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S. HRG. 111–912 

AUCTIONING UNDER CAP AND TRADE: 

DESIGN, PARTICIPATION, AND 

DISTRIBUTION OF REVENUES 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

MAY 7, 2009 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

BLANCHE L. LINCOLN, Arkansas 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

CHUCK GRASSLEY, Iowa 

ORRIN G. HATCH, Utah 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

JOHN ENSIGN, Nevada 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

RUSSELL SULLIVAN, Staff Director 

KOLAN DAVIS, Republican Staff Director and Chief Counsel 

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

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

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

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

WITNESSES 

Krueger, Dr. Alan B., Assistant Secretary for Economic Policy, Department 

of the Treasury, Washington, DC ....................................................................... 4 

Elmendorf, Douglas, Ph.D., Director, Congressional Budget Office, Washington, DC ............................................................................................................. 5 

Delbeke, Dr. Jos, deputy director-general and directorate general for environment, European Commission, Brussels, Belgium .............................................. 7 

Smith, Anne, Ph.D., vice president and practice leader of climate and sustainability, CRA International, Washington, DC ..................................................... 9 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

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

Prepared statement .......................................................................................... 37 

Bunning, Hon. Jim: 

Prepared statement .......................................................................................... 39 

Delbeke, Dr. Jos: 

Testimony .......................................................................................................... 7 

Prepared statement .......................................................................................... 40 

Responses to questions from committee members ......................................... 55 

Elmendorf, Douglas, Ph.D.: 

Testimony .......................................................................................................... 5 

Prepared statement .......................................................................................... 68 

Grassley, Hon. Chuck: 

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

Prepared statement .......................................................................................... 95 

Krueger, Dr. Alan B.: 

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

Prepared statement .......................................................................................... 97 

Smith, Anne, Ph.D.: 

Testimony .......................................................................................................... 9 

Prepared statement .......................................................................................... 103 

COMMUNICATIONS

American Society of Civil Engineers (ASCE) ........................................................ 117 

Association of Public and Land-grant Universities ............................................... 122 

Boyce, James K. ....................................................................................................... 125 

(III) 

(1) 

AUCTIONING UNDER CAP AND TRADE: 

DESIGN, PARTICIPATION, AND 

DISTRIBUTION OF REVENUES 

THURSDAY, MAY 7, 2009 

U.S. SENATE, 

COMMITTEE ON FINANCE, 

Washington, DC. 

The hearing was convened, pursuant to notice, at 10:07 a.m., in 

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

(chairman of the committee) presiding. 

Present: Senators Conrad, Bingaman, Kerry, Stabenow, Cantwell, Nelson, Carper, Grassley, Hatch, Snowe, Bunning, Roberts, 

and Enzi. 

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

Vetter, International Trade Advisor; Jo-Ellen Darcy, Senior Environmental Advisor; and Kelly Whitener, Fellow. Republican Staff: 

Nick Wyatt, Tax Research Assistant; and Jim Lyons, Tax Counsel. 

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

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The hearing will come to order. 

Voltaire wrote, ‘‘Men argue, nature acts.’’ 

While people argued over global warming, nature acted. Now, at 

long last, people appear nearly ready to act in response. 

Last year, the Senate had a good discussion of legislation to respond to climate change. As part of that effort, the committee 

heard from witnesses about the tax and trade aspects of a cap-andtrade program. But ultimately, the Senate did not act on legislation 

last year. 

This year we will once again take up climate change legislation. 

President Obama has given a high priority to addressing the problem. It is time for us as a Nation to show leadership and responsibility. It is our moral imperative to address climate change. It is 

time for us to act. 

Action would not be without cost. But the cost of inaction would 

be far greater. 

Many have analyzed the effects that a cap-and-trade program 

would have on our economy and our ability to compete in the 

world. Each study has generated its own set of questions and uncertainties. But we need to move ahead with the best information 

that we have. 

2 

Today we have asked our witnesses to share their analysis of the 

effects of a cap-and-trade program on the economy. And we have 

also asked for their thoughts on the best way to design the system 

to provide certainty, where we can. We need certainty in terms of 

establishing and containing costs. And we need certainty in terms 

of meeting our greenhouse gas reduction goals. 

We will ask: How can we reduce the effect of potentially increased energy costs on our economy? 

How can we reduce the effect on energy consumers? 

How should an auction be structured? 

How should allowances be allocated? Should they be auctioned, 

given away for free, or some combination of the two? What is the 

proper balance between free allowances and auction revenues? 

Are free allowances an effective tool to assist industries facing 

particularly high costs? Are they effective to assist industries that 

are trade-sensitive? 

If we provide free allowances, who should receive them? Based 

on what criteria? 

These are all questions that I hope our witnesses can help us answer. 

And so, while people argued, nature acted. Now Congress can act 

in response. Let us find out what we can, so that we may act 

wisely. 

Senator Grassley? 

OPENING STATEMENT OF HON. CHUCK GRASSLEY, 

A U.S. SENATOR FROM IOWA 

Senator GRASSLEY. Well, I think everybody knows that the Senate Finance Committee, when it comes to the suggested cap-andtrade tax, that we have a very essential role to play in this. When 

it comes to the potential environmental benefits of such a system, 

of course most of that is going to be handled by the Environment 

and Public Works Committee. However, we are talking about a program that will raise hundreds of billions of dollars every year for 

the Federal treasury. With revenue of that magnitude, that is obviously why we are having this hearing. 

What is more, the cost will be paid by every American in the 

form of higher prices for energy services or any product that takes 

energy to produce or transfer it to market. President Obama has 

acknowledged that, under a cap-and-trade system, electric rates 

would necessarily skyrocket. The exact quote is, ‘‘Electricity rates 

would necessarily skyrocket.’’ 

When OMB Director Orszag was before this committee last year 

in his previous capacity, he made it clear that: ‘‘Under a cap-andtrade program, firms would not ultimately bear most of the costs 

of the allowances but instead would pass them along to their customers in the form of higher prices.’’ In other words, it is going to 

be a consumer tax, not a corporation tax. Those energy price increases will also have a significant and negative impact on economic growth and job creation. 

If that sounds suspiciously like a Federal energy tax to those of 

you here, you are right, it is. The Senate Finance Committee has 

jurisdiction over all Federal taxes and has extensive experience in 

considering the tax incidence of certain policies. That experience 

3 

will be invaluable on this subject because a very important aspect 

in designing a cap-and-trade system is who will ultimately bear the 

cost of the program, and in what proportion. In short, who are the 

winners and the losers? 

One troubling aspect of cap and trade is that speculators from 

Wall Street, Chicago, and San Francisco are foaming at the mouth 

to get their hands on trading profits from cap-and-trade allowances. Hedge funds, private equity funds, and other companies 

have been lobbying Congress to pass cap-and-trade legislation. 

When I say the ‘‘troubling aspect’’ of that, that is not this Senator saying it just on my own suspicions, but this is what I am beginning to hear more from the grassroots of my State. It probably 

comes because right now Wall Street does not have a very good 

reputation at the grassroots of America. 

Then people are looking at Enron, which is not much of a company today, but 10 years ago was quite a company. They were 

early supporters of this. AIG was as well, and we all know the reputations of those companies. When you are talking about their support for things like this, that raises more questions in the minds 

of people who are already fed up with bailouts and things of that 

nature. 

We have Democratic Representative John Dingell quoted this 

way: ‘‘I attended a meeting of an organization interested in climate 

change legislation, and guess who it was? It was a bunch of goodhearted Wall Streeters getting ready to cut a fat hog.’’ Well, I want 

to make sure that the American taxpayers are not the fat hog that 

gets cut. 

Today’s hearing will help us to better understand the economic 

consequences of cap and trade and the various trade-offs that Congress will need to carefully consider. Our distinguished panel will 

help us do that. Thank you all very much. 

The CHAIRMAN. Thank you, Senator, very, very much. 

Our first witness is Alan Krueger, the new Assistant Secretary 

of the Treasury for Economic Policy. Congratulations, Dr. Krueger, 

on your confirmation. Any day now you will get sworn in, and we 

look forward to that very, very much. I know that Secretary 

Geithner expects and looks forward to having you on board; we all 

do. Thank you very much for appearing before us on such short 

notice. 

The second witness is Doug Elmendorf, who performs yeoman 

duty and does everything around here, crunches numbers on every 

subject under the sun, under a lot of pressure from lots of different 

sides to get their numbers first. We thank you very much, Dr. Elmendorf. But from our perspective, we sure like your work on 

health care reform, especially. 

Dr. Delbeke, thank you very, very much for appearing before us 

today. We appreciate your coming before us, especially in your capacity as deputy director-general of the European Commission and 

directorate-general for the environment. As is the normal course of 

business when foreign government officials testify before this committee, I note for the record that the U.S. Congress has no authority over Dr. Delbeke. Now, that begs the question, over whom do 

we have any authority anyway? [Laughter.] He is appearing today 

as a diplomatic courtesy. 

4 

Also, Dr. Anne Smith, vice president and practice leader of climate and sustainability for CRA International. Thank you very 

much, Dr. Smith. 

So, Dr. Krueger, why don’t you begin? 

STATEMENT OF DR. ALAN B. KRUEGER, ASSISTANT SECRETARY FOR ECONOMIC POLICY, DEPARTMENT OF THE 

TREASURY, WASHINGTON, DC 

Dr. KRUEGER. Sure. Good morning, Chairman Baucus, Ranking 

Member Grassley, and other members of the committee. I am delighted to be before the committee again so soon. [Laughter.] 

I took your advice very seriously, Senator Baucus, that it was 

time to get to work, and that is why I am here today to talk to you 

about cap-and-trade auctions. 

In my remarks I will describe the important role that auctions 

can play in an efficient greenhouse gas cap-and-trade program. I 

will also talk about the Department of Treasury’s experience running auctions and how auctions have been used in some existing 

greenhouse gas cap-and-trade programs in the U.S. and abroad. 

As you know, one of the President’s top priorities is to develop 

a comprehensive energy and climate change plan to invest in clean 

energy, address the global climate crisis, and create new jobs. In 

turn, we believe that a greenhouse gas cap-and-trade program 

should play a central role in our effort to achieve these goals at the 

lowest possible cost. We are very appreciative of the work being 

done in the Congress to this end and look forward to working together to craft successful legislation. 

One important element of an efficient and fair cap-and-trade system is allowance auctions. When designed and managed effectively, 

auctions distribute greenhouse gas emissions allowances efficiently 

by assuring that they are allocated to those who value them the 

most, thereby helping to minimize the cost of achieving our 

economy-wide emission targets. At the same time, the use of auctions can avoid the creation of undeserved windfall profits and can 

provide revenue that can be used to help families in the transition 

to a clean energy economy. 

Treasury has had significant experience in running high-value 

auctions. To finance the public debt, the Treasury Department uses 

auctions to sell a large volume of debt securities. The regular, predictable, and transparent nature of these auctions furthers Treasury’s objectives of financing the Federal Government at the lowest 

possible borrowing costs. 

Each year the Treasury Department’s Bureau of Public Debt conducts more than 250 public auctions and issues over $5 trillion in 

gross debt. In fiscal year 2008, for example, we conducted 279 auctions, in each case releasing the auction result data within our selfimposed time constraint of 21⁄2 minutes after the auction is closed. 

