U.S. GOVERNMENT PRINTING OFFICE

60–254 CC WASHINGTON : 2000

CREDIT FOR EARLY ACTION: WIN-WIN OR KYOTO

THROUGH THE FRONT DOOR

HEARING

BEFORE THE

SUBCOMMITTEE ON NATIONAL ECONOMIC GROWTH,

NATURAL RESOURCES, AND REGULATORY AFFAIRS

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

JULY 15, 1999

Serial No. 106–37

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BOB BARR, Georgia

DAN MILLER, Florida

ASA HUTCHINSON, Arkansas

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

HELEN CHENOWETH, Idaho

DAVID VITTER, Louisiana

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

CHAKA FATTAH, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

HAROLD E. FORD, JR., Tennessee

JANICE D. SCHAKOWSKY, Illinois

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

DAVID A. KASS, Deputy Counsel and Parliamentarian

CARLA J. MARTIN, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON NATIONAL ECONOMIC GROWTH, NATURAL RESOURCES, AND

REGULATORY AFFAIRS

DAVID M. MCINTOSH, Indiana, Chairman

PAUL RYAN, Wisconsin

BOB BARR, Georgia

LEE TERRY, Nebraska

GREG WALDEN, Oregon

HELEN CHENOWETH, Idaho

DAVID VITTER, Louisiana

DENNIS J. KUCINICH, Ohio

TOM LANTOS, California

PAUL E. KANJORSKI, Pennsylvania

BERNARD SANDERS, Vermont

HAROLD E. FORD, JR., Tennessee

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

MARLO LEWIS, JR., Staff Director

BARBARA KAHLOW, Professional Staff Member

JOEL BUCHER, Professional Staff Member

GABRIEL NEIL RUBIN, Clerk

DAVID SADKIN, Minority Counsel

(III)

C O N T E N T S

Page

Hearing held on July 15, 1999 ............................................................................... 1

Statement of:

Hakes, Jay, administrator, Energy Information Administration ................. 39

Kemp, Jack, distinguished fellow, the Competitive Enterprise Institute .... 11

Ridenour, David, vice president, National Center for Public Policy Research; Fred Krupp, executive director, Environmental Defense Fund;

Fredrick Palmer, general manager and chief executive officer, Western

Fuels Association; and Kevin Fay, executive director, International Climate Change Partnership ............................................................................ 58

Letters, statements, etc., submitted for the record by:

Fay, Kevin, executive director, International Climate Change Partnership:

Letter dated August 16, 1999 ................................................................... 99

Prepared statement of ............................................................................... 89

Hakes, Jay, administrator, Energy Information Administration:

Information concerning methane ............................................................. 58

Prepared statement of ............................................................................... 42

Kemp, Jack, distinguished fellow, the Competitive Enterprise Institute,

prepared statement of ................................................................................... 16

Krupp, Fred, executive director, Environmental Defense Fund, prepared

statement of ................................................................................................... 71

Kucinich, Hon. Dennis J., a Representative in Congress from the State

of Ohio:

Article dated December 23, 1997 ............................................................. 38

Prepared statement of ............................................................................... 4

McIntosh, Hon. David M., a Representative in Congress from the State

of Indiana, prepared statement of ............................................................... 8

Palmer, Fredrick, general manager and chief executive officer, Western

Fuels Association, prepared statement of ................................................... 82

Ridenour, David, vice president, National Center for Public Policy Research:

National Policy Analysis ........................................................................... 60

Prepared statement of ............................................................................... 64

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CREDIT FOR EARLY ACTION: WIN-WIN OR

KYOTO THROUGH THE FRONT DOOR

THURSDAY, JULY 15, 1999

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON NATIONAL ECONOMIC GROWTH, NATURAL RESOURCES, AND REGULATORY AFFAIRS, COMMITTEE ON GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 3:15 p.m., in room

2154, Rayburn House Office Building, Hon. David M. McIntosh

(chairman of the subcommittee) presiding.

Present: Representatives McIntosh, Ryan, Terry and Kucinich.

Staff present: Marlo Lewis, Jr., staff director; Barbara Kahlow

and Joel Bucher, professional staff members; Luke Messer, counsel;

Gabriel Neil Rubin, clerk; David Sadkin, minority counsel; and

Earley Green, minority staff assistant.

Mr. RYAN [presiding]. The hearing will come to order. David

McIntosh, the chairman of the hearing, is running late. We are

going to try and buy some time and wait for him, but we had some

votes a few minutes ago that had thrown everybody’s schedules off,

so I apologize, Mr. Kemp.

I am Paul Ryan, the vice chairman of the subcommittee. I have

got to tell you this is a distinct honor to be sitting here in front

of my former employer talking about this.

Mr. KEMP. It’s my honor.

Mr. RYAN. No, it’s really mine, Jack.

First we will go to the ranking member, Mr. Kucinich, for an

opening statement.

Mr. KUCINICH. Thank you, Mr. Ryan. I want to thank Mr.

McIntosh publicly. I will thank him again when he comes for holding this hearing today.

