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65–358—PDF 2009

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CLIMATE CHANGE LEGISLATION: 

ALLOWANCE AND REVENUE DISTRIBUTION 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

AUGUST 4, 2009 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

BLANCHE L. LINCOLN, Arkansas 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

CHUCK GRASSLEY, Iowa 

ORRIN G. HATCH, Utah 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

JOHN ENSIGN, Nevada 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

RUSSELL SULLIVAN, Staff Director 

KOLAN DAVIS, Republican Staff Director and Chief Counsel 

(II) 

(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee 

on Finance ............................................................................................................ 1 

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 3 

WITNESSES 

Stephenson, John, Director, Environmental Protection Issues, Natural Resources and Environment Team, Government Accountability Office, Washington, DC ............................................................................................................. 4 

Burtraw, Dallas, Ph.D., senior fellow, Resources for the Future, Washington, 

DC .......................................................................................................................... 6 

Viard, Alan D., Ph.D., resident scholar, American Enterprise Institute for 

Public Policy Research, Washington, DC ........................................................... 8 

Keohane, Nathaniel, Ph.D., director of economic policy and analysis, Environmental Defense Fund, New York, NY ................................................................ 10 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

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

Prepared statement .......................................................................................... 33 

Burtraw, Dallas, Ph.D.: 

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

Prepared statement with attachments ........................................................... 36 

Responses to questions from committee members ......................................... 54 

Grassley, Hon. Chuck: 

Opening statement ........................................................................................... 3 

Prepared statement .......................................................................................... 63 

Keohane, Nathaniel, Ph.D.: 

Testimony .......................................................................................................... 10 

Prepared statement .......................................................................................... 65 

Lincoln, Hon. Blanche: 

Prepared statement .......................................................................................... 75 

Stephenson, John: 

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

Prepared statement .......................................................................................... 77 

Responses to questions from committee members ......................................... 97 

Viard, Alan D., Ph.D.: 

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

Prepared statement .......................................................................................... 111 

Responses to questions from committee members ......................................... 124 

COMMUNICATIONS

American Forest & Paper Association (AF&PA) ................................................... 137 

American Public Power Association (APPA) ......................................................... 143 

Cargo Airline Association ........................................................................................ 147 

DC Action Factory ................................................................................................... 151 

National League of Cities ........................................................................................ 153 

National Petrochemical & Refiners Association .................................................... 156 

(1) 

CLIMATE CHANGE LEGISLATION: 

ALLOWANCE AND REVENUE DISTRIBUTION 

TUESDAY, AUGUST 4, 2009 

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC. 

The hearing was convened, pursuant to notice, at 10:06 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus 

(chairman of the committee) presiding. 

Present: Senators Bingaman, Kerry, Lincoln, Stabenow, Cantwell, Menendez, Carper, Grassley, and Hatch. 

Also present: Democratic Staff: Bill Dauster, Deputy Staff Director and General Counsel; Cathy Koch, Chief Tax Counsel; Pat 

Bousliman, Natural Resource Advisor; and Jo-Ellen Darcy, Senior 

Environmental Advisor. Republican Staff: Kolan Davis, Staff Director and Chief Counsel; and Jim Lyons, Tax Counsel. 

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR 

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The hearing will come to order. 

Aristotle was said to define the term ‘‘justice’’ as ‘‘a virtue of the 

soul distributing that which each person deserved.’’ 

Today we consider various methods of distributing emission allowances. We consider options for distributing revenues from a capand-trade program. We will see if we can find the way that has 

most of what Aristotle called, namely ‘‘justice.’’ 

Most major climate change bills place a limit or cap on carbon 

dioxide and other greenhouse gases. Companies subject to the cap 

must buy permits, often called allowances, to emit greenhouse 

gases. One key issue in such a system is: How much of these allowances should the government sell at auction and how much should 

the government give away for free? 

Economists expect that these allowances will have a value, like 

cash. Thus, many argue that the government should not just give 

these allowances away; rather, they argue that the government 

should auction them and return the proceeds to consumers. Others 

argue that the government should allocate a portion of the allowances to regulated companies. Doing so would soften the effects of 

putting a price on carbon. 

For example, last month the committee heard testimony regarding ‘‘trade-exposed’’ industries. Those are industries that could be 

hurt by trade with countries that did not have a carbon regime. 

Many argue for providing a portion of free allowances to these industries. Under the House-passed bill, at the outset, the governVerDate Nov 24 2008 15:04 Apr 15, 2011 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 R:\DOCS\65358.000 TIMD
2 

ment would freely allocate about 85 percent of the emission allowances. 

Roughly 40 percent of the overall allowance amount would go to 

local distribution companies that deliver power to customers. Proponents expect that the power companies would pass the benefits 

on to consumers. Another 15 percent or so would go to tradeexposed industries, and the balance would go to a range of stakeholders, including States, energy research entities, and refineries. 

Allowances will have a significant value. In 2012, the first year 

of the program in the House-passed bill, the Congressional Budget 

Office puts their value at about $60 billion. For the period 2010 to 

2019, they amount to more than $870 billion. CBO calls these allowances revenues. CBO makes no distinction between allowances 

that are auctioned and those that are allocated freely. 

According to the Congressional Budget Office: ‘‘The creation of allowances by the government should be recorded as revenues. That 

logic does not hinge on whether the government sells or, instead, 

gives away the allowances. Allowances would have significant 

value even if given away because the recipients could sell them, or 

in the case of a covered entity, use them to avoid incurring the cost 

of compliance.’’ 

In other words, the Congressional Budget Office says that all allowances are revenues, and whether they are allocated to local distribution companies or auctioned for other purposes, these allowances are like cash. 

There are a number of ways to use allowance revenues to mitigate the cost of climate legislation on consumers and businesses. 

For example, Congress could use the money from auctioning allowances to cut taxes by cutting marginal rates, by cutting capital 

gains rates, by cutting payroll taxes, or doing all of the above. 

This approach could apply broadly to individuals as well as businesses, and we could implement this approach with a system that 

is already in place, that is, our current tax laws. 

Alternatively, Congress could compensate consumers through rebates or fixed payments per-capita. For example, the government 

could give every American a fixed dividend every year. That is 

what happens in Alaska. Every year the Alaska Permanent Fund 

pays an annual share of oil earnings to every resident of the State. 

We could also devote allowance proceeds to low-income Americans. We could expand the Earned Income Tax Credit. We could 

use the electronic benefit transfer system that States already use 

to provide assistance like food stamps and low-income Medicare 

drug benefits. The House bill provided solid relief to low-income 

Americans through these means. The Senate should match it, or 

build on it. 

Still another approach would be to dedicate a share of revenues 

to investment in energy efficiency. Just last week, McKinsey Consulting said that America could save $1.2 trillion through 2020 by 

investing less than half that amount—that is $520 billion—in energy efficiency. 

Whatever the approach, we need to devise a system that both 

meets environmental goals and passes political muster. And that 

will not be easy—the close vote in the House tells us that—but it 

is something that we can and must do. 

3 

Today we will talk about how to do it. This is the fourth climate 

change hearing that the Senate Finance Committee has held since 

April as we prepare for a markup later this year, and I am pleased 

to welcome yet another distinguished panel of witnesses. 

So let us see if we can figure out how to distribute emission allowances in a way that one might call ‘‘just.’’ And let us see if we 

can figure out how to give all Americans what they deserve. And 

let us see if we can figure out the way to do so that has the most 

of what Aristotle would call ‘‘virtue of the soul.’’ 

Senator Grassley? 

OPENING STATEMENT OF HON. CHUCK GRASSLEY, 

A U.S. SENATOR FROM IOWA 

Senator GRASSLEY. Thank you, Mr. Chairman. 

This hearing deals with the allocation of emissions allowances 

under a proposed cap-and-trade tax system, and this is, of course, 

intended to address the issue of global warming. 

Our committee has primary jurisdiction over all matters dealing 

with Federal revenue, and the Congressional Budget Office has 

made clear that these allowances hold value and, therefore, represent Federal revenues. This is true, regardless of whether allowances are auctioned or simply given away, which the CBO would 

treat the same as if they had been auctioned and the revenue given 

away. 

Today we are going to hear a wide range of perspectives from 

across the political spectrum about how emissions allowances and 

the revenue from those allowances should be allocated. 

We know where the Obama administration stands when it comes 

to free allowances. The President supports 100-percent auction of 

these allowances. Testifying before the House Budget Committee 

earlier this year, Treasury Secretary Geithner said, ‘‘This program 

should include a 100-percent auction of emissions allowances—ensuring that the biggest polluters don’t profit on the basis of past 

pollution.’’ 

Testifying before the same committee at another time, the President’s Director of the Office of Management and Budget, Dr. Peter 

Orszag, said, ‘‘If you didn’t auction the permits, it would represent 

the largest corporate welfare program that has ever been enacted 

in the history of the United States.’’ 

The administration clearly has strong feelings on the topic, and 

this committee will soon have to draw its own conclusions on the 

same topic. To do so, it is important that this committee understand all of the implications for the American taxpayer of the various options of distributing allowance revenue. 

It is also important to provide some context for this discussion 

based on what we have learned at other hearings about the economics of a cap-and-trade tax system. We sometimes hear such a 

system described as though there will be no net cost to the American people, because the Federal Government is creating a commodity that holds value and can be sold to recoup the costs or even 

make money. 

This makes it sound as though we have stumbled upon the economic equivalent of the mythical philosopher’s stone that can turn 

4 

lead into gold. Of course, there is no such thing as a free lunch, 

and the government cannot create wealth through regulation. 

At a hearing before this committee earlier this year, CBO Director Doug Elmendorf referred to a ‘‘consensus of economic analysis’’ 

that a cap-and-trade system results in a net cost to the economy 

because of a ‘‘diversion of economic resources.’’ 

For instance, America currently uses coal as a cheap, domestically plentiful source of energy, but it produces a lot of carbon dioxide. So this bill would force a switch to more costly forms of energy 

that produce less CO2. In short, as Director Elmendorf wrote to 

this committee in response to my question, ‘‘The allowances that 

are created under a cap-and-trade program do not add wealth to 

the economy. Rather, they are simultaneously a cost and a source 

of income.’’ 