Given the large volume of financing provided through Treasury’s 

auctions, ensuring a smooth and efficient auction process has been 

a critical component of our success. We place a premium on running the most reliable Treasury auctions possible in the most 

transparent manner, and the Department delivers on this responsibility each and every week. Treasury’s long track record of successfully running high-value auctions demonstrates the key technical 

5 

expertise necessary to manage auction details in a manner that 

builds public trust and confidence. 

Now I would like to briefly describe a few prominent examples 

of the use of auctions in the existing greenhouse gas cap-and-trade 

programs. In 2005, the European Union established its emissions 

trading scheme commonly known as EU ETS, which I am sure Dr. 

Delbeke will discuss. This is the world’s largest emissions cap-andtrade program. The EU ETS caps carbon dioxide emissions from 

the electric power sector and several other major industrial sectors 

in Europe, which collectively account for about half of Europe’s CO2

emissions. 

The use of auctions in the EU ETS has been limited to date, but 

is growing. To offer one example of the use of auctions, since November 2008 the United Kingdom has held two single-round sealed 

bid uniform price auctions which yielded a combined $144 million 

in revenue. Britain’s Treasury conducts these auctions, and auction 

revenue is deposited into the United Kingdom’s consolidated fund 

for general spending purposes. There will be a substantial increase 

in the use of auctions in the EU ETS program in the future. 

Another example of auctions in the greenhouse gas area is the 

Regional Greenhouse Gas Initiative known as ‘‘ReGGIe.’’ This is 

the first mandatory greenhouse gas cap-and-trade program in the 

United States, and it covers electric power plants in 10 participating States in the Mid-Atlantic and Northeast regions. Auctions 

play a key role in allowance allocations in ReGGIe. 

Auction shares are set by each State and currently average 85 

percent across all of the participating States. The majority of 

States auction 100 percent of the allowances. I think it is useful 

to highlight some of the principles that were established to guide 

the development of the ReGGIe auctions: (1) fairness and transparency; (2) efficiency; (3) price discovery; (4) revenue; (5) to minimize collusion; (6) to minimize price volatility; (7) to make sure 

there is adequate liquidity; and (8) to conduct the auctions at the 

lowest administrative and transaction costs. 

To conclude, I would emphasize that the Treasury Department 

recognizes that designing auctions for a cap-and-trade program will 

require careful consideration of many auction features and program 

goals, and substantial expertise. Treasury’s long experience in developing and conducting auctions can offer important insights into 

the design and operation of high stakes greenhouse gas allowance 

auctions. I look forward to working with the Congress to enact and 

implement a successful cap-and-trade program to reduce greenhouse gas emissions. 

The CHAIRMAN. Thank you very much. That was very informative. 

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

The CHAIRMAN. Dr. Elmendorf? 

STATEMENT OF DOUGLAS ELMENDORF, Ph.D., DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE, WASHINGTON, DC 

Dr. ELMENDORF. Thank you, Chairman Baucus, Senator Grassley, members of the committee. I appreciate the invitation to testify 

today. 

6 

Global climate change poses one of the Nation’s most significant 

long-term challenges. Human activities are producing increasing 

quantities of greenhouse gases, and a strong consensus has developed in the expert community that, if allowed to continue unabated, the accumulation of these gases in the atmosphere will have extensive, highly uncertain, but potentially serious and costly impacts 

on the world. Moreover, the risk of abrupt and even catastrophic 

changes in climate cannot be ruled out. 

These expected and possible harms can justify policy actions to 

reduce the extent of climate change; however, the cost of doing so 

may be significant because it would entail large reductions in global emissions and, thus, probably in U.S. emissions over the coming 

decades. 

To accomplish this will mean transforming the U.S. economy 

from one that runs heavily on carbon dioxide-emitting fossil fuels 

to one that relies on nuclear and renewable fuels, as well as achieving improvements to energy efficiency or the large-scale capture 

and storage of carbon dioxide emissions. 

One option for reducing emissions in a cost-effective manner is 

to establish a carefully designed cap-and-trade program. The government would set gradually tightening limits on emissions, issue 

allowances consistent with those limits, and let firms trade the allowances among themselves. Such a program would lead to higher 

prices for energy and energy-intensive goods, which would in turn 

provide incentives for households and businesses to use less energy 

and to develop energy sources that emit less carbon dioxide. 

Higher relative prices for energy would also shift income among 

households at different points in the income distribution, across industries, and across regions of the country. Policymakers could 

counteract those income shifts by using the revenue from selling 

emission allowances to compensate certain households and businesses or by giving the allowances away. 

Let me make three points about the distribution of revenue or allowances in a cap-and-trade program. First, consumers would ultimately bear most of the cost of emission reductions. Indeed, the 

price increases that would arise would be essential to the success 

of a cap-and-trade program because they would be a chief mechanism through which businesses and households would be encouraged to make investments and change behavior to reduce emissions. 

Second, higher prices for energy-intensive goods and services 

would have a variety of consequences for different industries, regions of the country, and income groups. For industries, those producing energy or energy-intensive goods and services could experience a decrease in sales, with adverse consequences for shareholders and employees. 

These effects would be larger for producers with foreign competitors that do not face similarly stringent programs for reducing 

emissions. For different regions of the country, the impact would 

depend on the extent to which a household’s income is derived from 

carbon-intensive fuels and the extent to which their consumption 

is linked to carbon-intensive activities. 

For income groups, energy-intensive goods and services such as 

electricity, home heating, and transportation consume a larger fracVerDate Nov 24 2008 19:56 Mar 25, 2011 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 R:\DOCS\64630.000 TIMD
7 

tion of the income of low-income households, so those households 

would bear a relatively larger direct burden from policies that 

would reduce emissions. 

Point three. Policymakers have a wide range of options for distributing the value of the allowances, but choosing among these options entails trade-offs. For example, if allowances were auctioned, 

some of the revenue could be used to fund climate-related research 

and development. This approach might reduce the cost of transitioning the economy but would not provide immediate help to affected households and businesses. 

Instead, auction revenue could be used to reduce existing taxes 

on capital and labor. This could lessen the overall economic cost of 

restricting emissions, but again would do little to offset the burden 

that higher prices would impose on certain households and businesses. 

A different approach is to use the revenue to give rebates to lowincome households, perhaps through the tax system. This would 

lessen the burden on these households. Alternatively, allowances 

could be given away for free to certain industries. Giving away allowances is generally equivalent to auctioning the allowances and 

giving the proceeds to the same firms. 

Giving allowances to energy-intensive manufacturers would not, 

by itself, hold down the price of their output, which would rise to 

reflect the private market value of those allowances. The result 

could be windfall profits for those firms, which would tend to benefit higher-income households who own most stocks. 

However, if the distribution of free allowances was tied to future 

production or employment, then prices in those industries would 

not rise as much as otherwise, and employment would not fall as 

much. At the same time, because these firms would not reduce 

emissions as much as they would have without these free allowances, other sectors of the economy would have to reduce emissions 

by a larger amount in order to meet the same overall cap. 

In sum, emission allowances in a cap-and-trade system would be 

valuable commodities. Your decisions about how to distribute that 

value would matter tremendously for the overall effects of such a 

system. 

Thank you very much. 

The CHAIRMAN. Thank you, Dr. Elmendorf. 

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

The CHAIRMAN. Next, Dr. Delbeke? 

STATEMENT OF DR. JOS DELBEKE, DEPUTY DIRECTORGENERAL AND DIRECTORATE GENERAL FOR ENVIRONMENT, EUROPEAN COMMISSION, BRUSSELS, BELGIUM 

Dr. DELBEKE. Thank you, Mr. Chairman. Thank you very much 

for your kind invitation. Today, a comprehensive set of regulations 

exist in the EU to bring down greenhouse gas emissions. They 

cover cars, fuels, buildings, appliances. But the central piece of that 

whole set of regulations is the EU ETS, the cap-and-trade system 

that exists already since 2005. It covers the power and manufacturing industry that produces almost half of the greenhouse gas 

8 

emissions of the EU. It does not cover transport, as we have a system of motor fuel taxation in place. 

This comprehensive policy starts to pay off. Under the Kyoto Protocol, we have to do an 8-percent reduction by 2012. In 2007, we 

were at minus 4.3 for the EU 15, so abstraction can be made from 

the latest enlargement. In that year, emissions went down by 1.6 

percent, and analysts attribute almost half of that decrease to the 

functioning of the EU ETS. The reason is that the carbon price is 

a driver for increased investments in low-carbon technology. That 

means energy-efficient technology, fuel switching, and not the 

least, renewable energy. 

It is useful to recall that we started in 2005 with a 3-year 

learning-by-doing phase. That was necessary, it turned out, because the cap that the EU member states had allocated was too 

generous, and the system was over-allocated. But since then the 

cap-setting became more centralized by the European Commission, 

and the overall cap was lowered from $2.3 billion a year in the first 

period to about $2 billion in the current Kyoto period, and in December the EU decided to lower this gradually to $1.7 billion by 

2020 in view of a clear and predictable long-term signal to industry. 

In December, as well, on allocation, important decisions were 

made. Two principal methods were adopted: allocations can be 

given for free to regulated entities or they can be sold or auctioned. 

The EU ETS now uses a mixture of both. In the period of 2012, 

in fact, only 4 percent of the allowances are being auctioned. But 

as from 2013, at least half of the allowances will be auctioned. 

Why do we do so? We learned that power companies in the deregulated European market increased power prices even though allowances were handed out for free. This was giving rise to a lively 

political debate on windfall profits. So, the EU decided to stop giving free allowances to the power sector. Through full auctioning, 

moneys will instead go to the public authorities which can use 

them for climate action and other purposes. There is only one temporary derogation possibility for the newer member states, for 

plants built before 2008. 

For the manufacturing industry, in principle the same applies, 

but to a lesser extent, as the manufacturing industry is much more 

than power exposed to international competition. We therefore, 

today, analyze industry to determine to what extent they have an 

ability to pass on the costs from ETS. 

We use two variables in this assessment: cost impact and trade 

openness. As a transitional measure, all manufacturing industries 

will get some free allowances, contrary to what is going to be full 

auctioning in the power sector. But the sectors exposed to international trade will get a higher share. 

The free allowances will be distributed based on technological 

benchmarks, thus there will be a certain amount of free allowances 

per unit of production, say per ton of flat glass. This benchmark 

per product will be determined in advance of the trading period, 

and it will be multiplied with historic production figures. As a result, the facilities will therefore know already by 2011 how many 

allowances they will get for free until the year 2020. 

9 

There are many reasons for deciding the amount of free allowances in advance, and they are outlined in the written submission. 

Revisions of the amount of free allowances will be made only if a 

facility closes down or significantly changes its capacity. The reason is that the EU wants to create a maximum of regulatory stability and wants to limit allocation decisions as much as possible 

over time. 

The allocation rules will be reviewed after the international 

agreement in Copenhagen. If the competitive situation for European companies is being corrected due to climate action by other 

nations, then less free allowances will be given away. 

As a conclusion, the ETS as a cap-and-trade system functions 

reasonably well today, but will be strengthened as of 2013 with a 

much tighter cap and much more auctioning. The key is the price 

signal. It acts as an incentive for low-carbon technology and 

energy-efficient equipment and fuel switching, not the least in renewable energy. 

Thank you very much. 

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

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

The CHAIRMAN. Dr. Smith? 