I support the concept of early action credits. In theory, this type

of proposal would encourage businesses to reduce greenhouse gas

emissions by rewarding them with credits that can be used to make

future required reductions or sold on the market to another business that is not able to make reductions as cost-effectively or efficiently. Early action would encourage industry to reduce emissions

of greenhouse gases now as opposed to 10 or 15 years from now

when the effects become irreversible.

What makes an early action credit even more attractive is that

some of the largest companies in the world, those with the most at

stake, are actively engaging in the process. A credit program protects businesses against the uncertainty of future emission reduction requirements and gives those businesses incentives to act in

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a way that benefits the economy and the environment. Later today

we will hear more about this from Kevin Fay, the executive director of the International Climate Change Partnership, which represents some of the largest manufacturers, refineries and chemical

companies in the world.

Today’s hearing could not come at a better time. On June 29, the

New York Times ran an article with the headline, ‘‘Human Imprint

on Climate Change Grows Clearer.’’ The following week, much of

the company was in the grips of a deadly heat wave which took

over 70 lives. It was just a few short years ago that another record

heat wave in the Midwest killed more than 80 people in Chicago

alone.

Climate change, however, is not just about heat waves. Scientists

have linked the increase in greenhouse gases to the increased frequency and intensity of extreme weather patterns including

droughts, floods and hurricanes. Unfortunately, it seems as though

headlines about the damage, destruction, and human suffering

caused by those events are becoming more and more common. Last

summer’s drought in Texas and the Southwest combined with the

severe drought 2 years earlier was described by public officials as

‘‘the costliest and most devastating the region has seen since the

Dust Bowl years.’’ Researchers at Texas A&M determined that the

1998 drought cost the State’s farmers and ranchers $2.4 billion in

potential income, while the farm-dependent businesses suffered an

additional loss of $8 billion. In Florida last year, fires and drought

caused an estimated $150 million in damage to agriculture. I am

sure you all know that the list of weather-related damage goes on

and on.

We have before us an opportunity to forge an alliance among environmentalist and industry groups, Republicans and Democrats,

and others who support using market mechanisms to reduce greenhouse gas emissions in the most cost-effective and efficient manner.

I support the basis of the Kyoto Protocol. I also believe that reducing greenhouse gas emission and cleaning the air we breathe is

an important domestic policy in its own right. Over the past 30

years this Nation has taken great strides toward a cleaner and

healthier environment. We passed the Clean Air Act, the Clean

Water Act, the Safe Drinking Water Act and a number of other

laws because it was good for the American people, not just because

we signed an international treaty. In fact, just yesterday Senator

Jeffords introduced a bipartisan utility restructuring bill that sets

caps on carbon dioxide emissions. A credit program could be used

to encourage early reductions to meet that bill’s goals.

The U.S. economy is in the midst of the longest peacetime expansion in its history. We have every reason to believe that we can reduce greenhouse gas emissions and keep the economy strong. According to a recent study by the American Council for an EnergyEfficient Economy, the United States was able to stabilize its energy-related carbon emissions in 1998 while continuing robust economic growth. I want to restate that. According to a recent study

by the American Council for an Energy-Efficient Economy, the

United States was able to stabilize its energy-related carbon emissions in 1998 while continuing robust economic growth. Furthermore, total energy used was down last year, even though gasoline

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and fuel prices were falling for much of the year. In other words,

it is possible to control carbon emissions without harming the economy or drastically increasing fuel prices.

We have the unique occasion of being able to address this issue

in a proactive manner as opposed to reacting to the disastrous consequences we may find in the future. Mr. Chairman, we have a

long way to go. There are many different concerns that need to be

addressed before we can enact an early action program. Our distinguished panelists offer many different perspectives and will raise

a number of concerns. I am looking forward to hearing from the

witnesses this afternoon. I thank the Chair for the opportunity. I

certainly want to join in welcoming Mr. Kemp, who I have a great

admiration for, for all of his public-spirited works and for his vision

in working with a whole range of issues that affect this country.

So, Mr. Kemp, welcome.

Mr. KEMP. Thank you.

Mr. RYAN. Thank you, Mr. Kucinich.

[The prepared statement of Hon. Dennis J. Kucinich follows:]

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Mr. RYAN. Let me open with a brief statement that this is an

issue that goes far beyond environmentalism. This is an issue that

goes far beyond cleaning up our air standards. This is an issue that

goes well into the political-philosophical makeup of not just this

country, but the world. The Kyoto Protocol is not just an environmental vehicle. This Kyoto Protocol is becoming a political vehicle,

a political power grab by many under many standards. I am looking very forward to hearing your testimony, Jack, on this issue.

We are going to hopefully hear from a good host of witnesses

today on early action credits, whether or not the devil is in the details. Are early action credits truly free market vehicles toward

achieving ends that are scientifically justifiable or not, or are early

action credits vehicles toward circumventing the U.S. constitutional

process of Senate ratification of treaties, as the Constitution of this

land still requires, the last time I checked? This is something that

is of dire importance and consequence not only to our institution,

our democratic institution, our Constitution, but also let’s look at

the scientific—let’s look at whether or not the science jury is in or

not. I think we have to take a look at this issue in a holistic formula as to whether or not sound science tells us this is a wise

course to take, whether or not this does allow Americans to craft

laws for America, whether or not this is constitutional, and whether or not this violates our sovereignty.