It is in this light that I approach the question of what to do with 

the allowance value. It is not free money. Rather, it is, in effect, 

a national energy tax on all Americans, one which will exacerbate 

the negative impact of other taxes on economic growth and jobs. 

This means that, above all, we have a responsibility to mitigate, as 

much as possible, those painful effects on the American taxpayer. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

We now turn to our witnesses. First is John Stephenson, Director 

of Natural Resources and Environment Issues for the Government 

Accountability Office. Thank you, Mr. Stephenson. Second is Dr. 

Dallas Burtraw, senior fellow at Resources for the Future. Next is 

Dr. Alan Viard, resident scholar from American Enterprise Institute, and Dr. Nathaniel Keohane, director of economic policy and 

analysis for the Environmental Defense Fund. 

Thank you all for coming. As usual, I urge you to speak for 5 

minutes. Your prepared statements will be included in the record. 

So, why don’t you begin, Mr. Stephenson? 

Mr. STEPHENSON. Thank you, Mr. Chairman. 

The CHAIRMAN. There may be an interruption here, as a vote 

might occur in about 15 minutes to half an hour, but we will work 

our way through it. 

Mr. STEPHENSON. All right. Very good. 

The CHAIRMAN. Go ahead. 

STATEMENT OF JOHN STEPHENSON, DIRECTOR, ENVIRONMENTAL PROTECTION ISSUES, NATURAL RESOURCES AND 

ENVIRONMENT TEAM, GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, DC 

Mr. STEPHENSON. Thank you, Mr. Chairman. 

I am pleased to be here today to discuss GAO’s preliminary observations from our ongoing study for this committee on the potential distribution of allowances and revenues in the context of the 

cap-and-trade system to limit greenhouse gas emissions. 

These distribution decisions are vitally important to the overall 

economic impacts of the cap-and-trade system because a new commodity in the form of emissions allowances or tons of carbon dioxide will be created that will be valued at billions of dollars each 

year. 

5 

As such, decisions about the distribution of allowances and revenue from the sale or transfer of allowances will have a substantial 

impact on the government, covered entities, and households. Importantly, limits on emissions would likely raise the cost of carbonintensive energy production and use, and the system could have a 

disproportionate impact on low-income households that spend a 

larger share of their income on energy. However, the government 

could wholly or partially offset these impacts with its decisions 

about allowance and revenue distribution. 

With respect to allowance distribution, the government has three 

main choices: auctioning or selling the allowances, allocating the 

allowances for free, or some combination of both. 

First, auctioning would enable the government to collect substantial revenues. Auctioning is also transparent, creates incentives to 

lower emissions before the program starts, can level the playing 

field for covered entities, and decreases the chances of windfall 

profits among covered entities. 

Many economists favor auctioning for these reasons; however, 

auctioning does not by itself offer compensation to covered entities 

that could feel the greatest economic impact of the program. 

Second, the government could allocate allowances for free to covered entities or other parties, such as local distribution companies, 

or LDCs, and thereby transfer the value of the allowances to these 

parties. This could help build support for the program and ease the 

transition by helping offset any losses and profits among covered 

entities. Free allocation in the electricity sector is particularly complicated, however, and could potentially dampen incentives to decrease electricity use by businesses and households. This could 

force additional costs on other sectors affected by the program. 

A combination of auctioning and free allowances may help compensate certain energy-intensive industries. Several studies, including one by the Congressional Budget Office, suggest that allocating 

between 6 and 21 percent of the allowances for free would fully 

compensate these industries. 

With respect to distributing revenues or the economic value of allowances, we reviewed five options among many that could be considered. 

First, the government could reduce the overall cost of the program by reducing existing taxes on capital or income that make the 

economy less efficient. A cap-and-trade system, while not a tax, 

could raise the price of goods and services. As a result, lowering existing taxes might help compensate households and businesses for 

this economic effect, but would do little to offset disproportionate 

impact on low-income households. 

Second, the government could recycle revenues in the economy 

through lump-sum payments based on a variety of criteria, such as 

household size or income. This could help compensate lower-income 

households, while still preserving incentives to conserve energy and 

decrease emissions. The primary challenge is identifying the proper 

distribution mechanisms. 

Third, the government could expand the Earned Income Tax 

Credit to help low-wage earners, but this would not reach non-tax 

filers and could present administrative and compliance challenges. 

6 

Fourth, the government could transfer the revenues through free 

allocation, the equivalent of auctioning or selling the allowances 

and transferring their value to other parties. However, free allocation, if not implemented carefully, could result in windfall profits 

for certain covered entities and may benefit their shareholders 

rather than households and other businesses affected by the higher 

cost of goods and services. 

Finally, the government could direct revenues to climate-related 

activities, including funding the development of low-carbon technologies, domestic adaptation efforts and energy efficiency programs, or by providing aid to developing countries to help them address climate change. Each revenue allocation option involves 

trade-offs that are more fully described in my written statement. 

This concludes the summary of my prepared statement. I will be 

happy to answer questions at the appropriate time. 

The CHAIRMAN. Thank you, Mr. Stephenson. 

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

The CHAIRMAN. Dr. Burtraw? 

STATEMENT OF DALLAS BURTRAW, Ph.D., SENIOR FELLOW, 

RESOURCES FOR THE FUTURE, WASHINGTON, DC 

Dr. BURTRAW. Mr. Chairman, thank you for the opportunity to 

testify. 

I am a senior fellow at Resources for the Future. RFF neither 

lobbies, nor takes stands on specific issues and positions, and the 

views I present today are my own. 

I focus on the allocation of allowances to consumers through 

their local distribution companies under H.R. 2454. This and some 

other features of the proposal are designed to protect consumers 

from the adverse impacts of price increases and to reduce regional 

inequities. 

However, this approach raises the overall cost of achieving emissions reductions. The important point I want to leave with you is 

that an incremental reform to these provisions can achieve distributional and regional goals at substantially less cost and with 

greater predictability. 

I evaluate the allocation formulas in H.R. 2454 with three criteria in mind. 

First, administrative simplicity and consistency. The allocation 

approach in H.R. 2454 leaves the determining role in how households are affected to State public utility commissions, not Congress, 

and this will be done in 50 different ways. 

Second, protect consumers from adverse impacts. It is broadly accepted that free allocation to local distribution companies raises the 

overall cost of the program because, by reducing prices, the policy 

would also reduce the incentive for households and businesses to 

change the way they use energy. Greater emission reductions will 

be necessary in other parts of the economy at a higher cost. We 

find, on average, in almost every region and income group, households are, in fact, made worse off by the subsidy to electricity and 

natural gas consumption. 

Third, avoid unfair regional and distributional impacts. The status quo in H.R. 2454 leads to an inverted ‘‘U’’ with respect to the 

7 

distribution of costs across income groups. We do a good job of protecting the bottom 20 percent of households and the top 10 percent, 

but the increase in cost associated with the inefficient allocation to 

local distribution companies falls hard on the middle range of 

household incomes. 

A valuable reform would limit the role of local distribution companies. This would be sufficient to level the playing field across geographic regions and to protect low-income households. In addition, 

it would reduce overall costs and especially costs to middle-income 

households. 

Let me explain this reform. In H.R. 2454, over the first couple 

decades of the program, about 56 percent of emission allowances 

are directed back to consumers and businesses through the allocation to electricity and natural gas local distribution companies, 

home heating, and directly to low-income families. 

We hold this 56 percent constant and consider a limited allocation to local distribution companies on behalf of just residential 

customers of electricity and natural gas, totaling about 15 percent 

of the allowance value. The other 41 percent is delivered through 

dividends to households. 

Under this approach, hard-hit regions, such as States surrounding the Ohio Valley, do at least as well as under the status 

quo approach in H.R. 2454. Also, this proposal is more equitable 

across the income distribution. Direct dividends to households 

lower the overall cost of the program and allocate the value of allowances in a way that does not disadvantage the middle class. It 

also continues to fully protect households in the bottom two deciles 

of the population. 

Furthermore, in a profound way, the simple approach of direct 

dividends avoids the appearance of favoritism, by distributing to 

households an equal share of the value of a new property right that 

is created under a cap-and-trade program. 

To the benefit of middle-class households and to lower overall 

costs, the reform I propose could disadvantage three groups. First, 

it would remove the subsidy of the local distribution companies for 

industrial customers, but it would even tax trade protections 

through the generous 15-percent allocation for trade-exposed industries. 

Second, it would also remove the subsidy for commercial customers, but these customers are not exposed to international competition and would be expected to pass through costs to households 

who, indeed, bear the ultimate real cost of the program. 

Third, it could affect electricity industry profits. Free allocation 

to local distribution companies in H.R. 2454 is made on behalf of 

consumers, but an unappreciated result is that annual electricity 

industry profits increase by $2.5 billion a year as a consequence. 

The electricity industry is already well-represented by the 5- 

percent allocation to unregulated electricity plants that appears in 

a separate part of the legislation. A greater reliance on dividends 

would direct this additional unintended profit back to middleincome households. 

In sum, reform of H.R. 2454 could lead to lower costs and a more 

equitable distribution of costs across regions and income distributions. 

8 

Thank you for the opportunity to testify. 

The CHAIRMAN. Thank you, very much. 

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

The CHAIRMAN. Dr. Viard, you are next. 

STATEMENT OF ALAN D. VIARD, Ph.D., RESIDENT SCHOLAR, 

AMERICAN ENTERPRISE INSTITUTE FOR PUBLIC POLICY 

RESEARCH, WASHINGTON, DC 

Dr. VIARD. Chairman Baucus, Ranking Member Grassley, members of the committee, it is an honor to testify today about allowance and revenue distribution under cap and trade. The views I express are solely my own. 

I would like to make the following major points this morning. 

Free allowance allocation to unregulated firms is equivalent to imposing a carbon tax and giving the revenue to stockholders, which 

is inefficient and inequitable. In contrast, auction revenue could be 

used to lower marginal tax rates and help consumers. 

Free allocation to regulated utilities is also unwise. By reducing 

incentives for electricity conservation, such allocation increases the 

overall cost of cap and trade. Consumers bear a smaller burden in 

the regulated sector, but larger burdens everywhere else in the 

economy. 

There is a rock-solid economic consensus on the consequences of 

free allocation in unregulated markets. Regardless of where the allowances come from, firms still have the same incentives to reduce 

emissions and still face the same increases in production costs, 

leading to the same increase in consumer prices. Even with free allocation, cap and trade is a market-based mechanism for reducing 

carbon emissions. 

