakening the program’s overall effectiveness. 

These offsets will only be issued to projects that can ensure real greenhouse gas 

reduction benefits. Under this program, companies can: 
180 

• Buy low-cost emission ‘‘credits’’ from farmers, foresters and other landowners 

who reduce tillage and change other cropping practices, grow trees, and protect wetlands and forests. • Buy up to 25 percent of their carbon credits from low-cost projects in developing 

nations and other countries, allowing U.S. companies to profit from selling technologies to developing nations. • If the cost of the program gets too high, EPA will let companies buy more lowcost carbon credits from foreign nations or postpone some emission reductions until 

a later date. 

Finally, the bill provides for flexibility through innovation. By giving a portion of 

emission credits for free on the basis of electricity production and auctioning the remainder, the bill speeds the development of new energy and efficiency technologies 

that will provide a diverse set of strategies for reducing greenhouse gas emissions. 

In 2011, when the program begins, 15 percent of credits will be auctioned, steadily rising to 100 percent auctions by 2036. Based on a price range of $5-$30 per ton 

of carbon dioxide equivalent, these auctions are expected to raise $2-$12 billion by 

2011; and $9-$55 billion by 2036. 

These auctions will not be a new tax, and proceeds will go directly to the development and deployment of low-carbon energy and industrial technology. 

I believe that this bill’s greatest asset is its combination of certainty and flexibility. 

• It provides the certainty of a long-term cap that is consistent with the recommendations of the environmental and industry leaders working together in the 

United States Climate Action partnership (USCAP). 

• It provides the flexibility needed to meet the cap in the most cost effective manner—including offsets, and alter the schedule of future emissions reductions in a 

manner consistent with the best science the world has to offer. 

The bill also addresses critical details of program design, such as how many credits auctioned, how free credits are given to utilities, and how farm, forest, and wetland credits are integrated into the program. 

The use of offsets, in particular, will enable low cost reductions in greenhouse gas 

emissions, with simultaneous improvements in air quality, wildlife habitat, and 

water and soil conservation. 

I believe that certainty, flexibility, and environmental protection are bipartisan 

principles to which we can all agree. The challenge is to work out the details. 

Fifteen States, with more than 100 million citizens and representing over onethird of the U.S. population, have already agreed to binding cuts in greenhouse gas 

emissions. The citizens and elected leaders of these States have set a bold historic 

precedent. The States are leading the way, and it is time for Congress to act. 

I urge my colleagues to join me in working to craft a bipartisan compromise that 

moves aggressively to reduce greenhouse gas emissions, while treating all parties 

in a fair and equitable manner. And I believe the Electric Utility Cap and Trade 

Act of 2007 provides a strong foundation for this compromise. Together, we can 

move one step closer to a comprehensive answer to the problem of global warming. 

And the time to act is now. 

Thank you. 

Senator INHOFE. I would ask unanimous consent to place Senator 

Bond’s opening statement into the record. 

[The prepared statement of Senator Bond was not received at 

time of print.] 

Senator BOXER. Certainly. 

Anybody else have an opening statement they wish to place into 

the record? 

OK, so we are going to finish this now, Dr. Borelli, you will be 

our last person to speak, and then we will take a break and come 

back and continue with questions. Go ahead, Doctor. 

STATEMENT OF THOMAS J. BORELLI, PH.D., PORTFOLIO 

MANAGER, FREE ENTERPRISE ACTION FUND 

Mr. BORELLI. We thank the members of the committee—— 

Senator BOXER. Oh, I am sorry, I didn’t give you a proper introduction. You are the portfolio manager of Free Enterprise Action 

Fund. 
181 

Mr. BORELLI. That is correct, Madam Chair. 

We thank the members of the Committee on Environment and 

Public Works for inviting me to provide this testimony today. I am 

Tom Borelli, portfolio manager of the Free Enterprise Action Fund, 

a publicly traded mutual fund. Our fund seeks to increase our returns by advancing free market principles in the companies we 

own. 

All too often, today’s CEOs make decisions based on appeasing 

social and political pressure or by trying to generate revenue 

through legislation. In our view, these strategies are short-sighted, 

because they stymie competition, innovation and jeopardize future 

earnings. For these very reasons, we strongly oppose cap and trade 

legislation and company participation in the U.S. Climate Action 

Partnership. 

Accordingly, we are in opposition to legislation that sets carbon 

dioxide limits and allocations for the utility industries, including 

companies we own, like PG&E and Duke Energy. While the science 

implicating human activity on global warming is uncertain and 

speculative, the economic costs of cap and trade legislation are certain and severe. We are deeply concerned about the effect of cap 

and trade on both the U.S. economy and on future profitability of 

the companies we own in our portfolio. 

Some CEOs support cap and trade because they think they can 

ride the waves of political opinion and gain the political process to 

obtain Government subsidies and greater carbon allocations. Others support cap and trade because they think it is good public relations. However, jumping on the global warming bandwagon to be 

liked or chase transient uncertain gifts from Congress does not constitute a sound business plan. The Free Enterprise Action Fund is 

the only mutual fund that is using its shareholder standing to demand a debate about global warming in the board room. 

Through our interactions with CEOs are some of the largest companies in America, we have discovered that they have not evaluated or disclosed the severe economic consequences of cap and 

trade legislation to their customers or their shareholders. By neglecting to conduct proper due diligence regarding the impact of 

carbon dioxide regulations to their business, these CEOs are deceiving their shareholders. Such deception and negligence potentially exposes these companies to lower earnings and possibly 

shareholder lawsuits. 

Many CEOs are ignoring Government studies that estimated the 

economic impact of cap and trade. For example, the Energy Information Administration found cap and trade will raise gasoline 

prices by nearly 53 percent, raise energy prices by more than 86 

percent and reduce economic growth by almost 2 percent. More recently, the Congressional Budget Office report on cap and trade reported the costs will be borne by consumers, especially the poor, 

who would face persistently higher prices for products, such as 

electricity and gasoline. 

Given the severe impact on high energy prices on economic 

growth, CEOs should be very worried about cap and trade. Unfortunately, we have found that many CEOs are detached from economic reality. Caterpillar’s participation in U.S. CAP is a perfect 
182 

illustration of CEO incompetence and deception surrounding cap 

and trade legislation. 

Caterpillar’s CEO admitted he did not conduct a cost benefit 

analysis before deciding to join the U.S. CAP. In addition, he was 

not aware of the CBO study that found these regulations would 

hurt his coal industry customers. Caterpillar’s future profit depends on a growing economy and growth in the energy and mining 

industries. In fact, according to its 10K filings with the Securities 

and Exchange Commission, it cites a decline in economic growth in 

the mining industry as a key business risk. 

Yet Caterpillar is supporting cap and trade regulations that are 

going to harm the economy and the coal industry, a key customer 

for Caterpillar. Astonishingly, Caterpillar is lobbying against its 

own earnings. Not only is the CEO harming the economy, he is 

keeping his shareholders in the dark. Nowhere does Caterpillar 

disclose that its support of cap and trade can lead to a decline in 

its own business. 

Similarly, Dupont’s 10K repeatedly warns its shareholders about 

the negative impact of high energy prices on its business, but nowhere can shareholders find any disclosure from Dupont that cap 

and trade will raise energy prices. From the perspective of a portfolio manager, I am extremely concerned about the economic impact of cap and trade legislation on the economy and our portfolio. 

Growth of the stock market depends on cheap and plentiful energy 

supply to feed a thriving economy. Capping energy is capping economic growth. 

This matter brings to mind a saying attributed to Socialist Karl 

Marx and Vladimir Lenin: the last capitalist we hang shall be the 

one who sold us the rope. Companies supporting cap and trade are 

not only selling the rope, they are building the scaffold. Thank you. 

[The prepared statement of Mr. Borelli follows:] 

STATEMENT OF THOMAS J. BORELLI PH.D., PORTFOLIO MANAGER, FREE ENTERPRISE

ACTION FUND

We thank the Members of the Committee on Environment and Public Works for 

inviting me to provide this testimony today. 

I am Tom Borelli, a portfolio manager for the Free Enterprise Action Fund (ticker 

FEAOX) a publicly traded mutual fund. Our fund seeks to increase our returns by 

advancing free market principles in the companies we own. To meet our financial 

goals and the free market values of our shareholders, we frequently challenge CEO 

decisions that may harm the company’s long-term profitability. 

All too often, today’s CEOs make decisions based on appeasing social and political 

pressure or by trying to generate revenue through legislation that favor their company. In our view, these strategies are shortsighted because they stymie competition, innovation and jeopardize future earnings. 

For these very reasons, we strongly oppose cap and trade legislation and company 

participation in the United States Climate Action Partnership (USCAP). Accordingly, we are in opposition to legislation that sets carbon dioxide limits and allocations for the utility industry. 

While the science implicating human activity on global warming is uncertain and 

speculative, the economic costs of cap and trade legislation are certain and severe. 

We are deeply concerned about the affect of cap and trade on both the U.S. economy 

and on the future profitability of the companies in our portfolio—including PG&E 

and Duke Energy. 

Some CEOs support cap and trade because they believe they can ride the waves 

of public opinion and game the political process to obtain government subsidies and 

greater carbon allocations. Others support cap and trade because they think its good 

public relations. 
183 

However, jumping on the global warming bandwagon to be liked or chase transient and uncertain gifts from Congress does not constitute a sound business plan. 

Moreover, by pursuing these ill-conceived strategies, CEOs are overlooking their 

primary responsibility to their shareholders. 

The Free Enterprise Action Fund is the only mutual fund that is using its shareholder standing to demand a debate about global warming in the boardroom. We 

have challenged numerous corporations—including those in the utility industry—to 

justify their support of carbon dioxide regulations. 

For example, we have written to utility companies including PG&E asking them 

to justify their support of carbon dioxide emission limits and to estimate the increase in energy costs to consumers. Their response has been superficial, dismissive 

and did not disclose an estimated rate increase to consumers. 

However, our advocacy efforts beyond the utility industry are more illuminating. 

Through our interactions with the CEOs of some of the largest companies in America, we have shockingly discovered that they have not evaluated or disclosed the severe economic consequences of cap and trade legislation to their customers or shareholders. 

By neglecting to conduct proper due-diligence regarding the impact of carbon dioxide regulations to their business, these CEOs are deceiving their shareholders. Such 

deception and negligence potentially exposes these companies to consumer dissatisfaction, lower earnings and possibly shareholder lawsuits. 

Specifically, companies are negligent because they are: 

• Refusing to consider alternative views on the science 

• Refusing to conduct basic cost-benefit analysis of the regulatory scenarios like 

cap and trade on their business 

• Failing to disclose the consequences of cap and trade legislation to their shareholders 

• Failing to disclose that pursing cap and trade regulations may harm its customers and shareholders 

Many CEOs are ignoring government studies that estimate the economic impact 

of cap and trade. For example, during the Clinton administration the Energy Information Agency found under the best scenario, cap and trade will: 

• Raise gasoline prices by nearly 53 percent 

• Raise energy prices by more than 86 percent 

• Reduce economic growth by 1.9 percent, which is $256 billion of 2006 GDP 

• Reduce economic activity across most industries including the construction, 

manufacturing, transportation and finance industries 

• Raise interest rates because higher energy prices will exert upward pressure on 

overall prices and contribute to inflation 

More recently, the Congressional Budget Office (CBO) report on Cap and Trade 

concluded: 

‘‘. . . most of the cost of meeting a cap on CO2 emissions would be borne by consumers, who would face persistently higher prices for products such as electricity 

and gasoline. Those price increases would be regressive in that poorer households 

would bear a larger burden relative to their income than wealthier households 

would.’’ 