At this time I would like to check with Mr. Terry if he would like

to make an opening statement.

Mr. TERRY. No. I will yield to the chairman.

Mr. RYAN. I would like to recognize and turn over the gavel now

to the chairman of this subcommittee, Mr. McIntosh.

Mr. MCINTOSH. Why don’t you keep the gavel until we break for

the vote.

Thank you for starting this process, and let me apologize for

being late. Not often do you get a chance to meet with the chairman of the Ways and Means Committee. He came up to me at the

end of the last vote and said, I want to hear your concerns about

my tax bill. We had a half-hour discussion on the floor, and I apologize for being late. I think that we will get an even better tax bill.

I am happy about that.

Now, I want to briefly explain the purpose of today’s hearing,

which Mr. Ryan has gone into and then I will put my full statement into the record. This subcommittee has been looking into the

question of what the administration is doing to advance the Kyoto

policy without going to the Senate for ratification. We had a hearing on May 20th in which we looked into whether they were following the Knollenberg language in last year’s appropriations bill. It

became very apparent they are not, and it’s not an effective tool in

preventing them from using a back-door implementation strategy.

On May 27th, Senator Don Nickles and I wrote to Carol Browner

essentially asking if EPA was implementing the Kyoto Protocol

under the guise of existing law, how would anybody outside the

Agency know, because their answers are so circular. I have yet to

get a satisfactory answer back to that one. What we did get was

incomplete, essentially saying that they have committed not to implement it. Thus EPA believes that the language restricting spending in future bills is unnecessary, and we are supposed to trust

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their commitments. But in short, the agencies have not come forward in any meaningful way to respond to serious questions about

whether they are using regulation as a back-door tool.

Now we see a lot of action on proposing early action crediting

that would reward companies for doing today what they would

later be compelled to do under the Kyoto Protocol. It may sound attractive at first, but when you start thinking about it, you see that

it creates a conflict of interest between the private interest and the

public good. People will take actions and receive these illusory

credits and, therefore, create political pressure for the Senate to

adopt a policy that is patently bad for the country.

Today’s hearing will also look at what types of problems are

there with the system, what sort of financial conflicts are there

with those who are advocating this early crediting provision, and

what would be a better voluntary, truly voluntary, program that

could be a win-win for the country without taking us down the

path of ratifying the Kyoto Protocol.

With that, I would put the balance of my statement into the

record and yield back the time to the chairman.

Mr. RYAN. No objection.

[The prepared statement of Hon. David M. McIntosh follows:]

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Mr. RYAN. Jack, we have a vote. Do you have time?

Mr. KEMP. Yes.

Mr. RYAN. We will recess for about 7 minutes for the purpose of

voting and come back and swear you in and get going. How does

that sound?

Great. Recess for 7 minutes.

[Recess.]

Mr. MCINTOSH [presiding]. The committee will come to order.

Let us begin immediately with our first panelist, and welcome,

Mr. Kemp. Let me ask you, if you would, join me in taking an oath.

Chairman Burton has asked that I swear in all witnesses before

the subcommittee. If you would please rise and take the oath with

me.

[Witness sworn.]

Mr. MCINTOSH. Thank you very much.

Mr. KEMP. Thank you.

Mr. MCINTOSH. Mr. Kemp, welcome to the subcommittee, and

share with us your views.

STATEMENT OF JACK KEMP, DISTINGUISHED FELLOW, THE

COMPETITIVE ENTERPRISE INSTITUTE

Mr. KEMP. Well, Mr. Chairman, first of all, thanks for having

these hearings. Thanks for focusing the light of these hearings on

this issue. I have absolutely no question in my mind that this will

be a healthy debate. We don’t need to fear it. I think all of us

should welcome all sides to it. That’s what a liberal democracy is

all about, small L, small D.

I have a confession to make, Mr. Chairman. I’m not a climatologist, I am not an oceanographer. I didn’t invent the PC. I did invent the forward pass, but not the PC.

I’m really pleased to be with you. I appreciate your indefatigable

spirit in approaching this issue. I am sorry that Mr. Ryan is not

here, one of my old comrades in arms and a terrific guy. The same

could be said about Dennis Kucinich, who gave us some anecdotal

evidence concerning today’s topic.

Dennis, I just mentioned your name. I’m glad you came back. I

didn’t want to do it behind your back.

Dennis, I just wanted to say off the top of my head when I heard

about various climate problems in the South and in the Southwest

and maybe even in Cleveland, OH, who knows, I was reminded of

my experience as a skier. My wife and I and family have skied a

lot all over the world, but mostly in Colorado and Montana. I was

in Vail, CO, last winter and they were bemoaning the fact that

there wasn’t a lot of snow in Vail. Of course, people were blaming

it on global warming. And then there was a lot of snow in the Alps,

and people who should know better blamed too much snow on global warming. Ten years ago there was no snow in the Alps and lots

of snow in Vail, and that, too, was blamed on global warming.