The troubling aspect of free allocation, however, is the use of the 

implicit revenue, the point that the ranking member mentioned in 

his opening statement. 

As I have said, cap and trade with free allocation is equivalent 

to imposing a carbon tax or auctioning the proceeds and then giving the revenue to stockholders. The payment to stockholders is not 

a tax cut that improves incentives for current or future economic 

activity. It is a transfer payment or gift based on past activity. This 

has harmful implications for both equity and efficiency. 

First, on efficiency. Because households work in order to buy 

goods and services, a tax on goods and services or on their carbon 

content reduces the return to work. Putting a price on carbon does 

not tax pollution rather than work, it taxes pollution and work. 

Putting a price on carbon also penalizes investment by taxing the 

carbon content of capital goods. 

These disincentives can be undone if the cap-and-trade revenue 

is used to reduce other marginal tax rates, but that is infeasible 

if the allowances are given away. Of course, free allocation also increases inequality by aiding wealthy stockholders. It cannot be justified as compensation to stockholders because most of the cap-andtrade burden is shifted to consumers. 

In any case, we have never compensated stockholders for burdens imposed by excise taxes. Phillip Morris stockholders receive 

no compensation for the burdens of the tobacco excise tax. EconoVerDate Nov 24 2008 15:04 Apr 15, 2011 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 R:\DOCS\65358.000 TIMD
9 

mists across the political spectrum have denounced free allocation, 

as in the March 2009 cap-and-trade economist statement that was 

signed by 600 economists of every political viewpoint. 

If the allowances are auctioned, the revenue can be used to cut 

tax rates and also provide consumer relief. There can be a tradeoff between the goals of promoting economic efficiency and helping 

those consumers who are in need, but with the allowances being 

auctioned, there is ample revenue to fashion a package that will 

advance both goals. 

A package could include transfer payments or rebates that give 

relief to low-income households, individual income tax reductions 

that promote efficiency and provide relief to middle-income households, and corporate income tax rate cuts that promote efficiency. 

Corporate income tax rate cuts would offer large efficiency gains 

in today’s global economy, and, in the long run, much of the gains 

from those rate cuts would ultimately go to workers. 

Other ideas could be explored, such as deficit reduction. Payroll 

tax cuts would promote efficiency and aid workers, although they 

would complicate Social Security financing. 

Let me briefly discuss problems posed in the regulated utility 

sector. If the free allowances are flowed through as variable rate 

reductions, the outcome may be even worse than if the benefits had 

remained with shareholders. 

Electricity consumption would not fall, diminishing the reduction 

of carbon emissions in that sector, but cap and trade requires a 

fixed national reduction, so the price of allowances would have to 

rise to force deeper reductions elsewhere. The higher allowance 

price would mean larger consumer burdens in the rest of the economy and bigger stockholder windfalls at any firms that also receive 

free allowances. 

In short, holding down electricity prices in this way would mean 

steeper rises in gasoline prices and other items. Meanwhile, the national cost of reducing emissions would increase because costeffective reductions are not made in electricity consumption. 

In principle, these problems could be sidestepped by flowing the 

free permits through to fixed rates. I believe, for reasons I can 

elaborate upon if desired, that that is not a feasible option. 

Let me make one point before concluding, Mr. Chairman. 

Under a carbon tax, there would be no support for explicit transfer payments to stockholders, which would alleviate these problems. A carbon tax would also have a number of other advantages 

over cap and trade with respect to administration and responding 

to cost fluctuations and allocating emission reductions across years. 

Cap and trade could be modified to duplicate some of these advantages, but the best way to replicate a carbon tax is to adopt a carbon tax. 

In summary, Mr. Chairman, carbon control should take the form 

either of a carbon tax or cap and trade with full auction, and a 

large portion of the revenues should be used to reduce marginal tax 

rates. 

I would be pleased to address your questions. 

The CHAIRMAN. Thank you, Dr. Viard, very much. 

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

The CHAIRMAN. Dr. Keohane? You are next. 

10 

Thank you, Dr. Keohane. You were notified fairly late to come 

here. We deeply appreciate your changing your schedule so you 

could be here. 

STATEMENT OF NATHANIEL KEOHANE, Ph.D., DIRECTOR OF 

ECONOMIC POLICY AND ANALYSIS, ENVIRONMENTAL DEFENSE FUND, NEW YORK, NY 

Dr. KEOHANE. Well, thank you, Chairman Baucus, Ranking 

Member Grassley, and distinguished members of the committee. I 

am honored to be here today. 

Congress has an unprecedented opportunity right now in these 

next few months to put the American economy on a strong footing 

for the 21st century. A cap on carbon dioxide and other greenhouse 

gases will harness the efforts of entrepreneurs and innovators 

throughout our economy, ensuring that America will lead the world 

in making the next generation of clean energy technologies, and 

the investment unleashed by a carbon cap will help jump-start our 

economy today, while paying rich dividends later in the form of 

cleaner air, enhanced energy security, and, most of all, a livable 

planet to pass on to our children and grandchildren. 

In the process, a carbon cap will transform a portion of the public 

commons into a valuable asset. That asset is a public trust, and allocating its value wisely and equitably is a crucial test of any climate bill. 

In my testimony today, I will offer my perspective on how that 

test can be met in a way that strengthens our economy. The principles are straightforward: protect consumers, preserve and 

strengthen American manufacturing, and invest in the transition 

to a new, clean energy economy. 

Let me start with those broad guidelines for allowance allocation 

and then return later in my testimony to talk about the LDC mechanism in particular. 

In my written testimony, I provide a fuller perspective on how 

allocations to industry can be tailored to balance concerns for fair 

compensation against understandable concerns about doublecounting and unintended windfalls. 

I will start with those broad guidelines. First, protect consumers. 

A substantial portion of allowance value should be directed to 

households. By using more than one mechanism, as I will explain, 

Congress can achieve multiple goals: providing targeted assistance 

to low-income consumers, fairly reflecting geographical differences 

in the generation of electricity, and at the same time providing 

broad coverage to American households, farmers, and small businesses. 

Second, preserve and strengthen American manufacturing by 

preventing carbon leakage. Output-based rebates, like those in the 

House legislation, can help prevent emissions leakage to uncapped 

countries, safeguarding the environmental integrity of the cap, and 

keeping manufacturing emissions under the cap here in America 

will also keep jobs and businesses here. 

Finally, invest in the transition to a growing clean energy economy. Allowance value can provide additional incentives to accelerate the deployment and development of new energy-efficient and 

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11 

tion to a clean-energy economy. These principles are consistent, by 

the way, with the blueprint for legislative action put forward by 

the U.S. Climate Action Partnership, a coalition of businesses and 

environmental groups. 

Note that I have not said anything about the fraction of allowances that is auctioned rather than given away. That is because, 

by itself, the split between auctioning allowances and freely allocating them says little about the environmental or economic performance of the legislation. 

First, auctioning versus free allocation does not matter for the 

environmental effectiveness of the legislation. That is the job of the 

cap. 

Second, auctioning versus free allocation does not affect the total 

value of allowances, which depends on how many allowances there 

are. As a result, that split does not affect the economic incentive 

to reduce pollution or, as a general rule, the cost-effectiveness of 

the program. 

With those points in mind, let me go back briefly to the principles and discuss the House legislation very briefly. 

That legislation performs quite well. In fact, contrary to what 

you might think from reading the media coverage of the bill, H.R. 

2454 allocates nearly 80 percent of the total value of allowances to 

households, small businesses, and public purposes, including 43 

percent that is channeled directly to American families. 

One of the things that the House bill gets right is the use of multiple channels to direct value to households. That is important because households differ in a number of ways, including geography 

and income, and multiple channels can be designed to address 

those dimensions separately. 

In particular, giving a portion of allowances to local electric and 

natural gas utilities for the benefit of consumers offers a natural 

way of accounting for regional variations in how electricity is generated, more from coal in some areas, more from natural gas and 

nuclear in others. 

Of course, in giving allowances to LDCs, the legislation should be 

absolutely clear that allowance value must benefit consumers 

through lower utility bills. Other safeguards can include requirements that LDCs publish detailed plans and are audited to ensure 

they meet their commitments. 

At the same time, care should be taken to ensure that the method of allocating allowances does not dampen the incentives to take 

advantage of cost-effective common-sense ways to reduce energy 

use. This could be done with something as simple as a monthly 

check made out to each rate payer. 

Now, other mechanisms can channel allowance values to households as well, including a targeted tax credit for low-income consumers and a broader dividend for all households. What the House 

legislation does, using all three of these allocations, has been estimated by the EPA to keep households’ costs down to the cost of a 

postage stamp a day, or about a dime a day, per person. 

Working from that legislation, the Senate can move forward. The 

House has made an excellent start. Let us finish the job. 

Thank you. 

The CHAIRMAN. Thank you, sir. 

12 

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

The CHAIRMAN. There is a vote going on. I will ask questions, 

then Senator Grassley may be back in time. If not, we will just 

make adjustments here. 

My first question I will ask of you, Dr. Keohane, is, why does the 

House bill—and you favor the House bill—why allocate half the allowances based on emissions, the other half based on generation? 

Why that formula? 

Dr. KEOHANE. Well, that is the formula that I think was the 

product of a compromise among a range of stakeholders. 

The CHAIRMAN. What is the public cost, with half generation and 

half emission? 

Dr. KEOHANE. I think the task is, Mr. Chairman, to strike the 

right balance between reflecting historical patterns of energy generation that were put in place long before we started tackling this 

challenge, while also reflecting differences in population. So, I 

would suggest that, in determining the allocation for the initial 

years of the program, it is only fair to think about the starting 

point we are starting from. 

In other words, where are we starting out? Where we are starting out is a geographic pattern of energy generation that reflects 

varied resources throughout the country. 

Now, over time, as we make that transition to that clean energy 

economy, those regional disparities will be erased and the need, I 

think, for that channel of allocation will be diminished and can be 

phased out. But in the transitional period of the program, I think 

it is a way of reflecting existing regional disparities that reflect our 

starting point today. 

