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[Senate Hearing 107-350]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 107-350

 BIOMASS AND ENVIRONMENTAL TRADING: OPPORTUNITIES FOR AGRICULTURE AND 
                                FORESTRY

=======================================================================

                                HEARING

                               before the

                       COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY

                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 29, 2001

                               __________

                       Printed for the use of the
           Committee on Agriculture, Nutrition, and Forestry

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

78-341              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2002

____________________________________________________________________________
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           COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

                  RICHARD G. LUGAR, Indiana, Chairman

JESSE HELMS, North Carolina          TOM HARKIN, Iowa
THAD COCHRAN, Mississippi            PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            KENT CONRAD, North Dakota
PAT ROBERTS, Kansas                  THOMAS A. DASCHLE, South Dakota
PETER G. FITZGERALD, Illinois        MAX BAUCUS, Montana
CRAIG THOMAS, Wyoming                BLANCHE L. LINCOLN, Arkansas
WAYNE ALLARD, Colorado               ZELL MILLER, Georgia
TIM HUTCHINSON, Arkansas             DEBBIE A. STABENOW, Michigan
MICHEAL D. CRAPO, Idaho              BEN NELSON, Nebraska
                                     MARK DAYTON, Minnesota

                       Keith Luse, Staff Director

                    David L. Johnson, Chief Counsel

                      Robert E. Sturm, Chief Clerk

            Mark Halverson, Staff Director for the Minority

                                  (ii)

  
                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing(s):

Biomass and Environmental Trading: Opportunities for Agriculture 
  and 
  Forestry.......................................................     1

                              ----------                              

                        Thursday, March 29, 2001
                    STATEMENTS PRESENTED BY SENATORS

Lugar, Hon. Richard G., a U.S. Senator from Indiana, Chairman, 
  Committee on Agriculture, Nutrition, and Forestry..............     1
Allard, Hon. Wayne, a U.S. Senator from Colorado.................     3
Harkin, Hon. Tom, a U.S. Senator from Iowa, Ranking Member, 
  Committee on Agriculture, Nutrition, and Forestry..............    22
Hutchinson, Hon. Tim, a U.S. Senator from Arkansas...............     5
Leahy, Hon. Patrick J., a U.S. Senator from Vermont..............    33
Nelson, Hon. Ben, a U.S. Senator from Nebraska...................    15
Stabenow, Hon. Debbie, a U.S. Senator from Michigan..............     4
                              ----------                              

                               WITNESSES
                            Panel on Biomass

Dale, Bruce Chairperson, Department of Chemical Engineering, 
  Michigan State University, East Lansing, Michigan..............     6
Gruber, Patrick, Vice President, Technology, Cargill Dow, 
  Minnetonka, Minnesota..........................................     9
Judd, Robert, Executive Director, USA Biomass Power Producers 
  Alliance, Sacramento, California...............................    11
Woolsey, Edward, Director, Iowa Sustainable Energy for Economic 
  Development, Prole, Iowa.......................................    13

                   Panel on Environmental Trading, I

Batchelor, David, Market-Based environmental Program Specialist, 
  Michigan Department of Environmental Quality, Lansing, Michigan    37
Kaster, Gary, Manager, Forestry and Recreation Programs, american 
  Electric Power, McConnellsville, Ohio..........................    35
McCarl, Bruce, Professor of Agricultural Economics, Texas A&M 
  University College Station, Texas..............................    31
Sandor, Richard L., Chairman and CEO, Environmental Financial 
  Products LLC, Chicago, Illinois................................    29

                    Panel Environmental Trading, II

Bonnie, Robert, Economist, Environmental Defense, Washington, DC.    49
Fiedler, Jeff, Climate Policy Specialist, Natural Resources 
  Defense Council, Washington, DC................................    51
Kadyszewski, John, Adviser to the President, Winrock 
  International, Morrilton, Arkansas.............................    44
Kinsella, Jim, No Till Farmer, Lexington, Illinois...............    47
                              ----------                              

                                APPENDIX

Prepared Statements:
    Batchelor, David.............................................   114
    Bonnie, Robert...............................................   132
    Dale, Bruce..................................................    66
    Fiedler, Jeff................................................   136
    Gruber, Patrick..............................................    70
    Judd, Robert.................................................    77
    Kadyszewski, John............................................   125
    Kaster, Gary.................................................    97
    Kinsella, Jim................................................   128
    McCarl, Bruce................................................    95
    Woolsey, Edward..............................................    89
Document(s) Submitted for the Record:
    Chicago Climate Exchange Moves Toward Launch by Micheal 
      Walsh, Rafael Marques, and Scott Baron.....................   144

 
    HEARING ON BIOMASS AND ENVIRONMENTAL TRADING: OPPORTUNITIES FOR 
                        AGRICULTURE AND FORESTRY

                              ----------                              

                        THURSDAY, MARCH 29, 2001

                                       U.S. Senate,
          Committee on Agriculture, Nutrition and Forestry,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 9 a.m. in room 
328-A, Senate Russell Building, Hon. Richard G. Lugar, 
[Chairman of the Committee] presiding.
    Present: Senators Lugar, Allard, Hutchinson, Crapo, Harkin, 
Stabenow, Nelson and Leahy.

OPENING STATEMENT OF HON. RICHARD G. LUGAR, A U.S. SENATOR FROM 
                INDIANA, CHAIRMAN, COMMITTEE ON 
              AGRICULTURE, NUTRITION, AND FORESTRY

    The Chairman. This meeting of the Senate Agriculture 
Committee is called to order. Today, we will enjoy a hearing to 
explore the opportunities for agriculture and forestry that 
will result from the further development of biomass resources 
and from environmental trading.
    Two years ago, when oil prices were much lower, few thought 
the OPEC cartel would get together after a generation of 
squabbling and cheating on production rates. But in the January 
1999 issue of Foreign Affairs Magazine, the former Director of 
the CIA, Jim Woolsey, and I published an article entitled, 
``The New Petroleum.''
    We pointed out that America continues to face a strategic 
threat from over dependence on foreign oil. The fact that OPEC 
has succeeded in raising prices represents a clear failure of 
United States energy and foreign policy, in my judgment.
    That policy must change and one key change needed is the 
rapid development of renewable sources of energy. I have a 
particular interest in the development of biomass energy, 
including ethanol from biomass.
    In April 1999, I introduced S. 935 to accelerate and 
coordinate the biomass research and development activities of 
Federal agencies and to establish a peer review of competitive 
research and development program aimed at developing economical 
bio-fuels, biochemicals and bio-power from agricultural and 
forest residues.
    Fourteen months later, with broad support from 
agricultural, chemical, renewable energy and environmental 
organizations, the Biomass Research and Development Act was 
enacted into law.
    Now, we have a panel of witnesses today who are prepared to 
talk about the promise of biomass and the economic 
opportunities that biomass energy and chemicals can provide for 
farmers and for rural areas.
    In addition to its energy security and rural economic 
benefits, biomass energy is very climate-friendly. It should be 
at the top of the list of energy sources that reduce our 
dependence on foreign oil and improve our environment.
    Today's hearing will also examine the economic 
opportunities for the agricultural and forestry sectors from 
environmental trading relating to carbon and also to water 
quality. There are opportunities for which firms can pay 
farmers and foresters to adopt improved agricultural and 
forestry practices that sequester carbon, improve water 
quality, or enhance nutrient or nitrogen management.
    We have assembled two expert panels to testify today on 
these promising opportunities for environmental trading.
    U.S. forests and agricultural and forest soils sequester 
about 300 million metric tons of carbon per year. There are 
opportunities for improved agricultural and forestry practices 
that would increase the amount of carbon that they store.
    Sequestering carbon is an important mechanism for 
mitigating the threat of climate change. Carbon storage 
provides many 
co-benefits such as controlling erosion, helping to keep 
nutrients and pesticides from washing into water bodies and 
increasing soil productivity.
    In addition, there are many opportunities in which 
environmental trading can be used to further nitrogen 
management or nutrient management. These opportunities could 
reduce emissions of such powerful greenhouse gases as nitrous 
oxide and methane and improved water quality at the same time.
    Environmental trading directly related to water quality may 
be a cost effective means of implementing the existing Clean 
Water Act. Environmental trading can be a successful way of 
reducing the cost of environmental compliance.
    The cap and trade system for sulfur dioxide emissions under 
the Acid Rain Title of the Clean Air Act Amendments of 1990 has 
led to eight annual auctions of sulfur dioxide credits at the 
Chicago Board of Trade.
    The cost of compliance with the Acid Rain Title of that Act 
is 50 percent to 75 percent less than was estimated in 1990. 
The nonpartisan organization, Resources for the Future, has 
estimated the benefits of the act itself outweigh its cost by 
an extremely favorable ratio of 66-to-1.
    As we shall see from our testimony today, there is great 
interest among many parties in setting up an environmental 
trading system that would involve carbon dioxide and other 
greenhouse gases. However, the transactions costs of such 
trades could be considerable.
    The economics of such a trading system must be explored and 
there is also a need to demonstrate that the amount of carbon 
that is sequestered or greenhouse gas emissions which are 
reduced can be monitored and verified. We also need to 
determine the appropriate role of the Federal Government in 
encouraging environmental trading.
    I look forward, as I know all committee members do, to 
hearing the testimony to be presented today about the 
opportunities for agriculture and forestry resulting from 
biomass and from environmental trading.
    Let me mention at the outset before I call upon my 
colleagues for their opening comments and then recognize the 
first panel, that we appreciate very much the expert witnesses 
coming, some from long distances. In due course, we will hear 
everyone.
    But I wanted to make this comment. This is one of these 
days in terms of Senate activity. Specifically, at 9:45, we 
will have a necessary interruption for an important roll call 
vote on an amendment that will be determined at that point.
    Now, the Chair is not clear about what is going on in terms 
of how the parliamentary situation will proceed, but there 
could be other votes as our morning progresses.
    In any event, at 11 a.m., I will have to go to a meeting 
with the Majority Leader at which we will discuss, hopefully as 
concisely as possible, the agricultural budget as a part of the 
Budget Act debate, which will commence on Monday in an attempt 
to come to grips, at least, with where that will fit into that 
debate in a parliamentary or substantive way. That meeting will 
not take all morning, but unfortunately, it occurs at 11 a.m.
    If other Senators are available, I am prepared not only to 
yield the chair, but to welcome another Chairman at 11 a.m., so 
I make that announcement early on so Senators who are waiting 
in their offices for an opportunity to chair the committee 
might want to come forward and help out.
    Promptly upon returning, I hope to resume the Chairmanship 
and conduct the conclusion of the meeting. We have three panels 
and I will ask each of the panel members to be prepared to make 
a five-minute presentation as a summary of their testimony.
    No need to ask the question, because I will answer now, 
your testimony will be published in full in each case in the 
record. We welcome, really, the remarkable papers that you have 
presented.
    At this point, let me recognize Senator Allard.

    STATEMENT OF HON. WAYNE ALLARD, A SENATOR FROM COLORADO

    Senator Allard. Mr. Chairman, thank you. I appreciate your 
announcement. Unfortunately, I am going to have to preside over 
the full Senate at 11 this morning. We all have our busy 
schedules.
    I want to compliment you on your leadership on the biomass 
issue, taking organic material, usually very fibrous in nature, 
and converting that over into energy sources. In fact, I was a 
co-sponsor on some legislation that you introduced last year to 
try and deal with that called The National Sustainable Fuels 
and Chemical Acts of 1999.
    If I can give you any further help, I will look forward to 
working with you on that particular issue.
    You know, actually, what we are doing is we are looking at 
agricultural waste. It is corn stalks, wheat stalks, even wood 
waste which, like I mentioned earlier, are very fibrous in 
nature and being able to convert that into chemicals of some 
type or another and alcohol that can power automobiles and 
other forms of transportation.
    These fall into the category of alternative fuels and could 
possibly be an additional source of income for agricultural 
producers in our country or even those who perhaps actually are 
not in agriculture at this point in time.
    The environmental benefits, I think, are great, and have 
great potential. We end up with few harmful byproducts and 
certainly very few, if any, harmful emissions.
    In the State of Colorado, we have the National Renewable 
Energy Laboratory, NREL, and they are doing quite a bit of 
research. It is a Federal agency. It is supported by Federal 
tax dollars. It is doing a considerable amount of research in 
this area, too.
    So, I am looking forward to hearing the testimony of the 
panel that you bring forward this morning.
    I would also just mention that, you know, CO2 sometimes 
gets pulled in on the greenhouse gases and gets talked about. I 
think sometimes people forget about the cycle, the oxygen CO2 
cycle, which is part of the animal-plant cycle. If we have lots 
of CO2, that may very well generate more plant growth. Plants 
kick out oxygen and then animals reprocess that oxygen and put 
out CO2. I think sometimes in our discussion we forget that 
very basic science.
    Thank you very much, Mr. Chairman.
    The Chairman. I thank you, Senator Allard, for your support 
of these issues in the past and your attendance this morning.
    Also, a very faithful attender, Senator Stabenow, do you 
have a comment this morning?

   STATEMENT OF HON. DEBBIE A. STABENOW, A U.S. SENATOR FROM 
                            MICHIGAN

    Senator Stabenow. Yes, thank you, Mr. Chairman. I, too, 
want to congratulate you on your leadership on biomass research 
and join you in your support. I must also apologize in advance 
for trying to be three places at once this morning, so I will 
be in and out. But your invitation to chair at 11 a.m. I find 
very attractive as a junior Senator on the Democratic side. 
This may be my one and only opportunity for quite some time. 
So, I may rush back to make sure that I am here.
    This has really been a wonderful week for me to brag about 
Michigan, Mr. Chairman, and Michigan State University. We had 
some wonderful testimony from an expert a couple of days ago 
and now we have someone again who we are very proud of as well 
as someone from our State department. I would like to take a 
moment to introduce them before I have to step out and begin 
moving back and forth.
    I also have to say that I think this is actually a sign, 
given the Final Four on Saturday, that Michigan State will 
prevail in basketball one more time.
    I would like to extend a welcome to our two witnesses from 
Michigan, Dr. Bruce Dale, who is with us, who chairs the 
Department of Chemical Engineering at Michigan State 
University. We are very proud of the department and the work 
that is being done. Also, we have David Batchelor who is a 
Market-Based Environmental Program Specialist for the Michigan 
Department of Environmental Quality who is in the audience and 
will be speaking later.
    Before coming to MSU in 1996, Dr. Dale directed two large 
interdisciplinary research centers at Texas A&M University and 
also was a Professor at Colorado State that one of my 
colleagues represents.
    Dr. Dale was awarded the Charles E. Scott award in 1996 for 
contributions to the use of biotechnologies to produce fuels, 
chemicals and other industrial products from renewable plant 
resources.
    Most recently he led a National Research Council panel that 
produced a report entitled ``Bio-based Industrial Products: 
Research and Commercialization Priorities.''
    David Batchelor is from Lansing, Michigan, my hometown. He 
played an integral role in the development of Michigan's water 
trading program, which is the first of its kind in the nation. 
I am very interested in examining this model as a creative 
approach to helping agriculture and the environment. He will be 
sharing information about this program today. He has a very 
impressive background in addressing innovative environmental 
trading programs.
    So, Mr. Chairman, on behalf of my home State, I would like 
to welcome both of these gentlemen today.
    The Chairman. Thank you very much, Senator Stabenow. The 
Michigan Water Project is really impressive and we look forward 
to hearing about that.
    I compliment you again on the Michigan State men's 
tournament. You had left the other day before I had an 
opportunity to mention that in the Final Four in the women's 
side we will have both Purdue and Notre Dame.
    Senator Stabenow. Fabulous.
    The Chairman. It will be an exciting weekend for both of 
us.
    Senator Stabenow. It will be.
    The Chairman. Senator Hutchinson.

 STATEMENT OF HON. TIM HUTCHINSON, A U.S. SENATOR FROM ARKANSAS

    Senator Hutchinson. Mr. Chairman, all I can say is Arkansas 
lost in the first round to Georgetown, but I will join the 
distinguished Senator from Michigan in bragging on one of our 
witnesses.
    We have a witness who will be on the third panel who is not 
yet here, but he is on the way, I am told, that I want to 
recognize. His name is John Kadyszewski and he is from Winrock 
International. Winrock is one of the great, great contributors 
to the progress and the future of the State of Arkansas and in 
fact he has an impact internationally.
    His headquarters in Morrilton, Arkansas are very close to a 
place called Petit Jean. It is a very, very beautiful part of 
Arkansas.
    John graduated from Princeton in 1977. He has dedicated his 
career to energy and environmental research. His work on carbon 
sequestration and biomass is what brings him to our committee 
today.
    At Winrock, he has worked extensively in South America to 
measure carbon in connection with carbon sequestration in 
forests and on agro forestry lands. One project which will be 
of interest to this committee is the Arkansas Forest Carbon 
Initiative.
    In an effort to restore ecosystems of the delta, increase 
bio-diversity and increase farmers' incomes, this program hopes 
to develop a model to use carbon offsets as a source of income 
for private landowners that restore marginal crop land to 
bottom land hardwood forests.
    So, I appreciate, Mr. Chairman, your holding the hearing 
today and the opportunity to introduce Mr. Kadyszewski. I look 
forward to hearing more about this subject.
    Thank you.
    The Chairman. Thank you very much, Senator Hutchinson. We 
welcome, certainly, the distinguished witness from Winrock. You 
have had so many good witnesses from Winrock over the years.
    Senator Hutchinson. They do great work.
    The Chairman. They make a marvelous contribution to our 
committee and to others.
    Well, at this time it is a privilege to welcome the four 
panel members.
    They are: Dr. Bruce Dale, chairperson of the Department of 
Chemical Engineering, Michigan State University, East Lansing, 
Michigan;
    Dr. Patrick Gruber, vice president, Technology, of Cargill 
Dow, Minnetonka, Minnesota;
    Robert Judd, executive direct of USA Biomass Power 
Producers Alliance of Sacramento, California;
    Edward Woolsey, director of the Iowa Sustainable Energy for 
Economic Development in Prole, Iowa.
    I will ask you to testify in the order that I introduced 
you. First, we have Dr. Dale. It is great to have you here 
again, sir.