Given the severe impact on energy prices and overall economic growth, CEOs 

should be very worried about cap and trade legislation. Unfortunately, we found 

through our questions at annual shareholder meetings that CEOs are detached from 

the economic reality of cap and trade. For example: 

GE’s CEO Jeff Immelt refuses to have GE report to its shareholders regarding the 

cost and benefits of the company’s support of global warming regulations. Moreover, 

he claimed he could grow GE’s earnings even if cap and trade legislation caused a 

decline of GDP of 2 percent. Followers of GE’s stock will recognize that the company’s share price has underperformed the stock market under good economic conditions. 

J.P. Morgan’s CEO Jamie Dimon was unaware of the economic impact of cap and 

trade but said he would not support regulations that would harm his company’s 

earnings. Yet the company’s environmental policy states they are going to lead an 

effort to lobby for a national policy on global warming. 

Citi’s CEO Chuck Prince was also unaware of the economic impact of cap and 

trade but he felt the economic pain resulting from global warming regulations is 

worth the environmental gain. Citi supports a national policy to reduce greenhouse 

gas emissions but its funding of new coal power plants is the subject of criticism 

by environmental activists. 

Caterpillar’s CEO James Owens admitted he did not conduct a cost-benefit analysis of cap and trade before deciding to join USCAP. In addition, he was not aware 
184 

of the CBO study that found cap and trade regulations would hurt his coal industry 

customers. 

This CEO survey illustrates a complete ignorance about the consequences of global warming regulations on the economy and their businesses. 

Caterpillar’s participation in USCAP is a perfect illustration of CEO incompetence 

and deception surrounding cap and trade legislation. Caterpillar’s future profit depends on a growing economy and growth in the energy and mining industries. In 

fact, according to its 10-K filing with the Security and Exchange Commission (SEC), 

it cites a decline in the economic growth and a decline in the mining industry as 

a key risk to its business. 

Yet inexplicably, Mr. Owens is a member of USCAP, which supports cap and 

trade regulations that are going to harm the economy and the coal business—a key 

customer for Caterpillar products. Astonishingly, CEO Owens is lobbying against his 

own earnings! 

Not only is Owens harming his company, he is keeping his shareholders in the 

dark. Nowhere does Caterpillar disclose to its shareholders that its support of cap 

and trade can potentially lead to a decline in its business. 

Similarly, DuPont is another member of USCAP who may be lobbying against its 

own earnings. DuPont’s 10–K filing repeatedly warns its shareholders about the 

negative impact of high-energy prices on its business. Yet according to government 

studies, cap and trade will increase energy prices. Again, nowhere can shareholders 

find any disclosure from DuPont that its involvement in cap and trade regulations 

is a potential business risk. 

From the perspective of a portfolio manager, I am extremely concerned about the 

economic impact of cap and trade legislation on the economy and our portfolio. 

Growth of the stock market depends on a cheap and plentiful energy supply to feed 

a thriving economy. Capping energy is capping economic growth. 

More concerning is the myopic view of CEOs who only talk about the so-called 

benefits of addressing global warming but are totally unaware of the ramifications 

of carbon caps on the U.S. economy. 

What little gain a few companies may obtain from cap and trade must be balanced against the overall affect the legislation will have on the economy. Ironically, 

a few companies may win the battle for cap and trade but loose the war for earnings 

because of an economic downturn. 

This matter brings to mind the saying attributed to socialists Karl Marx and 

Vladimir Lenin: the last capitalist we hang shall be the one who sold us the rope. 

Companies supporting cap and trade are not only selling the rope, they are building 

the scaffold. 

RESPONSE BY THOMAS J. BORELLI TO AN ADDITIONAL QUESTION FROM

SENATOR BOXER

Question. You assert that the science linking human activity and global warming 

is speculative despite the recent report by the International Panel on Climate 

Change that it is more than 90 percent certain that human activities are largely 

responsible for global warming. Earlier in your career, you served as the manager 

of corporate scientific affairs for the Philip Morris Company in 1990. Philip Morris 

long disputed the link between smoking and lung cancer in the face of strong and 

ultimately overwhelming scientific evidence to the contrary. What is your personal 

standard for deciding when scientific evidence is sufficient to warrant action by 

businesses or government to save lives that might otherwise be lost? 

Response. First, I’d like to thank the Environment and Public Works Committee 

for the opportunity to testify on this important topic. Only an open and honest public debate will enable Congress to arrive at the proper legislative outcome regarding 

global warming. 

My views on human activity and climate change are an outgrowth of a diverse 

array of career experiences, which includes science, government and public policy. 

Starting with my undergraduate degree in microbiology, I earned a masters degree 

and doctorate in biochemistry and molecular biology where I conducted applied and 

basic research for General Foods. In 1987, I worked as a staff member for the Democratic majority for the House Science, Space and Technology Committee. 

Following my congressional experience, I worked for Philip Morris (now Altria) in 

a variety of roles in corporate affairs. After leaving Altria in 2005, I co-founded an 

investment company, Action Fund Management LLC, which serves as an advisor to 

the Free Enterprise Action Fund—a publicly traded mutual fund. 
185 

In the course of my broad work experience, I have acquired a deep and unique 

understanding regarding the interplay between science and politics and the affect 

government action has on corporations and the economy. 

All too often, the politicization of science has caused significant harm to the public—including reduced individual liberties, onerous laws that harm company earnings, lost jobs and diminished U.S. competitiveness in a global marketplace—with 

little, if any, public benefit. 

Given my collective experiences, I’m deeply concerned about government overreaction to fears about climate change. Unlike previous environmental issues, legislative efforts to control carbon dioxide emissions have the potential to transform our 

economy. 

I view legislation to restrict carbon dioxide emissions to address global warming 

concerns via a cap-and-trade scheme in a very different light. Not only is there great 

uncertainty regarding the impact of man’s influence on global climate change, but 

the proposed government action to restrict carbon dioxide emissions will hurt the 

economy, reduce our standard of living, drive employment overseas and dramatically reduce our liberty—all causing massive harm to society. 

I also want to thank you for drawing my attention to compare the scientific evidence regarding cigarette smoking and global warming. While epidemiology and climate sciences are vastly different, some of the underpinning principles of determining causation are relevant. I believe this comparison will enlighten the committee to recognize the major scientific gaps regarding the link between carbon dioxide emissions and global warming. 

The evidence linking atmospheric carbon dioxide (the subject of cap-and-trade legislation) to global warming does not support many of the criteria that were used 

to establish the causal relationship between smoking and lung cancer. 

For example: 

Temporal relationship.—The exposure occurs before the outcome. 

With cigarettes, smoking precedes the occurrence of lung cancer. 

However, global warming data obtained from ice core samples shows that atmospheric carbon dioxide follows warming. This finding is the exact opposite of the assumptions made in climate models that predict man made climate change. 

In addition, the temperature changes in the 20th century don’t correlate with atmospheric carbon dioxide levels. For instance, the greatest amount of warming occurred in the early part of the century while a period of global cooling happened 

from the 1940s to the 1970s, even though that is when increasing levels of atmospheric CO2 occurred. 

Specificity.—A particular agent causes a specific outcome. 

Cigarette smoking caused a significant increase in lung cancer rates. Prior to 

smoking, lung cancer was a rare disease. 

Regarding global warming, carbon dioxide is a minor greenhouse gas. Water vapor 

and methane have significantly greater ability to absorb and trap heat. In addition, 

natural sources of greenhouse gases far exceed the amount of carbon dioxide attributed to human activity. 

Second, periods of global warming have been independent of human activity and 

carbon dioxide levels. For example, historical records during the past millennium 

show there was a medieval warming period when Vikings farmed Greenland and 

a mini ice age during the 14th to the 19th century. 

Plausibility.—The correlation between agent and outcome agrees with the accepted understanding of the scientific process. 

Since cigarette smoke contains thousands of chemicals including many carcinogens, the relationship between smoking and lung cancer is consistent with the theory of chemical carcinogenesis. 

Regarding global warming, however, the observed warming is greater on the 

earth’s surface than in the lower atmosphere (troposphere). This observation is directly opposite the climate model predictions for greenhouse gas warming where 

warming is suppose to occur initially in the lower atmosphere. 

Alternative Explanations.—In order to prove causality it is important to rule out 

other explanations. 

With cigarette smoke, no other agent was identified that could explain the significant relationship between smoking and lung cancer. 

With global warming, recent evidence strongly supports that the solar activity of 

the sun may be responsible for the warming of the earth. Recent studies found a 

correlation between increased solar activity—measured by sunspots—with increasing earth temperatures, as well as a decrease in solar activity with decreasing temperatures. 
186 

Given the serious data gaps regarding the relationship between carbon dioxide 

emissions and global warming, I believe the prudent government response should 

not involve cap-and-trade legislation. 

Clearly, there remains great scientific uncertainty surrounding the role played by 

carbon dioxide in global warming. In this instance, I recommend the Congress take 

a very conservative stance and follow the Hippocratic Oath: first do no harm. 

RESPONSES BY THOMAS J. BORELLI TO ADDITIONAL QUESTIONS FROM

SENATOR INHOFE

Question 1. What is missing regarding business risks in the 10–K filings? 

Response. Federal securities law requires publicly traded companies to file detailed annual reports with the U.S. Securities and Exchange Commission (Form 10– 

K) disclosing their business and financial condition. 

In addition to comprehensive disclosure, companies are required to ‘‘describe in 

plain English’’ their operating environments and disclose business risks that could 

have a measurable impact on future operations and earnings. 

As part of this filing, companies disclose a variety of external factors such as litigation, regulations and other government actions, as well as economic conditions 

that could adversely affect a company’s future and serve as a warning to current 

and prospective investors. 

Companies participating in the U.S. Climate Action Partnership (USCAP) have 

failed to disclose the potential adverse business consequences of cap-and-trade legislation in their 10–K filings. For example, Caterpillar Inc.—a USCAP member— 

failed to disclose that its active support of cap-and-trade may harm the company 

reducing economic growth and reducing demand for coal. The coal industry is a 

major customer of Caterpillar. 

In Caterpillar’s 2007 10–K filing, the company acknowledges that a decline in economic growth and a decline in the mining industry is a key business risk. For instance, it states: 

Changes in Economic Conditions of Industries We Serve.—The energy and mining industries are major users of our machines and engines. Decisions to purchase our machines and engines are dependent upon performance of these industries. If demand of output in these industries increases, the demand for our 

products would likely increase and vice versa. 

Yet despite Caterpillar’s dependence on the energy and mining industry, the company supports cap-and-trade regulations that are likely to damage those industries. 

The Congressional Budget Office’s (CBO) report ‘‘Trade-Offs in Allocating Allowances for CO2 Emissions’’ reported that a cap on carbon dioxide emissions could result in a 40 percent decline in U.S. coal production. 