The CHAIRMAN. How do you address the concern raised by several that the LDC allocation would provide a windfall profit for the 

industrial and commercial sector? What guarantee is there that the 

free allowances will be passed on? I know there was an attempt directed to the local public service commissions, but what guarantee 

is there that the industrial and commercial sectors will not get a 

windfall? Dr. Burtraw pointed out that there are 50 different people who were making those decisions, and it raises questions of efficiency, frankly. 

I would like you to answer that, as well as Dr. Burtraw. 

Dr. KEOHANE. Well, I will take a stab at it, and I will look forward to hearing Dallas’s response as well. 

I think this is a crucial role for the Congress to play and, frankly, 

where some improvement can be made on the House legislation. I 

think it is critical, as I said a minute ago and as I write in my written testimony, that there be very clear guidelines that the benefits 

be passed on to consumers. 

Now, the House legislation has a couple of ways of doing that. 

It requires those local distribution companies to submit detailed 

plans specifying exactly how they will pass on the benefit to customers, and it includes strong provisions, strong safeguards for auditing those LDCs to make sure they follow through on their commitments. So, those are the kinds of things that provide a starting 

point. 

13 

As you say, it is crucial that, if the allowance value is allocated 

to the LDCs, that it go on to the benefit of their customers. I think 

this is an area where Congress needs to provide very clear guidance, perhaps even to the point of defining benefit of customers 

very clearly. 

My own definition would be reductions in the total electricity 

payments of households, although we can talk about how to do 

that—what mechanism to use. But, I think Congress should be 

very clear about what the definition of benefit is and provide clear 

and stringent guidelines to make sure they get—— 

The CHAIRMAN. Dr. Burtraw? 

Dr. BURTRAW. The instrument that the House has looked at has 

a distinction between the fixed and variable parts of the bill, thinking that, if we could compensate for the fixed part of the bill associated with fixed costs, such as transmission and distribution, that 

somehow this would be more equitable and avoid this efficiency 

cost of driving down electricity prices. 

The idea there is that people would be hyper-rational and would 

really recognize, oh, at the margin it costs this much to use electricity or natural gas, but I am getting this overall savings. 

Economists have come lately to this field of behavioral economics 

because we have come to recognize that, actually, behavior is a 

part of our economy, and the notion that households will sit down 

and separate the bill in their way—I think people go to the computer, they sit down and pay their bill, and, if they see a lower 

overall bill, they think electricity just got cheaper, and it is easy 

to consume more of it. 

So, the other idea is, well, what happens with industrial and 

commercial cost customers? There, if the same thing is attempted 

and you separate the fixed and variable portions of the bill, then 

the rebate for the fixed part is really going right to shareholders. 

It is not going to go to customers who are buying goods and services provided through commercial interests and industrial interests 

because, if we are operating in a competitive economy, they are 

still up-pricing goods and services at that marginal cost of electricity that they use. We might think that industrial and commercial cost customers are sophisticated. I do not think we can think 

that most households are going to be able to respond to signals this 

way. And so it becomes quite a convoluted mess in terms of separating what kind of signals, how is the PC going to do this. And, 

in fact, bills are not even structured at the State level to allow this 

kind of information to be passed on. 

The CHAIRMAN. Yes. But what percent is fixed that goes to the 

shareholders and what percent is not fixed or variable and does not 

go to shareholders? Just generally, would you have that? 

Dr. BURTRAW. Generally, you could think about electricity bills 

as being—roughly 40 to 45 percent of those bills constitute fixed 

costs. 

The CHAIRMAN. All right. 

Dr. BURTRAW. But what consumers actually see usually is about 

5 percent of their bill or 10 percent of their bill as a fixed cost, because all of these fixed costs stem 50 different ways in 50 different 

States; all these fixed costs are rolled into volumetric charges. 

The CHAIRMAN. All right. 

14 

Next in order. Senator Kerry, you are next. 

Senator KERRY. I have to go vote. 

The CHAIRMAN. Well, we can continue when you get back. Well, 

somebody. [Laughter.] 

Senator Stabenow, you are going to volunteer? Thank you. 

Senator STABENOW. Yes, and thank you to all of you. 

I think this a really important discussion, and it is unfortunate 

that we will have to interrupt it with a vote. 

Dr. Burtraw, as we talk about the concerns about volatility as it 

relates to the price of emission allowances—and this is for anyone 

to answer—there is concern about volatility as we transition to the 

new economy and significantly increase the costs, of course, that 

we have been talking about with homeowners and businesses. 

One of the things that I am looking at is something that others 

have been analyzing, which is a price collar that would essentially 

place a collar around the market price of emission allowances. It 

would have the environmental benefit of ensuring that the costs of 

the allowances do not go too low, but the predictability on the high 

end that you would be able to measure in terms of some kind of 

stability on what prices would be. 

I wonder if you might elaborate on any benefits that you might 

see—or anyone else on the panel—from a price collar, the variations we may consider, whether or not a price collar would diminish some of the need to allocate allowances to certain sectors, because there would be less of a price variation. If we have a workable price collar, do we need to allocate as many allowances to 

dampen costs if the collar is already preventing excessive costs? 

Now, I wonder if you might—— 

The CHAIRMAN. And Senator, I will let you complete, and you 

close when you want, but, when you finish, we will stand in recess. 

We only have a couple minutes left, but it is up to you. Stay as 

long as you want. 

Senator STABENOW. Thank you. 

Dr. KEOHANE. Thank you, Senator Stabenow. 

Quickly, I will answer and then give others a chance. 

I think the major virtue of a price collar is that environmental 

economists for 30 years have been saying that all we really want 

is a stable, smooth, increasing price signal to guide investment decisions in the economy. And that price collar helps deliver that, 

while removing the excess costs associated with price volatility. 

That type of volatility, in any kind of a market in a commodity 

market or whatever, it leads to a delay in new capital investments 

because those investments become inherently more risky. This is 

called real option theory, and it leads to longer waiting on the 

exact kind of innovative investments that we want to see happen 

in order to achieve a transition in the economy. 

Now, in some commodity markets, it makes sense to have volatility because you really are bringing your variable supply of corn 

or other commodities into the market, and there are risks on both 

the supply and demand side. Here, it is your job to set the emissions cap, the emissions goal, and the number of emission allowances that are going to be out there, so supply is set. Price volatility does not really have a useful purpose after you have done 

15 

your job of achieving what the social goals should be with respect 

to our environmental outcome. 

So, that price collar, what it is doing is, it is letting the market 

still play a role, but by limiting the volatility the market can only 

enhance the transition and investments we want to achieve. 

Senator STABENOW. Thank you very much. 

Anyone else? Yes? Dr. Keohane? 

Dr. KEOHANE. Let me jump in, because I think I will have a different view, and I imagine Dr. Viard will have a similar one to Dallas. 

I want to make four brief points here because I think, Senator, 

this is a very important question, but I am going to come at it from 

a very different point of view. 

First of all, the integrity of the cap is fundamental to the environmental performance of the program, and the danger with any 

policy like a price collar, that effectively allows for unfettered emissions at some price, is that it is going to bust the cap. So, there 

are alternative options we can use, as the House legislation has, 

that provide a lot of the same cost-containment features of that 

price collar, but they do it under the cap. The way the House does 

this is through an allowance reserve, kind of like a strategic reserve for allowances that are set aside and used for this purpose. 

Two more quick points. 

Senator STABENOW. I apologize. I am just told we have 1 minute 

left on the clock, and so I am going to have to ask to follow up in 

a discussion with you. This is very important, and I am going to 

turn it over to Senator Cantwell. 

Senator CANTWELL. I would just say, Madam Chair, thanks very 

much for staying here and having this important question on the 

collar. And I just want to say that I appreciate the witnesses recognizing that an auction and a 100-percent refund or percentage refund back to the consumers would be a very wise way to go. So we 

appreciate your testimony on that, and we look forward to submitting questions to each of you. 

Thank you very much. 

Senator STABENOW. With that, the committee is in recess, I believe. Is that correct? 

Senator CANTWELL. Recess. 

[Whereupon, at 10:47 a.m., the hearing was recessed, reconvening at 10:48 a.m.] 

Senator GRASSLEY. All right. I heard all of the testimony except 

the last few minutes of the last witness. I apologize to him, because 

Senator Baucus and I trade here when we have votes. 

I will ask the whole panel this question: in response to my written question from a hearing before this committee earlier, CBO Director Doug Elmendorf said, ‘‘The value of the allowances created 

under a cap-and-trade program would be large, but would inevitably fall short of the total economic effect of the policy—which 

would include the cost of the allowances themselves as well as the 

losses associated with the reduction in output associated with 

transitioning to a less carbon-intensive economy.’’ As a result, he 

said, ‘‘Policymakers would inevitably face trade-offs: using the allowance revenue to help particular consumers, workers, or shareVerDate Nov 24 2008 15:04 Apr 15, 2011 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 R:\DOCS\65358.000 TIMD
16 

holders will necessitate providing less compensation, or none, to 

other entities.’’ 

Please briefly describe the ideal proportion in which Congress 

should compensate the various affected segments of the American 

population and any groups Congress should not attempt to compensate. 

Starting with Mr. Stephenson and going left to right. 

Mr. STEPHENSON. Well, most of the estimates of the effect on 

gross domestic product are fairly modest, from 0.5 percent to 

maybe 2.5 percent. You are never going to offset the entire cost by 

the value of the revenues generated, and you do not really want 

to. You want there to be price controls and incentives for there to 

be a reduction in emissions—that is the goal here—and for all consumers to promote efficiency in everything they do. But a responsible way of allocating the revenues can go a long way towards offsetting the effects without those compensations. 

So, I mean, that is what we are talking about here. This is very 

complicated, and you are not going to make all sectors happy. The 

idea is to be as equitable as possible, and that is what we are trying to decide. 

Senator GRASSLEY. Dr. Burtraw? 

Dr. BURTRAW. Thank you. 

I think that it is imperative to achieve some kind of regional equity across the Nation with respect to the impacts of the program. 

We have been out front in identifying the regional differences, but 

also, in many forms, those regional differences have been greatly 

exaggerated. 