Again, I’m not an expert. I am just a layman like all of us here

who wants to get at the truth. I said earlier, this is a healthy debate. It can be done with civility, I hope. We don’t need to burn

down buildings in the name of saving the wilderness. We really

have to bring some rationality to this debate.

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I come today as a fellow of the Competitive Enterprise Institute.

I have another hat as codirector of Empower America. I’m very

close to my friends at the Citizens for a Sound Economy. I am a

man of the center right, a progressive, if you will, conservative. My

values are conservative, not unlike those of the panel. But I hope

to be progressive in terms of working for change, progress, reform,

a better future not only for the folks of our country, but the folks

who live in those parts of the world that look to the United States

of America at the end of the cold war for real leadership.

Leadership comes from example, not from bullying people, and

from knowing your own background. Mr. Mayor, Mr. Congressman,

and you too, David McIntosh, Mr. Chairman, I think all of us, left

and right, Republican and Democrat, male and female, ought to

lead by example, not by bombing people and bullying tactics. Having said that, I am really thrilled to be here and appreciate again

the opportunity that Chairman McIntosh has given to me and the

men and women who will testify subsequent to my testimony.

I’m going to create a historical record here today. I am going to

be relatively brief. It’s no secret that Jack Kemp has been called

the Hubert Humphrey of the Republican party. Senator Humphrey

said one time, he didn’t think his speeches were too long, he enjoyed every minute of them. I want to submit my full testimony,

Mr. Chairman, for the record and just summarize it and get to

questions.

Mr. MCINTOSH. Without objection, the entire testimony will be

included.

Mr. KEMP. H.L. Mencken, the great iconoclast, said one time, to

every human problem there is a solution, simple, neat, and wrong.

I think as my buddy Fred Smith has said, early action credits in

effect are energy rationing, and it’s a wrong solution to the problem, in my opinion, and I have some doubts as to the nature of the

problem.

I don’t want to offend anybody. I do have respect for my opponents. I spent 13 years of my life in professional football. As I came

out of that career, I found that some of the best friends I have in

my life are the guys that used to beat me to a pulp on Sunday.

They are friends. I expect that in politics. It’s tough.

Look, the issue here is bigger than Kyoto, albeit that’s a big issue

and deserves the attention of this committee. It’s bigger, in my

opinion, than the debate and discussion of global warming or the

disputes over climatic changes. In my opinion, Mr. Chairman, the

issue is whether or not the U.S. Congress is going to endorse, in

effect, a third way style of command-and-control economics and politics. By third way, I mean in the international arena, the idea of

allowing an international bureaucracy to trespass on the sovereignty of that which Paul Ryan alluded to in his opening comments. And I know, Mr. Chairman, you have been a champion of

protecting U.S. sovereignty; that is, that the United States should

pass its laws, and it should affect the United States and hopefully

affect other countries by setting an example, but not by turning our

decisionmaking over to supranational authorities.

Congressman Kucinich mentioned earlier clean air, clean water,

and I forget the other one. I want you to know, Dennis, I voted for

all of them. I believe in those goals as do, I think, most men and

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women of good will and civility throughout this country. There has

been a lot of progress. We can debate excesses, but I don’t think

that anybody can debate that we have to have standards.

That’s not the debate here. It’s whether we are, as Fred Smith

has pointed out, going to ration energy at a time when many countries and continents of the world are beginning to emerge into what

I call an Internet century, but with almost Fourth World capability.

I spent part of the month of April in Ghana. It was an incredible

trip, and they are talking about trading with the United States. I

look at that map over there indicating places on the Earth that are

going to have their energy rationed.

George Gilder had an interesting article, Mr. Chairman, in the

Wall Street Journal saying that Kyoto is kind of a zero sum approach to ecology. He mentioned that India, that huge continent of

India, over a billion people, uses less than one-tenth the energy per

capita as the American people. To tell them, Gilder writes, that

their billions of citizens cannot even match current Western uses

of fuel oil or fertilizer and other chemicals is to tell them that they

can’t perhaps feed enough people or let alone gain them wealth

without some form of a war. That’s what causes wars, telling people that the only access to resources is to take it from someone

else. I believe that is the predicate that has been laid down. I’m

not accusing anybody of wanting a war, but as Gilder pointed out,

nothing so pollutes the world as war.

I urge you to read the morning paper that talks about what happened with the bombing in Serbia with regard to pollution. They

had to send their children miles and miles away because of nausea

and other problems.

This is not the place to go into that, but I did want to make the

comment that this is a zero sum approach that will consign millions of black and South Asian and Latino, Third World and Fourth

World countries to poverty when you and I have discovered in a

postcolonial, post-cold war world that the answer to poverty is markets, and freedom, and private property, and limited government,

and the rule of law, and incentives for men and women to work

and save and invest and invent and take us forward into an age

in which technology is going to come up with solutions to problems

that we cannot even see in our limited scope here on the eve of the

new millennium. We want America to be cleaner, greener, and

wealthier. That’s the debate at least from our side of the issue.

