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58–417 2010

CAP, AUCTION, AND TRADE: AUCTIONS AND 

REVENUE RECYCLING UNDER CARBON CAP 

AND TRADE 

HEARING 

BEFORE THE

SELECT COMMITTEE ON 

ENERGY INDEPENDENCE 

AND GLOBAL WARMING 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

JANUARY 23, 2008 

Serial No. 110–23 

( 

Printed for the use of the Select Committee on 

Energy Independence and Global Warming 

globalwarming.house.gov 


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(II) 

SELECT COMMITTEE ON ENERGY INDEPENDENCE 

AND GLOBAL WARMING 

EDWARD J. MARKEY, Massachusetts, Chairman 

EARL BLUMENAUER, Oregon 

JAY INSLEE, Washington 

JOHN B. LARSON, Connecticut 

HILDA L. SOLIS, California 

STEPHANIE HERSETH SANDLIN, 

South Dakota 

EMANUEL CLEAVER, Missouri 

JOHN J. HALL, New York 

JERRY MCNERNEY, California 

F. JAMES SENSENBRENNER, JR., 

Wisconsin, Ranking Member 

JOHN B. SHADEGG, Arizona 

GREG WALDEN, Oregon 

CANDICE S. MILLER, Michigan 

JOHN SULLIVAN, Oklahoma 

MARSHA BLACKBURN, Tennessee 

PROFESSIONAL STAFF

DAVID MOULTON, Staff Director 

ALIYA BRODSKY, Chief Clerk 

THOMAS WEIMER, Minority Staff Director 


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C O N T E N T S 

Page 

Hon. Edward J. Markey, a Representative in Congress from the Commonwealth of Massachusetts, opening statement .................................................... 1 

Hon. F. James Sensenbrenner, Jr. a Representative in Congress from the 

State of Wisconsin, opening statement .............................................................. 3 

Hon. Earl Blumenauer, a Representative in Congress from the State of Oregon, opening statement ...................................................................................... 4 

Hon. Marsha W. Blackburn, a Representative in Congress from the State 

of Tennessee, opening statement ........................................................................ 5 

Hon. Jay Inslee, a Representative in Congress from the State of Washington, 

opening statement ................................................................................................ 6 

Hon. Jerry McNerney, a Representative in Congress from the State of California, opening statement .................................................................................... 7 

WITNESSES

Dallas Burtraw, Senior Fellow, Resources for the Future ................................... 8 

Prepared Statement ......................................................................................... 11 

Peter Zapfel, Coordinator for Carbon Markets and Energy Policy, European 

Commission—Environment Directorate General .............................................. 33 

Prepared Statement ......................................................................................... 35 

Answers to Submitted Questions .................................................................... 100 

Hon. Ian Bowles, Secretary of Energy and Environmental Affairs, Commonwealth of Massachusetts ...................................................................................... 43 

Prepared Statement ......................................................................................... 46 

Answers to Submitted Questions .................................................................... 108 

Appendix to Statement .................................................................................... 129 

John Podesta, President and Chief Executive Officer, Center for American 

Progress ................................................................................................................ 49 

Prepared Statement ......................................................................................... 50 

Appendix to Statement .................................................................................... 131 

Robert Greenstein, Executive Director, Center on Budget Policies and Priorities ........................................................................................................................ 65 

Prepared Statement ......................................................................................... 67 

Answers to Submitted Questions .................................................................... 117 


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HEARING ON CAP, AUCTION, AND TRADE: 

AUCTIONS AND REVENUE RECYCLING 

UNDER CARBON CAP AND TRADE 

WEDNESDAY, JANUARY 23, 2008 

HOUSE OF REPRESENTATIVES, 

SELECT COMMITTEE ON ENERGY INDEPENDENCE

AND GLOBAL WARMING, 

Washington, DC. 

The Committee met, pursuant to call, at 9:30 a.m., in Room 2128 

Rayburn House Office Building, Hon. Edward Markey [chairman of 

the Committee] presiding. 

Present: Representatives Markey, Blumenauer, Inslee, Larson, 

Herseth Sandlin, Cleaver, Hall, McNerney, Sensenbrenner, Sullivan and Blackburn. 

The CHAIRMAN. Good morning. This past December the New Direction Congress passed the Energy Independence and Security 

Act, a momentous first step towards combating global warming pollution and securing our energy independence. With that down payment in place, Congress now must turn to the next great challenge: 

enacting an economy-wide cap-and-trade program that will reduce 

heat-trapping pollution 80 percent by 2050. 

A cap-and-trade system harnesses the power of the market to ensure that pollution will be cut by a defined amount at the lowest 

possible cost. Cap-and-trade is an idea that is made in the U.S.A. 

Its advantages have been demonstrated under the Clean Air Act’s 

highly successful acid rain program. The Europeans have adopted 

this idea for their emissions trading system for carbon dioxide. 

And, fortunately, we are now in a position to benefit from the lessons we have learned in implementing that system. 

One of the most important questions that any cap-and-trade system must answer is how tradable pollution allowances should be 

distributed. Should they be given away for free to polluters or 

should they be auctioned off? The acid rain program and the early 

phases of the EU emissions trading system rely primarily on free 

allocation. But both economic theory and the EU’s recent experience have taught us that giving allowances away may result in 

massive windfall profits for polluters and, surprisingly, does not 

lower costs to consumers. 

In most cases, polluters will charge consumers for the value of 

the allowances, even if they receive those allowances for free. Auctioning avoids this problem and ensures that allowances distribution is transparent and fair based on the free market, rather than 

political deals. Auctioning also has the advantage of sending a carVerDate Mar 15 2010 23:41 Oct 15, 2010 Jkt 058417 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 E:\HR\OC\A417.XXX A417

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bon price signal that is loud and clear, not muffled by special interest giveaways. And, finally, auctioning can provide tens of billions 

of dollars of revenue, which can be used to greatly reduce the overall cost of the program and speed the transition to a low-carbon 

economy. 

By investing auction revenues in technology research and development, efficiency, renewable energy, and rebates and tax cuts for 

low and middle-income households, we can provide a much needed 

stimulus to the economy, one that will get us out of the doldrums 

and unleash a clean, green revolution of innovation and prosperity. 

For all of these reasons, economists have long been nearly unanimous in advocating auctioning over free allocation. Now, policymakers around the world are moving decisively towards robust action. As Mr. Zapfel, our witness from the EU will explain, the European Commission just this morning announced its proposal to 

move to 100 percent auctioning of allowances for electric utilities 

by 2013 and to increasing reliance on auctions for other industrial 

sources. At least six of the Northeastern states, including my home 

state of Massachusetts, represented this morning by Secretary of 

Energy and Environmental Affairs, Ian Bowles, are planning to use 

nearly 100 percent auctions to distribute allowances under the 

RGGI cap-and-trade program. 

As Congress begins debate on cap-and-trade legislation, it is imperative that we learn from these experiences. The health of our 

planet’s atmosphere is a sacred public trust that belongs to all of 

us, and the right to pollute it should not be given away for free, 

nor should we adopt a program that will enrich corporate polluters 

at consumers’ expense. 

I believe that with a well-designed cap-and-trade program based 

on robust auctions and revenue recycling, we can do our part to 

save the planet from global warming in a way that grows our economy, creates jobs, is efficient, transparent, and socially equitable. 

Our distinguished panel of witnesses today is well-qualified to help 

us to move forward on this endeavor. 

I would also at this time like to inform the members that David 

Moulton, who serves as the Select Committee’s Staff Director and 

Chief Counsel, will be leaving that position on February 7th. David 

is one of Capitol Hill’s most experienced veterans. And, much to my 

regret, he has decided to retire from the Hill after more than 25 

years of serving in the House and the Senate. 

David has been at my side on every major issue I have worked 

on since 1985, from energy to the environment to telecommunications to consumer protection. Over the last 23 years, he has 

worked with me in a series of capacities, including Legislative Director, Chief of Staff in my personal office, and as Staff Director 

of the Subcommittee on Telecommunications and Finance, before 

assuming the role of Staff Director for this Committee. 

Whether it is energy efficiency or the V-chip, children’s educational television, or rollercoaster safety, protecting the Arctic refuge, or fighting global warming, David has been my closest adviser. 

He has combined a deep commitment to the public interest with a 

mastery of the legislative process. 


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Over the last year, David played a pivotal role in setting up the 

Select Committee. And he has helped to grow it into a force for 

change in this Congress and in the world. 

David exemplifies all of the best qualities of the staff whose hard 

work and professionalism make it possible for this institution to 

serve the public. He combines the soul of John Audubon with the 

writing talents of Mark Twain. His skills, counsel, and creativity 

will be greatly missed by me and by all of my staff. 

David, I want to thank you for all that you have done for me over 

the years. You are not only one of the top advisers that anyone in 

Congress has ever had, but you are also my very dear friend. And 

I wish the very best to you, your wife, Francie, and your two 

daughters in all of your endeavors in the years ahead. 

And I know for myself and all of the staff of the Select Committee and the members of the Select Committee, we offer you our 

thanks for your public service. Thank you so much for everything 

you do. 

[Applause.] 

The CHAIRMAN. Let me turn to recognize the ranking member of 

the Select Committee, the gentleman from Wisconsin, Mr. Sensenbrenner. 

Mr. SENSENBRENNER. Thank you very much, Mr. Chairman. 

First of all, let me say that I think I speak for over 72,000 other 

people who were in Lambeau Field Sunday night that we don’t 

think global warming is such a bad thing. [Laughter.] 

Because if it weren’t for global warming, it might have been 20 

below there, rather than just a little bit below the zero margin. 

And the game was bad. 

Today’s hearing will focus on the details of a cap-and-trade system. Specifically, the hearing will examine how carbon credits and 

allowances are to be distributed in a cap-and-trade system. However, I will not be offering much input into this nuance question 

because I will oppose a cap-and-trade regulatory regime and oppose 

it strongly, no matter how credits are distributed within the system. 

My reason for opposing this mess is simple. From the outside of 

the Select Committee, I said that I will oppose any legislative effort 

that will hurt jobs and the economy. And I am convinced that a 

cap-and-trade system will do just that. 

One needs look no further than Japan, Italy, and Spain to see 

what quicksand awaits U.S. ratepayers under a cap-and-trade system. Together these nations will have to fork over $33 billion to 

buy carbon credits according to a November 30th Bloomberg news 

article. This amounts to a tax on electricity in those countries since 

the cost of these credits will probably be hidden in the overall electricity bill. 

Make no mistake. These costs are the price tag of the Kyoto treaty. President Bush has received much grief for failing to sign on 

to that bloated regulatory regime. But after seeing how it is raising 

electricity costs in Europe and Asia, I am pleased that the President followed my advice and kept the United States out of that bad 

deal. 


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The question isn’t if a cap-and-trade system will raise electric 

costs. The question is how much they will raise costs. This is a 

question that I have been asking over and over today and throughout the year as we continue to examine this issue. 

When this Select Committee conducted a field hearing in Seattle 

last November, I engaged with New York City Mayor Michael 

Bloomberg on the differences between a cap-and-trade system and 

a direct tax on carbon. While I disagree with Mayor Bloomberg on 

the need for carbon tax, we both agreed that at least a carbon tax 

is an honest attempt to reduce carbon emissions; whereas, a capand-trade system simply buries the cost deep within your electricity bill. 

Cap-and-trade is a politician’s dream, doesn’t have to vote for the 

tax and then can run around and criticize the evil electricity companies for passing the cost of these credits on to consumers. It’s a 

dishonest way of doing it. At least Mayor Bloomberg said that if 

we’re going to do this type of a taxing system, we ought to do it 

the honest way. 

If the politicians in Washington believe it is a good idea to use 

taxes in an effort to fight global warming, then they should show 

the ratepayers exactly how much they are spending on these socalled global warming solutions. I think most people would find 

that to be the real inconvenient truth. 

Ten years ago, when I was Chair of the Science Committee, an 

employee of the Clinton administration testified that the Kyoto 

treaty and the cap-and-trade system that was envisioned in that 

would raise electric rates by 80 percent. 

I can’t face the senior citizens in my district, saying that a procedure that I have advocated cost them that much money. And what 

is going to happen to manufacturing when the cost of energy here 

goes up that much but the cost in China doesn’t go up at all? 

Since 2005, Europe has been under a cap-and-trade system. So 

far the results don’t look good. Open Europe, a group that studied 

the system, found that it acted like a wealth transfer mechanism, 

subsidizing polluters in states making little effort to control carbon 

emissions while punishing states that had tougher emission allocations. 

Perhaps the cost of this system would be worth it if they were 

actually creating measurable improvements to the environment. 

But as Open Europe notes, this regulatory system has actually led 

to an increase in emissions from Europe. 

The American people deserve a technological approach to global 

warming that improves the environment while protecting the economy. They don’t deserve a tax hike that masquerades as a solution. 

I yield back the balance of my time. 

The CHAIRMAN. Great. The gentleman’s time has expired. The 

Chair recognizes the gentleman from Oregon, Mr. Blumenauer. 

Mr. BLUMENAUER. Thank you, Mr. Chairman. I, as always, appreciate the eloquence of our ranking member. One of the fallacies 

I hear, though, in his presentation is that we are already paying 

huge costs as a result of global warming. And the scientific evidence is that it is going to be far greater. 

The Stern review suggested that by investing as little as one percent of our GDP, we could avoid the worst effects. Failure to avoid 


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the worst effects could have the GDP worldwide dropping 20 percent. I mean, this is a wise investment. 

And the good news is that a year from now, the United States 

will no longer be the single holdout of the industrialized countries 

that don’t believe that we’re going into a carbon-constrained economy. It is still open to how that carbon constrained. And it maybe 

that carbon tax has some merit. 

I am intrigued, as you, Mr. Chairman, with the potential of the 

carbon cap-and-trade. It might just be the key to saving the planet, 

but it also might be very helpful to get us out of the current economic crisis that we find ourselves in because we have systematic 

weaknesses, economic deficit, environmental deficit, infrastructure 

deficit. 

A cap-and-trade has a potential for creating a great deal of value. 

How that is captured and where it is allocated is of great interest 

to me. I am going to be posing some questions to this terrific panel 

that you have assembled to see if there is some way that a portion 

of this value could be reallocated to deal with crumbling infrastructure, in some places in the wrong places, invested in the wrong 

ways, that we might be able to take a portion of it to be able to 

revitalize the infrastructure, to reduce the carbon footprint over the 

long run while we stimulate the economy in the foreseeable future 

and avoid economic catastrophe in the future. 

I deeply appreciate this opportunity and look forward to pursuing 

this. But be forewarned. This is something I would like some of our 

witnesses to think about with this. 