I think that my testimony indicated that free allocation of local 

distribution companies for residential-class customers actually 

achieves that regional balance and overcomes the differences in 

costs that households will face. Beyond that, I think it is not so 

much a question of compensation as that economists want to view 

this carbon-constrained economy as a common pool resource. It is 

a resource that we are not putting a property value on, and it is 

not a question of an entitlement or so much a question of compensation as it is a franchise that everyone owns in common, and 

that is why the appeal of per-capita dividends crosses the political 

spectrum and is a common-sense approach to the problem. 

Senator GRASSLEY. Dr. Viard? 

Dr. VIARD. Thank you, Senator. 

I think that a majority of the revenue should be used for some 

type of tax reduction that would reduce marginal tax rates. Not all 

of the revenue should be used for that purpose, however; there is 

clearly a need for an ample scope for having some type of relief for 

vulnerable consumers, which could take the form of things like expansion of the Earned Income Tax Credit, perhaps a modest program of per-person rebates, and so on. 

I think there would be ample revenue available to fulfill both the 

goals of protecting those who are in need and also reducing marginal tax rates to dampen the tax interaction effect that cap and 

trade would otherwise have. 

Senator GRASSLEY. Dr. Keohane? Have I pronounced it right? 

Dr. KEOHANE. That is fine, yes. Pretty close. Thank you, Senator. 

17 

To go back to the principles I guess I started with, I would say 

it is really crucial that we protect consumers, preserve and 

strengthen manufacturing, and invest in a clean energy economy, 

and what the right proportion is, specifically, I think, is one of the 

key tasks for Congress rather than for the economic analysts on 

the panel. 

I also want to echo what Dallas said with respect to households. 

In particular, I think taking account of regional variation and taking account of income, in particular, taking care of low-income 

households, I think those are critical aspects of allocation. 

Finally, I want to pick up on a point that Mr. Stephenson raised, 

which is the low cost of the overall program. It is important to remember that, when EPA looked at the House bill, they found the 

cost to households to be $80 to $111 a year, and, as I said, that 

is about a postage stamp per day, per household, or about a dime 

a day per person. So that is also something important to keep in 

mind as we consider these issues. 

Thank you. 

Senator GRASSLEY. Another question for the panel. 

We have been hearing that the Commodity Futures Trading 

Commission is now blaming speculators for the historic run-up in 

oil prices. Under cap and trade, like the Waxman-Markey bill, 

would hedge funds be permitted to speculate in carbon allowances? 

And a second part of that question: are the Wall Street investment 

banks supporting cap and trade because they know that they will 

have a new trillion-dollar market from which to feed? 

Mr. STEPHENSON. My understanding of Waxman-Markey is that 

derivatives are allowed, but not over the counter. I am not a derivatives expert, but I think a certain amount of that should be allowable, but it is going to create new oversight challenges depending upon the types of derivatives that are authorized. 

Senator GRASSLEY. Dr. Burtraw? 

Dr. BURTRAW. I think that, when it comes to market oversight, 

the Commodities Futures Trading Commission is the best agency 

positioned to be able to do this, given their expertise. 

But, your question is really a deep one. I ask also, what is the 

role of a secondary market here for CO2? How constructive is it? 

How important is it in order to really have the program work? And 

proposals such as Senator Cantwell’s to restrict trading in a secondary market and just directly distribute to compliance entities 

has that going for it and would seem to accomplish what we are 

trying to accomplish if it was done through frequent auctions or 

something like that. 

Senator GRASSLEY. All right. 

Dr. Viard? 

Dr. VIARD. I think this is an important issue, Senator. And I 

think the real underlying concern is the price volatility, and this 

goes back to an answer that Dr. Burtraw gave earlier to Senator 

Stabenow. 

The price volatility under cap and trade really is not serving a 

useful purpose, and so then you face a difficult dilemma, the extent 

to which you allow the secondary market, and the hedging activity, 

and so on. 

18 

Really, a more direct solution is to go ideally to a carbon tax, or 

at least to put a price collar on the cap-and-trade program, along 

with borrowing and banking of allowances to try to replicate a carbon tax, to really eliminate this price volatility and thereby remove 

any need or demand for that type of hedging activity. 

Senator GRASSLEY. Dr. Keohane? 

Dr. KEOHANE. Well, I think this is a crucial issue and one that 

is really important, and one where Congress has a crucial role. 

I want to point out, the role of the market is very important 

here, though. The market is what is going to seek out the lowestcost emissions reductions opportunities. That is what makes this 

program tick. 

Now, the role of the government is to provide very clear guidelines and stringent rules of the game to make sure that people stay 

within bounds. In particular, you can do things such as the House 

bill would have done or other people have proposed, like preventing 

over-the-counter trading, and there should be very strong penalties 

and enforcement guidelines for anybody who violates the rules of 

the game. But we need the market as the engine of driving costs 

down and making this work over the long run. 

Senator GRASSLEY. Senator Carper, you are the next one, even 

though you are way down on the bottom of the list. You are the 

only one here. 

Senator CARPER. The first shall be last and the last shall be first. 

Senator GRASSLEY. All right. [Laughter.] 

Senator CARPER. Every dog has his day. 

Earlier in the hearing I was in an out, but I heard some discussion, I think maybe a question asked by Senator Baucus on a provision of the House bill dealing with the allocation of allowances to 

the utility sector, whether it be based on input or output. 

As some of you know, that has been a roaring debate for years, 

and we have seen efforts to try to move forward scuttled because 

the utility industry could not come to any kind of consensus among 

themselves, much less with the environmental community, much 

less with the rest of us, and the compromise that was worked out, 

I think, was a really key aspect for the successful passage of the 

climate bill because it not only helped to smooth the transition to 

a low-carbon economy in terms of consumer price increases, but 

also recognized the clean energy investments that have already 

been made. 

As someone who has been involved in some of those battles over 

the years on the allocation system, I realize that the compromise 

that was struck was no mean feat, difficult to do. I would have 

maybe a question, if I could, Mr. Stephenson, maybe Dr. Burtraw, 

as a follow-up. But given our concerns about consumers bearing the 

cost of a climate program, are there better ways to ensure the deployment of energy efficiency programs other than having consumers, especially low-income consumers, see an immediate price 

increase, which may result in an auction? 

Mr. STEPHENSON. Well, there are advantages to giving tax relief, 

either in the form of a rebate check or reduced taxes to consumers. 

One of the challenges in providing the free allowances to the LDCs 

is that you are trusting them to do the right thing with their residential and their corporate customers, and that is going to require 

19 

a lot of oversight in 50 different ways, as Dr. Burtraw pointed out, 

to ensure that that happens. 

So the language in the Waxman bill is fairly generic. It says, ‘‘for 

the benefit of the rate payers,’’ but it is not clear exactly how that 

will happen. 

Dr. BURTRAW. I, too, appreciate that the compromise that is in 

the House bill is miraculous, that it really came through, and it is 

an amazing thing to behold, but that compromise was served up to 

maintain sort of an industry coalition, and it includes allocation to 

all customer classes. The type of reform I was suggesting—if that 

was more limited, then it could be coupled with a change in that 

allocation formula which could give greater weight to the emissions 

intensity of production. 

That would disadvantage States in the Northeast or in California, but their States might very well go along with this because, 

if there is a greater share as per-capita dividends, households in 

those States would actually benefit from that reform. But, as you 

said, what this compromise is doing now is recognizing historic investments in energy efficiency in those regions of the country. 

The second part of your question was about energy efficiency, 

and the evidence is overwhelming that there are huge opportunities to squeeze out energy savings in our economy, and our modeling indicates the same. The question really is the institutions 

that are going to allow us to provide incentives or direct involvement of investments that will allow us to achieve that. And I think 

LDCs can, and have, played a role in that historically, so that allocation on behalf of residential-cost customers could be in part directed towards that end. 

Senator CARPER. Thank you. 

Let me sort of stay with this for a little bit. I think it is fairly 

clear from the debate on climate change that a cap-and-trade program will affect various regions of our country differently. We just 

talked about that, and I think Senator Baucus alluded to that in 

his earlier question. 

Is there an allocation mechanism that could help ensure that one 

region does not suffer a disproportionate burden at the expense of 

another? 

Dr. Keohane, go ahead, please. 

Dr. KEOHANE. I will just say only briefly, Senator, that I think 

this is one of the potential roles. If we step back and look at the 

big picture, this is one of the potential roles that the LDC channel, 

in fact, can play. And so, as I mentioned in my testimony, I think 

this is why it is so important to have multiple channels for allocating value to households, because households do vary among a 

number of different dimensions and, in particular, I think the LDC 

allocation is a good means of addressing those regional disparities. 

We can talk about some of the details of that, but I think that allocation plays a crucial role in this legislation. 

Senator CARPER. Good. Thank you. 

Please? 

Dr. VIARD. Senator, I think you have certainly highlighted an important concern there about the regional impact. The LDC distribution is certainly not necessary, however, in order to deal with that. 

I mean, Congress has obviously adopted a large number of governVerDate Nov 24 2008 15:04 Apr 15, 2011 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 R:\DOCS\65358.000 TIMD
20 

ment programs that make transfer payments and grants, and a 

number of those do have allocations among States where a decision 

is made by Congress as to where the needs are greatest. And so 

it is possible to allocate money to vulnerable regions without having to go through the cumbersome mechanism of distributing to 

LDCs and engaging in intrusive Federal oversight of State utility 

regulation and so on. 

So, I think it is certainly a very worthy goal, but there are better 

ways, I think, to do it than the LDC allocation. 

Senator CARPER. Please? 

Dr. BURTRAW. I think that the LDC allocation, if it worked in a 

text book way, the way it is envisioned to potentially work—I think 

I have raised the question about that already—would overcome the 

regional disparity and achieve the compromise you are looking for. 

Our research indicates that the same outcome could be achieved 

even better if it was just limited to residential-cost customers, that 

it is totally sufficient to achieve that very same regional equity and 

it lowers the overall cost of the program dramatically for average 

households across the Nation. 

Senator CARPER. Good. I suspect my time has expired. 

Senator LINCOLN. I think I am chairing, but it is Senator Kerry’s 

turn. There you go. [Laughter.] 

Senator KERRY. I am sorry I missed whatever took place in between the testimonies and the questions, because I think it is helpful to have the continuity. But, at any rate, let me just begin in 

one place, Dr. Viard, just very quickly, because you sort of reinsert 

a carbon tax into this thing. 