 STATEMENT OF BRUCE DALE, CHAIRPERSON, DEPARTMENT OF CHEMICAL 
                  ENGINEERING, MICHIGAN STATE 
               UNIVERSITY, EAST LANSING, MICHIGAN

    Mr. Dale. Thank you, Senator Lugar. It is a privilege to be 
here again. I have the same difficult getting people to chair 
my department when I am out of town.
    Congratulations on the passage of your bill last year. I 
hope that this year the bill may be fully appropriated so we 
can do the competitive research that needs to be done to 
develop these bio-based fuels and chemicals.
    I believe that producing those bio-based chemicals and 
fuels will help to solve a number of serious national problems. 
Some of these problems have been mentioned here such as lack of 
economic development, particularly in rural areas.
    But specifically and more particularly, we lack sustainable 
technologies that can help us have economic growth while we 
still protect the environment.
    I believe that renewable chemicals and fuels can help us do 
all those things. I really can't imagine a more important 
effort with more interrelated benefits than to proceed with 
this research and develop this industry.
    As I speak and write on the subject of bio-based chemicals 
and fuels, renewable chemicals and fuels, one of the concerns 
that I most often hear expressed is whether these products will 
compete with the use of our agricultural land for food uses, 
and in essence, drive up food prices.
    Basically, the concern is: Can we have both food and fuel 
from biomass? There is a two-hour answer to this question and a 
five-minute answer. I am going to give you the five-minute 
answer. First, we have to recognize that most of our 
agricultural production actually goes to feed animals rather 
than directly to feed humans. Then, we consume the animal 
products.
    Animals need two primary nutrients. These are protein and 
calories. Providing plant biomass for chemical and fuel uses 
without increasing food prices means that we need to find more 
efficient and better ways of meeting the calorie and protein 
needs of animals.
    I believe that the research called for in your bill will do 
that, even though that is not its primary intent. So, I will 
explain. A very large-scale bio-fuel industry will be based on 
lignocellulosic materials. These are grasses, hays, trees, crop 
residues, and a whole variety of byproducts of food and fiber 
production.
    In the United States alone, we produce hundreds of millions 
of tons a year of these lignocellulosic residues. We can grow 
many more hundreds of millions of tons if there were a market 
for the product. That greater market could be a large-scale 
bio-fuels industry.
    Many of the grasses and legumes that could be grown as 
winter cover crops would have little or no impact on the 
production of the primary crop that is normally on the field 
only during the summer. The winter cover crop, which is sown 
into the main crop prior to harvest, grows throughout the fall 
and then again early in the spring.
    These winter cover crops could take up nutrients that might 
otherwise be lost to ground water and surface waters while 
still providing additional plant material for conversion to 
fuels and chemicals. So that would have no impact on food 
production, but, in essence, would be a better use of the 
agricultural land and soil conserving to boot.
    Your bill provides research to overcome the resistance of 
cellulosic materials to conversion to sugars. These sugars 
represent available food calories or energy. Scientists have 
long known and any process that frees up the sugars in 
cellulosic materials for conversion or fermentation to ethanol 
will also free up those sugars for feeding to animals.
    In essence, we will increase the resource base for both 
animal feed and bio-based fuels if we can liberate the sugars 
in cellulosic materials.
    The research provided in the Lugar Bill also emphasizes the 
importance of bio-refineries. Bio-refineries are large, 
integrated processing facilities that produce multiple products 
from plant material. Bio-refineries must use all of the 
components of plant material if they are to compete 
economically.
    This is the second part of the food and fuel equation. All 
plant material contains protein. In fact, the perennial grasses 
and legumes on which we might build a very large bio-ethanol 
industry contain between about 6 and 15 percent protein.
    As these plants and crop residues are refined or processed 
to produce fuels and chemicals, we will also produce very large 
quantities of proteins as byproducts of the refining process. 
These protein byproducts can then be fed to animals.
    Therefore, when we succeed in developing a large-scale bio-
fuels industry, as I believe we will, with its associated bio-
refineries, we will also accomplish two other things. First, we 
will learn how to make the sugars or calories in plant material 
available for animals. Second, we will recover large quantities 
of protein suitable for animal feeding.
    My calculations show that we can have both food and fuel 
biomass.
    In closing, I would like to make just a few points 
regarding the environmental benefits of these bio-based 
products, specifically bio-fuels.
    We all know that we rely on imported oil for a very large 
fraction of our transportation fuels. We need more reliable 
energy supplies. Bio-fuels can help. Unfortunately, many forms 
of energy production and use tend to degrade the environment.
    Wisely, your bill further provides research to maximize the 
environmental benefits of bio-based fuel products and fuels and 
minimize their drawbacks. As we build a bio-based industry, if 
we are smart and forward looking, we can do it right the first 
time.
    I believe there are at least two ways that a large-scale 
bio-fuels industry can actually improve the environment. First, 
plant materials, such as these deep-rooted perennial grasses, 
can intercept nutrients and pesticides before they reach 
groundwater, aquifers, lakes, rivers and streams.
    If we increase the demand for these grasses by a bio-fuels 
industry, we will also grow more of them and therefore provide 
the larger environmental benefits.
    Second, you have heard already from my colleague, Dr. Phil 
Robertson, about the perennial grasses that serve as net sinks 
of atmospheric carbon.
    These can promote soil carbon storage even when the 
aboveground plant matter is harvested. So, properly managed to 
produce both environmental and economic benefits, a bio-
products and bio-fuels industry could attract broad-based 
support from agriculture, industry and environmental groups.
    I also believe that evidence shows that a bio-fuels 
industry will actually increase and not decrease world food 
supplies because it will make available large new sources of 
the two major nutrients, calories and protein. We can have both 
food and fuel from agriculture.
    Thank you again for your invitation to speak today.
    [The prepared statement of Mr. Dale can be found in the 
appendix on page 66.]
    The Chairman. Thank you very much, Mr. Dale, for your 
testimony.
    Dr. Gruber. 

   STATEMENT OF PATRICK GRUBER, VICE PRESIDENT, TECHNOLOGY, 
               CARGILL DOW, MINNETONKA, MINNESOTA

    Dr. Gruber. Thank you very much for the opportunity to be 
here today to tell you about our company and our products. We 
are actually a bio-refinery that is just beginning this year.
    Our business is about taking corn and agricultural products 
and eventually biomass and converting them into plastic 
materials and chemicals.
    As we look forward in our total business plans, it seems 
that you all know our business plan already because you have 
written about it in your book. You have talked about it in the 
National Sustainable Fuels and Chemical Act which we, too, 
would like to see it fully funded because biomass is so 
important for lowering the overall economics for both bio-fuels 
and chemicals and polymers.
    The March 14, 2001 issue of Chemical Week Magazine had a 
cover picture of our manufacturing facility that is being built 
in Blair, Nebraska. It starts up in November of this year. It 
is a very large-scale polymer plant. Corn is the raw material.
    Its title is ``Bio-processing: No Longer a Field of 
Dreams.'' I think that is right.
    Something that people forget, that these products can be 
brought to market on price and performance. They are viable 
economically and don't need price support. The technology is 
just beginning to exist. We are the first example of it as we 
go ahead and commercialize it. I will say more in a bit.
    Our company is a very small company. We have about 150 
employees. We are a start-up company. We have parents who gave 
us money and then kind of said, ``Get out of the house.'' So, 
we are on our own in that sense. We have 150 employees, 50 to 
75 directly under contract as well.
    The markets, as we commercialize, are across the world. So, 
in essence, we are starting with grain products from the United 
States and moving them to Japan, Europe, and other parts of the 
world, but as polymers and plastics and fibers.
    This manufacturing facility that we are building in Blair, 
Nebraska represents a little over $300 million capital 
investment. That is after $200 million of research and 
development. That is the entry price to go and spend another 
very large chunk of money, several hundred million dollars, 
before we break even. That is the kind of Investment it takes 
to do this. One family of products, that is the kind of effort 
it takes. It has taken 10 years of my life so far to get this 
far, just to get the entry ticket to go forward.
    Even with a plant at that size, it starts to represent 
enough economies of scale so that we can start to back-
integrate. The overall market potential for our products is in 
the many billions of pounds.
    Here is what we are doing: The raw material, of course, you 
know, for now, will be corn. We will buy corn sugars. 
Eventually, we will use whole corn, stover, grasses or whatever 
is available as biomass as the technology matures. We would 
make these little plastic pellets. These are conventional 
plastic pellets. Then our customers would buy these from us and 
then make things like this bottle or these cups. This is an 
envelope. This is a film product. These fabrics, these were 
carbon dioxide above someone's cornfield in the Midwest United 
States last year! That is what these are right here. One 
hundred percent carbon in this shirt comes from carbon dioxide.
    This polymer is made from lactic acid. Lactic acid is made 
by fermentation from corn sugars or other biomass sugars. We do 
chemical processing to make a plastic and a fiber material. 
Lactic acid is the sour flavor in yogurt. You all know it well. 
The market potential for products like this is about 6.6 
billion pounds where we have already achieved the properties 
and performance to go out and compete.
    With cost reductions through biomass, that gets up to about 
10 billion pounds of potential. It is quite significant. It is 
a global market.
    Now, the amount of crops and biomass fermentable sugars 
that we would take, our 300 million pound plant would require 
400 million pounds of lactic acid. That is 500 million pounds 
of dextrose or sugars. That is roughly about 40,000 bushels per 
day of corn or 14 billion bushels per year.
    Already, we have economies of scale where we can start to 
think about how to back-integrate and apply the technologies 
that are being developed. That is why it is so important that 
your bill gets funded.
    PLA has a very attractive environmental performance and we 
use standard LCI methodology. Compared to other plastics, this 
product in its full manufactured form, would have about 67 
percent less carbon dioxide emissions compared to nylon and 
about 50 percent less than a polyester made from petrochemical-
based products. So, not only does it compete on price 
performance, we can actually make an excellent argument that it 
uses less fossil resources and emits less CO2 throughout its 
whole life cycle and production.
    Now, I also want to point out that everybody in the world 
is interested in these kinds of technologies. It is extremely 
important that the United States keeps its advantage, moves 
ahead, gets organized, both in the agricultural community with 
farms, yet also gets the technology organized. Countries all 
over the world are pursuing this green chemical area with 
vigor.
    We are able to take this huge risk and spend all this money 
because these product performs on price and performance. That 
is something that is too often lost. We need more products that 
can go out and compete because they work really, really, well, 
but yet are made from renewable resources.
    Thank you for letting me be here today.
    [The prepared statement of Dr. Gruber can be found in the 
appendix on page 70.]
    The Chairman. Thank you very much, Dr. Gruber. I just 
notice what I thought I heard you say in your testimony also 
appears in the text. You plan to use 40,000 bushels of corn a 
day in this one plant. You estimate 14 million bushels a year. 
This is just a single entity for which you are responsible.
    Dr. Gruber. Yes, just starting.
    The Chairman. That is extraordinary and encouraging.
    Mr. Judd. 

STATEMENT OF ROBERT JUDD, EXECUTIVE DIRECTOR, USA BIOMASS POWER 
           PRODUCERS ALLIANCE, SACRAMENTO, CALIFORNIA

    Mr. Judd. Mr. Chairman, thank you. Members, my name is Bob 
Judd from Sacramento, California, the heartland of the nation's 
electricity dilemma.
    Biomass fueled electricity is the issue I would like to 
address today. It is one of the rather hidden but rather 
significant uses of biomass materials. Currently and in the 
future, it could be an even larger use.
    As you know, Senator, biomass fueled electricity is a 
significant component of our nation's self-reliant energy 
strategy.
    We kid in California that we have gotten off of oil only to 
become addicted to natural gas, which we import from two 
foreign countries, primarily Canada and Texas. We have, as a 
result of the oil crisis in 1978, built a renewable energy 
industry in California that is about 12 percent renewable 
energy now. Biomass power is about 25 percent of that.
    Biomass fueled electricity nationally is found in 16 
States. There are about 100 plants nationwide. We convert about 
22 million tons annually of environmental liabilities into 
clean electricity.
    At present, the biomass power industry deals primarily with 
waste materials from the agricultural and forestry sector. In 
the future, the biomass power industry could also deal with 
cash crop materials, as you will hear from the representative 
from Iowa here, switchgrass and other materials that could be a 
new cash crop.
    It is a direct combustion technology system nationwide, 
built between 1985 and 1992, very modern facilities. There 
currently are none under construction at this point. On the 
energy side we can also look forward to direct combustion, the 
greater use of gasification, co-firing of biomass material in 
existing coal facilities which provides utilization of these 
materials and also development of ethanol from cellulosic 
biomass other than corn.
    There are experiments in California right now. Thirty 
percent of the industry is in California at present, the 
remainder is in 14 other States. It is a threatened industry at 
this point. It is declining when it should be growing. In 
California we had 41 plants in 1995. We are now operating 29 
plants.
    Other States, Boise Cascade, for instance, just closed its 
biomass power plant in Emmet, Iowa. Other States are cutting 
back. We are destabilized by the uncertainty about electricity 
markets, not only in California, but elsewhere.
    Our fuel comes from agriculture, primarily orchard 
prunings, sugar bagasse, and rice hulls at this point. From the 
forestry sector in terms of materials removed from the forest 
to reduce the risk of forest fire, and from mill residues that 
have no other commercial value.
    We buy this fuel. In buying the fuel there is a huge 
infrastructure of rural jobs that we create, three and a half 
jobs in the local economy for each job at the power plant.
    The question arises about biomass electricity why do it? It 
is slightly more expensive than cheaper new technologies out 
there. The reasons are quite clear. In fact, in a study 
recently done by NREL that Senator Allard referred to, they 
tried to evaluate or monetize the value of biomass power 
electricity, that is the non-electric value of biomass power 
electricity, and found just last year that for each unit of 
electricity generated by biomass materials the environmental 
and economic values are about 11 and a half cents per kilowatt 
hour of electricity generated.
    So, you are selling it at six and a half and you are 
getting 11 and a half back in benefits. What you are getting is 
renewable energy plus a bonus. It is like the prize in the 
crackerjack box. You get cleaner air because you avoid open 
fuel combustion of agricultural materials that would otherwise 
be burned at the end of a harvest season. You get reduced 
forest fire risk, you get rural jobs. You get a measurable 
reduction in greenhouse gases.
    In fact, of the seven percent reduction that was proposed 
in the late lamented Kyoto Accord, three and a half percent of 
that is attributable to the existing biomass industries. That 
is, if we disappeared, you would have to make up that three and 
a half percent on the back of someone else.
    We have a dilemma in California and elsewhere. In 
California our industry is on the razor's edge. We have not 
been paid since November by the utilities to whom we sold our 
electricity. Our fuel supplies are drying up because there are 
no activities on public lands providing us with fuels from the 
public sector. We have no price certainty going forward. There 
is a great need for stability.
    It is a terrific irony for us in California. I am sure that 
the press here covers it. While our renewable energy resource 
technologies there are threatened, the State goes out and buys 
the same kilowatt-hours from out-of-State generators at three 
times the price.
    Just as there is a need for bio-based fuel development, 
chemical development as other speakers have said, there is a 
need to stabilize the biomass power industry. There are States 
with huge biomass fuel resources that have no biomass power 
plants.
    We have this base now of plants that provide electricity 
for a million and a half homes nationwide. We need that base 
for ethanol development. As you may know, California is looking 
at the first two major cellulose-to-ethanol facilities co-
located at existing biomass power plants.
    They provide the technology platform and engineering 
efficiency that makes the economics work.
    But we need help. My last comment here, sir. Look at 
electricity deregulation. We deregulated miserably in 
California. It has been a failed experiment. Other States are 
doing the same thing.
    Deregulation has a defect, as well as benefits. The defect 
in deregulation is the premise that the price of the commodity, 
that is electricity, is the only thing that matters. It gives 
zero value to the non-electric public benefits, what an 
economist would call an externality, the clean air, the rural 
jobs, the reduced risk of forest fire and all that. When you 
add it in, it is a very cost competitive technology.
    Members will hear later this session the existing power 
industry has proposed a production tax credit to stabilize the 
existing industry. This tax credit is included both in the 
energy bill that Mr. Murkowski and Mr. Lott introduced and in 
the recent bill that Mr. Murkowski introduced. It would go a 
long way toward stabilizing and building this industry, sir.
    [The prepared statement of Mr. Judd can be found in the 
appendix on page 77.]
    The Chairman. Thank you very much, Mr. Judd. When I read, 
several weeks ago, the very great dilemma that you face, the 
irony that renewable supplies that in fact cost less in the 
reach of California than other supplies by one-third and that 
you were folding up the tent, not your plant, but some 
situations that you have described, it is not only an irony, 
but it is a national tragedy.
    I am grateful that you have come today. We wanted to make 
certain that that story had another audience. We appreciate 
your giving us that.
    Mr. Judd. Thank you, sir.
    The Chairman. Mr. Woolsey, would you proceed?

          STATEMENT OF EDWARD WOOLSEY, DIRECTOR, IOWA 
         SUSTAINABLE ENERGY FOR ECONOMIC DEVELOPMENT, 
                          PROLE, IOWA

    Mr. Woolsey. Mr. Chairman and members of the committee, I 
would like to thank you for the opportunity to speak to you 
today. I would also like to thank the Union of Concerned 
Scientists and the Environmental Law and Policy Center.
    Iowa Sustainable Energy for Economic Development, ISEED, is 
an Iowa-based coalition of organizations representing over 
500,000 individual members whose concerns range from academic, 
environment, agriculture, low-income, religious and economic 
development. They have all come together because they share the 
goal of increasing the role of renewable energy in Iowa.
    I will talk today about the economic and environmental 
impacts of biomass energy. Biomass energy can only be described 
as a new era dawning in the Heartland, an era which actually 
reveals the possibility of a brighter future for family 
farmers, a bright future for new industry and a bright future 
for the environment, an era that may truly be sustainable over 
generations, and if managed correctly, indefinitely.
    The term ``biomass'' means any plant-derived or organic 
matter available on a renewable basis. When I refer to biomass, 
I will be talking about materials that I consider capable of 
being sustainable in the Midwest. These materials include 
grasses, woody material and livestock manure.
    Corn is a type of grass that can be sustainable when grown 
in crop rotations with livestock. The starch component of corn 
converted into ethanol is currently the most successful form of 
biomass energy in the Midwest.
    Corn stalks and cobs are now currently the largest biomass 
energy feedstock in Iowa with an even greater energy potential 
than corn. One type of grass, switchgrass, was identified by 
Oak Ridge National Laboratories in 1990 as having the highest 
potential as an herbaceous energy crop in the nation.
    The development of a dedicated energy crop like switchgrass 
has many economic and environmental advantages as well as the 
potential to significantly impact United States energy 
production.
    A world-recognized switchgrass to electricity demonstration 
project sponsored in part by the USDOE Biomass Power for Rural 
Development Program is currently underway in Iowa. This 
project, the Chariton Valley Switchgrass Project, is a unique 
example of what is possible when a wide variety of players come 
together with the same objective.
    The project is a coalition of more than 20 organizations 
including Federal and State entities working in cooperation 
with an investor-owned utility, farm implement manufacturers, 
environmental groups, private business and about 160 producer 
farmers.
    The project will replace five percent of the coal currently 
burned in a 740-megawatt pulverized coal power plan with 
switchgrass. The project will use approximately 200,000 tons of 
switchgrass when fully operational from 50,000 acres. The 
project has just successfully completed its first successful 
test burn under the guidance of the National Renewable Energy 
Lab and the Danish Engineering Company, ELSAM. The results look 
very encouraging and from many perspectives I will talk about 
them shortly.
    Energy crops have the capability to allow farmers to grow a 
crop for an entirely new market, a crop for a market that is 
virtually unlimited. It is estimated that the ethanol industry, 
while only using seven percent of the current corn crop, 
currently increases net farm income more than $4.5 billion, and 
results in a net Federal budget savings of over $3.5 billion.
    From an Iowa perspective, in 1997 there were approximately 
26.8 million acres under real crop production. One point seven 
million acres of those were in the Conservation Reserve 
Program.
    If we were to take the Conservation Reserve Program acres 
and raise switchgrass on it and convert it to ethanol under 
currently available technologies, we could replace 40 percent 
of the current gasoline that we are importing into the State or 
about 680 million gallons.
    A recent study by Oak Ridge National Laboratories show that 
a bio-energy crop production program would increase total 
United States agricultural income by up to $6 billion or 
provide 7.3 percent of the total United States electric 
consumption. I think those are very conservative numbers.
    Soil loss, as mentioned earlier, switchgrass under 
cultivation as an energy crop may help build soils. Surface 
water quality, switchgrass planted in buffer strips along 
riparian zones and as living terraces on hillsides can reduce 
or significantly limit pesticides and nitrates in local 
downstream drinking water supplies and reduce eutrophication of 
the Mississippi delta region in the Gulf of Mexico.
    The deep rooting capacity of switchgrass can actually 
extract nutrients and pesticides from movement into the 
aquifer. Biomass species such as switchgrass that are 
indigenous to the region have the ability to provide a much 
more natural habitat to native wildlife species.
    Power plant emissions burning switchgrass. Switchgrass 
contains practically no mercury, arsenic, sulfur or other 
toxics. This results in a direct, immediate reduction in power 
plant sulfuric acid emissions. But perhaps we will find that 
the largest environmental benefit is in the reduction of fossil 
carbon dioxide released.
    Climate change. Biomass crops have the benefit of being 
carbon neutral with respect to their emissions. The plant uses 
the carbon during its annual growth phase and releases it 
during conversion to usable energy.
    It is my opinion that the agricultural biomass energy 
industry is the only solution that can address the global 
climate change issue on the scale required.
    In closing, let me thank you for your help and your vision 
in establishing programs like the Chariton Valley Switchgrass 
Project. Helping agriculture and energy groups work together is 
no easy task.
    What can be done now? I suggest more pre-commercial and 
commercial demonstrations, co-firing demonstrations, 
cogeneration demonstrations, combined heat and power following 
the Danish example and an integration of some of these 
technologies. Some examples have been mentioned already.
    The fossil fuel, nuclear and hydro-energy competition has 
been and continues to be subsidized in many different ways to 
the tune of billions of dollars. Serious progress in our new 
millennium industry will succeed only when the biomass energy's 
wide-ranging multiple benefits are incorporated into the 
consumer's purchasing decision.
    The vision of this Senate committee will help that happen. 
Thank you again for your time and interest in this very 
important issue.
    [The prepared statement of Mr. Woolsey can be found in the 
appendix on page 89.]
    The Chairman. Well, thank you for that very important 
testimony.
    Let me suggest, if I can, that I would like to recognize 
Senators Crapo and Nelson for opening comments. Then I will 
recognize you for an opening statement and questions. That will 
work out.
    Senator Crapo. Thank you, Mr. Chairman. I will submit my 
opening statement just for the record. I do have a question 
that I want to ask when we get to that point.
    The Chairman. Senator Nelson.