In my opinion, Mr. Chairman, the Kyoto Protocol and legislation

is attracting unwarranted corporate support. I noticed that Vice

President Gore, bless his heart, last year announced an emissions

trading agreement between a Canadian company and a New York

energy company. Vice President Gore said, ‘‘These two major corporations are seeing and seizing an opportunity to protect our planet, build their bottom line, and grow the economy.’’

So it sounds like it’s positive, but in my opinion, it’s still a zero

sum approach because there are thousands of small businessmen

and women anxious to go into business who are going to be, in my

opinion, compromised. The corporate community is naturally—

many of them are naturally attracted to this approach, getting valuable credits for advance action that allegedly reduces fossil fuel

emissions, but it creates, in my opinion, a profound dilemma. The

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treaty hasn’t been submitted for ratification, and most people don’t

think that it’s been submitted because it couldn’t pass. With all due

respect to the Senate, it couldn’t pass. In my opinion, what the administration has in mind is luring corporate America into these

early action credits so that they can buildup a rationale for ratification of Kyoto, to build support for Kyoto. I still think that it’s not

going to be ratified.

I would add that it’s unworkable. It is unworkable for the very

reasons indicated by the chart, Mr. Chairman, that you have put

up over here. It has taken time away from important things like

cutting capital gains taxes.

That was a serious comment, by the way.

The science of warming, the role of fossil fuels and greenhouse

gases and their relations to fundamental forces in the Earth’s climate for eons, even before the industrial revolution, is in contention. Joel Bucher wrote in March that Dr. Hansen, James Hansen,

the very same distinguished American scientist who caused so

much alarm in the 1980’s claiming that global warming would

bring catastrophic temperature increases, recently declared before

the scientific community, as Joel characterizes his comments in the

prestigious Journal of the National Academy of Sciences, that predicting global temperatures with climate modelling is all but impossible.

With all due respect, modelling climate has yet to reach a point

that most men and women would agree is capable of deciding for

us what we should be doing to have that cleaner and greener Earth

that most men and women of common sense want.

The Kyoto pledge to cut emissions to 7 percent below the 1990

level, which would be by 2010, Mr. Chairman, close to a 40 percent

reduction, would, according to several economic forecasting firms,

cost the U.S. economy well over $300 billion a year, close to $3,000

per household, raise gasoline prices by 65 or 70 cents a gallon. I

admit that I don’t know. I don’t have to know. But I do know that

rationing has never worked anywhere on the face of the Earth.

That’s what this is. I can’t imagine America on the eve of a millennium in which we can create not only more wealth for our own

country, but help provide an example for the rest of the world,

would want to introduce into our political economy such a Malthusian zero sum rationing idea. The administration’s own Energy Information Administration estimates a $64 billion per year cost;

someone said a conservative estimate of the cumulative cost would

be close to $400 billion by the year 2010. Again, I’m not throwing

these numbers out because they are perfect, I just do it to use it

as a metaphor. There is a huge cost involved with Kyoto, notwithstanding the fact that it’s consigning people to almost perpetual

poverty in many parts of the world.

I said that many of our major corporations, including energy producers, see early credits as a way to gain a windfall for steps that

they would have taken anywhere, anyway, and a way, perhaps, to

gain a competitive market advantage over smaller, often more entrepreneurial competitors. I don’t want to pit the little guy versus

the big guy. The American dream is to start small and grow your

business. I’m not anti-big business or corporate business, but my

bias is clearly toward the entrepreneur, the men and women who

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are the innovators and the wealth creators and the risk-takers who

may fail, but can start again.

The real fight in this issue, Mr. Chairman, is about our energy

future, our economic future and that of the world. The Kyoto

mindset implies taxes on energy use, on the use of energy as far

as the eye can see. Direct taxes are already under serious review

in Canada and the EU, the European Union, I should say. Early

action credits are touted as a market approach by everybody who

supports it. I appreciate their fidelity to markets. I doubt very

much whether they really understand the market if they think this

is a market approach.

I’m not trying to be a smart aleck up here, but I am trying to

suggest that you can’t set prices, Mr. Chairman. That’s why socialism has failed from Eastern Europe to every part of the world, because you can’t price goods and services. You can’t establish the

value of anything if the market doesn’t set those prices. I’m not

talking about libertarian, 19th century Darwinian biological competition, not at all. I think there are places where markets must

be enhanced, must be protected. I am for antitrust laws, but I

think having the Federal Government get into building cars, subsidizing ethanol, overseeing investment subsidies, it really doesn’t

make much sense, in my opinion.

I mentioned earlier that there is a large cost to Kyoto. I hope

people will read ‘‘Early Action Crediting: Growing the Kyoto Lobby

at Small Business’ Expense, a policy brief by CEI, and also CSE’s

explanation and analysis,’’ which was published February 12 of this

year. As I said, I think this treaty cedes U.S. sovereignty to global

bureaucrats.

I would be glad to answer any questions. I apologize for perhaps

going on a little bit longer than I wanted to, but I think this is an

important issue, and I welcome the debate. I know that I have got

a lot to learn, but maybe there are others who have something to

learn as well.

