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GLOBAL WARMING LEGISLATION: 

CARBON MARKETS AND PRODUCER GROUPS 

HEARING 

BEFORE THE

COMMITTEE ON AGRICULTURE, 

NUTRITION, AND FORESTRY 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

SEPTEMBER 9, 2009 

Printed for the use of the 

Committee on Agriculture, Nutrition, and Forestry 

( 

Available via the World Wide Web: http://www.agriculture.senate.gov 

COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY 

TOM HARKIN, Iowa, Chairman 

PATRICK J. LEAHY, Vermont 

KENT CONRAD, North Dakota 

MAX BAUCUS, Montana 

BLANCHE L. LINCOLN, Arkansas 

DEBBIE A. STABENOW, Michigan 

E. BENJAMIN NELSON, Nebraska 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, Jr., Pennsylvania 

AMY KLOBUCHAR, Minnesota 

KIRSTEN GILLIBRAND, New York 

MICHAEL BENNET, Colorado 

SAXBY CHAMBLISS, Georgia 

RICHARD G. LUGAR, Indiana 

THAD COCHRAN, Mississippi 

MITCH MCCONNELL, Kentucky 

PAT ROBERTS, Kansas 

MIKE JOHANNS, Nebraska 

CHARLES E. GRASSLEY, Iowa 

JOHN THUNE, South Dakota 

MARK HALVERSON, Majority Staff Director 

JESSICA L. WILLIAMS, Chief Clerk 

MARTHA SCOTT POINDEXTER, Minority Staff Director 

VERNIE HUBERT, Minority Chief Counsel 

(II) 

(III) 

C O N T E N T S 

Page 

HEARING(S): 

Global Warming Legislation: Carbon Markets and Producer Groups ................. 1 

Wednesday, September 9, 2009 

STATEMENTS PRESENTED BY SENATORS 

Harkin, Hon. Tom, U.S. Senator from the State of Iowa, Chairman, Committee on Agriculture, Nutrition, and Forestry ................................................. 1 

Chambliss, Hon. Saxby, U.S. Senator from the State of Georgia ........................ 3 

Thompson, Hon. Mike, U.S. Representative from the State of California .......... 41 

Panel I 

Gensler, Hon. Gary, Chairman, U.S. Commodity Futures Trading Commission, Washington, DC .......................................................................................... 5 

Glace, Joseph R., Vice President for Risk Management and Chief Risk Officer, 

Exelon Corporation, Chicago, Illinois ................................................................. 23 

Miller, David, Chief Science Officer, AgraGate, and Research & Commodity 

Services Director, Iowa Farm Bureau Federation, West Des Moines, Iowa ... 26 

Profeta, Timothy, Director, Nicholas Institute for Environmental Policy Solutions, Duke University, Durham, North Carolina ............................................. 21 

Winkler, Julie, Managing Director, Research and Product Development, CME 

Group, and Member, Board of Directors, Green Exchange Venture, Chicago, 

Illinois ................................................................................................................... 28 

Panel II 

Beckstoffer, W. Andy, Chairman and Chief Executive Officer, Beckstoffer 

Vineyards, Rutherford, California ...................................................................... 43 

Brubaker, Luke, Brubaker Farms, Mount Joy, Pennsylvania ............................. 47 

Rehermann, Frank, Chairman, USA Rice Producers’ Group, Live Oak, California ..................................................................................................................... 45 

Yoder, Fred, Past President, National Corn Growers Association, Plain City, 

Ohio ....................................................................................................................... 49 

APPENDIX 

PREPARED STATEMENTS: 

Gillibrand, Hon. Kirsten .................................................................................. 58 

Grassley, Hon. Chuck ....................................................................................... 68 

Thune, Hon. John ............................................................................................. 62 

Beckstoffer, W. Andy ........................................................................................ 65 

Brubaker, Luke ................................................................................................. 71 

Gensler, Hon. Gary ........................................................................................... 74 

Glace, Joseph R. ............................................................................................... 81 

Miller, David ..................................................................................................... 90 

Profeta, Timothy ............................................................................................... 106 

Rehermann, Frank ........................................................................................... 116 

Winkler, Julie ................................................................................................... 121 

Yoder, Fred ....................................................................................................... 132 

Page

IV 

DOCUMENT(S) SUBMITTED FOR THE RECORD: 

Brubaker, Luke : 

Darling International Inc., prepared statement ............................................ 140 

National Milk Producers Federation, prepared statement ........................... 150 

QUESTION AND ANSWER: 

Harkin, Hon. Tom: 

Written questions for Andy W. Beckstoffer .................................................... 162 

Written questions for Luke Brubaker ............................................................. 165 

Written questions for Gary Gensler ................................................................ 171 

Written questions for Joseph Glace ................................................................ 173 

Written questions for Dave Miller .................................................................. 174 

Written questions for Timothy Profeta ........................................................... 176 

Written questions for Frank Rehermann ....................................................... 180 

Written questions for Julie Winkler ............................................................... 184 

Written questions for Fred Yoder ................................................................... 188 

Grassley, Hon. Charles E.: 

Written questions for Andy W. Beckstoffer .................................................... 163 

Written questions for Luke Brubaker ............................................................. 168 

Written questions for Joseph Glace ................................................................ 173 

Written questions for Dave Miller .................................................................. 174 

Written questions for Timothy Profeta ........................................................... 177 

Written questions for Frank Rehermann ....................................................... 181 

Written questions for Julie Winkler ............................................................... 186 

Written questions for Fred Yoder ................................................................... 188 

Thune, Hon. John: 

Written questions for Andy W. Beckstoffer .................................................... 164 

Written questions for Luke Brubaker ............................................................. 169 

Written questions for Gary Gensler ................................................................ 171 

Written questions for Joseph Glace ................................................................ 173 

Written questions for Timothy Profeta ........................................................... 178 

Written questions for Frank Rehermann ....................................................... 182 

Written questions for Fred Yoder ................................................................... 189 

Roberts, Hon. Pat: 

Written questions for Luke Brubaker ............................................................. 167 

Written questions for Frank Rehermann ....................................................... 180 

Written questions for Fred Yoder ................................................................... 188 

Beckstoffer, W. Andy: 

Written responses to questions from Hon. Tom Harkin ............................... 190 

Written responses to questions from Hon. Charles E. Grassley ................... 191 

Written responses to questions from Hon. John Thune ................................ 192 

Brubaker, Luke: 

Written responses to questions from Hon. Tom Harkin ............................... 193 

Written responses to questions from Hon. Charles E. Grassley ................... 196 

Written responses to questions from Hon. John Thune ................................ 197 

Written responses to questions from Hon. Pat Roberts ................................ 195 

Gensler, Hon. Gary: 

Written responses to questions from Hon. Tom Harkin ............................... 199 

Written responses to questions from Hon. John Thune ................................ 199 

Glace, Joseph R.: 

Written responses to questions from Hon. Tom Harkin ............................... 202 

Written responses to questions from Hon. Charles E. Grassley ................... 204 

Written responses to questions from Hon. John Thune ................................ 205 

Miller, David: 

Written responses to questions from Hon. Tom Harkin ............................... 207 

Written responses to questions from Hon. Charles E. Grassley ................... 207 

Profeta, Timothy: 

Written responses to questions from Hon. Tom Harkin ............................... 213 

Written responses to questions from Hon. Charles E. Grassley ................... 214 

Written responses to questions from Hon. John Thune ................................ 215 

Rehermann, Frank: 

Written responses to questions from Hon. Tom Harkin ............................... 217 

Written responses to questions from Hon. Charles E. Grassley ................... 218 

Written responses to questions from Hon. John Thune ................................ 219 

Written responses to questions from Hon. Pat Roberts ................................ 217 

Winkler, Julie: 

Written responses to questions from Hon. Tom Harkin ............................... 221 

Written responses to questions from Hon. Charles E. Grassley ................... 223 

Page

V 

Yoder, Fred: 

Written responses to questions from Hon. Tom Harkin ............................... 225 

Written responses to questions from Hon. Charles E. Grassley ................... 226 

Written responses to questions from Hon. John Thune ................................ 228 

Written responses to questions from Hon. Pat Roberts ................................ 225 

(1) 

GLOBAL WARMING LEGISLATION: 

CARBON MARKETS AND PRODUCER GROUPS 

Wednesday, September 9, 2009 

U.S. SENATE, 

COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY, 

Washington, DC 

The Committee met, pursuant to notice, at 10 a.m., in room SH– 

216, Hart Senate Office Building, Hon. Tom Harkin, Chairman of 

the Committee, presiding. 

Present: Senators Harkin, Conrad, Lincoln, Stabenow, Casey, 

Klobuchar, Gillibrand, Chambliss, Lugar, Johanns, Grassley, and 

Thune. 

STATEMENT OF HON. TOM HARKIN, U.S. SENATOR FROM THE 

STATE OF IOWA, CHAIRMAN, COMMITTEE ON AGRICULTURE, 

NUTRITION, AND FORESTRY 

Chairman HARKIN. Good morning, and welcome to this hearing 

of the Committee on Agriculture, Nutrition, and Forestry on proposals for global warming legislation. 

Senator Chambliss is on his way. We have to get started because 

we are up against kind of a time crunch here. This hearing will adjourn promptly at—no later than 12:30. 

Our witnesses today will help us examine issues in structuring 

and regulating markets for greenhouse gas emission allowances. 

They will share the views of a cross-section of agricultural producers regarding the pending legislation. 

Let me start by reiterating the urgency and importance of addressing global warming. I had a chart here that I keep using, if 

I can have it here again. I do not know if you can see it from the 

back. But as this chart shows, the concentration of carbon dioxide 

in the atmosphere has increased by about 50 percent over the last 

150 years. We are now seeing the effects of that in rising global average temperatures. You can just see how rapidly it is going up increasingly from about 1980 on up at an ever increasing rate. And 

the ten warmest years on record, all occurred in the past 12 years. 

And just last week, Science magazine reported that temperatures 

in the Arctic are at the highest levels in the past 2,000 years. 

In plain words, we humans are changing the Earth’s climate. 

And while we do not know precisely all the consequences of our 

current climate trends, we do know they are likely to include more 

severe storms, more frequent and severe heat waves, in addition to 

rising seas and higher temperatures. 

2 

I agree with the majority of Americans who say that we must act 

to mitigate these effects. We must not simply leave future generations to cope with a hotter and more dangerous climate. 

Our Committee began to consider the role of agriculture and forestry in reducing greenhouse gas emissions and the consequences 

of cap-and-trade at our first hearing in July. Today we will examine these issues at the farm level. We will hear from a corn and 

soybean farmer, a rice farmer, a grape grower and vintner, and a 

dairyman. In addition, we are obviously going to hear from the 

Chairman of the Commodity Futures Trading Commission at the 

outset to talk about the aspect of how these markets might be regulated by the CFTC. 

Now, while we could not include representatives of every type of 

agriculture, I trust the testimony and discussions of these witnesses will begin to provide us with a better sense of on-the-ground 

effects that our agriculture sector is likely to see under global 

warming and under mitigation strategies. 

We will hear from farmers and ranchers how they might benefit 

through actions such as the installation of digesters to reduce 

methane emissions from livestock production and other forms of 

methane emissions; cropping practices such as no-till farming or 

applications of biochar that increase carbon contents of soils; increased demand for renewable energy resources such as biofuels 

and wind power. 

As the Committee with the responsibility for legislation governing commodity futures markets, the Senate is looking for our 

guidance on how to structure and regulate markets, and our first 

two panels will provide testimony on that issue. 

If we are serious about a cap-and-trade system, we must get the 

trading part right, and that means effective, practical regulation 

and oversight so the markets work. The benefits of a cap-and-trade 

approach have been clearly stated: use the market system to reach 

the least expensive path to reducing greenhouse gas emissions. But 

the potential costs if these carbon markets blow up cannot be overstated. Markets that are not properly and carefully regulated will 

blow up, and the economy and environmental goals of the program 

will blow up with it. This market has the potential to be a very big 

and very complicated part with a lot of money at stake, and we 

have seen what can happen when there is not sufficient transparency, accountability, or limits on risky behavior in markets. 

We should not put too much faith in the markets alone to deliver 

results. Do we want to repeat the adverse impacts of excessive 

speculation in the crude oil market last year for carbon? Do we 

want to replicate for allowances and offsets the free-wheeling derivatives market that helped bring down our economy? 

We must avoid the dangers of excessive speculation or price volatility or so-called innovation that turns out to be all about shortterm profit and simply creates greater risk instead of just managing the risk. 

Some of the ideology and recklessness that helped drive our economy and our markets over the cliff are now surfacing in discussion 

of a cap-and-trade system. I find this troubling. We have learned 

a lot from years of both regulating commodities and previous capand-trade efforts from both regional and international carbon marVerDate Nov 24 2008 14:07 Jan 20, 2011 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 C:\DOCS\62715 MICHA
3 

kets, and it is imperative that we incorporate those lessons into a 

properly regulated new carbon-trading regime. 

In closing, I want to thank Senator Chambliss, thank you and all 

of your staff for the support in planning this hearing. I look forward to working with you as we outline the appropriate representation of agriculture and forestry as we provide guidance for the 

structure and regulation of greenhouse gas emissions allowances 

markets. 

I would now turn to Senator Chambliss for opening comments. 

STATEMENT OF HON. SAXBY CHAMBLISS, U.S. SENATOR FROM 

THE STATE OF GEORGIA 

Senator CHAMBLISS. Well, thank you, Mr. Chairman, and thanks 

for holding this second hearing on cap-and-trade and its effects on 

agriculture. In spite of the news I saw on TV this morning, I hope 

you are going to be holding many, many more agriculture hearings. 

Things do happen in politics, but you have been a great friend on 

this as well as every other issue involving agriculture. 

I suspect that you and our colleagues on this Committee heard 

from many constituents, not just those involved in agriculture, over 

the August recess on cap-and-trade and climate legislation. I certainly did. It was clear to me that they want the Senate to very 

carefully consider all aspects of this issue and not rush to pass legislation. 

I look forward to hearing from CFTC Chairman Gensler who has 

certainly jumped into the fray on a number of issues, and, Mr. 

Chairman, we appreciate your great leadership, your involvement, 

plus your continued dialog with the Hill. You committed to do that 

during your confirmation process, and I thank you for doing exactly 

what you said you were going to do. 

Additionally, we will hear directly from those that will be regulated under a cap-and-trade system. Exelon, as an energy generator, will be required to purchase allowances and, therefore, deserves a workable risk management system within any newly created market. And CME Group, with its pending Green Exchange 

venture, will be subject to CFTC regulation as a designated contract market. 

I expect any domestic carbon market would work much like existing commodity markets, though with a few notable differences. 

As the Committee with jurisdiction over commodity pricing and 

trading, we need to ensure we are fulfilling our responsibilities and 

weighing in with our colleagues on the issue of regulating any such 

carbon commodity market. 

The issue of market regulation has not received the careful consideration that it justly deserves. To date, this Committee has focused its discussions on the impact on farmers and ranchers, and 

I am pleased that we will continue to hear about that important 

topic today. 

As many of you know, the Texas A&M University’s Agriculture 

and Food Policy Center recently released a report using its Representative Farms Data base to model the effects of the House climate bill on the farm level. For those of you here today who are 

not familiar with representative farm studies, they are commonly 

used in agriculture to model the effects of proposed legislation on 

4 

the micro level or at the individual farm level. The AFPC has been 

doing this type of work for Congress for more than 25 years. While 

the macroeconomic studies help Congress understand the effects of 

proposed legislation on agriculture as an industry, it is the representative farms that provide the ground truth of these proposals. 

The ground truth that this study shows is very serious. The 

study says that 71 out of 98 farms will be worse off under the 

House cap-and-trade plan, even in the early years of the program. 

Most concerning, the 27 farms that benefit do so only because other 

producers go out of business. Not one rice farm or cattle ranch benefits, while only one cotton operation and one dairy benefit, mainly 

due to the fact that they both grow a significant amount of feed 

grains. 

While intuitively we knew that there would be winners and losers in cap-and-trade, we did not know that the benefits and costs 

would be so disproportionate and regionally perverse. How can we 

as members of the Agriculture Committee endorse a policy that disproportionately favors certain commodities and, thus, only one part 

of the country at the expense of all others? 

Mr. Chairman, I know you are very proud of your corn and soybean farmers in Iowa. You should be. But how can I reasonably 

support a bill that will put farmers in Georgia in a worse position 

or farms in California or farms in the Southwest, while transferring the benefits to the Corn Belt through attrition? 

I look forward to hearing from the producer panel today with 

their thoughts on the House bill and the likely effects it will have 

on producers as reflected in this study. Given the complexities of 

the market issues and the negative effects likely to be felt by producers, Mr. Chairman, I think you were wise to plan for additional 

hearings. I hope our staffs can get together during this week and 

plan for the next hearing, and I thank you again and appreciate 

your leadership and your work on this issue. 

Chairman HARKIN. Well, thank you very much, Senator Chambliss. Again, you are correct, we have to make sure that agriculture 

is treated fairly and equitably in this cap-and-trade legislation. I 

am committed to that. And we have to be cognizant of its varied 

impacts, depending upon what type of agriculture you are in and 

what part of the country you live in. And, hopefully, we will be able 

to address those and work those out as we move ahead on that. Obviously, we do not have jurisdiction over all that, but we will have 

jurisdiction over at least making our intents known to the Environment and Public Works Committee, I guess it is, before they start 

marking up. 

We have a full panel today. As I announced earlier, we have to 

adjourn here by no later than 12:30. I am going to ask that each 

witness take 6 minutes. I am going to be—I have never been very 

strict on the gavel before, allowing people to go over, but I think 

we are going to have a lot of people who want to ask questions here 

today. So I am going to ask each of our panelists no more than 6 

minutes at the maximum to discuss your papers. That will give us 

54 minutes, and that will leave us about an hour and a half for 

questions. And I am going to ask for 5–minute rounds on questions 

also. 

5 

So we will start off with the Honorable Gary Gensler, Chairman 

of the U.S. Commodity Futures Trading Commission. Your statement will be made a part of the record in its entirety, as will all 

statements—and I read most of them last night—be made part of 

the record in their entirety. I would ask you just to sum up, as I 

said, in no more than 6 minutes. 

Mr. Gensler, welcome again to the Committee, and please proceed. 

STATEMENT OF HON. GARY GENSLER, CHAIRMAN, U.S. COMMODITY FUTURES TRADING COMMISSION, WASHINGTON, DC 

Mr. GENSLER. Thank you, Mr. Chairman and Ranking Member 

Chambliss. It is good to be back together with you and members 

of the Committee. My testimony will focus on the Commodity Futures Trading Commission’s experience regulating emissions trading markets and how we can apply those experiences to trading in 

government-issued greenhouse gas allowances and offset credits. I 

am testifying on behalf of the full Commission, our four Commissioners, as I was glad to do the last time I was with you as well. 

We believe that effective regulation of carbon allowance trading 

will require cooperation on the parts of several regulators. There 

are five components that I believe should be considered: first, the 

standard setting and allocation, and, of course, the environmental 

compliance that goes along with that; second is recordkeeping, 

maintaining a registry for the allowances and offsets; third, overseeing trade execution systems; fourth, overseeing clearing of 

trades; and, fifth, protecting against fraud, manipulation, and other 

abuses. 