   STATEMENT ON HON. BEN NELSON, A U.S. SENATOR FROM NEBRASKA

    Senator Nelson. Well, thank you very much, Mr. Chairman. It 
is a pleasure to welcome this panel to this very important 
discussion and subject.
    As a matter of personal pride, I would say to Dr. Gruber 
that it is nice to have you here. The Blair Plant in Nebraska 
is not only a great opportunity for economic development, but 
it certainly represents a major move for renewable resources, 
cleaner environment, less reliance on foreign source of energy.
    So, I thank you for your commitment to all of these 
subjects. I appreciate very much the fact that the Blair Plant 
continues to be on the leading edge in finding new technologies 
and new uses for biomass.
    I appreciate what the future of that can be.
    Mr. Woolsey, I also appreciate very much the suggestion 
that biomass, such as switchgrass, could be an integral part of 
an energy policy for the production of energy in an 
environmentally friendly way.
    As we work toward the use of the environment and renewable 
resources, I hope that we will continue to find great 
opportunities for partnership between energy and the 
environment because so very often the critics of energy and the 
destruction of the environment point out that we do disturb the 
environment from time to time in our quest for energy.
    To the extent that we are able to find these new sources of 
energy without destruction or disruption to the environment, I 
think we will balance those interests and perhaps we will have 
people on both sides of the issue happier and less at odds.
    So, I appreciate what you are suggesting and I hope we will 
be able to be supportive of all of your efforts, and 
particularly as you make new efforts in these areas. I 
appreciate it very much.
    The Chairman. Thank you very much, Senator Nelson. I 
congratulate you for having that wonderful plant of Dr. 
Gruber's in Nebraska.
    Senator Nelson. Excuse me. I think Senator Harkin would 
just as soon it was across the river. But we are glad it is 
very close to both Nebraska and Iowa.
    The Chairman. Well, I can understand that. We have already 
had some testimony about how much corn will be consumed by that 
plant. I made a quick calculation. It is a little bit less than 
two percent of the entire corn crop of Indiana that will be 
utilized by Dr. Gruber's single plant. This is a significant 
contribution, 14 million bushels a year.
    With that note, I recognize my distinguished friend who has 
been talking about this area for a long time. Please, would you 
proceed with your comments?
    Senator Harkin. I appreciate that, Mr. Chairman. I 
apologize for being late. I am more than thrilled about the 
plant at Blair. Just keep expanding and pretty soon it will be 
big enough to just be in Iowa, too. That is true.
    Mr. Chairman, the production of biomass for energy and 
other products offers us an opportunity to increase our income 
in rural areas while at the same time providing significant 
environmental benefits.
    I want to share your vision, Mr. Chairman, that American 
farmers will play a significant role in securing America's 
energy future by breaking free of our dependence on foreign 
petroleum. We have just begun this journey, as I have just 
picked up on some of the statements and reading some of the 
testimony here.
    But through ethanol and bio-diesel and biomass production, 
wind power, methane, capturing methane, farmers can really 
transform themselves from being consumers of energy to actually 
becoming producers of energy.
    In fact, I had a staff person who no longer is with me, but 
who has done a lot of work in this area and now is out in the 
private sector in a consulting firm. He wrote a proposal a few 
years ago for ``electro-farming,'' that farmers could be 
``electro-farmers'' producing electricity to sell to the grid.
    In fact, at the price of corn at that time, it showed it 
was more profitable for a farmer to do that in Iowa than it was 
just to sell the corn on the market. Actually, it is more true 
today because the price of corn has gone down, not up. But we 
need to change some of our systems and change some of the ways 
we support things in order to move in that direction.
    I met this weekend with a farmer in Iowa who just has a 
couple of windmills. He started out a long time ago with 
windmills. Now he has the new ones. He just has two on his 
farm. I said, ``Yes, but you don't make any money on that; do 
you?''
    He said, ``As a matter of fact, I am paying for them. I am 
not making money now, but as soon as they are paid for, I will 
start making money.''
    But he is actually paying for them through the selling of 
electricity, just by having two windmills on his farm and 
selling them to the grid.
    Ed Woolsey, by the way, I am from a small town in Iowa 
called Cumming. There is really only one town smaller than 
Cumming and that is Prole. But we are neighbors. Prole is about 
ten miles from Cumming, I guess, something like that.
    But in Iowa, this project that we have going down in the 
southeast Iowa, we just had the first burn, as Ed said, and it 
looks very promising. But I think there is another stage to 
this. For example, switchgrass can even be more a conserving 
crop than what we plant, the small season grasses that we plant 
on CRP land right now. Then we can cut that switchgrass and use 
it. We are burning it now in a boiler.
    We have another project, I might say to my friends from 
Blair, where we are going to start using fuel cells, in other 
words, using a digester to take the switchgrass, put it through 
a digester, strip the hydrogen off, put the hydrogen into a 
fuel cell to make the electricity to put back in the grid or to 
operate your farmland.
    Quite frankly, because a fuel cell is so efficient, much 
more efficient than a coal-fired turbine or natural gas-fired 
turbine, the initial data on it looks very promising.
    So, I can see a future down there where again, farmers may 
be making energy from a number of things, wind, methane, 
switchgrass, wood, a whole bunch of different things that might 
go into what I call ``electro-farming'' where farmers could 
actually farm providing environmental benefits and actually 
provide power to the grid in a number of different ways.
    I have not even touched on ethanol and soy diesel. Soy 
diesel, for example, is making its mark right now in Iowa and a 
lot of other places. If we just had one percent of our diesel 
in this country using soy diesel, that would be about 300 
million gallons a year and that would boost the price of 
soybeans about 15 cents a bushel.
    Plus, when you use soy diesel, it cuts hydrocarbons. It 
cuts particulate matter. It cuts down the carbon monoxide and 
cuts down on net CO2. It is a 78 percent cut on CO2, because 
well, obviously, when the plants are growing it sucks CO2 out 
of the air and then you burn it in the soy diesel and put CO2 
back in the atmosphere so you have a net reduction of CO2.
    Mr. Chairman, your vision, I think, is one that I share. I 
think in the next farm bill, I hope we can look at it in those 
terms. How we begin to shape and fashion and do things that 
will give farmers the ability to engage in ``electro-farming,'' 
I don't know, that is an interesting work, but just production 
of energy from a variety of sources, and at the same time being 
good environmental stewards.
    So, I hope our panel and others that are here will help us 
work on that and give us some ideas and thoughts on how we 
start to make that transition. I know it is not going to happen 
tomorrow, but I think we can begin to make some significant 
inroads down the pike.
    I want to just close on this is one thing. That is that I 
had a lot of hopes that farmers now could begin to be 
reimbursed by society at large for helping clean up the 
atmosphere. Now, we get a lot of hits in agriculture because of 
methane. But no one talks about all the carbon we take out.
    So, I thought that with the Kyoto Agreements that now we 
begin to actually have farmers be reimbursed for actually 
taking some of the carbon out of the atmosphere through carbon 
sequestration. If, however, we are going to disavow that Kyoto 
agreement, I am beginning to wonder now, how we are going to 
get the payments out to our farmers for carbon sequestration if 
we are not going to try to cut down on greenhouse gases.
    This creates a real kind of a problem for agriculture, for 
farmers. I had seen this as one way of actually starting to pay 
farmers for the societal benefit of taking carbon out of the 
atmosphere. Now it is sort of up in the air. I don't know what 
is going to happen with the whole Kyoto Agreement, but I just 
wanted to put that out there for your consideration.
    Again, Mr. Chairman, thank you very much. I appreciate the 
opportunity to make an opening statement.
    The Chairman. Our distinguished Ranking Member has sort of 
advertised our next two panels because they are going to tell 
us how farmers get money, about these markets, with or without 
Kyoto. We are looking forward to that part.
    First of all, I want to ask Senator Crapo for his questions 
so he has an opportunity to participate.
    Senator Crapo. Thank you very much, Mr. Chairman. I agree 
very strongly with the tenor of the testimony that we have 
heard today and with the comments of the other members of the 
committee, so I will not go through that.
    I do have one specific question. Mr. Woolsey, I believe 
that you mentioned in your testimony animal waste as one of the 
other biomass sources. I am sorry I missed the first two 
witnesses' testimony. I don't know how many of the others 
mentioned it.
    But it is actually not listed in the list of biomass 
sources that would benefit from the tax credit that is in the 
legislation we are currently considering. It seems to me that 
it should be added in. I was just wondering how each of the 
members of the panel felt about that.
    Mr. Woolsey, would you start?
    Mr. Woolsey. Yes. I think it is appropriate to use 
livestock manure, processed through anaerobic digesters to 
capture the nutrient in that manure and to contain that manure 
to reduce the chances of spills and to capture some energy from 
it. I think it is a good way to handle livestock manure.
    Senator Crapo. It, too, has all the other extra benefits 
that we have talked about, doesn't it, as well?
    Mr. Woolsey. Certainly.
    Senator Crapo. Mr. Judd, would you agree?
    Mr. Judd. Yes, sir, I would. Collection, as in any kind of 
material that is generated from a large number of sources, is 
the difficulty that we find in California when we look at 
digestion. But, you bet, we need to use whatever we have. There 
are so many under-utilized resources that could diminish our 
dependence on traditional sources of energy.
    Senator Crapo. Under our current environmental 
requirements, we are going to have to be collecting and dealing 
with it anyway.
    Mr. Judd. Absolutely, that is correct.
    Senator Crapo. Dr. Gruber, do you have an opinion on this?
    Dr. Gruber. I agree that it is another potential 
opportunity and there is still technology that needs to be 
developed there. I think Minnesota had a project announced last 
week where it was turkey waste to energy. So, it is possible.
    Senator Crapo. Dr. Dale.
    Mr. Dale. The largest fraction of manure is plant material 
that did not get digested by the animal, so to the degree that 
we talk about plant matter, it is exactly equivalent.
    I agree, it is a resource that we are not using properly. 
We ought to try to use it.
    Senator Crapo. Mr. Judd.
    Mr. Judd. I just wanted to mention this. You may remember 
two years ago Chairman Roth added the poultry waste provision 
to the IRS Section 45 tax credit because of particular 
environmental problems in the Delmarva area. In fact, when you 
look at it, it is primarily biomass combustion.
    The energy comes not from the litter itself, but from the 
bedding materials, the wood shavings, the peanut shells, 
whatever they may use as the bedding material under all of 
these poultry houses. So, it simply is a refinement of the 
current biomass technology processes that are underway.
    Senator Crapo. Thank you very much.
    The Chairman. Thank you, Senator, for that question and 
those responses.
    Senator Nelson.
    Senator Nelson. Thank you, Mr. Chairman.
    Dr. Gruber, as we look forward to the United States moving 
ahead in the use of biomass for energy purposes, is there one 
single thing that would be the most important thing that we 
could do, maybe whether it is tax abatement of whatever it is, 
is there one single thing we could do that would give us a 
major boost in this effort?
    Dr. Gruber. One single thing is always the tough one. I am 
not sure there is. The areas that need to be addressed: I would 
describe them as sustainable farming practices or the concept 
of sustainable business development applied to farming. The 
USDA needs to get active and teach American farmers and work 
with them as to what that looks like because it is the same 
discussion we have been having, how to make it more 
environmentally friendly. That is going to become more and more 
important because that is where the competition is around the 
world. How that is done and financed, that is a question for 
you guys, because I don't know the best way to do it. Something 
needs to be done.
    Now, we also need economic, clean energy sources. The idea 
that we can get rid of petrochemical-based products and only 
use them where it is absolutely critically required for certain 
energy applications in some circumstances or maybe for some 
products, OK I understand that.
    But the fact is that if we had green energy from biomass we 
would have no fossil resources at all used to make products 
like this, none. That is something. That is significant. It can 
be applied to lots of other chemicals. The technologies are 
generalizable and they apply to even bio-fuel manufacture.
    So, making sure that the technologies get funded, that our 
scientific communities get trained in the fundamentals, the 
bio-processing, many things that Professor Dale has talked 
about, all apply and need to occur.
    Senator Nelson. Thank you.
    The Chairman. Let me just ask fundamentally, Dr. Dale, as 
you take a look at this whole area, as you have, some of us who 
are interested in foreign policy and agriculture have suggested 
again and again that we have a strategic problem.
    It seems obvious, but for instance, the Washington Times 
yesterday has a story about Prime Minister Putin working with 
President Khatami of Iran and suggested he had similar visits 
with Saddam Hussein of Iraq and others with the thought that in 
fact a coalition of nations might control the supplies and the 
transport routes, the pipelines. These are folks that do not 
necessarily have our interest in mind.
    As a matter of fact, as a strategic plan, even dealing with 
a weak hand, Prime Minister Putin does this and we report it 
and it doesn't seem to sink in with the American public because 
by and large we do have gasoline at the pump and we have 
readily available supplies.
    Most of our constituents are unhappy about the price of 
natural gas this year and were unhappy about the price of 
gasoline the year before. But these things are assimilated.
    Now, what I suppose I wanted to ask you as a bottom line 
is: Is this a total pipe dream or will it bring us back to 
reality? How much of the American energy supply is doable in 
terms of renewables or something other than fossil fuels or 
something other than oil which may be beyond our reach after we 
have run through the last barrel that we can find in this 
country.
    What is the parameter we can look at here because this 
becomes very, very important? For the moment, why, we 
congratulate ourselves on the small percentage of what we are 
doing and we assume that this is all to the good. But in the 
overall sense of our economy, our future, someone has to draft 
out what we can do in terms of that which is renewable and 
reachable in ways that we have not been doing.
    Have you given any thought to this proposition?
    Mr. Dale. Yes, sir. I have given a lot of thought to it. 
The answer is, specifically focusing on liquid transportation 
fuels from plant material, because I believe that is the area 
of our greatest strategic vulnerability and also the area that 
has the greatest national benefits in terms of economic 
benefits and environmental benefits.
    The laboratory results are that we can expect to get about 
100 gallons of ethanol per ton of plant material when we have 
fully developed the technology, as your bill envisions, and 
done the research to learn how to do that economically. At that 
rate we would need approximately one and a half billion tons of 
plant material processed in the United States to meet all of 
our liquid transportation fuel needs, something on that order.
    We already have hundreds of millions of tons of residues 
and byproducts that we can use. Most importantly, these are 
cheap. They are very inexpensive. If we do the research, the 
development work that is required to learn how to convert, 
particularly lignocellulosic materials, grasses, crop residues, 
straws, switchgrass, forest residues, to fuel, specifically I 
am talking about fuel ethanol, that is the one I know most 
about, we can make a very, very large impact in our liquid 
transportation fuels. We could replace all of our imported 
petroleum over a period of decades, probably.
    The Chairman. All of it?
    Mr. Dale. Yes, all of it.
    The Chairman. Over a period of decades?
    Mr. Dale. Yes.
    The Chairman. You have that many pounds of plant material 
of some sort converted into ethanol and thus our transportation 
system would not change, we would just have a different basis 
for the fuel that is supplies it?
    Mr. Dale. That is right. We could replace all of it.
    The Chairman. Well, that would be a remarkable event. I 
hope you are right. This is why I was asking the question 
because as an informed observer of this, more than informed, 
why this is the kind of estimate that probably we need to have 
some strategic plan of how we were to arrive at that.
    We still do have a lot of oil left. You are talking about 
decades, not so much every year. The decline becomes more 
apparent. It is like the aquifers, things change. Strategic 
planning by some of us in government has really got to look at 
that point, I think.
    Mr. Dale. The key is, Senator, we can grow plant material 
very inexpensively. If we can learn how to convert it 
inexpensively, then there is every reason to believe we can 
produce very large quantities of fuel ethanol and other fuels 
on a sustainable basis from our plant resources.
    The Chairman. The other side of my question is that we are 
talking here in addition to talking about fuel for our country 
and ecological changes that are important, environmental 
changes, but we are talking also about farm income.
    Now, in the course of transferring all of this from 
imported oil to something that is grown by some farmers, 
producers in our country, enough material to supply all of 
these energy needs, this is a huge amount of income and 
probably a huge shift in agriculture as we know it in order to 
achieve that. It is probably a shift in terms of income 
prospects for those who have land or who have trees or 
switchgrass or corn or whatever may be the basis for this.
    As Senator Harkin said, we are talking about a farm bill 
and how we move from a situation in which we have a farm policy 
now that, in my judgment, almost ensures over supply every 
year. My guess is that we are going to have pretty low prices 
for quite a while. So, we will then be thinking about how we 
supplement this with taxpayer funds to keep our farmers going.
    But that is not very satisfying for the farmers, quite 
apart from the taxpayers or Senators. The question is: Is there 
something out there that we can be doing not only as a 
substitution but is a better idea in terms of management of a 
part of our lands?
    Can any of you offer a thought about that or quantify it in 
any way? Dr. Dale, do you have some thoughts about that, too?
    Mr. Dale. Well, we are paying $25 or so a barrel for 
imported petroleum. If we start paying that money to our own 
producers on the order of, I think four or five million barrels 
a day, I don't know what the exact numbers are, this is not 
rocket science, as they say. That is an awful lot of money 
staying here at home. Much of it would end up close to where 
the plant material is produced, in the rural areas of the 
country that are currently lacking for this type of 
opportunity.
    I do believe in the research priorities envisioned by your 
bill. If we do this right, we can build an industry that is 
both economically viable and also environmentally sustainable. 
So, the answer is lots of billions of dollars.
    As the Senator said, a billion here and a billion there, 
you are talking about real money. It is real money and it is a 
lot of it.
    The Chairman. Senator Harkin.