Mr. MCINTOSH. Thank you, and I appreciate your forceful argument for true free markets.

[The prepared statement of Mr. Kemp follows:]

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Mr. MCINTOSH. Let me explore with you a little bit the point that

you were making that this really isn’t a market mechanism that

is being created. One of the things that amazes me about the proposals for early action crediting is that they create something that

could have a value in the marketplace only if the Kyoto Protocol

is ratified and it becomes law. And so I don’t know what label you

would give to it, some kind of future I guess, some sort of credit

that at a future date would have a value if the Senate ratifies the

treaty. To me that creates a problem of incentives in that people

who are granted those credits from the government have a great

deal of incentive to want the treaty to be ratified because this piece

of paper gains value in the marketplace when those restrictions go

into place. For those who don’t have the piece of paper, then the

restrictions are all the more costly because they have to comply

with the treaty.

Others have characterized it as sort of an insurance policy. I’d

like to ask you to comment on the validity of that assumption, the

argument that if the Senate does the wrong thing and ratifies the

treaty, at least some of us in the marketplace will get a little

money back.

Mr. KEMP. That really is—again, I have great sympathy, hopefully some understanding of their position. And with all due respect, Mr. Chairman, I think you were the first to really bring this

issue to the forefront of public opinion, at least to the business

community, that they had better watch out because it is a slippery

slope into which they are, in my opinion, being ‘‘incentivized’’ is a

good word, seduced is a pejorative. I think it is seduction, it is very

seductive to think that you can gain an advantage when you get

that credit. And you have got to be big, Mr. Chairman. You have

got to be a big guy on the block in order to take advantage. You

are going to have lots of lawyers and lots of accountants and lots

of folks focusing on this issue. That rules out the men and women

of entrepreneurial talent who are trying to move up that ladder.

I want to say something, and be careful that I say it correctly.

If you stop and think about the history of freedom of enterprise,

from Adam Smith in the 18th century to today in Milton Friedman,

I don’t think there is an economist at least one who is market-oriented who doesn’t have some fear or distrust of laws that make it

easy for people to collaborate in order to keep other competitors

out.

I don’t mean that to pick on anybody. I just think that it’s a very

human condition. When I was quarterback of the Buffalo Bills, I

did not want any competition with me. I only wanted one quarterback on each football team. But it really gives advantage to the big

guy. I can’t imagine the party of Lincoln giving an advantage to the

big guy over the little guy. This is what it does. It really does. It’s

economically unsound, it is politically seductive, and it is going to

give tremendous power not only to the bureaucracy of the United

States—and I don’t want it for a Republican administration or a

Democratic administration. I wouldn’t want to give this to any of

our Republican candidates nor give it to the two Democratic candidates or the Independent party. I guarantee, Mr. Chairman, and

you know this far better than Jack Kemp, this gives tremendous

power to the international bureaucracy. Tremendous power.

35

Mr. MCINTOSH. Well, both directly and indirectly, because it assumes the ratification of the treaty, which empowers them tremendously.

The second question I have is would you agree that before we implement any type of early action credit where the benefit is related

to emission reductions complying with Kyoto, that we have to make

the decision whether or not we are going to adopt Kyoto as policy?

I have introduced a bill that says essentially before any further action can be done to set up this type of credit program, the Senate

has to be given a chance to debate and ratify the Kyoto

Protocol——

Mr. KEMP. Yes, absolutely.

Mr. MCINTOSH [continuing]. So we know whether it is going to

be the policy of the country or not. To reverse that means that you

are making the decision without debate, without any normal course

under the Constitution.

Mr. KEMP. I was absolutely shocked, Mr. Chairman, with all due

respect, to have the President of the United States of America saying in December 1997 that we are going to have a program to pursue our course, and we are going to do it whatever happens at

Kyoto.

It’s unbelievable. Unbelievable. He said the other day we are

going to intervene in any part of the world in which there is a violation of human rights irrespective of any vote in the U.S. Congress. We have converted NATO from a defensive organization to

an offensive organization without a debate in the U.S. Congress.

This is what I call third-way politics, as pursued by this administration, the Blair administration, the Schroeder administration in

Germany. Someone has got to stand up, Mr. Chairman, and question what is happening to political economic policies in the world

today through third-way politics. It’s seductive. It’s mesmerizing,

but it’s really sacrificing the sovereignty of the United States of

America.

Mr. MCINTOSH. I think one of the great things that you have contributed to the sovereignty debate is that you point out it cuts

across apparent ideological lines. When you trample on the safeguards in the Constitution, the division of powers, for whatever

ends, whether they are ostensibly conservative or ostensibly liberal,

government does a great injustice to liberty.

Those are the two questions that I have. Mr. Kucinich, do you

have any questions?

Mr. KUCINICH. Yes, I do.