Now, in terms of these first two components, those fall within the 

expertise of other agencies other than the Commodity Futures 

Trading Commission. In other words, there are others better 

equipped to regulate the ‘‘cap’’ part of cap-and-trade. 

EPA, for example, currently issues allowances on sulfur dioxide 

and nitrogen oxide as mandated under the Acid Rain and Clean Air 

Market Acts. On a smaller scale, a group of ten States from Maryland up to Maine has the Regional Greenhouse Gas Initiative and 

issues allowances on greenhouse gas emissions. And in each of 

those cases, other entities issue the allowances, do the environmental compliance, and maintain the registry. The constant, however, in all of these markets is the CFTC currently regulates the 

emissions futures trading markets. In other words, the CFTC has 

a great deal of experience regulating the ‘‘trade’’ part of cap-andtrade. 

We have broad experience in the latter three components of carbon trading: regulating the trade execution systems and clearing of 

trades and protecting against fraud, manipulation, and other 

abuses. The Commission already oversees this trading and clearing 

of emissions futures and options contracts of the New York Mercantile Exchange and the Chicago Climate Futures Exchange. Additionally, just last month, under direction from Congress in last 

year’s farm bill, the Commission began looking into if the Carbon 

Financial Instrument spot contract traded on what is called the 

Chicago Climate Exchange, a sister exchange to the futures exchange, is actually a significant price discovery contract. So the 

6 

Commission has abundant experience in the regulation of centralized marketplaces, and should Congress seek to regulate cash markets for emission instruments, the Commission is well suited to 

carry out that function as well. 

The Commission has thorough processes to ensure that exchanges and clearinghouses are in place to protect market participants and ensure fair and orderly markets, and that trading in 

these exchanges comply with the law and regulations. Our surveillance staff keeps a close eye on the signs of manipulation and congestion and determines how to best address, and we have the authority to set position limits as well within these markets. 

The CFTC also has wide-ranging transparency initiatives, and it 

is designed to provide as much information to the American public 

as possible. So should you go forward with the cap-and-trade legislation, the CFTC would work with other regulators and market 

users to make sure that the transactions that occur—transactions 

that would have to be recorded on a registry kept by the EPA or 

USDA or others—that that registry be updated on a very real-time 

basis so that there would be market transparency. 

The CFTC, however, if you were to move forward, would need additional resources. I fear that I keep saying this, but the staff and 

technology to effectively regulate the expanded carbon markets. We 

have the expertise. We would probably need some additional resources. 

We also would want to work with Congress and look forward to 

working with Congress to enact broad, comprehensive reform of the 

over-the-counter derivatives marketplace. This reform must also include an oversight of the emissions and allowance markets if they 

were to develop in the over-the-counter space as well. 

As Congress moves forward and possibly regulated cap-and-trade 

legislation, I look forward to working with this Committee to ensure that the new markets are comprehensively and effectively regulated. I believe the CFTC does have the expertise and experience 

necessary to help regulate the growth in carbon markets, and we 

must protect against the same hazards in the carbon markets that 

we currently guard against in other commodity futures markets, 

particularly fraud, manipulation, and other abuses. 

I thank you for inviting me here today. I look forward to your 

questions. I did it in 4 minutes. 

[The prepared statement of Mr. Gensler can be found on page 74 

in the appendix.] 

Chairman HARKIN. That is perfect. Thank you very much, Chairman Gensler, and I will say that we will have just 5–minute 

rounds. Again, I hope that we will respect each other’s time on that 

and try to limit it to 5 minutes, and I will start off and start my 

clock at 5 minutes. 

Chairman Gensler, two things I want to ask. If we have a capand-trade system for greenhouse gas emissions, is there really a 

need for an over-the-counter market? And, second, I am concerned 

about derivatives. If we allow trading of derivatives on greenhouse 

gas offsets and allowances, would it make sense to require at the 

end date of a future or other derivative contract that there be a 

transfer of the actual offset or allowance, not simply a cash settlement? 

7 

I ask both those questions because of my concern about derivatives on offsets or allowances and then derivatives on those derivatives and derivatives on those derivatives, and we are right back 

where we started before. And so I repeat: Is there a need for an 

over-the-counter market? And, second, should there at some point 

near the settlement date be some delivery of the actual offset or 

allowance and not simply a cash settlement? 

Mr. GENSLER. Mr. Chairman, I appreciate your question. It continues a dialog we have had before in these hearing rooms. I believe that all futures on these carbon markets should be on exchanges, just as we have all futures for corn and wheat and oil and 

natural gas on regulated exchanges, and we are equipped to do 

that. I believe working with Congress, we need to make sure that 

any—what is currently called over-the-counter derivatives or swaps 

on these are brought under regulation, that the dealers in carbon 

markets, just like the dealers in oil or in wheat markets, should 

be fully regulated for capital and so forth; and that the standard 

contract should also be brought on exchange rates, standard swap 

contracts for these carbon allowances. 

But I do believe that there are going to be times where there is 

going to be tailored product that cannot readily be brought onto a 

centralized clearing. An example might be that if you wanted to 

build a utility in Iowa or in Georgia or in any one of your States, 

and that utility wants to bring on a financing for 10 years or even 

20 years, you might want to lock in—that utility might want to 

lock in the price of the carbon emissions out 10 and 20 years, and 

that might not be readily available on a market. 

I do believe, though, working with Congress, that contract too 

should be under regulation by making sure that the dealer who is 

transacting that has to have the capital, has to report it to the regulators, the EPA and possibly other regulators regulating the cap 

side, and also to the regulators regulating the trading side as well. 

Chairman HARKIN. How do we control the possible proliferation 

of derivatives on greenhouse gas emissions and the speculation 

thereon? 

Mr. GENSLER. Well, I think as we are working with Congress to 

bring the whole over-the-counter derivatives marketplace under 

regulation, we must do that here as well; that the dealers in these 

contracts must be regulated for transparency, 100 percent of their 

transactions, whether they be tailored or standardized; but also if 

you were to move forward and ask the CFTC to regulate that, that 

we be able to set aggregate position limits across those traded in 

the futures market as well as those in what might be in this tailored or still bilateral market. 

Chairman HARKIN. One last thing. I hope that you and the other 

Commissioners and your staffs will continue to monitor what is 

being done here—not here, but in the Congress—so that at the appropriate time, when this legislation looks like it is mature and is 

ready to go to the floor, that we could get from you what resources 

you would need to carry out the provisions of the bill in order to 

provide adequate oversight and regulation. 

Mr. GENSLER. We will do that, Mr. Chairman, and I commit to 

work with you and the appropriators to share that with you. 

8 

Chairman HARKIN. I just want to make sure they just do not 

dump on your lap all this stuff without the resources that you 

would need to regulate and have this oversight. 

Mr. GENSLER. Thank you. 

Chairman HARKIN. Thank you, Mr. Chairman. Thank you, Chairman Gensler. 

Senator Chambliss? 

Senator CHAMBLISS. Thank you, Mr. Chairman. And let me just 

echo that, Mr. Chairman, because you and I have talked before 

about the fact that I think you are underresourced right now for 

what you have been charged to do; and I think you are finding that 

out every day you go to the office. So we need to make sure as we 

go through the whole financial overhaul, restructuring that we do 

not load you up with something else that would prevent you from 

being able to do your current job. 

I want to continue along that same line. I understand what you 

are saying about seeking to regulate all of these contracts and put 

them all on exchanges, but we know that today where the only capand-trade market that is functioning is in Europe, about 75 percent 

of contracts are traded over the counter. If they have been at this 

for a while and they are trading that high a percentage over the 

counter, what are we going to do different to try to bring those contracts onto the exchange? 

Mr. GENSLER. Senator, I believe that you are right to look—Europe does give us some guidelines as to what might happen here. 

There are actually three marketplaces. There is the futures marketplace, where actually in Europe that market is all on exchange, 

the futures. There is a cash marketplace, and I think that is what 

you refer to. Some of that is off-exchange, of course. 

If I could say it here, if a farmer in Iowa wanted to transact and 

sell an offset to another farmer in Iowa or maybe in Georgia, they 

might do that over the counter. 

Third, there is the swaps or derivatives marketplace. I believe 

that we have to have 100 percent of the futures marketplace regulated, just as we do in corn and wheat and oil. I believe that we 

have to have the standard derivatives contracts onto exchanges, as 

we are trying to do with Congress in other contracts as well, and 

that leaves the question on the cash markets. Can one farmer 

transact with another farmer? And I think that is probably appropriate. But if a centralized market comes together, I think we have 

to regulate that centralized market to protect against fraud and 

manipulation. These election trading platforms should have oversight and regulation, I believe. 

Senator CHAMBLISS. Does the proposal by the administration 

that has come forward from Treasury, and while it is not firm yet 

by any means—and I know you have some issues with it. We have 

some issues with it. But the proposal that is out there, does that, 

do you think, give you the appropriate power to regulate the carbon 

contracts also? Or are we going to have to make some changes in 

that? 

Mr. GENSLER. I believe that the administration sent up to Congress a very strong package and that that package actually, to your 

question, does cover in the definitions of swaps contracts on emissions, allowances, and offsets. If it does not, we will have to tweak 

9 

it, along with Congress, but the intent was, working with Treasury, 

that it did cover that. 

Senator CHAMBLISS. Let us talk for a minute about this issue of 

standardized versus specialized contract, and we have got the same 

issue, obviously, out there today with a number of other commodities. But is there going to be any difference in trying to say that 

a contract on a carbon emission is a standardized contract if it does 

so-and-so versus an interest rate contract that is standardized if it 

does so-and-so? Where are we going to come down on this? And 

how are we going to define ‘‘standardized’’? 

Mr. GENSLER. I think it is very similar. What the administration 

put forward, and I support, is that the biases toward bringing more 

transparency and lowering risk that standardized products are on 

exchanges or trading platforms and centralized clearing, if a clearinghouse accepted a carbon allowance swap to be cleared, then the 

presumption would be that it would be standardized. 

That still might be the case that if somebody has to finance a 10– 

or 20–year utility plant, they could do that. But most likely the 1– 

year, the 2–year, or the 3–year carbon allowance trading would be 

largely standardized—maybe not entirely, but largely standardized. 

Senator CHAMBLISS. OK. Just in addition to staying in touch 

with us relative to the resources, I think this issue is going to be 

critical with respect to the markets you have jurisdiction over now 

as well as any carbon contracts. And it is another reason I think 

we better be careful as we move ahead with cap-and-trade to make 

sure we get it right, and that if we are going to clear all of these 

contracts, with few exceptions—and I agree with you, I hope we 

can do that—we need to make sure that the traders out there on 

both sides of these contracts really have some direction. And I 

think we have got to be very careful that we give them the right 

kind of language to know what it is they are going to be dealing 

with. 

Mr. GENSLER. Senator, I agree, and I also think you have highlighted the intersection of Congress’ work between cap-and-trade 

and over-the-counter derivatives reform. These two legislative initiatives might be timed a little differently and through different 

committees at times, but they very much relate in the regards you 

just said. 

Senator CHAMBLISS. Thank you, Mr. Chairman. 

Chairman HARKIN. Thank you, Senator Chambliss. Senator Klobuchar was next, she is not here. Then we turn to Senator Grassley, Senator Grassley? 

Senator GRASSLEY. Thank you, Mr. Chairman. Thank you, Mr. 

Gensler. 

In your testimony, you state that emissions contract markets operate no differently than other commodity markets that CFTC regulates. However, there are members of the following panel that say 

these markets are quite different because the market is mandated 

by a Government-imposed cap and the market is ever reducing 

supply. So would you please reconcile these two points of view that 

the market really is different, but should be regulated in a uniform 

way as other commodities? 

Mr. GENSLER. There are many similarities, like in the agricultural products this Committee oversees and their futures in corn 

10 

and wheat. There is an annual crop in a sense. There is an annual 

crop of allowances that are issued. It may be reducing instead of 

growing. Hopefully we think of corn and wheat growing, and this 

might be reducing. 

It has some similarities to even Treasury bonds. Treasuries are 

issued by the Government. These are issued. Again, we would like 

to think that there would be fewer treasuries, but, unfortunately, 

there seems to be more every year. So there are many similarities. 

Where the similarities depart—I would certainly look forward to 

working with this Committee and Congress to see if there is additional oversight we would need. But I think in terms of overseeing 

a trading market, there are far more similarities than there are 

differences to all the other products that are overseen, whether it 

be the agricultural, the energy, or the financial products that are 

currently overseen in the futures markets. 

Senator GRASSLEY. Next, you mention briefly in your testimony 

about the recent public hearings that CFTC held on whether to set 

position limits on energy markets like we do in agriculture markets. Expand for me and the Committee on your findings at the 

hearings. 

Mr. GENSLER. We had three hearings where we had 23 witnesses, and we had over 400 comment letters that came in. What 

we are looking at is Congress really directed in our statute that the 

CFTC set position limits—this was back in the 1930’s—and we did 

so in agricultural products and still do so. We did in energy products with the help of the exchanges through June of 2001. And, in 

fact, it was just 8 years ago that we sort of backed away from that, 

and the exchanges now have what is called accountability levels 

rather than hard limits. 

So we are taking a very close look as a Commission at this, all 

the comments, the thought really being that markets—how do we 

best promote a market, the fair and orderly market that no one 

party is so highly concentrated in that market that actually by 

being so large in the market, it sort of distorts a market and limits 

liquidity and limits the market function rather than adds to the 

market? 

It is a lot to move forward, but if we were to move forward—and 

I say ‘‘if’’ because we have a Commission process—we are looking 

to do that in the fall with proposed rules. We would take more public comment through the usual means that we do that. 

Senator GRASSLEY. Thank you, Mr. Chairman. 

Chairman HARKIN. OK. Thank you. 

Senator Klobuchar? 

Senator KLOBUCHAR. Thank you very much. Thank you, Chairman. 

Over 25 years ago, Minnesota was the first State in the Nation 

to adopt legislation to address acid rain, and since then, as you 

know, President George H.W. Bush in 1990 created the Acid Rain 

Emissions Trading Program. And so our country has had some experience with this, and I know this is an emissions program that 

is regulated by the EPA. However, the CFTC has oversight of emissions trading. Could you comment about how that is working and 

any analogies you can draw with the proposals before us? 

11 

Mr. GENSLER. Senator, I thank you. I did not know it was your 

home State that started that. 

I think it has worked well. It is a small market, and much smaller than these anticipated markets. But under the Acid Rain and 

Clean Air Act, two products—sulfur dioxide and nitrogen oxide— 

are limited, and that is all done by the EPA. There is no offset program. It is more an allowance program. But then there are futures 

trading on these various contracts, and they are traded on something called the Chicago Climate Futures Exchange, and then also 

there is, I will call it NYMEX, or New York Mercantile Exchange, 

has—and I think you have a witness later today about that. 

Those futures trade. They are under our current regulatory regime. So far there has not been any issues that are not similar to 

the other things that we oversee to protect against fraud manipulation. We oversee the clearing and the exchanges on these. 

Senator KLOBUCHAR. And do you think it has been a success, the 

trading on that? 

Mr. GENSLER. I think that the trading—I am not going to speak 

to the environmental side, which I have read a lot about, but it is 

other expertise. I think the trading has brought greater price discovery, that those participants in the market who want to transaction, have a broad national market; that natural hedgers, just 

like in corn and wheat and oil, have somebody on the other side 

who might take the other side, who is a speculator but is setting 

a price with them to ensure that outcome. 

So I think in that regard, yes, it has been a success. It is still 

a very small market, of course. 

Senator KLOBUCHAR. OK. So you think you could draw some 

knowledge and wisdom from that, but that this would be a much 

bigger project to tackle? 

Mr. GENSLER. I think that is right. 

Senator KLOBUCHAR. OK. And how does it compare with what is 

happening with the EU and how the EU has handled it? 

Mr. GENSLER. Well, in Europe, you are right to mention that 

they, too, have gone forward, but they have a greenhouse gas initiative. They have two contracts, two trading—one is on the allowances, the EU allowances, and one is on emissions reductions or 

what we here call ‘‘offsets.’’ And those two contracts trade very actively on the European Climate Exchange and on something called 

Bluenext, two different exchanges. One is regulated by a French financial regulator, the other by the U.K. regulator. 

The open interest there, interestingly, is about the size—I just 

looked at it last night—about half a million contracts on the European Climate Exchange, which is about the size in open interest in 

corn or wheat, which are about 300,000 or 400,000 contracts. It is 

about a third of the size of WTI oil, which is about a million and 

a half open interest, just to give you a sense of the size of that market. 

Senator KLOBUCHAR. OK. Since you have mentioned wheat a few 

times—and this is a little different topic—in January, the GAO 

issued a report in response to House Ag Committee Chairman 

Collin Peterson, who is a Minnesota Congressman, and he asked 

the GAO to examine issues surrounding the regulation of futures 

trading, as you know. And once noteworthy aspect of the report 

12 

was the conclusion that eight empirical studies generally found 

limited statistical evidence of a causal relationship between speculation in the futures market and changes in commodity prices. A 

recent report by Homeland Security revealed that speculation was, 

in fact, one of the major causes behind the recent fluctuations in 

wheat. 

So could you comment on these reports and the connection between speculation and volatility of commodity prices? 

Mr. GENSLER. We have recently—I think it was just last week— 

promoted greater transparency in these markets by disaggregating 

our weekly reports. We now also break out the index investors in 

the market. I think that the best role for the CFTC is to help promote transparency so market analysts can best answer the Senator’s question. 

I do think as it relates to wheat specifically, if I can narrow that, 

I do think that index investing in the wheat contract in Chicago— 

and it is a very narrow topic—probably did contribute to what is 

called a lack of convergence in the wheat market. That is, the price 

of futures and cash in the wheat market has not come together. 

And so I think a little bit over half of that marketplace in the Chicago wheat market is index investors, and I think that is one of 

the contributing—not the only factors, but contributing factors to 

the lack of wheat convergence. 

Senator KLOBUCHAR. Thank you very much. 

Chairman HARKIN. Thank you. 

Now Senator Stabenow. 

Senator STABENOW. Thank you, Mr. Chairman, and welcome, 

Chairman Gensler. 

Mr. GENSLER. Good to be back in front of you. 

Senator STABENOW. It is good to see you. Just as one member, 

I would indicate, and speaking to our appropriations leaders, that 

if we move forward on cap-and-trade, we certainly need to address 

resources to make sure the CFTC is able to fully address all of the 

issues involved in this, which are incredibly important. 

I wanted to follow up more on the over-the-counter issue, which 

I think is a very important piece of all of this, and not only as we 

look at reforms that we are addressing here in this country, but in 

the House bill they would allow U.S.-covered entities to use international carbon instruments by the EU, the emissions trading system, or the UN’s Clean Development mechanism to meet our domestic compliance purposes. 

So given that approximately 75 percent of all the emission trading in Europe takes place over the counter, how do you see 

commonizing international carbon instrument compliance if the 

U.S. legislation were to restrict such instruments for compliance 

purposes to those traded on regulatory markets? 