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

PRACTICE LEADER OF CLIMATE AND SUSTAINABILITY, CRA 

INTERNATIONAL, WASHINGTON, DC 

Dr. SMITH. Mr. Chairman and members of the committee, thank 

you for inviting me. I am Anne Smith. I lead the climate and sustainability group at CRA International. My testimony today is my 

own and does not represent CRA or any of its clients. 

Today we have heard a lot about alternatives for distributing 

revenues from a carbon cap. These decisions are very important in 

determining the winners and losers under a carbon policy, but 

many people think that this carbon revenue will be large enough 

to eliminate the cost of the carbon cap, and this cannot be so. Any 

policy that cuts carbon emissions will have a net cost on society. 

Now, most people understand that a tax creates net costs to an 

economy, even while it raises large revenues—potentially large revenues—for the government. In tax circles, that net cost is called 

the ‘‘dead weight loss.’’ There is no way that the government can 

recycle the tax revenues to make that dead weight loss of the policy 

go away. 

The same is true of the cap-and-trade policy, because the allowance price works just as if it were a carbon tax rate. For cap and 

trade to work, auction prices have to rise high enough to make 

using conventional fuels cost more than the more expensive, lowercarbon energy sources. 

The allowance price works just like a tax by creating an unavoidable net cost. This is the cost of reducing emissions down to the cap 

and this cost happens no matter whether the government or the 

private sector is given the rights to the revenues that come from 

this tax. 

There is a corollary to the fact that a carbon limit will have a 

net cost. Carbon limits cannot increase total employment across the 

10 

economy. Yes, a shift to more expensive forms of lower carbon energy will create new jobs. These are the so-called ‘‘green jobs.’’ But 

the use of the more expensive energy will also reduce demand for 

workers across the whole economy even more so. 

It is important to recognize then that the net cost of a carbon cap 

could be large, so cost minimization should be just as important as 

cost burden sharing in designing the policy. While that option increases flexibility in how the cost burden can be shared, it does not 

address another concern with cap and trade, which is certainty in 

its costs. 

Prices in all cap-and-trade programs are notoriously uncertain. 

The EU’s ETS has seen prices cycle up and down by a factor of 4 

twice in the past few years. In the EU, carbon price uncertainty 

has inhibited companies from investing in low-carbon technologies, 

as was desired. There are other unnecessary costs of allowance 

price uncertainty, including credit rating risks, costs of risk management by businesses, and their costs of preparing auction billing 

strategies. There is the inevitable wasted investment when price 

expectations on which decisions were made turn out to have been 

wrong. 

The government also should prefer predictable allowance prices 

because they make auction revenues predictable. For instance, 

what use is there for variability in the government’s revenues if 

those revenues will be funding programs that have long-term funding needs? 

Even if auction revenues would just be rebated back to citizens, 

would the citizens appreciate their ability and the size of their rebate checks? This price certainty is a completely avoidable feature 

of a market-based approach to carbon policy. It can be done 

through price ceilings and floors, or even simpler, by using carbon 

fees or taxes. 

So why is there resistance to these price certainty measures? 

Some are self-interested. Price certainty could kill the prospects for 

traders and hedge funds, et cetera, to sell a lucrative array of new 

financial products, but their lost demand for these services actually 

means a reduction in the cost of the policy to the economy at large. 

Others feel price ceilings could take away the certainty but will 

make adequate reductions in emissions. 

However, there is no scientific imperative to insist on very precise cap levels in specific time periods, and it is that insistence on 

the very precise reductions that creates the volatility in the prices. 

The meaningful emissions goal is to reduce all emissions to nearly 

zero over the long run, over many decades. This will require sustained investment in other new directions in our economy. That 

sustained investment will more likely come if the carbon price is 

predictable, durable, and credible for decades to come. 

In the end, a cap works just like a carbon tax except that, with 

a cap, you do not know what the tax rate will be. Having better 

knowledge of what the carbon price will be will help minimize the 

net cost to the policy, but it will still leave us with carbon revenues 

that can be used to distribute that policy’s cost fairly. 

Thank you for this time. There are more details in my written 

comments, which I request be put in the record. 

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

11 

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

The CHAIRMAN. Dr. Krueger, if you could just flesh out a little 

more Treasury’s experience in dealing with various auction markets and the degree to which the variance in different markets does 

or does not make a difference, and how well Treasury would be 

qualified to deal with auctions under a cap-and-trade system. Just 

flesh out what Treasury does. You did in your statement, but give 

a little more detail. 

Dr. KRUEGER. Sure. 

The CHAIRMAN. Give us the confidence we would like to have— 

and I think we already have that confidence, but if you could underline it—of what a great job Treasury would do. 

Dr. KRUEGER. Sure. I think the Treasury Department and the 

Bureau of Public Debt do a remarkable job with their auctions. The 

auctions are transparent. There is a schedule announced well in 

advance when each auction will be held, when it opens, when it 

closes. As I had mentioned, the results are announced within 21⁄2

minutes after the end of each auction. There is a working group 

that provides surveillance to make sure that the auctions are not 

manipulated that meets every 2 weeks and monitors price movements, volumes, and so on. I think that Treasury auctions are wellregarded throughout the world. 

The CHAIRMAN. Senator Grassley asked—and I do not mean to 

steal his thunder—and he implied something that I hear from some 

folks too, that, gee, we have an auction and allowances, those folks 

on Wall Street will figure out a way to make a buck. They will manipulate it. The specter of Enron sometimes comes up a little bit. 

You said you have a surveillance team. Could you outline just 

what manipulation may or may not have occurred under some of 

the auction markets that Treasury conducts currently, as well as 

what manipulation may or may not occur if cap-and-trade allowances were auctioned and that auction were managed by the Treasury? 

Dr. KRUEGER. The working group that Treasury participates in 

also includes representatives from the Federal Reserve Board, from 

the Federal Reserve Bank of New York, the SEC, and the Commodity Futures Trading Commission. As I mentioned, they meet 

weekly. They monitor activities. The Treasury, as you know, does 

not have enforcement power. If it is warranted in the case, the relevant enforcement agencies then follow up. 

I think it is important to recognize that the design of an auction 

can have an influence on its susceptibility to manipulation, and 

there are a great many design features of auctions: who participates, are they sealed bids or open bids, what is released after the 

auction, before the auction, and so on, a great many design features that need to be carefully thought out. But there are ways of 

designing an auction to try to minimize manipulation and to minimize price volatility. 

The CHAIRMAN. What is the difference between the cap-and-trade 

allowance auction market versus SOX and NOX auctions? The EPA 

conducts, as I understand it, the auctioning of SOX and NOX. Of 

course, this is much, much greater—auctions of allowances under 

cap and trade—than auctions of nitrous oxides and sulphur oxides, 

et cetera. Could you give us a flavor of just the huge magnitude 

12 

of difference between SOX and NOX, the Clean Air Act versus auction of the carbon allowances under a cap-and-trade system? I want 

to try to understand the competency of Treasury in conducting 

such a large auction. 

Dr. KRUEGER. Yes. Well, they would be several orders of magnitude different in terms of the revenue they would collect. Of 

course, it would depend on how many of the allowances under a 

cap and trade were auctioned. The administration budget proposed 

that there would be around $80 billion of revenue from cap and 

trade per year, which is—I do not have the exact figures on the 

SOX auctions in front of me—several orders of magnitude different. 

I think one way of thinking about the design of the auction is, 

it should be related to, ultimately, the goals of the program. The 

ReGGIe auctions are actually done quite similarly to the way that 

treasuries are auctioned in that they are uniform-price, sealed-bid 

auctions. I think that a good deal of thought would need to go into 

how best to design auctions under a cap-and-trade system to meet 

the ultimate goals of the program. 

The CHAIRMAN. Do you think Treasury is qualified to properly 

design the market, the auction? 

Dr. KRUEGER. I think Treasury has a tremendous amount of expertise and experience in conducting auctions, and I think the 

Treasury Department would be very willing to work with whatever 

agency or institution ultimately is responsible for conducting the 

cap-and-trade auctions and add their expertise. I think there is 

considerable expertise. 

I would also add that auction theory within economics is a 

branch of economics which is quite well-developed. In preparing for 

this hearing, I read a paper by John McMillan about some things 

that went wrong and some things that went right in the spectrum 

auctions, drawing on international evidence as well as the U.S. It 

is an area of economics in which there is considerable expertise 

outside of the government as well which can be drawn on. 

The CHAIRMAN. Who wrote that paper? 

Dr. KRUEGER. It was written by John McMillan. I should also— 

full disclosure: I was the editor of the journal in which it was published, the American Economic Association’s journal. Unfortunately, John passed away a couple of years ago. 

The CHAIRMAN. I am sorry. All right. Thank you very much. 

Senator Grassley? 

Senator GRASSLEY. Yes. Dr. Elmendorf and Dr. Smith, between 

a carbon tax and a cap and trade, which provides more certainty 

for consumers and businesses—question number one. Question 

number two, which is more efficient from an economic standpoint? 

Three, and last, what role would speculators play in either a carbon tax system or a cap-and-trade system? 

Dr. ELMENDORF. Senator, many analysts favor a carbon tax over 

a cap-and-trade system because it provides greater flexibility in the 

timing of the emissions reductions. But that comparison I have just 

stated is to a pure cap-and-trade system, if you will. Much of the 

work that has gone on in the expert community and in the discussions in Congress has been about essentially hybrid systems to 

which basic cap and trade has added a price ceiling, price floor, or 

other mechanisms for trying to reduce the volatility of prices. That 

13 

muddies that comparison. But I think the crucial issue, from an expert’s point of view, is trying to give firms and households flexibility in the timing of emissions reductions. 

Either a cap and trade or carbon tax has an advantage over command and control systems in giving flexibility, and who is reducing 

emissions, and in what context. But the additional flexibility and 

timing, either through a tax or through some of these more flexible 

versions of cap and trade is viewed by experts as being very important at minimizing the economic burden of reducing emissions, and 

also minimizing the uncertainty facing households and firms. 

Senator GRASSLEY. Dr. Smith? 

Dr. SMITH. Yes. A carbon tax is going to be more efficient and 

more certain than a carbon cap. Now, as Dr. Elmendorf said, there 

are some more hybrid schemes that are being suggested but have 

yet to make their way into the policy proposals that are in front 

of the Congress, to put price floors, price ceilings on top of the cap 

and trade. In doing that, you do get a lot closer to the efficiency 

of the tax; however, you also get a lot closer to a tax that is just 

more cumbersome because you have to do auctions and the like. It 

is just a much more complicated scheme in order to simply set a 

well-established carbon price. 

So once you go that route, it really probably makes a lot more 

sense to just acknowledge it is a tax. Additionally, if you are auctioning all the permits, the benefits of cap and trade that are associated with the allocation of permits go away and the auction looks 

a lot like a tax, except, again, you do not know the tax rate. Thank 

you. 

Senator GRASSLEY. Yes. 

When it comes to speculators, I think we in Congress have to 

keep in mind, particularly as it deals with energy, the outrage that 

came last summer with $4 gas and speculators driving it up to 

$147 a barrel, and in turn the impact that that made on the price 

of grains, as an example, and the increased price of food, as an example. Then we all want alternative energy, and the negative impact it made on alternative energy, particularly biofuels. Some of 

us are going to be very careful about enhancing the role of speculators in this whole process of solving global warming. 