It strikes me that a carbon tax is probably the most-felt entity 

by the general population because that is just going to get passed 

on one way or the other in everything that they do without any allowance or rebate or adjustment. It is just a tax. 

And, second, the carbon tax does absolutely nothing to reduce 

emissions, per se, except to the degree that someone voluntarily 

chooses to say, well, we have this tax here, maybe we will mitigate 

a little bit, we would do this or that, but there is no target, there 

is no goal, there is no mandate reduction. Correct? 

Dr. VIARD. I think I would have to disagree with that a little bit, 

Senator. First of all—— 

Senator KERRY. Is there a mandated reduction in a carbon tax? 

Dr. VIARD. Any carbon tax is equivalent to a cap-and-trade system, where the permit price or allowance price under cap and trade 

is the same as the carbon tax. So, for example, a $20-per-ton carbon tax will give you the same reduction as a cap-and-trade system 

in which the price of allowances is $20. 

Senator KERRY. Why? A company could say, I am under no obligation to reduce emissions, this is the cost of doing business. I am 

perfectly happy to pay the tax, pass it on in the cost of doing business, and not reduce. 

Dr. VIARD. But that is exactly the same situation that they are 

in under a cap-and-trade system. No particular firm is mandated 

to achieve any given reduction under cap-and-trade either. In fact, 

that is what makes cap-and-trade so efficient. What makes it a 

market-based mechanism like the carbon tax is the fact that the 

21 

firm makes the choice. It decides, can I achieve this reduction at 

a cost of less than, say, $20 per ton? When they can, they do. 

Senator KERRY. But they have a goal and a target, which everybody is moving towards, which is part of what helps set the price. 

Dr. VIARD. Well, the one difference is how the emissions are determined each year, which is that, under a cap-and-trade system, 

you are locking in the quantity of emission reductions each year, 

while under a carbon tax you are locking in the price or the cost 

of making that last ton’s worth of reduction in emissions. 

That is actually an advantage for the carbon tax which you can 

replicate to some extent with banking, borrowing of allowances, 

and price collars under cap and trade, because it says, if it is costly 

to make reductions in emissions in a particular year, let us not 

make as many reductions that year. If it is particularly cheap in 

a given year, let us make more reductions in that year. It is the 

stock of carbon dioxide in the atmosphere that we are ultimately 

concerned about. 

Senator KERRY. I do not want to spend the whole time on that 

debate. I think most people would argue that it is much less efficient and much more problematic in terms of the impact of the average taxpayer. 

But let me come back, Dr. Burtraw and Mr. Stephenson. You 

both talked about the mixture of the two here. I have always been 

a 100-percent auction person, because I believe that it is the cleanest, et cetera, et cetera, et cetera. But I also recognize the process 

the House had to go through to pass a bill, and I know we are just 

not going to have that, and I acknowledge that. We are going to 

have to find some mix here, and you alluded to that mix. 

It seems to me that that mix was the key to being able to put 

together the kind of political fabric that you also have to deal with 

here in order to pass a piece of legislation. 

Now, the mix that the House arrived at, would you make any adjustments to that mix, either of you, Mr. Stephenson or Dr. 

Burtraw, particularly with respect to the consumer protection, 

which we want to maximize? 

Mr. STEPHENSON. Well, we are not specifically evaluating Waxman, but we do note that the percent of auction increases significantly over the years. 

Senator KERRY. Because it does the transition, correct? 

Mr. STEPHENSON. Because of the transition. 

We think that, if you are going to give a free allowance, that is, 

in essence, the same as auctioning, creating a value and giving it 

back to that entity. The problem is that auctioning is just more 

transparent. 

Senator KERRY. Agreed. Except there is a difference, it seems to 

me. If you are a company and you are sitting there and you are 

giving this allowance back, you get a breather. 

Mr. STEPHENSON. Right. 

Senator KERRY. You get an opportunity to say, all right, now we 

can adjust to the new way we are going to do business here in 

order to reduce our emissions and pass on the cost savings to the 

consumer. If you just do the auction, it is slam, bang right up front 

and there is no mitigation for that cost unless you give an allowance. 

22 

Mr. STEPHENSON. Right. But, at the same time, you have to trust 

the distribution company to do what is intended with that free allowance—— 

Senator KERRY. I agree completely with your judgments, all of 

you. I think you have all made the point very pointedly, and it is 

one that we have already, in fact, responded to, which is, there has 

to be a clear mechanism that is transparent and accountable that 

guarantees that you are going to give that back to the consumer. 

Mr. STEPHENSON. Right. You are trusting the LDCs to do the 

revenue allocation instead of the government. 

The CHAIRMAN. Senator Lincoln? 

Senator LINCOLN. Thank you, Mr. Chairman. 

I appreciate you and Senator Grassley holding the hearing. It is 

a huge issue for so many of us, and without a doubt these are critical issues in the creation and implementation of this cap-and-trade 

legislation that is going to have a big impact on our families and 

our businesses all across the country. 

I want to appreciate, again, the chairman asserting the jurisdiction of the issue of climate change here in this committee, and I 

am certainly proud of the bipartisan way that we always attack 

these issues, both pragmatically and looking very carefully at how 

we formulate long-term solutions. And I think we will have that opportunity in health care, and certainly here, and I appreciate the 

fact that we are exerting that jurisdiction. 

With all that said, it is indeed a very difficult issue, maybe even 

more difficult in the current economic environment, I think. The 

average family in my State these days sits down at their kitchen 

table and, quite frankly, they talk through their worries about 

their retirement plan losing its value, their kids’ college savings account losing its value, their neighbors have just received a notice 

about being laid off, perhaps, and they are all scared, quite frankly. 

And our businesses. They are making tough choices right now, 

whether to cut benefits, or cut hours, or cut workers, or close their 

doors altogether. And I would say the vast majority of Arkansans 

do indeed believe efforts need to be made to reverse the detrimental effects of climate change. But they are apprehensive, and 

rightly so, about what a massive policy change such as cap and 

trade will mean for them in a time when they are working day-today just to make ends meet. 

And to be frank, the legislation we have seen come out of the 

House has done nothing to ease those apprehensions whatsoever. 

The Waxman-Markey bill picks winners and losers and places a 

disproportionate share of the economic burden on families and 

businesses, particularly in rural America, in my opinion. 

I think it is a deeply flawed bill, and I hope that we will work 

hard to come up with something that makes better sense. The bill 

out of the House would significantly increase the cost of fuel for 

consumers. Some have gone as far as to say that the oil industry 

and its consumers were singled out by the House of Representatives to bear the cost of cap and trade. 

And while that may not seem a big problem to some of my urban 

colleagues on the east or west coast, it is a huge concern for me. 

Many of my rural constituents have no choice but to drive quite a 

ways, whether it is through two or three different counties, to get 

23 

to work or school every day. And many of them spend their days 

in the fields, behind the wheel of a combine or a tractor. Gasoline 

and diesel are, and will continue to be for the foreseeable future, 

important parts of their everyday lives. 

In addition, many of our businesses in my State that compete 

with international manufacturers or international producers tell 

me that protections for our energy-intensive domestic industries in 

Waxman-Markey are insufficient to combat unfair competition 

overseas from countries such as India and China. 

The offsets provided for agriculture as well will not benefit many 

of our producers who will all undoubtedly face increased input 

costs if this bill were to become law. 

So, I point out these concerns to certainly indicate to the chairman and others that we have much work to do over here, and I 

hope that we will dig in and make that happen. I think certainly 

several of our colleagues and I joined last year in laying out a set 

of principles that need to be addressed, and I think those principles 

are still very, very relevant. 

I am certainly proud to have worked with Chairman Bingaman 

in the Energy Committee to come up with a good bill. I think, quite 

frankly, what we could do with a companion tax package to that 

energy bill could do a tremendous amount in moving us forward incrementally in terms of moving us away from carbon-emitting energies and incentivizing those energy productions, renewables and 

others, that could make a tremendous benefit, and I hope that we 

will work hard on creating that companion legislation. 

I think I have to at least say a little bit, Mr. Chairman, about 

the climate change legislation, how it does not provide a fair and 

equitable allowance allocation for domestic oil refiners and, more 

importantly, their customers. 

Under Waxman-Markey, refiners are held responsible for 44 percent of all covered emissions, and yet they receive a mere 2 percent 

of free allowances, compared to coal-producing energy and a whole 

host of others that are out there. It is going to result in the domestic refining industry being required to purchase over 90 percent of 

the allowances it would need for compliance with this legislation. 

Small refineries and the fuels they produce emit 10 million metric 

tons of CO2 each year, but, under Waxman-Markey mandates, they 

would have to purchase on the open market 9 million CO2 allowances annually. Those allowances are assumed to cost $20 per ton. 

Lion Oil in Arkansas, as well as Murphy Oil, which is a great 

corporate citizen of our State, would have to spend $180 million annually to purchase allowances in the early years and much more 

in later years. Over the last 23 years, their average annual profits 

have been $13 million per year. 

So, in testimony before the House Energy and Commerce Committee, Lion’s vice president Steve Cousins explained the obvious, 

that under Waxman-Markey, the company will be unprofitable in 

year one and insolvent within a matter of months, not years. 

As I mentioned, without a doubt, similar impact would be felt by 

other independent domestic refiners. Murphy Oil, as I said, another 

responsible corporate citizen in Arkansas, is doing a tremendous 

job. 

24 

So I guess my question, Dr. Viard, do you think the allowance 

allocations structured in Waxman-Markey would increase the U.S. 

market share supplied by foreign oil as compared to our domestic 

production? 

We are not going to be able to do away with oil production in this 

country. It is certainly not in the early foreseeable future. But are 

we just opening the door for just all imported oil and imported oil 

products? 

Dr. VIARD. Well, it is almost an inherent consequence, I think, 

Senator, of pursuing a climate control program unilaterally. It is 

very difficult to deal with a worldwide externality through the unilateral action of any given country. Allocating allowances based 

upon past activity is not really a solution to that problem. It increases the wealth of stockholders but does not reduce the marginal cost of doing new production in the United States. 

Output-sensitive allocations of permits to trade-competing industries is one possible solution to the problem of carbon leakage or 

of international competition. Whether it is the best solution, I am 

not sure. I think, frankly, it is difficult to do an ambitious program 

of carbon control dealing with a worldwide externality until we 

have broad international cooperation to deal with the problem that 

affects the entire planet. 