The CHAIRMAN. Great. The gentleman’s time has expired. The 

Chair recognizes the gentlelady from Tennessee, Ms. Blackburn. 

Ms. BLACKBURN. Thank you, Mr. Chairman. Thank you for the 

hearing. And I want to thank our witnesses for being here today. 

I also want to apologize. We have an O&I Committee hearing with 

Energy and Commerce. So I am going to have to be up and down 

and back and forth today, Mr. Chairman, but I do thank our witnesses for being here. And I thank you that we are going to look 

at how a cap-and-trade would be administered and the prospects 

for such a system. 

I will tell you right up front I have some grave concerns about 

this type carbon reduction scheme because of my belief that it 

would drastically affect the nation’s energy supply and would significantly distort the market. So I join my colleagues in letting you 

know that I do have some questions that I would pose to you. 

Now, I know that proponents of the cap-and-trade system argue 

that the system is necessary because humans are causing a global 

climate change through emissions and carbon dioxide. And, therefore, we have to institute something that is going to drive a change 

to this human behavior. 

But then we turn around. And in our study and research, I have 

read several things in some of our scientific journals from the past 

decade that show that most, if not all, of our recent global warming 

is caused by the sun and other natural causes and cannot be specifically and irrefutably linked to human activity. 

And if these schemes were to be implemented, they would have 

little to no effect in changing the current projected rate of temperature more than a couple of degrees over 100 years. 


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So I think that it is our responsibility. It’s this Committee’s, and 

it is Congress’ responsibility to take reasonable actions to protect 

the environment. But closing coal plants and imposing massive energy costs on consumers in developing nations is in my opinion not 

the way we ought to go. 

A cap-and-trade or a carbon tax system will likely lead to shuttering many of the power plants that are in existence today and 

would compromise the American job market and could lead to a 

greater dependence on foreign energy sources, rather than driving 

us toward energy independence. And all of this would end up having a negligible environmental effect. 

In my opinion, that may be a little bit too steep a price to pay. 

This past summer, several of my colleagues and I traveled to Europe and firsthand had some firsthand visits with those on the capand-trade system. It raised some concerns. We look forward to 

hearing from you today. 

I yield back. 

The CHAIRMAN. Great. The gentlelady’s time has expired. The 

Chair recognizes the gentleman from Washington, Mr. Inslee. 

Mr. INSLEE. I was talking to the President of the National Academy of Sciences the other day. And he wasn’t worrying about the 

sun wobbling around or sunspots destroying the climactic system 

of the Earth. This is a problem we have got to tackle. I am glad 

we are here because if we don’t solve this problem, nothing else 

matters. 

I want to make three comments about cap-and-trade. First, those 

who are critical of the cap-and-trade system, I would just simply 

say, as they say in Texas, show me what you’ve got. Show me what 

you’ve got to solve this problem. And those who criticize this and 

approach from a lot of other criticisms never come up with another 

system to solve this problem. It is the best system we have available, and we should implement it. 

Second, for those who argue that a cap-and-trade system is sort 

of a camouflage system, trying to avoid responsibility, I would suggest the reason it is important is the first word. It is a cap. And 

a carbon tax does not have a cap. A carbon tax makes some assumptions about behavior that may or may not be true. 

The European experience has been a tax alone does not and cannot solve the problem. You have to have a hard, meaningful, concrete, impenetrable, legally enforceable cap. 

And this we guarantee our constituents. We are going to tell our 

grandkids we are going to have a solid, enforceable limitation on 

how many megatons of CO2 we are putting into the atmosphere. 

Third, the most important debate we will have in the next 12 

months is on an auction because there are some things we can 

learn from Europe. It’s true they don’t know what football is, but 

there are some things we can learn from them. 

And the number one lesson from Europe is that you have to have 

an auction if you are going to have a meaningfully successful capand-trade system, both for reasons of equity because of the tragedy 

of the commons that they first brainwashed me about in economics 

back 36 years ago but also because it has to work that way from 

an equity standpoint and an enforcement standpoint by putting a 

price on carbon. That is a lesson from Europe. They have learned 


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it. We don’t have to go through their painful first few years. We 

can learn from their experience. 

I will be working on legislation to have the earliest implementation of 100 percent oxygen as soon as humanly and politically possible. It is what I believe will be the single most important debate 

we have in Congress this year. And we hope that the forces of oxygen prevail for our grandkids’ sake. It is a lesson from Europe. We 

have got to learn it. 

Thank you. 

The CHAIRMAN. The gentleman’s time has expired. The Chair 

recognizes the gentleman from California, Mr. McNerney. 

Mr. MCNERNEY. Thank you, Mr. Chairman. 

I want to thank the panel for coming here today. The cap-andtrade policies that are ultimately adopted by this government are 

not only extremely important, but it is also an extremely interesting process. 

Speaking as a scientist, I look forward to getting into some of 

these details and having some fun mucking around, but, in particular, such a program will determine the direction of our economy. It will help or hurt our poor, our lower-income people. It will 

guide industry and, if done properly, will make America a leader 

as we move forward into the twenty-first century. 

So, with little or no pressure on the panel, I look forward to your 

testimony. And I reserve the balance of my time. 

The CHAIRMAN. The gentleman can do that. The Chair recognizes 

the gentlelady from South Dakota, Ms. Herseth Sandlin. 

Ms. HERSETH SANDLIN. Thank you, Mr. Chairman. I will reserve 

my time for questions as well. Thank you. 

The CHAIRMAN. The Chair recognizes the gentleman from Connecticut, Mr. Larson. 

Mr. LARSON. Thank you very much, Mr. Chairman. I, too, look 

forward to the testimony. And I feel somewhat like that old George 

Gobel line. I feel like a pair of brown shoes at a black tuxedo event. 

I do favor very strongly a specific tax credit, carbon tax credit, 

because I think that that is the most direct, most efficient means 

of us accomplishing a goal. I am skeptical about the cap-and-trade 

and remain to be convinced and certainly am anxious to hear from 

our panelists today. 

But I am especially concerned about the auction and about how 

the auction takes place, how a cap-and-trade is going to be administered, what is going to happen down line to people when we know 

the costs are going to rise. 

I especially am concerned in the Northeast about the constituents that I represent. And I feel that they would be more advantaged by making sure that we had a payroll tax deduction specifically tied to a carbon tax that would both benefit them and I think 

provide both an appropriate cap and a path forward for us to solve 

this very difficult problem. 

I think it also would be helpful to us in dealing with our foreign 

partners, most notably in China and India, because of the transparency issues that obviously exist but remain to be convinced otherwise. 


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The CHAIRMAN. The gentleman’s time has expired. And all time 

for opening statements from the members has been completed. So 

we will now turn to our panel. 

And we will hear first from Mr. Dallas Burtraw. He is a Senior 

Fellow at Resources for the Future. Mr. Burtraw is an economist 

who is recognized as one of the leading national experts on emissions cap-and-trade systems. He has worked in this area for the 

past two decades and has played an important role in evaluating 

the Clean Air Act’s acid rain program and has worked extensively 

on the Northeastern states’ RGGI program and on the EU’s emission trading system. We welcome you, Mr. Burtraw. Whenever you 

are ready, please begin. 

Mr. BURTRAW. Thank you. Thank you for the opportunity to testify today. 

STATEMENT OF DALLAS BURTRAW 

Mr. BURTRAW. Resources for the Future neither lobbies nor takes 

positions on specific legislative or regulatory proposals. So I emphasize that the views I present today are my own. I mean, I am going 

to talk specifically about the question of how emission allowances 

are allocated or initially distributed in the implementation of a capand-trade program by addressing several specific questions. 

The first is, what are the efficiency benefits of auctions? There 

are not many viewpoints that you can get most economists to agree 

on, but one of them is that the role of an auction in the implementation of an emissions cap-and-trade program delivers significant 

efficiency benefits. 

One perceived virtue of auctions is that they are consistent with 

the principle of simplicity and transparency, which is valuable in 

the formation of a new market. 

A second and equally forceful reason that economists favor an 

auction is that it makes funds available that can be used to achieve 

other goals. Depending on how these revenues are used, they can 

help in an important way to reduce the economic costs of climate 

policy. For the purposes of minimizing the costs and promoting economic growth, economists would favor dedicating the use of revenues from an auction to reduce preexisting taxes. 

A second approach would be to reinvest some portion of allowance value to reinforce policy goals. For example, in the ten-state 

Northeast Regional Greenhouse Gas Initiative that takes effect in 

2009, at least 25 percent of the allowance value which would be realized through an auction is to be budgeted to consumer benefit, 

such as investments and energy efficiency. 

A third idea is that even a relatively small sliver of auction revenues would provide a relatively substantial infusion of support for 

research and development of new technologies. I know that others 

on this panel have other ideas that deserve consideration on this 

revenue question. 

Second, would free allocation of allowances significantly reduce 

economic impacts on consumers? The group that is most affected by 

climate policy will be consumers. 

In the electricity sector under an auction, although we find that 

some electricity generators are going to bear some costs under an 

auction, consumers of electricity bear about eight times greater 


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costs. This results because generators are able to pass along the 

cost to consumers through increasing prices. 

Free allocation of emission allowances to generators cannot be 

expected to reduce this impact where there are competitive markets. The only important exception is in that portion of the electricity sector where there are regulated prices. And in these regions, consumers would benefit from free allocation to firms. 

However, in general, throughout the economy, the ability of firms 

to pass on the cost of allowances does not hinge on how they receive the allowances initially. Sometimes one hears firms argue to 

the contrary, saying they would not charge their customers for 

emission allowances they received for free. 

When one hears this, one might think that a different conversation needs to be had between those firms and their shareholders 

because it is shareholder value they would be giving away. 

The fact that a firm and competitive market will charge its customers for the use of an asset that the firm has received for free 

is often a difficult idea for people to grasp at first but is wholly consistent with economic theory and is in general what has been observed in empirical studies. In general, giving allowances away for 

free to firms will provide little benefit to consumers. 

There is one way that consumers could benefit from free allocation, however. And that is if citizens were to receive allowances’ 

value directly. This approach has been called a cap-and-rebate to 

every person with a Social Security number. 

Number three, to what extent do auctions deprive polluters of 

capital needed to invest in achieving substantial reductions in 

greenhouse gases? In the electricity sector, most new investment 

and generation relies on project-specific financing, meaning that 

each project is evaluated and financed independently with capital 

from outside the firm. As a consequence, implementation of an auction will not affect the availability of capital for financing new 

projects in the important electricity sector. 

What proportion of allowance value is needed to compensate polluting firms? Overall, economic estimates suggest that the loss in 

market value of industries that are going to be heavily affected by 

climate policy is less than 30 percent of the value of emission allowances. This estimate masks some differences among firms because many firms turn out to be winners, and some firms are losers. 

In the electricity sector, which, again, is the center of much attention, the industry as a whole would require just six percent of 

allowance value, but this accounts for firms that gain value. And 

to compensate only the losers would require about 11 percent of the 

allowance value. 

Is it feasible to allocate, construction an allocation formula, that 

would efficiently target compensation to those firms that are adversely affected? 

The award of free allowances is a blunt instrument for achieving 

compensation for producers. Free allocation tends to reward winners as well as losers, thereby eroding efficiency and the ability to 

compensate other affected parties. 

We find the opportunity costs of compensation to producers in 

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ered successfully. The difference accrues to firms as windfall profits. 

One way to improve this would be to apportion allowances for 

the states and let the states conduct allocation to achieve compensation goals. This cuts in half roughly the cost of achieving compensation or more modest compensation targets also reduce the 

cost. Nonetheless, under any strategy, there are important considerations regarding the difficulty of achieving compensation. 

Finally, to what extent are the economic impacts of legislation on 

polluting firms likely to be spread among shareholders who hold diversified portfolios? In this modern age, the vast majority of shareholders hold few, if any, stocks in individual companies. Most of us 

hold assets in mutual funds. For this reason, the way to deliver 

compensation to owners of equity is to design an efficient policy in 

order to lessen the overall cost of the policy, which is precisely the 

virtue of the use of options. 

Thank you for the opportunity to testify. 

[The statement of Dallas Burtraw follows:] 


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The CHAIRMAN. Thank you, sir, very much. 

Our second witness is Mr. Peter Zapfel. Mr. Zapfel is the Coordinator for Carbon Markets and Energy Policy for the European 

Commission. Mr. Zapfel has represented the European Commission 

as a delegation member in the U.N. climate negotiations and has 

been actively involved in the commission’s work on emissions allowance trading, including the EU’s proposal just released today to 

transform the EU emissions system post-2012. 

I would like to state for the record that the Committee appreciates Mr. Zapfel’s voluntary participation. The Committee recognizes that because of Mr. Zapfel’s status as a representative of the 

European Commission, neither Congress nor the Committee have 

legal authority over his presentation today. 

We welcome you, Mr. Zapfel. And whenever you are ready, please 

begin. 

STATEMENT OF PETER ZAPFEL 

Mr. ZAPFEL. Mr. Chairman, members of the Committee, it is a 

pleasure to testify today. In particular, as you alluded already, before we have earlier this morning when you were getting out of 

your beds, the European Commission has tabled a set of legislative 

proposals to implement our far-reaching climate and energy policy 

goals for the next decade. 

What I would like to do in my five minutes of intervention here 

focusing on auctioning is give you some information of what we 

have proposed this morning, why we have proposed to go to auctioning as the main method of allocation, give some experience we 

have with free allocation, and end up with a few recommendations. 

Before going into auctioning, I also, however, want to point out 

that the core of our proposal this morning on reviewing our carbontrading scheme is the proposal to bring down the emissions cap, 

the number of allowed emissions, by 21 percent in 2020 compared 

to the emissions level in the trading scheme in 2005. So we have 

a very robust emissions cap proposed that will drive forward the 

carbon market and deliver environmental benefits and also create 

a well-functioning carbon market. 

The Commission has this morning proposed that as of 2013, as 

of the start of the third trading period, we make auctioning the 

main method of allocating allowances and we go and do a transition so that by 2020, in principle auctioning is the only method of 

allocating allowances to the European common market. 

Free allocation would immediately end at the end of the second 

rating period in 2012 from our plans. And for other industrial installations in other sectors covered by our scheme, free allocation 

would be phased out over an eight-year period so that by the end 

of the third trading period in 2020, we would no longer in principle 

have free allocation. 

Why have we made these proposals? We see three merits, in 

principle, for auctioning. Auctioning has merits in simplicity. Auctioning has merits in transparency. And auctioning is also seen as 

advantageous from our side for the efficiency in the clear carbon 

pricing that it creates. 

What experience do we have in Europe with free allocation for 

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cation is a very complex process to handle. The asset value of the 

allowances of the carbon allowances is considerable. And for the 

formal process, you need a device to allocate the allowances free of 

charge. You need a lot of data, which is administratively a very 

cumbersome process, the first point. 