     STATEMENT OF HON. TOM HARKIN, A U.S. SENATOR FROM IOWA

    Senator Harkin. Thank you, Mr. Chairman. I know we do have 
a vote and I have an amendment up right after this vote. I am 
really sorry because I did want to hear the next panel, but I 
will read the testimony.
    Again, it seems like we have a couple of paths we can go 
down. One, through the bio-refinery process where we can take 
cellulosic material, get the ethanol out of it, the fuel out of 
it and other byproducts out of that and put those to internal 
combustion engines.
    Now, Dr. Dale, you said we could replace all of the liquid 
fuels. Ethanol today is basically gasohol. It is 10 percent. I 
assume by that you mean we are going to run 100 percent ethanol 
in internal combustion engines or something like that.
    Mr. Dale. Or a fuel cell.
    Senator Harkin. OK. Now that is the other pathway to go. 
You have to bio-refine or you can use the digesters to take the 
cellulosic material, strip the hydrogen off, use the hydrogen 
to put in fuel cells, either for transportation or for 
stationary production.
    All of the figures I have seen in the past indicate that 
that really is the most efficient way to go simply because 
electric motors are so much more efficient than internal 
combustion engines, and much cleaner.
    So, I don't know how you balance those two and which 
pathway is the right one to go down. I don't know yet and we 
need more research in that area. Maybe both ways have some 
viability.
    But it seems to me when we start talking about the use of 
these materials for power generation, you have basically those 
two kinds of pathways to go down. Is there something I am 
missing? Do you have any thoughts on those two pathways?
    Mr. Judd. I have just one comment, sir. In California, as 
we look at ethanol generation from cellulosic materials, rice 
straw, for example, or forestry wood chips, the nice synergy 
that exists is that, as you bring your feedstock in, you take 
your ethanol off and you are left with lignin which you then 
feed in as the combustion fuel at the electricity power plant 
and send the electricity to the grid which you want to do to 
build your renewable resource base.
    Then you cycle the steam back through the distillation 
process. So, the economics of co-locating, for example, ethanol 
distillation and biomass electricity generation are much 
better, at least in the circumstances that are being evaluated 
in California, than doing a biomass ethanol facility stand 
alone.
    As I hear other speakers and yourself talking about taking 
hydrogen off and then you are left with residue, that still 
stands as a very good source for electrical power generation. 
We should be using all of it.
    I think when you are dealing with something as critical as 
national security and with the livelihood of family farmers and 
our food production systems, that you justify going down both 
routes as vigorously as you can.
    For example, with fuel cells right now producing ethanol, 
if you produce ethanol from, say, corn or switchgrass or 
biomass feed stocks and take about 10 percent of a slip stream 
of ethanol off that and run it into a fuel cell, and ethanol is 
a beautiful fuel for fuel cells, the heat that is given off in 
that fuel cell will provide enough heat to run your processing 
system to make your ethanol.
    So, you have a sustainable system right there with that 
fuel cell. It is a beautiful integration of those technologies.
    Senator Harkin. Do you have any thoughts on the carbon 
sequestration issue I just raised in my opening comments, 
carbon sequestration and what it will mean if we don't sign the 
Kyoto Agreement to reduce greenhouse gases? Are there any 
thoughts on that? Is there anything I should be looking at or 
thinking about in that regard?
    Mr. Dale. One of my colleagues at Michigan State and other 
people who have done this, Dr. Phil Robertson, whom I believe 
you heard from earlier this week, has shown in very careful 
work that if you properly manage an agricultural ecosystem, you 
can actually harvest the above-ground part of the plant 
material while building up very, very large amounts of carbon 
in the soil.
    So, if we do this right, I believe we can have this carbon 
sequestration. Then deciding how to compensate or in what way 
to compensate farmers for that is a national policy that you 
folks get to work out. But there is obviously great potential 
for that.
    In fact, I think agriculture is probably the only industry 
that we have that has the extent, the volume of material 
processed that can actually make a dent in fossil fuel based 
CO2 emissions. Nothing else is large enough.
    Dr. Gruber. I would agree with that. With carbon 
sequestration we will be measuring what it is, because each 
area of farmland is different. So that makes it particularly 
tricky. The data to quantify it doesn't exist in a form that is 
useful today.
    So, that is work that has to be done like right now.
    Mr. Woolsey. As I mentioned in my testimony, I think 
biomass energy is the only way that we can satisfactorily 
address the global climate change issue. I think it is the only 
thing that carries enough actual volume and breadth of 
capability.
    Senator Harkin. We are going to have to pay attention to 
this. I just had a briefing by the Aspen Institute. We had 
somebody in from NOAA, National Oceanic and Atmospheric 
Administration. They do a study every 10 years. They did the 
first climate projection in 1980, then the next one in 1990. 
They just came up with the one last year.
    Whatever doubts I may have ever had about global warming, I 
think they have been put aside by the most recent findings they 
have of what is happening globally. So, I think we do have to 
pay attention to reducing greenhouse gases however we can.
    The idea of farmers producing energy is one way of doing 
it. We still may get CO2 released, obviously. We are not going 
to cut all that out, but if you are taking more out than you 
are putting in, you are starting to reduce it.
    Mr. Chairman, this is a fascinating discussion. I am sorry 
I have an amendment right after this and I can't return. I 
apologize.
    The Chairman. Well, for the moment, if you would stay we 
would appreciate it. We will vote. We will recess the hearing 
for a few minutes and I will return and maybe other Senators 
likewise. We appreciate your patience.
    [Recess.]
    The Chairman. I thank you very much for reassembling. Mr. 
Judd, in your testimony you mentioned not only plants in 
California, but throughout the nation. I just jotted down 
quickly, maybe as many as 41 in all of the States. You said 12 
had closed for various reasons. You cited electricity as one of 
the reasons.
    If you can, describe the economics of why biomass plants 
are closing, not only in California, but also elsewhere in the 
country.
    Mr. Judd. Most of the biomass plants around the nation were 
on what one would call fixed price contracts, called PURPA 
contracts that you may know about, that provided them a 
guaranteed stream of revenue for 10 years which was done 
basically to attract lenders to finance the construction of 
these facilities in the first place.
    Incidentally, attracting financing is one of the problems 
that the industry has going forward both in the existing power 
plants and I think for projects such as switchgrass. They need 
to know there is a stable market for the electricity they might 
generate before they will make these capital investments.
    Well, there was a confluence of circumstances in that the 
ten-year contracts that the biomass power plants had are now 
and over the past 3 years coming to a close. So, their revenue 
stream diminishes by about 70 percent, typically.
    At the same time, the price of fuels that we have to buy 
has increased over time. We pay, it varies State by State, but 
in California we probably pay about $40 a ton for the fuels 
that we buy. Much of that cost goes to transport the fuels. But 
each $10 that we pay for fuel equates to a penny on the price 
of electricity that we put out.
    If we sell electricity at six cents and we are buying fuel 
at $40 or a four-cent equivalent, the two-cent gap there often 
isn't enough to cover debt service, O&M, et cetera. The problem 
has been exacerbated in some States, particularly those that 
are more forest-dependent than others in that there are no 
fuels coming off of public lands.
    The Chairman. I read in California where you had the 
problem of forest areas being taken off altogether. I guess you 
cannot even pick up the residues.
    Mr. Judd. Yes, sir. In December there was a moratorium on 
all commercial activity on public lands in the Sierra
    The Chairman. Even picking up the residue on it?
    Mr. Judd. Yes. That is all the biomass industry does. The 
biomass industry basically takes material that has no 
commercial value. It is after the commercial value has been 
wrung out of it.
    The intent was not to deprive the biomass industry as the 
Forest Service did that. They were responding to litigation 
that was before them. But the inadvertent consequence was that 
half of the biomass industry in California had its fuel supply 
threatened and had then to go to the spot market to buy 
replacement fuel at a much higher cost, which, of course, is 
reflected in the price of electricity.
    In other States, in Idaho that I mentioned, similarly, they 
simply cannot get enough fuel right now to run their plants. 
Northern Michigan is the same. Maine is the same, although for 
different reasons in Maine.
    There is an instability that we have not seen before there. 
It is quite worrisome, because we worry not so much about the 
plants being able to run, many of them are running at less than 
full capacity. But there is this large infrastructure of fuel 
hunters and gatherers, I suppose you would call them, who go to 
the farms and the forests, gather the residual materials, 
process them and bring them to the plant for fuel.
    We fear that if these people are not getting paid or 
generating enough revenue that they will disappear and if the 
infrastructure collapses, then you are stuck.
    The Chairman. So, even as we are discussing the vast 
potential of all of this, the fact is some of the fledgling 
plants that we have are endangered--
    Mr. Judd. Yes, sir, that is true.
    The Chairman. Leaving aside the philosophy of the thing, 
the practical situation is that this is sort of a disaster area 
as you are describing it.
    Mr. Judd. It is the irony we talked about before at a time 
that renewable resources, and maybe particularly biomass, could 
really play a role on the electricity side of things.
    The Chairman. Are there legislative changes, amendments, 
that you or your associates or others that you know of can help 
us with either in this committee or with the Energy Committee 
as we proceed with this discussion on comprehensive energy 
policy? It appears to me some fixes are required.
    Mr. Judd. We would welcome that opportunity to work with 
your staff and Members of this committee. We think we do have 
some ideas that transcend State level issues that are more 
appropriately addressed at the Federal level.
    The Chairman. Very well. We would like to do that because I 
recognize precisely what you are saying. I think as long as it 
continues we are going to be hearing next year about maybe just 
a fledgling few that are still around.
    Mr. Judd. Our frustration is a bit like yours. In your 
prior legislation you see the potential of biomass resources 
for a variety of uses. You get a little restless that it is not 
happening fast enough.
    We on the electricity side are the same way. There may be 
100 plants nationwide, but there certainly could be more and 
there should be more.
    The Chairman. Let me ask you, Mr. Woolsey, you mentioned 
some very large dollar figures in terms of the amounts that 
might be paid the farmers for all sorts of residue product that 
might come into the system.
    I just jotted down $6.6 billion, which you mentioned at 
some point in your testimony, referring, I gather, to total 
farm income in the country perhaps that could be increased 
through the use of biomass. Before I misinterpret that 
altogether, help me, if you will, as to what kind of an 
increase in the market or the income for agricultural America 
do you see in this situation?
    Mr. Woolsey. Yes, the $6 billion was a figure that came 
from Oak Ridge National Laboratory's report on what the 
potential for a bio-energy industry might be.
    The Chairman. Is that an annual figure?
    Mr. Woolsey. That is an annual figure.
    The Chairman. Who gets the $6 billion? Where is that spent?
    Mr. Woolsey. The $6 billion would be spent all along the 
food chain, if you will, from the farmer-producers of the bio-
energy crop through the transportation system to get those 
crops to market to the producing facilities that were 
processing those commodities.
    The Chairman. How much of it do you anticipate would go to 
the farmers? Just try to isolate that part to begin with, or do 
you have any idea?
    Mr. Woolsey. From the way we break down costs there, we 
would say about one cent a kilowatt-hour. If we were looking at 
something like electricity production, for every $10 in fuel 
costs it equates to one cent per kilowatt-hour. You can usually 
figure about $40 a ton for biomass material, $40 to $50 a ton. 
So it is four or five cents.
    If your total purchase price was six cents, seven cents, 
eight cents, something like that, more than 50 percent of that 
would be going directly to your farmer-producer.
    The Chairman. The reason I wanted to sort of tease out this 
figure, we have, for example, in the current budget debate, in 
the farm bill debate, the idea that last year net farm income 
for all farmers, all producers of everything in America, was 
about $45 billion.
    It was a net plus, not a minus, $45 billion. This year USDA 
is estimating at least preliminarily it will be $41 billion. 
That is down $4 billion. Through various Congressional 
policies, the $45 billion has been sustained for the better 
part of three or four years. It is a rolling average.
    That is not accidental. Essentially, almost enough money 
has been added in through an extra AMTA payment, or whatever 
the device was, to get us to $45 billion.
    There is nothing sacrosanct about $45 billion of income. 
You know, in this committee we pointed out that the return on 
investment in productive agriculture in this country is very 
low. I suggest from my own experience it is four percent. Some 
say lower than that. Others more leveraged would say five or 
six. But we are talking about a low, single digit figure.
    In any event, we tried to sustain it at $45 billion. You 
are talking about $3 billion in this equation that isn't there 
now. It may not all be net profit, so even by my saying the 
definitions I don't want to get fouled up.
    But we have to find some way, it seems to me, as a nation, 
if we are even going to sustain the fairly low level of net 
income we have in agriculture now, other than plugging in 
fairly large chunks of money.
    At the meeting that I am about to attend at 11 o'clock, it 
will be how much money do you plug in? Well, there are all 
sorts of differences of opinion. Every farm group in America 
has a view about this. In addition to individual farmers, the 
taxpayers may have some view. The President may have some view 
with regard to Medicare, Social Security, tax cuts, other 
situations that come into this equation.
    So, eventually, a market-based agricultural economy means 
that there has to be something that has merchantable value, 
that can be sold and can create a profit. So, I don't want to 
narrow our discussion today that deals with national security. 
It deals with the environment, clean air, clean water, and 
better management of our resources. But still the farm income 
issue is one that is very central to our committee's focus.
    Mr. Woolsey. There was a study called ``The Economic Impact 
of the Demand for Ethanol'' in 1997 by Evans from Northwestern 
University. In that study he has estimated that corn to 
ethanol, the current biomass energy crop, increases net farm 
income by more than $4.5 billion. So, that is 10 percent of the 
total income coming from just the corn to ethanol industry.
    The Chairman. That is net farm income?
    Mr. Woolsey. Yes, net farm income. You know, we are on the 
new era of a new commodity being produced by American 
agriculture here. I think the impact is going to be very 
significant.
    The Chairman. Dr. Dale.
    Mr. Dale. Senator, just for round numbers comparison, if we 
were to pay farmers to produce roughly a billion tons of plant 
material at $40 a ton to produce 100 billion gallons of liquid 
fuels, then you are talking about direct payment to farmers in 
the neighborhood of $40 a ton plant times one billion tons. So, 
it is around $40 billion.
    I believe it is conceivable that over a period, again, of 
decades, because we are not going to replace the existing fuel 
industry overnight. But over a period of decades, you would 
talk about in effect doubling of the payments to the farmer.
    The Chairman. That same $40 billion we are talking about is 
total net now.
    Mr. Dale. Not to mention all the additional economic 
activity that would occur because of the processors and so 
forth.
    The Chairman. Dr. Gruber.
    Dr. Gruber. We have also taken a look. We have said, OK, 
suppose we build a bio-refinery and we have downstream chemical 
products and it is broadened out and also makes bio-fuel, what 
would that look like over a period of 10 or 20 years?
    We calculate the direct rural impact for those kind of 
products, chemical products with bio-fuels, ethanol, that would 
be about $10 billion per year with 50 percent at the producer 
level and 50 percent at the processor level. That is what it 
would look like just from the products related to us and what 
we are doing. We need more of those.
    The Chairman. One final question, and I believe that it was 
you, Mr. Judd, who talked about the use of coal in one of these 
formulations. Who mentioned coal? Did you, sir?
    Mr. Judd. Yes, sir.
    The Chairman. How does that fit into the process? The 
reason I ask is that in all of these situations there tend to 
be alliances of people who are doing some things now. The coal 
industry, as they come before us and the Energy Committee and 
what have you, is in an embattled situation.
    We have lots of coal in this country but many people point 
out, or some, that we should never use very much more of it 
because of environmental problems. Others are not that 
restrictive. How would you use it and how would this benefit 
the coal industry in some type of combination?
    Mr. Woolsey. Well, what we are using is a technology called 
``co-firing'' where we are replacing about five percent of the 
coal in a large power plant with biomass. In our case it is 
switchgrass. Just that five percent that we are replacing will 
require a demand from about 50,000 of agricultural land.
    The reason that co-firing has been identified is because it 
is the cheapest way we can get into the game. To retrofit a 
current coal-fired power plant for biomass, to accept biomass 
fuels, is a relatively cheap enterprise.
    Then, the only thing you are worrying about is setting up 
your infrastructure for fuel procurement. That is one of the 
things that we are demonstrating in our project.
    The Chairman. For the benefit of the coal people, even 
though you are replacing five percent of the coal that might be 
needed is that the plant continues at all. In other words, as 
opposed to somebody saying ``We ought to shut down this plant 
because it uses coal.''
    Mr. Woolsey. It does and it helps clean up the air 
emissions because of the clean-burning properties of biomass 
fuel. There is more oxygen in it. You get a cleaner product 
coming out of the emission stream of that plant, reduced 
mercury, reduced arsenic and carbon dioxide.
    The Chairman. Mr. Judd, do you have a comment about that?
    Mr. Judd. No, sir. He hit it right on the head.
    The Chairman. Well, gentlemen, I thank you very much for 
your testimony and the time you spent with us, including the 
intervals. This has been very, very helpful, the papers as well 
as the dialog with the Senators. We are grateful to you.
    Please followup, if you will, because the committee is 
really eager to consider language for constructive amendments 
that may move us along.
    The purpose of the hearing in a way is to find out what the 
state-of-the-art is this year. But even more important, we are 
going to have a big energy debate. So, the issue is timely.
    Thank you for coming.
    The chair would like to recognize now a panel of Dr. 
Richard Sandor, Chairman and CEO of Environmental Financial 
Products, LLC, Chicago, Illinois;
    Dr. Bruce McCarl, Professor of Agricultural Economics, 
Texas A&M University at College Station, Texas;
    Gary Kaster, Manager of Forestry and Recreation Programs, 
American Electric Power, McConnellsville, Ohio, and
    David Batchelor, a Market-Based Environmental Program 
Specialist, Michigan Department of Environmental Quality, 
Lansing, Michigan.
    I appreciate very much your coming together to discuss now 
environmental trading. I will call upon you in the order that I 
introduced you. Please try to summarize your testimony in five 
minutes. All your statements will be made a part of the record 
in full.
    Dr. Sandor, it is great to visit with you again. You have 
been a pioneer in the marketing effort. We are eager to hear 
from you this morning.

STATEMENT OF RICHARD L. SANDOR, CHAIRMAN AND CEO, ENVIRONMENTAL 
               FINANCIAL PRODUCTS LLC, CHICAGO, 
                            ILLINOIS

    Mr. Sandor. Thank you very much, Mr. Chairman. It is a 
great pleasure to be here before this committee. You honor us 
with this opportunity to talk about market-based solutions to 
environmental problems.
    Our small company, Environmental Financial Products, is a 
specialist investment bank boutique which focuses on 
development of new products in the financial markets, capital 
markets, agricultural markets. We have worked in financial 
futures, in insurance and weather derivatives, and in the SO2 
trading program.
    We are now focused very much on the environmental area. We 
were, as you know, Senator, early advocates for emissions 
trading in the sulfur dioxide program. We authored some early 
papers on its advantages. While serving as a Director of the 
Chicago Board of Trade, I was privileged to chair the committee 
that worked with the EPA to develop the SO2 auctions, I might 
mention parenthetically, that the ninth EPA/CBOT auction was 
held yesterday. Over nine years, the market has worked very, 
very well. The latest auction prices came in at $170 to $100.
    I might point out that the SO2 price forecasts ranged from 
$300 to $900. So, your opening remarks were right on the mark. 
Prices have been seventy five percent below where cost levels 
the pundits had forecasted.
    The Chairman. To clarify that, that was the opponents of 
the Clean Air Act who suggested that those huge sums would be 
required.
    Mr. Sandor. Yes.
    The Chairman. For many reasons, but one of them being that 
you have developed a market where you have mitigated that cost 
to America society by about 75 percent.
    Mr. Sandor. Yes. We had companies like AEP and Enron 
participating yesterday in the forward market including out-
year allowances and the out-year numbers, Senator, were 12 
percent of the average forecast. So, they were down 82 percent 
from the forecasts made in 92.
    We think that there is the same opportunity in carbon 
trading. We were told that SO2 trading would never work. People 
said ``it is arcane, it is a mystery of American capitalism. 
Better to have heavy-handed regulation and don't allow industry 
to be flexible.'' But I think the SO2 program has changed that.
    The government played a critical role in that area and it 
was not really very costly for the American taxpayer. The 
government did three things, and we think the same 
opportunities are there today.
    First, it created a viable legal infrastructure with a 
clearly defined commodity. It was like a property right. It was 
recognized and registered by the government. It was very, very 
cost effective.
    Second, it also provided monitoring and verification 
protocols to accurately determine the emissions rates. There 
were monitors. There were verifiable accounts. There was an 
emission registry, all of which was a proper function of 
government.
    Third, it encouraged the markets that existed under 
regulated financial institutions like the Chicago Board of 
Trade, the investment banks, the energy sector. So, we need 
three things: a commodity that is legal and measurable and 
fungible: monitoring and verification protocols; and we need to 
let the private sector go.
    It is commonly accepted, I guess around the world, and it 
is conventional wisdom, that the United States efforts on 
climate change have stalled. But I think, as you well know, 
Senator, conventional wisdom doesn't apply in the Midwest.
    We were privileged to have a grant from the Joyce 
Foundation, a major eleemosynary organization in Chicago. The 
grant, which is funded through Northwestern University was 
allowed us to start the Chicago Climate Exchange.
    The rationale is to develop a voluntary, private program 
for emissions trading among a wide variety of industrial and 
agricultural sources. We are targeting seven States, the 
industrial upper Midwest, Illinois, Indiana, Iowa, Ohio, 
Michigan, Minnesota and Wisconsin to develop this structure.
    We think there is a huge export market for American carbon 
sequestration and we have included Brazil in the program. This 
will help us develop the legal and trading protocols to 
internationalize the carbon market.
    We are going to begin sometime in the next six to nine 
months. We have in the Midwest a $1.8 trillion economy. It 
ranks among the top five economies in the world. We have 
475,000 farms in that area alone that could participate.
    We have assembled a worldwide group of environmentalists, 
scientists, agricultural business people, members of NGO's, all 
to advise us on how to do this, as well as deans of two of the 
leading business schools in the country, Northwestern and Yale. 
We have included advisory groups that have worldwide 
representation.
    We have received letters of intent from a number of 
industrial corporations, utilities, et cetera, and more letters 
of intent have been promised to us by numerous groups.
    We have utilities like Cinergy and Alliant that are going 
to work with us in the design. We have four agricultural 
cooperatives that have signed up, the Iowa Farm Bureau 
Federation Growmark, and several others.
    What is the ultimate potential for this market for 
agriculture? In conclusion, we think that $4 to $6 billion is a 
reasonable estimates. That assumes carbon prices are at the low 
end of the estimates many academics have made. Academics at 
Harvard and Wharton are suggesting $100 to $200 a ton. If they 
are right, growth in net farm income is worth $20 to $50 
billion, just for the carbon sequestration rights, let alone 
the carbon rights from using in biomass in fuel substitution.
    I would like to take this oppurtunity to announce today 
that our firm, or a firm that we are associated with, 
Sustainable Forestry Management, executed the first trade of 
forestry carbon credits. We did the trade with the confederated 
Salish and Kootenai Tribes in Montana. The proceeds will be 
used to help reforest lands that were decimated in 1994 by 
fires. So, there is a real life example. We did that trade in 
advance of this hearing to be able to share with you that we 
have exported to London Native American reforestation and 
sequestration credits and it is being paid for as an export 
commodity.
    Thank you very much, Senator.
    The Chairman. How much did you pay the tribe?
    Mr. Sandor. That is confidential, Senator. It is a private 
transaction, but the tribe is getting the money directly.
    The Chairman. Thank you very much.
    Dr. McCarl. 