Dr. KEOHANE. Senator, if I may, briefly on this point, because I 

think it is an important point, and I certainly understand the concerns of your constituents. I was actually on the panel with Lion 

Oil before the House. 

Senator LINCOLN. With Mr. Cousins. Yes. 

Dr. KEOHANE. I want to focus in on this issue of competitiveness 

for domestic refineries, because I think in that area, perhaps contrary to what my colleague just said, I believe we can show—and 

I will be happy to share this information with you separately—that 

domestic refineries would be protected under the bill. In other 

words, for their process emissions, that is the emissions that come 

from the smokestack, that is what they have to pay for that foreign 

suppliers would not, and I think there is some good evidence to 

show that the House strikes the right balance. Of course, the Senate might strike another balance. I just want to say, briefly, the 

larger amount, the allowances that are the carbon content of the 

fuel, that also has to be paid for by foreign importers of oil. So, that 

is a level playing field. And I think the small bit that is process 

emissions, I think there is a balance that can be struck there. 

Senator LINCOLN. Yes, but the process emissions are presumably 

what they would be held accountable for, not everything else that 

trickles down from that industry, and, without that being lumped 

in with those other energy-intensive industries, they are just not 

going to get a fair shake. 

The CHAIRMAN. I am going to have to go to Senator Menendez, 

because we all have an obligation that begins about 11:30, promptly. 

Senator LINCOLN. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator Menendez? 

25 

Senator MENENDEZ. Thank you, Mr. Chairman, and thanks for 

holding this hearing. I think the committee’s jurisdiction here is 

important. 

I saw the House made some history in its bill, and I look forward 

to what the Senate can do. I have a concern with the House bill. 

I think it fails to chart a course towards lowering emissions in the 

transportation sector. And transportation accounts for nearly onethird of our emissions, and yet 1 percent of the allowances goes towards mitigating emissions in that sector. So we can improve 

CAFE standards, we can clean our fuels to slow the growth of 

emissions, but if we want to truly lower emissions from transportation we need to slow the growth of vehicle miles and travel. Then 

that, to me, ultimately means that we need to invest in transit and 

more compact development strategies that can help us in that respect. 

So, I look forward, as we pursue this, to see if we can be able 

to have a climate bill that funds clean transportation infrastructure 

projects and incentivizes sensible land use policies as part of that. 

I would like to ask Dr. Keohane, we have heard a lot today about 

costs to consumers, and I think we need to be careful of how we 

think of those costs. If we fail to comprehensively deal with climate 

change, it is inevitable that this country, it seems to me, will face 

hardship on an enormous scale. 

In New Jersey, we had a group of scientists who predicted sealevel rising, of course, along the entire coastal part of New Jersey, 

an incredible consequence to us in property values, in economic impact, diminished food production, more wildfires, stronger storms, 

deadly heat waves—they will all become par for the course if we 

do not act. 

So, does that not mean, when we are talking about costs here, 

that the real cost comparison is not the cost of action or inaction, 

because it seems to me we have to act? The real cost is whether 

we want to act now and gradually wean ourselves off from fossil 

fuels and improve efficiency or whether we continue to delay and 

force ourselves into a position down the road where we will need 

to dramatically reduce emissions in a matter of years, rather than 

looking at decades. 

Dr. KEOHANE. Well, thank you, Senator. 

I think that is a crucial point and one I am glad you raise, because you often lose sight of that. When we start talking about 

issues of allocation, we lose sight of why we are here in the first 

place, which is simply that the cost of inaction is untenable and 

much, much higher than anything we are talking about in terms 

of a dime a day of the costs to households of doing something about 

this. 

As you said, coastal States and inland States would suffer major 

consequences. It seems like it is far off, but that will happen in the 

lifetime of our children and their children, if not before. In fact, we 

are already seeing evidence of climate change. So, it is crucial to 

take account of that, all of the costs of these plans that are out 

there, including the EPA’s, which say how small the cost will be 

to households. They only look at one side of the ledger, so they do 

not even account at all for those enormous costs of inaction. And 

as you say, delay will only drive up the costs. It will make it that 

26 

much harder to address this problem if we wait now, if we drag our 

feet. And by the way, that is not going to help American manufacturing if we wait, because the key to helping American manufacturing is putting the policy in place that will help us lead the world 

in the next clean energy revolution. 

So, I think your point is a crucial one. I am glad we got a chance 

to raise it. 

Senator MENENDEZ. Yes? 

Dr. BURTRAW. On a narrow matter, a specific area of reform in 

H.R. 2454 has to do with, as I have been talking about this morning, the local distribution companies, that free distribution to the 

local distribution companies preserves low prices for electricity and 

natural gas consumption through 2026, and only then does it begin 

to phase out. 

There is a justification for this kind of subsidy to consumers and 

businesses, because they inherit a stock of capital, appliances, 

home building efficiency, et cetera now at the outset of a program, 

and they cannot immediately respond to changes in pricing as well 

as they can over time when they begin to make investment changes 

in their own house infrastructure. 

But, if they do not anticipate any changes in relative prices until 

after 2026, there is no incentive for the next decade for housing 

and land use planners, et cetera, to begin to anticipate that. 

Senator MENENDEZ. Which anticipates the next question. That is, 

reducing the cost of this bill for working-class families under the 

bill is essential, and I will support efforts that accomplish this 

more. 

But what you just talked about: one of my concerns is that my 

understanding of the House bill is that local distribution companies 

are required to pass some allowance value to residential consumers, but much is left to their discretion and to State regulators’ 

discretion. 

Do you see States under such a system competing for carbonintensive business by funneling this value to industry? If so, then 

how do we get the consumer side of that benefit, and is that sound 

policy? 

Dr. BURTRAW. I think you have really hit a great point there. 

There is a sort of a prisoner’s dilemma. Many of the State public 

utility commissions are chartered under State constitutions to promote economic development and job growth in their States. That is 

perhaps as it should be, but consequently their incentives, when 

given these allowance values and decisions about how they should 

be distributed within their States, they could make the decisions 

that are geared primarily towards job growth and subsidizing industrial growth in the State and not seeing pass-through to consumers. So it is really an open question. It is an undetermined 

question, what the outcome would be. 

Senator MENENDEZ. We certainly want to see the job growth but 

also strike a balance to make sure that consumers get part of the 

benefit. 

Dr. Keohane? The last word on that? 

Dr. KEOHANE. I just wanted to say, very quickly, I think it is 

very important that consumers get that benefit. I think one approach that the House legislation, which is not perfect, tries to take 

27 

is, that benefit would go in proportion to the electricity consumed. 

So there are provisions in there to prevent what you are talking 

about, but I think we can go beyond those and do a better job of 

ensuring that consumers see that benefit. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

The CHAIRMAN. I have no more questions. 

Senator Kerry, do you have questions? We are supposed to, as 

you know, board a bus in about 5 minutes. 

Senator KERRY. Yes. I would like to before I come down. 

The CHAIRMAN. Go ahead. Sure. Why don’t you go ahead? 

Senator KERRY. I will just be a little later. 

Let me ask this generally of the panel. Last week, the McKinsey 

Company released this report showing that investments in energy 

efficiency—— 

The CHAIRMAN. Senator Kerry, why don’t you go ahead, and then 

you can just finish the hearing. 

Senator KERRY. All right. Thank you. 

The CHAIRMAN. Recess when you are finished. 

Senator LINCOLN. Can I ask—— 

The CHAIRMAN. You can work it out with Senator Kerry. 

Senator KERRY. Sure. Do you want to go ahead? 

Senator LINCOLN. I just have two quick questions to put out 

there. 

Just, to any of you all in the panel, if you would, just to talk further on Senator Menendez’s issue on consumers, would any of the 

witnesses disagree with the assumption that free allowances benefit the recipient industries more than they do consumers? That 

would be my first question. 

I am trying to figure out, as he mentioned—and I think it is 

going to be critical in terms of cost to consumers—the language in 

the bill, at least Waxman-Markey does not provide very specific 

rules. You leave it up to State public utility commissions to determine how those households are going to be compensated, which I 

think is incredibly open-ended, which I do not think is going to 

work for constituents like I represent, predominantly low-income. 

I have the third-lowest median income in the country in Arkansas. 

And the last thing is, and I asked this question to the USDA 

folks which they did not include in their analysis, but the cost of 

food. For those of us who come from farm States and the input 

costs that we are going to incur, the relative cost of food, not just 

the cost of utilities to consumers, but the cost of food. 

Thank you. 

Dr. BURTRAW. In the analysis from the numbers I’ve been studying, we do include the cost of food. We include the entire composition of the household basket of expenditures on regions and income 

deciles across the country. So I think that the free allocation for 

the local distribution companies, a lot of it does fall to industry, not 

just to consumers. 

For example, an unappreciated fact is that the electricity indus- try can expect profits of about $2.5 billion because of the free allocation on behalf of consumers to local distribution companies. That 

results because of expanded generation and production in the electricity industry, and so that is extra revenues and extra profits 

through the industry. That is not really the intent of this free alloVerDate Nov 24 2008 15:04 Apr 15, 2011 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 R:\DOCS\65358.000 TIMD
28 

cation on behalf of consumers, and so I think that is on the table 

when you think about other claims for compensation in the industry. 

Senator LINCOLN. You mentioned several in your testimony. 

Dr. KEOHANE. If I may briefly just add, I think in particular for 

those low-income consumers and the low-income households you 

mentioned, it is important to keep in mind, again, there are multiple channels here. And one thing I think the House legislation 

does get right is in setting aside 15 percent of the allowances to 

low-income households. 

The Center for Budget and Policy Priorities says that, in combination with the electricity LDC allocation, will fully compensate 

the poorest one-fifth of households and start to compensate the 

next fifth. So that provides, again, a starting point. If we want to 

go further, terrific. But it is important to recognize that is in there. 

Senator LINCOLN. And I do not disagree with you that it is there. 

My biggest concern is, we have worked for years and years and 

years to get a refundability to the child tax credit to the lowest of 

income folks who suffer or certainly need that the most, so getting 

it to them is a whole other question. Setting it aside is one thing 

and that is great, but getting it to those people who need it the 

most is a whole other issue. 

Thank you. Yes, Dr. Viard? 