A second question would be, as a follow-up: Has the CFTC conducted an analysis of what impacts, if any, the administration’s 

Over-the-Counter Derivatives Markets Act of 2009 would have on 

the domestic and international carbon markets? 

Mr. GENSLER. Well, in the first question, I think that international cooperation is critical. I do not know where Congress will 

come out in terms of whether those allowances or offset allowances 

13 

over in Europe will be allowed here. But even if they are not, there 

is going to be some relationship of these two marketplaces. 

I believe that we have to have full transparency even into the 

over-the-counter market. The over-the-counter swap market may 

still be allowed, but it should be fully regulated. We should have 

the transparency. Any dealer in those markets should be registered, and we should have 100 percent transparency into that, 

and we should report the aggregate positions. 

In terms of the second question about the over-the-counter reform that has been proposed by the administration, it does include 

oversight of the carbon allowance markets. We have not had a separate study of that because it is such a small part, it is a small 

market in nitrogen oxide and in sulfur dioxide. There is a small 

market also between ten States, in New England down to my home 

State, Maryland, called the Regional Greenhouse Gas Initiative. 

But, again, it is small. We have not had an independent study yet. 

But I do think that if we move forward, we must cover carbon 

allowances in what is being considered in the over-the-counter derivatives legislation that the administration sent up. 

Senator KLOBUCHAR. So, just to recap, you are not seeing a problem in between what is happening internationally and at least at 

this point what the House bill has said in terms of using—allowing 

the international emissions standards versus what we are doing 

here? I mean, harmonizing that, would you have any recommendations as it relates to that? 

Mr. GENSLER. My recommendation would be is if an allowance or 

an offset there is fungible into a U.S. system, if the Congress decides that it is fungible, then we want to make sure, just as oil is 

fungible worldwide, that we are looking at the aggregate markets, 

that we would have to be working even more closely with the FSA 

currently overseas and then there is a French financial regulator 

that oversees those trading markets over there. So fungibility puts 

a greater burden—this fungibility is a global fungibility of offsets. 

It puts a greater burden on the regulators to have a coordinated 

approach. 

Senator KLOBUCHAR. And do you feel confident that you can 

achieve that? 

Mr. GENSLER. I think we can, but it is a greater challenge because sometimes they have a different point of view than we do on 

how to regulate these markets. 

Senator KLOBUCHAR. All right. Thank you, Mr. Chairman. 

Chairman HARKIN. Thank you, Senator Stabenow. 

Now Senator Casey. 

Senator CASEY. Mr. Chairman, thank you very much, and, Chairman Gensler, thank you for your appearance again. You have appeared in front of many Senate committees, and we are grateful 

you are here again. 

I am going to give you a little commercial in a moment, but I 

wanted to, first of all—that is because of your Pennsylvania connections, by the way, but I also want to commend your work. But 

we are here today to talk about a challenge that faces not just our 

country but the world, and the basic challenge is how to slow, stop, 

and reverse global warming. Obviously, there is legislation that is 

in the House, and the Senate is working on this as well. As we do 

14 

that, we have to be able to balance and take into serious consideration and implement strategies within the legislation to make sure 

that our farm families are not adversely impacted. I believe, 

though, by as much as it is a challenge, it is an opportunity. It is 

an opportunity not just to stop global warming and keep our environment clean, but it is also a jobs opportunity, to create jobs and 

also to enhance our national security. 

We know that rural America, the families in rural America have 

been hammered by this recession. In fact, some of them were adversely impacted long before the recession with the high energy 

costs. Senator Gillibrand and I were just talking about our dairy 

farmers, all across States like Pennsylvania and New York and so 

many others, that have been adversely impacted. 

We are grateful today that you are here. We are grateful for your 

work in restoring confidence and giving a sense of strategy and a 

sense of purpose to the work that you do as a regulatory body that 

needs, as I realize, more resources. 

I know that later today we will hear from, among others, Luke 

Brubaker from Pennsylvania, and he was kind enough to provide 

some Pennsylvania crop insurance advertising. We are grateful for 

that, and we are grateful it was on the top of the pile of our papers. 

I want to thank him on behalf of the people of Pennsylvania. 

Senator KLOBUCHAR. Would you like one? 

Senator CASEY. Senator Klobuchar is passing out extra copies. 

But that all leads back to you because I know you are a Wharton 

graduate. We are pretty proud of you, and we hope you come back 

to Pennsylvania and live and pay taxes and do all that. 

[Laughter.] 

Senator CASEY. But in the meantime, you have got a lot of work 

to do here in Washington. 

I was especially impressed by and happy about the fact that in 

your testimony you said—I am looking at page 2. You said, and I 

quote, ‘‘As Congress moves forward with... cap-and-trade legislation, I believe it should ensure that there is a comprehensive regulatory framework over the expanded carbon markets...’’ I think 

those are very important words, ‘‘comprehensive regulatory framework.’’ And then later, on page 6, you emphasized ensuring that 

‘‘all transactions in both the carbon futures and cash markets are 

promptly reported and that a central registry is updated at least 

on a daily basis.’’ And all of the concerns that you have raised 

about how we do this to get it right and to be able to regulate it. 

I will ask in the very limited time that I have left, because I 

know I have talked for a couple of minutes here as a preface, but 

in terms of your resources, both human, staff resources as well as 

technology, tell us about what you need to do your job generally, 

but also in particular, if legislation is passed to give you this additional assignment, so to speak. What would you need specifically 

or as best you can guess in terms of people and resources? And on 

the technology part of it, is it both hardware, software, and other 

aspects of technologies? 

I know it is a broad question, but you have all of a minute to 

answer. 

Mr. GENSLER. Well, I thank you, and I appreciate the advertisement. If there is anything you like in what I do, you can credit it 

15 

to my University of Pennsylvania education. Anything that you do 

not like, you could credit to my wayward days elsewhere. 

[Laughter.] 

Mr. GENSLER. But in terms of needed resources, with Congress’ 

help we have just gotten back to the size we were in 1999, about 

570 people. We are going to submit, the Office of Management and 

Budget, to Congress in, I think, a week’s time a much larger number, but it is going to be what we really believe we need to do our 

current duties. In technology, it is mostly software upgrades. We 

need to take our position and trading surveillance systems, probably spend on the order of $11 or $12 million, but we do not 

know—it is probably a multi-year project—to upgrade that to 21st 

century surveillance rather than right now it is too much after-thefact surveillance. 

Senator CASEY. Well, thank you very much, and, Mr. Chairman, 

both Chairman Gensler and I have been very careful on our time, 

so I will stop right here. Thank you. 

Chairman HARKIN. Thank you very much, Senator Casey. 

Senator Johanns? 

Senator JOHANNS. Thank you, Mr. Chairman. Let me, if I might, 

start my questions with maybe a little bit of context. In our last 

hearing with the Agriculture Committee, I asked a question of one 

of the panelists, Lisa Jackson. If we do what the House bill wants 

us to do, what will the environmental benefit be? Will temperatures come down? Will we reduce CO2 emissions in the world? And 

the answer was no. You know, going it alone is not going to change 

much. Then soon after that, India and China weighed in, and they 

basically said, ‘‘We are not interested in capping emissions.’’ So we 

are asking our farmers and ranchers to bear the burden of this 

when, quite honestly, I would find it very hard to make a claim to 

them that we are going to see really any environmental benefit. 

Second, although there is some debate about the nature and extent of this, it is a given that they are going to have higher input 

costs. Now, like I said, we can have a great debate as to whether 

diesel fuel is going to go up X versus Y and this and that, but I 

think it is a given that they will pay higher input costs. 

Now, I put that together with this notion that we have had in 

agriculture, especially as a result of the 2002 farm bill, that really 

what we are trying to do with agriculture is take some of the volatility out of it. We talked about the safety net and the loan deficiency program, the marketing loan program, the countercyclical 

program, the ACRE program. All of those are designed to kick in 

at a point where we take some of the volatility out of it. 

You know, farming is one of those businesses: They cannot pick 

their price; they cannot predict the weather; they cannot predict 

what kind of pests they are going to deal with, and on and on. So 

it is a very, very difficult situation anyway. 

Here is what worries me about your piece of this puzzle. I do not 

think there is anything that we could do that would guarantee that 

in the trading here that is going to occur that there is not going 

to be volatility. We might be able to define, to some extent, what 

the parameters of that are going to be. But it just seems the nature 

of this that there is going to be volatility. 

16 

Now, I think the Ranking Member made some excellent points. 

As I read the Texas A&M study, there are more losers than winners on this in agriculture. And even in the two farms from Nebraska that they analyzed, those are dryland farmers, and in Nebraska we irrigate. I think they would have been on the losing side 

of the equation because of higher electricity costs. 

So my question to you is: How much should farmers and ranchers be worried about the volatility, the additional volatility that 

this cap-and-trade legislation is going to put into their lives? And 

how much does this bill prevent that from happening? 

Mr. GENSLER. Senator, I think that you are right, as you said, 

that farmers and ranchers cannot pick the price, cannot predict the 

weather, and so forth. I think that what we can do moving forward 

with Congress is make sure that if you move forward, the trading 

side is most transparent so the farmers and ranchers can see that 

pricing; that if they want to hedge it, they can hedge it out a long 

time; and that the price that they get is created in a market that 

is free of manipulation and it is fair and orderly. That is our remit 

at the CFTC, is to make sure that price discovery is fair and orderly, it is transparent, and the farmer can hopefully hedge their 

risk out, you know, on a yearly or multi-year basis. 

Senator JOHANNS. Here is the difficulty of that if you are a farmer, and I will use the turkey industry as a good example. When 

corn went to $6.50, $7, it wiped out the turkey industry in Nebraska. Just wiped them out. So if you have higher prices and you 

end up with that kind of situation with higher input costs, it will 

be zero consolation to that farmer when I call them and say, ‘‘I am 

sorry you went broke because of this thing, but it was transparent.’’ 

Do you see what I am saying? 

Mr. GENSLER. No, I mean, I see what you are saying. I am just 

addressing what we do well as a market regulator is assuring that 

there are markets that are not only transparent, but the price discovery function—and this is also for farmers or ranchers that 

would be having offsets and they wanted to sell those offsets, too, 

and get the benefit of a price that way as well, as a revenue, that 

that market is free from manipulation on the trading side of capand-trade. 

Senator JOHANNS. Thank you, Mr. Chairman. 

Chairman HARKIN. Thank you, Senator Johanns. 

Let us see. Senator Conrad was next. Senator Gillibrand? 

Senator GILLIBRAND. Thank you, Mr. Chairman. 

Mr. Gensler, thank you so much for being here. We are extremely grateful for your testimony and your leadership on these 

issues. I have basically three areas of inquiry that I hope you can 

address. 

The first is about the regulatory structure. I want to know your 

opinion on whether we should develop a regulatory structure for 

carbon trading that is distinct from other commodities, or would 

that, in fact, be more detrimental to the goal of providing effective 

market regulation and make it more difficult for the CFTC to do 

their job—enforce position limits, protect against fraud, and other 

regulatory objectives? So, basically, I would like your opinion on 

which regulatory structure you think is best and would be most effective? 

17 

Second, I want you to address a little bit more specifically about 

the clearing process. Equity and equity options are handled 

through an open format, and the multiple exchanges competing for 

business generally can bring down costs for both clearing and settlement, and it has had that effect over recent years. 

Clearing for commodities remains a closed system that lacks any 

competitive dynamic, and as a result, the costs are higher associated compared to equity and equity options contracts. 

So, in your opinion, is it better to create a new model utilizing 

a noncompetitive model? Or would you prefer to do a more open 

competition, open access market? Which do you think is more effective, and why? 

Then the third issue is a little bit about over-the-counter and 

customized markets, what you would recommend? If we did have 

a customized market, an over-the-counter market, what would you 

recommend for that? And, in particular, do you believe it is appropriate to exempt anyone, particularly end users with bona fide 

hedges, from the mandate of everything having to go through clearing or an exchange? And do you think it would be appropriate and 

enforceable to exempt firms with inherent carbon risk—for example, utilities producers—from such a mandate? 

So, essentially, do you imagine or would you recommend any 

trading of customized markets for the carbon exchange that would 

not necessarily have to go through clearing or not through an exchange rate, depending on what we choose? And then, second, if 

you do imagine an exception, what kind of regulatory oversight 

would you imagine? Because, clearly, you would want to have 

transparency and the regulators would need to know volume. But 

what would you imagine for the regulatory aspect of that piece? 

Mr. GENSLER. Let me see if I can try to address all three of your 

questions and some of the subparts. It is good to be back with you, 

Senator. 

In terms of regulatory structure, I think that the Commodity Futures Trading Commission does have the expertise and experience, 

does currently oversee the futures markets, albeit small, in emissions for these out of the acid rain program and even the regional 

alliance that I think both of our home States are in. So I think that 

is a good structure. We have two market regulators in this country. 

I am not sure we need a third market regulator. There is enough 

that we can harmonize between the SEC and the CFTC. 

I think that in terms of clearing you raise a very good point. We 

have actually recommended for over-the-counter derivatives that 

we have an open model for clearing. We think that that will promote greater competition amongst exchanges and exchange platforms, and certainly I think it is worthy to think about that in 

terms of the carbon markets. We would certainly recommend that 

for the carbon over-the-counter derivatives marketplace, but you 

raise a question about carbon futures, which is a worthy question. 

Right now it is a more closed approach on the Chicago Climate Exchange, I believe, but I might be mistaken on that. 

Now in terms of over-the-counter markets, I think that it is important to bring as much of the over-the-counter market into centralized clearing and onto exchanges as possible. Some will not be 

able to be standardized, of course. You raise a second question as 

18 

to whether, if there was a hedge that is entered into for accounting 

purposes, it is a bona fide hedge—I think, if I read into your question, might that be treated a little differently? The administration 

proposal was to grant the SEC and CFTC some rule-writing authority in that regard to allow some of that to be exempted. 

I do have a concern that the more we exempt, the more that we 

might be years from now looking back at 2009’s Enron loophole or 

something. So I think we have to be very careful in each of these 

categories in terms of exemptions, because we want end users to 

manage their risk appropriately, these tens of thousands of end 

users, but I think society also needs to lower the overall risk by 

bringing as much into central clearing as possible. 

Senator GILLIBRAND. So if there is a customized market left, 

what would you have it look like? And who would be eligible—— 

Mr. GENSLER. Well, I think there will be a customized market, 

both in carbon markets as well as interest rate products and elsewhere. But I think the dealers in those markets have to be fully 

regulated so that the customized transactions and the standard 

transactions, the dealers would have to have capital; there would 

be business conduct to protect against fraud and manipulation so 

we could police the markets along with the SEC on the other products. These products would probably be more ours, oversight, and 

then the transparency, that not only as regulators we saw it, but 

we could aggregate the data and put it out to the public. 

Senator GILLIBRAND. Thank you. 

Chairman HARKIN. Thank you, Senator Gillibrand. 

Senator Lincoln? 

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

holding the hearing today. Welcome, Chairman Gensler. We are 

glad you are back. 

Mr. GENSLER. Good to see you again. 

Senator LINCOLN. I would like to associate my comments with 

the Senator from Pennsylvania, Senator Casey, in terms of the 

challenges that we face, but the opportunities that we can find 

there. And I think there are great opportunities here. 

I also want to associate my comments with him in terms of making sure that as we do move forward, we do not do so putting a 

disproportionate burden on our hard-working farm families and our 

agricultural communities across this country. They do a tremendous job providing food and fiber for the world, and I hope that as 

we look at what we are trying to do, we will keep that in mind always. 

While it is not necessarily my preference to move on cap-andtrade legislation in the Senate this year, if the Senate is going to 

move on climate change legislation in the future, certainly the regulation of carbon markets is something that we have to get right. 

And we are certainly going to need you all at CFTC to help us do 

that, Mr. Chairman. 

Under the cap-and-trade legislation, we are venturing to create 

kind of a whole new commodities market which presents, I think, 

a number of these challenges that we talk about and issues for 

Congress. And we thank you for your hard work in this area and 

the research you have already done in working to try and come up 

with those solutions. 

19 

Just a couple of questions for the Chairman. Obviously, CFTC 

could play such a large role, as you have mentioned, and has the 

capability to do that in regulating carbon markets under a cap-andtrade system. What would you say is probably the most important 

thing that you have learned or that we, all of America, should have 

learned or could have learned from the EU experience in regulating 

the carbon market? 

Mr. GENSLER. I think that what we have learned from the European experience is these markets are going to be likely sizable, that 

we have to bring transparency to these markets, that they need to 

be regulated. They do not yet regulate the over-the-counter derivatives marketplace, and I cannot point to a problem there, but I 

think enough problems have been in our markets that we should 

include the carbon markets in what Congress is moving forward in 

over-the-counter derivatives for sure. But I think transparency and 

to make sure that we bring it under market regulation, any centralized cash market, any centralized futures market, and also this 

over-the-counter market. 

Senator LINCOLN. Will you continue to, I think, certainly re-emphasize the fact that what we have done in the past hear in similar 

situations has been on a much, much smaller scale when we talk 

about—you have mentioned the SO2 and the SOX and the NOX 

and what we have dealt with there. Do you think what we are 

dealing with here is too large to deal with, with this type of an approach? 

Mr. GENSLER. No, I do not. I think it is just a larger scale. The 

size of it makes it even more incumbent upon us that we have an 

oversight function, that the price discovery function is free of manipulation, and that it is transparent; that a national registry, even 

if it is kept by EPA, is updated on a very regular, real-time basis— 

not at the end of the month, not at the end of the quarter, but it 

is really updated on a very regular basis and so forth. 

Senator LINCOLN. Well, I have some real concerns about the volatility or the possible volatility in these new markets, carbon markets. And I guess the two questions I would have to you on that 

would be if you believe that the Waxman-Markey approach is the 

correct approach to helping prevent carbon markets from wildly 

fluctuating, what do we see in the possibility of the ramifications 

of that volatility, that possible volatility, particularly to consumers? 

I know Senator Johanns brings up his turkey farmers. I have got 

a lot of poultry farmers and catfish farmers and others that exactly 

what happens, cattlemen as well, when the price of that feed goes 

up, they are out of business. And when they do, then the price of 

those products, those foods in the grocery stores go up. There is 

concern all around. 

What about that volatility? Do you think the Waxman-Markey 

approach has enough in it to deal with that volatility? And how do 

you think that volatility could affect our consumers? 

Mr. GENSLER. I think that as Congress tries to address itself to 

how to lower the emission of greenhouse gases, the trading piece 

of this, it is most important to make sure there is transparency. 

Like other markets, there will be some volatility, but the way one 

addresses that volatility is to make sure that people can hedge 

their risk for long periods of time, that they are not subject to the 

20 

whims of a current weather pattern or some weekly pattern and 

they can hedge it; they can see that national pricing, they are not 

subject just to some dark market; and that you have a strong regulator who is going to enforce manipulation standards and aggregate 

position limits as we seek to do in other markets. 

But you are right, and both Senators are right. I mean, there will 

be some volatility in this marketplace, but I think transparency, 

anti-manipulation, a national market rather than smaller regional 

markets, and aggregate position limits are a part of the puzzle 

here. 