The second point of free allocation tends to be a rather in-transparent process while this major asset value is allocated into the allowance market. 

Thirdly, because of the periodic nature that we do the allocation 

process and because of the possibility and, actually, the rules for 

free allocation change from period to period, this has the potential 

actually to distort decision-making by actors in the market and 

has, in fact, to some extent distorted decision-making. 

And, fourthly, as has already been alluded to in introductory 

statements, free allocation creates distributional disadvantages for 

some sectors in a sense that the additional benefits in terms of 

companies increasing their prices far outweigh the additional costs 

and you create something which politically is called windfall profits. 

Finally, as I said, some recommendations. I think we reckon in 

the European Union that auctioning as a method of allocating 

emission allowances is a fairly new thing in emission markets. 

There are several environmental markets operated here in the 

United States. Some auctioning has taken place there. Also we in 

Europe at this stage have limited experience with auctioning. But 

in a number of fields on a daily basis—on a very regular basis— 

governments organize the allocation of economic assets by auctions. 

And we can learn a great deal from such other government-driven 

auctions; for example, for government bonds, for spectrum licenses. 

So we are not starting something completely new with transitioning to auction as the main method of allocating carbon allowances. 

There are two things I want to raise at the end of my testimony 

of what is crucial in our view to make auctioning a successful 

mechanism of allocating allowances. First of all, we think we need 

to take time to design the auction mechanism very well. That’s why 

we have proposed today to trust in principle. We want to go to auctioning, but we will work out as part of the implementation process 

a detailed regulation. And we want to work with a lot with stakeholders, with the experts in financial markets to design a wellfunctioning auctioning mechanism because the economic assets involved are considerable. So we need more time to work that out in 

a good way. 

And, secondly, we need smart ways of recycling the revenues 

from the auctioning. There are various things to which the allowance value, the revenue can be put to. And there is further work 

to be done in working out, as I say, in a smart and effective way 

to allocate, to recycle the revenues. 

Thank you very much. 

[The statement of Peter Zapfel follows:] 


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The CHAIRMAN. Thank you, Mr. Zapfel. We very much appreciate 

your being here today. 

Next we have Ian Bowles. He is the Secretary of Energy and Environmental Affairs for my home state of Massachusetts. He is a 

recognized national leader in climate and energy policy. Secretary 

Bowles oversees the state’s six environmental natural resources 

and energy regulatory agencies. Among other things, Secretary 

Bowles has the lead role in Massachusetts’ implementation of the 

Regional Greenhouse Gas Initiative, RGGI. 

Prior to serving as secretary, Mr. Bowles was Associate Director 

of the White House Council on Environmental Quality under President Clinton. 

We welcome you. Mr. Secretary, whenever you are ready, please 

begin. 

STATEMENT OF IAN BOWLES 

Mr. BOWLES. Thank you very much Mr. Chairman and members 

of the Committee. Thank you for your focus on this tremendously 

important topic today. I am delighted to be here. 

My comments today reflect the general context in New England. 

We have expensive electricity. We have no indigenous coal and natural gas, face transportation costs to bring those fuels to our region. We have on average lower greenhouse gas emissions than the 

rest of the nation. And we have across New England a deregulated 

power market. 

In Massachusetts, we have also made—and other New England 

states have as well—considerable investments in energy efficiency. 

And in Massachusetts, we are currently in a rate decoupling proceeding where we are trying to eliminate the current economic incentive on our distribution utilities to maximize power sales at a 

time when we are trying to cut greenhouse gas emissions. 

We already have in place some limited greenhouse gas limits on 

our power plants. And, as the Chairman noted, we are in the process of transitioning to the RGGI system the first of next year. 

In renewable energy, we are moving forward with three new biomass power plants, the Cape Wind project, a sizeable solar program, and new incentives for biofuels. And, as the Chairman noted, 

we have combined, first state in the nation to do so, our energy and 

environmental agencies together to focus on three key goals: tapping the economic potential of the burgeoning clean energy sector— 

in Massachusetts, we have got a quarter of billion dollars of private 

venture capital investment and a great deal of job creation in that 

area—second, curbing our greenhouse gas emissions; and, third, reducing our energy costs. 

When Governor Patrick brought Massachusetts into the RGGI 

process early last year, one of the central questions we faced was 

whether to auction for allowances or whether to grant them. Based 

on our analysis, we concluded that auctioning was a better way to 

protect the interests of the ratepayer. 

And the core thing to know there is that in a deregulated power 

market, the value, the economic value, the market value, of an allowance is going to make its way into the electricity bill one way 

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ances for a future generation event in the future, or whether they 

decide to sell those allowances. And either way that value is priced 

in, whether or not that allowance is given out or whether it is sold 

to the generator. 

On the contrary, if you sell it to the generator, then you’ve got 

those revenues to do something with and you can protect the ratepayers. And that’s what we decided to do with our auction proceeds. And our first auctions begin in the second quarter of this 

year as we move into the compliance period for RGGI. 

As we did an analysis of what we should spend those monies on 

to best protect the ratepayer and achieve our environmental objectives, energy efficiency stood out above all else. We have the opportunity to not only save money for the ratepayers but also to lock 

in permanent greenhouse gas emissions reductions. 

In terms of the cost of RGGI, we see in the first couple of years 

less than a one percent increase in potential electricity bills. And 

as energy efficiency investments grab hold and accrue over time, 

within ten years, we see over five percent energy savings. 

Now, why is that? It’s because we’ve got a great deal of energy 

efficiency left in our system and, indeed, across the nation that is 

cheaper in many cases than power generation. 

In terms of how much revenue we are going to produce, if it’s a 

$1 permit, you will produce about $26 million. If it’s a $5 permit, 

it will be $133 million. At the higher end of that scale would be 

effectively doubling our investment in energy efficiency in the Commonwealth. 

As you think about a federal system, I would make a couple of 

key points. One is that states, I think, are in the best position to 

deliver energy efficiency services. It’s something where the federal 

government is somewhat too removed from the individual ratepayers and the end-use consumers. It’s something that states have 

done a great deal on. And I think you could set up objective standards to say, ‘‘What is the performance basis that we would like to 

see for use of proceeds down at the state level for energy efficiency?’’ 

I would also make that point that as compared to a 

grandfathering scheme, where you are giving out allowances, the 

auctions really level the playing field across all of the different sectors, instead of building in potentially unfair treatment for early 

movers. 

As we conduct our auctions this summer, we are going to focus 

on a few things. I will mention them quickly. I am happy to get 

into more detail in the questions. 

We are going to have our auctions open to any qualified buyer. 

As we watch the market develop, we may add rules in the future 

to make sure there isn’t any hoarding or anything of that nature. 

We are going to have a sophisticated market monitoring system so 

we know who some of the players are. And then as we go forward, 

we are going to use a three-year compliance period to allow some 

flexibility between years because emissions vary depending on 

things like weather events. 

Finally, I just would mention I have submitted a longer ten-page 

appendix. And I would be delighted to take questions. And I thank 


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you for your focus on this. We in the states look forward to engaging with the Congress as you move forward. 

Thank you very much, Mr. Chairman. 

[The statement of Ian Bowles follows:] 


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The CHAIRMAN. Thank you, Mr. Secretary, very much. 

Our next witness, Mr. John Podesta, is the President and CEO 

of the Center for American Progress. Mr. Podesta served as Chief 

of Staff to President Bill Clinton from October of 1998 to January 

of 2001, where he was responsible for directing, managing, and 

overseeing all policy development, daily operations, and staff activities of the White House. 

Mr. Podesta has also held a number of other senior positions on 

Capitol Hill and in the White House and is a recognized expert on 

technology policy, amongst other areas. We are very fortunate to 

have him with us here today. 

We welcome you back, John. Whenever you are ready, please 

begin. 

Mr. PODESTA. Thank you, Mr. Chairman. 

STATEMENT OF JOHN PODESTA 

Mr. PODESTA. And I started with David Moulton, but they kicked 

me out a lot faster. So it’s nice to be back here. 

You have got my full statement. 

[The statement of John Podesta follows:] 


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Mr. PODESTA. I would like to make four quick points. First, I 

would like to take this up a notch. Make no mistake. While it may 

be slow-moving, I think we are in a crisis. As our understanding 

of the implications of global warming increase, the case for dramatic, immediate action is only made stronger. 

Just last week, we learned that the western Antarctic ice sheet 

is melting faster, at a rate that was anticipated this could mean 

a sea-level rise of two meters, as Dr. Pachari noted, in this century, 

not the inches or feet, as originally predicted by the IPCC Fourth 

Assessment, which will threaten population centers, agricultural 

patterns, and coastal ecosystems around the world. 

Perhaps the best we can hope for and certainly the least we 

ought to plan for is a climate that will cause severe economic dislocation and national security challenges to the United States. 

Worldwide we are already feeling some of the economic consequences of climate change. We will soon feel the national security 

consequences of human migration, food shortages, water scarcity, 

destructive weather events, spread of disease, and national resource competition. 

The challenge I think we face as a nation and a world is nothing 

short of conversion of our economy that is sustained by high-carbon 

energy, putting both our national security and the health of our 

planet at risk to one based on low-carbon, sustainable sources of 

energy. The scale of that undertaking is immense, but its potential, 

as the Chairman noted, is also enormous. 

My second point is that energy policy is economic policy. In order 

to reverse the economic downturn we are currently facing and to 

capture the opportunities provided by a low-carbon energy transformation, we must put energy at the center of our nation’s economic growth. Fundamentally changing how we produce and consume energy, investing in low-carbon innovation, and transforming 

our economy to a low-carbon model are key to promoting economic 

growth, mobility, job creation, and regaining the technological leadership in the global innovation marketplace. 

Mr. Sensenbrenner noted a ten-year-old EIA projection, which 

proves I think in more recent projections to be wrong. I would note 

that ten years ago the United States had 44 percent of the solar 

market. Today we have nine percent, a loss mostly to Japan and 

Germany. I think the jobs of the future clearly are on the clean energy side. 

The U.S. Congress obviously realizes the importance of energy 

policy to the Economy. I commend the Congress for passing the 

2007 energy bill and particularly for your work, Mr. Chairman, 

over the years on the raising the CAFE standard. 

The Center for American Progress recently released a report entitled ‘‘Capturing the Energy Opportunity’’ that laid out a strategy 

that we believe is pro growth, provides opportunity, and takes on 

global warming, all in a fiscally responsible way. At the core of that 

strategy is a fundamental commitment of the federal government 

to invest in green-collar jobs, research and development, and deployment of low-carbon technology, and to assist low and middleincome Americans with rising energy costs. 

My third point is that a cap-and-trade needs to be at the center 

of that energy policy. CAP advocates an energy strategy that emVerDate Mar 15 2010 23:41 Oct 15, 2010 Jkt 058417 PO 00000 Frm 00067 Fmt 6633 Sfmt 6602 E:\HR\OC\A417.XXX A417

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ploys both a cap-and-trade system and a suite of public investment 

policies funded by the auction revenue of carbon permits. 

A cap-and-trade will identify the necessary level of carbon reductions to get us to a point where we have a sustainable planet and 

allow the marketplace to price the cost of those emissions. In order 

to avoid a windfall profit for polluting industries, we recommend 

auctioning 100 percent of the carbon credits. Our proposal would 

allocate ten percent of auction revenue to businesses operating in 

energy-intensive sectors to compensate shareholders, employees, 

and communities in those sectors. We recommend half of the remaining 90 percent of the revenue be allocated to low and moderate-income Americans to help offset energy price increases. 

Polluting industries, and not hardworking American families, 

should shoulder the burden of this transformation to a new energy 

in the future. And to ensure that low and moderate-income Americans are protected from short-term increases in energy costs, we estimate and commit $336 billion over 10 years for income support 

and for middle class tax support. The remaining half of the revenue 

would go to support science and technology innovation; drive transition to a low-carbon economy by funding R&D; efficiency, as Ian 

has mentioned; and other initiatives, including infrastructure investment, Mr. Blumenauer. 

To meet the overall goal of emissions reduction under this capand-trade model, we recommend adopting complementary policies. 

For example, we support going further than what the Congress has 

recently passed in implementing a 55-mile-per-gallon cap-based 

standard by 2030, improving our distribution in fueling infrastructure, investing in transportation infrastructure, and another suite 

on the electricity side, including creating a performance standard 

for all new coal-fired facilities equivalent to the best available carbon capture and store technology. 

So my last point, and I will conclude by saying that we cannot 

continue waiting to jumpstart this energy transformation. Adopting 

a combination of short-term stimulus and long-term public investment policies will not only enable for the U.S. to once again become 

a world leader in low-carbon energy innovation but will also diversify our energy base, thus fostering economic stability, helping to 

boost economic growth, creating new green-collar jobs, and boosting 

productivity for our economy. We think we can create a virtuous 

cycle and a win-win situation for the American public. 

Thank you. 

The CHAIRMAN. Thank you, Mr. Podesta. 

And our final witness, Mr. Robert Greenstein, the founder and 

Executive Director of the Center on Budget and Policy Priorities. 

Mr. Greenstein has written numerous reports, analyses, and articles on budget and poverty-related issues, including most recently 

how best to design planet policies to address impacts on low-income 

households. For his outstanding work at the center, Mr Greenstein 

was awarded a McArthur fellowship. 

We welcome you here today. Whenever you are ready, please 

begin. 

Mr. GREENSTEIN. Thank you, Mr. Chairman. 


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STATEMENT OF ROBERT GREENSTEIN 

Mr. GREENSTEIN. My focus is on the effects that climate change 

policies can have on the budgets of American families and the federal budget and the implications that has for the design of a capand-trade system. 

Our analysis indicates that Congress can design climate change 

policy that is environmentally sound and fiscally responsible, treats 

consumers fairly, and avoids increases in poverty. But to do so, the 

policy will have to be well-designed, and it will need to generate 

sufficient revenue to meet the requirements of sound climate 

change policy and mitigate the impacts on vulnerable populations. 

That means it will be essential to auction most or all of the allowances. 

Our analysis of these issues can be summed up in four key num- bers. Number one, $750 to $950 per year. That is the average increase in energy-related costs for the poorest fifth of the population 

from a quite modest, 15 percent, reduction in emissions, the kind 

of target that is often mentioned for, say, 2020. As you know, climate change policies work, in part, by raising the price of fossil 

fuel energy products to encourage efficiency and the substitution of 

clean energy sources. That will raise costs to consumers for a variety of items, from gasoline and electricity to food, mass transit, and 

other products that have energy inputs. 