            STATEMENT OF BRUCE McCARL, PROFESSOR OF 
         AGRICULTURAL ECONOMICS, TEXAS A&M UNIVERSITY, 
                     COLLEGE STATION, TEXAS

    Mr. McCarl. Thank you for inviting me here today. I should 
mention I am not only from Texas A&M, but I am also from 
something called the CASMGS Carbon Sequestration Consortium, 
which was championed, I believe, by Senator Roberts. I believe 
you were one of the co-sponsors. So, thank you for that.
    Here is a little bit of the fruit of that afford although 
it is basically just beginning.
    There are a number of important ways, I think, agriculture 
can help offset greenhouse gas emissions. Also, there are a 
number of questions of implementation that need resolution. I 
believe that is why you, in your wisdom, funded that group.
    I think there are three basic ways that agriculture can 
participate. The first as we have heard a lot about so far 
today is to produce offsets by producing bio-fuels, which in 
turn reduce our fossil fuel usage and offset carbon. Second, 
agriculture can provide also sinks through carbon sequestration 
in forests and soils.
    Third, there is a set of emission reduction possibilities 
including managing livestock wastes, fertilizer and other 
remission sources.
    My economic analysis of these show that there are some 
cheap opportunities here, quite a few that would be economical 
at prices less than the $100 to $200 a ton figure that was just 
mentioned such strategies should be attractive in a private 
market. If these could be sold, they would have substantial 
effects on farm income.
    But I would also like to say it is a bit of a double-edged 
sword because for farm income to go up, farm prices tend to go 
up which means consumers pay more for food. Conceivably, we 
could also have substantial reductions in export potential 
because we have diverted land, say, to bio-fuels or forests and 
taken it out of food production.
    There also is a substantial accompanying environmental 
improvement. In some of my work I see as much as 50 percent 
erosion reduction, along with substantial reductions in 
nitrogen and phosphorous use.
    In terms of strategies to achieve this, the largest roles I 
keep finding in my work tend to be for afforestation, soil 
sequestration through tillage change and biomass for power 
plants. The biomass for power plants tends to happen only 
prices above at about $50 a ton carbon.
    Since wood a $50 carbon prices is produced is about 50 
percent carbon, that means a $25 subsidy toward the $40 price 
that one of the last speakers just quoted, which would make the 
fuel stock cheaper to them, in effect, and make biomass more 
competitive.
    I think the potential for a market such as Dr. Sandor 
talked about is good. There is a real possibility for private 
money in such a market so that the government is not the one 
that has to pay out the $4 billion, but rather it is a contract 
between, say, power plants and the farmer as opposed to direct 
payments from governmental sources.
    However, I do think that there may be a role for government 
because of differnces in co-benefits. In particular, a power 
plant could go to buy carbon by switching a power plant over to 
natural gas or by having farmers change tillage. There are 
substantial co-benefits differences across these opportunities. 
In one case you might have less soil erosion and pesticide 
runoff getting into the water and therefore you might have 
beneficial water quality implications. You may have another set 
of benefits on the power plant side, thus may be a reason for a 
government role to perhaps heighten the attractiveness of 
things that also generate substantial co-benefits, as 
economists, we often say there is a market failure in terms of 
co-benefits because the market may not favor one strategy over 
another because of the other co-benefits.
    I think there is substantial work yet needed on 
implementation and there are substantial issues to be 
considered. I will just mention two but I have a longer list in 
the formal testimony.
    I have reviewed some studies that show most all of the 
agricultural soil carbon sequestration activities saturate 
after 20 years. The soil goes to a new equilibrium and it will 
go not much further. Under those circumstances then what we 
really have to hope to have agricultural carbon sequestration 
be a nice initial move and that over time our science and 
engineering will help us solve our emissions problems. Thus, 
agriculture can serve as an important bridge to the future. I 
calculate under saturation that agricultural carbon offsets 
could be worth half or less than an emissions offset because of 
this saturation.
    The other thing that I think is important is the leakage 
issue. If we do a lot in United States agriculture to offset 
carbon emissions and we reduce our production because of that, 
we may see increases in production in countries that are not 
subject to carbon emission regulations and they will increase 
the carbon. From a global standpoint, I think we may have a bit 
of a carbon wash here in that they might increase emissions we 
offsets. Thus, the scope of the trading scheme, is very 
important as has been recognized in some of the Washington 
discussion of the Kyoto Accord.
    In closing, I would say that I think further work is needed 
and Congress recognizes that in funding CASMGS.
    Thank you for your attention.
    [The prepared statement of Mr. McCarl can be found in the 
appendix on page 95.]
    The Chairman. Well, thank you, Dr. McCarl, for your work. I 
think the testimony you have about the saturation principal is 
a very important addition to this. It is not a one-way street. 
There are some changes that are going to occur there.
    The other point, and you are well aware of this, certainly, 
in your work in Texas. It is that most of the people who come 
before our committee who are advocates of much greater 
conservation, and by that it pertains to acreage, want to get 
out of farming.
    In other words, there seems to be no lack of land out there 
for the moment. We could always come into new problems. There 
is no straight line here. But I heard from the panel before 
people worrying about if we use more land for energy, will we 
have enough food?
    I think the practical answer is yes. We are over-supplied. 
We are doing almost everything we can to over-supply ourselves 
some more. So, the problem now is a very substantial offset, if 
we can find one. But as you are pointing out, it might not be 
perpetual. It might be a 20-year fix and then we think of 
something else.
    Mr. McCarl. It very much might be that we pursue a carbon 
program like this now and then in 20 years we could use our 
land for food and other purposes after the engineers have 
helped us reduce emissions in primary energy production.
    The Chairman. Sadly enough on this point, I need to call 
another recess. I apologize for this. Senator Leahy, the 
distinguished former Chairman of this committee, whose 
beautiful portrait is in the back there, you will recognize him 
because he served so well. He will serve again in a few 
minutes. But he is on his way and he will conduct the hearing 
until I return.
    So, I appreciate very much your patience. We will have a 
short recess. Senator Leahy will chair and then we will return.
    Thank you. [Recess.]

STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM VERMONT

    Senator Leahy [Presiding]. I understand that Senator Lugar 
is detained. We have a debate of high consequence to the press 
and low consequence to the public underway on the Floor, as 
well as a number of other meetings including some that require 
Senator Lugar's well-known expertise in this body and he is 
there.
    You know, I could not help but think, and I would have said 
this had I been here earlier, the America people and the people 
in governments everywhere are coming to understand that we 
ignore the threat to global warming, the buildup of greenhouse 
gases at our mutual peril.
    We face the undermining of our quality of life. We may even 
face the end of some forms of life on our planet.
    Now, I am proud that this committee, the Senate Agriculture 
Committee on which I have served for 26 years, has worked with 
the American agriculture community to be part of the solution 
to these problems. We are touching on some of these issues 
today.
    That is why I am concerned that the new administration is 
furiously backpedalling on protections of the environment. In 
rapid fire succession, the White House is rolling back one 
environmental protection after another, affecting the very air 
that we breath and even the water that we drink.
    There is a public flip-flop on the President's campaign 
promise to act on the power plant emissions of carbon dioxide, 
a major greenhouse gas, notwithstanding his promise to act on 
that, that has quickly changed once he came into office.
    Then the President suspended an historic rule, one that was 
two years in the making, after hundreds of public meetings, 
that protected 60 million acres of roadless forests.
    Last week President Bush told the American people that 
World War II air and water quality standards were sufficient to 
protect the public from arsenic, despite a definitive study 
from the National Academy of Sciences in 1999 that said exactly 
the same.
    Frankly, I would trust their 1999 report to protect the 
water that my children and grandchildren might drink as being 
far more accurate than some studies that we did back in World 
War II.
    The White House followed that announcement by rolling back 
environmental protections in mining operations.
    This week the President is rescinding the right to 
protection for communities with chemical plants. He is 
requesting Secretary Norton of the Department of the Interior 
to open up the nation's national monument to coal, oil and gas 
interests.
    On top of this, the President continues to press for the 
unnecessary, and I believe shortsighted exploitation of one of 
our nation's most precious and fragile wilderness areas, the 
Arctic National Wildlife Refuge.
    And, to make matters worse, the President and EPA 
Administrator, Christine Whitman, announced that they have no 
interest in working with the international community toward the 
reduction of greenhouse gas emissions, and particularly the 
reduction of carbon dioxide.
    Actually, that announcement probably could not have come at 
a worse time. Not only does it signal the end of a national 
policy toward the reduction of harmful greenhouse gases, this 
retreat from a leadership role in issues of climate change can 
put at risk all the gains we are hearing described today.
    Worse, if global climate change predictions are correct, 
the White House steadfast determination to listen to the 
wealthiest special interests could put at risk North American 
agriculture as we know it.
    Eleven years ago, when I was Chairman of the Agriculture 
Committee, we included a provision in the 1990 Farm Bill on the 
risks of global warming. It was 1990 and the first Bush 
administration had just watched the international community 
come together on concerns of greenhouse gases and climate 
changes to form an international panel on climate change.
    In that same year, former President Bush helped Congress 
create the United States Global Climate Change Research Program 
as a multi-agency task force to study climate change. In that 
same year we on the Senate Agriculture Committee added the 
first ever provisions dealing specifically with greenhouse gas 
reductions, something that got strong support from both 
Democrats and Republicans.
    I championed the Global Climate Change Prevention Act. This 
provision encouraged biomass-based energy sources and promoted 
active carbon storage known as carbon sequestration on 
agricultural land. It was the right thing to do at the right 
time.
    Two years later, former President Bush signed the United 
Nations framework Convention on Climate Change, an agreement to 
stabilize atmospheric greenhouse gas concentrations at a level 
to prevent dangerous anthropogenic interference with climate 
systems.
    Now these early efforts, both bi-partisan and visionary, 
laid the strong framework of voluntary programs that facilitate 
the international trend toward carbon dioxide regulations. We 
knew we had to do something. The United States is the world's 
leading emitter of carbon dioxide.
    We also had the technology to be the leader in technologies 
and policies to control those emissions.
    Now, more than a decade beyond the 1990 Farm Bill, our 
nation is at a crossroads. The 1990 Farm Bill's attention to 
global climate policies helped spur research and new 
technologies positioning the United States as a potential 
international leader in carbon dioxide reduction.
    Unfortunately, I believe the new administration is throwing 
away our world leadership role in protecting the earth. It is a 
wasted opportunity. It is also a disturbing setback. The years 
and years of effort and vision by both Republicans and 
Democrats in finding solutions.
    Mr. Kaster, you are probably delighted to have that as a 
lead-in to your testimony. I am just trying to do what I can to 
help.
    Mr. Kaster is the manager of Forestry and Recreation 
Programs, American Electric Power in McConnellsville, Ohio. We 
are delighted to have you here, sir. Go ahead.

  STATEMENT OF GARY KASTER, MANAGER, FORESTRY AND RECREATION 
    PROGRAMS, AMERICAN ELECTRIC POWER, McCONNELLSVILLE, OHIO

    Mr. Kaster. Thank you, sir. I am glad to be here. Thanks 
for teeing me up.
    Senator Leahy. I am not a golfer, but I think I know what 
that means.
    Mr. Kaster. I am delighted to be part of this panel of 
experts, especially in joining my colleague, Richard Sandor, 
one of the nation's foremost experts on carbon trading.
    As you indicated in my introduction, I am a forester and 
the manager of American Electric Power's forestry programs. In 
that regard, with that expertise, since 1994, I have had 
intensive involvement with carbon sequestration projects, both 
for American Electric Power and with UtiliTree Carbon Company.
    Between my oral statement this morning and the testimony I 
have submitted, I hope to give the committee and the Chairman 
an overview of the electric utility industry's and American 
Electric Power's perspective and experience with carbon 
sequestration projects.
    While AEP does not support the Kyoto Protocol in its 
current form, the immutable fact is this issue will not go 
away. The target is fossil fuel use, especially coal. The 
pressure to reduce CO2 emissions will be relentless.
    AEP believes, as does the industry, that any future treaty 
must include an unconstrained international trading system, 
crediting of all legitimate and verifiable joint implementation 
and clean development mechanism projects, full credit for the 
enhancement of natural sinks such as forests and agricultural 
lands, and a compliance regime that will be an effective 
deterrent against noncompliance.
    Now, in spite of an uncertain future, electric utilities 
are interested in all technically and economically feasible 
alternatives for managing greenhouse gas emissions. Land use 
change and forestry opportunities have been demonstrated to be 
among the most cost-effective ways to address CO2 emissions, 
often costing only a few dollars per ton.
    Properly implemented, these practices are technically 
proven and can offset a large amount of CO2. In addition, such 
projects have secondary environmental and social benefits such 
as the restoration of degraded lands and the protection of bio-
diversity.
    An excellent example of the industry's experience with 
carbon sequestration projects is that of UtiliTree Carbon 
Company. UtiliTree is a nonprofit corporation established by 41 
utilities to sponsor a portfolio of eight international and 
domestic forest carbon sequestration projects.
    UtiliTree has committed slightly over $3.2 million to fund 
these projects, which consist of a diverse mix of rural tree 
planting, forest preservation, forest management and research 
efforts at both domestic and international sites. Carbon 
dioxide will be managed at a cost of under $1 per ton.
    An excellent example of what a major United States utility 
is doing in this arena would be that of American Electric 
Power. AEP serves 4.8 million customers in 11 States in the 
Midwest and south central United States.
    AEP's domestic generation capacity is 38,000 megawatts, 
which is 67 percent coal-fired. In 1999, AEP burned 78 million 
tons of coal. AEP is voluntary commitments under the climate 
challenge include a broad portfolio of actions which include 
supply side improvements, demand side efficient improvements, 
and land use change and forestry projects.
    Included among AEP's forest carbon sequestration projects 
are enhanced forest management on the company's forest lands, 
planting 20 million trees on company and other lands, the Noel 
Kempff Climate Action Project in Bolivia, and the Guaraquecaba 
Climate Action Project in Brazil.
    More detail on both AEP's projects and UtiliTree's projects 
are available with my submitted testimony.
    To give the committee a perspective of the potential 
importance of carbon credits from forestry and agricultural 
sinks, I would like to share with you the projected impact on 
AEP if we were required to comply with a Kyoto-type Protocol, 
if it does not include market mechanisms and sinks.
    Compliance would cause the premature retirement of 11 
gigawatts of generation, a $1.2 billion write-off, replacement 
of 10 gigawatts of generation with natural gas combined cycle 
at a cost of $5.3 billion, an increase in generation costs of 
between 25 to 45 percent, depending on natural gas trends; and 
a system wide coal burn reduction of 30 million tons per year, 
to be replaced by 485 billion cubic feet of natural gas.
    Obviously, cost-effective solutions to managing greenhouse 
gas will be important to my company and to our customers.
    As previously mentioned, land use change opportunities such 
as forestry and agricultural sinks will be among the most 
economical ways to address CO2 emissions. To date, investments 
in most projects have been for voluntary commitments or banking 
for future use and as such do not reflect the true market 
price.
    However, looking down the road we would be less than honest 
in not acknowledging that there is a possibility of a future 
voluntary or mandated domestic or international carbon regime. 
At that time the market will demand a greater supply and at 
that time a more defined market would emerge.
    I would also anticipate at that time that the industry 
would be much more interested in credits from credible and 
well-quantified agricultural carbon sequestration projects.
    Thank you.
    Senator Leahy. Thank you very much.
    [The prepared statement of Mr. Gary Kaster can be found in 
the appendix on page 97.]
    Senator Leahy. Next we have David Batchelor, Market-Based 
Environmental Program Specialist, Michigan Department of 
Environmental Quality from Lansing, Michigan.
    It is good to have you here.

          STATEMENT OF DAVID BATCHELOR, MARKET-BASED 
          ENVIRONMENTAL PROGRAM SPECIALIST, MICHIGAN 
     DEPARTMENT OF ENVIRONMENTAL QUALITY, LANSING, MICHIGAN