Moreover, Caterpillar’s voluntary participation in USCAP is controversial and has 

already cost the company one of its customers in the coal industry. Murray Energy 

Corporation refuses to buy Caterpillar products because the company’s active support of cap-and-trade threatens the coal industry. 

Finally, Caterpillar’s membership in USCAP is not based on a thorough review 

of the impact of cap-and-trade on its business. Caterpillar CEO Jim Owens stated 

at the 2007 shareholder meeting that the company had not conducted a cost-benefit 

analysis to estimate the business impact of cap-and-trade regulations. Instead, Caterpillar’s participation is based on his view that the company needed a ‘‘seat at the 

table’’ with the other industries and activists that are pursuing regulations. 

Shareholders should be informed through its 10–K filing that: (1) cap-and-trade 

regulations are harmful to Caterpillar’s business because of the impact of the legislation on the economy and the coal industry; (2) Caterpillar’s support for cap-andtrade regulations is controversial and it may result in a boycott of its products and; 

(3) Caterpillar did not conduct an analysis to determine the benefits and risks of 

participation in USCAP. 

Interestingly, Caterpillar finds it appropriate to list even remote business risks 

like disease epidemics in its 2007 10–K filing: 

Disease Epidemics.—Historical data shows that major flu epidemics often 

caused sharp drops in economic output. Such epidemics are difficult to forecast, 

either in their occurrence or in their impact. So, such an event would have the 

potential to impact our results more unfavorably than we would assume in our 

outlooks. 

Yet the company fails to disclose that its support of cap-and-trade legislation will 

harm its business. 
187 

Shareholders have a right to know the consequences of Caterpillar’s effort to support cap-and-trade legislation. Fair, transparent and full disclosure of the business 

risk of cap-and-trade would allow shareholders to make an informed decision about 

investing in Caterpillar. 

The aforementioned disclosures would allow shareholders to evaluate the external 

business risk of global warming regulations on Caterpillar’s business by providing 

insight into the judgment, and decisionmaking capability of company management. 

Question 2. As a portfolio manager what concerns you regarding cap-and-trade 

legislation? 

Response. Cap-and-trade legislation would harm the investment community in 

three major ways. 

First, cap-and-trade legislation would harm the economy and the future profitability of businesses. Yet despite these negative consequences, corporations have not 

factored these costs in their estimates of future earnings. 

This assessment is based on our experience at shareholder meetings where we 

discovered that CEOs were surprisingly ignorant regarding the negative impact of 

cap-and-trade regulations on the economy. 

Business leaders are unaware that the Energy Information Administration’s (EIA) 

study of cap-and-trade found that prices for energy and gasoline would rise significantly and that economic growth would decline by almost 2 percent. 

Higher energy prices would increase operating costs and negatively affect earnings. Consumers would also bear the cost of higher energy prices, reducing disposable income and leaving fewer dollars to spend on goods and services. Finally, higher energy prices would increase inflationary pressures. 

Because of higher energy prices and a decline in economic growth, cap-and-trade 

legislation would harm individual company earnings, the economy and stock market 

prices. 

In addition to the direct impact on earnings, companies have not considered or 

contemplated the consequences of fanning the flames of global warming hysteria on 

their products—this is especially true for companies that are participating in the 

United States Climate Action Partnership (USCAP). 

Environmental activist calls for immediate reductions in carbon dioxide emissions 

are creating a legislative and public policy nightmare for some corporations. 

General Electric faces legislation in California calling for the banning of incandescent light bulbs—a company product and invention of company founder, Thomas 

Edison. Activists are also calling for a ban on the use of coal-fired electricity power 

plants thereby jeopardizing GE’s technology for reducing carbon dioxide emissions 

from coal-fired power plants. 

PepsiCo faces calls for the banning of bottled water. Elected officials responding 

to the populist theme of combating global warming are actively pursing efforts to 

reduce bottled water consumption. Aquafina, the top selling brand of bottled water, 

is a PepsiCo product. 

The mayor of San Francisco recently banned the purchase of bottled water by the 

city government. The mayor justified his action by stating, ‘‘As the city advances 

its Local Climate Action Plan to combat global warming, it is paramount that we 

initiate policies that limit the most significant contributions to climate change.’’ 

San Francisco is not an isolated case. Salt Lake City Mayor Ross (Rocky) Anderson is urging the U.S. Conference of Mayors to promote tap water as a way to limit 

greenhouse-gas emissions. New York City just initiated a $700,000 media campaign 

to promote the use of tap water over bottled water. News articles on the campaign 

note that plastic water bottles are disposed in landfill sites, and production and distribution contributes to global warming. 

As the bottled water movement moves nationwide, it will threaten a major growth 

area for the entire bottled water industry, harming the profitability of PepsiCo, 

Coke and Nestle. 

Finally, companies are keeping shareholders in the dark about the consequences 

of cap-and-trade on their businesses. Companies like Caterpillar (see above), 

PepsiCo, GE, and DuPont are not disclosing the impact of these regulations in their 

10–K filings with the Securities and Exchange Commission (SEC). 

Unfortunately, without company disclosure about the harmful impact of cap-andtrade legislation on their company, portfolio managers and the public are making 

investment decisions devoid of such knowledge. 

Senator BOXER. Well, I look forward to coming back—— 

[Laughter.] 
188 

Senator BOXER [continuing]. And hearing from some of the great 

capitalists respond to your charges. It will be extremely interesting. 

I wouldn’t miss it for the world. 

So I will be back, as I hope everybody will be back. Just talk 

among yourselves and we will get back as soon as we know what 

the situation is with immigration. So we will see you within probably 20 minutes, a half hour at most. 

We will stand in recess. 

[Recess.] 

Senator BOXER. The committee will come to order. 

We will start with the questioning. Each colleague will have 5 

minutes. I will now go to the early bird, so Paul, if you could keep 

me advised as to who was here first, that would be fine. 

Excuse me, I am just trying to find a paper here. Dr. Borelli, you 

and Mr. Murray were very hostile, in my opinion, toward the utility companies who are here today who serve millions of Americans, 

and questioned their adherence to capitalism. I think Mr. Murray 

actually blamed the Clean Air Act Amendments for marriages 

breaking up. Now, I have heard a lot in my lifetime, but I have 

never heard anyone blame the Clean Air Act for marriages breaking up. 

So I am just going to ask my friends from the utilities who are 

here today to address the issue as to whether they think that their 

companies are abandoning capitalism and if they are somehow out 

of the mainstream of where they ought to be. I am going to start 

with Mr. Darbee. 

Mr. DARBEE. Thank you, Madam Chairman. We actually think 

that it is very important to take this stance. It is very consistent 

with the view of our shareholders. What we have found is that 70 

percent of the people in California view themselves as very concerned about the environment. They are our customers, and our 

regulators feel the same way. They have totally supported the 

view. So when you are meeting your customers’ needs and your 

regulators’ needs and you are moving in a consistent direction, that 

usually is consistent with meeting the needs of your shareholders. 

Additionally, it occurs to us that there may be liabilities for companies in the future and problems for companies in the future that 

arise from global warming. For example, it is anticipated, as the 

Earth warms in the next 50 years, that rainfall in California will 

be very substantially diminished. That means that our hydro facilities will be providing less water as they are this year, and therefore, we will not have access to clean, inexpensive hydro energy. 

So we have thought long and hard about the approach we are 

taking and its relationship with the shareholder and concluded it 

is very consistent with that. We have discussed it extensively at 

our board level and they have agreed with that conclusion and supported it heartily. 

Senator BOXER. Thank you. Now I would ask Mr. Jim Rogers to 

comment, and then Lewis Hay. Just to remind everyone, President 

and CEO of Duke Energy, is Duke Energy becoming socialistic and 

communistic or what? 

Mr. ROGERS. We are far from that. I should say that Mr. Murray 

is one of our important coal suppliers. We buy over 4 million tons 

a year of coal from him. I appreciate his comments, but the fact 
189 

of the matter is, he is a little off the mark. Because one of the reasons that we are addressing this issue is because we think it is 

critical that we do. We are the third largest consumer of coal in the 

country. We burn almost 50 million tons of coal a year. We want 

to make sure we can build a bridge to a low-carbon economy. This 

is all about getting going and building a bridge. 

We are going to go there, whether we go there in 20 years or 40 

years or 60 years, we are going to go there. The sooner we go to 

work, the most cost-effective it will be. As I said at the outset, I 

am here on behalf of my consumers. I will tell you, I was the only 

CEO in the industry that supported the Clean Air Act Amendments in 1990. I took a lot of criticism for that. But at the end of 

the day, we have made it where I can see that we are on the edge 

of stepping off the SO2 bridge. We have done it without any adverse impact on our customers. And we smoothed the transition, 

because we started early. My judgment is, we can smooth the transition into a low-carbon economy if we start early. 

Senator BOXER. Thank you. Then finally, answering the charges 

that you have lost your way, Mr. Hay, could you comment? 

Mr. HAY. First of all, I would echo the comments of my peers, 

I agree with them, so I am not going to repeat them. But no, we 

have not abandoned capitalism. We are very clean, as I mentioned 

in my testimony, and yet we are still a profitable company and 

doing very well. In fact, Fortune Magazine just named us the most 

admired company in our industry. 

What I think is most important, and what I think Mr. Murray 

is probably alluding to, is that we need cost certainty. If we have 

great cost uncertainty, it could do damage to our economy. If we 

extract a lot of costs from our customers, it could do damage to our 

country. So that is why we propose recycling it. 

I did want to comment on the jobs aspect, because I think that 

is an important issue. We are concerned about jobs. We don’t want 

jobs to go overseas, and that needs to be addressed in any program 

that is put forth. But the one thing I want to say is, there are going 

to be plenty of jobs available as we build new nuclear plants, as 

we build more wind facilities, as we build geothermal facilities, all 

of that. We can’t get enough skilled workers as it is. If we do something about the environment, we are going to need a lot more. 

Further, that is not just going to be nuclear and those kinds of 

facilities. It is going to be new, cleaner coal plants. Just as an interesting point, if we replaced the oldest fully paid, fully depreciated coal plants that are the most inefficient out there, just with 

conventional coal plants, nothing fancy from a technology standpoint, we could reduce our industry’s emissions by over 10 percent. 

So I think we are going to be still burning a lot of coal in the future, and I am willing to bet on our engineers and technologists to 

come up with ways to do it even cleaner in the future. 

Senator BOXER. Thank you, sir. 

I am going to put into the record the report that I received from 

the British Environmental Minister, where he says that since 1990 

in Great Britain they have had a 15 percent reduction in carbon, 

since 1990, and their GDP rose 45 percent. So maybe Mr. Murray 

and Mr. Borelli might want to take a look at that. 

[The referenced material was not received at time of print.] 
190 

Senator BOXER. Thank you. I have gone over for a minute, so I 

am happy to give an extra minute to Senator Inhofe. 

Senator INHOFE. Thank you, Madam Chairman. I think a couple 

of good things have happened in this hearing. For one thing, there 

seems to be a lot of support in the event that it came about for an 

economy-wide as opposed to a utility-wide approach to this thing. 