Senator LINCOLN. Thank you. 

Thank you, Mr. Chairman. 

Chairman HARKIN. Thank you, Senator Lincoln. 

Again, Chairman Gensler, thank you very much for your testimony and for your leadership at the Commodity Futures Trading 

Commission. I listened as intently as I could to a lot of the questions. Some of those were kind of policy questions and things like 

that, but we just need to have you keep in close contact with us 

on resources that are needed and how we structure the oversight 

and regulatory regime for this so that it functions well. 

I leave you with where I started and, that is, my concerns again 

about speculation on derivatives and how that might artificially 

jack up the prices on these allowances and offsets and not in accordance with really what they should be worth. I asked that question at the beginning, and I still have concerns about it, but this 

would be an ongoing dialog and discussion, I am sure. 

Mr. GENSLER. Thank you, Mr. Chairman, members of the Committee, and we are available to be of help at any time. 

Chairman HARKIN. I appreciate it very much. Thank you very 

much, Chairman Gensler. 

Mr. GENSLER. Thank you. 

Chairman HARKIN. We will call our next panel up: Mr. Timothy 

Profeta, Director of the Nicholas Institute for Environmental Policy 

Solutions at Duke University; Mr. Joseph R. Glace, I believe—I 

hope I pronounced that right—Vice President for Risk Management 

and Chief Risk Officer, Exelon Corporation; Dr. Dave Miller, Chief 

Science Officer, AgraGate, and Research & Commodity Services Director for the Iowa Farm Bureau; and Ms. Julie Winkler, Managing 

Director, Research and Product Development, CME Group, and 

Member of the Board of Directors of the Green Exchange Venture. 

Mr. Glace, did I pronounce your name correctly? 

Mr. GLACE. Yes, sir. 

Chairman HARKIN. OK, good. 

Senator CASEY. Mr. Chairman, Mr. Glace also has Pennsylvania 

educational roots. Am I correct? 

Mr. GLACE. Yes, sir. 

Chairman HARKIN. What is this, Pennsylvania Day here? Or 

what is going on here? 

Senator CASEY. We are just going to keep that commercial going. 

Thank you. 

[Laughter.] 

Chairman HARKIN. We have Pennsylvania on the next panel, too. 

Pennsylvania Day here. 

21 

Well, welcome to all of you again. You can tell from Mr. Gensler’s 

testimony and our questions that there is a lot of interest in this 

Committee on how this is not only structured, but how it is regulated. This panel basically will continue our discussion on how we 

regulate carbon markets in a cap-and-trade system. Our next panel 

will be from the producer group perspectives, but I understand that 

a lot of this stuff flows back and forth, and we might get into some 

producer things also here on the regulatory panel. 

As I said in the beginning, your statements will be made part of 

the record in their entirety. I would ask you to sum up in 6 minutes or less what your main point is so we can get to discussions 

with you on those points. 

I would start first with Mr. Timothy Profeta, Director of the 

Nicholas Institute for Environmental Policy Solutions, and not a 

stranger here to the U.S. Senate. 

STATEMENT OF TIMOTHY PROFETA, DIRECTOR, NICHOLAS INSTITUTE FOR ENVIRONMENTAL POLICY SOLUTIONS, DUKE 

UNIVERSITY, DURHAM, NORTH CAROLINA 

Mr. PROFETA. Thank you, Mr. Chairman. Thank you, Mr. Chairman and Members of the Committee, for the opportunity to testify 

today. Right now I wish I went to school in Pennsylvania, but it 

is an honor to be here. 

My testimony today is focused on the issues and concerns regarding the design of the carbon market. Given the financial market 

failures in recent years, however, it is understandable that a market approach should not be viewed as a foregone conclusion. However, I want to submit at the outset that, in our institute’s evaluation of a number of policy options, the market remains the best 

means to achieve the environmental goals at the lowest cost. 

Almost by definition, private actors with a market incentive will 

find a lower, less costly alternative to reduce greenhouse gas emissions than the Government could determine by fiat. And cost, in 

the end, is the determining factor. No sector is more aware of this 

than the agricultural sector. And as one more aside, let me note 

that the institute this week released a report co-authored by our 

colleagues at Texas A&M and Oregon State and EPRI to try and 

put an end to the ‘‘he said, she said’’ debate over agricultural impacts. At bottom, our study found that the net flow of greenhouse 

gas revenue and indirect commodity market revenues for farmers 

still outweighed the increased operating costs that we did see from 

the climate program. 

Much of the market’s cost-reducing benefits, however, could be 

weakened if the market does not operate transparently and efficiently. We know all too well that imperfect markets occur. Recent 

market failures provide a number of lessons, however, that you can 

apply to the creation of a new carbon market, including the importance of market transparency, vigilant regulators with adequate resources and jurisdiction, and effective risk management. 

But before I recommend how these lessons should apply to the 

carbon market, let me first point out its uniqueness. Carbon will 

be unlike other commodity markets. It is an especially important 

point right now as the question of a carbon market is becoming 

complicated for fear that it will be a proxy for greater commodities 

22 

regulation. I would like to point out a few distinguishing aspects 

of the market. 

First, unlike other commodities markets, the entire carbon market is created by the Government to achieve a societal goal. Demand for the product, and the product itself, is created by Government action, and thus the Government has a special duty to ensure 

that the market operates effectively. 

Second, entities covered by the legislation will have no choice but 

to participate in the market, and it is a market with an ever reducing supply. 

Third, the carbon market is likely to be driven heavily by derivatives, underscoring the need to design an appropriate regulatory 

structure. In particular, climate legislation will likely create a longterm, 38–year obligation for regulated entities, and these entities 

will need access to financial instruments to hedge their exposure 

through derivatives—a necessary element to securing investment 

for new, low-carbon-emitting energy technologies. 

I would like to leave you today with four principles for an effective carbon market based on the lessons of the past decade: one, 

real-time transparency; two, adequate risk management and settlement; three, a vigilant and well-funded regulator; and, four, transparent data and strong quality controls on the allowances traded. 

First, transparency. To the extent that instruments are traded on 

registered exchanges, the exchange member’s activity will be 

‘‘printed’’ on the exchange providing for the needed transparent information. If OTC transactions are to take place in the carbon market, the legislation will need to ensure that the regulator, market 

participants, and the general public have sufficient data to oversee 

and evaluate trading activity. 

Finally, Congress will need to balance the public’s access to timely market information with the legitimate concern that covered entities may need to protect their confidential business information. 

In addition to the information made available to the general public, 

regulators should have access to the full range of market activity 

in real time in order to prevent and punish market abuses, including fraud and manipulation. The obligation should lie with the 

market participant to provide the information to the regulator, not 

the other way around. 

Current market participants also need to know that the allowance purchased on the spot, forward, and futures markets, which 

are held to maturity, will be delivered. In regulated financial markets, counterparty risk is generally managed by clearing the transactions. If the Committee wants to minimize the risk from 

counterparty failure, as much trading should occur on exchanges, 

or at least be cleared centrally, as is feasible. 

Many will contend that clearing of long-term structural contracts 

will be difficult, as such transactions are unique and not liquid, 

and that parties will be required to post the collateral, or margin, 

necessary to participate in the market. These are non-trivial issues 

and pose a choice between mitigating systemic risk and creating 

the additional cost of posting margin. 

It is important to note that market participants pay for the risk 

or risk management somehow, either through the posting of marVerDate Nov 24 2008 14:07 Jan 20, 2011 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 C:\DOCS\62715 MICHA
23 

gin or through the pricing of OTC instruments. It will be your role 

to evaluate that tradeoff. 

In the case that Congress provides exceptions to cleared or exchange-traded transactions, transparency for the counterparties 

and the regulator is even more important. 

Access to market data should be coupled with sufficient resources 

to process and analyze the information, broad jurisdiction that allows the regulator to oversee any trading that involves allowancebased financial instruments, and appropriate enforcement authority. If Congress will ask the CFTC to take on the oversight of this 

new market, then more resources will be required to build the team 

of regulators needed. 

Finally, the Government must ensure that the information regarding emissions is transparent, predictable and reliable. It must 

predictably produce information about the Nation’s emissions to 

allow the market to evaluate the demand. A good example of an 

effective program has been the U.S. Acid Rain cap-and-trade program. 

The Government also must provide the market with adequate assurances that the products traded in the carbon market are what 

they claim to be. With regard to the emissions allowances, the Government will create, serialize and track the Government-issued 

right to emit. 

With regard to offset credits, however, the Government’s role is 

to provide adequate protocols and procedures to ensure the market 

that any carbon offset project is real and verified. 

The market is a powerful tool, by which environmental objectives 

may be achieved at historically low costs. Concerns about market 

abuses have, nonetheless, led some to conclude that now is not the 

time to create a new market. Let me posit that the exact opposite 

is true. If you choose to create a market, now is the best time to 

create a transparent, effective market that prevents excessive speculation and manipulation. The lessons are clear, and the public is 

attuned to the needs. If it wants to do so, Congress has the tools 

it needs to create a well-functioning marketplace. 

Thank you, Mr. Chairman. I look forward to your questions. 

[The prepared statement of Mr. Profeta can be found on page 106 

in the appendix.] 

Chairman HARKIN. Thank you, Mr. Profeta. 

Now we will turn to Joseph Glace, Vice President for Risk Management, Exelon Corporation. Welcome, Mr. Glace. 

STATEMENT OF JOSEPH R. GLACE, VICE PRESIDENT FOR RISK 

MANAGEMENT AND CHIEF RISK OFFICER, EXELON CORPORATION, CHICAGO, ILLINOIS 

Mr. GLACE. Good morning and thank you for inviting me to testify this morning. It is truly an honor to be here today. 

My name is Joe Glace, Vice President and Chief Risk Officer of 

Exelon Corporation. Exelon is a public utility holding company 

headquartered in Chicago. Our local retail distribution utilities, 

ComEd and PECO, serve 5.4 million customers, or about 12 million 

people—more than any other company in the United States. We 

have fossil, hydro, nuclear, and renewable generation facilities. Our 

nuclear fleet is the largest in the Nation and the third largest in 

24 

the world. I have worked in the energy field for over 29 years. At 

Exelon, I am responsible for leading the risk management function, 

including the identification, assessment, and monitoring of market, 

credit, and operational risks. 

In my testimony today I would like to highlight the following: 

Exelon’s support for comprehensive climate legislation; Exelon’s opposition to requiring all trading, derivatives, and hedging activities 

to be conducted on exchanges; Exelon’s support for expanding the 

CFTC’s jurisdiction to the new market for carbon allowances, including the over-the-counter market; and Exelon’s support for the 

reporting requirements for OTC transactions in the carbon markets. 

Exelon was an early and vocal advocate of climate change legislation. Our CEO, John Rowe, first testified in favor of addressing climate change by means of a carbon tax in 1992. We are pleased 

that the House has passed a comprehensive climate and energy bill 

and look forward to working with the Committee and the Senate 

to pass comprehensive, cap-and-trade legislation this year. 

Exelon supports a bill with realistic targets and an effective cost 

containment mechanism, such as a cost collar, and allocating allowances to regulated local utilities with a requirement that the value 

represented by those allowances be used to provide benefits to customers. 

I think it is important to explain briefly Exelon’s overall approach to commodities trading. We are not speculators. We use 

commodities trading primarily to reduce price risk from spot market power prices. Our business model is to lock in, or hedge, the 

price we are paid for the electricity we generate. 

We do this by buying and selling energy products in the markets 

that are available. For example, we might sell electricity at an 

agreed-to price for all hours in the summer months of June 

through September. We also might transact in the over-the-counter 

market for coal to lock in our fuel cost. 

Our customers benefit from this hedging and trading activity. We 

are in a position to agree to longer-term power sales contracts with 

both wholesale and retail customers. It is our experience that retail 

customers, in particular, want stable power prices. Without hedging and trading, that simply would not be possible. 

One of the principal concerns many have expressed with adopting a carbon control regime is how it will affect our fragile economy. Simply put, a properly regulated, robust trading program, 

plus liquid trading markets, will help control the overall cost of the 

program. 

It is important to view the issues before this Committee from the 

customer’s perspective. What steps should the Congress take to 

regulate carbon trading emissions without imposing undue costs on 

consumers? Our strongly held view is that any regulatory reform 

of the commodities markets should ensure that the products which 

we use to hedge our risks remain available to us and at a cost that 

is comparable to the costs we face today. We believe it would be 

a mistake to force most, if not all, derivative hedging activities to 

exchange-traded platforms. 

Today, a substantial component of our derivatives hedging program is in the OTC market without clearing. Transacting on exVerDate Nov 24 2008 14:07 Jan 20, 2011 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 C:\DOCS\62715 MICHA
25 

changes is much more expensive than in the over-the-counter markets because it requires posting of substantial amounts of cash as 

collateral. This is one reason we do not—in fact, cannot—conduct 

all of our hedging activity on exchanges. Moving all our hedging to 

exchanges would require substantially larger cash outlays. This in 

turn would mean our customers would have to pay substantially 

more for electricity. 

Another drawback of limiting hedging activity to exchanges is 

that these entities only offer a standardized set of products. Exelon 

often enters into customized transactions that mitigate the particular risk we are trying to hedge than would one of the exchangetraded standard products. To draw the obvious conclusion, power 

prices will be higher, meaning consumers will ultimately pay more 

than they would otherwise, if companies like Exelon are forced to 

do all of their hedging on exchanges. 

I will now turn to the question at hand: what to do about the 

coming market for carbon emissions allowances. The cost of carbon 

allowances will be a cost of doing business for generators. It will 

be just like the cost of natural gas, oil, or coal—an input that is 

necessary to enable us to make and sell our product. Exelon will 

need to hedge the price risk associated with that product. Exelon 

will want to have both exchange-traded and over-the-counter offerings that now exist to manage these risks. 

We recognize, however, that there is a need for fair and balanced 

regulation. No one wants another crisis that could pose systemic 

risk, or a market structure with continuing regulatory gaps. That 

is why we support the expansion of the CFTC’s jurisdiction to the 

new market for carbon allowances, including the over-the-counter 

market. This should allay any concern that any trader could artificially drive prices up. 

The Commodity Exchange Act already contains strong anti-manipulation provisions that should be made applicable to the OTC 

markets and perhaps revised and refined to ensure that they provide to the CFTC the tools it needs to prevent manipulation. 

For the same reason, Exelon also supports the adoption of new 

reporting requirements for OTC transactions in the market for carbon allowances. The CFTC has to have access to information about 

transactions to enable it to fulfill its regulatory oversight and enforcement function. Also, the obligation to report, as such, will be 

a powerful deterrent to would-be manipulators. 

I appreciate the Committee’s invitation to testify today. This is 

a complicated subject area. I hope that I have provided you with 

a sense of why it is important to ensure that there is effective oversight of the emerging carbon markets while at the same time 

guarding against over-regulation that would result in higher costs 

for companies like Exelon and in turn for our customers. 

I would be pleased to answer any questions you may have this 

morning. Thank you. 

[The prepared statement of Mr. Glace can be found on page 81 

in the appendix.] 

Chairman HARKIN. Thank you very much, Mr. Glace. 

Now we will turn to Mr. Dave Miller, Chief Science Officer for 

AgraGate, and Iowa Farm Bureau. Welcome, Dr. Miller. 

26 

STATEMENT OF DAVID MILLER, CHIEF SCIENCE OFFICER, 

AGRAGATE, AND RESEARCH & COMMODITY SERVICES DIRECTOR, IOWA FARM BUREAU FEDERATION, WEST DES 

MOINES, IOWA 

Mr. MILLER. Thank you very much for this opportunity to discuss 

issues regarding market structure and market performance as it 

pertains to carbon markets. My name is David Miller, and in addition to the activities and services working with the Iowa Farm Bureau and AgraGate, I also farm. On our 400–acre farm in southern 

Iowa, we converted to continuous no-till in order to qualify to earn 

carbon credits under CCX rules. I am one of thousands of U.S. 

farmers who work more than 16 million acres that have been paid 

for providing environmental services through the CCX enrollment 

and carbon services. While I have served for over 6 years on various governing committees at CCX, I am speaking today on behalf 

of AgraGate and the Iowa Farm Bureau. 

Occasionally, we have been asked why all of the credit registrations we have done through AgraGate have been on the Chicago 

Climate Exchange, and the simple answer is that the CCX has the 

only protocols that are workable for production agriculture and private forestry. Market design and structure matter and are critical 

to market performance. Some of the items that I would like to discuss today include market transparency, offset protocol standards, 

and the critical need for fungibility of compliance offsets. And I 

apologize to the Committee for getting down into the weeds on 

some of these things, but as a farmer, I know if I do not take care 

of the weeds, there is no crop. 

Market transparency is critical to smooth operation of a carbon 

market. Transparency means that not only must there be a clear 

enumeration of what criteria are used to define offsets, but that 

there must be a mechanism in place so that prices—bids, offers, 

and sales transactions—are publicly reported and readily available. 

The only market in the offset market that currently offers that 

transparency is the Chicago Climate Exchange. Unfortunately, that 

pricing transparency has been sharply curtailed. Under the provisions of H.R. 2454, there is language that suggests that domestic 

offsets from current registries may be exchanged or recognized in 

the Federal regulatory program, but not allowances or international offsets. This has resulted in all offset transactions moving 

to the bilateral, privately negotiated trades where the buyer can be 

assured that they will receive offsets rather than the other compliance instrument as might be the case on the electronic platform. 

To improve transparency, CCX rules have been updated to require that all these privately negotiated trades be reported. But the 

bid-ask spread has widened significantly, and the market has fragmented. This has increased the transaction costs associated with 

carbon marketing and has reduced the net returns to the actual 

offset providers. 

Regulatory uncertainty is now harming the thousands of farmers 

and companies who have taken the lead in building these rulesbased carbon markets, and it is extremely important that we provide a smooth transition for those who are making emissions reductions today in CCX and other verified programs. 

27 

With regard to fungibility, the fungibility of compliance offsets is 

extremely important, where a registered offset credit equals a registered offset credit regardless of the source of the credit. It is a 

market design characteristic that is essential if the transaction 

costs of the carbon market are to be minimized. 

‘‘Term Credits,’’ as delineated in H.R. 2454, are not fungible compliance instruments. They only delay compliance obligations. They 

do not satisfy them. They are an inferior product, and based on the 

experience of temporary credits under the European trading system, they will have little or no value. It is extremely problematic 

that H.R. 2454 has relegated all soil sequestration offsets, by design, to the class of term credits. It is neither necessary nor desirable from a market design perspective to address the issue of permanence in this manner. 

Design criteria for offset protocols can make or break the viability of agricultural and forestry offsets as real tools in the efforts to 

reduce atmospheric carbon. To be viable, offsets must be designed 

for ‘‘working lands.’’ And to be a workable part of the solution, the 

carbon offset protocols must work within the framework of existing 

agricultural markets. Length of contract matters. In Iowa, more 

than 60 percent of the farmland is rented by the operator with the 

vast majority of that land on 1–year renewable leases. In our experience of working with farmers on carbon offsets, the No. 1 reason 

why a farmer would not participate in a carbon offset program is 

the length of contract. 

We have looked at the proposed protocols of other registries. 