Dr. Smith, just a yes or no on this. Did I read you right, that 

you firmly believe that, with this system we are talking about, we 

are going to increase unemployment in the United States? 

Dr. SMITH. Yes. 

Senator GRASSLEY. I want to ask you and Dr. Elmendorf another 

question. We had debate in the Senate on the budget. Fifty-four 

Senators voted for an amendment stating that any climate change 

legislation should be done ‘‘without increasing electricity or gasoline prices or increasing the overall burden on consumers, through 

the use of revenues and policies provided in such legislation.’’ 

I would like to ask you two, given what you have heard today 

about the dead weight loss inherent in any cap-and-trade system, 

is it possible to design a system using the revenue it generates to 

ensure no net increase in the overall burden to consumers? Dr. 

Smith? 

Dr. SMITH. No. 

Senator GRASSLEY. Dr. Elmendorf? 

14 

Dr. ELMENDORF. No, sir. 

Senator GRASSLEY. So then 54 Senators had a wrong assumption 

based on that amendment. 

One last point. 

The CHAIRMAN. That will not be the first time. 

Senator GRASSLEY. No, it sure will not be. [Laughter.] And I have 

made some mistakes too, and misunderstanding. 

Let me make a point for Dr. Delbeke, I believe. This comes from 

the Washington Post, April 9, 2007. It is a long article on European 

cap and trade. I’m going to quote from three paragraphs. 

‘‘In other ways, the approach has been a bureaucratic morass 

with a host of unexpected and costly side effects and a much smaller effect on carbon emissions than planned. Many companies complain that it is unfair. 

‘‘Consider the plight of Kollo Holding’s factory in the Netherlands, which makes silicon carbide, a material used as an industrial abrasive and lining for high-temperature furnaces and kilns. 

Its managers like to think of the plant as an ecological stand-out. 

They use waste gases to generate energy and have installed the 

latest pollution-control equipment. 

‘‘But Europe’s program has driven electricity prices so high that 

the facility routinely shuts down for part of the day to save money 

on power. Although demand for its product is strong, the plant has 

laid off 40 of its 130 employees and trimmed production. Two customers have turned to cheaper imports from China, which is not 

covered by Europe’s costly regulations.’’ 

Is that right or wrong? 

Dr. DELBEKE. Thank you, Senator. I am not familiar with the 

specifics of the case, but as I indicated, we had a learning-by-doing 

regime between 2005 and 2008, so the system has moved on. The 

system has been improved in order to avoid any distortions between companies, and I think we have been successful on that. 

These types of articles are no longer read, or the arguments are no 

longer made by our companies. 

I think it is very important to indicate that there are economic 

activities that are going to be favored through a cap and trade and 

economic activities that are going to be discouraged, because it is 

those activities with the low-carbon technology overall that are 

going to be at the winning side of the equation. 

So, we see a lot of substitution of economic activities following 

the cap and trade, but as I indicated, we have independent advice 

and analysis indicating that the cap that we are setting for ourselves in Europe has been respected, that the emissions go down, 

and that, correspondingly, economic activity has not been hampered. 

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

Senator Kerry? 

Senator KERRY. Thank you very much. 

Senator Grassley, I hope you heard that final comment: ‘‘economic activity has not been hampered.’’ I might add that the 

ReGGIe that we have in New England has been entered into voluntarily—voluntarily. Half of the American economy has entered into 

a voluntary mandatory reduction. In our mandatory voluntary reVerDate Nov 24 2008 19:56 Mar 25, 2011 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 R:\DOCS\64630.000 TIMD
15 

duction, we are doing better than many parts of the country economically. In fact, it has not resulted in a loss of jobs. 

But let me just point out one other thing, if I can. I know many 

people in the country are determined to try to make cap and trade 

into a ‘‘tax.’’ I have seen the consultant reports and the suggestions. But it is, in fact, not a tax. It creates an asset, and the asset 

is tradeable. 

Are there some costs attendant because the unit cost of electricity might go up or production of power? Yes. But what many of 

the studies do not take into account—including, I believe, Dr. 

Smith’s—is what energy efficiencies come along with that so that 

the net cost to the consumer goes down. 

The Union of Concerned Scientists has just come out with a report showing that in every sector of the country, over a 25-, 30-year 

period, the consumer’s out-of-pocket expenses because of energy efficiencies, better gas mileage, less expenditure, et cetera, their cost 

net out-of-pocket would be less even though the unit of gas or electricity kilowatt hour may be up. 

Now, let me point out something else. On a tax, carbon tax, the 

purpose of this exercise is to reduce emissions. We want to reduce 

emissions because science is telling us that, if we do not, there are 

catastrophic consequences. Almost every economic model I have 

seen thus far, certainly from the industries, never takes into account the cost of the tax to the consumer of the catastrophic damages, never takes into account the energy efficiencies and savings, 

or the new jobs. The modeling is about as deficient, or purposefully 

deficient, as any modeling I have ever seen. 

The fact is, if you put a carbon tax in place, that is all well and 

good. You have put a price on carbon, but you have absolutely no 

guarantee you are going to reduce emissions. You have to wait for 

the marketplace to perhaps respond to the cost of the carbon tax. 

Many people do as they always do, just subsume it into the cost 

of doing business. So they will take the tax, they will write it into 

the cost of their product, and will do nothing to reduce emissions. 

So, if you are going to really meet the challenge of this exercise, 

which is to reduce emissions, you have to find a way to create a 

mechanism in the marketplace that people are thinking emissions 

reductions rather than just writing off the cost of doing business. 

Oh, we have to pay this tax, we will pay this tax, we will write it 

into our product, but nobody reduces emissions, and you continue 

to go down a catastrophic path. 

Now, I will just say very quickly, Dr. Elmendorf, is it not a fact 

that CBO has concluded that—you know, we hear people trying to 

say it is going to increase people’s taxes. I understand CBO’s analysis says that there are ways to design climate change policy so the 

typical household does not experience a loss of purchasing power 

in their budget. Is that correct? 

Dr. ELMENDORF. I think it depends on what mean by ‘‘typical’’ 

here. The consensus of economic analysis is that the diversion of 

resources from making stuff under the baseline set of policies toward reducing carbon emissions under a cap-and-trade policy, that 

diversion of resources reduces by a modest amount the measured 

output of the economy relative to what would otherwise be the 

case. I say ‘‘modest amount.’’ 

16 

Senator KERRY. Let me cut in. If you have a complementary policy that increases the efficiency of our buildings, increases the efficiency of energy systems, increases the mileage people get for gasoline even though they are spending more, you can, in net cost, in 

fact, reduce or eliminate an impact, and you could have a net savings. 

Dr. ELMENDORF. So my point was about the net cost that—think 

of a refrigerator. If one spends the time designing and uses the 

metal to build the parts that make it produce less emissions, then 

one has not used those pieces and that time to build a bigger refrigerator, or a better crisper, or what have you, but the effects on 

net for the country as a whole seem to be modest. 

The bigger issue, I think, in economic terms is the distribution 

across people, businesses, and regions in the country. One of the 

key points of my remarks and many people’s analysis is that you 

affect that distribution crucially in what you do with the value of 

this asset that you described, Senator. 

Senator KERRY. Let me just point out that the global consulting 

firm, McKenzie Company, which has been hired by no single industry and no party with an interest in this argument, has shown in 

a study they spent millions on that you can get the first 30 percent 

of emissions reductions, which takes you for the next 10 or 15 

years, and the first 30 percent of emissions reductions pays for 

itself. Is that a fact, Dr. Delbeke? 

Dr. DELBEKE. Indeed, that is what we observed in Europe. 

Senator KERRY. Thank you. 

The CHAIRMAN. Thank you, Senator. 

Senator Cantwell? 

Senator CANTWELL. Thank you, Mr. Chairman. I thank the panelists for their testimony. I am very interested, concerned, obviously, about the distribution implications of the cap-and-trade system, and I think that I am much more interested in something that 

tries to make the public whole and keeps our costs down over the 

long term. I am certainly concerned about the trading implications 

as they relate to Wall Street. 

But I am struck that your predecessor, Dr. Elmendorf, was here 

a year ago, Peter Orszag, and he testified before the committee, ‘‘If 

you don’t auction carbon permits, it would represent the largest 

corporate welfare program that ever has been enacted in the history of the United States.’’ 

And so I guess I am asking you, Dr. Elmendorf, about your CBO 

studies and analysis of auctioning of carbon emission permits and 

returning the revenue to households in the form of payments as the 

best way to protect households, obviously, from higher prices resulting from capping carbon. If you could expand on that analysis 

and what that means, particularly for the low income. 

Dr. ELMENDORF. CBO has stated consistently that giving away 

allowances is effectively the same thing as selling them and giving 

the proceeds from their auctions away. The amounts of money involved can be very large. It depends, of course, on the precise nature of the cap and other parts of the legislation. 

In CBO’s estimate of the Lieberman-Warner bill last year, we estimated the total revenue that would be gained from auctioning the 

permits over 10 years in the neighborhood of $1.2 trillion. So that 

17 

is a collection of $1.2 trillion that will show up in higher prices, but 

then the distribution of that $1.2 trillion makes all the difference 

in the world for the impact that certain households, industries, and 

regions would face. 

Senator CANTWELL. So instead of giving them to companies, as 

Mr. Delbeke was saying has happened in Europe, and the prices 

go up, give them to consumers instead to protect them. 

Dr. ELMENDORF. I think a crucial point about giving them to 

companies that I tried to make in my remarks is that just giving 

them to affected companies amounts to a windfall receipt by them. 

If, on the other hand, one gives them to companies in a way that 

is linked to their decisions to continue production or continue employment, then one is providing an incentive to them to continue 

production and continue employment, and it is not simply a giveaway and then it has other economic effects. But how one gives 

them away, what restrictions are on that gift, again, makes all the 

difference in the world for the economic effects. 

Senator CANTWELL. I know my colleague Senator Grassley 

brought this up, and having lived through the Enron thing, and 

now the credit default swap situation, I will tell you, the trading 

scheme thing worries me. I see that last November Credit Suisse 

announced that they were securitizing carbon deals in which they 

bundled together carbon credits for 25 offset projects, split these 

into three tranches representing different risk levels, and then sold 

them to different investors. To me, that sounds a lot like what we 

just did with the mortgage-backed securities that were at the heart 

of our meltdown. 

So, Dr. Delbeke, I wonder if—I know the prices have fluctuated 

sharply from 2 euros to 30 euros over the course of the first phase 

of the program. What lessons can we learn about the trading experience? I know you said do more on the auctioning side, but I am 

also concerned about the offset markets and how to do a better job 

there, obviously, when you are incenting historic polluters as opposed to those who have already been historically helping in the 

situation. 

Dr. DELBEKE. Well, perhaps a few comments to start with on the 

use of the intermediaries and the role that they have been playing 

in the European market. I think that a very important element 

that we observed is that the liquidity of the market is very important, and the intermediaries have given that in the European market, because after all the European market is a limited market, 

given the scale of the problem, so the wider the market, the more 

liquidity, and the intermediaries have played the role of bringing 

demand and supply to a very positive extent. 

On the use of the revenues from auctioning, indeed, we have 

seen in our economic analysis that you can really boost economic 

activity if you spend revenues in one or the other way; you can 

have a positive or a negative effect. So, the use of the revenue is 

a critical element. 