I have felt the same way. I think it is important, if everyone is 

going to be miserable, let them all be miserable. 

The other thing that I think is significant is the discussion as to 

whether or not a carbon tax in the event that we are doing something like this, I would think that would be, and I think there were 

five people who mentioned in their opening statement that probably would be the best approach if we had to get to that point. Real 

quickly, I would just ask, does anyone disagree with that? To me 

it is a more honest way of doing it. Does it masquerade the cost 

of this thing? Are there those who disagree with that? 

[Several witnesses raise hands.] 

Senator INHOFE. OK, that is, well, now, you are one of them who 

was on that side of it, I think, Mr. Darbee. You testified earlier this 

year that a carbon tax is the most efficient way to regulate greenhouses gases. That is out of your testimony. 

Mr. DARBEE. Right. 

Senator INHOFE. But let’s go to the next question. 

Mr. DARBEE. Was that a question, Senator? 

Senator INHOFE. No, it wasn’t a question. It was a statement. It 

was out of your statement. 

Let me ask, Mr. Donohue, is there any cap and trade policy out 

there that you would be for? 

Mr. DONOHUE. We have watched very carefully what has happened in Europe, their efforts to deal with Kyoto. The Chairman 

made the point of what happened in England and what they basically did is eliminated their coal-fired plants, for a number of reasons. We have watched what has happened there with upstream 

and downstream cap and trade issues, with a great deal of complexity and some corruption. 

But if you had a cap and trade system that measured against our 

five criteria, was structured in such a way that it had strong support and it protected jobs, it used new technology, did a lot of other 

things, didn’t put a great, huge new bureaucracy in, we would look 

at it. What I am asking, and what I believe this committee ought 

to think very seriously about, is how do we get an unemotional, serious look at the unintended circumstances of whatever we choose 

to do. 

As I said in my statement, we are going to take a very hard look 

at this. We are going to listen to everybody’s position on it. We are 

going to measure it against our criteria and we are going to be 

open to learning. If we are going to operate on these issues without 

learning, without looking at what happened to others, without considering questions, you saw the stuff with ethanol, that everybody 

was passing last week. At the same time, we are getting a report 

that that is going to make it impossible for us to reach our objectives in protecting the atmosphere. 

So we need to look at what is going on. Senator, I look forward 

to working with you and a lot of people here to learn as much as 
191 

I can to share that with my members and to come up with something that deals with this. 

Senator INHOFE. I appreciate that. Yes, Mr. Lewis. 

Mr. LEWIS. [Remarks off microphone.] Senator Inhofe, thank you. 

First, about Britain’s emission reduction, that was the result of the 

dash to gas tax. That is when Britain, for economic reasons, 

switched from taxpayer-subsidized coal to free market natural gas, 

which made a lot of sense when natural gas was less expensive 

than coal. But now coal is cheaper than natural gas, so Britain is 

switching back from natural gas and Britain’s emissions are going 

up. 

But as far as this whole issue of cost certainty and carbon taxes 

and so on, the whole idea of cost certainty or regulatory certainty 

is a chimera. It is impossible. Just think about the biofuel mandate 

that was enacted in 2005, which was supposed to go up to 7.5 billion gallons. Now all of a sudden, we have proposals for mandates 

up to 36 billion gallons. Every time you put in place one of these 

policies, you just open the door for demands for even tougher policies. 

I want to make one point clear, which I think is critical and I 

don’t think enough people are paying attention to it. Unless the 

legislation you are considering takes the regulatory action out of 

EPA’s hands with respect to carbon dioxide, you can’t even have a 

pretext of cost certainty or regulatory certainty, because as soon as 

EPA gets around to making a judgment that carbon dioxide emissions endanger public health and welfare, it will have to start a 

NAAQS (National Ambient Air Quality Standards) rulemaking. 

The Supreme Court has forbidden EPA to take costs and technical 

feasibility into account when setting national ambient air quality 

standards. Some folks at this table think the current CO2 levels endanger public health and welfare, the only way we can lower CO2

levels below current levels would be by de-industrializing the 

world. 

Senator INHOFE. That is a good point. I am glad you brought that 

up. We are rapidly running out of time here. 

I just wanted to ask Mr. Murray, first of all, I appreciate your 

testimony. Back in 1997, when we have our 95 to 0 vote on the 

Byrd-Hagel amendment, that was all of us up here who were there 

at that time voted in favor of that, saying that we would not agree 

to this type of an approach unless the developing nations would 

participate and it would not hurt the economy. Do you feel strongly 

that that should be true today? 

Mr. MURRAY. [Remarks off microphone.] Yes, back to 1995 [inaudible] should be the one taking? 

First of all, globally, the Kyoto Protocol is just a farce. Not one 

country except Sweden has complied. The Chairman mentioned 

Great Britain. They took credit for excluding the coal industry and 

going to four times more expensive RC gas 20 years ago, and they 

retroactively took credit. These foreigners are going to cheat, and 

every bill that you have introduced depends on global trading. They 

are interested in the standard of living. They will continue to 

cheat. 

The coal use in China right now will increase five times between 

now and 2020, five times. They are bringing on a new 500 mega-
192 

watt power plant every 5 days. They have 455 on the drawing 

board. I say this with all the respect that I can: it is smoking 

opium for this Senate to take a position to destroy American jobs, 

quintuple the cost of living for people on a fixed income, and export 

the jobs to countries who have already said they are going to continue to emit CO2. So nothing has changed, Senator. It still should be at 25. The 

Chairman said she didn’t believe what I said about Ohio. You have 

my invitation, Ma’am, to come out, because you people inside the 

beltway and you Senators do, on the majority side, give a clear appearance that you don’t have the foggiest idea what a person does 

to pack a lunch and go to work or wear a hard hat. 

Senator BOXER. Sir—— 

Mr. MURRAY. You are inside the beltway. I know what is going 

on out there. 

Senator BOXER [continuing]. Sir, I would appreciate you didn’t 

have that kind of edge. Because I have some information here 

about you, that you have the biggest fines against you of any other 

miner in Ohio. You know, you come up here and say how much you 

care about ordinary people, the Clean Air Act split up families. But 

we read here in The Columbus Dispatch of Ohio, that you own the 

two largest mines which recorded injury rates about a fourth higher than the national average. So let’s not have a double standard 

about how much you care about people. That is all I will say on 

the point. 

Mr. MURRAY. Madam Chair, I am going to respond to that. You 

are flat-out wrong. 

Senator BOXER. Fine. 

Mr. MURRAY. That information came from your friends at the 

United Mine Workers and the unions. It is not fair. Today, my 

safety record at my coal mines, and I take it to bed with me every 

night, and I resent you bringing this in. 

Senator BOXER. Right. 

Mr. MURRAY. Because my employees are important to me, and I 

take their safety to bed every night. My safety record today is one 

of the best in the coal industry anywhere. So don’t take propaganda 

from the United Mine Workers and tell the public that it is fact. 

Because you are flat-out wrong, Madam. 

Senator BOXER. OK, sir. We will place in the record an article 

from The Columbus Dispatch of Ohio, January 15, 2006, I am not 

going to argue with you, sir, I am going to put this and let it stand. 

It is cited chapter and verse. But I don’t appreciate your attacking 

members of this committee. 

[The referenced material follows:] 
193 
194 
195 
196 

Senator BOXER. Now, we are going to move on. 

Mr. MURRAY. I don’t appreciate your attaching every American 

working person. 

Senator BOXER. Sir, if you had the record among American workers that I had, you would be happy. 

Let me call on Senator Carper. 

Senator CARPER. Now onto more mundane matters. 

[Laughter.] 

Senator CARPER. I want to go back to a point I made earlier. Senator Alexander and I, in fact, to an extent Senator Sanders and I, 

we actually agree on a lot. Personally, I want an economy-wide bill. 

But in terms of how we proceed with respect to utility emissions, 

we want to address four pollutants, not just CO2. We want to address sulfur dioxide, nitrogen oxide, and mercury as well. In fact, 

Senator Alexander and I both have basically the same goals. By 

2015, we want to reduce nitrogen oxide emissions by 70 percent; 

by 2015, we want to reduce sulfur dioxide emissions by some 80 

percent. Both of those are a cap and trade approach. By 2015, we 

would like to reduce mercury emissions from plants that generate 

mercury by 90 percent. 

We also agree that by 2016, CO2 emissions from utility plants 

ought to be back where they were in 2001. That is a lot of agreement. We also agree to a cap and trade approach, we agree that 

we want to have some element of an auction in terms of the allocation approach. I call for going to a full auction system by 2036, he 

calls for maintaining it, I think, at about 20 percent auction in 

terms of the allocation of credits or allowances. So there is actually 

a whole lot of agreement. 

We have heard in the testimony here today though sort of whether we agree on a carbon tax, I don’t think that is going to happen, 

at least not on my watch, on whether it should be an output-based 

allocation, should it be an input-based allocation. My approach, and 

the approach that the co-sponsors of my bill have said, and some 

of you have agreed to, and I thank you for that, we ought to try 

to reward those who create electricity, the more electricity with the 

least amount of input is something we ought to be incentivizing. 

That is really our focus. I realize that others don’t see it that way. 

I talk a lot about, along with my friend, Joe Lieberman, here, we 

talk a lot about third ways. I think third way, Democratic way, Republican way, well, how about a third way. Today I want you to 

think about a fourth way, and I want to ask some of our witnesses 

to think about a fourth way. The fourth way may be one of the 

ways, output-based allocation, input-based allocation and auction 

approach, and maybe another approach that a couple of you are familiar with and we are hearing folks talking about, where the allocation doesn’t go, credits don’t go to the power generators, but rather, it might go to local distribution companies. 

I would just like to have some discussion on that. Mr. Darbee, 

if we could start off with you, I would kind of like to go down the 

row here. But Mr. Darbee, any comments you have on that, and 

we will just go to Mr. Grumet and to others, please. 

Mr. DARBEE. I would be happy to, Senator. 

I think it is important that as one approaches this problem, we 

learn from the successes of acid rain, as well as the problems in 
197 

Europe. What we saw in Europe with the cap and trade program 

implemented there, one, there were too many allocations, allowances that were allocated. But also what we saw was the producers 

that were generating energy received these allowances and in effect, they were rewarded twice. The price of power went up and 

they received payments for that, because of the coal. But then they 

also received the allowances. That was problematic. 

We have thought about that, and felt that the right solution 

would be to distribute the allowances to the load serving entities 

of the utilities. Now, I am sure many would say that is a very selfserving point of view. But at the same time, in every statement we 

have said, we feel then the benefits of that should be passed directly to our customers. 

So we would propose that some of the funds might be used for 

technology, R&D, so that would be it. Also for the people who are 

suffering from an income standpoint and can’t afford the price of 

power, that they would get the benefits. Then something like an 

average payment out to the customers, not a per kilowatt bill, but 

an average payment out to them would be useful. That way, there 

wouldn’t be any windfall for generators, and the people who have 

paid already for high-priced power, as we have in California, at 

about 81⁄2 cents per kilowatt hour for energy, they would not pay 

twice for a cap and trade program, not pay twice for clean energy, 

they would in fact get a credit back, recognizing that they have 

supported clean energy for a substantial period of time. 