    Mr. Batchelor. Thank you, Senator Leahy and members of the 
committee. It is a pleasure to be here and have an opportunity 
to testify on Michigan's Water Quality Trading Program, the 
lessons that we learned to put that program together, and share 
information that may be useful in terms of how innovative 
market-based programs may benefit agriculture.
    Conservation subsidies under the Environmental Quality 
Incentives in Wetland Reserve programs have made significant 
reductions in agricultural runoff. Greater water quality focus 
under the Conservation Reserve Program and using watershed 
approaches to improve water quality habitat under CRP will 
provide even greater results.
    However, while most of Michigan's waters are of high 
quality, some are threatened. Some are impaired due to nutrient 
enrichment and sedimentation from agricultural and urban 
runoff.
    It is for these reasons that we looked at the development 
of a voluntary trading program. We will soon implement the 
nation's first Statewide water quality trading program. It is 
called ``Water Quality Trading'' rather than pollution trading 
because a person has to make surplus reductions to generate 
credits. A percentage of each trade is retired to provide a 
direct benefit to water quality.
    Our program is voluntary. It focuses on nutrients. It 
operates on control cost differentials between sources and 
takes advantage of the economies of scale. These market forces 
create opportunities for farmers to implement changes that 
benefit water quality.
    The agricultural sector supports Michigan's program because 
it replaces the heavy hand of prescriptive, permit-based 
regulations with economic incentives and performance oriented 
approaches.
    It is based on partnerships at the local, State and Federal 
level. Here is how it works: To participate a farmer must 
prepare an NRCS-certified plan. The plan documents existing 
operations, determines nutrient levels and recommends 
management practices that will work on the farm.
    The farmer decides what practices to implement and submits 
a notice to the department. The practices selected by the 
farmer become legally enforceable when the department registers 
the nutrient reductions as credits that may be traded.
    This approach was chosen because most farmers learn about 
incentive programs through the NRCS and Soil Conservation 
Districts. They trust and rely upon these agencies and 
certified planners for information and technical support.
    This approach holds farmers accountable for sustainable 
changes that will work on the farm, rather than mandatory 
measures that often don't.
    A recent test of our water quality trading program was 
conducted on the Kalamazoo River. Farmers, municipal and 
industrial sources used the World Resources Institute Nutrient 
Net model to compare and select the most cost-effective ways to 
reduce phosphorus.
    The cost of agricultural reductions ranged from about $8 to 
$50 a pound. Point source costs were as high as $200 a pound. 
Several farmers were able to achieve a greater return on 
investment through trading than they can through conservation 
subsidies.
    Michigan is using the Nutrient Net as a prototype for an 
electronic board of trade. This is revolutionary. It is an 
internet-accessible program with mapping applications to 
delineate watersheds and identify sources that trade.
    It provides real-time information to evaluate trading 
partners, trading options, and allows the agency as well as the 
public to track trades cradle to grave.
    Here are some things that we learned that may be helpful to 
you as you move forward to incorporate innovative strategies of 
the farm bill. Highly managed programs have high transaction 
and administrative costs. They result in fewer trades and 
reduced environmental and economic benefit.
    Prescriptive management practices just don't work. Letting 
farmers decide what changes are sustainable, providing credit 
for reductions that actually improve water quality and 
performance-based accountability is key to successful markets.
    Recent studies show that multiple environmental benefits 
can be obtained through tillage, cropping and nutrient 
management practices. Leveraging these synergies through 
multiple markets can dramatically increase the economic and 
environmental performance of water quality and nutrient trading 
programs.
    As this committee moves forward to strengthen the 
conservation title of the farm bill and improve water quality, 
here are some things you may consider:
    First, specific authorization of additional NRCS staff and 
resources is needed for farmers to take advantage of voluntary 
trading programs like Michigan's. This would increase 
participation by providing information and technical 
assistance. It will also leverage existing conservation 
programs by providing the option to trade to those farmers who 
don't qualify for subsidies.
    Second, there are a number of successful trading programs, 
but there is much to learn. Authorization and funding for 
market-based demonstration projects and pilot State programs in 
the farm bill would help define agricultural policy, test 
innovative strategies, develop infrastructure, and design 
successful programs.
    Last, I would even recommend you consider including a pilot 
nutrient trading or multiple market trading program in the next 
farm bill.
    The U.S. Department of Agriculture or the States or both 
could administration the program. Multiple credits could be 
retired, auctioned or reinvested to provide more money to 
farmers who deliver greater multiple benefits and generate 
information pertinent to the design of future programs.
    Thank you for this opportunity to testify.
    [The prepared statement of Mr. Batchelor can be found in 
the appendix on page 114.]
    Senator Leahy. Thank you.
    That last point, just for unity around the country, would 
it not be better to have the States administer it or the 
Federal Government?
    Mr. Batchelor. There are advantages to both approaches. The 
advantage to having the States do it obviously is that the 
States know best what the water quality issues are and would 
probably be in a better position to administer the funds.
    Senator Leahy. Thank you.
    Dr. Sandor, you have heard my concerns about the message 
this new administration is sending to the Nation and the world, 
both in denying to regulate the carbon dioxide from power 
producers and my understanding is that they called the Kyoto 
Protocol dead on arrival.
    I feel that is a shortsighted position. I am a strong 
believer in market-based, incentive-based pollution reduction 
efforts for our nation's industry, but I know most industry 
leaders strongly resist change unless it is projected to reduce 
risk.
    Given this, isn't the success of cap and trade efforts due 
to the industry reducing risks because of strict Federal 
regulations that would have cost them money, such as the Clean 
Air Act in the case of sulfur dioxide?
    Mr. Sandor. I think the cap and trade system and the 
regulatory impact of the SO2 program is in fact the cause of 
the mandated reductions, by definition, of sulfur.
    However, we firmly believe that a voluntary pilot program 
will go a long way toward enlightening the debate on carbon and 
the cost of mitigation. We have inserted in the record, for 
example, evidence of why we think that America's utilities, 
working with America's farmers, can effectively mitigate all of 
the greenhouse gas emissions at very, very reasonable costs.
    But much of the debate, as it was centered in the SO2 
program and with carbon, is done by academicians. I speak as a 
defrocked academic, but I do not understand these numbers. I 
think they are so far dead wrong. As wrong as they were in 
sulfur, they are more wrong in carbon and we need a pilot to 
demonstrate it. That is very, very critical.
    I do not share Dr. McCarl's viewpoint and most academics in 
the Midwest do not share his viewpoint about saturation. I 
respect it and I understand it is based on one simulated study. 
We think there is a great amount of money to be earned by the 
agricultural sector at a minimum cost to the government.
    If you let us get on with the voluntary program and provide 
infrastructure for it, we will do it as we did it at the 
Chicago Board of Trade in SO2 and we will do it in carbon.
    Senator Leahy. Do you think emitters would be willing to 
pay up to $20 to $30 per ton to pay farmers to store carbon?
    Mr. Sandor. Yes. I think that $20 a ton is interesting. You 
spoke about the Kyoto Protocol and under the Kyoto Protocol is 
a 600 million ton reduction. At that, the total GDP impact 
would be $12 billion on a $10 trillion economy.
    The total cost of mitigating it, your numbers, Senator, at 
$20 to $30 to mitigate carbon would only be $12 billion versus 
a $10 trillion economy.
    The problem is that your numbers of $20 and $30 per ton of 
carbon, which I think is the right number, is widely different 
from pundits who say it is $50 to $250.
    Senator Leahy. You know, it is interesting, the emissions 
trading credits; I expect those are the environmental successes 
we have seen for sulfur dioxide. I don't think those would have 
existing without the Federal emissions requirement. Would you 
agree?
    Mr. Sandor. Yes. We support a cap and trade program and we 
should ultimately get into that. We think we will shed a light 
on the issue in the voluntary market. Five hours ago I was very 
privileged to learn my second grandson was just born. I will be 
leaving after the hearing to see him and my daughter. For his 
sake, I really do think we need to make some efforts in this 
area.
    I very much support the efforts of the Agriculture 
Committee on the issue. We in the markets will take care of our 
business if you give us some help on homogenizing the commodity 
and monitoring and verification.
    Senator Leahy. Having but one grandchild now 3 years old, I 
enjoy him a great deal. I told his father that had I known the 
grandson would be so much fun, I would have skipped the 
fathering and gone straight to grandfathering. That is not 
really so, because I love the father a great deal. But the 
three-year old is a lot of fun, especially when he finds that 
the snow banks in Vermont are a lot taller than he is. That can 
be a lot of fun.
    In just a moment, Dr. McCarl, I am going to go to you so 
you can have a chance to respond to some of the things that Dr. 
Sandor said.
    But, Mr. Kaster, you argue in your testimony that your 
company, American Electric Power, does not support the Kyoto 
Protocol in its current form.
    The U.S. Senate is on record as saying some changes need to 
be made, although it has never rejected the treaty itself. But 
President Bush and Governor Whitman have said that they have no 
interest in the Kyoto Treaty. They want the United States to 
reject that agreement completely.
    Do you agree with that?
    Mr. Kaster. We do not agree with Kyoto in its present form 
for a number of reasons, not because we deny or are saying that 
there is no global warming problem or issue to be addressed.
    Senator Leahy. Do you think it should be rejected 
completely as the President and Administrator Whitman have 
said?
    Mr. Kaster. It needs to have a lot of work to be something 
that will be acceptable to the American economy and the 
American society, and especially to the U.S. Senate to be 
compatible with Senate Resolution 98.
    Senator Leahy. Do you agree with the President and 
Administrator Whitman that it should be rejected completely?
    Mr. Kaster. No.
    Senator Leahy. You do agree with the Senate that it needs 
work.
    Mr. Kaster. It needs a lot of work.
    Senator Leahy. I understand.
    Dr. McCarl, you heard Dr. Sandor say that utilities 
emitting carbon might be willing to pay farmers up to $20 to 
$30 per ton to store additional carbon. Would that be an 
attractive investment opportunity for farmers at that price?
    Mr. McCarl. My estimates are that farmers could generate on 
average about two-tenths of a ton of carbon per acre. So, at 
$20 to $30 we are talking about a $4 to $6 payment. I believe 
that would probably be an attractive investment.
    Just briefly on the saturation issue, I am an economist and 
I didn't make up the saturation numbers. They were actually 
results out of a summary from 50 different field experiments by 
T. West Oakridge National Laboratory, the saturation results 
are not from computer simulations as implied by Mr. Sandor, 
they show saturation in my judgement. I am not interested in 
debating this point further because I did not develop them. I 
gave Mr. Sandor the reference a few minutes ago and he can 
pursue this further.
    Senator Leahy. Let me ask this question. I asked it of Dr. 
Sandor and I will ask it of you, Dr. McCarl. Would it be useful 
to establish a research and demonstration program within USDA 
to let farmers interested in pursuing trading opportunities 
apply on a competitive basis to USDA for funding to assist in 
monitoring and verifying the amount of carbon sequestered 
greenhouse gas emissions reduced through such trades on a pilot 
program basis?
    If we had something like that, one, would it be useful and 
second, would that be useful both to you and I will let Dr. 
McCarl speak for himself, but would that be useful for all of 
us to find out what works?
    Mr. Sandor. Yes, very much so, Senator. Anything that we 
could do to advance or facilitate price discovery would 
significantly add to the intelligence of the debate. So, we do 
need that help, unambiguously.
    Senator Leahy. Dr. McCarl, what do you think?
    Mr. McCarl. Absolutely, I believe a demonstration project 
would be useful. I also think there are also some things that 
we can observe right now. Within British Petroleum, there is a 
carbon trading operation at the moment. They are coming up with 
prices in the $50 to $60 range for carbon dioxide, which 
translates to $10 or $12 for carbon. I think we do need to 
observe such markets and take a look at what is happening. I 
also believe within the British Petroleum program we run a 
little bit of a risk of observing development of the cheapest 
opportunities right off the bat and later prices may be higher.
    If we were to pursue stabilization of greenhouse gases, I 
have heard say that the Kyoto limits come nowhere close to what 
we need to do so there is a substantial market that may be 
needed and we need to gain insight into the full range of that 
market.
    Senator Leahy. Do you think there might be some, initially 
at least, some cherry picking, pick the easiest, cheapest?
    Mr. McCarl. That is what I am saying. The things that we 
see happening right now in British Petroleum is that they 
stopped all the gas flaring. Well, the gas flaring is a pretty 
cheap thing they could do right off the bat. Later on there 
will have to be bigger investments made.
    Senator Leahy. But again, with the right monitoring, I mean 
somebody should be able to get a pretty objective pass and say, 
OK, we have done the easy part, but there is only so much of 
that you can do anyway.
    Now, let us go to phase two and phase three and whatnot. It 
is getting increasingly more difficult.
    Mr. McCarl. Right, and the other thing about agricultural 
soil carbon is that you tend to get your biggest increments 
toward the beginning of the program and later it starts to tail 
off some because it saturates sort of like filling a bucket of 
water. As it starts getting full, there is little capability of 
more.
    Mr. Sandor. Let me mention a couple of things just to 
inform the debate. The same things were said about the sulfur 
market. The first trade occurred in Wisconsin roughly eight 
years ago. The price of sulfur emissions at that time were 
$300, which was 50 percent below the forecasted level.
    Yesterday, the Chicago Board of Trade auction put the price 
of year 2008 allowances at $100. So, it is two-thirds of what 
it was 18 years ago and everybody said the easy stuff was being 
done at $300. Now it trades at $107. These are real prices in 
the market today.
    Second, regarding farm income. I think Dr. McCarl is spot 
on, but there are other things that farmers can do to earn 
carbon credits that have to do with biomass, fuels poplar tree 
planting, creekside planting, etc.
    The academic estimates suggest potential carbon gains are 
up from .2 to .4 tons per acre per year. They are added into 
Dr. McCarl's numbers at $20 or $30 and at 4/10ths per acre, you 
are talking about as much as $8 to $12 of additional net income 
to farmers per acre, per year.
    Senator Leahy. Mentally projecting this on to my tree farm 
in Vermont, which is a combination of tree farms and fields, I 
should mention for full disclosure that in the 26 years I have 
been here I have declined any Federal programs of any sort at 
fairly significant, you might say, fairly significant 
disadvantage, but it makes it a lot easier to be objective.
    I have been in the position of the old Wild West days, the 
joke about the judge who had the plaintiff and the defendant 
before him and he announced in great indignation that the 
plaintiff had offered him a $5,000 bribe. The defendant had 
offered him a $10,000. He was just offended. He was returning 
$5,000 to the defendant and they would try the case on the 
merits.
    Mr. Batchelor, I am not suggesting anything about these 
programs. They are good, legitimate programs. I just don't use 
them. You talk about a pilot nutrient-trading program in the 
next farm bill in which the Federal Government might serve as 
the buyer or broker for such trades by holding public auctions.
    Would it be an advantage for the USDA to perform this role, 
something like the Chicago Board of Trade, which has been 
auctioning sulfur dioxide emission credits under the Clean Air 
Act?
    Mr. Batchelor. Yes, Senator. I think the one thing that can 
be done at the Federal level is creating the market, if you 
will. As Dr. Sandor indicated, there has to be a commodity that 
can be traded. That can be done under the farm bill. Until that 
is done, entrepreneurs will not have a market to play in.
    Senator Leahy. Gentlemen, I thank you all very much. Some 
of the questions I have asked are some that Chairman Lugar 
would have asked had he been here. He and I have worked on some 
of these issues now for well over 20 years.
    I cannot think of anyone in the Senate I admire more than 
The Chairman. We will work closely on this. I hope that I asked 
all the questions that he wanted as well as my own, but I would 
ask your indulgence, if there are further questions that we 
might be able to contact you.
    Also, following the traditions of this committee, when you 
see the transcript, if you feel that you want to amplify or 
change your numbers of whatever, please feel free to do that. 
This is not an adversarial hearing. We are looking for the most 
information we can get.
    I do appreciate all of you taking the time to be here.
    We will take about a five-minute recess while the staff 
resets everything here. When we come back it will be John 
Kadyszewski, Jim Kinsella, Robert Bonnie and Jeff Fiedler.
    [Recess.]
    The Chairman [presiding]. The hearing is called to order 
again. I appreciate the patience of each one of you. Let us 
just proceed with the testimony, hopefully five minute 
summaries of your statements. They will be placed in the record 
in full. Then we will proceed with the questions. Would you 
please proceed?

         STATEMENT OF JOHN KADYSZEWSKI, ADVISER TO THE 
     PRESIDENT, WINROCK INTERNATIONAL, MORRILTON, ARKANSAS

    Mr. Kadyszewski. Mr. Chairman, thank you for the invitation 
to present the results of our work. It is a privilege to be 
asked to make a contribution to your deliberations and I am 
sorry that I missed the introduction this morning from Senator 
Hutchinson from Arkansas. I hear he was quite complimentary of 
our work.
    I was in an airplane on the way back from meeting with the 
west coast RC&D councils to talk about carbon credits.
    The Chairman. Well, he was eloquent and we appreciate that 
introduction, and you would have, too.
    Mr. Kadyszewski. Winrock is a nonprofit organization 
headquartered in the beautiful State of Arkansas on top of 
Petit Jean Mountain, which is in the center of the State. We 
have offices in more than 40 countries around the world. We try 
to use good science and economics to increase economic 
opportunities for farmers, sustain natural resources and 
protect the environment.
    Our program has four major focus areas, agriculture, 
forestry, natural resource management, and clean energy, which 
includes bio-fuels. So we work across all the sectors for which 
management might be important in the agricultural world.
    Today, I will report on our work to measure carbon storage 
in forestry and land use projects. Our experience clearly 
demonstrates that forestry and agro forestry projects can be 
measured to known levels of accuracy and precision at costs 
well below the expected value of the emission reductions 
credits that would be generated.
    Emissions trading, therefore, could encourage investments 
in carbon storing projects with two benefits: First the removal 
of carbon dioxide from the atmosphere and second, the potential 
mitigation of climate change impacts on people and agricultural 
production systems.
    Scientific evidence is increasingly clear that greenhouse 
gas emissions are having an impact on global climate. The most 
important near term impacts will likely be felt through an 
increased frequency in severity of droughts, floods, and 
storms.
    This could affect United States and global agricultural 
production. We are pleased to see the interest of the Senate 
Agriculture Committee in this subject because we think that 
agriculture is likely to be one of the first sectors to feel 
the economic and financial consequences of climate change 
activities.
    Emissions trading entails the acceptance of a system of 
trading rules. Whatever rules are used are going to have to 
have good measurement practices.
    As a science-based organization, we chose to focus our 
effort on the development of these good measurement practices, 
both for storage in forestry and land use projects, as well as 
for avoided emissions from clean energy systems in bio-fuels.
    We began our work in 1992 with the development of peer-
review methods and procedures for forestry and agro forestry 
systems. These methods and procedures have been field tested on 
a variety of projects at multiple locations in the United 
States and around the world and can be downloaded free from our 
website.
    They are now being used to measure and monitor carbon 
storage in several private projects developed by environmental 
organizations such as the Nature Conservancy, as well as 
private companies like American Electric Power and Synergy.
    We are working on a revision to those methods and 
procedures now and it will be done in partnership with the 
CiFor, which is the international forestry research center in 
Indonesia because we believe that it is important for these 
kinds of methods and procedures to have international 
confidence.
    Not only do we have confidence in the science, we believe 
that the cost of measurement will not be a significant burden 
on project sponsors.
    For forestry projects, measurement costs achieved to date 
have been less than 25 cents per ton of carbon, achieved with 
accuracy and precision levels above 95 percent. We stratified 
projects and use statistical sampling techniques to keep 
measurement costs down. But these are real actual measurements 
of carbon storage, not derived from models.
    Existing forest inventory data allows us to estimate 
variability with any stratum and minimize the number of plots 
we need to measure. So, the existence of good forest and soil 
inventories of USDA is a critical component to keeping 
measurement costs down.
    With our own funds and support from the Electric Power 
Research Institute, we have been developing even lower cost 
methods for monitoring, using aerial photography and 
videography. We believe that digital imagery will allow us to 
do more than just reduce the measurement costs. It is also 
going to permit us to measure in a quantitative manner other 
environmental benefits.
    We heard mention of water quality in a previous panel.
    We will be able to look at things like habitat protection 
and restoration, watershed improvement and reductions in 
nonpoint pollution. Quantification of these other benefits 
could provide additional sources of revenues for farmers and 
landowners and could be measured simultaneously with the 
measurement of carbon to achieve cost efficiencies.
    Since the early 1990's, companies have been encouraged to 
take voluntary actions to reduce emissions of greenhouse gases. 
So far, land use change in forestry projects have accounted for 
only about five percent of the reported credits achieved 
through voluntary projects. Most of that has been for 
afforestation and reforestation projects.
    While it has been relatively easy to obtain consensus 
around standard methods and procedures for measuring carbon 
stored in forestry and agro forestry projects, the same has not 
been true for other classes of agricultural projects.
    Although there is general agreement that crop and 
pastureland can be managed to increase carbon storage in soil, 
there is less agreement on how best to measure these changes 
and whether measurement will be cost effective.
    Competing measurement systems or uncertainty about how best 
to measure discourages private investors from looking at these 
classes of projects.
    We have been developing and testing methods and procedures 
for agricultural projects and believe we can measure carbon 
storage to known levels of accuracy and precision at 
predictable costs.
    However, there are only a handful of nonforestry projects 
being voluntarily reported and practical experience under real 
project conditions is limited. We estimate the costs of 
measurement will be higher for agricultural projects than for 
forests. But we expect the values will still be beneath the 
emission reduction credits that they can produce.
    For many categories of forestry projects the Energy 
Information Administration that handles the voluntary reporting 
provides tables with estimated carbon storage values that 
forest project sponsors can use if they do not wish to make 
actual measurements.
    One question that we are frequently asked as a measuring 
group by landowners and project sponsors is whether the tables 
provided are accurate indicators of expected carbon storage. We 
explain that the tables are based on forest inventory data 
collected to produce a national inventory. As such, an 
individual project may do better or worse than the average.
    But it has been our experience that most projects that 
people want to measure do better than the tables because they 
are usually managing the resource to produce such a product.
    Another frequently asked question that we receive is how 
much carbon can be potentially stored in forestry and land use 
change projects in the United States, The U.S. Government has 
produced several reports that describe carbon storage 
potential, as have academic institutions.
    In general these estimates do not include economic 
valuations of current land use and we believe overestimate the 
economically viable carbon storage options.
    About one-third of the total atmospheric loading of carbon 
dioxide over the past century and 20 to 25 percent of current 
annual global emissions results from the loss of carbon in 
forests and soils.
    New approaches to the management of vegetation-covering 
soils across the landscape could store substantial amounts of 
carbon and provide other environmental co-benefits. Landowners 
can use the revenues from emissions trading to implement new 
management practices.
    Higher carbon content in soils and vegetation usually will 
help agricultural production systems adjust to changes in 
climate, especially the changes in rainfall patterns and severe 
weather events. More carbon in the soil means better adaptive 
capacity.
    In closing, Winrock's experience with measuring carbon 
storage across the range of projects shows that it can be 
measured to known levels of accuracy and precision at costs 
well below the expected values of the resulting emission 
reduction credits.
    I would be happy to answer any questions that you might 
have about the various classes of projects that we have 
actually measured. Because we have also worked fairly 
extensively with bio-fuels and bio-energy systems, I may be 
able to address measurement questions on those subjects as 
well.
    [The prepared statement of Mr. Kadyszewski can be found in 
the appendix on page 125.]
    The Chairman. Thank you very much, sir.
    Mr. Kinsella. 