Households with limited incomes will be affected the most because they spend a larger share of their income on energy-related 

products than more affluent households do. And they also are less 

able to afford investments that can reduce their energy consumption, such as buying a new energy-efficient car or going out and 

buying a new heating system for their home. If climate change legislation is passed but nothing is done to protect people of limited 

means, more of them will slip into poverty, those who are poor will 

become poorer, and the trend toward widening income inequality 

will be aggravated. Now let me give you a little context. This figure of $750 to $950 per year in increased costs for the 

bottom fifth of the population, from a 15 percent reduction in emissions, the people in question, the bottom fifth of the population, 

have average income of only a little over $13,000 a year. So 750 

to 950 would be a big hit on them. Figure number 2, $50 billion to $300 billion per year. That is the 

Congressional Budget Office estimate of the resources potentially 

generated by climate change policies. That is CBO’s estimate of the 

value of the emissions permits under a cap-and-trade system. In 

other words, it is the amount of the proceeds the government would 

receive if the permits were fully auctioned off. 

Key figure number 3, approximately 14 percent. That is the 

share of the auction proceeds needed to fully offset the increased 

energy costs that low-income consumers would face. In my written 

testimony, I outline principles for designing a mechanism, an approach to fully and efficiently offset the increased energy costs on 

the bottom 20 percent of the U.S. population and also provide some 

relief to hard-pressed working families in the next to the bottom 

20 percent. That could all be done for about 14 percent. That is 

one-seventh of the value of the proceeds from auctioning off the 

permits in a cap-and-trade system. 


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Now, if Congress wanted to assist middle-income consumers as 

well, that could be accomplished if a somewhat larger share of the 

proceeds were used for that purpose. For example, with approximately half of the allowance value, half of the value of the permits, 

Congress could fully compensate the bottom 60 percent of Americans and provide significant compensation to the next 20 percent, 

leaving out only the most affluent 20 percent, which is the group 

that consumes the most energy and is most able to afford to make 

sizeable adjustments in their consumption patterns. 

My final, my fourth, key number, less than 15 percent. That is 

the Congressional Budget Office’s estimate of the share of the allowance value that is needed to fully compensate energy companies 

and other emitters for financial losses due to climate change policies. 

CBO has conducted a review of all of the literature in the field. 

There are a number of studies that have been conducted. The 

broad set of findings are that the net impact on the emitters could 

be in terms of potential economic losses would be offset for less 

than 15 percent of the permits. And CBO has called the provision 

of a larger share of the permits free to emitters as an approach 

that would result in, CBO’s terms, windfall profits for the companies receiving the free allowances. 

Now, there is a misconception—Mr. Chairman, you referred to it 

in your opening remarks—a misconception some have that energy 

prices will not rise or not rise as much if the allowances are given 

away. That belief flies in the face of the basic laws of supply and 

demand. A cap on emissions will limit the supply of energy from 

fossil fuels. And when supply is restricted, prices rise. Regardless 

of whether the government gives away or sells the allowances, the 

energy companies will be able to sell their products at the higher 

price. They will be able to charge what the market will bear. 

Harvard economist Greg Mankiw, who served as Chair of President George W. Bush’s Council of Economic Advisers, has characterized a cap-and-trade mechanism in which the allowances are 

given away in large numbers for free as a form of, in Mankiw’s 

words, corporate welfare. Now—— 

The CHAIRMAN. If you could please summarize? 

Mr. GREENSTEIN. Let me summarize. The final thing I simply 

wanted to mention was the impact on budgets. Higher energy 

prices will raise the cost of federal, state, and local services. The 

cost of heating schools, hospitals, and the like will go up. Cost-ofliving adjustments for Social Security and veterans’ programs will 

need to be higher to reflect the higher energy costs. 

The Pentagon is the nation’s single largest consumer of energy. 

And its costs will rise. Those can all be addressed, too, those issues, 

by devoting a share of the permits to offsetting the resulting increases in federal, state, and local costs, all of which comes back 

to the same issue. 

All of these things can be taken care of if most or all of the permits are auctioned off. If they are not, you get a potential for increased poverty, increased deficits in debt from the higher government costs, alongside windfall profits for emitters. 

Thank you. 

[The statement of Robert Greenstein follows:] 


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The CHAIRMAN. Thank you, Mr. Greenstein, very much. 

And now we’ll turn to questions from the Select Committee. The 

Chair will recognize himself. 

Mr. Zapfel, thank you again for being here today. It is very important to us. 

The EU is making a big change today. They are moving in a completely different direction than they did in their original phase in 

dealing with greenhouse gas emissions. 

What happened when the allocation was free for the various sectors of the European economy? What was it that you found happened? 

Mr. ZAPFEL. Thank you, Chairman. 

As I pointed out before, when we go into the fourth year of free 

allocation now in our first rating period and, thus, in our second 

rating period, we have predominantly free allocation, we learned 

very early on, even before our trading scheme started via the future markets on the side of our prices, that the value of the allowances get priced, first and foremost, into electricity. 

We continue to do ongoing economic assessment. Our scheme is 

now just going into its fourth year. There is empirical evidence we 

continue to learn. But in principle, we see that, as has been said 

before, even if allowances are given for free, some sectors find it 

fairly easy to include the value of allowances into the prices. And 

this distributional effect is something that has resulted in a lot of 

debate in Europe and is actually one of the multi-weighting factors 

proposals that we have made today. 

The CHAIRMAN. Okay. So how do you deal with the challenge? 

Many people say that this is an unprecedented step that you are 

taking and that industry is unprepared to deal with the consequences of having an auction system. What is your response to 

that? 

Mr. ZAPFEL. It is not something we do overnight. As you know, 

we are now in the year of 2008. And the proposal is that the 

changes come in the year 2013. 

In principle, overall in the design of the regulatory framework for 

our carbon market, we pay a lot of attention to that we give this 

new market sufficient regulatory stability. And one of the key 

issues there is that we give sufficient foresight so we don’t do 

changes overnight. 

We had, for example, a lot of debate whether we should already 

change our rules on very short notice so that the second phase 

would already see regulatory changes. The Commission has not entered in such changes because we think for the market to develop 

well, to work efficiently, it needs sufficient lead time so that everybody can prepare for the rule changes. 

The CHAIRMAN. And how are you dealing with industry opposition? And which industries are most opposed to moving to an auction system? 

Mr. ZAPFEL. I think, also as you said before, I think we are not 

the only ones across the world who is considering starting a legislative debate to move towards auctioning. 

We, of course, follow very carefully the debate in the United 

States. We have seen what is happening in the RGGI system or 

what has been decided in the RGGI system. There are other carbon 


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markets designed around the world, in Australia and New Zealand. 

There is a debate here. So I think we are moving along an international trend that is developing. 

Of course, I think from the perspective of an individual business, 

if you are subjected to a carbon cap, it is always a preference for 

an industry to ask for free allowance, rather than to have to pay 

for the allowance. I think that is a natural opposition that we have 

in our political process. 

What is important to us is that there is to continue to empirically evaluate what are the real effects. What empirical evidence 

do we have? As I said, so far, there is no compelling empirical evidence that this is damaging. What we reckon is that some sectors, 

as I said, the borrow sector can move quicker. And other sectors 

need some time to adapt, industrial sectors, which we give more 

time to adapt to those changes. 

The CHAIRMAN. Okay. Thank you. 

Mr. Podesta, you are an expert on the budget and appropriations 

process. What recommendations would you make to ensure that 

any revenues that do come from an auction system are, in fact, preserved for R&D, are preserved to take care of the poorest citizens, 

who may be affected by this very dramatic change in the way in 

which we regulate energy in our country? 

Mr. PODESTA. Mr. Markey, that is a very good question, but I 

think that we have dealt with it before in the Land and Water 

Conservation Fund and other funds that could be segregated either 

through the direct appropriations process or moving in the direction that we see, for example, in the Lieberman-Warner bill, where 

the money is deposited directly into certain accounts that would be 

used only for the purposes that would be put forward. 

But I think that’s in the end of the day I think a critical question 

to ensure that the money goes to both what Mr. Greenstein spoke 

about, which is to cushion the burden. Again, in our proposal, we 

take it up to the middle class so that while they may see net increases in their energy pricing, we also believe that their energy 

bills can over the mid term bend down, as we have seen in California, because they are using less energy as efficiency is driven 

through the system. But ultimately they are going to pay a little 

bit more. 

And we think that those accounts need to be balanced and that 

the structure of the cap-and-trade system needs to essentially fence 

off that money so that both of those things can take place: the right 

kind of investments and protection of working people in this country. 

The CHAIRMAN. Thank you, Mr. Podesta. Again, Mr. Zapfel, 

thank you for being here. We feel like we are here on day one at 

8:00 A.M. of the new era of auctioning. And I personally just want 

to praise the European Union for their courage in moving in that 

direction. I think it is the correct direction. 

The Chair’s time has expired. And I recognize the gentleman 

from Wisconsin, Mr. Sensenbrenner. 

Mr. SENSENBRENNER. Thank you very much, Mr. Chairman. 

As I think we all know, there is a great deal of concern about 

the direction that our economy is taking. And the fix is on for a 

bipartisan economic stimulus package. And the debate is over not 


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whether to stimulate the economy but how best to do it. The bottom line is that there will be money pumped into the economy to 

try to prevent a recession from occurring or worse. 

Now, I am a member of Congress. And everybody up here is a 

member of Congress. How does a member of Congress justify voting to pump money into the economy in an economic stimulus 

package and then turn around and support a cap-and-trade program, which takes money out of the economy and could cost both 

consumers and businesses billions of dollars? Let me start with 

you, Mr. Podesta, since your advice is always very good to members 

of Congress. 

Mr. PODESTA. Well, Mr. Sensenbrenner, I don’t think you need 

to have that net impact. In fact, I think, as I said, you could create 

the virtuous cycle of taking money out of the economy that’s going 

towards polluting the atmosphere, creating a worldwide crisis, 

causing us long-term national security problems that will require 

us to put more money into defense, take that money out from the 

pollution side, put it back in through rebates for low-income people, 

middle class people, and investments that will build a long-term 

economy. 

Mr. SENSENBRENNER. Okay. First of all, we don’t need to get into 

the science, but CO2 is not a pollutant. CO2 is a naturally occurring 

gas. It’s not like sulfur dioxide or something like that. Every time 

we exhale, we exhale CO2. And that is not polluting this room. 

Mr. PODESTA. I never thought I would say this, but I agree with 

the Supreme Court and disagree with you, Mr. Sensenbrenner. 

Mr. SENSENBRENNER. Well, the Supreme Court is not right all 

the time either. 

Mr. PODESTA. I agree with that. 

Mr. SENSENBRENNER. Okay. Yes. The thing is let me continue on 

this. In 2000, the CBO did a study on cap-and-trade system and 

determined that the cap-and-trade system would be tremendously 

regressive. 

Now, I think that both you and Mr. Greenstein seemed to indicate that without tinkering around with the cap-and-trade system, 

it would be regressive and without the tinkering around, we end 

up giving carbon breaks for the rich using carbon, instead of tax 

and debate in the vernacular. 

If we go to tinkering around, which people are debating about, 

aren’t we turning cap-and-trade into a wealth redistribution system? Mr. Greenstein. 

Mr. GREENSTEIN. I would say the answer is no. Under a cap-andtrade system, you have a decision. You have to make a decision. 

You give the permits away for free. You auction them off. You have 

to make a decision. 

The CBO report indicates if you have a cap-and-trade system and 

you give away the permits for free, you have highly regressive effects. If you have a cap-and-trade system and you auction off some 

substantial share to all of the permits, then whether it’s regressive, 

progressive, or neither of the above, sort of make this just kind of 

right in the middle, depends on what you do with the proceeds 

from those permits that you auction off. 

But the only way in which it is clearly regressive is if you either—if you give away a substantial share of the permits for free, 


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it is clearly going to be regressive because you clearly won’t have 

enough money to offset the regressivity that the increases in consumer prices alone would cause. 

As long as you auction off a substantial share of the permits, you 

have the potential to ensure that the system is not regressive. You 

can make it progressive if you want to. You can simply avoid the 

regressivity. 

Mr. SENSENBRENNER. But getting back to what Mayor Bloomberg 

told this Committee last November in Seattle, you know, why not 

be honest? If we’re going to increase energy costs to do this, why 

doesn’t Congress directly levy a tax, which is the honest way of 

doing it? And that way members of Congress have to be accountable for their votes one way or the other, rather than simply folding the cost of this into energy bills and then Congress taking a 

bow for ‘‘giving money away’’ to people that we decide need to get 

the money from the auction. Isn’t Mayor Bloomberg right in saying, 

‘‘Let’s be up front and honest,’’ rather than, you know, going 

through this tremendously bureaucratic system with all kinds of 

values of who deserves the money from the auction and who 

doesn’t? 

Mr. GREENSTEIN. There may be a different set of answers on the 

panel here. Let me quickly note for starters that your prior question, ‘‘Is it regressive? Is it not regressive?’’ the same question applies to a carbon tax. It would all depend on what you did with the 

proceeds for—— 

Mr. SENSENBRENNER. Yes. I am not for carbon tax either. 

[Laughter.] 

Mr. GREENSTEIN. Now, as you know, the advantage of a cap-andtrade is you have a firm cap on emissions. And the disadvantage 

is you don’t know in advance the impact on the price. With the carbon tax, you have certainty on the price but uncertainty on the 

exact level of emissions reduction that you get. Many economists, 

including—— 

Mr. SENSENBRENNER. Well, my time is up. You know, Europe has 

had cap-and-trade. And the amount of emissions has gone up. So 

my time is up. Thank you. Europe has failed, don’t need to copy 

them. 

The CHAIRMAN. The gentleman’s time has expired. The Chair 

recognizes the gentleman from Oregon, Mr. Blumenauer. 

Mr. BLUMENAUER. One of the benefits of the head in the sand attitude of this administration is that we have a chance to look at 

the experiences in other parts of the world as people are struggling 

with how we are going to have a carbon-constrained economy. 

Lots of things are not pollutants in the natural order. I mean, 

CO2 in its normal amounts is not salt, but if we get too much of 

a good thing, we have real problems. And I appreciate our witnesses saying that these things are not mutually exclusive in terms 

of stimulating the economy by not taking it out of the economy. 

Everything I heard from the witnesses is you are thinking that 

this is not somehow something that is going to be shot into space 

that is going to be circling the planet. This value is going to be reinvested somewhere. It is going to be a windfall in the hands of 

some. It is going to be targeted towards redevelopment. 


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Mr. Podesta, I am not certain that I would use the Land and 

Water Conservation Fund as an example that gives me hope. I 

think we can learn from that experience as well. But you are suggesting that it is part of a comprehensive strategy. 