Senator CARPER. Could we ask for an additional 2 minutes, just 

to let a couple more people respond to that one question? 

Senator BOXER. Go ahead. 

Senator CARPER. Thank you very much. Mr. Grumet, I would ask 

that you be pretty crisp in your response. 

Mr. GRUMET. I will do my best, Senator. Let me just reflect 

broadly on the challenge. That is that the electric sector is complicated because of the diversity of generation, different carbon 

footprints, and the diversity of regulatory structures. So one of the 

big challenges with the electric sector that we don’t deal with in 

the petroleum sector is that we have regulated and de-regulated 

companies. Those different regulatory treatments affect how companies can pass the costs through, which at the end of the day really is what matters, the costs you bear are the costs that you receive 

in fuel prices that you can’t pass on to somebody else. 

The commission is grappling with a concern which would have 

kind of a perverse impact, which is that in a regulated coal-heavy 

utility portfolio, free allocations would be required by the State regulators to be passed through to the ultimate consumer. The good 

news is you would lower the price, the bad news is you basically 

are blunting the purpose of the program. A natural gas company 

with much lower carbon footprint in a de-regulated State would 

pass the entire cost along to consumers. So you could actually have 

a situation where lower carbon-producing utilities in de-regulated 

States, that their customers would receive a higher price signal 

than heavier intensive carbon generators in a regulated industry. 

So the idea is that the distribution companies, since they are all 

regulated, provide an opportunity to basically leapfrog over the 

generators to the State regulators. 
198 

Senator CARPER. I am going to ask you to wrap it up right there, 

if you would just bear with me. I want to hear from David Hawkins. Do you have any comments on this, Mr. Hawkins? 

Mr. HAWKINS. Yes, Senator, and I will be brief. We believe that 

if there are allocations outside the auction approach that they 

should be made to the local distribution companies. We think that 

is the right place to do it. 

Senator CARPER. Mr. Hay? 

Mr. HAY. I think that is an idea that has a lot of merit. I do have 

one concern. 

Senator CARPER. What would that be? 

Mr. HAY. That would be just how, you are now delegating to each 

State public service commission how to get the money back to the 

customers. You may end up with very different approaches, and it 

could dilute the price signal that customers need. But other than 

that, I think the idea has tremendous merit. 

Senator CARPER. Good. Mr. Rogers, you have about 10 seconds. 

I’m sorry. 

Mr. ROGERS. I think it has merit, but I would say go back and 

let’s stay grounded as to why the allowance system was developed 

in 1990. It was really to use those allowances to use existing plants 

to continue to run through the transition period. It was to help 

those that are adversely impacted. That is the sole purpose. There 

are a lot of other good reasons to use these allowances, I am sure. 

But the reality is, the purpose was to help those that are adversely 

affected. That is those 25 States where more than 50 percent of the 

people rely on electricity from coal. We have to help them transition. Allowances are nothing more than a transition mechanism. 

Senator CARPER. Thanks. I would just conclude by saying my 

friend Mr. Donohue is pretty good at finding a deal. There may be 

an agreement to be found on this. I would welcome your helping 

us define that. 

Mr. DONOHUE. I look forward to working with you, Senator. 

Senator BOXER. Senator Voinovich, and then we are going to go 

to Senator Klobuchar. 

Senator VOINOVICH. Thank you, Madam Chairman. 

I would like to call the attention of the witnesses and the committee to the map that was submitted as part, I think, of Mr. Rogers’ testimony, and would like to bring to the attention of this committee that the perspective of members of the U.S. Senate have a 

whole lot to do with whether they are in the green, the red or the 

blue. I can understand the gentleman from California, you have 1 

percent from coal. So you have a different perspective on things 

than some of the other people here that represent other States. 

Senator BOXER. I think it is a little more than that. It is not 1 

percent. 

Senator VOINOVICH. That is what it says. 

Mr. DARBEE. It is about 1 percent, Senator. We used to have a 

lot more coal, but we have worked very hard to clean up that portfolio. 

Senator BOXER. Yes, used to be a lot more. Thank you. 

Senator VOINOVICH. OK, so I think also that the colors also will 

color the judgment on allocation of credits. I would again like to 

bring to the attention of the utilities represented here, and this 
199 

committee, that the long-term reconciliation of differences of opinion among the utilities on how credits be allocated is very important. Down the road, if we go and get any kind of legislation 

passed, Madam Chairman, that will be the Achilles heel, as Senator Carper and I know, when we worked together last year on another piece of legislation. 

The question I have is, assuming that you agree that technology 

is not currently commercially available to capture and store carbon, 

how would you pay to accelerate the technology to make it commercially viable? Or do you believe that using an economy-based cap 

and trade, an economy-based protocol, will stimulate and fast-track 

the technology? That is one question. Mr. Lewis, I would like you 

to respond to that. 

The second question is, if I have the time, is that how do you 

deal with nations who compete with the United States of America 

who have made it very clear that they aren’t going to sacrifice jobs 

on the altar of the environment, and pretty, I mean, I know the 

Chinese, and I will tell you, jobs trump everything. So I would like 

to hear from you, Mr. Lewis. 

Mr. LEWIS. Thank you. You often hear climate change described 

in terms of a security threat, and you even hear people say, even 

the military now looks at this as a security threat. Well, in the history of this country, to my knowledge, we have never addressed security threats by constraining particular sectors of the economy 

with regulation or even the entire economy. What we have done is 

tax people, for example, to build the atom bomb, the Manhattan 

Project, or the Apollo Project, which is often invoked as a metaphor 

for what we ought to do in the area of climate change. 

So I would recommend that if there is this great potential for 

carbon capture and storage, fund it through tax payments, and not 

through cap and trade that is put in place before we know that carbon capture and storage is economical. There is a huge study out, 

just a few months ago by MIT, The Future of Coal, and I am sure 

many people have looked at it. But it basically says it will take 

$250 million and 8 years just to determine whether carbon capture 

and storage is economical, assuming at $30 a ton carbon dioxide 

penalty. That doesn’t even address all of the problems with infrastructure and liability. 

How many decades has it been since some people thought it was 

a good idea to have a depository for spent nuclear fuel in Nevada? 

Chairman Reid says that will never happen on his watch. So how 

many people are going to want to have billions of tons of CO2

stored in their State, or want to have a pipeline system comparable 

to the natural gas pipeline system running through their back 

yards? 

So the idea that we should require CO2 reductions now as if we 

already knew that carbon capture and storage was economical and 

could ever become operational, I think is putting the cart before the 

horse. 

Mr. DONOHUE. Senator, may I just add one sentence on the issue 

about China and India? We all know that they are creating a lot 

of pollution that comes to California and the West Coast and other 

places. It is very difficult in India, with 800 million people still 

digging in the dirt, and you are right on target. The only thing I 
200 

see coming out of China and India that is encouraging at this point 

is that they are focused on energy efficiency, that is, how to get 

more kilowatts out of less energy. The new foreign minister, who 

used to be the Ambassador to the United States, is absolutely 

laser-focused on that. I think that will begin a small diminution in 

the pollution. We ought to encourage that. 

Senator VOINOVICH. By the way, the legislation, the Hagel bill 

that we got passed, has helped that, because we created the Asian 

Pacific Initiative, which is where we should be going. But the issue 

is that if we move down, we have to capture some way some of the 

costs that we are going to have, versus the costs that they are not 

willing to come up with, in terms of our competitive position. 

Mr. DONOHUE. I agree with that, Senator. 

Mr. MURRAY. Senator, one quick comment on your question. The 

Energy Information Administration of the Department of Energy 

says that carbon capture technology will not be available until 

2020, at the earliest. MIT has confirmed this in a study that Marlo 

referred to. As long as you don’t have the technology to capture, as 

long as we are going to have an international marketplace in which 

the cap and trade would take place, it is a figment of an imagination. It will never work. It will work to the disadvantage of the 

United States of America and these people, that I truly care about, 

that are working families and people on fixed incomes. 

So anything that this Senate would ever do must be international. The other countries must step up. It is naive to think that 

we have to take the lead. They are not going to. They are not going 

to follow us. So I think we need to look at America first. 

The fact that technology is not there, it is a dishonest international marketplace, cap and trade is a figment for people that 

don’t know what they are talking about. 

Senator BOXER. Thank you, Senator Voinovich. 

Senator Klobuchar. 

Senator KLOBUCHAR. Senator Lieberman can go before me, Senator Boxer. I have a few minutes left. I think he was next, right? 

Senator LIEBERMAN. You can go ahead. 

Senator KLOBUCHAR. All right, thank you. 

I first wanted to note for the record, I know we were talking 

about miners. My grandpa worked in iron ore mines, he wore a 

hard hat every day, Mr. Lewis, and my dad grew up working in 

the iron ore mines. They also both loved their environment and 

were great outdoors people. My grandpa was a great hunter, and 

I believe there are ways to work on these two issues, the workers’ 

issues as well as the environmental issues together. That is what 

I have been trying to do here. 

So my approach is to look at how we can make sure that we are 

protecting consumers as we go forward, what I consider with our 

major challenge, which is doing something about climate change. I 

wanted to ask you, Mr. Grumet, there was some discussion about 

this MIT study about how it would, I think it was Mr. Donohue 

that talked about how it would result in significant electricity price 

increases. I have to tell you, from my perspective with Excel Energy in Minnesota, not in the cap and trade context, but in the renewable standard, we have a 25 percent renewable standard by 
201 

2025. They don’t believe it is going to lead to increases and have 

been supportive of this measure. 

So I think Mr. Donohue said it would increase electricity rates 

by 30 to 75 percent, according to the MIT study. Is that your take 

on this study? 

Mr. GRUMET. Well, Senator Klobuchar, we did look at the MIT 

study, which I think is a very good study. One of the pieces I think 

in the description that I was confused by, Mr. Donohue, was that 

it implied that all of the increases over this 25-year-period were 

going to be due to the climate program. My read of the study is 

that under business as usual, electricity prices are presumed to increase by 38 percent. So I think you need to subtract that 38 percent from your 30 to 75 number as a starting point, so that you 

can isolate what is actually being attributed to climate change. 

Now, we have not looked, at the Energy Commission, all of the 

bills. I think most people are aware we have worked closely with 

Senators Bingaman and Specter, and I had looked at the assessment of that bill. I was also taken that the characterization from 

the Chamber just ignored the cost cap in the Bingaman-Specter 

bill. While that cost cap is not popular with everybody, its purpose 

is to avoid these kinds of, I think, rather exaggerated assessments 

that it is not possible to have a cap and trade system without 

harming the economy. I think that we have demonstrated clearly, 

EIA has demonstrated clearly that of course, that is not true. We 

agree with the Byrd-Hagel requirements; we agree with the need 

for international linkage. But we don’t take the defeatist tone that 

it is not possible. 

Our own assessment of what the MIT study said about the 

Bingaman-Specter bill is that it would increase electricity prices by 

about 5 to 10 percent between now and 2030. That is real. We have 

just submitted to the record our own analysis of the Commission’s 

now-strengthened proposals, which would raise the cost cap to a 

starting point of $10, and our own assessment, which we will share 

with you, suggests that optimistically the cost increase would only 

be 5 percent. Pessimistically, worst case, if the safety valve was 

triggered right away, it would be 15 percent. 