 STATEMENT OF JIM KINSELLA, NO TILL FARMER, LEXINGTON, ILLINOIS

    Mr. Kinsella. Thank you for the opportunity to speak to you 
today on what I consider is a potential paradigm switch in farm 
programs. I am a farmer. I farm in central Illinois. I farm the 
farm we grew up on.
    When I was little and in high school, we had cows and pigs 
and alfalfa and corn and soybeans. As soon as I went away to 
college my dad got rid of the cattle and went to corn and 
soybean, basically intensive tillage crop production.
    I did study soils. I got a Master's in soils. I was gone 
from the farm for about 12 years. I came back in 1974 and saw 
quite a change. Our soils had degraded considerably. They were 
more eroded. The structure was not as good. There was a lot 
more runoff.
    What was not really surprising to me, the organic matter 
had declined. I could see it. They weren't as black as they 
used to be. We took extensive soil samples that year across the 
farm, which averaged 1.9 percent organic matter. These soils 
were probably originally after the glacier and before they were 
tilled less than 100 years ago, probably about four percent.
    So after seeing this, we made a conscious decision to 
change. We bought the farm from my grandpa's estate that year 
and we haven't tilled since. We started no-tilling in 1975. 
What was surprising to me after 26 years of no-till is organic 
matters have come back. They are about the level they were 
originally.
    I think most scientists still don't realize that this is 
possible. I realized that we have a real potential here to not 
only improve the soil, but also to improve the air and also the 
runoff water.
    If I figure backward from where we were 26 years ago until 
now, we have taken about 11 ton of carbon per acre over that 
period out of the air and put it in the soil. That works out to 
be about 4/10ths of a ton per acre, per year, which is about 
twice what models say you can do.
    But we did really tried hard to improve our soils. We grew 
alfalfa on all set aside land. We put manure on our hills and 
lighter soils. So, if just half of the 350 million acres of 
farm ground in the United States could repeat that, that would 
be about 70 million tons of carbon per year that could be 
sequestered. That is roughly about five percent of the 
greenhouse gas emission total in the United States So, it could 
be very significant.
    Also, here is my 1099 for agriculture payments, which I 
even hesitate to show you, but for last year it is $86,226 on 
little over 850 acres. So, I appreciate that. Keep those cards 
and letters coming.
    We didn't have to do anything special. There was no strings 
attached. I could have plowed 20 inches deep like some are now. 
I think the LDP Program is encouraging oxidation of carbon 
because you have nitrogen and other things left when you 
oxidize soil organic matter. I had no strings attached I could 
lose thousands of tons of soil of off our farm and thousands of 
tons of carbon.
    So, we do have an opportunity, I think, to change what we 
are doing. I don't think farmers would resist. We appreciate 
the taxpayers for providing us some help in these hard economic 
times, but maybe we owe them something back. I think what we 
can give them back is an improved environment, better air, 
better water and better soil for our grandkids, i.e., 
sustainability!
    So, I do think we know how to do this. We have a book by 
Lau and others. We know how to sequester carbon at the 
scientific level. We don't know quite how much, but it really 
doesn't matter how much, as long as we are doing it. I think we 
can get tied up in really sophisticated details on quantity 
when there are so many secondary and tertiary benefits to 
having carbon in the soil, that the quantitiy is not all that 
important.
    Corn is a wonderful crop. It is a CiFor crop, which is a 
good carbon sequester. An average corn crop of 150 bushel would 
sequester about 11,000 pounds carbon/acre. An average soybean 
crop sequesters about 3,000 pounds. Where is the best place to 
grow corn in the world? The Corn Belt. Where is the best place 
to grow soybeans in the world? Probably Brazil.
    But we have a long-term advantage because we can grow 
better corn and sequester more carbon, improve our soil and we 
can use some of the extra photosynthate for bio-fuels, ethanol 
and even electricity. So, we have a long-term advantage.
    I think the government needs to be involved. They have to 
be the gatekeeper. First we have to have a value placed on 
carbon. We have FSA and NRCS in nearly every county. FSA can 
administer the program. NRCS can educate and affirm that the 
practices are being done.
    So, we have to set a price. I think $100 a ton is a pretty 
good value. You are not going to move the farmer for less than 
$20 or $30 an acre. He is not going to do it for any $4. It is 
a change in their whole operation. It takes a lot more 
management.
    So, we really have to have some government, subsidy for 
carbon. There are a lot of other benefits to that. I really 
don't think private trading will work very well, CO2 is not 
like sulfur dioxide, where these people all work together in 
the same industry segment.
    The four million farmers out here have no linkage with all 
the emitters. If you put too much into getting that linkage 
together, that is going to take the value out of the carbon at 
the farm. That is the important issue there.
    So, my recommendations are really to: No. 1, aggressively 
fund carbon research and measurement. I know there is a meeting 
here tomorrow on that. No. 2, set a price for carbon and make 
it high because there are other benefits to having carbon in 
the soil.
    No. 3, we would get paid based on crop yields, which we 
turn in anyway to FSA. We can also base it on the climate and 
really on the amount of tillage we do. The more you reduce 
tillage, the less carbon you release into the atmosphere.
    No. 4, it is and should be a voluntary program. If I chose 
to grow mung beans, it takes me a little bit more time and 
effort and I get a little more money, I can chose to do that. 
If I chose to grow corn and get subsidized for carbon, to put 
carbon in the ground, that is voluntary.
    I think we have a unique opportunity now in agriculture and 
with your committee and the farm bill that, to me, our kids 
would say ``it is a no-brainer.'' We have the opportunity to 
not only maybe switch some of the subsidies that have no 
strings attached, to start putting a few strings attached to 
them which would improve the enviroment.
    If you want us to sequester carbon, put a value on carbon. 
If you are going to give us this money, we are going to have to 
improve the environment, which is the air, the water and the 
soil. We really can change, but it is not going to be easy, 
because tillage is part of agriculture. It is almost a religion 
to some.
    It is going to be hard for a lot of people to make that 
change. But if there is enough incentive to the landowner who 
owns the land, I think that it will slow the consolidation that 
we are seeing in agriculture, because the big consolidated 
farms have a hard time managing a good no-till or reduced till 
operation.
    I thank you for the opportunity, sir.
    [The prepared statement of Mr. Jim Kinsella can be found in 
the appendix on page 128.]
    The Chairman. Well, thank you very much, Mr. Kinsella, for 
your observations from your personal experience. It is 
extraordinary helpful to all who are interested in this hearing 
or watching the televised part of it. I appreciate your coming.
    Mr. Bonnie. 

 STATEMENT OF ROBERT BONNIE, ECONOMIST, ENVIRONMENTAL DEFENSE, 
                         WASHINGTON, DC

    Mr. Bonnie. Well, I appreciate the opportunity to be here 
today. My name is Robert Bonnie. I am an economist with 
Environmental Defense, a national nonprofit environmental group 
that promotes science-based economically sensible solutions to 
environmental problems.
    On the issue of climate change, we have long advocated cap 
and trade programs, also called emissions trading to harness 
the power of market forces to meet air pollution targets in a 
cost-effective manner.
    Of most relevance to today's hearing is that markets 
provide a significant opportunity for landowners to profit from 
activities that generate greenhouse gas benefits.
    Specifically, as part of the upcoming farm bill, we hope 
Congress will consider legislation that spurs the interest and 
participation of the agricultural and forestry sectors in 
environmental markets by providing landowners with grants to 
assist them in undertaking carbon sequestration projects.
    Under a greenhouse gas cap and trade system, landowners may 
one day be paid for activities such as carbon sequestration 
that produce real verifiable greenhouse gas benefits. Those 
payments will come not from the government, but from the range 
of industrial sources subject to greenhouse gas emissions 
targets. Clearly, no such market exists today, especially in 
light of President Bush's recent reversal on regulating carbon 
dioxide emissions from power plants.
    However, given the overwhelming scientific evidence for 
global warming, there is a high likelihood that United States 
industry will one day be subject to such caps.
    By developing markets for greenhouse gas offsets today, 
farmers may well stand to profit tomorrow.
    I want to concentrate today on carbon sequestration. 
Combustion of fossil fuels is the primary source of 
anthropogenic greenhouse gas emissions. However, often lost 
from the debate is the significant role of land use activities 
in the global carbon cycle.
    The Inter-governmental Panel on Climate Change estimates 
that land use activities, particularly tropical deforestation, 
account for approximately 20 percent of global anthropogenic 
greenhouse gas emissions.
    In short, the land use sector is part of the problem, but 
it can also be part of the solution.
    Through improved land management practices farmers can 
remove carbon dioxide from the air and increase the storage of 
carbon in plants and soils. In so doing, farmers could earn 
carbon credits in a variety of ways, by reforesting marginal 
agricultural lands, by bringing land under conservation 
tillage, just to name a couple.
    In addition to the climatic benefits, these activities 
would have significant potential co-benefits such as erosion 
control, wildlife conservation and restoration of native 
forests.
    While many United States landowners are very familiar with 
conservation tillage, reforestation and other sequestration 
practices, they have little experience with measurement and 
accounting systems that will be required for carbon 
sequestration markets to work.
    Indeed, markets for land-based carbon crediting are in 
their infancy and there is little practical experience for 
policymakers and landowners to draw upon.
    The Federal Government can play a very valuable role both 
in jump-starting the market and in developing on-the-ground 
experience in carbon crediting by providing landowners with 
grants to develop measurement, verification and reporting 
systems.
    A grants program could also afford an opportunity to 
examine questions relating to leakage. That is ensuring that 
carbon sequestration activities that result in reduced yields 
of crops don't simply shift greenhouse gas emitting activities 
to other properties.
    Permanence is another issue that should be assessed. Carbon 
sequestration is reversible, meaning that carbon stored in 
soils and plants can later be released as a result of altered 
land management practices or natural disturbances. While this 
issue is often cited as the most difficult obstacle confronting 
carbon sequestration markets, it should be relatively easy to 
develop crediting systems that account for the potential 
reversibility of carbon stocks.
    Besides developing crediting systems that ensure real, 
verifiable greenhouse gas benefits, the government should also 
ensure that the crediting of land use activities doesn't lead 
to perverse environmental outcomes such as encouraging 
conversions of natural ecosystems.
    Such a grants program would provide landowners with greater 
insight into the potential profitability of such markets. For 
policymakers, this effort would also shed light on the utility 
of land-use crediting as a solution for addressing climate 
change.
    Thus, it is important that any effort under the farm bill 
provide an opportunity to evaluate and learn from the projects 
funded by the grants program.
    Some who question the science surrounding climate change or 
who oppose the Kyoto Protocol might argue that any discussion 
of carbon credits is the proverbial camel's nose under the tent 
with regard to future regulation of greenhouse gas emissions. 
This is unfortunate.
    Everyone can agree that there is a reasonable possibility 
that the government will at some time act to restrict 
greenhouse gas emissions. Many corporations, for example, 
increasingly recognize that they may one day operate in a 
carbon-constrained world and they are taking meaningful steps 
to respond to this possibility.
    Increasing our knowledge of sequestration crediting today 
will provide important insight into future discussions of 
policies to address climate change. It will also provide an 
insurance policy against the future risk of climate change.
    The investments we make today in learning more about 
solutions like carbon sequestration could pay important 
dividends when the United States decides to seriously confront 
climate change.
    Thank you very much.
    [The prepared statement of Mr. Bonnie can be found in the 
appendix on page 132.]
    The Chairman. Thank you very much, Mr. Bonnie.
    Mr. Fiedler. 

 STATEMENT OF JEFF FIEDLER, CLIMATE POLICY SPECIALIST, NATURAL 
           RESOURCES DEFENSE COUNCIL, WASHINGTON, DC

    Mr. Fiedler. Thank you, Mr. Chairman, for your invitation 
to testify today.
    Before I start, I would like to briefly thank Senator Leahy 
for his comments earlier on President Bush's recent policy 
decisions on the environment, which obviously greatly alarm 
NRDC.
    Issues we are discussing today are still important, 
however, despite President Bush's rejection of the Kyoto 
Protocol and domestic power plant emission controls. First we 
have heard that projects are moving ahead in anticipation of 
greenhouse gas controls.
    These projects need guidance so that they answer the 
questions and concerns that have been raised here today on this 
panel.
    Second, we can and should implement domestic legislation, 
even in the absence of an international treaty. Global warming 
is a serious problem. It is time to move beyond the voluntary 
programs that we have had for the last 10 years during which 
United States emissions have risen over one percent per year.
    NRDC believes that the agriculture and forestry sector has 
the potential for a positive role in addressing the serious 
problem of global warming. In addition, projects in these 
sectors can, if implemented properly, have other environmental 
and rural development benefits.
    The first point I would like to make, however, is that 
environmental trading is only one of several ways to provide 
incentives to farmers to reduce greenhouse gas emissions. 
Direct payments or tax incentives for landowners are other 
viable approaches, which may avoid some or all of the problems 
of trading and may also fit better within current domestic 
agriculture and forest policy.
    NRDC has endorsed environmental trading in many 
circumstances, including a cap and trade system for CO2 
emissions from power plants. We are not opposed in principle to 
trading. Despite this, we have concerns about offsets or credit 
trading programs in the agriculture and forestry sectors.
    First, tradable greenhouse gas credit should only be 
awarded for real emission reductions. Second, the availability 
of such credits should strengthen, not weaken, the overall 
target of the trading system into which credits might be sold.
    Third, activities should only be eligible if they have no 
negative environmental and ecological effects. These concerns 
are widely shared by environmental organizations at the 
national, State and local level.
    Given these unresolved questions, NRDC opposes including 
these sectors in a greenhouse gas trading program unless strong 
rules can be developed and put in place. This supposition 
applies both domestically and internationally.
    Let me talk first about the need to ensure that credits 
represent real emission reductions. It has not been 
demonstrated that tradable credits can be produced in the 
agriculture and forestry sectors with a level of certainty 
sufficient for these credits to be used in an energy sector of 
a carbon trading system.
    Certainty is not just an issue of whether we can measure 
agricultural soil carbon with the same accuracy as power plant 
emissions, although this is an important question. Certainty is 
a broader requirement that if two emission reduction units can 
be traded, then the atmosphere must have actually seen the same 
benefit for those two claimed reductions.
    This certainty requirement is difficult to meet in the 
agriculture and forestry sector.
    There are four main reasons that I want to address today.
    The first concern is that credits may be awarded for 
activities that do not go beyond business as usual practices 
that would have happened anyway and that these credits 
therefore do not represent real additional emission reductions.
    The second is that activities that cause emissions could be 
shifted to land areas not enrolled in an offset trading 
program, undoing the benefits of activities on the enrolled 
lands.
    Third, carbon sequestered for credit may not remain 
permanently on the land. In the event of planned or 
unanticipated losses of carbon stocks, the trading system rules 
may not guarantee that a agriculture sector credit is 
ultimately equivalent to a fossil fuel emission reduction 
credit.
    Finally, forestry and agriculture credits may not meet the 
same measurement accuracy as reductions in other sectors.
    I am going to focus on the need to go beyond business as 
usual to other concerns that I address more fully in the 
submitted testimony.
    Forestry and agriculture trading systems should not award 
credits for practices that would have happened anyway. If 
credits do not represent reductions below business as usual 
activity in the agriculture sector in that power plants and 
other sources that will purchase credits will emit more than 
their cap while there is no offsetting real emission reduction.
    The practical implementation of the requirement to go 
beyond business as usual activities is that offset projects 
need to be evaluated against a hypothetical baseline, which is 
based on projections of future activity.
    Developing this BSE line takes time and effort, which adds 
to the cost of projects. It also introduces a major source of 
error in estimating the credits because projected baselines are 
technically subjective.
    There is just simply no right way to develop these 
baselines. It is also important to note that both the buyer and 
seller of credits have the same incentive to justify a baseline 
that maximizes the number of credits awarded.
    The so-called moral hazard problem requires careful third-
party evaluation.
    In summary, project-based trading inevitably involves some 
tradeoffs between the accuracy of the estimation of credits and 
the associated transaction costs, combined with the realization 
that even the most exhaustive analysis will have considerable 
uncertainty.
    NRDC does not want to place unrealistic hurdles in the way 
of a policy proposal that may have real environmental benefits. 
Unfortunately, the experience to date with project evaluation 
in the forestry and agriculture sector has been fairly ad hoc 
and there are not acceptable off-the-shelf evaluation methods 
for credits.
    Individual companies and other organizations have 
implemented dozens of pilot projects both internationally and 
domestically, but for the most part the evaluation methods used 
have been unique to each one. There has been little comparative 
testing of these methods.
    I have to respectively take issue with a statement in Mr. 
Kaster's testimony from AEP that ``experts have determined the 
project can be accurately quantified.'' I simply don't think 
that that expresses the consensus view of experts in this 
field. Perhaps as represented in the IPCC Special Report on 
Land Use Change in Forestry which highlights major 
methodological gaps.
    It is also important, as I detail in the submitted 
testimony, that the presence of agriculture and forestry 
trading strengthens the overall target of a domestic system 
into which credits will be sold and doesn't weaken it.
    Finally, preventing negative environmental and ecological 
effects is also an extremely important criteria for any trading 
program.
    In conclusion, NRDC has several concerns with greenhouse 
gas emissions trading in the forestry and agriculture sectors.
    Chief among these is the difficult in ensuring the project-
based credits represent real emissions, that credits may not 
represent permanent climate benefits, and that benefits could 
be lost outside project boundaries.
    In addition, we oppose using offsets to weaken the overall 
target in a greenhouse gas trading system. At this point, NRDC 
does not believe that rules can be written to address all these 
concerns. We therefore do not believe that a responsible offset 
system can be implemented.
    Given the potential benefits to the climate, landowners and 
other participants in the trading system, however, we do 
believe it is worthwhile investigating possible rules in the 
context of a rigorous pilot program that does not yet produce 
tradable credits.
    At the same time, we believe that other viable policy 
approaches, including direct payments and tax incentives should 
also be explored and may hold more promise for quick and 
successful implementation.
    Thank you for your time today.
    [The prepared statement of Mr. Fiedler can be found in the 
appendix on page 136.]