As I hinted at in my opening statement, what I am interested 

in is your observations about making it part of a comprehensive 

strategy that focuses on the two principal expenditures of American 

households, both in terms of dollars and in terms of carbon, housing and transportation. 

I would be interested in observations, particularly from the right 

wing here on the panel, at least my right wing, in terms of how 

you think we can best harness the value that could be created to 

help households with infrastructure and energy conservation and 

transportation that would reduce their carbon footprint, stimulate 

the economy, and protect their economic security. 

Mr. PODESTA. Well, let me begin. I think the Congress—and, 

again, I commend you—has already taken a giant step by increasing vehicle efficiency on the transportation side. There is obviously 

more investment to do in transportation, in smart growth, in some 

of the initiatives that you have championed in more mass transit 

spending, et cetera. And I think some of the proceeds of the auction 

should go and ought to go to those kinds of investments. 

On the housing side, I think you get it that through, again, complementary policies through the cap-and-trade, better building 

codes, a smart grid, investment in the electric infrastructure so 

that you could have real-time metering and basically begin to do 

what has happened in California, which over the past 30 years has 

kept its per capita energy consumption flat while the United States 

energy consumption has grown by 40 percent while maintaining 

high levels of growth in the economy and high levels of wealth in 

the state. 

So I think those complementary policies—and Mr. Bowles is trying to implement those in Massachusetts—are directly going at the 

issues of efficiency, building codes. That is where the low-hanging 

fruit is. And we need to pay attention to that, in addition to creating the right kind of structure over the cap-and-trade. 

Mr. BLUMENAUER. Mr. Bowles, you referenced the trade-off in 

terms of the one percent increase, five percent longer-term savings 

in energy. Can you talk about in a little more detail how you think 

you can seize on that and make that sort of difference? 

Mr. BOWLES. Yes. I mean, just the key point, I think, of the question is—and I would agree with everything John just said—that we 

have a tremendously inefficient and creaky electricity system in the 

United States. We need to upgrade transmission. We need realtime metering. And we need a hell of a lot more end-use efficiency. 

It is the lowest-hanging fruit. 

So when Congress thinks about what should we be doing to use 

these auction proceeds, I think a lot of the whole panel agrees that 

auctioning makes sense. Once you got the proceeds, what do you 

do? How do you prioritize it? I would use the criteria of, how can 

we save the most for consumers, low-income middle class? I mean, 

how can we lock in the greatest environmental benefits? 

I think things like appliance standards, which Congress has 

moved forward on, vitally important. Building codes are at the 


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state level. We in Massachusetts are joining the International Energy Conservation Code, vitally important. So I think you can do 

a great deal of that. 

On the efficiency side, there is a tremendous amount of return. 

We did an economic analysis. In fact, it was done under the Romney administration—I am happy to share it with the Committee— 

that showed the disproportionate returns that would come from allocating the auction proceeds to energy efficiency. We could see savings above five percent in commercial, industrial, and residential 

parts of the electricity sector. So that’s the lowest-hanging fruit and 

I think the biggest opportunity for savings. 

The CHAIRMAN. The gentleman’s time has expired. The gentleman from Oklahoma, Mr. Sullivan. 

Mr. SULLIVAN. Thank you, Mr. Chairman. 

I would like to thank all of the panelists for being here today. 

I guess this question is for anybody who wants to answer it or as 

many of you that want to answer it. What certainty do we have 

that any cap-and-trade program would achieve carbon target certainty? And also with all of the trading going on, where do you see 

the tangible reductions taking place? Anybody? 

Mr. BURTRAW. On the second part first, our modeling and modeling by the EIA suggest that over the first couple of decades of a 

climate policy, although the electricity sector is responsible for 

about 40 percent of the CO2 emissions in the country, it’s expected 

to account for two-thirds to three-quarters of the emission reductions that would be achieved. That is why there is so much attention given to the electricity sector. 

The other part of your question is, how can we be sure that a 

cap would be obtained and not violated? That has been the predominant success of capped programs previously. The issue when 

there have been emission increases has been when a cap was initially set at a level that was regrettable and not as tight as perhaps it could have or should have been. 

Mr. SULLIVAN. Yes, sir? 

Mr. ZAPFEL. Yes. When we designed our carbon market in Europe, we studied very carefully the experience in the U.S. The main 

thing to achieve the emissions reductions is to have a very credible 

and robust compliance and enforcement system. 

The price of a carbon allowance today in Europe is roughly 20 

to 22 euros per ton of CO2. If you fail to surrender the emission 

allowance, there is a financial penalty levied on the company of 100 

euros per ton of CO2. So that creates a very strong incentive to 

comply with the cap. 

And the reductions come not from the trading of the allowances 

but come from the carbon price signal that you create in the economies. So you make it worthwhile to innovate, to push forward on 

the technological front and bring the emissions down. 

Mr. BOWLES. I would just add—and thank you for the excellent 

question—that one of the benefits of auctioning is you have price 

discovery and you figure out what it is worth to have one of these 

allowances. 

If you just give them away, you don’t have that information. So 

you can adjust your cap at the federal level to say, ‘‘Are we hitting 

our target? And do we need to send a louder price signal into the 


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economy?’’ I think it’s a real benefit of the cap and the auction approach that you don’t get necessarily from a carbon tax approach. 

Mr. SULLIVAN. Anyone else? How much time do I have left? 

The CHAIRMAN. The witnesses can take 2 minutes and 23 seconds. 

Mr. SULLIVAN. Okay. I’ve got—— 

The CHAIRMAN. You can yield it back or ask a question. 

Mr. SULLIVAN. I’ve got one more question. I’ll ask anybody. 

The CHAIRMAN. Okay. Please? 

Mr. SULLIVAN. Would you say that the allowances and their 

prices should be set by Congress, the administration, or the market? What if the price of allowance skyrocketed to an unsustainable 

level? What would be the backup plan? I guess you kind of talked 

about a little of that. 

Mr. BOWLES. Let me just comment quickly on what we have done 

in the Regional Greenhouse Gas system. So there are two different 

triggers based on price that allow access to a larger market for offsets. So there is a large market for carbon offsets, which are other 

ways to achieve greenhouse gas reduction. So it starts out in a New 

England market, then goes national, and goes international based 

on price triggers. So as price goes up, you have an increasing pool 

of alternative ways to reach compliance. 

I don’t know if that answers your question. 

Mr. SENSENBRENNER. Would the gentleman from Oklahoma 

yield? 

Mr. SULLIVAN. Yes, I will yield. 

Mr. SENSENBRENNER. I was just advised that the Times of London reported this morning that the United Kingdom under the new 

European system that Mr. Zapfel described would end up having 

to pay an additional 6 billion pounds, or $12 billion, a year in order 

to comply with this. 

You know, I am just wondering what the hit on the British economy would be, which is an economy that is much smaller than the 

American economy, with this kind of essentially a bureaucratic hit. 

Maybe Mr. Zapfel can answer that. 

Mr. ZAPFEL. I cannot confirm the figures that you put forward. 

We have undertaken a substantial evaluation for the EU overall. 

We have come to the conclusion that our far-reaching climate and 

energy targets, so not just the reductions via the weighting scheme, 

overall can be achieved at a fairly affordable cost of roughly half 

a percent of our GDP. All of this needs to be compared to the—— 

Mr. SENSENBRENNER. If the gentleman will yield further, a $12 

billion hit on the economy of the United Kingdom is not insignificant. And this is what the largest and most respected newspaper 

in the United Kingdom analyzed what you have just announced 

today. It ain’t free. 

Mr. ZAPFEL. As I said, I cannot confirm those figures. Overall for 

the European economy overall, the costs are fairly insignificant. We 

also have to look at the cost of non-action, as has been outlined in 

the Stern report, which can be a lot more considerable than cost 

of bringing down our emissions. 

Let me also use the occasion because you said no emissions have 

been reduced. There is some research. Your statement refers to the 


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first period, the first trading period, 2005 to 2007, which was for 

us in Europe a learning period. 

We didn’t have the benefit, as you have in the U.S., with air pollutant trading programs, SOx and nitrogen trading programs. So 

we started from scratch in Europe. Our emissions cap was not 

binding in 2005 to 2007. Also, we do not have our Kyoto commitments kicking in in 2005 to 2007. 

We brought down the emissions cap for the trading scheme in 

the second phase already about 10 percent compared to the first 

phase, which makes sure that we will see emissions reductions in 

the second phase. And, as I stated in my introductory statement 

before, this emissions cap will come down by another 11 percent so 

that we are 21 percent below 2005 emissions by the year 2020, 

which guarantees emissions reduction and the environmental integrity of the European common market. 

The CHAIRMAN. The gentleman’s time has expired. And the Chair 

will recognize the gentleman from Washington State, Mr. Inslee. 

Mr. INSLEE. Thank you. 

I think Mr. Greenstein mentioned that someone argued that this 

would be corporate welfare if you don’t have an auction system. I 

just want to ask about the logic of that. 

Going back to this issue of the tragedy of the commons, my understanding is that people who argue that essentially say, ‘‘Look, 

there is an asset. The atmosphere only has a limited carrying capacity for CO2.’’ And if we’re going to give rights away to people 

to pollute that, you are giving away a scarce asset. It has an economic value. 

And, therefore, it would be a sense of welfare of giving away a 

public asset for free. It would be like giving away gold from our national parks or the like. Is that the logic? And does an auction solve 

that problem? 

Mr. GREENSTEIN. Well, an auction does solve that problem, but 

you don’t have to go to that logic to reach the corporate welfare 

conclusion. And the term isn’t mine, although I would agree with 

it. 

What is interesting is the ‘‘corporate welfare’’ term in this context actually is Greg Mankiw’s term. He is a leading conservative 

Republican economist at Harvard. He was the Chair of President 

George W. Bush’s Council of Economic Advisers. 

What Mankiw was saying—you don’t even have to go to the commons thing to get it. What Mankiw was saying was, ‘‘Look, if in 

a cap-and-trade system you give to energy companies and other 

emitters allowances that exceed in value the increased costs they 

will incur under the new system, then you’re giving them a form 

of welfare. It’s one thing if you simply offset the increased costs 

that will occur, but if you go beyond that and you just give them 

these permits, which they can sell for billions of dollars above and 

beyond what is needed to offset their costs, that is corporate welfare.’’ 

That is what CBO is essentially saying as well. CBO’s term is 

‘‘windfall profits.’’ Mankiw’s is ‘‘corporate welfare.’’ It is simply saying you give them more than they need to offset their costs. You 

are giving away billions of dollars in gain to these companies and 

their shareholders. That is clearly a form of windfall. 


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Mr. INSLEE. I appreciate that. 

Mr. Podesta, I really appreciate you are basically saying that environmental policy in this case isn’t economic policy, it’s a view I 

share. I want to let you know you are not alone. 

I was just looking at a report from McKinsey and Company. It 

just came out in December. They concluded that almost 40 percent 

of abatement could be achieved at negative marginal costs. In other 

words, 40 percent of your savings of CO2 you would actually reduce 

your costs. There would actually be a profit margin for the U.S. 

economy, if you will. And it talked about the barriers to achieving 

those 40 percent improvements or principal capital accumulation to 

do the work, the rehabbing your house, the acquisition of new heating and cooling system, more efficient cars, the whole nine yards. 

I just wondered if you could give me any more thoughts about 

how we could fence off the revenues from a cap-and-trade system 

to be used for the legitimate purposes of that, both R&D, help to 

consumers to weatherize their homes, help to them to obtain new 

efficient equipment. What is the best way to do it? I know you gave 

us some ideas, but what is the best way in the real life to do that? 

Mr. PODESTA. Well, as I said—and maybe I could provide some 

more information for the record, Mr. Inslee—I think that creating 

accounts in which the Congress decides where that money is going 

to go, either by allocating permits to it, which is the approach 

taken in the new Lieberman-Warner bill, or by auctioning 100 percent of the permits, which is our preferred approach, segregating 

that money and making those important investments but ensuring 

that that money is available, either through tax credits, which, 

again, we hope to see, I think, the production tax credits reauthorized in this session of Congress on renewable energy or through direct investments that could be operated either through the states 

or directly, is the best way that takes, again, a good chunk of that 

money and apply it to the very real challenge. 

The other place that we would spend some money is on innovation itself, into boosting the R&D portfolio of the United States. We 

have seen enormous returns of investment in the past, particularly 

at DARPA and the DOD programs, but if you think about the information technology revolution driven by federal investment at the 

front end, I think you can imagine at least an energy innovation 

virtuous cycle driven by investment at the federal level into these 

new technologies. 

We see a lot of venture capital pouring into that arena right now, 

but I think if you had the right kind of investment portfolio from 

the federal government, that would really quicken the change that 

we need. 

Mr. INSLEE. Thank you. 

The CHAIRMAN. The gentleman’s time has expired. The Chair 

recognizes the gentleman from California, Mr. McNerney. 

Mr. MCNERNEY. Thank you, Mr. Chairman. 

Mr. Podesta, you laid out in your testimony how the revenue 

from a cap-and-trade scheme based on auction might be equitably 

distributed. I think that is a terrific approach. Can you recap your 

proposal and then comment on how free giveaway of the cap-andtrade system would distribute revenue? 


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Mr. PODESTA. Well, I think that, you know, again, we have had 

your European experience described here this morning. I think 

going to the second part of the question, I think if you have a free 

giveaway and no watch and no allocation of revenue, what is likely 

to happen is rates will go up. The generating companies will pocket 

the money. Their shareholders would do very well. And the people 

at the other end will do very badly. 

So we support the kinds of proposals that Mr. Greenspan—Mr. 

Greenstein was—he’s still a liberal. [Laughter.] 

Mr. Greenstein was talking about taking 45 percent of the auction share and rebating that to people, either directly through the 

tax code or, particularly for low-income people, where that mechanism doesn’t work very well, to do it through other kinds of income 

supports, which Bob, of course, is the expert on, and then taking 

45 percent, making these public investments that I described. 

And then we also recognize that and I think the work that CBO 

has done suggests that 10 to 15 percent of the revenue might go 

to companies and communities particularly hard hit by increasing 

the costs of production of energy. 

I am thinking here particularly in places hard hit that are coalproducing and those kinds of arena. The CBO estimates that that 

looks like to be about 10 to 15 percent of the revenue. So we would 

say put that back into those communities, help them weather the 

transition to a new economy. 

Mr. GREENSTEIN. Can I add one quick point on that? There have 

been questions from several members to John on, how do you make 

sure the money actually goes for these purposes? And there have 

been discussions of trust funds and the like. I think we need to separate out the discretionary part of the budget, the appropriated 

part, from the other parts, entitlements, taxes, and so forth. 