On the price development, I would like to say that of course 

prices fluctuate, but since we have started our system in 2008 

under the Kyoto provisions, prices have been fluctuating roughly 

between 8 euros and 25, 27 euros. That is the maximum we got. 

They have been mostly fluctuating in the range of 15 to 25. 

18 

Now, I would consider that as an acceptable fluctuation given the 

exceptional economic recession that we are having because, in fact, 

through the economic recession it is cheaper to reach the target. So 

in that sense it is anti-cyclical. It helps companies to respect carbon 

limits in a time of recession as somewhat cheaper, and that has 

been an important element that we observed to date. 

Another element is that incentives for innovation have been the 

key driver, and we see in our analysis that the type of renewable 

energy that we have set ourselves in Europe for more than half is 

going to be realized though the cap-and-trade scheme as we have 

set it up. 

The CHAIRMAN. Thank you very much. 

Senator CANTWELL. Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Enzi? Thank you. Thank you very much, 

Senator. 

Senator ENZI. Thank you, Mr. Chairman. When I came in here 

I thought I understood what we were doing, and now I am very 

confused. I thought our purpose was to reduce carbon, but it appears it is to raise money. I know that there is already a market 

in trees, orchards. Chicago has an exchange that does some carbon 

credits. 

Now, one of the things that always worries me about that, I was 

at the Hague when we were doing some of the global warming 

Kyoto Protocol, and the United States was not allowed any credit 

for trees, I guess because trees have always been absorbing it, so 

we are not making any change in the atmosphere by continuing to 

do trees. 

But out our way, the Rural Electric Association has had a voluntary green program, and a lot of people have been paying in addition to their bill so that the REA could buy new trees and plant 

them. I think that makes some sense. That would be some additional carbon absorption. 

But from listening this morning, we know the government prints 

some allowances. They are not going to provide anything other 

than a cost of doing business, which to me means a tax. Then we 

are going to auction them. The businesses, I guess, will buy them 

in proportion to their emissions, and then the companies will pass 

that cost on to their customers, who hopefully then would use less. 

But that sounds like a carbon tax. The money from the allowances would then be distributed back to the people so that they do 

not revolt over their increased prices. Now it is starting to sound 

like a Ponzi scheme to me: tax the companies, raise the price, give 

the money to the people, then the people give the money back. 

At any rate, I am also confused on these allowances that are 

given to industries. That sounds to me like the Federal Government then picking and choosing the winners and the losers, or a 

brand-new form of earmarks. I have been visited by a lot of small 

companies, and I am curious as to how the small companies are affected by this. I heard some comments that the system adjusts 

around after a while. I am not sure small companies exist after a 

while. They are the ones that are particularly concerned about the 

way this is going to hit them, and how they are going to be able 

to participate in an auction. 

19 

So, you can see that I am very confused on this, and I need a 

lot of answers. I cannot get them in 5 minutes, but I will try a little 

bit here. 

Dr. Delbeke, you mentioned that only 4 percent of your credits 

are auctioned, the rest are given away. How much revenue does 

that produce, and what is the revenue used for? 

Dr. DELBEKE. This 4 percent is being auctioned today by the 

member states, and I have no precise figures with me what that 

represents. But the auctions that are going to happen as of 2013, 

which is more than half of the allowances in the ETS, will correspond to, depending on the price, some 20 to 30 billion euros a 

year. 

Senator ENZI. And half of that is going to go to cleaning up 

things and the other half goes to what? 

Dr. DELBEKE. A political decision was taken that half would be 

used to finance climate-related expenditure, such as deforestation, 

incentives for clean technology, etc., both at international and domestic levels. It is for the member states to decide this. The other 

half would go to the general revenues of the state. But this is not 

an issue over which the European Commission has direct power. 

The revenues accrue to the treasuries of the member states. 

Senator ENZI. Thank you. 

Dr. Smith, could you go into the dead weight loss a little bit 

more? Is that small administrative charges? 

Dr. SMITH. The dead weight loss is the cost that occurs when you 

put a tax or carbon price on the economy. It is just the cost of reducing the emissions. The revenues from the auction, if there is an 

auction, are never going to be enough to offset that cost. It is a separate piece of the puzzle. 

So, yes, there is a large revenue stream, there is a lot of recycling 

of revenues that can be done and spent in different ways. But you 

talked about this Ponzi scheme. I would not call it a Ponzi scheme, 

but, if you tax the companies, you have them raise the prices, and 

then you pass the revenues back to the citizens, you would never 

have enough revenues to offset the cost from the tax or the carbon 

cap. 

Senator ENZI. Thank you. My time has expired. 

The CHAIRMAN. Thank you, Senator, very, very much. 

Senator Nelson? 

Senator NELSON. It was mentioned by Senator Grassley, Mr. Assistant Secretary of the Treasury, that we saw speculators get into 

the unregulated marketplace and run up the price of oil, and then, 

when people had to start selling their positions, they started selling 

their positions, and the price of oil came down. 

Now, as we look to an auction system here, how do we keep speculators out of the marketplace? 

Dr. KRUEGER. Thank you. The design of the auction can be done 

in such a way to try to minimize manipulation, so there are features that can be used that increase flexibility, for example, in the 

availability of allowances over time. That is one way of reducing 

the opportunity for speculators—if there were speculators who can 

infiltrate the market—from influencing the price. 

So there are some design features. I think a good deal of thought 

needs to go into how cap-and-trade auctions can best be designed, 

20 

but there are some design features that can help minimize the role 

of speculators. Then there are other issues like surveillance to try 

to prevent collusion and market manipulation. 

Senator NELSON. Give me an example of a design feature. 

Dr. KRUEGER. One issue has to do with whether the allowances 

can last for more than 1 year. So you can have a temporary shortfall where you have more opportunity to exploit limited supply, but, 

if there is banking and borrowing over some period of time, that 

is one way of potentially limiting the role of speculators who could 

cause a spike in prices. 

Senator NELSON. Dr. Elmendorf, we had such a success with acid 

rain, and understandably this is of much greater magnitude, as you 

said. But how can we sell this, for the objections of people like Senator Enzi, that this is a scheme that is designed to increase revenue more than it is to try to reduce carbon? How can we sell it 

on the basis of what we learned with the success of the acid rain? 

Dr. ELMENDORF. So, selling is not my line of work, really. 

Senator NELSON. Well, it is ours. [Laughter.] 

Dr. ELMENDORF. I think the basic economic point here is that the 

private markets work very effectively at allocating resources because people bear the costs of the things that they do. People want 

a steel plant that uses too much raw materials, they pay more for 

that and they do not do that well in the marketplace. A standard 

lesson of Economics 101 is that markets do not do well if people 

and firms do not bear the costs of their economic activities. 

Climate change is a classic example of that. The carbon emissions attributable to my personal activities I do not bear the cost 

of, but collectively we in this country and we in this world are 

bearing the cost, and the increasing cost, of higher carbon emissions. What putting a price on carbon does is to get the households 

and businesses to take those indirect effects into account in their 

own decisions and to economize on their release of carbon emissions in the same way they economize in their use of steel, their 

use of fuels, and everything else. 

The round trip of the money that Senator Enzi noted does indeed 

sound circular, but I think the crucial aspect of that is that, even 

if the money goes directly back to the household, the household 

still faces a higher relative price of activities that involve a lot of 

carbon emissions. 

So, we change the relative price of certain activities, of certain 

goods in the society, and thus lower the relative price of others. It 

is that change in relative price that then tends to reduce the demand for the things that are relatively higher price and redirects 

it toward activities and products that are relatively lower price. 

That is exactly the shift that is needed to end up with less carbon 

emissions. 

So it is changing the relative price that creates the incentive, but 

the money that is collected can go back in its entirety, if you 

choose, to give households back the income that they have lost 

through the payment of that tax to the government. 

Senator NELSON. Was that the experience that we had with sulphur dioxide and its cap and trade? 

Dr. ELMENDORF. The scale is sufficiently different that I do not 

want to draw too clear an example of that. But I think what that 

21 

experience does demonstrate is that having a system in which the 

right to emit things can be traded, within a certain limit, is a way 

of reducing those emissions in a very efficient manner. I think my 

experience shows that. 

The CHAIRMAN. Thank you very much. 

Senator NELSON. And it worked? 

Dr. ELMENDORF. Yes, it did. 

The CHAIRMAN. Thank you, Senator. 

Senator Conrad? 

Senator CONRAD. First of all, I want to thank you, Mr. Chairman, for holding this hearing and bringing this panel before us, because I, for one, feel that I have learned a lot this morning just in 

an hour and a quarter. I want to thank each of the witnesses. 

The purpose of this exercise, as I understand it, is to reduce carbon emissions, so I would ask each of the witnesses, what is the 

most efficient way to reduce carbon emissions, between cap and 

trade and a carbon tax? I will start with you, Dr. Krueger. 

Dr. KRUEGER. Well, as was mentioned before, a cap-and-trade 

system has certainty on the reduction in greenhouse gas emissions. 

So, if the main focus is to reduce greenhouse gases, I think the certainty of the cap is the reason why I would say that cap and trade 

is a more certain way of reducing emissions. 

Senator CONRAD. All right. 

Dr. Elmendorf? 

Dr. ELMENDORF. For a given amount of emissions reduction in a 

year, most analysts would say that a carbon tax is more efficient 

because it reduces the volatility of the price of emissions. But it has 

the feature that Alan Krueger noted, that at a given moment in 

time one is less certain of the amount of reduction that one would 

achieve, and that is a trade-off that has to be made. 

As I suggested earlier, development of more complicated cap-andtrade approaches is building in some of the flexibility in the timing 

of emissions reductions that comes naturally with a carbon tax, 

and that is bringing those two closer together in their effects. 

Senator CONRAD. But I want to be very clear in what I am hearing. I am hearing you say that the most efficient way to reduce carbon emissions is with a carbon tax, not with respect to an annual 

target, but going forward, an economic analysis would tell you that 

the most efficient way is a carbon tax? 

Dr. ELMENDORF. That would be the conclusion of most analysts. 

Yes, Senator. 

Senator CONRAD. And Dr. Delbeke? 

Dr. DELBEKE. I would emphasize two elements. The cap is being 

reached, so a cap and trade gives certainty on that. The second is 

that the flexibility within the system allows that the one for whom 

it is cheaper to reduce emissions can do more and gain money from 

that. He gets paid by those for whom it is more difficult to reach 

the emission reduction. 

So the inherent flexibility in the system is something that is incredibly important, contrary to imposing a tax on any economic operator in the same manner irrespective of what his capabilities are 

for reducing the emissions. That comes close to the heart of technology; for one operator it may be much cheaper to reduce emissions than for another. We observed in Europe, for example, that 

22 

power companies have much more capability for reducing emissions 

compared to, for example, steel mills or aluminum smelters. One 

can pay for the other to do the job. 

Senator CONRAD. Dr. Smith? 

Dr. SMITH. A tax actually gives you just as much flexibility as 

the cap and trade. The idea that one can pay for the other only 

works if there is a 100-percent allocation of permits to the businesses in the first place, which does not happen with an auction. 

There is no question that tax is the most efficient way to get the 

emissions down. It gives you some uncertainty about the emissions 

at any point in time, but since the goal is a very long-run target 

of zero emissions across the globe, we need a durable policy and 

price certainty, and the tax gives you that. 

Senator CONRAD. All right. Let me go to my final question, and 

that is, in economic terms—because we have to be concerned about 

bringing down emissions, but we also have to be concerned about 

economic effects—which of these approaches is best from an 

economic standpoint: economic growth, jobs, and the rest? Dr. 