Some of these protocols have single-term length commitments anywhere from 20 years to 199 years. Our experience is that farmers 

and private forestry landowners are very reluctant to sign contracts that extend that long. 

Generalized quantification methodologies are a very effective and 

low-cost way to quantify soil sequestration offsets. But do not be 

fooled by the ‘‘illusion of accuracy’’ that some would say exists 

when credits are granted based uponsite-specific soil sampling. And 

there is more in my statement about that, but for time, I will leave 

that to the written. 

I would like to address some of the market regulatory framework. As is being demonstrated by the early action programs, carbon can and is becoming a commodity that can and will be traded 

just like other commodities. The experience of the Chicago Climate 

Exchange is proving that markets for carbon can and do work. The 

actual registry and retirement of allowances and offsets should be 

done on regulated, open, transparent markets with specific standards for price reporting that include date of transaction, vintage, 

quantity, and price information. 

The CFTC should continue in its role as the regulator of derivatives, futures, and options contracts associated with carbon trading, 

and Farm Bureau opposes the efforts to combine CFTC and the Securities and Exchange Commission and supports regulation of the 

commodity futures business by CFTC. Derivatives, futures, and options on carbon contracts are not fundamentally different than 

other derivatives, futures, or other markets. The oversight provided 

by the CFTC can be adequate for those markets. 

28 

In my written testimony, I also talk about some of the capital 

and margin requirements. Leverage is important, and I think we 

need to pay attention to those. 

I would finish by saying that USDA has a distinct and unique 

role as part of the administration of offsets, and that is a unique 

part of also the regulatory structure. 

I thank you for the opportunity to be a part of this, and I stand 

ready for any questions. 

[The prepared statement of Mr. Miller can be found on page 90 

in the appendix.] 

Chairman HARKIN. Dr. Miller, thank you very much for your 

statement, both here and the written statement. 

Now Ms. Julie Winkler, Managing Director, Research and Product Development for the CME Group, and member of the Board of 

Directors of the Green Exchange Venture, and since everybody is 

bragging about Pennsylvania, I am told you really came from Waterloo, Iowa. I want to state that for the record. 

Ms. WINKLER. That is correct. 

Chairman HARKIN. Thank you. Ms. Winkler, please proceed. 

STATEMENT OF JULIE WINKLER, MANAGING DIRECTOR, RESEARCH AND PRODUCT DEVELOPMENT, CME GROUP, AND 

MEMBER, BOARD OF DIRECTORS, GREEN EXCHANGE VENTURE, CHICAGO, ILLINOIS 

Ms. WINKLER. Mr. Chairman, members of the Committee, I am 

Julie Winkler, Managing Director of Research and Product Development of CME Group Inc. and a member of the Board of Directors 

of the Green Exchange LLC. Thank you for the opportunity to appear before the Committee today and provide our views regarding 

the regulation of a U.S. carbon market. 

The Green Exchange Venture believes that cap-and-trade is the 

preferred solution for guaranteeing emissions reductions at the 

lowest possible cost to the economy. In order for the promise of a 

cap-and-trade program to be met, it must be built on certain design 

principles. 

First, we strongly support providing compliance entities with a 

choice of utilizing exchange-traded derivatives and OTC instruments to meet their environmental obligations. Also, in order to 

provide these customers with effective risk management tools and 

liquidity, the U.S. carbon markets must allow for broad market 

participation. We further believe that the Commodity Futures 

Trading Commission is best suited as the regulator of the U.S. carbon marketplace. Last, to ensure the creation of a transparent U.S. 

carbon market with the necessary liquidity and price discovery 

they provide, regulatory proposals should not include a transaction 

tax. 

CME Group is one of six founding members of the Green Exchange Venture, which is currently comprised of 13 partner firms 

from the energy, environment, and financial sectors. CME Group 

currently provides the electronic trading platform, central 

counterparty clearing services, and other exchange services. Our 

partners are currently major participants in the European carbon 

markets as well as regional environmental markets. 

29 

We strongly believe that a cap-and-trade program offers the best 

opportunity to minimize the cost of mandatory reductions in greenhouse gas emissions. Emissions trading systems are already operating or planned in over 35 countries, and they have proven that 

cap-and-trade programs can successfully cut emissions with efficiency and cost-effectiveness. 

There are several design features that are critical to a well-functioning cap-and-trade system and related derivatives markets. 

Based on our extensive market development experience, we strongly believe that a cap-and-trade system must include participation 

beyond compliance entities. 

Futures markets perform two essential functions: they create a 

transparent venue for price discovery, and they permit low-cost 

hedging of risk. And to be effective, futures markets depend on a 

broad universe of market participants with both short-and longterm expectations to make markets and provide liquidity. 

We also believe that imposed price floors or ceilings should be 

avoided if a carbon market is to create meaningful price discovery. 

Price caps reflect factors extraneous to the fundamental factors 

that drive prices and, thus, are not connected to actual supply and 

demand. 

While it may seem that artificially constraining prices with a 

ceiling will reduce price volatility or market manipulation, the opposite is likely to result. 

We fully understand the motivation to protect American consumers from dramatic increases in the cost of carbon. However, we 

believe this can be facilitated through strong market oversight and 

not through price floors and ceilings. 

By offering electronic trading of exchange-traded carbon derivatives, coupled with a comprehensive clearing solution, we will enhance price discovery, contribute significantly to liquidity, and reduce risk and uncertainty for market participants. CME Clearing 

is one of the largest central counterparty clearing services in the 

world and has provided clearing services for the futures industry 

for over a century without a single customer default. 

Electronic trading and clearing solutions also provide a trustworthy and timely audit trail to effectively identify anyone who engages in misconduct. We believe that because of the CFTC’s established expertise and coordination with the global derivatives industry, it is in the best position to provide strong regulatory oversight 

to the carbon markets. 

We applaud the efforts of this Committee and the administration 

to ensure that a mandatory U.S. cap-and-trade program will enhance transparency, integrity, efficiency, and fairness in the markets. As beneficial as exchanges and clearinghouses will be in a 

U.S. carbon market, they will not meet all the needs of customers. 

Although the Green Exchange Venture and other emissions trading 

platforms would likely be the presumed beneficiaries if all transactions were required to be executed on electronic trading platforms, we do not believe this would be in the best interest of a U.S. 

cap-and-trade program. 

Exchange-traded and OTC derivatives markets are essential to 

the efficient functioning of a U.S. carbon market. Together, these 

markets can provide compliance entities with the ability to increase 

30 

their certainty in their future cash-flows by protecting against price 

risk and effectively managing their capital, thereby increasing their 

ability to meet compliance obligations at the lowest possible cost. 

The OTC market is complementary to standardized exchangetraded products by providing products customized to a regulated 

entity’s emissions and their time horizon. While some types of customized transactions must be conducted OTC, the remainder of carbon transactions that we envision will likely lend themselves to exchange-traded products. 

While OTC transactions should be present for a cap-and-trade 

program to be fully successful, the OTC carbon market must provide a greater level of transparency than what is currently present 

in other OTC markets. As part of its special call reporting, the 

CFTC already requires extensive reporting of OTC commodity derivative positions. This reporting framework can be leveraged and 

extended to include new carbon derivatives. Entities such as the 

Green Exchange Venture will provide capped entities and other 

market participants with the venue to safely and securely manage 

their carbon price risks. 

Regulated exchanges, clearing solutions, and the CFTC will ensure a high level of transparency to the U.S. carbon markets. This 

strong regulatory structure combined with added transparency in 

the OTC market will enable compliance entities to meet their environmental obligations and allow agricultural and forestry offset developers to fully participate in a well-functioning U.S. carbon market. 

I appreciate this opportunity to offer these comments to the Committee and will be pleased to respond to any questions. 

[The prepared statement of Ms. Winkler can be found on page 

121 in the appendix.] 

Chairman HARKIN. Thank you very much, Ms. Winkler, for your 

testimony. Thank you to our entire panel. 

Mr. Profeta, are there any reasons why the success of a cap-andtrade approach in reducing sulfur dioxide emissions under the 

Clean Air Act cannot be replicated here for reducing greenhouse 

gas emissions? What have we learned from the European market? 

And why can’t we just replicate that here? Is that something that 

we could do? 

Mr. PROFETA. Well, Mr. Chairman, I think the first foremost lesson is yes, both of those experiences have taught us that the market does work. The acid rain trading program somewhat famously 

came in at about 20 to 30 percent of the cost estimated, what was 

estimated when the legislation was passed. We found in the EU 

that the market works as well. 

There are distinctions here in terms of this greenhouse gas market that might be created by Congress and those markets that 

have—I think the universal opinion on this panel would be that 

there might be greater oversight and need a comprehensive regulatory program at the outset. 

The acid rain program is a different scope and scale and not 

nearly as driven, likely to be driven to the derivatives as this longterm market would. And the EU market as well, the cost was 

somewhat mitigated by some of the distinctive features in the EU 

market and has actually started to gravitate toward exchanges. 

31 

Now about 50 percent are on an exchange, and, of course, the EU 

market also, being short term, does not have the long-term requirement of the emitters that this would have. 

So both those teach us a lesson that the markets can work and 

also there can be distinguishes not in need of regulatory oversight 

as this one. 

Chairman HARKIN. I also want to note that in your written testimony, you mentioned as an aside the study that was co-authored 

by several leading agricultural economists. You said it found that 

‘‘the net flow of greenhouse gas revenue and indirect commodity 

market revenues for farmers far outweigh the increased operating 

costs.’’ It says ‘‘benefits to crop and livestock producers far outweigh these economic losses‘‘—to consumers and agricultural processors—‘‘signaling gains to the sector as a whole. If done the right 

way, agriculture can be made a winner in climate legislation.’’ 

I assume, though, that there are some sectors within agriculture 

that will do better than others. Is that right? 

Mr. PROFETA. Absolutely true. There will be ebbs and flows in 

the system, and some sectors and some farmers will do better than 

others. I think in general we have found there were higher input 

costs but higher output costs as well, a modest consumer response, 

increased bioenergy supply, and offset income opportunities. And 

the key feature, the main benefit to the farmers that really come 

through in these modeling runs come through indirect commodity 

market shifts that drive up crop prices and revenues. So that is not 

seen in some of the other studies, and I should note that in doing 

that we reached out to our colleagues at places like Texas A&M 

and Oregon State to try and bring together a team that could get 

after the ‘‘he said, she said’’ that has been happening in terms of 

the agricultural economics of climate. 

Chairman HARKIN. Mr. Glace, do you believe a price collar a floor 

and ceiling would bring about desired certainty in terms of controlling risks and volatility? How do you feel generally about a price 

collar? 

Mr. GLACE. Exelon advocates the use of a price collar. The main 

reason is to protect customers from higher prices in the early transition period for this program, if you will. We think that it is very 

important to protect customers from being impacted by higher 

prices, and we think that is the primary use of the collar. In any 

risk management situation, if you are afraid of volatility and uncertainty, it is nice to have options. Collars and floors help band 

in some of the risk, and these are the tools in the bag that we all 

use routinely to manage risks. 

Chairman HARKIN. I want to turn now to Dr. Miller and Ms. 

Winkler. I have only got a minute left here, but back to the issue 

of derivatives and swaps and the over-the-counter market, Ms. 

Winkler is basically praising and is in favor of that. Dr. Miller, you 

raised some questions about it. 

As I understand, Ms. Winkler, you are saying that we need this 

to get financing for offset projects. Well, that may be one way, but 

aren’t there other ways such as forward contracting, traditional 

bank lending, or guaranteed USDA loans that could also ensure 

offset projects get financed rather than just through a derivatives? 

32 

I am concerned about this view that we must have 

customization, especially when compliance obligations are measured in standard government-issued allowances due each April 1st. 

Given that do we really need customization? I am still searching 

for that answer. Ms. Winkler? 

Ms. WINKLER. Yes, Chairman, I think the best example would be 

my fellow panelist Joe Glace talking about the needs for him to 

have the flexibility to have both customized transactions in the 

over-the-counter market in addition to the standardized exchangetraded products that he uses. So while financing is certainly one 

reason why people would use over-the-counter instruments, it is 

not the only reason. You know, some of the other things is that it 

can help an emitter specify the actual emissions that they are offsetting against and hedging against, and also being able to customize it to the time horizon that they are most concerned about. 

Also, as Joe pointed out, you know, for some entities it becomes 

more difficult to be able to post that collateral with the exchange 

in terms of the margin requirements, and with the role of an exchange and a clearinghouse, we are providing mark-to-market and 

settlement values on a daily basis, which could at times, with price 

movements, require substantial dollars to be moved in and out of 

the clearinghouse. 

Chairman HARKIN. Dr. Miller, do you have any observations? My 

time is—— 

Mr. MILLER. Yes, I think one of the great issues is transparency 

of the over-the-counter market, and you can gather and get additional transparency with reporting. We do reporting of the cash 

grain markets. We do not report every individual transaction, and 

we do not report who was at the transactions, but we do report the 

prices and we do report where those things were happening. And 

that gives sufficient transparency to that system that it functions 

well, and that is partly what is missing in the current over-thecounter markets. 

Chairman HARKIN. Got it. Thank you. 

Senator Chambliss? 

Senator CHAMBLISS. So, Dr. Miller, if we went to a system where 

there was complete transparency and the reporting of those contracts that were traded over the counter, would that address the 

concerns that you have about OTC? 

Mr. MILLER. To a large degree, I think it would, particularly as 

it would apply to the compliance instrument itself. The actual offsets or allowances are going to be registered products that are 

standard products because they are a compliance instrument. And 

right now in the voluntary market, the only exchange that is doing 

broad-based price reporting is Chicago. The other exchanges, I 

went out and looked, and I cannot find reported prices for the Climate Action Registry. I cannot find reported prices. I can for the 

futures markets that are regulated, but for the spot markets on a 

number of these other projects and CDM projects, there is no price 

reporting. There is no transparency. 

The associated issue that is connected with that, though, is leverage, and one of the problems that was part of the debacle, if we 

would say, that occurred in the financial markets with regard to 

credit default swaps, et cetera, was not only a transparency issue 

33 

but a leverage issue. And, yes, there is cost to doing margining and 

things on exchanges, but the exchanges did not have any defaults, 

the exchanges did not have those problems because there were limits to the amount of leverage that could be put to those type of derivatives. 

Senator CHAMBLISS. Well, Ms. Winkler, if we develop a system 

that requires transparency of all trades, whether they are standardized trades or whether they are more tailored transactions, 

which I assume we could devise some system to do that, would that 

interrupt the market in any way, in your opinion? 

Ms. WINKLER. Senator, we are very much in support of full transparency of the marketplace, and, you know, our goal as operating 

an exchange and a clearinghouse is being able to serve as the price 

discovery vehicle for what carbon is in the U.S. And I believe 

through our existing infrastructure and also the audit trail that 

our electronic trading system and our clearing system can provide, 

in the close coordination we have with the CFTC, we are going to 

be able to easily accommodate that additional transparency that is 

going to be needed. 

Senator CHAMBLISS. Mr. Glace, would your ability to enter into 

financially settled swaps for electricity such as the example outlined in your testimony be hindered or become more expensive 

under the recent proposal put forward by the administration for 

regulating over-the-counter derivatives? 

Mr. GLACE. Yes, sir. We believe that, again, a lot of the forcing 

to organize the exchanges would seriously reduce the amount of 

hedging that would be able to be done in the marketplace because 

of the fact of all the initial cash that has to be put up to support 

the transactions. 

Senator CHAMBLISS. And who is going to pay for that ultimately? 

Mr. GLACE. Ultimately, consumers pay for this additional—any 

additional cost that enters the system ultimately finds its way into 

the price to the consumer. 

Senator CHAMBLISS. Yes. Well, in talking about the transparency 

issue, which I think is going to be the focus of the debate when we 

get to this financial system overhaul issue, I assume you have no 

issue with transparency. 

Mr. GLACE. No, sir. 

Senator CHAMBLISS. You are not trying to hide anything or do 

any secret deal out there. So is there a way, in your mind, that we 

could develop a system that would provide full transparency and 

allow you to operate in the market with tailored transactions like 

you sometimes do today? 

Mr. GLACE. Absolutely. Exelon supports expanding the CFTC’s 

jurisdiction and expanding the CFTC’s ability to gather reporting 

and transactional information to assess positions. And we believe 

in rigorous oversight in the markets and full transparency. 

Senator CHAMBLISS. Mr. Profeta, let me ask you to comment on 

that same question. You encourage, obviously, the clearing of all 

transactions ‘‘as is feasible,’’ I think is the way you put it in your 

testimony. I think that has been stated an awful lot and with different wording by different experts in this field. But is there a way 

to take tailored transactions, in your opinion, and whether you call 

34 

them standardized or not, effect total transparency in the marketplace? 

Mr. PROFETA. I think the most important thing is to make it 

transparent to the regulator, and I think it is possible to do that 

in much the way my co-panelists have described here. The best 

way to control for the risk is to build it into the system so you do 

not get to the point where to regulate it is to see it. But there are 

distinct, long-term structured deals that it appears cannot be 

standardized and put—cleared. And if it is open and apparent to 

the regulator, I think we can control for a lot of the risk that way. 

Senator CHAMBLISS. What do you think would be the biggest hurdle in having a tailored product transparent to the regulator? Or 

is there a hurdle out there? 

Mr. PROFETA. I think it is just a matter of establishing the correct authority for the regulator to receive that information. As I 

suggested in my testimony, it may be appropriate to put the obligation on the transacting parties to give the information to the regulator rather than putting the obligation on the regulator to make 

sure that the data gets to the CFTC. 

Senator CHAMBLISS. Mr. Chairman, I know I am over my time, 

but let me follow up. Mr. Glace, is there a problem from your 

standpoint as a participant in these contracts in the marketplace 

in providing the regulator with full disclosure of what the transaction that you have entered into from the hedge standpoint is all 

about? 

Mr. GLACE. No, sir. Full disclosure is not a problem. 

Senator CHAMBLISS. OK. Thank you. 

Chairman HARKIN. Thank you, Senator Chambliss. 

Let us see now. Senator Johanns? 

Senator JOHANNS. Mr. Profeta, let me get started with you. I 

think in response to some questions, you have acknowledged that 

for farmers there is going to be higher input costs, and I think virtually every study shows that. Is that something we agree upon, 

input costs will go up? 

Mr. PROFETA. Yes, input costs will go up. Fertilizer costs may be 

controlled by provisions to help that industry, but input costs will 

go up, yes. 

Senator JOHANNS. And I think the fertilizer business would debate you on that one. They seem to believe their costs are going 

to go up also. 

Mr. PROFETA. I have said the word ‘‘may’’ cautiously because I 

have no idea what the Senate’s policy will be on that and how it 

will be affecting the industry. But there are efforts at least to try 

and hold that sector of the industry harmless. 

Senator JOHANNS. Now, as I understand the Texas A&M study— 

and, again, by inference from your testimony, it appears that you 

are reaching much the same conclusion—it is not the credits or allowances or whatever that is really going to help the farmer out 

to deal with those input costs. It is your belief that they will get 

a higher price for their products, right? 