You would need some kind of trust fund mechanism like that for 

the discretionary part. You wouldn’t—and I wouldn’t recommend 

it—for the consumer relief part. If you’re giving part of the consumer relief through an expansion in the earned income tax credit 

or a new tax credit, such as Mr. Larson has in his bill that’s based 

on the first certain amount of the payroll tax that is paid, we don’t 

have anything in the tax code where the IRS has to look each year 

at how much money is in a particular trust fund and make the tax 

credit go up and down every year. 

You just do the tax credit. You work with CBO and the Joint Tax 

Committee. You have an estimate of how much revenue is going to 

come in from the auctioning of the proceeds. You design the appropriate tax credits that you need. You make sure the scores all fit, 

and you go forward. 

So trust fund thing would be needed for the discretionary part. 

For the tax part and the direct spending part, you need some direct 

spending for the low-income people, as John mentioned. You just 

write that into the cap-and-trade bill, and you go forward. 

Mr. MCNERNEY. Thank you. 

Mr. Bowles, in a state like Massachusetts and also in California, 

we’re starting to see the effects of RGGI and AB 32. Do you have 

any specific recommendations in terms of how to make sure that 

the federal programs complement those, instead of what other possibilities there are? 


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Mr. BOWLES. Thank you for the excellent question. One thing I 

just would try to underscore for this whole discussion is a lot of the 

cost-negative items that Mr. Inslee mentioned from the McKinsey 

report, which I commend to the Committee to read, are really implemented by the states, things like building codes, energy efficiency, building renewable power plants, zoning, smart growth. A 

lot of the easy stuff we need to do is going to be implemented by 

the states. 

So I really encourage the Committee and the Congress to look at 

giving financial incentives with some of those auction proceeds to 

say if you, state, are doing all those things plus rate decoupling, 

maximizing efficiency, then we’re going to support you. 

You need to create some incentive because the states are the 

units that regulate the utilities and have such a big role where a 

lot of the easy things are going to be done first. 

Back to your broader question. Look, I think the Congress could 

do us in California and 17 other states a great favor by making 

sure EPA got out of the way on the CAL LEV standards. They are 

vitally important and goes beyond what the CAFE increase, which 

is terrific, does. Obviously we’re seeking EPA implementation of 

the Mass v. EPA case on the Clean Air Act. 

And so I think there are a lot of things that the Bush administration could do to get out of the way of states like Massachusetts 

and California. But thank you for the question. 

Mr. MCNERNEY. Thank you. I yield. 

The CHAIRMAN. The gentleman’s time has expired. The Chair 

recognizes the gentlelady from South Dakota, Ms. Herseth Sandlin. 

Ms. HERSETH SANDLIN. Thank you, Mr. Chairman. 

I thank all of our witnesses today for helping illuminate further 

in acknowledging and helping quantify what costs may be associated with making this transition but also identifying the economic 

opportunities that exist and ensuring that we don’t ignore the fact 

that there are costs to inaction. 

I do want to describe sort of a set of circumstances, though, as 

it relates to the part of the country that I represent, the great 

plains in rural America, and just get your thoughts if you could 

comment on if we do move to a cap-and-trade and as we discussed 

the issue of free allocations versus auctions and then reinvesting 

and recycling the revenue, just to get your thoughts on whether or 

not we phase this in and give time to adapt, as Mr. Zapfel described, or if we move to something more 100 percent auction nearly immediately with what we set up because I have some concerns 

about that in light of the circumstances present in, say, South Dakota. 

On the positive side of cap-and-trade for South Dakota, I see 

greater incentives to develop our wind resources, greater incentives 

to develop solar resources throughout our area in the Southeast 

and other regions, reinvestment in our hydroelectric facilities, the 

investment for carbon capture and sequestration because we are a 

very heavily coal-dependent region of the country. 

There are also economic opportunities here for agriculture as it 

relates to certain farming and grazing practices as carbon storage 

and transitioning to integrating new technologies for cleaner burning coal in our coal-fired facilities that service our rural electric coVerDate Mar 15 2010 23:41 Oct 15, 2010 Jkt 058417 PO 00000 Frm 00088 Fmt 6633 Sfmt 6602 E:\HR\OC\A417.XXX A417

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operatives. But that is sort of the difficult side here of cap-andtrade that when you have rural electric cooperatives, you have 

rural consumers, you have very poor consumers in certain parts of 

the Great Plains that live on Native American reservations when 

we are still working to develop the transmission that some of you 

talked about, the need to sort of reinvest in the infrastructure of 

our transmission capacity for wind, time to measure just precisely—and the Chicago Climate Exchange is trying to do this for 

agriculture. It seems to me that we need a little time to adapt. 

And that’s why I think that, at least for now, I sort of favor more 

of a phase-in approach, rather than something that is nearly a 100 

percent option immediately within the system. 

So if you could comment on that and then, Mr. Zapfel, if you 

could also comment on perhaps as you describe, maybe an initial 

misjudgment in the European system being that they were free allocations versus an auction, now you’re making that transition, but 

I understand that you chose not to help measure, quantify and 

measure, for agriculture to participate in the cap-and-trade system 

in Europe. And if you could comment on that? 

Mr. GREENSTEIN. Could I make a comment on the phase-in 

issue? We should note that under all of the bills, there is a major 

phase-in in the sense that the emissions reduction target is a small 

amount of emissions reduction initially. And that phases in very 

gradually over a number of decades. That is the major phase-in. 

With regard to the permits, one could do something where you 

give away a large share of the permits for free initially and then 

phase that down. The Lieberman-Warner bill I think gives away 40 

percent or more of the permits for free initially. And on paper it 

eventually phases it to zero. 

My concern is, the politics being what they are and the power of 

the companies being what they are, I believe that if LiebermanWarner were enacted, we would never get to zero. The Congress 

would come back and change the law well before we got to zero and 

that we could end up getting stuck permanently at too high a level. 

That doesn’t mean you couldn’t do any phasing at all, but I think 

the notion of starting with—I don’t know—more than 15 or 20 percent of the permits being given away, starting with any higher percentage and just assuming you’re phasing it way down I think is 

dangerous. 

I think it risks the potential that before the phase-down occurs, 

companies get the law changed. And then the various purposes for 

which you thought you had money, such as a number of the things 

you just mentioned, can’t get the resources to be funded. 

Mr. BURTRAW. I would like to just add the phase-in in terms of 

the changes in electricity prices is going to be immediate. So the 

program can be put in place, and you can talk about allocation in 

different ways, but you are going to see an immediate change in 

product prices. 

So there is no phase-in to talk about except in some portions of 

the country in the electricity sector, where there are two alternatives in those regions of the country where there are regulated 

prices and a free allocation to firms will get passed through to consumers and soften the blow initially. But the problem is that treats 

the country in a very asymmetric way because you have roughly 


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half the country under cost-of-service and half the country with 

competitive electricity markets. I think that’s inviting a new civil 

war. 

So an approach that has emerged recently that has surprising 

support from very disparate companies would be free allocation to 

load serving entities. These are the retail electricity companies that 

deliver electricity services directly to customers. And they could be 

expected to pass through to customers the value of the emission allowances. 

This has a politically attractive appeal that it would keep electricity prices low and would look like a phase-in as we enter the 

new constrained carbon regime. The problem, as other speakers 

have already mentioned, is this constitutes essentially a subsidy to 

electricity consumption that you don’t get for natural gas or transportation fuels or to industry and commerce. And so to put this in 

place, to enshrine this, would dramatically raise the cost of carbon 

policy nationally. We don’t want to get our feet stuck in cement 

there. 

So if you want to look for a phase-in, allocation to load, as is the 

component of the Lieberman-Warner bill, is a reasonable way to 

start, but I would urge you to think about that as a rapid transition to a full auction and recognize coming from the Great Plains, 

you know, this creation of this $350 billion a year in intangible 

property right is analogous—the last time we saw this in American 

history was the assignment of property rights in the great American West because this is going to be on a recurring annual basis. 

This is an enormous new property right. 

And the question is, to whom will it accrue over the rest of the 

century? And that’s why the auction is such an important question. 

The CHAIRMAN. And the gentlelady’s time has expired. But could 

you, Mr. Zapfel, deal with this issue of how Europe is treating the 

agriculture sector? I think it is important for us to hear that. 

Mr. ZAPFEL. Yes. It is a pleasure to do so. 

Our common market is not as it is discussed here, an economy 

program. We see the common market as one of the essential elements of bringing down our emissions. 

We have reviewed now whether we should include credits from 

agriculture and forestry, but we remain of the opinion that for the 

time being, they should stay outside of our carbon trading mechanism for mainly two reasons. First of all, we need high-quality 

monitoring/reporting of the emissions, which we do not see we can 

do yet in those sectors. And, secondly, we also haven’t been able 

to address the questions of permanence and leakage yet. Especially 

in the forest, if you grow forests but in the same time other places 

you cut down forest, so the permanence in the leaking is important. 

As Mr. Sensenbrenner, Congressman Sensenbrenner, has pointed 

out, the environmental integrity of the common markets delivering 

emission reductions is essential, also for the public. So, for that 

reason, we have proposed that agriculture and forestry credits stay 

out of the system up to 2020. 

The CHAIRMAN. Great. The gentlelady’s time has expired. The 

Chair recognizes the gentleman from Connecticut, Mr. Larson. 

Mr. LARSON. Thank you, Mr. Chairman. And thank you for putting together this incredible panel. And it is with a certain amount 


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of trepidation that I go forward with my questioning knowing the 

vast amount of work that you and my good friend and colleague 

Jay Inslee have done on cap-and-trade. 

My only regret is that you didn’t have Polar bears here today so 

that we could have more of the press here on such a weighty issue 

of discussion of the cap-and-trade system versus something that I 

think still needs to be pursued in terms of dialogue and discussion 

in terms of a carbon tax. 

Now, I say that, and I want to thank Mr. Podesta because I 

thought he started off and framed this in the appropriate—we’re in 

a crisis. And this crisis has to be solved. And it has to be solved 

now. 

The inconvenient truth is that, as you heard our good colleague 

from Wisconsin say, that, well, the most direct and straightforward 

transparent way to deal with this, of course, would be for a carbon 

tax. But, of course, he wouldn’t be for that. And neither would a 

lot of colleagues because of the anathema attached to taxes. 

And, of course, we have an aversion to taxes in this country. For 

example, we fund a war or, well, we don’t fund the war with taxes. 

We go into debt with a war and tell the American people that it 

is being paid for. So I believe that the choices are difficult and they 

become more clear. 

And I thank Mr. Greenstein also for I think illuminating the 

choices that we face here: one that deals with the certainty of emissions, the other with the certainty of price. I come down on the side 

of the certainty of price. 

I am proud to have initiated legislation along with Mr. 

Blumenauer and Mr. Miller that pretty much follows what Vice 

President Gore—and, my God, if we can get Vice President Gore 

and the President of the Chamber of Commerce to agree that this 

is the way that we should go in terms of a carbon tax and that it 

should have to offset the mitigating factors and the regressivity of 

it a direct payroll reduction that corresponds in it so that you can 

get down-the-road relief for people that actually need it, then I 

think we’ve got something, notwithstanding I am interested in this 

whole auctioning thing. 

I have to say, I have to give this the Augie and Ray’s test. Now, 

most of you don’t know what Augie and Ray’s is. It’s a little hamburger/hot dog joint in East Hartford, where most of the people 

that I know gather. But they’re pretty down to Earth, you know, 

and they read people pretty well, debate the Red Sox and the Yankees, yadda yadda yadda. 

But here is the deal. You say auctioning to them, and they’re 

looking at me like I am on Mars. And I’ve got to be honest. How 

would it work? Who administers it? Mr. Greenstein and even Mr. 

Sensenbrenner make some sense when they say, isn’t there a more 

direct, specific, easier way for us to administer something, albeit it 

may be a tax? And how is this all going to transpire? 

This is not going to be—and I heard Mr. Greenstein talk about 

the Lieberman-Warner bill. Gee, is this a hedge fund windfall? 

How would this be administered? How do the proponents of this 

see this auction actually taking place? Who controls it? Who sets 

up the auction? Who is purchasing? What is going on here? Mr. 

Bowles? Thank you. 


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Mr. BOWLES. Let me just comment from our experience in New 

England, Connecticut being an important member of the RGGI 

process. The easiest thing to do is what we are doing first, which 

is power generation only. Covered plants in the RGGI footprint are 

25 megawatts and up. 

They bid into the ISO every day into the bid stack to figure out 

whether they’re going to dispatch power or not. So they do it every 

day. They know how to do it. It’s not complicated. All we have to 

do to set up the auction process is get one of the auction vendors 

in the RGGI organization—— 

Mr. LARSON. What is an auction vendor? 

Mr. BOWLES. Auction vendors are folks who run the NOX program, people who administer any number of other—— 

Mr. LARSON. You can see my problem here. 

Mr. BOWLES. Yes, but—— 

Mr. LARSON. You say, ‘‘auction vendor.’’ You say it runs the NOX

program. I would say, ‘‘The NOX program’’ at Augie’s. They would 

be saying, ‘‘Are you talking about the Sox or the Nox? What are 

you talking about here?’’ 

Mr. BOWLES. I guess all I am suggesting to you is that—— 

Mr. LARSON. You are doing a very good job, by the way. I didn’t 

mean to interrupt you, but I am trying to make a point here about 

how this will all take place. 

Continue, please, Mr. Bowles. I’m sorry. 

Mr. BOWLES. I was just going to say I think the answer to your 

voters is to simply say, ‘‘Power generators do this every day. Nothing much changes except that we’re going to make them pay for 

this little thing to help protect the environment. And we’re going 

to find a way to pass that back into more savings for you’’ because, 

like Massachusetts, Connecticut is also just passing least cost procurement through legislature. And there is going to be a bunch of 

savings available. 

So I guess I would say in the power sector, it is quite simple, and 

it happens today. I think it is more complicated to move into other 

sectors, particularly to explain. But thank you for the question. 

Mr. LARSON. Mr. Greenstein. 

Mr. GREENSTEIN. I don’t think the big complexity is administering the auction. You know, we had auctions of the electromagnetic spectrum. The FCC administered that. We could establish a new federal agency to run the auctions. I do—— 

Mr. LARSON. Would that be a more efficient way to do this? 

Mr. GREENSTEIN. I do want to say that, all else being equal, I 

would prefer a carbon tax to a cap-and-trade. Having said that, I 

don’t want to let the perfect be the enemy of the good. I am not 

sure you could pass a carbon tax. I think you would be more likely 

able to pass a cap-and-trade than a carbon tax. 

And if you have a cap-and-trade with an auction, what that auction really does is to make the cap-and-trade more like a carbon 

tax, not fully, just partly. I mean, if you can pass a carbon tax, 

more power to you, but I think part of how we got here is the sense 

that that would be hard to pass. 