Krueger? 

Dr. KRUEGER. Well, one thing I would point out, which is not directly answering your question but it is certainly related, is I think 

the way we measure dead weight loss needs to change. We need 

to take into account the effect of emissions on well-being on society. 

The traditional measures of dead weight loss, which Dr. Elmendorf 

and Dr. Smith discussed, ignore the purpose of the program, which 

is to reduce greenhouse gas emissions. 

Now, I am sure that they are aware of this, so I think a broader 

measure of well-being and of output, kind of adjusted for pollution, 

would take that into account. So it is not clear to me that the dead 

weight loss goes quite in the direction that was stated. 

I guess I would just emphasize on your question that you have 

a tremendous amount of flexibility with a cap-and-trade system, 

and certainly compared to the regulation, the command and regulatory control system, you have tremendous amount—more flexibility, and that would lead towards a much more efficient system. 

Senator CONRAD. My time has expired, but perhaps we will have 

another round. 

The CHAIRMAN. Thank you, Senator. 

Senator Bunning? 

Senator BUNNING. Thank you, Mr. Chairman. 

Dr. Krueger, whether we look at allowance auctions or free allocation under a cap-and-trade system, this will mean nothing unless 

we reach an international agreement on cap and trade. I have concerns about mandating a system that would not only punish American consumers and producers, but would restrict domestic economic growth. 

Advocates of cap and trade argue that by implementing such a 

system America can take a global leadership position on climate 

change. They argue that developing nations like China, India, and 

Russia will follow, not lead, on climate change and that mandatory 

agreements with these nations would not be necessary because 

they will voluntarily adopt the emissions standard in the future. 

Do you agree with that? 

23 

Dr. KRUEGER. Well, I agree that it is critical to bring the rest of 

the world’s emissions down. I think this is one area where there 

is a practical difference between a tax and a cap and trade, which 

has not been mentioned. I think it is easier to integrate a cap and 

trade system in the U.S. with the rest of the world than it would 

be on a tax. 

Senator BUNNING. No. Answer my question: do you agree, unless 

we have an international agreement with India, China, and other 

emitters of more pollutants than the United States, even 20 years 

from now if we cap and trade or we put a carbon tax on and we 

do not get any cooperation out of China, opening 94 coal-fired generating plants with no restrictions, India, the fastest-growing country in the world, and Russia, who just thumbs their nose at us 

when we talk about this, are we going to lower emissions in the 

world if we do not get that agreement? 

Dr. KRUEGER. I agree with you that it is very important to have 

such an agreement. If we lower our own emissions, I do believe 

that will lower world emissions. However, that does not mean it is 

not essential that we have agreements with the rest of the world. 

I think it is very important that the Special Envoy for Climate Negotiations, Mr. Stern, is pursuing those types of agreements. 

Senator BUNNING. Do you believe that there will be any transfer 

of economic job loss to other countries that do not cap and trade? 

Dr. KRUEGER. In some industries, I believe there is a risk of—— 

Senator BUNNING. Steel makers and those types of people who 

use a lot of electricity and a lot of power, aluminum makers and 

those kind of—— 

Dr. KRUEGER. I think it would be very important to look across 

industries, look at trade-sensitive, high energy-using industries and 

to address them if it is deemed necessary. 

Senator BUNNING. I heard the number $1.2 trillion mentioned. I 

do not know whether it was Senator Kerry or somebody at the 

table. I saw a study done by MIT that mentioned $1.8 trillion as 

the cost or the tax, or whatever you want to call it, of doing a capand-trade system. The $600 billion that was mentioned in the 

budget was not in the same vocal report that MIT made. Is that 

false, or is that anywhere close to being true? 

Dr. ELMENDORF. Senator, the amount of money involved depends 

tremendously on the details of the system. It depends on how much 

the cap reduces emissions relative to the baseline and how quickly 

it does that. It depends on the extent to which activities outside of 

the traditional cap sectors overseas, or in this country, can be used 

as offsets to the emissions reductions that are required. So the 

number that I gave was CBO’s estimate of the revenue—— 

Senator BUNNING. CBO. 

Dr. ELMENDORF. Of the particular Lieberman—— 

Senator BUNNING. One bill? 

Dr. ELMENDORF [continuing]. Legislation from last year. 

Senator BUNNING. All right. 

Dr. ELMENDORF. We have not scored the Waxman-Markey bill for 

this year because it is not a fully formed bill, and we cannot do our 

estimates until we know. 

Senator BUNNING. I understand that. 

Dr. ELMENDORF. So it depends on what the legislation is. 

24 

Senator BUNNING. All right. 

The CHAIRMAN. Actually, your time has expired. 

Senator BUNNING. Thank you. 

The CHAIRMAN. Thank you very much. 

Senator Stabenow? Thank you, Senator. 

Senator STABENOW. Thank you, Mr. Chairman. And thank you to 

all of you. I think it is clear that we are talking about rewriting 

the rules of the economy to a low-carbon economy. I think there are 

very important reasons to do that, and costs that do not show up 

in the modeling so far. 

I am interested in any studies that have been done regarding increased storms, hurricanes, the kinds of damage that have been 

done to families’ homes and businesses, and changes that will come 

in agricultural production that relate to these issues. I think there 

are multiple costs that we need to address as we look at this. But 

clearly there are costs as well. I certainly come from a manufacturing State where we are very concerned about those costs. 

Dr. Elmendorf, you were talking about, sort of, the trade-offs on 

making stuff. I believe that we can make new stuff, and clean energy, and working very hard around issues of building wind turbines, making the 8,000 parts in my State, as well as across the 

country, solar energy, and all of the other new things that create 

jobs in the industries that I share the concern about with Senator 

Bunning. 

I would like to ask questions relating to distributing cost, which 

is really, I think, very much at the heart of how we do this in the 

right way so, instead of losing jobs, we gain jobs, which is, in my 

mind, the critical question. 

When we look at the allocations versus auction and the concern—which I think is legitimate—about windfall profits going to 

individual companies, if we look at an auction in my State and assume a $22 price for carbon, rates, I am told, would increase about 

20 percent. Would it not be better to address the rate increase directly by providing the allocations to consumers through the utility 

commissions or the local distribution companies? I know that is one 

of the options I have seen for rate increase mitigation and rebates 

so that it is seen directly on their utility bill. 

You can bypass, instead of having that go to the utility—I know 

that our utilities would support that as well—and go directly to the 

State or local—in Michigan it is a public service commission—to 

address whether it be individual home price increases, manufacturers, other businesses. Could you speak to that approach, Dr. Elmendorf and Dr. Krueger? 

Dr. ELMENDORF. I think the key point to keep in mind is that 

the prices of some things that are fossil fuel-intensive have to rise 

to induce the shift in behavior so we can prevent—you can prevent 

through your policies—increases in particular prices, and a particular design of the use of the allowances might do that for electricity. 

But that then shifts the burden of the overall emissions reduction, the difference between where it would be without policy and 

where you are trying to be. It shifts the burden on overall reduction out of the electricity sector and into other sectors. So it does 

not make the concern go away, it puts its somewhere else. The 

25 

prices of other things will have to rise by more in order to get the 

emissions reductions outside of the electricity sector if we decide— 

if you decide—not to take the reductions in the electricity sector. 

Senator STABENOW. Well, I am not suggesting, first of all, that 

there not be a cap. Obviously the cap is the ultimate pressure, the 

cap, and the cap coming down, and the number of the allocations. 

But it is a question of whether it goes directly, that allocation, to 

the utility to determine how to spend that in terms of lowering 

rates, or to the State regulatory agency that can determine, is it 

the manufacturer’s rates that are going up, is it the individual 

homeowner, what is happening? They, at least in our State, determine what shall happen in terms of the rate structure and the rate 

increases. 

Dr. ELMENDORF. Again, I would just caution that, if the effect of 

that is to keep household rates lower, then business rates will rise 

by more, and that cost will be passed on to households in the prices 

of the products they buy from those businesses. 

Senator STABENOW. I understand that. I understand. For us, 

they regulate both, so there is no assumption that it has to be a 

higher rate increase for manufacturers under that. You are saying 

that is one outcome. 

Dr. ELMENDORF. I am just saying that the price increase will 

have to occur somewhere in order to induce the change in behavior, 

and you can move around where it happens, but you cannot get 

away from it altogether. 

Senator STABENOW. Sure. Sure. 

The CHAIRMAN. Thank you very much. 

Senator Snowe, you are next. 

Senator SNOWE. Yes. Thank you, Mr. Chairman. Thank all of you 

for being here today. This has been very valuable testimony as we 

move forward on this significant initiative. 

Dr. Delbeke, welcome. It is important to learn from the European 

experience as we proceed in crafting legislation regarding cap and 

trade. 

Could you tell me how you would regard a greenhouse gas registry, now that the European Union has established one? That is 

something that another Senator, Senator Klobuchar, and I are 

working on, and in fact got the money to implement it, and EPA 

is moving forward on that. But the registry, as we have determined, would be instrumental. 

Obviously having an overall assessment of the level of emissions, 

not only by, collectively, the industries, but by each sector in terms 

of determining how the allocations are made with respect to allowances or the value, obviously, of the price of carbon. I know in the 

European experience, the price of carbon collapsed initially. Would 

a greenhouse gas registry have been useful in this process from the 

outset? 

Dr. DELBEKE. Thank you very much for this question. Absolutely. 

I would say this is an essential piece of the infrastructure for having the cap and trade running, and the risk we took in 2005 is that 

we had to rely on estimates without having historical emissions 

measured, verified by third parties, et cetera. We did not have that. 

But we were basing our system on estimates, and we had to overcome that. 

26 

So, after the second year we got our database right, so it is an 

essential piece. That is why we are very confident that the price 

collapse we had in the first period will never happen again, because we have, now, the database in place that we needed to base 

our reviewed cap and our declined cap on between now and 2020. 

Senator SNOWE. So you think that it stabilized the price of carbon in that sense, and at least now you have a handle on the overall pricing because of the historical basis? 

Dr. DELBEKE. Absolutely. Even the companies were overestimating their emissions of carbon. So by the moment they had 

to measure and there was a third party verifying, we saw that they 

had pleasant surprises, that their carbon emissions went down 

quicker simply because they were looking at it. Before that moment, they were just not having that tool available and that element for comparison with others in the sector and across sectors. 

Senator SNOWE. Thank you. 

Dr. Krueger, what is your view on that? 

Dr. KRUEGER. I think it is extremely important to have information, accurate information. One of the issues is, how is that information released, how transparent is the information? That is one 

way of trying to reduce volatility. 

Senator SNOWE. Now, Dr. Delbeke, one of the issues that we are 

going to be making a decision on as well is to what extent how 

much of the revenue should be allocated for energy efficiency investments. Some parts of the country already have had that experience. Certainly in my part of the country, in the northeast, we have 

what is known as the ReGGIe system. About 70 percent of the revenues are reinvested into energy-efficient alternatives in technology, so it has worked very well, and innovation has developed 

as a result. 

Now, am I to understand the European Union has had a net investment of its revenues into energy alternatives up to 70 percent 

now? Is that going forward? What was the history in the past between member States and the overall European Union? 