Mr. PROFETA. Yes. This is the study that we released. I am 

happy to bring the authors who are intimately familiar with it to 

meet with you, Senator. But, yes, their findings were that the key 

benefit to the farmers comes from the indirect commodity market 

35 

shifts that drive up the crop prices and their revenues. They do 

have some benefits from the offsets, from tillage practices, manure 

management, et cetera, but that is not the driver. The driver is the 

crop price. 

Senator JOHANNS. Now, if you are on the buying end of that, 

though, if you are in the dairy industry—which is absolutely going 

broke at the moment, if you are in the pork industry and one pork 

producer said to me recently, he said, ‘‘Mike, we are 30 days from 

being bankrupt.’’ If you are in the cattle industry that has not 

made money for 2 years, this is pretty much a disaster for them, 

isn’t it? 

Mr. PROFETA. I would like to go through the numbers with you. 

I do not think that the input cost projections that came out of the 

study are in the realm of disaster, particularly compared to the 

fluctuations we have had in those input costs in the past year. 

They far exceed what would be projected out of this legislation. 

Senator JOHANNS. Well, if you are the one going broke—and, believe me, dairy is not making any money at the moment, quite the 

opposite. Pork is really getting hammered. Beef has not been good 

for a couple of years. Call it what you want. This is not a good situation. 

Mr. PROFETA. Senator, I would agree, and let me be clear. The 

intent of the study was try and get after, you know, the assumptions and lay them there and let you as a Senator to make a judgment as to—I am from the State of North Carolina. I work with 

the pork industry a lot. I know how they are suffering. And I am 

certainly not advocating for any legislation that would cause the 

kind of pain that you feel. 

I think there are ways to balance these societal objectives, not 

hurting the industry and also addressing climate change, and what 

we are trying to do is give you the data that helps you get to that 

place. 

Senator JOHANNS. Now, let me, if I might, kind of pivot off of 

your comments to Mr. Glace. Mr. Glace, you are, as I have described, a big guy—not in stature. In business is what I am referring to. How big are you? What would your revenues be in a year? 

Mr. GLACE. Approximately $15 billion. 

Senator JOHANNS. $15 billion. Now, if we do something up here 

that impacts your bottom line, you are just going to pass it on to 

the consumer, right? You are not going to go broke. 

Mr. GLACE. Exelon believes that all costs to manufacture and inputs to make electricity ultimately get into the power price, and 

that does, in fact, get to the consumer. 

Senator JOHANNS. Yes. And if you are the irrigator and you are 

buying electricity, they are going to pay more, right? 

Mr. GLACE. Yes, sir. 

Senator JOHANNS. One of the concerns I had with the study, the 

Texas A&M study, is the two farms they looked at in Nebraska 

were dryland, and about 60 percent of our row crops are actually 

irrigated. So those irrigators are going to pay more for electricity 

if, in fact, the Government raises the cost of doing business. 

Mr. GLACE. We believe that power prices will increase, yes. 

Senator JOHANNS. Now, you can hedge your risk just simply because you are going to notify somebody in an electric bill that they 

36 

are paying more. But where the farmer does not set the price, how 

do they possibly compete with you? I mean, you are such a big enterprise. You can control your prices. The poor farmer out there 

just is going to get what they get, and if it causes them to go broke, 

they will go broke, won’t they? 

Mr. GLACE. Again, I cannot speak for the farmers’ economics 

very specifically, but we do believe that all—Exelon believes in 

markets, and markets set prices. And whatever the buildup of the 

ultimate market inputs are that determine the market price, the 

market clears and the market sets a price. And Exelon believes 

that markets produce the least efficient—the most efficient, excuse 

me, possible outcome for the consumer, and that a market-based 

solution is always going to be the least cost or most effective solution. 

Senator JOHANNS. See, here is the problem with that in agriculture. The fat cattle guy cannot go to Tyson’s and say, ‘‘Boy, you 

know, I just got a higher electric bill, and I got this and I got that. 

Instead of selling these fat cattle for $100, I need $110.’’ Because 

you know what? Tyson’s is going to go, ‘‘So what?’’ I mean, it is the 

reality of the marketplace for farmers. Do you agree with me there? 

Mr. GLACE. I do not pretend to know the farmer realities and the 

farmer marketplaces, but I do know that if a market sets a price 

for clearing that the farmer will get a bill that is commensurate 

with that market price. 

Senator JOHANNS. They cannot pass it along. 

Mr. GLACE. I will take your word for it. 

Senator JOHANNS. Yes. Well, that is the way it works. 

Mr. GLACE. Absolutely. 

Senator JOHANNS. Thank you. 

Mr. GLACE. Thank you, sir. 

Chairman HARKIN. Thank you very much, Senator. 

Now Senator Gillibrand. 

Senator GILLIBRAND. Thank you, Mr. Chairman. I want to go 

over some of the issues that Ms. Winkler raised and some of the 

questions that you asked, Mr. Chairman. 

One of the issues was about why do we need a customized market, and there were a couple of areas that I wanted you to perhaps 

provide—anyone on the panel who has information and wants to 

provide more detail, that would be helpful. 

On the question of whether it will provide offset projects financed 

under the bill, will be able to provide the financing, one of the reasons is that financing for projects is often contingent on a firm 

being able to predict their future carbon risk through a derivative 

contract, for example, and if you just have exchange-traded, you 

have no more than 5–year-out contract. 

So could you please elaborate more on that financing perspective, 

because the Chairman brought up, well, why can’t you just get a 

loan? What is the difference with that access to capital, then the 

liquidity that the derivatives market would provide, if any, to further answer that question? 

Ms. WINKLER. Thank you, Senator. One of the main differences 

is just because of the customized nature of that instrument and the 

financing needs for those particular projects that need to be developed. It is in their best interest to be able to deal with a 

37 

counterparty that is able to, you know, lend to them and also that 

they are able to contribute toward the financing of that the physical assets that they have. And in the cases of many of these 

project developers, these projects take anywhere from 7 to 10 years 

and, especially in terms of the offset projects, need to be verified 

and approved along the way. So there is a substantial amount of 

risk that is outstanding. A typical lender is going to find that pretty difficult to be able to stand behind that at a reasonable rate. 

Senator GILLIBRAND. So you are saying that the lending market 

may not be readily available because of the outstanding risk, and 

so that you really need a derivative to hedge that risk specifically 

for the amount of time that that project may well take to come to 

fruition. 

Ms. WINKLER. That is correct. 

Senator GILLIBRAND. Now, is that your experience, Mr. Glace? 

Mr. GLACE. Yes. 

Senator GILLIBRAND. OK. Second, you said in your testimony, 

Ms. Winkler, that if you were going to have—if you were not going 

to have a customized market, it would leave out certain players 

who need access to these markets because of the capital requirements. But one of the things we talked about earlier that the 

Ranking Member brought up was that we would actually want capital requirements. And, in fact, not only do we want complete 

transparency for what the trade is going to be, but that we actually 

might even have higher capital requirements because of the increased risk. So that does not address your—that would undermine 

your argument that certain players would, therefore, be excluded 

from the market. 

Ms. WINKLER. I think the way to describe it is that an exchangetraded market, we believe, relies on broad market participation, 

and that is kind of central to being able to have the market determine what that carbon price is going to be. 

There are many differences in terms of the over-the-counter market and the level of sophistication of the people that interact in 

that market, and typically they are eligible contract market participants. And so I think there are pretty significant differences just 

between who we would anticipate dealing in that customized market versus what we would expect in the exchange-traded market. 

And it is certainly our hope and our intention that both markets 

have to have increased transparency over what they have today. 

Senator GILLIBRAND. And capital requirements. I want to get to 

your argument that you thought the reason why we needed to have 

an OTC market was because there would be no capital requirements. And what I think the Ranking Member was getting at is 

if we create this over-the-counter market and allow for it, it is 

going to need increased transparency and significant capital requirements, which would undermine your argument. 

Ms. WINKLER. The capital requirements is certainly something 

that is under review by the administration as part of their larger 

over-the-counter and financial regulatory reform. So we would view 

that anything that would need to be done in carbon over-thecounter ets would be in line with those broader goals of the administration. 

38 

Senator GILLIBRAND. And then the third issue that addresses 

this is the question of foreign carbon allowances to be purchased 

and used for domestic appliance. It is allowed in the Waxman-Markey bill right now. However, the issue of mandated standardization 

and exchange trading is impacted because 75 percent of the European market right now is over the counter. So how do you see that 

impacting the harmonization efforts that we are trying to make 

and participation—if the EU, for example, has a 75–percent overthe-counter market and the U.S. has none, how will that affect us 

in terms of competitiveness or access to capital or liquidity or volatility or any of the issues that you brought up? 

Ms. WINKLER. I think the biggest concern, Senator, is that if 

there is not an over-the-counter market that is allowed in the U.S., 

we believe that that activity is going to take place—— 

Senator GILLIBRAND. Go overseas. 

Ms. WINKLER [continuing]. And it is going to go overseas to less 

transparent environments and areas where our regulators do not 

have as direct authority as they do here in the United States. 

While we certainly still see, you know, some transactions taking 

place in the over-the-counter market, we have been seeing a trend 

in the EU ETS toward clearing. And that has been a positive trend, 

and it kind of speaks to how over-the-counter markets develop over 

time, and they do become more standardized, they do become more 

liquid. And now kind of the predominant number of the instruments are being cleared, and we would view that being as much 

of the same development that we will see here in the U.S. But our 

primary concern is that if we do not allow over-the-counter transactions, people are going to need those customized tools, and they 

are going to lend themselves to less transparent environments that 

we do not have the authority to regulate properly. 

Senator GILLIBRAND. Thank you. 

Chairman HARKIN. Thanks, Senator Gillibrand. 

Senator Lugar? 

Senator LUGAR. Thank you, Mr. Chairman. 

In our last comprehensive hearing on this subject, the testimony 

of Secretary Vilsack was that all farms would benefit from a capand-trade situation similar to the House bill. Senator Chambliss, 

in releasing the Texas A&M study, which has been cited several 

times in the hearing, indicated that 71 farms would not prosper, 

27 would, and so that is quite a disparity. And the reasons were 

varied, but the farms that came out best were farms such as my 

farm in Indiana that produces corn and soybeans. 

I take the privilege of these personal references because I want 

to ask you, Dr. Miller, about a situation on my farm or maybe at 

yours. We have about a third of our acreage in corn, a third in soybeans, and a third in trees. About 22 years ago, my son and I started planting black walnuts in rows, some other trees subsequently, 

and in due course, the Chicago Climate Exchange approached us 

and said, ‘‘Would you like to be a partner in this exchange?’’ They 

wanted some farm in Indiana at least to have that situation going, 

but they could measure only most recently planted trees because 

the idea was that if you have trees already on the farm, why, those 

were already there. The incentive was to plant more. 

39 

So, as a result, they measured some of our trees, and I have been 

accumulating credits. I go to the website of CCX and find that I 

have no several thousand tons of carbon sequestered in those trees 

on the farm. 

My problem is that the price of that carbon per ton has been plunging. It was as high one time as $7 a ton. It is now 25 cents 

a ton as you go to the website today. 

Now, there is something wrong with the market there, as we are 

all busy patting about climate change, and yet the markets are not 

reflecting that much is going to happen there. 

Now, CFTC, in a very bold move, has taken CCX apparently 

under its wing and at least is hoping that this may be established 

as a market of sorts. 

I go through all this detail to say that it is not at all clear, even 

if you were on a farm in which you wanted to put pastureland into 

trees or, as the Texas A&M study points out, most of the gain for 

the corn farmers comes from the fact that fewer acres apparently 

are planted. Therefore, supply and demand raises the price of corn, 

and that has all kinds of implications in terms of the American 

food system, quite apart from the worldwide food system in which 

our whole emphasis is on more acreage and more production with 

the population of the world growing. 

These are all contradictory problems but relevant, I think, to the 

ordinary farmer who might contemplate. How do you, in fact, stay 

alive? Do you plant trees? Is there going to be a similar market for 

no-till planting? We have had celebrations at the Farmers Union, 

people here in our Committee. 

I ask all of this simply to raise a question that maybe you can 

help answer. How established is it that there is going to be any 

market for my trees or any trees I should plant? How about the 

trees that are already there if I promise not to harvest them? You 

say a contract period of 5 years or 10 years. Do I get credit for 

that? Or is that in the past? Give me some inclination, if you can, 

from this practical example. 

Mr. MILLER. The market is in its infancy, and in its infancy it 

will have more variation and gyration than it will in a mature market. But regulations matter, and one of the challenges that the current Chicago market has is that part of its tradable compliance instruments were deemed basically worthless by the future regulations. Therefore, that piece of the market is trending toward zero. 

The offsets are not trading at zero, but they have had to move 

to the over-the-counter market to find value. And so when we sell 

offsets such as from forestry or soils right now, we are trading at 

4 times, 5 times, 6 times what that listed exchange price is that 

is trading allowances that 2454 did not recognize. 

So it is the same problem Europe had when they did not allow 

banking forward of a market that was long offsets in the current 

term or long allowances in the current term. They went to zero, 

and that is what markets do when you have an excess supply of 

something that has no carry-forward. 

Relative to the ability for farmers to participate, we are at, 

again, the infancy of what all these solutions can be from the agricultural and forestry sectors in our markets. The CCX, which has 

the only broad-based set of workable protocols, is an incomplete 

40 

set. There is a real role for USDA to help set and develop additional protocols. Nitrous oxide management is one that possibly almost all farmers could participate in. But we have no standard protocol for that yet. It is a more expensive protocol to probably do. 

It is more difficult. It has got some scientific challenges. 

At CCX, we took the ones that had the best science around them 

at the time we did them and started with those, and we have 

added protocols. 

In the Texas A&M study, their ranches did not have any offset 

income in the Texas A&M study, and I am quite familiar with that. 

Partly, when they did their panels, the CCX rangeland offset requires management of the stocking rates, and those particular 

ranches in those representative panels could not economically do 

what is required of the CCX offsets in order to get offset credits. 

We have ranches that are complying with that—us, Farmers 

Union, various different aggregators—but it is not something that 

every ranch is going to be able to do and remain economically viable. And I think that is one of the things we have to be aware of. 

While it might be technically feasible for the individual resources 

that are available, it may not be economically viable to do the 

things that are required in order to earn offsets. 

Senator LUGAR. I ran over my time, Mr. Chairman. I would just 

underline the importance for our Committee, if we are to adopt a 

cap-and-trade situation, to go well beyond the House bill and to get 

into the weeds, so to speak, of this because, otherwise, this is going 

to be a fiction that somehow there are allowances here, or credits 

or even a market, without somebody going into the details Dr. Miller has just illustrated in brief. And I think this is critical, or we 

are going to leave farmers absolutely without defense in this situation, I think zapped all across the board. 

Chairman HARKIN. Senator Lugar raises a good point. I thought 

about this at that previous panel that, you know, you have a stand 

of trees, we had a forest, a private forest. Now, because he is not 

adding anything additional, therefore, he gets no offsets. But if he 

cut down his trees and planted new ones, well, then he would be 

OK. This is that same old thing that we have been through so 

many years on this Committee on conservation and other things. 

If you tear out what you have got and plant something else, well, 

then you will get the benefits. But if you just keep your conserving 

practices or what you have done to your land, then you do not get 

anything, and that just does not make sense to people. It does not 

make sense to me either. So we have got to address that also on 

this. 

Well, thank you all very much, and we will call our next panel. 

Thank you very much. 

Our next panel, our producer group perspectives, we have Mr. 

Andy Beckstoffer, and he will be introduced by our colleague. Come 

over here, Mike. Then Mr. Frank Rehermann, Chairman of USA 

Rice Producers’ Group from California; Mr. Luke Brubaker from 

Brubaker Farms in—I had a wrong address here on it—Pennsylvania. Mount Joy, Pennsylvania. Mr. Fred Yoder, Past President of 

the National Corn Growers Association from Ohio. We will ask you 

all to take your seats there. 

41 

We are graced with the presence of a long-time friend of mine, 

our colleague from the House side, Representative Mike Thompson, 

and I am going to turn to him for the purpose of introduction because I know he has to get back to the House. But in my way of 

introducing the introducer, I will just say that Congressman 

Thompson was first elected to represent California’s 1st District in 

1998. It includes all of Napa, Lake, Mendocino, Humboldt, and Del 

Norte counties. I do not know what else you have added. Sonoma 

County, too? 

Mr. THOMPSON. Part of Sonoma. 

Chairman HARKIN. Part of Sonoma County, and Yolo, also. Prior 

to serving in Congress, Representative Thompson represented California’s 2nd District in the California State Senate, where he 

chaired the Budget Committee. So, again, not a stranger to us at 

all, and a great friend and colleague from the House side. I will 

turn to Congressman Mike Thompson for purposes of introduction. 

STATEMENT OF HON. MIKE THOMPSON, U.S. 

REPRESENTATIVE FROM THE STATE OF CALIFORNIA 

Mr. THOMPSON. Well, Mr. Chairman, thank you very much, Mr. 

Vice Chairman, thank you also for allowing me to do this. I have 

got a couple friends testifying today, but I have been asked and am 

honored to introduce one that I represent at home, and that is my 

good friend Andy Beckstoffer. 

Andy is the founder and the Chairman and the owner of 

Beckstoffer Vineyards, which farms over 3,000 acres of vineyard in 

Napa, Mendocino, and Lake counties of California. He is the largest non-winery grape grower in Napa Valley and along California’s 

north coast. He is also the largest seller of premium winegrapes in 

Napa and on the north coast area, and he provides grapes to over 

80 premium wineries. 

Since 1970, Beckstoffer Vineyards has been a leader in developing and implementing new vineyard technologies in the California premium north coast area, and Andy has been recognized 

around the world for these efforts. And I hope he gets a chance to 

talk about this, but he is doing some great stuff now, a whole 

bunch of new organic plantings in Mendocino County and Lake 

County, and something that he might not think is exciting, and 

maybe you will not either, but being a vineyard owner myself, we 

have to rip our land before we plant vineyards, and Andy now in 

his new plantings, he is only ripping the area specific as to where 

the grapes will be planted, not disturbing the rest of the ground, 

which I think is pretty cutting edge. 

In 1975, he was a founding director of the Napa Valley Grape 

Growers Association. In 1976, he became a member of the Napa 

County Planting Commission and in 1983 a director of the 

Winegrape Growers of California. He is also a member of the World 

Presidents Organization, a director of the Wine Market Council, 

the California Association of Winegrape Growers, and the Land 

Trust of Napa County. And he is an accomplished conservationist. 

As a farmer and businessman, he understands that investing in 

the conservation of our land is an investment in our future. His 

leadership in helping build national support for increased tax inVerDate Nov 24 2008 14:07 Jan 20, 2011 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 C:\DOCS\62715 MICHA
42 

centives to put property into conservation easements will be felt for 

generations to come. 

I carried that bill in the House. It has tremendous support over 

here in the Senate, and he was really the catalyst for that, helped 

put it together, and he not only talks the talk, but he walks the 

walk. After that bill was passed, he was the first landowner across 

the country to put his land into a conservation easement, and it is 

really significant because it is a historic vineyard in the Napa Valley. And if I told you the property values of a vineyard like that, 

most people in agriculture would not believe that they would draw 

that kind of money. 