The last thing I will say is, under no circumstances could a carbon system that started with a $10 price cause the electricity prices 

to go up by more than 15 percent if that price was triggered right 

away. I think taking the ‘‘I think’’ and ‘‘I hope’’ and ‘‘please trust 

me, I am a good guy’’ out of the equation, is going to be necessary 

to forge the kind of compromise we are going to need to legislative. 

Senator KLOBUCHAR. Thank you. 

Mr. Donohue, you said in your testimony here that you wanted 

to have all the facts for us to go forward. I guess that seems to me 

inconsistent with the position of the Chamber in the last few weeks 

on the carbon registry bill that I put forward, which was supported 

by Senator Lieberman, Senator McCain, Senator Coleman, Senator 

Snowe, Senator Collins, none of which I would really describe as 

radicals on the economy. Yet you have sent this key vote alert, saying that in fact this bill may be considered a key vote for Senators, 

presumably if they voted against it. 

I just wanted to ask you some things that were contained in this 

letter. Because really, the idea was to get a national registry, giv-
202 

ing the EPA the power to get the information. In the letter you 

said that it would be overbroad, unduly burdensome and would be 

virtually impossible to implement. I am just wondering where you 

came from on that, given that right now, we have about two or 

three different agencies collecting this information. Some do it 

every 3 years, some do it every year, some do it every few weeks. 

I wonder why you would consider this so impossible to implement 

and overbroad. 

Mr. DONOHUE. Thank you for asking, Senator. I thought you 

might react to our letter. 

We sent that letter for three reasons. The first is that our understanding was that while working on the energy bill, we were going 

to try and leave the carbon and the cap and trade carbon issues 

and all of that to these hearings and to future legislation. That is 

how it was described that we were going to deal with this matter. 

There was no conversation about it ahead of time, and that was 

our first reaction. 

The second reaction was that we really believe that there is great 

question with some of the carbon collection, information collection. 

We thought it would be very, very useful to have this conversation 

and to measure those pieces of legislation against the objectives we 

are all trying to get to. The third reason that we oppose that is that 

we thought it was going to get very much, it was going to have a 

negative effect on a lot of the other things that we were trying to 

deal with in that energy bill, where we were basically rolling back 

all, many of the good things that were put in place in 2005. 

Having said that, and I am not sure that is satisfactory, going 

forward, we will be very happy to sit down and talk with you about 

it in the right piece of legislation, with adequate discussion and 

hearings, and you may be very persuasive. Certainly there is nothing personal in going after that bill. It was something that was put 

in at the last minute without preparation, without discussion, and 

in a way that we thought would be detrimental and ought to be 

heard in another forum. We would be glad to work with you on it. 

Senator KLOBUCHAR. Mr. Donohue, if I could just respond to 

that, one of the reasons we did it is that many large corporations 

were calling for this, because of the fact that we have 31 States 

doing this, developing their own registry. I believe that if you look 

at the record from other hearings, this kind of thing, a national 

carbon registry was discussed that didn’t dictate what the policy 

was. If you are talking about past actions, the Senate actually 

passed, Senator Brownback and Senator Corzine introduced nearly 

the exact same amendment that said it would be voluntary. If the 

registry contained less than 60 percent of the total national greenhouse gases in the United States, this was 5 years ago, then it 

would become mandatory. 

Now, that bill, which was part of the energy bill, actually never 

became law. But if you are talking about past actions, this has 

been discussed. I do look forward to talking with you about this in 

the future. But I just believe that some of the allegations made in 

the letter, for whatever purpose you did it, were not correct. 

Mr. DONOHUE. Thank you. I look forward to talking to you, Senator. 

Senator KLOBUCHAR. Thank you. 
203 

Senator BOXER. Thank you very much, Senator, for your leadership. There is no question this is coming. So we look forward to 

your continuing to give us your thoughts and ideas as we move this 

along. 

Senator Whitehouse. 

Senator WHITEHOUSE. Thank you, Chairman. 

When I first started out in my public service career, I was involved in utility regulation. Way back in the early 1980s, we did 

one of the first what we called conservation rates, with Narragansett Electric, part of the New England Power System in Rhode Island. I was representing the Attorney General in those negotiations. This was before phrases like demand side management, 

which are old hat now, even came up. This was sort of primitive. 

So now looking at an environment under which you all are under 

enormous environmental pressure with respect to your emissions, 

and when you look at the various slices of a solution, you see that 

one of the largest slices is reducing demand. It also tends to be one 

of the cheapest slices. In fact, from a lot of perspectives, it is actually a net gainer economically. 

Again, it has been a while since I have been involved in this, because the conservation rates were many years ago, and Mr. Rogers, 

I practiced down at FERC, which at that point didn’t have a great 

interest in these matters. But I gather that is improving since 

then. 

What do you think is the best way, I am going to ask this of the 

utility representatives, Mr. Darbee, Mr. Hay and Mr. Rogers, what 

do you think is the best way for the Senate, for Congress to help 

you institutionalize increasing conservation and efficiency into your 

power mix, so that it is seen as much of your portfolio as any other 

and you are able to recover it, your investment in that sort of a 

power source? 

Mr. Darbee. 

Mr. DARBEE. Senator, you are absolutely on target. I assure you 

that so long as power companies produce more profits by generating more power, they will do it as surely as the sun rises tomorrow. Thirty years ago in California, the regulators and policymakers took an approach that we actually opposed at the time. 

What they did was they broke the linkage between making more 

money and selling more kilowatt hours. It is called decoupling. 

That neutralized the incentive for us to sell more power. 

Then they overlaid on that a system of incentives that amounted to more than $100 million, for us to encourage our customers to use 

less. That program has been fantastically successful. It has avoided, as I said in my statement, the construction of 24 power plants 

in the last 30 years. 

During that period of time, per capita energy use in California 

has remained flat, whereas across the country it has gone up 50 

percent. So my point is, the technology for clean coal doesn’t exist 

today. But if we align the financial incentives for utilities, we could 

make great movement forward. That actually would cause the 

United States to be more competitive with other countries, because 

we would use power more efficiently. 

We have sent delegations to China, and the Chinese have looked 

at this, because they are very inefficient, how they use power. They 
204 

want to come up the curve on energy efficiency as quickly as they 

can. So actually, they want to take steps toward solving global 

warming and being more efficient and more competitive. So I think 

that is a critical thing. 

I just want to go back to one of the earlier comments. Anyone 

who is really serious about dealing with global warming understands that we need a carbon registry to set the baseline as soon 

as possible. 

Senator WHITEHOUSE. Understood. Mr. Hay, if you could just 

elaborate a little bit in your answer on what the next steps would 

be. I think a lot of people have put the kind of price signal in for 

conservation. But yet, when we look at the conservation piece, it 

is still huge. So what are the next steps that we need to take, so 

that you all have the proper incentive and the proper reward to 

really pursue additional home insulation, whatever the steps are 

that will make the most sense? 

Mr. HAY. Thank you, Senator. Generally, I agree with your comments. I think there is a huge opportunity in energy conservation. 

We have done some benchmarking across our industry and the performance is very varied, from some companies that are doing a fantastic job, like Mr. Darbee’s, and I would rate my company in the 

same way, and the DOE does as well, to some that have done nothing. 

Nonetheless, I do think it is, and I agree with Mr. Darbee that 

we need more incentives, and that will move us forward. But it is 

a State by State issue. We have different regulatory structures literally in every State. Decoupling is one solution. But I would point 

out in Florida, we have a totally different approach. Our PSC will 

not allow us to build a new plant until we have proven to them 

that we have done everything economically possible in terms of energy efficiency and conservation. 

So while we do have an incentive to sell more power, generally, 

we can’t do it, we don’t have the means to do it, unless we prove 

to our commission that we have done everything. The only thing 

I can say going forward, besides getting all the States aligned and 

sort of benchmarking and getting everybody to the levels that the 

top performers are at. As I said, that would reduce emissions by 

about 10 percent in our sector. 

There is, it is still a State by State issue. There are new technologies that could allow us to do even better than what we are 

doing today. 

Senator WHITEHOUSE. Thank you. I just got the courteous permission of the Chairman and of Senator Lieberman to allow Mr. 

Rogers to answer as well, even though I am over my time. 

Mr. ROGERS. Senator, I am very supportive of what you are proposing. In the 20th century, we provided universal access to electricity. That was our mission. In the 21st century, I think our mission should be to provide universal access to energy efficiency products and services. It is going to require a paradigm change in terms 

of how we are regulated at the State level. I think that we have 

a proposal that we filed in North Carolina called Save a Watt, 

where we get rewarded in the same way we get rewarded for building a new megawatt, for every megawatt we can reduce, we earn 

off of it. 
205 

So the way to think about this is that historically, think about 

the last decade and a half, the real price of electricity has gone 

down. Most of the DSM programs that came out of the 1980s or 

1990s were about educating consumers, where the bill was a small 

part of the disposable income and it was back of mind. You spent 

a lot of money moving it to top of mind. It didn’t really work, although more and more people are becoming aware. 

What we really need is to change the mission of utility companies in this country and give them the mission to go in and put 

chips in refrigerators, chips in air conditioners, to give them the 

mission to invest in new infrastructure and commercial businesses 

and industrial businesses, so that at the end of the day we can reduce usage, and do it systematically. 

Senator WHITEHOUSE. Including timing costs, changing the time 

of day of use, all those sorts of things. 

Mr. ROGERS. But I would go even a step further. Most of our customers have busy lives. We are connected with price signals 24/7. 

If we put a chip in the refrigerator or the air conditioning and we 

can remotely control it, our goal is to maintain their comfort and 

convenience while at the same time making sure we are reducing 

the demand at key times. 

So I think there is a lot of rich thinking, and I should say, I am 

currently co-chairman of the National Action Plan on Energy Efficiency, as well as co-chair of the Alliance to Save Energy. So I have 

been very engaged in this issue. I see great promise in the future. 

But what you all need to do is really encourage States, develop 

principles and really say to the State, you have to change the paradigm, you have to give these companies the mission to give universal access to energy efficiency products and services. 

Senator WHITEHOUSE. Very good. I would be pleased to followup 

with any of you offline. I know my time has expired. I do have 

some familiarity with your industry from my past. I do think this 

is an important thing to work on. I look froward to working with 

you, and I thank the Chair. 

Senator BOXER. Thank you, Senator Whitehouse. 

Senator Lieberman. 

Senator LIEBERMAN. Thanks, Madam Chair. Thanks to the witnesses for your testimony. We have heard some very helpful testimony this morning. I think it comes at a moment where, as I said 

earlier, I believe that a majority of members of this committee, certainly of the subcommittee that I am privileged to chair, but I believe the overall committee, are ready to write a bill. In other 

words, we have heard a lot of testimony, people have reached a 

judgment that climate change is a real problem, that the way to 

deal with it is through a national cap and trade system to create 

some predictability, set national goals and figure out the best way 

to achieve them. 