Dr. DELBEKE. Well, just to clarify, an important element of the 

European institutional setting is that revenues and the way they 

are going to be used belong to the member states and not to the 

central European decision-making system, so it depends very much 

on what the member states want to do with it. But we see that 

those who have been going forward with a willingness to become 

technology leaders have done so. If you look at, for example, Germany and what they have done in the field of renewables, cars, and 

carbon capture and storage, it was with the revenues from auctioning, partly, that all of these efforts were financed. 

Senator SNOWE. So none of the revenues went to the overall European Union? All went back to the member states in that respect? 

Dr. DELBEKE. Indeed. Indeed. 

Senator SNOWE. So there is not, probably, an average. Each 

state, each country, makes its own determination. 

Dr. DELBEKE. Indeed, Madam. 

Senator SNOWE. Dr. Krueger, this is going to be obviously a central issue, because I know the President has suggested 80 percent 

go to the Making Work Pay tax credit to obviously alleviate hardship on Americans who are experiencing increased costs, and that 

27 

is certainly understandable, and 20 percent for energy innovation. 

In the northeast, obviously it has been about 70 percent investments. 

Is there going to be any allowance for flexibility for those areas 

of the country that are already on a cap-and-trade system and have 

shown innovation, to have some flexibility in continuing that innovation? 

Dr. KRUEGER. I think you raise a very important issue for a national cap-and-trade system. The administration, I think, would 

welcome an opportunity to work with you and Congress on how we 

integrate a program like ReGGIe into a national system. 

The President has said that also, where the proposal says that 

it is very important that businesses, communities, and citizens see 

some of the benefit from the money coming back that is collected 

in this program. 

Senator SNOWE. I appreciate it. Thank you. 

Senator BINGAMAN. Senator Carper? 

Senator CARPER. Thanks very much. 

To our witnesses, welcome. Dr. Krueger, I think you are new on 

the job. I think you were confirmed yesterday, and I just want to 

congratulate you and welcome you and say that we look forward 

to working with you. 

I would ask Senator Roberts to join us in this conversation for 

just a moment if I could. Senator Roberts? If I could. 

Senator ROBERTS. Yes, I am here. Were you going to ask my 

questions like you normally do? 

Senator CARPER. I would like to, if you would let me. I just want 

to come back to some points that—— 

Senator ROBERTS. We have a luncheon date. 

Senator CARPER. Yes, we do. We are going to talk about this at 

lunch, too. 

Senator ROBERTS. Right. All right. 

Senator CARPER. But I just want to come back to a couple points 

raised by you and Senator Enzi, whom I think are among the more 

thoughtful, and usually entertaining, colleagues. 

Senator ROBERTS. Well, I have not said anything yet. Senator 

Enzi has been thoughtful and entertaining. 

Senator CARPER. You will have your turn. I am sure you will be. 

Senator ROBERTS. All right. 

Senator CARPER. My colleagues have heard me say before, one of 

the things that intrigues me, as a person who works in public policy and has for a long time, is how do we harness market forces 

to try to drive good public policy outcomes? One of the reasons I 

have been interested in cap and trade is because I think it enables 

us to harness market forces to drive public policy outcomes, and 

that is to reduce emissions and to use a market-based system to 

do that. 

Senator Enzi raised the issue of trees and forests and trying to 

preserve those and promote the planting of more. I could not agree 

more, and that is why I have supported for a number of years, as 

I am sure he does, the notion of using offsets. Whether they be 

trees or forests, including farming, providing methane containment 

units, whether it is cattle feed lots, or pig feed lots, or whatever, 

28 

those are the kinds of things that I think make sense; I suspect he 

does as well. 

I would just say, I think we have the opportunity—Delaware was 

the first State to ratify the Constitution. In certain matters it is 

good to be first. I would go along to say there are some things you 

do not want to be first in, and maybe one of those is to have a capand-trade system on climate, on CO2. As it turns out, somebody 

else has gone first. We will learn from their mistakes, and we have 

a lot to learn from their mistakes. 

Finally, I would say—this point has been made by some—we 

have the opportunity to experiment with cap-and-trade in this 

country. We have had a chance to do that with sulphur dioxide, 

and it actually turned out pretty well. If we used a tax on sulphur 

dioxide, we would probably have come in with a tax between $800 

and $100 per ton. With the market approach that we used with the 

acid rain legislation, we ended up with a price set by the marketplace in the cap-and-trade system for sulphur dioxide of about 

$200. So I would just say, I would urge my colleagues, especially 

to whom I address my comments, whom I respect a lot, to not lose 

sight of those arguments. 

The other thing I would ask my colleagues not to lose sight of 

is, we focused a whole lot on emissions from utility plants. I focused a lot on that in the last 7 years. We have not talked much 

at all about transportation. About a third of the CO2 emissions that 

are seen in this country come from the transportation sector. In 

1975, if you will recall, we created CAFE legislation that raised 

fuel efficiency standards from about 15 miles per gallon to about 

25. 

So you would think, well, we are going to see a big reduction in 

CO2 emissions from transportation. Wrong. We saw a huge increase instead of a big reduction. The reason why is because people 

simply drove more. We planned our neighborhoods and put work 

and schools far from where we lived and we just drove a lot more 

in the years that followed. 

If we are going to make real progress in reducing CO2 emissions, 

we cannot forget transportation. Today we fund the transportation 

systems through a gas tax, and by that we pay for our roads in 

transit by burning more gasoline. The more you burn, the more you 

fund your roads. It is like our incentives are actually kind of perverse there. We drive less, our transportation budgets dry up. 

I think we can do better. Senator Arlen Specter and I have introduced legislation called Clean-TEA. Clean-TEA uses 10 percent of 

any auction proceeds that would come from a climate change bill 

to fund more energy-efficient transportation systems, whether they 

be passenger rail, freight rail, transit, to help people get out of 

their cars, trucks, and vans and to use something that is more 

energy-efficient. Under Clean-TEA, 10 percent of the auction proceeds would be provided to States and localities based on how 

much they reduce emissions, not increase emissions. 

A question for Dr. Elmendorf. I noticed in your testimony that 

you did not include funding alternative transportation as a way to 

reduce cost to the consumer. I just want to know, is there a reason 

why? Since we are getting more alternatives to driving, will this 

not save consumers money under what we have proposed? 

29 

Dr. ELMENDORF. So, Senator, we did not list every option conceivable in the testimony. The omission of something should not be 

viewed as a negative judgment about it. 

I think in general, the virtues of a carbon tax or a cap-and-trade 

system are that the market, as you say, then gets to decide what 

the most efficient place is to reduce emissions. The more that the 

government tries to decide separately that the best place to reduce 

emissions is in transportation or the worst place is in electricity or 

something else, those sorts of judgments tend to raise the cost of 

the reductions as a whole. 

Now, the important exception to that is that we know there are 

certain sorts of research and development activities and certain 

sorts of transportation projects and so on that the private sector is 

going to do by itself, and there is, of course, an appropriate public 

role for the government in funding basic research and development 

and providing public transportation and other services. 

The CHAIRMAN. Thank you, Senator, very much. 

Senator Bingaman? 

Senator BINGAMAN. Thank you all very much. 

Dr. Delbeke, thank you for your leadership on this important 

issue and the courtesies you extended to me and my staff when we 

visited with you at the EU a month or so ago. 

Let me just ask Dr. Elmendorf, first, and maybe Dr. Krueger, if 

I am understanding this correctly. It seems as though a lot of the 

discussion is assuming that our choices are three: either leave 

things the way they are, impose a cap and trade system, or impose 

a carbon tax. 

I do not think those are the three choices we have because of 

what the EPA is on track to do. As I understand what the EPA is 

now committed to, the Supreme Court told them they had to take 

action to determine whether or not greenhouse gases, in fact, endangered public health. They entered into, or issued, an endangerment finding, and therefore they are on track to regulate greenhouse gases under the Clean Air Act, unless Congress says do not 

do that, we want to do it some other way. 

So one way or another, the cost of reducing greenhouse gas emissions is going to be experienced and imposed upon our economy, 

the way I am thinking about it. Is that an accurate way to think 

about it, Dr. Elmendorf? 

Dr. ELMENDORF. I think there is very widespread agreement that 

it is much more efficient—much more efficient—to reduce carbon 

emissions through putting a price on carbon through a tax or cap 

and trade than it would be to regulate carbon emissions on a plantby-plant, building-by-building basis. I think you would have difficulty finding anybody who would disagree with that proposition. 

Exactly where the EPA is headed at this point, I think, is less 

clear; of course, they are at a very early point in their response. 

There was a particular concern that, under the provisions of the 

Clean Air Act, they would be forced to regulate many very small 

emitters. They assert that they do not have to under the Act, and 

I am not a lawyer with expertise in that area. But even if they do 

not have to cover all of these very small emitters, I think there is 

still no doubt that it would be more expensive for the country as 

30 

a whole to reduce emissions through that sort of direct command 

and control than through one of these market-based mechanisms. 

Senator BINGAMAN. And absent a change in law, an amendment 

to the Clean Air Act or something to that effect, they are on track 

to limit greenhouse gas emissions unless we tell them otherwise. 

Am I accurate in that, Dr. Krueger? 

Dr. KRUEGER. This is my first morning on the job, so I probably 

should not comment on that. I can say that—— 

The CHAIRMAN. And you are doing a good job, too. 

Dr. KRUEGER. Thank you. I should say I have not even had a 

chance to sign up for health insurance yet. [Laughter.] 

The CHAIRMAN. Yes. We are trying to help there, too. [Laughter.] 

Dr. KRUEGER. The President very much believes in trying to use 

market-based solutions to address this. 

Senator BINGAMAN. Let me just ask, as a matter of economics, 

Senator Enzi was complaining about the so-called Ponzi scheme 

where we have this round trip of the money, where basically we 

have a cap-and-trade system, we auction allowances, we then try 

to return the money to the people who are having to pay for higher 

electricity bills. 

In direct regulation of greenhouse gas emissions, which I believe 

the EPA would accomplish assuming they go ahead, there is no 

round trip, there is no return of any money to the folks who are 

bearing the cost of that increased regulation, as I see it. Is that an 

accurate way to think about it, Dr. Elmendorf? 

Dr. ELMENDORF. Yes, that is right. 

Senator BINGAMAN. So basically what we have a choice of here 

is, do we allow this to be done by direct regulation, which it is now 

on track to be done by, or do we substitute for that a cap-and-trade 

system, or a direct tax of some kind where we would at least have 

the opportunity to return some of that money to mitigate the economic impact on people who may suffer from increased costs in the 

process. Is that the right way to think about it? 

Dr. ELMENDORF. I think you are right, Senator. The opportunity 

to use the proceeds from allowances—or from a tax if you went that 

direction—to mitigate the effects that will be concentrated in particular households, industries, and regions, is a very important opportunity and a very important decision that you face in constructing this legislation. 

Senator BINGAMAN. My time is up. Thank you. 

The CHAIRMAN. Thank you very much, Senator. 

Senator Roberts, you are next. 

Senator ROBERTS. Well, thank you very much, Mr. Chairman, 

and thank you for holding this hearing. 

I appreciate the admonition and the counsel by my friend from 

Delaware, who is not present, I see. I was not aware of the CleanTEA bill, and we are exploring that. I am not going to say what 

I thought Clean-TEA was, but we can get into that at some other 

time. 

We have more cattle than people out in Kansas by 2:1, and usually they are in a better mood. 