Dr. VIARD. Yes, Senator. I think that you have hit on an important point here. You mentioned the refundable child credit, which 

I think is a much better way to try to provide compensation to vulnerable consumers than any of these schemes that work through 

the local distribution companies. 

You have mentioned, quite rightly, some of the problems with the 

provisions of the House bill. I think we can honestly try to perfect 

those provisions and so on, but it is almost trying to square the circle, I think. I guess the thing that comes to my mind is that, if it 

is not worth doing, it is not worth doing well. And I think that that 

applies to trying to channel this through the LDCs. 

If you flow it through in variable rates to either residential consumers or to business consumers, then you are undermining conservation incentives and you are just creating bigger consumer burdens elsewhere in the economy. If you flow it through as fixed-rate 

reductions to industrial consumers, it is captured by the stockholders of those companies, as Dr. Burtraw mentioned. 

If you do not put precautions in place, it could be captured by 

the stockholders of the utilities. If you do successfully flow it 

through in reduction of fixed charges for residential consumers and 

you make sure residential consumers understand that, then you actually have created a consumer rebate system that may not look 

too bad at first glance. 

But then we come back to the question: Why not do something 

with the refundable child credit or with their Earned Income Tax 

Credit or with per-person rebates which you could easily finance 

through auction revenues? 

Senator LINCOLN. Well, thank you all. I certainly look forward to 

working with you all, as well as my colleagues, Senator Kerry, 

Chairman Baucus, and Senator Grassley, to come up with some 

good solutions. 

29 

Thank you. 

Senator KERRY. Thank you, Senator. 

Dr. Keohane, how do you respond to that issue of the LDCs and 

this ability to get back to the consumer more effectively? 

Dr. KEOHANE. Well, I think Dallas actually made a reference to 

this, as did Dr. Viard. I think ideally what you would be able to 

do is compensate consumers through the LDC allocation, since that 

is the way, as I said, that reflects those geographic disparities, and 

you can phase that out over time, once those disparities ease. 

Now, in terms of the mechanism, I think the ideal is to distinguish the price signal that gives the incentive to reduce energy use 

and invest in energy efficiency, to keep that, while compensating 

households through a lump sum mechanism. One way you might 

do this—I think it would be pretty simple—it does not have to be 

on the utility bill. It could be a check that shows up in the same 

envelope, or maybe a different envelope. 

Senator KERRY. Would that still be through the LDC? 

Dr. KEOHANE. Yes. So the LDC would simply send a check to its 

rate payer. 

Senator KERRY. What is the value of doing it through the LDC? 

Because obviously some people here have challenged that. 

Dr. KEOHANE. In some ways you could always come up with another—— 

Senator KERRY. So far you have talked about the regional impact. 

Dr. KEOHANE. Right. I think that is—— 

Senator KERRY. Is that the only value? 

Dr. KEOHANE. Well, so, let me say, I think Dr. Viard said, you 

could come up with another system that would respect regional differences. It seems to me that maybe that is possible. It sounds like 

it would be pretty complicated, and I think the advantage of the 

LDC allocation is it is sort of a natural way, in my view, to reflect 

some of that geographic variation, some of the starting point. Exactly how you do that, exactly what the balance is, exactly what 

the mechanism is, I think those areas can be worked out. 

I guess the idea is that using multiple channels here is a way 

of getting at the multiple dimensions. You have the low-income 

household tax credit for low-income families, you have a broadbased consumer dividend for consumers as a whole, and then you 

can use the LDC allocation to try to reflect some of those geographic variations. 

Senator KERRY. Are you contesting, the rest of you, the notion 

that 83 percent of the total here is going to go back to the consumer? 

Mr. STEPHENSON. I just think it is hard to tell at this point. I 

think that most economists would say that—— 

Senator KERRY. Well the auction piece is not hard to tell. Fifteen 

percent is automatically going directly back. 

Mr. STEPHENSON. Right. Right. 

Senator KERRY. And then you have the LDC distribution component, which is about 35-plus percent, 40 percent with a bonus, so 

you are up around 55 or 60 percent right there, and then you have 

the additional fee. Why is it hard to measure? What is hard about 

it? 

30 

Mr. STEPHENSON. I just think there are efficient mechanisms for 

allocating to make sure that they go to the right place. For example, as was mentioned, the Earned Income Tax Credit for low income, or a rebate check, simply, keep it apart from the LDCs to 

make that determination on how to lower a consumer’s bill and expect that they will understand the difference between the fixed and 

the variable portion of their bill and still have the price incentives 

for them to be more energy efficient in their everyday practice. 

Senator KERRY. Senator Lincoln spoke about the cost to this person and that person, and the cost to the industry, et cetera, et 

cetera. McKinsey, last week—I mean McKinsey is not the first 

time. McKinsey spent millions of dollars doing a complete analysis 

of the carbon cost-abatement curve, and over a year ago they came 

out with a report that showed that upwards of 35 to 40 percent of 

the reductions here pay for themselves the first 20 years. 

It seems to me there is a lot of knee-jerk push-back, to be honest 

with you, by people who just want to protect their current status 

quo who are not taking into account the realities of energy efficiencies, of new technologies, and of what is happening in the marketplace anyway. Now, McKinsey, last week, came out and said 

that investments in energy efficiency could result in 17 percent 

emission reductions, which is what we are looking for, below 2005 

levels within the next decade, at a net savings of $700 billion for 

U.S. consumers and businesses. 

What do they know that you do not, or what do you know that 

they do not? 

Dr. BURTRAW. I have a lot of respect for them, but it is the questions that they are not asking that really you have to ask, which 

is, really, what are the institutions that are going to help deliver 

those savings? But I believe those studies are superb with respect 

to identifying opportunities in the economy for these kind of efficiency savings. The questions of what institutions, what incentives 

are we going to put in place to get firms and households—— 

Senator KERRY. Well, we have already put $80 billion worth of 

incentives in in the stimulus package this year. 

Dr. BURTRAW. Yes. Yes. 

Senator KERRY. And we are going to pass an additional energy 

package, I am confident, that is going to do even more. 

But nobody, it seems, when they come up here, likes to take 

these things into account. None of the analyses that I have seen 

yet that factors in the cost, including CBO, the EPA, and the Waxman bill, actually factored in energy efficiencies and new technologies. 

Dr. BURTRAW. Well, Senator, we have looked at that, and the results that we found were so striking that it gave us great pause, 

that the investments in energy efficiencies would so dramatically 

reduce the cost of a cap-and-trade program, that we had to stop 

and ask ourselves the same question you are asking and that 

McKinsey is asking, which is, why are these potential cost savings 

not being realized? And the answer I have for you is that the institutions and the incentives for households, for individual decisionmakers, are not quite clear. They do not quite work the way we 

think they should, and that is the public policy problem. 

31 

Senator KERRY. Well, maybe the Cash for Clunkers Program is 

evidence that people are underestimating the smarts of the average 

citizen here to respond to their economic need and reality. 

Dr. Viard? 

Dr. VIARD. Senator, I think you have raised some good points 

here. 

You know, economists are certainly reluctant to assume that 

there are any private cost-reducing measures that firms could be 

taking now that they are not taking and that the government could 

then go identify those. I think we would certainly resist that notion. But I think that it may well be true that when you give firms 

the right incentive by putting a price on carbon, either through a 

carbon tax or through cap and trade, that of course firms will be 

able to identify those opportunities. I think it is certainly important 

that we use a market-based mechanism, preferably a carbon tax in 

my view, but cap and trade is also market-based, rather than intrusive government regulations. 

There is also, of course, a role for government to play in promoting basic research into technology, including clean energy technology. 

Senator KERRY. Well, I need to get down to the White House. 

But let me just say in departure that all of these companies that 

are stating exaggerated opposition to this, based on very unrealistic 

modeling, need to stop and consider what their models are going 

to look like when this is regulated by the EPA without any allowances and without any auction, because then they are in for a very 

different economic world. Would you agree? 

Dr. VIARD. I think the EPA regulation is a command-and-control 

approach that would be highly unsuitable. 

Senator KERRY. But it is going to happen if we do not do something up here, and I hope people hear that message loudly and 

clearly. They are smarter and better to come to this table and work 

with us as they did with the House to define the solution here. It 

may not be ideal, but the alternative, I would think, to most of 

those companies, is going to be that they will be regulated. If you 

care about coal in America, and there are plenty of Senators up 

here and plenty of States that do and have reasons to do so, then 

the only solution is not to sit there and wait to be regulated so that 

coal prices go up, natural gas goes down—and coal is a lesser 

choice anyway for ReGGIe in New England, for California, for the 

Midwest coalition. The only way there is going to be a choice is if 

they burn it clean, and the only way to burn it clean is to have 

clean coal technology, and the only way to do that is through this 

kind of a mechanism where you have $10 billion over 10 years 

going into that clean coal technology. If it is regulated by EPA, 

there is no money going into the clean coal technology. It is a battle 

of appropriations. 

Sir? 

Dr. BURTRAW. Senator, I have been an advocate for cap-and-trade 

programs for 20 years, but I would say that, when it starts to look 

like the Chicago phone book, when it is so complicated that you 

cannot figure out who is benefiting and who is losing and exactly 

how the system works, when there is also massive wealth redistributions and shifting going on within the program, then I ask the 

32 

question, is it in the public interest to see direct regulation instead 

of cap and trade? I do not want us to go there, but I think that 

is the challenge that we face. 

Senator KERRY. Well, none of us wants to go there, and that is 

the challenge we face. Our objective is to try to make it as simple, 

as straightforward, as transparent, and as accountable as possible. 

That is exactly what we are working on. It is the purpose of this 

hearing, and others. And we will not end with this hearing. We will 

follow up with you, and we will talk with you about how you think 

we can deal with some of the flaws that you see in WaxmanMarkey without so changing the equation that we cannot put it 

back together again, too. That is part of the trickiness here. I think 

you would agree with that. 

So we look forward to working with you on that. 

We will stand adjourned. The record will remain open until 

Thursday for obvious reasons, and we look forward to following up 

with you. 

Thank you very much. We stand adjourned. 

[Whereupon, at 11:38 a.m., the hearing was concluded.] 

(33) 

A P P E N D I X 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD


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(137) 

COMMUNICATIONS


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Æ 


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