Having reached that understanding and agreement and alliance 

with Senator Warner, which I deeply appreciate, he and I both understand, as we now begin to reach out to the stakeholders in the 

business community and the environment community, experts of 

various kinds on this, that we have a lot of decisions to make within that larger architecture that I have described. In that sense, 

your testimony today has been very important. 
206 

Mr. Donohue, I particularly want to thank you. I think your testimony on behalf of the Chamber of Commerce has been very encouraging to me, which is to say that you have recognized we have 

a problem and you have left yourself open on behalf of the Chamber to a national cap and trade system, depending on how it works. 

I really invite you and your staff to get involved with us in putting 

it together. 

You made a statement in response to the question Senator Inhofe 

asked about whether under any circumstance you could see yourself supporting, or the Chamber supporting cap and trade, which 

was, you said it was possible, you would want to see the details, 

and you were concerned about unintended consequences. I think 

that is the phrase you used. I agree with you. Senator Warner and 

I and others have talked about this. This is the question that some 

resolve with what they call a safety valve, others call it an off 

ramp. 

John Warner, I am going to give him credit, because I am sorry 

he is not here to say it himself, he said we ought to have an off 

ramp, but it ought not to be too easy an off ramp. Because if it is 

too easy an off ramp, then the economic calculations that some of 

the witnesses made, to invest enormous amounts of money in complying with technology to comply with this system, could be thrown 

totally off, because the market will be skewed. 

So John used the example of the highways, which, if they are 

dramatically downhill, then there are emergency off ramps. That is 

what we are looking for, is an emergency off ramp. That is why, 

I am going to ask Mr. Hawkins in a minute, but that is why I am 

troubled by some of the proposals to have Congress mandate a 

price off ramp, which I think may be much too inflexible. We are 

looking for, Senator Warner and I are looking for some kind of 

market mechanism here. 

So first off, I wanted to thank you, Mr. Donohue, invite your participation. Second, ask if you have any thoughts about how we 

might create an emergency off ramp. Because we want this, obviously, to deal with a critical environmental problem. But we also 

want it not only not to be harmful to the economy, we hope it will 

help. 

Mr. DONOHUE. Senator, first of all, thank you for your comments. 

Than you for your logic in trying to figure out what might be the 

benefit and/or the unintended circumstances. We very much look 

forward to working with you and your colleagues on that. I am not 

going to attempt, in the middle of my members that all have different views, which I promise you are going to bring them to some 

collective effort over time, to comment on off ramps, simply to say 

that your instincts, which usually are pretty good about things like 

this, encourage me as I might encourage you, and we will sit down 

and talk about it. We need, all of us, to get smarter on this. We 

need to look ahead to the cause and effect of what we do. If we take 

just a little longer to get that done, I think in the last analysis, 

when we look back on whatever we do, we will feel better about 

it. So we look forward to a vigorous participation with you and I 

will assure you that not only the Chamber but its companies are 

always available to you and your colleagues to talk about it. 

Senator LIEBERMAN. Thanks, Mr. Donohue. 
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Mr. Hawkins, you, I think, were the one who testified, or maybe 

one of two, about so-called safety valve or off ramps. I want you 

to offer some testimony about what you have heard and whether 

you have any ideas about how we would best do this. 

Mr. HAWKINS. Yes, thank you, Senator. I do appreciate the emphasis on the idea of an emergency. 

What I would say is that the problem with the safety valve or 

the off ramp concept is that it undermines the basic market provisions of the cap and trade system. 

Senator LIEBERMAN. Right. 

Mr. HAWKINS. We are going to depend to get costs reduced in 

this program on the ingenuity of entrepreneurs who see a business 

opportunity that basically say, it is a new world. Low-carbon energy resources have an economic value. I can put money into it, I 

can go to my board of directors and get money allocated for the intense expenditures that may be necessary up front to bring an innovative new product or process to market. They need for that 

business plan to work to know that the market signal is going to 

be there. 

If you introduce these concepts of off ramps or safety valves, you 

fundamentally conflict with that. You set a number that they know 

they have to beat, or their investment is going to be either worth 

nothing or worth a lot less. That makes it a more difficult hurdle 

to get that work done, which could, ironically, lead to higher overall 

prices for this program. Somebody might be paying money to the 

Treasury to purchase these additional printed allowances, but they 

wouldn’t be getting the emission reductions. 

So we think that the concept of banking as a hedging strategy, 

the concept of borrowing, are ways to address this issue, and perhaps the metaphor is, rather than an off ramp, it is a lane change. 

But let’s stay on the road. 

Senator LIEBERMAN. So you would prefer to, you would see the 

banking and borrowing provisions, which I think it is fair to say 

Senator Warner and I will include in our draft, as the answer to 

that problem as opposed to an off ramp, emergency or otherwise? 

Mr. HAWKINS. It is part of the answer, Senator. Another answer, 

frankly, comes from all sorts of groups. We will have all sorts of 

information about how well this is performing. 

There is always the off ramp that Congress has, which is to take 

a look at a program, see how it is working, and if the case can be 

made that some adjustment in time tables or rates are appropriate, 

then Congress can respond. We have seen that happen in the Clean 

Air Act over the past 35, 37 years. The first schedule for attaining 

the health-based standards in the 1970 Clean Air Act was 1975. 

There have been a series of adjustments, both in the tools and the 

objectives over time. I am sure everyone doesn’t think it has been 

a model of perfection, but it has worked to clean up the air, to provide real signals for progress. It has done it with an economy that 

has grown rapidly in the meantime. 

Senator LIEBERMAN. I will tell you that Senator Warner and I 

have been talking about using some of the thinking of the U.S. Climate Action Partnership as a basis for what we are going to put 

together. The goal there is a 2050 goal and a 60 to 80 percent 

range of reduction of current greenhouse gas emissions. To do that 
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and avoid potentially disastrous economic consequences as part of 

a crash program toward the end, you also have to set some goals 

and points of review by Congress of how this is working at 5, 10, 

15 year periods. So we would like to obviously involve all of you 

in helping us present interim goals that are reasonable and doable. 

I note Mr. Darbee, Mr. Grumet and Mr. Hay. 

Mr. DARBEE. Senator, let me say that I think you have it exactly 

right, that we should have an off ramp. But it should be somewhat 

of an emergency off ramp. We are thinking about prices between, 

let’s say, $10 and $20 for carbon, somewhere it should be set. That 

off ramp price should go up every year on a prescribed and gradual 

rate over time. 

In California, some years ago, we implemented a deregulation 

plan. The results of that, because reality was different than the 

theory that we anticipated, was catastrophic. It was a complex situation, but it was catastrophic. My concern is when one has a model, 

it may look good. But in implementation it may look significantly 

different. Therefore, a safety valve at a high level that is difficult 

to access makes sense. Because we wouldn’t want a repeat of the 

catastrophic experiment we had with deregulation in California to 

occur on a broader scale with respect to cap and trade in the 

United States. 

Senator LIEBERMAN. Good point. Very helpful. 

Mr. Grumet. 

Mr. GRUMET. Thank you, Senator Lieberman. Just a couple of 

quick points. Our Commission is focused very much on the on ramp 

to this debate, recognizing that at the moment, the price of venting 

a ton of carbon into the atmosphere is zero. What an off ramp does, 

regardless of the price, is it takes the anxiety out of the debate. 

That does reduce the signal, because anxiety encourages some people to put in great efforts. 

But we also think it is probably the critical aspect that is going 

to allow 60 members of the U.S. Senate to move this Congress. The 

two other points I would make quickly, and I agree very much with 

David and Peter, that this should not be an escape valve, this 

should be an off ramp. The analysis that we have just presented 

suggests that you can achieve significant reductions along the lines 

of what we proposed with a starting price of $10 that does go up 

every year and never trigger the safety valve, if you are basically 

optimistic about the pace of technology, if you believe that vehicle 

fuel economy standards are going to be increased, if you believe 

that we are going to see more renewables, you will never trigger 

the safety valve. 

So I think there is a bit of a choice here, and you have to pick 

one side of the argument. If you are as I am, and I think David, 

a technology optimist, then the off ramp is there to not convince 

us that we need it, but it is to address the people who are no longer 

in the room that this is a program that they can tolerate. If you 

are a pessimist, then we actually think you need it. 

The last thing I will say is, I think we focus too much just on 

the price signal. Because ultimately we are not going to set a carbon price at the outset of this program which is going to be adequate to move us quickly toward things like carbon sequestration. 

I just don’t believe it is possible. 
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However, we have another option. We can invest significant resources to accelerate those technologies. If you took the 1.9 cents 

per kilowatt wind production tax credit, and afforded it to carbon 

sequestration, which it presently doesn’t have access to, that is a 

$24 a ton incentive. What our commission has proposed is to couple 

these two things, to have a starting price of $10, which we think 

we could get done right now, and then provide through bonus allocations an incentive for zero-based coal equal to what we provide 

for wind. That is $24, day one, legislation that I think you could 

enact in this Congress, you could have a $34 price signal for carbon 

sequestration. That is real money, and I think it could happen 

soon. 

So our argument is just not to focus simply on the price signal 

or on the technology but think about how you can put them together in a way that can move us toward timely action. 

Senator LIEBERMAN. Thanks. Mr. Hay, last word, because I have 

to go. Maybe some of you have to go, too. 

Mr. HAY. [Remarks off microphone.] I would be happy to comment on that. I agree with Mr. Darbee’s comments. [inaudible.] 

Senator LIEBERMAN. Right. 

Mr. HAY. Even in very well established markets, like the gas 

market that has been around for years, we are now seeing evidence 

just earlier this week that it is possible that a company like 

Amarinth may have manipulated the gas market last summer, 

costing consumers huge amounts of money in terms of increased 

costs of natural gas. 

So every time we do a tweak to cap and trade, we do run the 

risk of unintended consequences. For instance, banking and borrowing, I think if it is done right, it could work. But I do worry 

about people borrowing and banking to hoard credits and therefore 

manipulating the market. I just want to urge you, every market 

that we have ever tried to start in this country, and I am a big believer in markets, but you have to do it carefully. The electricity 

markets in some of the States that have them, they are still changing the rules today, many, many years after they have been established. As we saw in California, if you get it wrong, it can be devastating. So we have to be very careful and think this through. 

Senator LIEBERMAN. Very helpful. 

Jim, did you want to say something? 

Mr. ROGERS. I think the important point here is that you have 

a goal of 20, 50, 60 to 80 percent. 

Senator LIEBERMAN. Right. 

Mr. ROGERS. So you need to be careful in terms of how you set 

the off ramps, how you set the pricing on the way. Because for instance, most estimates today say to get carbon capture and sequestration, you need the price to be about $25 to $30, to kind of give 

you the range, to bring that online. So again, I think the other important point is, if you don’t have a solid carbon price, and I am 

supportive of this safety valve concept, but if you undermine the 

price, it gets very difficult to have a clear price signal, so the behavior actually is real behavior. So that is the challenge. 

Senator LIEBERMAN. That is the challenge, to make sure that in 

trying to reduce some of the anxiety, to deal with the unintended 

consequences, we don’t eliminate the market-based aspect to what 
210 

we are trying to do here. Because that clearly is one of its most 

attractive features. Of course we know in other circumstances, such 

as the Clean Air Act, it has worked. 