Mr. LARSON. Thank you. 


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The CHAIRMAN. The gentleman’s time has expired. I think if we 

could pass a carbon tax, it probably would be less power to us subsequently, but I think that’s a lesson that we have learned. 

The Chair recognizes the gentleman from New York, Mr. Hall. 

Mr. HALL. Thank you, Mr. Chairman. 

And thank you to all of the witnesses. I think part of what needs 

to happen is as you are educating us, we need to go out to our constituents and to the country and help to educate them so that they 

will understand that the corner store or, you know, the deli that 

I go to in my district when people talk about a carbon tax versus 

a cap-and-trade, to help them understand what that is. It’s not, as 

you say, given the NOX and the SOX and, you know, the successful 

change in chlorofluorocarbons that was wrought by a similar kind 

of governmental process. This is proven ground. 

I also come from a place myself, moral place and a philosophical 

place, that says that there is, there should be, and there exists an 

implicit environmental bill of rights and that every one of us, every 

child born on this planet, has a right to breathe clean air and to 

have clean water to drink and unsoiled soil for their food to be 

grown in. 

And so I object to the idea that, oh, we’re interfering with business. Somehow we got way ahead of ourselves and polluted the 

planet and the ecosystem to the point where we’re not only dealing 

with or trying to deal with climate change, but we’re also suffering 

from asthma epidemics and emphysema epidemics in our inner cities, especially among our children. And last summer across the entire State of New York, there were a number of days when we had 

dangerous air quality alerts in rural parts of the state, where you 

wouldn’t expect that. And it’s because of the pollution moving from 

other power plants in the Midwest or wherever across state lines. 

And so by trying to deal with greenhouse gas emissions, we will 

also be dealing with our dependency on foreign sources of oil, a balance of trade deficit, creating new jobs in new industries and new 

technologies here, making ourselves more independent, keeping our 

sovereignty, not having to fight wars in unstable parts of the world, 

et cetera, et cetera. So there are so many. It’s a win-win-win thing 

we’re talking about. Cap-and-trade is only one small aspect of it. 

So having made that little bit of a speech, I want to ask Secretary Bowles. In particular, I am interested in the idea that efficiency seems to be endorsed unanimously as one of the most effective and immediate steps we can take to cut greenhouse gases and 

our power bills. 

But under the current system, it is counterintuitive for utilities 

to pitch in since they make their money by selling power. In your 

testimony, you reference efforts to decouple sales from revenue. 

Could you elaborate on those efforts and what types of investments 

we could make with auction revenues or allowance incentives that 

we could use to bridge the gap? 

Mr. BOWLES. Thank you for the excellent question. And thank 

you for your statement, very well-said, at the beginning. I would 

agree. 

New York State just did a rate decoupling, as I am sure you 

know. The public utility commissions of the states regulate utilities. They have got a history of rate-making that is, by and large, 


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tied to volumetric sales of power, whether or not those utilities own 

the power generation or not. 

So in the half of the country, as Dallas mentioned, that has a deregulated power system, New York and Massachusetts and all of 

New England, our utilities don’t own the power generators. They 

own just the wires. So they bring it to your house. And the power 

generators own power generation. 

So we have inherited a system in the past where it made sense 

to measure rate recovery for the utilities based on the volumetric 

sales. It seems like a simple thing. Instead, the criteria should be 

on performance and reliability, outages, things like that, least cost 

service, so making sure that the utilities are bringing good power 

and reliable power to your doorstep but not incenting them or discouraging them on the volume of power that they sell. 

And that is really the crux of rate decoupling, is severing that 

link, that manifest economic incentive that says to the utilities, 

‘‘Maximize power sales in order to maximize revenue for your 

shareholders.’’ Instead, we need the utilities to be indifferent or, in 

fact, incented on a performance basis to be partners in energy conservation. 

I think the utilities—New York has got a terrific model with 

NYSERDA. In different states, the utilities, such as Massachusetts, 

actually run the efficiency programs. And that is a good thing because they are very close to their partners, but they need the type 

of oversight to make sure their spending is done well. 

So I think a federal incentive in terms of conditioning some of 

the auction proceeds back to states who have done decoupling and 

have done least cost procurement, things of that nature, really 

makes a ton of sense for getting that low-hanging fruit. 

Thank you for the question. 

Mr. PODESTA. Very briefly, the same applies to the natural gas 

market as well. 

Mr. HALL. Thank you. 

The next question I have is, how directly do you think we should 

try to—I guess I am done. 

The CHAIRMAN. Ask one more question. 

Mr. HALL. Okay. I will ask my last question. What would you 

think of, Mr. Podesta, for starters, for instance, a proposal to target 

auction revenue by using the sales of credits for power plants to 

do something like helping car companies to put electric vehicles 

into mass production or to build alternative fuel infrastructure? 

Mr. PODESTA. Well, I think that, again, that is exactly the kind 

of incentives that you want to encourage. That not only helps, to 

go back to your opening statement, on the overall CO2 problem and 

the global warming problem, but I think if we could move the 

transportation fleet more onto the electric grid through plug-in hybrids and other types of new generational vehicles, you have also 

dealt with the oil security problem, which is another pressing problem the United States faces, both from a balance of trade perspective but, most importantly, I think, from the sources of oil and 

where that money is actually flowing to in the United States. 

So I think that is important. And I think that some of those proceeds and we would recommend that some of those proceeds go to 

the U.S. auto companies in the form of tax rebates to re-tool to get 


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onto this new generation of vehicles that, either through plug-in 

hybrids or, as General Motors is moving towards, a slightly different platform, the Chevy Volt. 

Mr. HALL. Thank you very much. I yield back. Thank you. 

The CHAIRMAN. The gentleman’s time has expired. The Chair 

recognizes the gentleman from Missouri, Mr. Cleaver. And I think 

there is going to be a roll call coming up in just a very little bit, 

up on the House floor. But if each member for a second round 

would like to have two minutes to ask if they have one compelling 

question, we can recognize them for a second round. On the first 

round, to complete the first round, we will recognize the gentleman 

from Missouri, Mr. Cleaver. 

Mr. CLEAVER. Thank you, Mr. Chairman. I apologize I was late. 

I’ve had another committee hearing. 

And I only have two questions. And I guess I should preface it 

by saying I support either cap-and-trade or carbon tax, either way. 

But I am going to take a little negative slant here. And I hope this 

hasn’t already surfaced. 

When I was mayor of Kansas City, we had a municipal ordinance that would allow us to fine slum landlords $2,000 each time their 

property was cited as violating the city code. And we discovered 

after about five years that there were some landlords who actually 

built the fines into the cost of doing business because, you know, 

you are only going to get caught every month or every other month. 

And so they just built it in. 

What happens if there are power plants or entities participating 

in the program from just placing the cost of polluting into what 

they spend to do business? And it’s not a matter of stopping. It’s 

just a matter of I’m going to pay the cost. 

Mr. BOWLES. I guess I just would say that I think that really 

summarizes the argument for auctioning, instead of allowances, because the power generators will charge their customers for the economic value of that permit because they can sell it to someone else 

or they can expend it when they run or they can save it for the 

future. 

So I would say that concern is best addressed through having an 

auction, whether it is a clear transparent understanding of what 

the value is. And then you also have the revenue that you can go 

back to help out low-income energy consumers to get control of 

their own energy bill through, things like energy efficiency. 

But others may have answers as well. 

Mr. GREENSTEIN. I would add that the whole purpose of the capand-trade system is really to raise prices in a sense for fossil fuel 

energy and create the incentive for private actors in the market, 

companies and consumers, to switch to cleaner, more efficient 

forms of fuel. 

In fact, I think—so to the degree that a company keeps prices 

higher putting all of this in, then whether it’s wind and solar or 

all sorts of other forms of alternative energy that may not be that 

economically attractive now, they become very economically attractive because they become cheaper. 

One other quick point on that is when you are thinking about 

how to use the proceeds. Certain things that can’t happen now 

without government subsidies in the energy sector no longer need 


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government subsidies under a cap-and-trade because the price 

point has changed. 

And, in fact, listening to the discussion this morning, Mr. Chairman, I started to become a little concerned that I would offer a caution. When you design the legislation, make sure you don’t squander some of the proceeds on efficiency incentives that the government isn’t needed anymore, that the market itself will drive as a 

result of the changes in prices that the cap-and-trade will come 

about. 

I’m not saying you don’t need any energy efficiency subsidies, but 

I think you may need less than you think you would need if the 

cap-and-trade works the way it is supposed to. 

Mr. CLEAVER. Thank you. Actually, you answered my second 

question, Mr. Greenstein. Thank you. 

The CHAIRMAN. And Mr. Burtraw, do you want to respond to Mr. 

Cleaver? 

Mr. BURTRAW. Yes, sir. I just wanted to point out that for fossil 

fuel consumption, the electricity sector, there are in place continuous emission monitors that record on a 15-minute basis the emissions from the power plant. So this is electronically reported. And 

also major fuel users report to the EIA their fuel use. It’s fairly 

transparent to calculate the carbon content of fuels that are being 

used. 

So that is one fortunate aspect of this problem that with a lesson 

we have learned from that sulfur dioxide trading program. With 

certain penalties in place, you can expect to achieve virtually 100 

percent compliance under this program. 

The CHAIRMAN. The gentleman’s time has expired. Now we will 

go to a lightning round here, give members if they want two minutes to ask any follow-up questions they would like to make. The 

Chair recognizes the gentleman from Washington State. 

Mr. INSLEE. Thank you. 

We went to Europe last summer and looked at the cap-and-trade 

experience. And it was described to me as a great scandal, the situation where there was an allocation without auction. And then 

there are windfall profits in the billions of dollars taken by utilities 

in Europe. 

And consumers in Europe were outraged by this when they found 

out they had been gamed by this system that this asset had been 

given to the utilities and then they turned around and put it in the 

rate base and charged the consumers the implicit value of not selling the asset. And they said not selling the asset was a cost to the 

utility which then they turned around and sent right to the consumers. 

So what I was hearing from Europe is that give-away system 

turned out to be a scandalous affair and I presume is one of the 

things that is driving the move now towards more of an auction. 

I just wonder, Mr. Zapfel, if you could comment on that. Was I 

reading that situation correctly? And then I want to ask Mr. 

Burtraw to what extent could that be replicated in the United 

States? 

Mr. ZAPFEL. Thank you, Congressman. 

I would not go as far as considering it as a scandal, but I think 

what we have learned in practice is that the same thing happens 


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that, for example, Mr. Burtraw would show, even if you give away 

the allowances for free in some sectors, it is very easy to pass them 

on in the prices. 

So this conceptual effect has very much proven it would be so 

also in practice. And this is, as I have stated already in my introductory statement, one of the main multi-weighting factors that we 

move over to auctioning now. 

So I would not see this as—we had initially this perception in 

Europe that our mechanism was failing because this was happening, but now as we go ahead on this, more and more people look 

into this and research this. This is demonstrating that the carbon 

market is, in effect, functioning, that the price signal is created, 

and the price signal works itself through the economy. And the efficiency advantages of the common market can be realized in practice. 

What we talk about with allocating allowances is a distributional 

effect. And where in society do you want to put the distributional 

effect? Do you want to give it to the taxpayer in the first place or 

do you want to give it to the shareholders of the power company? 

Mr. BURTRAW. Sir, to a first order, we would estimate that the 

change in product prices will not depend on how that allocation occurs. So if you are giving away this valuable asset to firms, that 

is a transfer that is a form of compensation. There is a second form 

of compensation they receive, which is the changes in revenues, the 

changes in product prices. And this opens the possibility for potentially dramatic overcompensation or what people have called windfall profits. 

So the same thing I would expect to occur in the U.S., as was 

observed in the EU if there was free allocation of emission allowances to generators or to emitters throughout the economy generally. 

Mr. INSLEE. Thank you. 

The CHAIRMAN. The gentleman’s time has expired. Mr. Podesta, 

you would like to respond. 

Mr. PODESTA. Actually, I would just like to disagree with my 

friend Mr. Greenstein for a second. I think the chances of the Congress overinvesting in public goods is small. And I think that the 

amount of money that we’re talking about to incentivize states to 

decouple rates to do home weatherization, to add the kind of efficiency boost in the early days of this I think would be money wellspent and, again, creates a virtuous cycle of efficiency, productivity 

in the economy, and job creation. 

And so I wouldn’t worry just about the price. I think sort of applying some of that revenue against that efficiency portfolio would 

be a very good thing for you to do as you design this cap-and-trade. 

The CHAIRMAN. Mr. Greenstein, 20-second rebuttal? 

Mr. GREENSTEIN. I am all for weatherization. I think when you 

write this bill, you will be besieged by various industries and interests, promoting all sorts of subsidies and tax credits that are billed 

as green and pro efficiency. And a substantial share of them will 

not be necessary. The market signal will do it. And if you give into 

them, you won’t have enough money for other key things, like consumer needs. 


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The CHAIRMAN. The gentleman’s time has expired. The gentleman from California, Mr. McNerney. 

Mr. MCNERNEY. Thank you. 

The CHAIRMAN. Two minutes. 

Mr. MCNERNEY. One of the auctioning schemes I am aware of 

starts with the first year of the auction giving out permits equal 

to the amount of carbon produced in the prior year and then reducing that level by a percent or two per year until over a 30-year period you have reached your long-term goals. 

Now, that would allow businesses to plan ahead for auctioning 

price increases and so on. Is there another scheme that makes 

more sense than that or is that basically what you are advocating, 

whoever would care? Mr. Greenstein. 

Mr. GREENSTEIN. I am sorry. Clearly everyone is talking about 

phasing in the tightening the cap over time. I think that is the key. 

No one is talking about going to, say, a 50 percent emissions reduction in 10 or 15 years. The key I think is to have that emissions 

cap gradually tighten over an extended period of time, have people 

know where that cap is going over an extended period of time. And 

that is the key thing I think for the planning of the future. 

Mr. PODESTA. The old McCain-Lieberman bill stair-stepped down. 

It had more dramatic reductions at a stair-step level. But I think 

that a phased reduction is a more sensible way. It is easier to plan. 

And it permits you to hit your target and again get the pollution 

savings that are necessary. 

But I think the most important issue at the end of the day is 

what you are trying to get to. And I would say Europe has adopted 

the target of hitting a two degrees Centigrade rise in temperature 

above pre-industrial level by 2050. That is I think an appropriate 

target. And sort of creating the curve to get you to that point in 

2050 with early action between now and 2020 and 2025 is really 

critical. 

Mr. BOWLES. Could I just comment on that, Mr. Chairman, just 

to say I draw a distinction between a phase-in of a cap versus a 

phase-in of auction versus allowance. I think a weakness to my 

mind of some of the Senate bills is the phasing in of auctioning. 