So he has been on the cutting edge. He has worked to restore the 

Napa River throughout the Napa Valley, and he is a lifetime expert 

in specialty crop farming. And as everybody in this room knows, 

specialty crops represent about 50 percent of the entire plant crop 

economy, and they contribute mightily to our Nation’s nutrition. 

He has a hands-on knowledge of how not only climate change is 

affecting winegrapes, but also the benefits that specialty crops provide in helping our country meet the challenges of climate change. 

I want to thank you all for allowing me to do this, and I want 

to thank you in advance for listening to his comments. And I am 

just proud to be the one to have brought Andy to the Senate. 

Thank you. 

Chairman HARKIN. Thank you very much, Mike. You are welcome to stay if you would like. I know you have probably got—— 

Mr. THOMPSON. We are working on this thing called ‘‘health care 

reform’’ over there. 

[Laughter.] 

Chairman HARKIN. I have heard of it. I have heard of it. All 

right. Well, thank you very much, Mike. 

Mr. THOMPSON. Thank you. 

Chairman HARKIN. I really appreciate it very, very much. 

Then we will start with you, Mr. Beckstoffer, and we will work 

from right to left in this regard. Mike was mentioning something 

about ripping grapes and stuff. I turned to Saxby, I said, ‘‘Is that 

like minimum tillage that we know about?’’ It sounds a little bit 

like that. 

Also, I want you to know something else. In 2000, in my State 

of Iowa, we had a total of 100 acres of grapes in Iowa. We now 

have over 1,000. So look out, here we come. 

[Laughter.] 

Senator CHAMBLISS. Mr. Chairman, let me just say, too, that 

Mike happens to be the Chairman of the Wine Caucus over on the 

House side, and as a former Member of the House and a consumer, 

Mr. Beckstoffer, we appreciate you sending a little bit up here 

every now and then of your fermented product that we can make 

sure we test every now and then. 

Chairman HARKIN. Mr. Beckstoffer, welcome, and please proceed. 

Again, I am going to ask you to summarize. As you probably have 

heard, all your statements will be made part of the record in their 

entirety. If you could sum it up in 6 minutes, please. 

43 

STATEMENT OF W. ANDY BECKSTOFFER, CHAIRMAN AND 

CHIEF EXECUTIVE OFFICER, BECKSTOFFER VINEYARDS, 

RUTHERFORD, CALIFORNIA 

Mr. BECKSTOFFER. Thank you very much. I live in St. Helena, 

which is a small agricultural town in the Napa Valley of California, 

and my family grows winegrapes, as you said, and that in your 

terms is a specialty crop. 

We are small farmers, but grapes are a big business. There are 

over 24,000 grape growers in the Nation, and the full economic impact of wine and grape products is estimated at over $162 billion. 

Grapes are grown in over 40 States today, and grapes are a significant part of the specialty crop segment of the U.S. agricultural 

economy. Specialty crops, as Mike says, represent approximately 50 

percent of the farm gate value of total plant agricultural production. 

We in the winegrape and wine business are very proud of the 

fact that most medical people believe that wine is good for your 

heart. I truly believe and hope that that is true. 

Chairman HARKIN. I believe. 

Mr. BECKSTOFFER. But, for sure, grapes and peaches and pears 

and carrots and lettuce and tomatoes and all fruits and vegetables 

are specialty crops that provide essential nutrition to the American 

people. That is where their real importance is. 

Where I live in the Napa Valley, it is a very well known premium winegrape-growing region. What is not so well known is that 

while some 9 percent of Napa County’s land mass is devoted to 

vineyards, over 10 percent of the county’s land is protected by some 

sort of open space or agricultural conservation arrangement. Conservation and environmental sensitivity are hallmarks of our lives 

in the wine country. The increased tax incentives on conservation 

easements which were legislated in 2006 have made a major contribution to our ability to conserve these agricultural lands. In our 

small valley, over 1,650 acres have been put under conservation 

easements since 1960, and over 300 of that has been our lands. 

Senator Baucus here in the Senate and Congressman Thompson 

in the House are now sponsoring legislation to make those incentives permanent. These incentives are crucial to land conservation. 

They are crucial to keeping small farmers on the farm and ultimately crucial for positive climate change. 

In considering my testimony, in the limited time I want to emphasize three major concerns. 

First, specialty crop growers are generally relatively small farmers. Our family is the largest vineyard owner in the Napa Valley 

and the north coast. But on any statistic involving all farms, we 

are very small farmers. This is the case with most specialty crop 

farmers. We are scattered politically and geographically and do not 

have the organization or capacity to compete with the large program crops for adequate consideration in major legislation, such as 

that involving climate change. Without your special indulgence and 

careful consideration, much of the Nation’s nutrition engine will 

suffer. 

Second, it has been widely reported that many car dealers have 

opted out of the Cash for Clunkers program because of the heavy 

documentation requirement on their limited staffs. We have simiVerDate Nov 24 2008 14:07 Jan 20, 2011 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 C:\DOCS\62715 MICHA
44 

larly limited staffs. I would hope that the reporting requirements 

of any climate change program would be held to the minimum. 

Third, the USDA’s Economic Research Service reports that between the years 1997 and 2002 over 8 million acres of American 

farmland have been lost to agriculture due in good part to urbanization and economic pressures. In California, our population is estimated to double in the next 25 years. 

In the Napa Valley, some 60 miles from San Francisco, there is 

tremendous urban pressure. It is my view that winegrape vineyards here are the long-term highest and best economic use of the 

land. And for this reason, we have been able to preserve the vineyards with that urban pressure. This is true in varying degrees in 

all agricultural lands near urban areas. These lands in many cases 

are relatively small specialty crop lands. It is widely anticipated 

that Federal and State carbon reduction programs will increase 

costs for energy, fertilizer, pest management tools, and other inputs 

such as transportation. If winegrape growers and agriculture are 

not excluded from any carbon emissions cap while being able to receive credits for offsets provided, these unaddressed increased costs 

will result in the loss of an additional increment of agricultural 

lands. 

Further, it is my understanding that agriculture, through plant 

and soil sequestration, has been identified as a priority area for 

cap-and-trade offsets. If the profitability of agriculture is further 

reduced through increased costs and competition from foreign 

wines made with cheap labor with Government supports, that will 

serve to limit the availability and expansion of agriculture as an 

important component of any cap-and-trade program. 

The winegrape quality and standards in the Napa Valley are in 

no immediate danger or short-term danger from climate control activity. There are some things that are changing, however. For example, we are experiencing more heat spikes. Generally speaking, 

heat and sunlight bring beneficial effects to grape ripening and maturity. We prepare our trellises and canopy management to accept 

and accentuate this. When heat spikes occur, they damage the 

grapes and thus we must prepare our trellises to avoid sunlight 

and heat—in direct contradiction to our major objective of heat and 

sunlight accumulation. 

The nights are getting warmer. The secret of producing great 

winegrapes involves achieving a chemical balance between sugar, 

acid, and pH. Sugar is accumulated during the day, acid in the cool 

nighttime temperatures, and pH at both times. Climate change is 

increasing our nighttime temperatures, and at this time we have 

no way of knowing the effect on grape balance and quality. We 

greatly need research to show these effects. I understand that most 

of the carbon sequestration research has been done on annual 

crops. Our vines with a 20– to 40–year life span have a significantly different carbon footprint, and their relationship to annual 

crops should be analyzed. 

Another area where climate change is beginning to affect us is 

pest infestation. The disruption in the ecosystem is producing new 

pests and mutations and vine diseases that we just do not understand. This could have a major effect on our ability to limit pesticides. 

45 

For reasons of economics, fruit quality, and soil and water conservation, we have over the past many years drastically reduced 

our tractor usage in the vineyards. We limit irrigation practices for 

reasons of fruit quality, and when we do irrigate, we use effective 

drip irrigation. We make extensive use of cover crops to host beneficial insects and limit pesticides as well as reduce tillage to limit 

soil moisture. We—— 

Chairman HARKIN. Mr. Beckstoffer, could you summarize? 

Mr. BECKSTOFFER. OK. We in the grape business have been practicing for a long time, and we just hope that these early practices 

will be recognized in any potential carbon market or offset program. 

Thank you very much. 

[The prepared statement of Mr. Beckstoffer can be found on page 

65 in the appendix.] 

Chairman HARKIN. Thank you very much, Mr. Beckstoffer. I am 

sorry. We are just running out of time. 

Next, Mr. Frank Rehermann, Chairman of USA Rice Producers’ 

Group, also from California. Welcome, Mr. Rehermann. Please proceed. 

STATEMENT OF FRANK REHERMANN, CHAIRMAN, USA RICE 

PRODUCERS’ GROUP, LIVE OAK, CALIFORNIA 

Mr. REHERMANN. Good afternoon, Chairman Harkin, Ranking 

Member Chambliss, and members of the Committee. My name is 

Frank Rehermann, and I am a rice producer from Live Oak, California. Since 1972, my wife and I have produced rice in a family 

partnership which now includes our two sons. I currently serve as 

Chair of the USA Rice Producers’ Group, one of four organizations 

which comprise the USA Rice Federation. And, incidentally, Chairman Harkin, I am proud to say that all 850 acres I farm are enrolled in the CSP program. 

Chairman HARKIN. Good for you. Thank you. 

Mr. REHERMANN. The USA Rice Federation is the global advocate 

for all segments of the rice industry. Our multi-billion-dollar industry provides jobs and income for a broad and diverse array of people in the value chain. Beyond our obvious economic and nutritional benefits is the fact that we provide winter-flooded habitat for 

important species of migratory waterfowl and other species. That 

habitat is critical to their very survival. 

Our objections with climate change legislation as recently passed 

by the House lie in the area of increased production costs. Hopefully, our own Congress will not approve legislation that will have, 

may have the unfortunate, albeit unintended, consequence of shifting rice production to our foreign competitors because we can no 

longer compete. 

The U.S. rice industry is already faced with the importation of 

some 750,000 tons of rice per year from foreign origins, and, therefore, competing in our own markets has become more difficult. And 

as that happens, the natural consequence of that would have an effect on the Nation’s ability to provide food security. That would be 

placed at further disadvantage. 

We currently have few, if any, opportunities in rice production to 

further sequester or reduce greenhouse gases. However, on a 

46 

proactive basis, work is newly underway in California to develop 

computer modeling techniques to quantify greenhouse gas emissions and, accordingly, to estimate emission responses to possible 

changes in cultural practices. All factors will be evaluated to determine their feasibility. 

However, as of now, we cannot identify a way to offset the increases in production costs of rice attributed to H.R. 2454. Moreover, the much discussed study by Texas A&M demonstrates that 

on all rice farms sampled, production costs will go up significantly, 

and that causes our bottom line to reduce significantly and ultimately has an effect on equity. 

The American Farm Bureau Federation estimates that just the 

increase in rice production cost per acre could reach as high as 

$153 per acre. Within that margin lies any ability we have to show 

a profit. 

Additionally, we consider it highly unlikely that rice-producing 

countries with whom we compete will impose onerous regulatory 

burdens, as evidenced by historical evaluation. Therefore, we respectfully urge the members of this Committee to fully evaluate alternative approaches to curbing greenhouse gas emissions and to 

oppose pending or similar climate change legislation. 

We have some suggestions that we would like to make today, but 

in the event that legislation similar to H.R. 2454 is considered in 

this body, we believe there are several key provisions which must 

be clearly and explicitly included in the bill to help ensure U.S. agriculture is not irreparably injured in the process. 

One, a specific exemption should be included for the agriculture 

sector from the greenhouse gas emission reduction requirements of 

climate change legislation and the underlying Clean Air Act. 

Second, a definition of ‘‘agriculture sector’’ for the purposes of 

this exemption should be clarified to include production as the path 

from the field through the stage of processing necessary for the 

commodity to be marketed in commercial channels. 

We will need additional funding to accomplish more research by 

USDA and the land grant university system. We need the establishment of a program using the funds and authorities of CCC to 

compensate producers for their increased input costs. We would 

like to see the establishment of a robust agricultural offset program 

that is flexible and run entirely by the USDA. 

In conclusion, I urge this Committee to work and the Senate to 

postpone consideration of climate change legislation until such time 

that alternative legislative approaches for curbing greenhouse gas 

emissions are developed which do not injure American agriculture. 

If this effort, however, is unsuccessful, we request that this Committee work with other committees of jurisdiction and your Senate 

colleagues to ensure that our recommendations are included in any 

climate change legislation enacted into law. We believe that these 

provisions in the current approach to climate change would be very 

detrimental to the U.S. rice industry. 

Again, thank you for the opportunity to present our views. I will 

be glad to answer any questions. 

[The prepared statement of Mr. Rehermann can be found on page 

116 in the appendix.] 

47 

Chairman HARKIN. Well, thank you, Mr. Rehermann, for being 

here and thank you for your testimony. 

Now we turn to Mr. Luke Brubaker of Brubaker Farms of—is it 

Mount Joy, Pennsylvania? 

Mr. BRUBAKER. Mount Joy, right. 

Chairman HARKIN. Mount Joy, Pennsylvania. Welcome, Mr. Brubaker. Please proceed. I am sorry. I was looking at your folder 

here. 

STATEMENT OF LUKE BRUBAKER, BRUBAKER FARMS, MOUNT 

JOY, PENNSYLVANIA 

Mr. BRUBAKER. Thank you, Chairman Harkin and Ranking 

Member. And I am so disappointed my Pennsylvania Senator just 

left me earlier, and all the rest of the members, I was going to address them, but they have gone. 

Chairman HARKIN. That is all right. 

Mr. BRUBAKER. I would like to thank you for the opportunity to 

speak before you today about the issue of global warming. I do not 

come here today as an expert on global warming, but to tell you 

some of the great things that happen on Brubaker Farms, and I 

believe that we can have an impact on the atmosphere and on global warming. 

To begin, I would like to speak with you about Brubaker Farms 

Dairy and dairies in general and how they can profit from the 

product—manure—which, in some cases, is thought of as a liability 

rather than an asset. 

I like to think of myself not just as an environmentalist, but also 

as a business leader where I can lead in the local community and 

represent dairy farmers on State and national issues. Please refer 

to my short bio which I believe you received. 

Brubaker Farms of Mount Joy, Pennsylvania, is owned by my 

wife and myself, in partnership with our two sons, Mike and Tony 

Brubaker. My father purchased the farm in 1929 and started the 

operation with eight cows. My brother and I purchased the farm 

in the early 1960’s, and at that time it was an animal operation 

that consisted of 18 cows. In the early 1990’s, my sons graduated 

from college and wanted to come back to the farm to be a part of 

that operation. At that time, my brother sold his interest in the 

farm to me and my sons, and we entered in to a formal partnership 

to manage Brubaker Farms. At the time the partnership was 

formed, the Brubaker animal operation consisted of 200 cows. The 

farm now consists of over 800 cows, 600 young stock, and also a 

250,000 bird broiler chicken operation per year. These expansions 

to the operation allow it to provide the necessary income to sustain 

the three families that now rely on it for their economic well-being. 

We have developed an operation that is both financially stable 

and is an important part of the local economy. We have taken actions to ensure that the site is maintained as a working farm in 

the future through participation in the Pennsylvania Farmland 

Preservation Program. In order to address farm commodity price 

issues, farm expenses, and family financial needs, we are ready to 

make the necessary business decisions to ensure that the farm will 

continue to be viable into the future. The farm is a family business, 

and the economic viability of the operation is critical in order to 

48 

allow it to continue to be an effective business well into the future, 

and for it to be an economically sustainable family enterprise. 

The most recent project we have completed is a manure digester. 

We are excited about what this new addition means to our farm 

and to the energy security of Lancaster County, Pennsylvania, and 

neighboring communities. At the present time, our digester is generating approximately 4 to 5 megawatts of electricity a day. Most 

of the electricity that we generate is sold back to the local electric 

utility company, PP&L. We have the capacity of producing enough 

electricity to supply approximately 150 to 200 homes a day, and 

most of that is closer to 200 homes a day now. 

Key to the methane production is the cows and heifers. The manure flows by push and gravity to a recovery pit where it is 

pumped into a large lagoon of approximately 700,000 gallons and 

where bacteria in the lagoon converts volatile solids in the manure 

into biogas or methane gas. The lagoon is completely covered and 

insulated. The gas flows underground into the generation building 

which houses a large Guascor engine and generator capable of producing 225 kilowatts. 

Now I would like to speak to some of the advantages of a methane digester: reduces the strain on the PP&L grid; reduces the 

need for electricity produced from fossil fuel power plants; reduces 

pathogens in the digested manure; separates the solids from liquid 

and recycles the solids for bedding; reduces the odor by 75 to 90 

percent after digested; fly larvae are killed by the digester, resulting in less flies; reduces methane and other greenhouse gases into 

the atmosphere; weed seeds killed in digested manure which in 

turn can reduce chemical use; selling electricity to the local power 

company as renewable energy. 

We are permitted to add food by-products that can be metered 

to the manure which makes extra electricity; possibility of 

partnering with cafeterias to use food scraps added to manure rather than land filling which also makes electricity. In turn, this can 

result in a profit to the farmer. 

Methane is one of the potent greenhouse gases. It is 20 to 23 

times more powerful in trapping heat in the atmosphere than carbon dioxide. We make a profit from the sale of carbon credits to industry or individuals who need or want to offset emissions. 

As a greenhouse gas, methane differs from carbon dioxide in an 

important way. Methane remains a climate change threat in the 

atmosphere for a number of years. 

The reduction in the methane from our digester can lead to a 

slowing of climate change. Use of the manure after it goes through 

the digester is readily available to plants for plant food, which in 

turn helps prevent leaching and a chance for run-off. 

As you know, in this critical time, the dairy farmer has some financial difficulty. Some of the things we talked about today could 

help the dairy producer. And as a side note, I would be happy to 

offer suggestions or ideas that could help correct the dairy situation. 

I believe that over the next 10 years, environmental and renewable energy issues are going to be some of the biggest challenges 

for agriculture and farmers. Using State and Federal funding and 

loan assistance for this project and our new solar project to produce 

49 

electricity for about 150 homes on the roof of our new heifer barn 

helps Brubaker Farms make our goals a reality. 

I believe investing in projects like these is good for the future of 

the dairy farmer industry and livestock industry, the economy, the 

environment, and the whole world. 

I will be glad to answer any questions that you might have, and 

thank you again for the opportunity to speak today. 

[The prepared statement of Mr. Brubaker can be found on page 

71 in the appendix.] 

Chairman HARKIN. Well, Mr. Brubaker, thank you very much. 

Very stimulating. Very stimulating. 

Now we turn to Mr. Fred Yoder, Past President of the National 

Corn Growers Association, from Plain City, Ohio. Welcome, Mr. 

Yoder. Please proceed. 

STATEMENT OF FRED YODER, PAST PRESIDENT, NATIONAL 

CORN GROWERS ASSOCIATION, PLAIN CITY, OHIO 

Mr. YODER. Chairman Harkin, Ranking Member Chambliss, it is 

a pleasure to be here. Unfortunately, somebody has to be last, and 

I guess today I was the last one. I guess I am just lucky. 