Again, thank you, Mr. Kemp, for your testimony. I have to say

that I am with you on the sovereignty questions. As a matter of

fact, Mr. McIntosh and I have had a chance to work together on

some of the more serious sovereignty and constitutional issues in

this Congress. I also have a great deal of respect for the legislative

process and for the Senate’s prerogative. As someone who favors

Kyoto ratification, I would not want to see the Senate in any way

be usurped. The decisions have to flow from the U.S. Senate on this

treaty, or any kind of treaty for that matter. I happen to believe

that a treaty should have some force then, but to try to implement

it in other ways, I wouldn’t favor that either.

36

I would wonder, though, what your views would be—let’s say, for

example, if Kyoto was a dead issue here, and we were just talking

about a condition in this country where we could incentivize aggressive behavior on the part of corporations who—— Mr. KEMP. I would be in favor of that. I have even talked about

allowing for the full expensing of the cost of equipment used to

clean up the air and the water. Why shouldn’t someone be

incentivized? I think there should be incentives—— Mr. KUCINICH. I think that we agree on that, too. The concern

here, and I understand the concern the chairman expressed, that

you would not want to see an incentive mechanism put into place

that might be an excuse for bypassing the process in the Senate.

Mr. MCINTOSH. That’s right. In fact, I have talked with colleagues about the possibility of substituting incentives. If you gave

somebody basically a tax deduction and say, move quicker toward

reducing air pollution, assuming that is a goal that we all share,

that might be a more appropriate way to achieve the goal.

Mr. KEMP. The President just spent a week running around the

country. I’m not belittling it. In fact, I was invited on that tour to

show bipartisan support for trying to attract capital into areas that

are without capital. I would prefer that we do it through changing

the Tax Code as opposed to having an international bureaucracy

force India, China, Asia, Latin America and Third World and

Fourth World countries to cut their use of energy before they ever

get a chance to get out of the grinding poverty into which centuries

and millennia have been allowed to occur.

Mr. KUCINICH. What I think is interesting is that where we can

get some concurrence on the importance of incentivizing environmentally and even socially beneficial conduct, the question is this

debate over Kyoto. One of the reasons why I favor it is because I

would like to see the United States take leadership in this area.

Let me state why: Because I think that we can use this as an opportunity to create greater efficiencies and enable our industries

here to capture new markets and to enable us to continue our leadership and perhaps the controlling of and even transformation of

pollution industries.

Mr. KEMP. Well, I like what you say, and I think that you have

raised a very important point, and obviously you have been talking

with Mr. McIntosh.

I would remind everybody that may be listening or watching or

maybe who will hopefully read this testimony, as convoluted as it

may sound, do you know what the cost of MIPS in the United

States on the eve of the new century, millions of instructions per

second computerwise? Less than $1. Do you know what it was 10

years ago? $10,000; $250,000 20 years ago. We are now, with our

ability technologically, able to deliver instructions through computers in those little microprocessors at a cost of less than $1 for

millions of instructions per second. Wow. Why don’t we, the greatest Nation on the face of the Earth, with all our faults and all of

our problems and all of the work that we have got to do, why don’t

we recognize that freedom of enterprise, freedom of trade, and incentives for men and women to invent and innovate is the greatest

example that we can have to help the rest of the world enjoy some

of the benefits of the wealth-creating society?

37

What bothers me about this, Dennis, is that it’s predicated upon

using less energy at a time in which we are going into an Internet

century in which the needs of electricity are going to be exponentially increasing in the 21st century. The answer is not rationing.

The answer is wealth creation and freedom of enterprise.

Mr. KUCINICH. I would agree with you on wealth creation. I

would also suggest, Mr. Kemp, that perhaps the answer is also in

new technologies which do not have the same by-product in terms

of pollution. One of the things that I notice British Petroleum is

doing is looking more and more at solar research as opposed to the

increased consumption of fossil fuel.

Mr. KEMP. Just don’t give them a tax credit, please. We have too

many tax credits in the Tax Code. It’s the worst Tax Code that I

have ever even seen in my life.

I apologize. I have absolutely—lucky for you all—run out of time.

I apologize. But I know a lot of people want to testify.

Mr. KUCINICH. Could I give a one-sentence benediction from William Buckley? He is talking about these ideas that we are speaking

of today. He says, ‘‘It’s quite a brilliant application of the idea, putting a cash price on inordinate consumption, which is very different

from forbidding it.’’ So that’s—I have been reading him since I was in high school.

Mr. KEMP. There is hope for you yet, Dennis.

Mr. KUCINICH. And for you.

Mr. MCINTOSH. Thank you. We appreciate you very much for

coming and joining us today.

Mr. KUCINICH. Could I put Mr. Buckley’s column into the record,

Mr. McIntosh?

Mr. MCINTOSH. I would be honored to include that in the record.

It says, ‘‘Conservatives Should Hail Kyoto Pact.’’ I will have to give

it close scrutiny.

[The information referred to follows:]

38

39

Mr. MCINTOSH. The next panel is Mr. Jay Hakes, who is the Administrator of the Energy Information Administration.

Welcome, Mr. Hakes. If you want to stay standing, I will administer the oath.

[Witness sworn.]

Mr. MCINTOSH. Thank you. And please share with us a summary

of your testimony. We will include the full written remarks into the

record and then get to the question and answers.