I mean, an auction process is manifestly superior in terms of returning benefits to the ratepayer and consumer. I think phasing in 

the cap, of course, makes sense. 

Mr. GREENSTEIN. I fully agree with that. 

The CHAIRMAN. The gentleman’s time has expired. The Chair 

recognizes the gentlelady from South Dakota. 

Ms. HERSETH SANDLIN. Okay. Let me pursue that a little bit further because I know you think and, to a degree, I agree with you 

the auction is the way to level the playing field. But there are certain regions of the country that start out at a disadvantage. And 

I am very concerned. 

Mr. Podesta, if you could respond to this? Because, as you laid 

out how you see the percentages of how you allocate the revenue, 

I don’t see sufficient revenue there to dramatically improve our 

transmission capacities. 

So when I am in South Dakota and we are dealing with the 

Western area power administration of the West and the Midwest 

independent system operator to the East and we have got all this 


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wind that we can’t get out that would benefit the electricity providers and other businesses in South Dakota, I mean, I would be 

more willing to identify it as a weakness in terms of the phase-in 

of the auction if there were some combination of the investment in 

the infrastructure with a cap-and-trade. And so if you could comment on that? 

Mr. PODESTA. Well, I think, again, there are two different issues 

involved with that. We apply ten percent to try to soften the blow, 

if you will, on communities that are particularly affected. You 

know, you could argue it’s 15 percent, but it’s probably not much 

more than that. 

There is a second question, which is, does giving away the auction permits actually result in the investment or does auctioning 

the permits and then having the money available to make those investments, which is the better system? 

I think the people on the panel all think that a more transparent 

system is auction the permits and then use the proceeds of the permits to upgrade the grid, make the R&D investments, et cetera. 

Ms. HERSETH SANDLIN. And I don’t think I disagree with you on 

that. My concern is the 100 percent auction at the outset. I mean, 

I am looking at it as building in some time. And maybe the weakness of the Senate bills is they build in too much time, they start 

too low. 

Mr. PODESTA. Right. 

Ms. HERSETH SANDLIN. But you can understand my concern 

about—— 

Mr. PODESTA. I think that if you are going to move in that direction, though, you also may want to condition what those permits 

are being granted for with respect to the reinvestment, for example, in the grid upgrade so that they are not just being passed back 

as a sort of benny, as was the European experience that Mr. Inslee 

has described in a larger sense to the shareholders of those companies. 

Ms. HERSETH SANDLIN. Okay. 

The CHAIRMAN. The gentlelady’s time has expired. The gentleman from Missouri, Mr. Cleaver. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

For the last two years, I guess the people who are in the Northeast area of our country have been very, very pleased because there 

has been a ten percent reduction in greenhouse gas emissions but 

not because of any intentionality on the part of power plants. The 

weather has been mild. And as a result of the weather being mild 

and there is a ten percent decrease in emissions, isn’t that dangerous when we are talking about trying to create incentives for 

people to reduce their emissions? 

I mean, what if the cap is above? It may be too high above the 

emissions. Doesn’t that just have a negative impact? 

Mr. BOWLES. I would just comment—— 

Mr. CLEAVER. And how do we handle it? 

Mr. BOWLES [continuing]. To say that that is an argument for 

multi-year compliance periods because you do have weather events 

and you have got increases and decreases in energy use during 

that. 


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So I would say the Regional Greenhouse Gas Initiative is a 

three-year compliance period. We also in our trading scheme have 

unlimited banking going forward. So if you buy a permit, you can 

use it in the out years. And so I think that is best dealt with 

through market rules. 

But I agree you will have fluctuation based on weather events. 

Mr. CLEAVER. Mr. Burtraw. 

Mr. BURTRAW. Yes. I would like to add I really echo your concern. I think as we look across the performance of emissions trading systems previously, although there is a lot of concern about 

price spikes and cost containment, empirically the most important 

phenomena has been price collapses or prices have turned out to 

be much less than we thought because, well, it turns out economic 

incentives work and a lot of innovation comes to the market. 

So one of the ways to protect against that is a reserve price in 

an auction, which makes—and that is a standard feature of good 

modern auction design. You are going to find it on eBay the next 

time you try to go auction something there. And so it puts in a floor 

on the value of emission allowances within an auction and thereby 

provides sustainable expectations for innovators and new investors 

going forward. 

Mr. CLEAVER. Do all of you agree with that? [No response.] Then 

I guess I must agree as well [Laughter.] 

Mr. PODESTA. Particularly if eBay does it. 

The CHAIRMAN. All right. The gentleman’s time has expired. I am 

going to ask a final question here, and I am then going to ask each 

one of you in reverse order of the original statements to each give 

us your one-minute summary of what you want the Select Committee on Global Warming to know as we are going through this 

year and trying to make recommendations on how to construct a 

program to deal with this issue. We are also waiting for Mr. 

Blumenauer to return. And hopefully he can make it here before 

the end of that process. 

Mr. Burtraw, let me ask you this question. When we did the acid 

rain bill back in 1990, all of the allowances were given away. And 

everyone says that worked great. What is different with this problem, the CO2 problem? Why is that lesson from 1990 not applicable 

to this issue of dealing with greenhouse gases because that is a 

very commonly asked question? And all of you on this panel seem 

to disagree with that approach of giving away the allowances. And 

the acid rain process did work. So what is the difference? 

Mr. BURTRAW. There are two things that are different. Number 

one, that was only targeting the electricity sector. And in 1990, 100 

percent of the electricity sector was under cost of service regulation. So if the regulators were awake and doing their job, they were 

going to make sure that companies could not charge consumers for 

something they had received for free. 

So consumers were well-protected under traditional cost of service regulation. Today we have had half the country in the electricity sector move away from that for their very own good reasons. 

The second is that, again, that was only in the electricity sector. 

And today we’re looking at a program that is going to affect the entire economy. So with that type of free allocation in the electricity 

sector, it made sense in that it suppressed electricity, any change 


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in electricity, prices any more than needed to happen there, but 

when we go economy-wide, that type of an approach for those regions of the country in the electricity sector that are still regulated 

will constitute a subsidy to electricity consumption. And that is 

going to cause a disequilibrium in marginal costs across the economy and raise the costs of carbon policy significantly. 

Our modeling, for example, suggests that it could push up national allowance prices by 15 percent. That means all of the other 

sectors of the economy are going to have to work that much harder. 

The CHAIRMAN. Great. Thank you. 

I received a letter from the Southern Alliance for Clean Energy 

regarding the subject of today’s hearing. And I would like to ask 

unanimous consent that it be included in the record. 

Without objection, so ordered. 

Let me turn now to our concluding one-minute statements. And 

we will begin with you, Mr. Greenstein. 

Mr. GREENSTEIN. I think the case has been well-made at this 

hearing for auctioning the permits and also for the need, both substantively and politically, for consumer relief. So I won’t use up 

much of my one minute on that. 

However, there is one issue I mentioned in my testimony we 

never came back to. And it’s kind of I think maybe not on the radar 

screen. So let me spend 30 seconds on that. 

We really do need to pay attention to the fact that the price 

point, the increase in prices, which will create incentives for various efficiencies, will also raise the price of everything from heating 

school buildings, education at the state and local level, to a variety 

of federal programs from the Pentagon’s cost to veterans’ cost of 

living increases. 

And you need to make sure that there is some room within the 

allowances to deal with those costs that the public sector is going 

to incur. You don’t want an impact of cap-and-trade to be cuts in 

local education budgets or cuts in veterans’ programs. I know it is 

not as politically attractive as this incentive and that incentive, but 

I think it is a key part of what needs to be taken into account or 

we end up having cuts in basic services, increases in other taxes, 

or big increases in deficits down the road as a result of the impact 

of higher energy prices on the important things that local, state, 

and the federal governments do. 

The CHAIRMAN. Thank you, Mr. Greenstein. 

Mr. Podesta. 

Mr. PODESTA. Again very briefly, the cost of doing nothing is a 

lot more than the cost of doing something. And I think if we get 

this right and I think cap-and-trade is at the heart of a new energy 

policy, it can really power the economy forward. 

It is not as sexy as sort of complex, undecipherable financial instruments, but maybe if we put the minds of the people who currently are on Wall Street trying to do that towards innovation in 

this sector, it will create jobs, it will create efficiency, it will create 

productivity, and it will be a great boon to places like South Dakota as well as the rest of the country. 

The CHAIRMAN. Thank you, Mr. Podesta. 

Mr. Bowles. 


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Mr. BOWLES. Mr. Chairman, I would ask your permission to include a longer appendix as part of my testimony I’ve prepared for 

the Committee. 

The CHAIRMAN. Without objection, it will be included. 

[The appendix offered by Mr. Bowles follows on page 129.] 

Mr. BOWLES. I would echo John’s point about the clean energy 

economic opportunity. The United States, the great inventor of 

technology that is exported to the world in so many areas, has been 

lagging behind. Governor Patrick has made this a central part of 

his economic development strategy. And I think we need to start 

looking at it in the opportunity context more. 

Second, I just would tell the Committee we have also built in 

greenhouse gases to our state environmental review process. And 

we have seen new proposals for green buildings. We saw the Harvard Allston campus agree to the first legally enforceable cap on 

greenhouse gas emissions from a real estate development project. 

That is another area that we can get into that I think is important. 

And, third, I would just say send clear signals and level the playing field. Don’t penalize early action states as you move forward. 

And measures like auctions really set an even playing field. And 

I encourage you to move forward as quickly as you can. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Mr. Bowles. 

Mr. Zapfel, again a special thanks to you for being here today. 

Mr. ZAPFEL. Thank you, Mr. Chairman. 

I would want to go back to the broader context in my closing 

statement of beyond the auctioning. I think we have seen, both in 

the United States and in Europe, we see, that environmental markets can deliver sulfur and nitrogen oxide markets here. The common market starts to deliver in Europe. 

So there has been I think some of the debate you were having 

here now should you go for a cap-and-trade system. We had the 

same debate in Europe. But now three or four years after introducing our system, it has become a feature of daily business in Europe. And we got used to it. We got used to having a common price 

of some $30 a ton of CO2. And nobody has ever revised down our 

macroeconomic cost projections. So the economy can continue to 

steam ahead with a common price. 

EU is ahead in the common market while you are ahead in the 

effluent pollutant markets. We have learned a lot from you on the 

effluent pollutant experience. We stand ready to continue to transfer this dialogue, transfer this experience to where we are ahead 

on the common market. 

We are not ahead everywhere. On auctioning I think we are a 

bit of a latecomer. And we can collaborate even more. So I think 

together, the U.S. and Europe, we can make headway in building 

a global common market and solving the big challenge we have 

ahead of us, bringing the emissions, greenhouse gas emissions, 

down significantly over the decades to come. 

Thank you for this opportunity to testify. 

The CHAIRMAN. Thank you, Mr. Zapfel. 

And you are the cleanup, Mr. Burtraw. 

Mr. BURTRAW. Yes. Thank you. 


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Well, first of all, I would just like to leave the impression that 

auction design is actually fairly simple. Emission allowance is a 

very simple commodity compared to the spectrum auction or the 

daily electricity auctions. And this is not the time to go into it in 

great detail, but, really, it is dramatically simple. 

So do not be intimidated by the notion that designing and putting in place an auction for emission allowance is going to be a difficult thing to accomplish. It is probably one of the more simple 

auctions that could be designed. And it is not at all uncommon for 

the government to now charge for things that previously it gave 

away for free to put such a mechanism as that in place. 

And, secondly, I would just like to leave the question in your 

mind with you of where does this value come from in the first 

place. It really comes from citizens in the U.S. in terms of their 

value isn’t being taken out of the economy or sent away and 

burned but, rather, it’s changing the way that property rights are 

assigned throughout the economy. 

An approach that I think is a candidate approach with all others, 

I mean, an economist prefers an auction because of the opportunity 

to use auction revenue to promote economic growth and other program goals, but also another approach that could be a candidate 

would be to use an FDR type of an approach and see that these 

emission allowances belong to citizens and they could be directly 

allocated to citizens. That would be the most way to achieve the 

most progressive income distribution as a consequence. 

The CHAIRMAN. Thank you, Mr. Burtraw, very much. And I agree 

with you on that spectrum auction point in 1993 working with the 

Clinton administration. We moved over 200 megahertz of spectrum. 

We created a third, fourth, fifth, and sixth cell phone license in 

every community. And it revolutionized the wireless marketplace 

moving from analog to digital. 

Up until then we had given away the spectrum, but by changing 

the model, we actually created a more entrepreneurial environment 

and derived more revenues for the federal government. I don’t 

think it is as complex. I do agree with you on that as well. 

Before closing, I would like to thank the outstanding panel. I 

think we are unanimous in that that this was a first class panel 

and an excellent way to kick off this important debate this year. 

I think we have learned that robust auctions and well-targeted revenue recycling must be a core element of a cap-and-trade system. 

This is the only way to ensure that we can meet the goal of saving 

the planet while keeping the playing field level, ensuring consumers are protecting, and spurring innovation and economic 

growth as we move to a low-carbon economy. I think it is also clear 

that we need to look closely at mechanisms for oversight of auctions and the carbon market to ensure simplicity, transparency, 

and fairness. 

With that, this hearing on carbon auctions is adjourned. Going 

once, going twice, sold. 

[Whereupon, at 11:58 a.m., the foregoing matter was concluded.] 


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rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 224 here 58417A.138
183 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 225 here 58417A.139
184 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 226 here 58417A.140
185 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 227 here 58417A.141
186 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 228 here 58417A.142
187 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 229 here 58417A.143
188 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 230 here 58417A.144
189 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 231 here 58417A.145
190 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 232 here 58417A.146
191 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 233 here 58417A.147
192 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 234 here 58417A.148
193 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 235 here 58417A.149
194 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 236 here 58417A.150
195 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 237 here 58417A.151
196 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 238 here 58417A.152
197 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 239 here 58417A.153
198 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 240 here 58417A.154
199 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 241 here 58417A.155
200 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 242 here 58417A.156
201 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 243 here 58417A.157
202 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 244 here 58417A.158
203 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 245 here 58417A.159
204 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 246 here 58417A.160
205 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 247 here 58417A.161
206 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 248 here 58417A.162
207 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 249 here 58417A.163
208 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 250 here 58417A.164
209 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 251 here 58417A.165
210 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 252 here 58417A.166
211 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 253 here 58417A.167
212 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 254 here 58417A.168
213 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 255 here 58417A.169
214 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 256 here 58417A.170
215 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 257 here 58417A.171
216 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 258 here 58417A.172
217 


rfrederick on DSKD9S0YB1PROD with HEARINGInsert offset folio 259/400 here 58417A.173