So your testimony has been very helpful. I do want to say, again, 

for Senator Warner and myself, our door is open, I suppose to anybody who agrees that we have a problem and we have to do something about it. Then we will figure out together how to do it best. 

We are going to focus on this intensely in the coming weeks. Because we really do set ourselves a goal for being able to present a 

mark from the two of us to our subcommittee before we break for 

the August recess. 

Thank you all, very, very much. Thanks, Madam Chairman, for 

an excellent hearing. 

Senator BOXER. Senator Lieberman, thank you for your amazing 

leadership on this, not just this partnership with Senator Warner, 

but your previous partnership with Senator McCain, and all the 

work you did before most people even knew this was an issue. I 

just want to thank you so much. 

I just want to say, Mr. Grumet, I have here an analysis of the 

Bingaman proposal which I think you have been working on with 

the safety valve and without a safety valve. My problem is that you 

have it with a safety valve, the kind that you want, it doesn’t do 

that much better than business as usual. So I would hate to see 

us construct an entirely new system here that has a purpose, and 

as Mr. Rogers says, undermines the price, and then we wind up not 

making much progress. That is something I don’t want to be associated with. 

So I am going to let you see this analysis. 

Mr. GRUMET. Whose analysis is it? 

Senator BOXER. Whose analyses is this, Mike? 

Mr. GRUMET. Oh, it is a chart. 

Senator BOXER. WRI, the World Resources Institute. I am going 

to show this to you, because if this is wrong, that would be good. 

Mr. GRUMET. It is wrong. I am very familiar with it. It is wrong, 

and we provided you some detailed economic analysis today which 

shows you can get a 15 percent reduction from business as usual 

without triggering a $10 safety valve. 

Senator BOXER. Fifteen percent reduction? 

Mr. GRUMET. Fifteen percent reduction. 

Senator BOXER. What do you think we should do for the environment? 

Mr. GRUMET. I think ultimately we need to get a 60 to 80 percent 

reduction by 2050. 

Senator BOXER. Exactly. 

Mr. GRUMET. However, I am much more interested in focusing on 

the next 15 years than the next 50 years. I think the science says 

more than anything that we need to act with urgency. So I am very 

concerned that we can have the debate about an 80 percent reduction for another 8 years. 

Senator BOXER. I couldn’t agree with you more. I agree with you. 

The problem is, where we might differ, I don’t know, because we 

really haven’t had a chance to discuss this at length, is that I believe, and I have said this to the CEQ who had this argument, because President Bush doesn’t want to have any mandatory caps, he 
211 

is different from where you are, they just say, we need technology 

to solve this. Totally right. But if you don’t have the credibility, if 

you don’t have the consistency, if you don’t have the certainty, you 

are not going to get the technology. 

How do I know this? I am from California. I meet with venture 

capitalists every day. I meet with the business community in Silicon Valley and they want certainty. Well, first, let me say I am 

going to close this. I just want to thank everyone on the panel. This 

has been very, very, very instructive. It actually turned into a 

broader discussion than I even thought it would, and given the announcement that Senators Lieberman and Warner made, it was a 

very fitting day to have this. We didn’t know when we set it we 

would have that great news, that they were working on this. 

But I guess what I want to do is actually direct my closing comments to Mr. Donohue and also echo the view that, I am very 

pleased at your being open to looking at this. In all my 30 years 

of public life, it has been a long time, I have never seen business 

so far ahead of Government on an environmental issue. I just want 

to say to those of you who are out there, thank you, thank you, 

thank you. I think the factors that weigh into this are people who 

are responsible, responsible about their country, about their 

grandkids, about the future. I think Mr. Rogers alluded to this. 

But I am not corny enough to think that it stops there. It is also 

a sensible business decision to make. We need a planet that is 

going to survive. Let’s just be honest. If the scientists are right, 

yes, there are a few who don’t agree, and we know that. But if the 

vast majority of scientists are right, we have a problem on our 

hands. One of the things I realized when I started to immerse myself a little bit into these predictions is that the good news is, the 

things that we do to combat global warming are all really good for 

us, they are good for consumers, they are good for our health, they 

are good for our families. 

So this is, I believe, instead of approaching this with fear, we 

should approach it as a huge opportunity for America. I think the 

vision that I see is not one of people suffering, but rather, the creation of a whole new green economy. We are already seeing it in 

my State. I think if we took off our green eyeshades for a minute 

and just looked at a little bit at the bigger picture. When we put 

the green eyeshades back on, I think we will see real opportunity. 

Now, who are these businesses? I mean, these are the businesses 

that belong, just some of them, to the U.S. Climate Action Partnership: Alcoa, Alcan, Boston Scientific, BP, Caterpillar, Conoco, 

Deere, Dow, Duke, Dupont, FPL, GE, GM and now Ford and 

Chrysler have jumped on, Johnson and Johnson, Marsh, PepsiCo, 

PG&E, I don’t know if I mentioned, Shell, Siemens Corporation, it 

goes on and on. 

This is capitalistic America saying that we should respond. This 

is an opportunity. They have risen to the challenge. 

I realize, Mr. Donohue, that you represent a way broader cross 

section. But what I want to say is, in America, if we grab onto a 

challenge, there is nothing stopping us. We all know why we are 

so proud to be Americans. That is how I see this. 

Now, I look at my home State, the most energy efficient State, 

the least energy use per capita, a State that has had enormous 
212 

growth, people want to come there. The job opportunities are enormous. It is so amazing to me, to see what we have done. 

So I hope, Mr. Donohue, and I am sure you do come out to California now and then. I would love to be with you when you visit 

Silicon Valley and talk to some of our people. Some of them came 

and actually talked to Senator Warner about the opportunities. As 

we go into the century and get deeper into the century, we should 

be a leader, we shouldn’t shrink from the challenge. We shouldn’t 

sit there and say, oh, China is not doing this, oh, India is not doing 

this. We don’t wait around for China to do the right thing. We lead 

the way. 

I think with the news today, yesterday, that we had from members of my committee that have forged a bond to commit to producing this legislation, we have this chance now. I want as the 

Chair of this committee, to hear all of you. I want to hear from coal 

country. I want to hear from everybody. Because I think we can 

make this a win-win. Surely if we do nothing, if we walk away 

from this challenge, it is a lose-lose, all across the board, it just is. 

I mean, again, as a spiritual person, and we had the most amazing testimony from religious leaders here, it is God’s green Earth. 

So we can’t walk away from this challenge. Now, if some scientists 

have exaggerated this thing and it is only half as bad as they said, 

we are ahead of the game. If it is worse than they said, we will 

do as much as we can to get ahead of it. 

But as I say, Mr. Donohue, I think you are a pivotal person here. 

I want to imbue on you this strength to take this on and to do your 

level best and to lead. Because what a moment we could have in 

history here if we made that breakthrough. So sir, would you like 

to respond? 

Mr. DONOHUE. Well, first of all, Madam Chairman, I would like 

to thank you for your confidence in the Chamber and your thoughtful comments. I would like to make just two additional issues. I 

was very pleased to hear yourself and Senator Lieberman and others talk about a willingness to consider these matters in a broader 

context, as you indicated, the hearing has expanded, so that we 

could look at the unintended circumstances, so we might look just 

a little bit further ahead, and we would make more thoughtful decisions. I look forward, on behalf of all of the names you read and 

the people here, and you can see they don’t all agree on everything, 

participating in this process. 

The second thing is, I would like to see you in California, and 

I would like us to go together to the high-tech area, and have a little fun on one thing just beyond the normal conversation. We are 

beginning to look at how much electricity is consumed by all of the 

high-tech devices, all of the servers, all of the Internet, all of that. 

Those companies had better get involved in this, because the percentage of electricity that they are using would astound them, and 

it is, because they are beginning to look, and it astounds us. It is 

a good place to go, and I accept your invitation. 

Senator BOXER. Good. 

Mr. DONOHUE. I will try and find out when we are both going 

to be there at the same time. 

Senator BOXER. Well, we will work on that. 

Mr. DONOHUE. I would also invite you to come to the Chamber. 
213 

Senator BOXER. Sure. 

Mr. DONOHUE. We will get together a broader group of industries 

to express some of their interests and concerns, some of them legitimate and some of them probably not, and let you have an opportunity to talk to them. I thank you very much for including us. 

Senator BOXER. Absolutely. I think this is essential. As Chair of 

this committee, one of the first things I said when I took the gavel 

is, I want to bring bipartisanship back to this committee. Because 

this committee has an unbelievably wonderful history. All the landmark laws, whether it is Endangered Species Act, that I opened up 

with, so I am closing full circle here, with the fact that we are able 

now to de-list the bald eagle, because of the Endangered Species 

Act. We have had successes in the Clean Air Act and the Safe 

Drinking Water Act, and the Clean Water Act, all of these, the 

Superfund Program, all of those, not without controversy, not without difficulty. But the fact of the matter is, Republicans and Democrats, Presidents of both parties, Congresses led by both parties, we 

have managed to keep these laws. I view what we are going to do 

here on climate change as one of those landmark moments. 

I am a believer in America doing the right thing at the end of 

the day. We will do the right thing here. I am a believer in listening to all sides before we decide. I do agree with you, when we go 

to the Silicon Valley and when we visit the various communications 

sectors down there, they understand that they have a responsibility. 

The most beautiful thing, I think, about that area is, and I will 

tell you a story, Mr. Donohue, that just amazed me, when I first 

ran for the Senate, I went to the Silicon Valley and I had a meeting 

with a very large group there. I thought, well, they are going to tell 

me, I am going to ask them the most important thing I could do 

for them, because I always like to ask that question of every group, 

what is the most important thing, or the two most important 

things. 

I felt it was going to be, lower my taxes, lower my taxes. I went 

in there and they said, education. Please, we have got to have an 

educated work force. So then I thought, I pushed them further. 

What is your second most important issue? I thought they would 

say lower my taxes. They said, housing. We really worry that our 

workers can’t afford the housing prices here in California. 

So this is a group that really, they do very well, but they do good 

things for the country. What could be better than that, to have a 

business that does so well, and many of you represent those businesses who do so well, but also, you are stewards of the environment and you care about our families. This is really important. 

So Mr. Donohue, you and I will work together and go west. 

Mr. DONOHUE. Senator, you ended with a story, perhaps I can 

end with a story. 

Senator BOXER. Sure. 

Mr. DONOHUE. Since the early 1970s, this country has spent $3 

trillion cleaning the air, the water and the land, along the lines of 

some of the issues you have discussed. The Federal Government of 

the United States has spent about 20 percent of that. I would probably say it has encouraged the spending of a good deal more of it. 

But when you look at the accomplishment that we have made in 
214 

this country to date on that with 80 percent private money, and 

compare it to what some of our developed nation trading partners 

have done, notwithstanding the press that we get on the subject. 

I am very proud of what we have done and I look forward to seeing 

how we can do more in the future. 

Senator BOXER. It is a good story. It is a good story, it is a great 

story. 

On this one, we are going to work together, or we really, we 

won’t succeed. So we must work together. 

So I want to thank all of you very much, and we stand adjourned. 

[Whereupon, at 1 p.m., the committee was adjourned.] 
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