The CHAIRMAN. Than who? 

Senator ROBERTS. Than most of us. Fifty percent of the energy 

consumed by Kansas is generated by coal-fired plants. Actually, I 

31 

think that is 73 percent, but I will not quibble over that. We have 

over 150,000 head of cattle there in Dodge City. I did stop to think, 

when you all were talking about measuring CO2, how you would 

do that with a herd of 150,000. We would like to invite you out, 

if you have some ideas. Taking it one cow at a time might take you 

a little long, but it would be an interesting way if you could measure that. 

Wichita is a major manufacturing city. It is the air capital of the 

world. I have an awful lot of rural communities, very similar to 

others on this committee, more especially Montana, and others in 

the high plains, Wyoming. They dot the landscape and the prairie. 

They also have energy-intensive industries that keep the local 

economy above water and their community banks investing, and 

the American dream a reality, and they feed America and a troubled and hungry world, so it is a pretty good investment. 

But cap and trade or cap and tax, whatever we want to say, a 

simple energy consumption tax, our folks take a pretty dim view 

of that, despite the excellent testimony of the panel. 

I met with the chairman, president, and vice president of a 

small, independent oil and gas refining company; I do not need to 

get into who it is. There are 30 of them, by the way, that make 

up the small refineries across the country, 13 percent of our U.S. 

refining capacity. They just told me that a cap-and-trade—or a cap 

and tax system is what I call it—the one being considered in the 

House by Congressman Waxman and others, if passed, would simply cause them to shut their doors on day one. That was their judgment. I trust them on the issue, and they were very clear. 

I just do not think this is the way we want to treat our domestic 

small businesses, with the hope that somehow some of that money 

would come back in the way that Senator Enzi tried to explain it 

in regards to his testimony. 

We feed 145 people. One farmer feeds 145 people throughout the 

high plains in agriculture. They are going to begin their spring 

planting here real quick, if they have not already started. But during last year’s global warming debate I was not at the Hague, but 

I was at Manhattan, KS. I asked the Kansas State research and 

extension folks to run an economic analysis of what cap and 

trade—or the bill at that time, and I know it is changing—or cap 

and tax means. That is not MIT, but those are the folks that I really pay attention to in regards to agriculture program policy. The response I got from them was very much like the small refiner: it 

was a little frightening. 

The cost of production from one acre of irrigated corn increased 

over $100, an acre of wheat, roughly $25, and an acre of sorghum, 

$30. Parlay this into the increased energy cost for transportation, 

and refrigeration, and storage, and you can start to imagine how 

much more disposable income will be used just to purchase our 

food and fiber. 

This, I think, is the reason why Collin Peterson, who is the esteemed chairman of the sometimes powerful House Agriculture 

Committee, indicated in the press just the other day, cap and trade 

is dead as far as he is concerned. 

Now, you have the additional tax increase for your electric bill, 

your vehicle fuel, and you are not left with much in your pocketVerDate Nov 24 2008 19:56 Mar 25, 2011 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 R:\DOCS\64630.000 TIMD
32 

book. In fact, about the only winner out of this scenario is the Federal Government and the good intentions of all the folks who work 

in the Federal Government. That ties back to the questions that 

Senator Enzi asked, and I will not repeat that. 

But the point that needs to be made is that every cap and trade 

proposal I have seen is a core way to tax energy consumption to 

get CO2 down, as was pointed out in previous testimony, but it is 

also a way to bring more revenue to the Federal Government. 

Once again, my time is running out, and you have been pretty 

tough on that, Mr. Chairman. But I went to the Antarctic very 

early and looked at the ice corridors when we were even debating 

it and we had a problem with global warming, and I saw the ice 

corridors and I became convinced, and I was trying to tell everybody in Agriculture—I was somebody then, I was a chairman—that 

we really ought to pay attention to this, and do not say there is 

not a problem, say there is a challenge and we can be part of it 

with carbon sequestration. So I know there is a problem. 

But we asked the person who was in charge of that whole operation, if we had passed the Kyoto treaty, how much CO2 would we 

take out of the air in 100 years? He said 0.015, which stunned me. 

I said, why? He said, because without the support of some kind of 

international cooperation you will feel good about yourself and you 

may take some CO2 out of the air, but you are really not going to 

make much of a difference. 

The CHAIRMAN. Right. Senator. There is a little light on over 

there on the clock, which means a vote just started. 

Senator ROBERTS. I understand that. I understand that. 

The CHAIRMAN. So, Senator Hatch, you are next. 

Senator HATCH. Well, thank you, Mr. Chairman. I thank all of 

you for being here. 

Dr. Smith, thank you so much for joining us today. I appreciate 

learning more about the distinction between auction allowances 

and free allocations with regard to price volatility. However, I 

would like to focus on testimony debunking a myth that a carbon 

cap or tax would create jobs. Now, you state that even though a 

shift towards lower-emitting forms of energy would create new jobs, 

these jobs would be created by forcing out current energy jobs with 

more expensive forms of energy. Because it will cost more for companies to produce the same amount of output with these new technologies, overall worker productivity would fall and aggregate payments to workers would also fall. 

Now, do you believe that implementing a cap-and-trade program 

or a carbon tax would result in net job losses? 

Dr. SMITH. Yes. That statement argues that there is a net decrease in wages paid to workers in total. There are only two ways 

to interpret that: there are either fewer jobs or the jobs that we 

have are a lot less well paid. 

Senator HATCH. All right. Now, some climatologists believe that 

implementing a cap and trade or a program that would reduce carbon emissions by 83 percent, in the year 2050, would reduce temperatures by only 9 hundredths of one degree Fahrenheit. Are we 

sacrificing millions of jobs in order to reduce climate change by 9 

hundredths of one degree? 

33 

Dr. SMITH. If we look at the U.S. action in isolation, yes. There 

is nothing else that we are considering when we estimate the cost 

of the U.S. policy. The costs of inaction are not the benefits of action in the U.S. policy. 

Senator HATCH. Dr. Delbeke, thank you for coming. We appreciate you participating here today. Now, some European economists 

examined Spain’s Green Jobs initiative. As you know, President 

Obama is using Spain and other European countries as a model for 

creating more U.S. green jobs. These economists have revealed 

some alarming statistics about the transition to greener jobs. Here 

are some of them: the U.S. can expect 2.2 jobs to be destroyed for 

every renewable job financed by the government; 9 out of 10 green 

jobs created by Spain over the past 10 years are no longer in existence today; since 2000, Spain has spent $753,778 to create each 

‘‘green job;’’ consumer energy costs in Spain would have to be increased 31 percent to repay the debt generated by the green job 

subsidies. 

Now, can you comment on any of these particular claims, and do 

you believe the same would apply to the United States under a capand-trade program? 

Dr. DELBEKE. Thank you very much, Senator. I am not familiar 

with the precise figures as you called them, but two comments. I 

think that renewable energy technology is developing very fast, and 

I would not be surprised that, indeed, those who were in business 

20 years ago have changed their business or have gone out of business. 

The other thing I think that needs to be underlined that we see 

in Europe is that the jobs created in the renewable sector have 

been, and are today, the most growing. We saw also on the stock 

exchange that the valuations for these companies are incredibly 

high, including in Spain and elsewhere. So, in that sense we think 

there is a transition that is being undergone in Europe, but it is 

towards those low-carbon, clean technologies that pay off in terms 

of jobs and output. 

Senator HATCH. All right. Thank you. 

Dr. Elmendorf, my constituents in Utah are deeply concerned 

about an increase in energy prices as a consequence of cap-andtrade legislation. The Congressional Budget Office estimates the 

Lieberman-Warner bill from last year would raise $902 billion over 

10 years. Now, this year’s version would be far higher. According 

to the President’s budget proposal, part of these revenues would be 

redistributed to ‘‘compensate the public.’’ 

Now, according to the National Rural Electric Cooperative Asso- ciation, if a $50 cost per metric ton of carbon dioxide is imposed 

under a cap-and-trade system, residential electric bills would increase by 70 percent in Utah. Now, that is a very high rate compared to most other States. 

Now, am I correct that the people of Utah and these other 

carbon-intensive States such as West Virginia, North Dakota, and 

Arkansas would have to bear a far greater burden of higher electric 

bills as a result of the President’s climate change agenda? 

Dr. ELMENDORF. Senator, CBO has not done analysis on a Stateby-State or regional basis. I recognize it would be very useful for 

you if we had. 

34 

Senator HATCH. Yes. 

Dr. ELMENDORF. So I cannot speak to Utah specifically. But it is 

true, and I said in my remarks, that the effects of raising the price 

of energy and energy-intensive goods would be distributed very unevenly across the country, and that puts squarely in front of you 

and your colleagues the question of whether you want to use the 

revenue that would be collected through such a cap-and-trade system or a carbon tax to offset those effects, and to what extent you 

want to do that for people who live in certain areas of the country, 

or work in certain industries, or have certain levels of income. 

Senator HATCH. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. Thank you all. 

Senator Cantwell had a question. 

Senator CANTWELL. If I could just ask a quick question. 

The CHAIRMAN. Sure. 

Senator CANTWELL. Do we have time? 

The CHAIRMAN. Sure. We have a couple, 3 minutes. 

Senator CANTWELL. About upstream caps. Would an upstream 

cap on fossil fuel cover more than 80 percent of the greenhouse gas 

emissions, Dr. Smith? 

Dr. SMITH. It would be close to that. 

Senator CANTWELL. So, I mean, that is an agreement. Everybody 

is agreed on that, is that correct? Is that correct, Dr. Elmendorf? 

Dr. ELMENDORF. I think that is roughly correct, yes. I do not 

have precise numbers. 

Senator CANTWELL. All right. 

And then the upstream cap obviously would avoid the problems 

of partial fuel, fossil fuel, emission coverage and verification, and 

all of that that is usually with a cap-and-trade system. Is that 

right, Dr. Smith? 

Dr. SMITH. Definitely. 

Senator CANTWELL. All right. 

And then Dr. Elmendorf, there is a Research for the Future map 

that basically shows that carbon intensity, if you did an upstream 

cap, does not really vary that much by region. Is that right? So, I 

mean, if you implemented something, you do not see this variation 

in cost by region across the country? 

Dr. ELMENDORF. It is a topic of ongoing research about how the 

regional effects interact with the effects at different levels of the income distribution. So there is a recent study that suggests that 

low-income people in particular parts of the country might have 

particular effects. It really depends, as I suggested earlier, on both 

the fossil fuel intensity of the production in certain areas, what industries people mostly work in, but also on the fossil fuel intensity 

of their consumption. 

For people who drive further because they live in rural areas, 

people whose local utilities generate electricity mostly using coal, 

they would find it more or less difficult to get power from other 

sources—those consumption issues matter as well. So it is complicated to keep track of on a regional basis, and the Research for 

the Future people are doing terrific analysis that we often draw on. 

I think it is a little bit of an unsettled question as to how to look 

at this, not just by region, but also by region and income group together. 

35 

Senator CANTWELL. Thank you. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Thank you all. This has been very important, very helpful, informational testimony. I think we have all learned a lot here on an 

extremely important subject. Thank you, Dr. Delbeke, for joining us 

as well. This is certainly going to require collaborative and cooperative effort, and your presence here helps in that regard. So, thank 

you all very, very much. 

The hearing is adjourned. 

[Whereupon, at 12:02 p.m., the hearing was concluded.] 

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