    The Chairman. Well, thank you, Mr. Fiedler. I appreciate 
your specific testimony, which has been carefully thought 
through. It poses the proper skepticism toward what I would 
clearly say is the bias of this Chairman and his committee, 
that we want to make headway in this area.
    You have certainly drawn up a number of thoughts we have to 
have in our enthusiasm. Let me just say as sort of a cosmic 
comment, and I really don't want to discuss, because I don't 
know the entire basis for the President's decision on Kyoto, 
but I think a capsule idea is that before the Foreign Relations 
Committee last year our State Department negotiator at the last 
round, and it escapes me where it was held, but, in any event, 
we were trying to think through with him the position of the 
United States as we approached once again our Kyoto partners 
there.
    The whole idea of sequestration of CO2, and perhaps other 
things, but that was one on the minds of many people, came 
forward in that situation and in fact became a large part of 
the State Department's bargaining position as to how our 
obligations could be met.
    It was not perceived that you could get all the way, but 
nevertheless, there was considerable progress. I commended that 
point of view because I indicated, just simply as a curbstone 
opinion in terms of domestic politics, that it probably assured 
that the State Department and those that are opposing this 
might enlist a domestic constituency who might find this to be 
very valuable.
    There are many arguing for the Kyoto position who have not 
really thought about the politics about how the Senate of the 
United States might ever vote for such a treaty. The last vote 
we had was 95 to 4. They were opposed to the idea of proceeding 
until a number of things occurred, including China, India, and 
other countries categorized as under-developed also coming up 
to the bar and thinking through these situations with us.
    I would say politically, until the Chinese, the Indians and 
others are a part of this situation in Kyoto in one form or 
another, it is not even going to be discussed seriously as a 
treaty before the Congress.
    But as one who is sensitive to where we might head, I was 
suggesting that there were some possibilities here even while 
we are waiting for China and India and the rest. One of them is 
in this area. It comes with good agricultural practices, people 
who value conservation of our natural resources, generally, and 
want to move in that direction.
    So, I was sad as we were at that meeting, our European 
partners thought very little of this idea. In part, they 
indicated you folks are just getting off too easily. Well, what 
we really want to see is some economic anguish and you folks 
have had it too good for too long and it is time you suffered 
in the process. So, don't give us all this hokum about formulas 
and measurements and so forth.
    Now that puts it in language which is unlike the French or 
the German or whatever was spoken, but that was the gist, as I 
gather it, as I visit with these diplomats and I see them 
regularly and they come into here, the foreign ministers of 
almost every country. We often discuss these things.
    So, as a result, we didn't make a whole lot of headway. I 
thought that was too bad, but that is not to discourage this 
committee. This is why we are having another hearing and trying 
to think constructively. What do we do as Americans?
    I think each of you have expressed that in a way. Even if 
the rest of the world or the Kyoto Treaty or a climate change 
treaty doesn't come to fulfillment, in terms of our own 
conservation practices, our own environment, our own farm 
income, our disposition to move toward market solutions as 
opposed to large Federal payments in whatever form, whether 
they are called emergencies or income supplement or what have 
you, annually, it is on a constructive tact.
    I simply mention that because I was encouraged by what you 
had to say, Mr. Kadyszewski. You at Winrock believe you are 
actually able to measure something. I was curious because as I 
read through your testimony and I am not familiar with your 
methods but can you describe for lay people what kind of tools 
you have? Obviously, you don't put a stick in the ground or 
something as crude as that. But what do you do? How can you 
tell?
    You talked about tables, but then also actual measurement. 
So, if you were a corn farmer and you approached Winrock and 
said, ``I would like for my operation to be measured if I do 
certain things,'' how would you go about that?
    Mr. Kadyszewski. Well, most of the measurement experience 
that we have, as I mentioned, has been in forestry and 
agroforestry systems. The techniques we are using aren't magic 
and I almost shouldn't describe them as our techniques because 
it is a scientific consensus amongst the forestry community 
that you can in fact measure trees with a high degree of 
accuracy. People have been doing it for a long time.
    So, the technique you use in that case is you identify 
permanent plots. So we geo-reference the plots so we know where 
they are so we can come back to them five, ten, fifteen or 
twenty years in the future using a GIS system.
    We measure the aboveground biomass, trees, with a DBH tape 
that you wrap around the tree at what is called mean breast 
height diameter. For the under story, we have a ring that is a 
quarter square meter ring. You clip all the vegetation in that 
plot. You weigh it and you determine the carbon content.
    For the dead wood we use what is called the line intersect 
method where you have a string that you lay across your plot in 
a particular way and you count the number of pieces of dead 
wood that it intersects and you weigh them.
    For the soils, we dig soil pits in our plots. You dig four 
separate soil pits so that you can commingle the soils because 
one of the difficulties in measuring soils is the higher 
variability that you find within forest sites.
    So, these are standard measurement techniques. What is 
important is that people agree on them because if there are 
lots of different ways of doing it, you create uncertainty. 
What you want to do is be able to have a set method so that it 
can be transparent, and replicable. When someone else wants to 
question measurements say, a buyer or a seller's 
representative, you want both to come up with the same 
measurement.
    If you are an independent organization interested in 
environmental purposes or other purposes, and you come in and 
take measurements, you also want the measurement system to be 
transparent so anyone who comes in and wants to question 
whether the carbon was there can redo it and find that the 
measurements are within the predicted level of accuracy.
    So, when I use the 95 percent number, I think that is 
pretty good. I think that is a level of accuracy in measurement 
that is able to be sold and can be achieved at a reasonable 
cost.
    The Chairman. Your first measurement, you had a baseline 
the first time you go through measuring the tree.
    Mr. Kadyszewski. Or the soil. If you were talking about a 
cornfield, for example, it would depend on what the practice 
was.
    The Chairman. But you would have to start this year. At 
this point I do not really know what is happening. But you sort 
of give me a baseline. Then one or two years later, at what 
interval is it reasonable to take a look at this again and see 
what developments have occurred that would lead you to this 
estimate?
    Mr. Kadyszewski. That would vary by project type. If you 
are in a forestry project, you can detect changes every year. 
You might not want to measure as frequently as every year, 
because there is a cost there. But you can use an estimate and 
come back.
    We usually talk about measuring at the one-year, the three-
year to make sure you have it right and then five, ten, and 
twenty. Once you establish a curve, you can predict performance 
and then verify at the end of the period that you actually 
achieved it.
    Now, when we are talking about soils it is a little 
different because soils have much smaller changes over larger 
areas. So, it is very difficult, especially given the 
variability in soils, to detect changes from year to year.
    If you want to look at a soil measurement, you are probably 
talking about five years out to get a good comfort level on 
that change level.
    That is why the cost of soil measurements, that and the 
need for digging, is more expensive.
    We are constantly looking at new methods. We think there is 
some work on development of soil measurement techniques going 
on right now through USDA with Los Alamos Labs where they are 
using a portable probe. So, instead of digging a hole, you can 
push the probe in the ground and oxidize the soil onsite and 
take hundreds of measurements over an hour's period and really 
deal with the variability problem in a much more cost-effective 
manner.
    So, we see in the soils area new techniques coming down the 
road that will reduce costs for soil measurement and provide 
the same level of accuracy and precision that we now achieve.
    But right now, the biggest problem in the soils world is 
that people don't agree on what methods to use. So, you go in 
and use one person's method and somebody will say, well that is 
the wrong one. You should have done it this way. Then you have 
no transparency and comparability. So it discourages investors 
from doing those kinds of projects.
    The Chairman. Now, all of this, just looking at the 
timeframe, means that some time has got to pass before you can 
verify that you have something to sell. Granted that buyer and 
seller agree on the quality, but a year or two or three have to 
pass before there is some commodity to sell at the market. Is 
that a fair characterization of this situation?
    Mr. Kadyszewski. Yes. For a tree, you would need a year 
before you would have a clear measurement signal that you 
actually achieved your target.
    The Chairman. That has to be understood. It is not like the 
bushel of corn where you can get a futures price today on the 
Board of Trade. This is a market that has some time lines in it 
that are substantial because with the nature of the growth of 
the trees, as you say, or the changes in the soil or what have 
you.
    But still, you try to establish values that have some 
agreement.
    Mr. Kadyszewski. You look to real examples. You look to the 
experience of people like Mr. Kinsella who said, ``I have done 
this for 26 years and here is what I got.''
    The Chairman. Well, he made a measurement of the soil 20 
years ago or so, in the story that you gave, and found some 
unfortunate trends in that. Then you went to a no-till practice 
for 20-some years.
    Describe again what you measured and how do you know that 
this happened?
    Mr. Kinsella. When I did come back my father had not tested 
the soil for a long time. I was up on the latest procedures. We 
took samples to seven inches. The procedure at that time was 
not GPS, so we could not geo-reference them. But we took 11 
samples for 40 acres, which was the standard practice.
    We did send it to A&L Labs in Indiana for the Walker Black 
test, which, at that time, was considered the standard organic 
matter test. I just wanted to know what the organic matter was. 
I really didn't realize that I could change it.
    We didn't take a sample again until about 1987, about 13 
years later. I saw our soils changing. They were getting a lot 
darker. We tried to get back to the same area at that time and 
sent it to the same lab. They had increased remarkably at that 
time.
    The curve kind of does level off. The first 10 years you 
are going to increase the most. It does level off. Carbon in 
the soil is kind of like water in the bathtub. You can probably 
get it down to 40 or 50 percent of its original level. Then you 
can bring it back up. It might take 20 to 40 years, but you can 
hardly run it over because it will only hold so much based on 
the climate.
    The Chairman. That is what we have been hearing today in 
the testimony, the saturation effect. Someone suggested 20 
years, but it may be less than that.
    Mr. Kinsella. Ours actually is leveling off now. The last 
test was just slightly above the previous one. We have found a 
GPS now where we do take more samples. But this is a pretty 
good estimate. We were just fortunate to have that opportunity 
to have that data that was on the same 440-acre farm. It is not 
all a farm, but this is the base home farm that we tested and 
it is the same area that was sampled. You know, I wasn't in the 
exact same spot, but I think it is a pretty good indication.
    I believe originally there was 118 samples and the last 
time, because we are more concentrated in two and a half acre 
grids, there was something like 144.
    But I think it is a pretty good indication of what 
happened. But now we can't wait 26 years for somebody to just 
start doing this. That is the problem right now. There are not 
many fields that are that long of no-till basically with that 
kind of a record.
    The Chairman. Now, you believe that this carbon 
sequestration led to the organic matter changing. I think you 
said it went from 1.9 percent to 4.0 or so.
    Mr. Kinsella. It was not necessarily. It was that we 
stopped tilling.
    The Chairman. That was the major feature.
    Mr. Kinsella. By adding air with tillage we oxidize the 
organic matter. Of course, the other thing that is vulnerable 
now, as I understand it, the new organic matter that has been 
sequestered is more vulnerable to oxidation. So, if I would go 
in there and till now, I could really lose a lot of that.
    I think that is what has happened to our CRP ground. In our 
CRP ground, we had a ten-year program, put it in grass and we 
sequestered a lot of carbon. Now people are plowing that 
because with organic matter, it is 50 percent carbon and about 
5 to 10 percent nitrogen. That is basically free.
    When you oxidize the carbon by adding air with tillage, the 
CO2 goes off in the air and it leaves the other stuff there, 
the nitrogen, the sulfur and the phosphorus, basically free 
elements. What we have been doing in this country is mining our 
organic matter so we can live off of the other nutrients.
    That is the issue, why you have to have retribution or 
carbon sequestration because I could save mine for 25 years and 
somebody could come in and rent this ground away from me and 
take all the advantages. Then the air would be the same.
    To me, carbon is like money in the bank. When we put money 
in the bank, we get a return on that. They give us interest. If 
we take it out, there is a penalty. With carbon it has been the 
other way around. If you put carbon in the bank we actually get 
penalized because there is more management and we have to add 
some nitrogen to get to these levels.
    We used alfalfa as our nitrogen source in our set-aside 
program. If you have to buy it in town now, at $400 a ton, it 
is getting very expensive. So, there is a penalty for putting 
carbon in the bank and there is a benefit for taking it out. 
That is why you have to put a value on carbon.
    We have to have a gatekeeper on the money. Alan Greenspan, 
if you get too many savers, he lowers the price of savings.
    The Chairman. Maybe one or two of you pointed out about the 
gatekeeper aspect and the retribution. You know, this is a part 
of some policies now. Anecdotally, with my own farm, the 
portion that is in the timber improvement stand under the 
natural developments in Indiana, there is a lower tax rate on 
that.
    But the thought is that if you change your mind, cut the 
trees and build houses or what have you, then you must pay all 
the taxes from that point on back. It is recaptured by Marion 
County in the State of Indiana.
    So, you are not obligated as a landowner to keep the trees 
there forever. But, nevertheless, you are getting benefits in 
terms of a tax cut all the way through because this is deemed a 
hindrance to society and so forth.
    But, if you kick that away, then you need to pay for that. 
So, I think that is an interesting problem as we try to gauge 
these markets, how we do that. Now some of you said it is not 
impossible, and that is probably right. But it takes some doing 
as opposed to a simple commodity sale.
    Your past experience is very important in that.
    I will listen to all of you opining on the benefits of this 
and the fact that benefits can occur. As you pointed out, you 
are not opposed to doing a pilot project to see what extent 
some of this might work out.
    You are sort of cautioning against wholesale enthusiasm, 
which is probably prudent to do. You probably studied what 
Winrock is doing, or others, in terms of these measurements. 
What comment do you have about that?
    Mr. Fiedler. Well, the comment I would make, I think, is 
what I tried to allude to in my testimony, that measurement is 
not the only issue. I agree that methods are being developed 
where we can measure with a pretty high degree of accuracy, 
though possibly high cost, what is currently in the soil or on 
the land.
    The problem comes in the fact that you are trading these 
credits from individual projects one a one-to-one basis for the 
emission reductions in the energy sector. If we give credit to 
people for things that they were doing anyway, then you are not 
actually achieving an emission reduction.
    So, the analytical problem that, to my knowledge, no one 
has really solved, is what is a practical way to tell if 
someone is going beyond business as usual and should therefore 
be rewarded with a real credit. That is not a measurement 
problem. It is a projection problem. It is a baseline problem. 
It does not have an easy solution.
    The Chairman. Let me just query this part of it, though. 
This is just a part of the forest. Let us take my trees out 
there. Let us say I took a tape around them at chest level and 
sort of demonstrated something had happened with those trees. 
Granted, they are there. So, I can say business as usual. I 
have already said I am obligated to save Indiana to keep those 
trees there. They continue to grow.
    On the other hand, conceivably, they are doing something 
with regard to sequestration. In other words, isn't it a 
question of trying to find this baseline to begin with where 
you start out on the project, which may be with a forest 
sitting there or it may be with nothing. Then you put seedlings 
in and have a go at that.
    Maybe if you have been in no-till for a while you would not 
encourage somebody to quit so they could then startup again. In 
other words, I think as a practical matter we need to accept 
good conservation practices where they are occurring, because 
some of our early takers in the system may be people who are 
already with it in the system. They understand conservation and 
are enthusiastic about that.
    Mr. Kinsella is sophisticated about some of the effects of 
CRP after a while, which all of us ought to be mindful of. We 
are about to renew that again or extend it or determine the 
criteria, conservation-wise, as to how somebody makes a bid.
    Please proceed.
    Mr. Fiedler. Well, I think the questions that you are 
raising are exactly the problems that need to get dealt with in 
setting that baseline or determining what business as usual is. 
I would love to give credit for every farmer or every landowner 
who is helping to keep carbon out of the atmosphere.
    I think there are ways to do that without having to provide 
them a tradable benefit. The problem really is introduced for a 
lot of these concerns by the desire of some people to trade it 
with an energy reduction.
    To put a number or a scale on this problem, the United 
States land base is currently sequestering carbon, you know, as 
we proceed without domestic greenhouse gas policy in that 
regard.
    If we were to give people credit for that, I mean they 
deserve some reward, but if we were to give them a tradable 
credit, there are tens or even hundreds of millions of tons of 
carbon every year projected to be sequestered.
    If that were to flow into a domestic trading system for the 
power sector, you know the number I came up with in my written 
testimony was that emission reductions from a domestic power 
plant trading system might be 150 million metric tons of carbon 
equivalent in 2010.
    If we would then give 100 million tons of credit, from what 
is happening on the land base, we have essentially gutted that 
power plant legislation.
    The Chairman. I accept your point of equity and that is a 
very important point. I would not, however, rule out the 
trading with the power companies yet any more than we were 
trying to think earlier how you have some alliance with the 
coal people.
    In other words, we have a number of people out here in the 
American economy who at one point or another will have to be 
supportive of a general policy of reduction of emissions that 
we want.
    So, this has been one way of integrating some interests 
that are confluent. As a philosophical purist, you might say, 
well, not to be giving too much reward to polluters or people 
who are doing things they should be doing any way and maybe 
not.
    This is a practical exercise. When you get into trading, it 
could be, as you say, maybe another way of handling it is 
through government grants, something through the ARS system or 
whoever we have out there in the field that knew this.
    I am excited about this because one of our earlier hearings 
on conservation brought forward from my own State some of the 
soil and water people. They brought to my office a week ago 
some software and a slide presentation of my farm. It was not 
just a project in which they went out to find the Lugar Farm. 
They had done all the farms.
    The soil surveys are pretty well complete, likewise the 
elevations. But in any event, in various overlays they showed 
me what they can take out on a laptop and put in the back of a 
farmer's truck in trying to demonstrate, whether it is the EQIP 
Program or something else, what the benefits are, in fact even 
write a contract or print one more accurately that tells him 
what the cost share is and what he can get to sign up while he 
is out there. This changes the equation a whole lot in terms of 
the visits by the farmer, the time measurement and all.
    At this point in most States we have very accurate 
measurements of the fields. This was the case with my farm. The 
old aerial photography when we used to plow up and so forth 
have been taken over by much more accurate lines and 
measurements. Likewise, all of the elevations, the soil types, 
they were able to give me an overlay of the anticipated yield I 
would get from my corn crop on each of the acres there. It was 
interesting. It may be accurate or not. I don't know.
    This was without benefit of my feeding in data. But they 
had done enough work with the soil, the drainage, the nature of 
what I have there.
    So, this leads me to believe that we are getting a data 
bank now in American agriculture that is substantially 
different even than five years ago and much different from the 
first aerial photography that is a part of the conservation 
file for my farm from the 1970's and so forth onward.
    I am sure all of you have had this experience, too, because 
you are in this business all the time. Is it encouraging in 
terms of both measurement as well as equities that we have this 
kind of data and in terms of presentation to actual farmers and 
landowners, does this give us a jump on things or is it simply 
another program and beside the point?
    Mr. Kadyszewski. First, I would make a comment on your 
trees on your farm, on the availability of data. This has 
really changed in the last two years. There is a massive amount 
of digital information coming on line on a whole variety of 
subjects, including the compilation of the forest inventory 
plots and the soil inventory plots. But the watershed 
information, hydrologic information, rainfall overlays, 
ownership, tax assessment values, currently in use, all these 
things can be pulled down, if you know where to look, off of 
various Web sites.
    The National Wetlands Inventory, Gap analysis, national 
assessment State by State of bio-diversity values on a local 
level. That kind of information allows you to have a lot more 
confidence in designing a measurement program. So, the reason 
that we are able to achieve 95 percent precision in the United 
States at what we think are low costs is because you have this 
background data out there that allows you to do your 
statistical sampling with some rigor using the variability that 
is already out there from the measurements that have been taken 
by the government.
    As the Forest Service and the Soil Inventory switches over 
to the new methods they are now introducing, that is only going 
to get better over time.
    In this particular area where you have a problem that is 
not going away soon, 10 years from now the amount of data and 
the accuracy of that data is going to so far exceed what we 
have today that I do not think measurement and accuracy is 
going to be a problem in these kinds of situations.
    To address the baseline question of your farm, well, if you 
called us and said I would like to measure carbon for benefits, 
we would say, ``Well, you are probably not eligible for any 
benefits for your farm.''
    We would say we would not want to measure it because your 
farm is there and under the current tax situation that you 
described, you have agreed to keep it in trees. So, any carbon 
that was accumulated in your trees is business as usual.
    The Chairman. That was Mr. Fiedler's point, that 
unfortunately, I have already made my bed.
    Mr. Kadyszewski. You have already made your bed. You could 
change practice on your land. You could say, ``Well, gee, I 
want to have more carbon on my land, so I want to change what I 
am doing now to increase the storage rates that I could get.''
    Then we would talk about, OK, what practice are you going 
to change, and measure that. We usually monitor the baseline. 
We don't just start with that initial inventory. We also set up 
a parallel plot in a similar system that will not be changed. 
Then we compare.
    If you had two different pieces or land, or even the one 
piece and you wanted to make a change, we would find a piece of 
land similar some place else that wasn't being changed and 
track that to have a base line.
    The Chairman. Well, I appreciate very much your indulging 
all these detailed questions, but I think they may be of some 
value as people take a look at this hearing record will 
understand that we are trying to get to the nitty-gritty of how 
we either take action in the farm bill or set forward at least 
some guidelines for someone who is interested in this in the 
energy bill to do something about it.
    I suspect that the time is right, really, for some 
thoughtful, constructive action, but we want to be thoughtful 
about what we are doing. It is not that we will make an 
egregious error, but this is an idea whose time has almost 
come. It seems to me it is on the threshold of not only 
additional income for farmers, but very constructive action in 
conservation, which many have been doing like Mr. Kinsella and 
others for quite a while. But in a good number of 
othersituations, not at all.
    It is almost in the same category as the venture our 
committee had last year in crop insurance under risk management 
situations. I think we have devised a remarkable safety net for 
agriculture. But I am not certain how much the word about this 
has spread in agricultural America. It certainly has to a 
number of very sophisticated farmers.
    Given the structure of agriculture, as we all know from the 
Sparks Report and others, eight percent of the farms in this 
country, about 160,000, are doing about 75 percent of the 
business. The impact there would likely be considerable. If you 
can get 85 percent insurance on your crop revenue before you 
even go in the field this year. That is a very substantial 
safety net.
    Yet, at the same time, my guess is we are going to have a 
big debate about disasters, floods, and pestilence, whatever. 
It doesn't matter what hits you, if you have 85 percent revenue 
crop insurance. That is the nature of our discussion here.
    Mr. Kinsella.
    Mr. Kinsella. That is one idea that I didn't mention in the 
testimony that one of the ideas is rather than give a direct 
payment, there is some risk in the transition period. There is 
a potential of losing yield until you get your soils back in 
shape.
    One of the ideas was possibly instead of a direct payment, 
maybe a credit for some crop insurance, some risk insurance. So 
that is something that you might integrate those two programs.
    The Chairman. That is an important point.
    Thank you very much for coming and spending this time. It 
is only 1:25. You have been with us for four and a half hours. 
We are grateful to you.
    The hearing is adjourned.
    [Whereupon, at 1:25 p.m. the committee was adjourned, to 
reconvene at the call of the Chair.]
      
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                            A P P E N D I X

                             March 29, 2001

      
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                   DOCUMENTS SUBMITTED FOR THE RECORD

                             March 29, 2001

      
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