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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

COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

RICHARD G. LUGAR, Indiana, Chairman

JESSE HELMS, North Carolina

THAD COCHRAN, Mississippi

MITCH MCCONNELL, Kentucky

PAT ROBERTS, Kansas

PETER G. FITZGERALD, Illinois

CRAIG THOMAS, Wyoming

WAYNE ALLARD, Colorado

TIM HUTCHINSON, Arkansas

MICHEAL D. CRAPO, Idaho

TOM HARKIN, Iowa

PATRICK J. LEAHY, Vermont

KENT CONRAD, North Dakota

THOMAS A. DASCHLE, South Dakota

MAX BAUCUS, Montana

BLANCHE L. LINCOLN, Arkansas

ZELL MILLER, Georgia

DEBBIE A. STABENOW, Michigan

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)

(III)

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

Page

IV

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

(1)

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.

2

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 approVerDate 11-MAY-2000 11:39 Apr 18, 2002 Jkt 078341 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 78341.TXT SAG1 PsN: SAG1
3

priate 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

4

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 EnvironVerDate 11-MAY-2000 11:39 Apr 18, 2002 Jkt 078341 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 78341.TXT SAG1 PsN: SAG1
5

mental 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

6

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

7

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 fiveminute 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.

8

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 biofuels.

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 biofuels 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.

9

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, Ne- braska 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

10

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.

11

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

12

monetize the value of biomass power electricity, that is the nonelectric 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.

13

[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,

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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 investorowned 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

15

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.

16

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

17

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.

18

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?

19

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.

20

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.

21

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

22

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?

23

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.

24

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 tenyear 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

25

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 conVerDate 11-MAY-2000 11:39 Apr 18, 2002 Jkt 078341 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 78341.TXT SAG1 PsN: SAG1
26

tinues 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.

27

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.

28

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 ‘‘cofiring’’ 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 coalfired 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.

29

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 stateof-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.

30

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.

31

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.

32

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

33

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

34

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 inVerDate 11-MAY-2000 11:39 Apr 18, 2002 Jkt 078341 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 78341.TXT SAG1 PsN: SAG1
35

terests 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 leadin 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.

36

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 costeffective 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.

37

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.

38

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.

39

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.

40

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.

41

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 car- bon 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.

42

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.

43

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.

44

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.

45

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.

46

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.

47

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.

48

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.

49

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,

50

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 environVerDate 11-MAY-2000 11:39 Apr 18, 2002 Jkt 078341 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 78341.TXT SAG1 PsN: SAG1
51

mental 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 impleVerDate 11-MAY-2000 11:39 Apr 18, 2002 Jkt 078341 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 78341.TXT SAG1 PsN: SAG1
52

mented 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.

53

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

54

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

55

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

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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.

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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.

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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

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ized 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

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onstrated 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

61

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

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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.

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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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