Again, my name is Fred Yoder. I grow corn, soybeans and wheat 

near Plain City, Ohio, and I have been an active participant in climate change discussions for many years. In December, I had the 

opportunity to attend and participate in the United Nations World 

Climate Conference in Poland where I was able to discuss the role 

of agriculture in reducing greenhouse gas emissions. Also, in addition to being part of NCGA’s efforts, I serve on the boards of numerous ad hoc groups, including the 25x25 Carbon Working Group 

and the Ag Carbon Market Working Group here in D.C. 

I feel strongly that agriculture needs to be considered a significant part of the broader solution as we evaluate ways to reduce 

greenhouse gas emissions. Our Nation’s farmers can play a major 

role in the market-based cap-and-trade system through sequestering carbon on agricultural lands. In fact, numerous economic 

analyses have indicated that a robust offset program will significantly reduce the costs of a cap-and-trade program for consumers. 

In the near term, greenhouse gas reductions from livestock and 

agricultural conservation practices are the easiest and most readily 

available means of achieving reductions on a meaningful scale. The 

EPA estimates that ag and forestry lands alone can sequester at 

least 20 percent of all annual greenhouse gas emissions in the 

United States. 

Further, agricultural producers have the potential to benefit from 

a properly crafted cap-and-trade system. Given these opportunities, 

it is critical that any climate change legislation seeks to maximize 

agriculture’s participation and ensure greenhouse gas reductions 

while also sustaining a strong farm economy. 

For years, corn growers have adopted conservation practices such 

as no-till or reduced tillage which result in a net benefit of carbon 

stored in the soil. In fact, on my farm, I engage in both no-till and 

reduced tillage. Also, for the past 5 years, I have worked with my 

State association, the Ohio Corn Growers, on a research project 

with Dr. Rattan Lal of the Ohio State University on soil carbon sequestration research. As part of our research, we have on-farm 

50 

plots at six different locations to study various soils and their carbon capture capabilities. I have been actively engaged from the beginning in defining the research protocols, and this is just one example of the proactive steps our industry has taken. 

NCGA was pleased with the inclusion of a number of agricultural 

offset provisions during the House negotiations on H.R. 2454. However, we currently have a neutral position on the legislation until 

we finish conducting an economic analysis of the House bill. We expect to have preliminary results of our study coming in the next 

few weeks, which will better explain the potential cost increases 

and income opportunities for corn production under the American 

Clean Energy and Security Act. We must get this nailed down. 

Perhaps one of the largest unresolved issues in H.R. 2454 is the 

treatment of early actors and the definition of ‘‘additionality.’’ Producers who have taken steps to sequester carbon or other greenhouse gases should not be at a competitive disadvantage by being 

excluded from selling credits for future offsets that occur as a result of ongoing efforts. The House bill acknowledges this by allowing the generation of new carbon credits for producers who initiated sequestration practices as early as 2001; however, NCGA does 

not believe that this language is inclusive enough. 

Planting and tillage decisions are made each and every year, and 

there is no guarantee that a producer will decide to continue the 

same practice as the previous season. Each and every crop we grow 

sequesters additional carbon, and Congress should not establish 

policies that offer perverse incentives to producers to discontinue 

their conservation practices. 

To that end, NCGA supports the development of an ‘‘avoided 

abandonment’’ offset credit so that no-till producers can participate 

in a carbon market for their ongoing sequestration activities regardless of when that practice began. 

As an aside, the House-passed version of H.R. 2454 also includes 

an important provision related to the Renewable Fuels Standards. 

The House bill prohibits EPA from considering indirect land use 

change when conducting their life cycle analysis for corn-based ethanol until a peer-reviewed study can be conducted to verify the scientific accuracy of the model. 

NCGA disputes recent data that would suggest direct correlation 

between domestic ethanol production and international deforestation. The language in the House bill is a step in the right direction toward sound science and a more rational life cycle analysis. 

We would urge that the Senate include the same provision in its 

version of the climate bill. 

In conclusion, it is our hope that we can continue to work with 

the Senate Agriculture Committee to ensure Congress chooses the 

best path for agriculture and rural America. I thank the Committee 

for its time, and I do look forward to your questions. Thank you. 

[The prepared statement of Mr. Yoder can be found on page 132 

in the appendix.] 

Chairman HARKIN. Well, thank you very much, Mr. Yoder. 

Thank you all. 

I will just start with you, Mr. Yoder, on what you just kind of 

closed on. The whole idea of stackability is one that we have looked 

at, and we will be making, obviously, strong recommendations on 

51 

that so that a farmer might be able to get CSP-type payments and 

do other things and still get to be able to get offsets for carbon sequestration. That is a little bit easier than the early actors. 

Now, the early actors, as you point out, was under 2001, I think 

it is in the House bill. 

Mr. YODER. That is what was in the House bill. 

Chairman HARKIN. But what about the case of the forester we 

had here in an earlier panel we had in July, where he is the third 

generation—I forget. They had 1,000 acres of timber or something 

like that, but they do other kinds of farming, too. Obviously, it has 

been in their family a long time. Obviously, they are sequestering 

carbon. If he cuts down all those trees and plants new ones, he gets 

to sell offsets. If he does not, he gets nothing. So I think that whole 

thing has to be addressed because that is a pretty permanent practice to have timber like Senator Lugar has on his farm. So both of 

those, you raise those issues, and they are very important issues 

to us. 

Mr. Brubaker, very stimulating, what you are doing there. I 

guess the question I would have is: How have your neighbors in 

Lancaster County who also raise livestock, how have they reacted 

to the addition of a methane digester to your operation? There are 

other dairy farmers around you. 

Mr. BRUBAKER. Right. There are many dairy farmers. If Lancaster County was a State, we would be, I think, about number 11, 

maybe number 12 now. If just Lancaster County was a State, for 

the number of dairy cows, we would be about number 11 in the 

United States. So, yes, there are a lot of dairy farmers around, and 

we are getting a lot of interest in building methane digesters. They 

are coming from Vermont. They are coming from Minnesota. They 

are coming to look at our digester. And we are not the only digester 

in the United States. Do not misunderstand me. I think there are 

about 110 digesters, give or take, in the United States. But we just 

built this probably about 2 years ago—well, about a year and a half 

ago we built it. We started thinking of this in about 2006. I guess 

that was when milk prices were a little weak then, and we 

thought, ‘‘We have got to find another profit.’’ And we decided it 

would be a profit coming from the back end of the cow, and so we 

decided to build a methane digester, which we are getting so much 

interest in. Our power company in Pennsylvania is paying us a 

good price for electricity, and that is what I hear around the country, that power companies are not paying a good price for electricity. They are paying us a good price for electricity, and we are 

selling carbon credits, and it is a win-win situation. 

So that answers some of your question. 

Chairman HARKIN. I assume you are just running the methane 

through, what, kind of an engine or something that is turning, a 

generator? Is that the way you are doing it? 

Mr. BRUBAKER. Yes. If you look on the back side of the paper 

that I—that is actually the picture of the digester right there. And 

from that digester there, you will see over there at the far left, 

there is some piping that runs about a 6–inch pipe over into an engine room, which runs a big, almost a 400–horsepower Guascor engine, which runs a generator, which we are selling the electricity 

right onto the grid. 

52 

Chairman HARKIN. Is this economically viable to do something 

like this? Can you actually make money on something like this? 

Mr. BRUBAKER. Well, yes, we are making money on it, and that 

is why people are looking at it. We did have—in about 2006, Governor Rendell was out to the farm for a meeting, myself and my 

two sons and the two Secretaries of Agriculture. We took a little 

trip after the talk, and we sat him beside the manure pit, and we 

told him what we want to do. He did some writing and said he 

wants to look into this situation. It was not too long until Pennsylvania had a Harvest grant. We got a Harvest grant, and we also 

got a grant from USDA which made it work for us to take the risk 

to build a digester, which it cost about a million and a quarter to 

do. But if everything goes well, the way we are producing, we are 

way above expectations on producing electricity, and we should pay 

it off in 3 to 4 years. And if we would not have had the grants, 

I believe we could have paid it off—could pay it off in, to be conservative, 8 to 10 years. 

Chairman HARKIN. Mr. Rehermann, again, one of the benefits of 

having you here is, again, to highlight the fact that different parts 

of agriculture do not fare as well under the proposed legislation, 

and one of those that has come to our attention are the rice farmers. 

I have heard mention of methods to reduce methane emissions 

from rice farming. I guess that comes from the straw or something? 

I do not understand that. But are there any kind of practices like 

that that would be viable as an offset practice for rice farmers? 

Mr. REHERMANN. For approximately, Mr. Chairman, the last 30 

years, we have investigated methods by which we can rid ourselves 

of our straw, which yields about 3 ton per acre, a good rice crop. 

We have sought alternative uses, and to date, we have no feasible, 

large-scale alternative use for rice straw. And so most of it is incorporated into the soil. Certainly that leads to methane gas production. 

We continue that plight. We continue to search, but we have no 

real evidence that we are going to be able to sequester or reduce 

the emissions any more than we do. 

We irrigate. We are under constant irrigation. We use a fairly 

high amount of nitrogen. We till the soil. Our soils are heavy clay 

and not well drained. All those things lead to the emission. 

Chairman HARKIN. Again, it is a balancing here that we are trying to do here. There have been, obviously, a lot—well, I have gone 

over my time. I am sorry. I was not paying attention to the clock. 

I will finish there, and if I have a follow-up, I will follow up later. 

Senator Chambliss? 

Senator CHAMBLISS. Well, gentlemen, thanks for your testimony 

here today. Mr. Yoder, always good to see you. 

We have talked about the study that Texas A&M did that has 

just been released in which there is a very distinct difference in 

farmers who would prosper from this versus farmers who would 

struggle from it. We heard some of that from you folks here. 

We have got to develop a policy that hopefully will benefit all 

farmers and ranchers across America and not just a policy that is 

going to—in this case, as the Texas A&M study showed, would particularly benefit Midwest farmers and corn and soybean farmers. 

53 

Do you have any advance understanding of what your study is 

going to show with respect to this particular piece of legislation 

and its effect on corn that may be grown in Georgia or North Carolina versus corn that may be grown in the Midwest? 

Mr. YODER. Well, I cannot really say for sure what the study that 

we are doing right now will say, but I will say this: With our work 

in Ohio with Dr. Lal from Ohio State, there is a definite difference 

in soil’s ability to sequester carbon. So there will be some differences across the country. It is not going to be one size fits all. 

In fact, if Senator Johanns was here, in the sandy soils of Nebraska it would be virtually impossible to generate a credit from 

soil sequestration because of the sandy soil, the lack of organic 

matter. 

However, the study that you are referring to from Texas A&M 

really only looked at two types of offsets, and that was no-till sequestration and also methane digesters. And so it was really kind 

of narrow in scope. 

The other thing, too, that we have to consider is that in the Waxman-Markey bill there were 13 different projects that they listed 

as projects for agriculture to participate, and it is much broader 

than just no-till sequestration or methane digesters. For instance, 

raising a cover crop or reducing the amount of water that you irrigate with, with maybe some varieties that take less water, reducing nitrogen use and things like that. 

So I think the thing we have to do in order to make this work 

for all of agriculture is to come up with scientifically based 

verifiable projects that we can do clear across the United States 

and not put one part, like Georgia, at a disadvantage compared to 

an Iowa or something like that. I think we have the science to do 

this, but I think it is important for your Committee to really work 

on broadening this and making sure that we have some sciencebased projects that everyone can participate in and not just a few. 

Senator CHAMBLISS. All of the testimony thus far that we have 

heard indicates very strongly that we are going to see a rise in 

input costs. Apparently, nobody is in disagreement with that, 

whether it is nitrogen or petroleum or whatever it may be. So in 

order to continue to generate a profit from a corn-growing standpoint, obviously you are going to have to get a higher price for it, 

which we all assume that would be a likely scenario. Otherwise, as 

the Texas A&M study showed, the only way you are going to see 

corn and soybeans prosper is for acreage to come out of production, 

which means farmers going out of business. 

Mr. Brubaker, if that scenario does play out and we see a significant increase in corn prices—we have heard testimony that we are 

going to have an increase in electric prices, we are going to have 

an increase in the other feedstuffs that you use in your production. 

With the dairy market in very tough times right now, what is that 

going to do to your operation? 

Mr. BRUBAKER. Well, maybe we are in a better position than 

some, but I want to try to look at it as the whole picture of dairy 

and livestock producers. Maybe one thing you could do would be if 

a farmer participates in the carbon sequence in one way or another, that you would offset his expenses, his fuel expenses or 

something like that, if that is going to raise fuel and electric costs. 

54 

I am just trying to think of something that would offset it. Exempt 

that farmer if he participates in the program, offset his fuel prices, 

electric prices, or doing something like that. Maybe that is an opportunity, or maybe that is an encouragement. 

Senator CHAMBLISS. Well, we are in an atmosphere, unfortunately, that rather than increasing subsidies, we keep getting shot 

at from the standpoint of decreasing subsidies. And it makes it 

pretty difficult. 

Frank, good to see you as always, too. Thanks for being here. The 

Texas A&M study as well as other studies have shown that rice 

farmers are not going to fare too well for the reasons that you enumerated. What is this going to do to you and the international market? If the United States forges ahead with a cap-and-trade program, where are rice growers in this country going to be from a 

global market standpoint? 

Mr. REHERMANN. Senator Chambliss, we cannot help but be severely disadvantaged by that if we lose our ability to compete in 

that global marketplace, and we are constantly being reminded 

that in order to effectively compete, we have to be a lower-cost producer than trending higher. We have had the same impacts on our 

input costs, the energy-related input costs that every other business in the United States has had. The principal difference, as you 

know, is that we cannot pass those costs along to the consumer. 

So I peril to think of the disadvantage we are going to be in the 

export market. We are having a more and more difficult time, as 

I mentioned, competing against imports into this country. 

Senator CHAMBLISS. Well, and I know some of the difficulties you 

are experiencing now. The last couple of years have been pretty 

tough years in the rice industry from a global competition standpoint. And if we are looking at increasing your input costs without 

seeing a collateral increase in prices, are we going to see more and 

more rice growers go by the wayside? 

Mr. REHERMANN. I fear that in this country you will. I think that 

the people who will benefit will be the growers in the countries 

that do not implement such onerous regulations, our competing nations—Vietnam, Thailand, Burma. If China and India export, we 

have big trouble there. I do not look for them to lead the way in 

climate change initiatives. 

Senator CHAMBLISS. Mr. Beckstoffer, I am particularly interested 

in how a small California winegrape grower can provide offsets 

under this cap-and-trade program. Can you tell us what emission 

reduction or carbon sequestration activities winegrape growers are 

doing now and what they can do under an offset program? And I 

apologize. We just do not grow a lot of grapes over our way. A lot 

of muscadines, but not grapes, are used extensively in the manufacture of wines. So educate us a little bit about what you are doing 

and what can be done. 

Mr. BECKSTOFFER. We do not plant grapes but once every 40 

years, so that we do not do new things that often. So as many of 

the people on this panel have said, if our early practices where we 

sequester carbon every year based on what is already in the ground 

is not give credits, we are not going to get many credits, because 

we simply do not do that. 

55 

What we do for reasons of grape quality, if you will, and soil conservation is that we—we are very worried about compaction and 

things of that sort, so we do not drive tractors that much. We are 

worried about pesticides, so we grow cover crops so we can host 

beneficial insects and things of that sort. We use drip irrigation so 

we do not use a lot of energy to irrigate. But all of those are practices that we do every year, and so somehow or another, we must 

get credit for the photosynthesis and for the carbon sequestration 

we do with our normal business practices, and that for plants that 

are planted every 40 years, as Mike Thompson was saying, we do 

this precision ripping, and that cuts down on tractor usage. It cuts 

down on carbon because you are actively—you are turning the soil. 

But we started that because the rocks were really big and it cost 

a lot of money to move those rocks. But most of the things we do 

for wine quality and for soil conservation are things that would 

help climate control, plant and carbon sequestration. But you have 

got to give us credit for what we do every year, or we are not going 

to get much benefit. 

Senator CHAMBLISS. All right. Mr. Chairman, I think that is all 

I have right now. Thank you very much, gentlemen. 

Chairman HARKIN. I have another one to ask Mr. Beckstoffer, 

and that is, it seems to me that you are in a unique position. Your 

vines are long-term type, carbon sequestration, 30, 40 years on 

some of these vines. Do I assume that you also—do you do any 

kind of cover crop in between your vines and stuff like that? 

Mr. BECKSTOFFER. Yes, we do, and we do that—what we do is 

we do it to dry out the soil. We plant the kind of crops that would 

dry the soil in the spring and then would go away when the plant 

needs the soil in the rest of the summer, because in California we 

get rain from November to March and not any time in between 

that. But our vineyards are—there is a cover crop between the 

rows that we mow and we do not turn the soil anymore. We mow 

it, and we mow it only, say, once a year because the kind of crops 

we do die in the summertime because we do not want to use the 

soil—we do not want them taking up our soil moisture. 

But if you would look at a vineyard, you would see—we plant 

over 1,000, 1,200 vines per acre, so that is very intense in terms 

of the green foliage there, which is the photosynthesis. But the 

ground much of the year is green as well. 

Chairman HARKIN. Well, thank you all very much. I just have to 

respond to my friend from Georgia here on this issue of the increased input costs and the increased price for feed for our dairy 

farmers or hog farmers or cattle farmers. 

Senator Thune and I just had a hearing out in Sioux City here 

a week or so ago on energy, basically biofuels, and it was stated 

there by not only growers but some of the representatives of our 

big seed manufacturers that 300 bushels per acre of corn is not too 

far in the distance. In fact, I think it was—let me see. It was DuPont or the other one, Monsanto—I forget which one—which they 

predict that by 2020—they did not predict. They said it is certain 

that we will have a 40–percent increase in the productivity of corn 

per acre in this country. And that is not even taking into account 

some of the genetic research that is going on now, in corn especially. I am probably particular to corn because of Iowa, but corn 

56 

where they are developing strains of corn that use less water, that 

can grow in different parts of the world with less water. Some of 

it may even be brackish-type water that the plant can utilized 

like—I always point out there are some plants that produce fruit 

or something that use sea water, but they have a gene in there 

that says, ‘‘Salt, you stay here, and we will take the fresh water.’’ 

And they are finding that—like coconuts being, of course, the most 

obvious one. So if you can find those kinds of genes that we could 

help introduce, then we could grow corn in a lot of different areas 

that we are not growing it now. 

So we are going to have—I am told it was Monsanto who said 

that we will have 300 bushels by 2030. Pioneer said we would have 

a 40–percent increase in 10 years, so that is basically equivalent 

from both of them. So there is a lot of—we are going to produce 

a lot more corn per acre in the future. And that is good. That is 

very good for all of us. So I do not think we have reached the limits 

of our research yet on those areas. 

Well, thank you all very much; this has been very helpful to us, 

all your testimony. Rest assured we are trying to figure out how 

we can give the best information possible to the other committees 

when they bring this up—sometime, I do not know when, maybe 

this fall. 

Thank you all very much, the Committee will stand adjourned. 

[Whereupon, at 1:06 p.m., the Committee was adjourned.] 

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