STATEMENT OF JAY HAKES, ADMINISTRATOR, ENERGY

INFORMATION ADMINISTRATION

Mr. HAKES. Thank you, Mr. Chairman, for inviting me, and I certainly have pared down my remarks. I am happy to talk about the

voluntary reporting of greenhouse gas emissions, which is a program that is administered by the Energy Information Administration. In the past year interest in this program has grown, but this

hearing is the first time that I have testified before a congressional

committee on the subject.

The Energy Policy Act of 1992 in section 1605(b) established this

data collection which allows individuals or companies at their option to report annually on the reductions in the emissions of carbon

dioxide, methane, or any of the other greenhouse gases. They can

also report on carbon sinks such as forestation activities. The details of this program can be found in my written testimony, and I

won’t repeat that.

I would talk perhaps about what I think has been some of the

success of the voluntary reporting program. This program has been

designed to be user-friendly. Using integrated software, we have

made it relatively easy to report, given particularly the complexity

of this fairly new issue. It’s been easy to access and analyze the

data that has been submitted. To encourage participation, reporters are offered many different ways of reporting and are allowed

considerable flexibility in how they calculate their savings.

As you may be aware, many companies report under this program and the number is growing. So far this year we have 172

companies that report under this program, and that’s well above

the 108 that submitted reports in 1994, the first year of the program. Participation is particularly high in the electric utility industry where companies accounting for two-thirds of utility emissions

do report under the program.

Although there is no third-party verification of the reports, the

energy expertise of EIA has allowed us to work with the companies

to develop data that we do believe to be accurate. The hope that

the reports would document useful examples of how to reduce emissions that could be emulated elsewhere seems to have been at least

partially realized. For example, the recycling of sulphur

hexafluoride first reported in the 1996 cycle now seems on the way

to becoming a widespread industry practice. In turn, we have been

able through numerous phone calls, e-mails and other communications to educate many companies on how to measure the emissions

of greenhouse gases, and this is significant because until recently

there was no reason for them to track them and, therefore, no experience.

40

Despite the successes, using the existing program for new purposes such as documenting credits for early reduction would face

a number of formidable challenges. Since these credits would have

economic value, the standards for reporting them would probably

have to be much more rigorous than under the current program.

The flexibilities that have made the voluntary program a success

so far may limit its adaptation to a program requiring greater uniformity.

Let me just give a couple of illustrations of the issues that would

arise. First is the issue of baselines. To award credit for early action, there would need to be a common agreed-upon baseline from

which savings are calculated. To know how much emissions are

being reduced, we need to know the number from which the resulting emission levels should be subtracted to calculate the savings.

The current program allows flexibility in baselines that would be

difficult to maintain in a more rigorous system to award credit. The

current program allows reporters to calculate savings by subtracting the current emissions from their expected levels in the absence of voluntary activities.

Although these reports provide useful information, they leave unresolved the issue of what is sometimes called additionality; that

is, how can you tell whether the action would have been part of a

normal business practice even without the voluntary program or

whether it would have produced the savings that went—or whether

it produced savings that went beyond or were additional to what

would have been expected in a business-as-usual case. If reporters

are rewarded for something they would have done anyway, it is

conceivable that a large number of credits would be awarded without significantly reducing the expected trajectory of rising U.S.

emissions. EIA projects that under current policies, emissions are

likely to be 33 percent higher in 2010 than 1990.

The current voluntary reporting program also allows reporters to

use historic levels of emissions as their baselines for calculating

savings. A reporter could, for instance, subtract his 1998 emissions

from his 1990 emissions and use the remainder as his savings.

During that period, however, the reporter may have sold part of its

operations responsible for a large part of its emissions to a second

entity. The second entity is not required to report and wouldn’t be

penalized; therefore, there could be leakage of savings.

I would be glad to conclude at that point, seeing the red light on,

and answer your questions.

Mr. TERRY [presiding]. You can keep going.

Mr. HAKES. I just had a few more comments. The second problem

was the problem of leakage, which I think, along with additionality, are the two big conceptual problems that these approaches

are going to have to wrestle with. There are other complex issues

such as property rights that are discussed in my written testimony,

and I would refer you to that.

The voluntary data that EIA has collected has been done in a

very transparent manner, and it may be possible to go back after

41

the fact and recast it with new assumptions. But I think that is

a challenge that would be difficult, but not necessarily impossible.

So that is basically what I plan to comment on, and as I said, I

would be glad to answer your questions.

[The prepared statement of Mr. Hakes follows:]

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Mr. TERRY. I thank you very much. I will start with one question. In your oral testimony here, you had mentioned some of the

difficulties in making initial determinations to set baselines and

what I envision is a deepening bureaucracy. Have you been able to

establish how much staff it takes now, full-time staff, to do a voluntary reporting program? How much it would have to grow and

expand to make it into an overseeing regulating system?

Mr. HAKES. We do both the annual inventory reporting of the

greenhouse gases and the voluntary reporting, which are two different programs with three different employees and a budget of

$600,000. The acid rain program at the EPA, which does sulfur

trading, which is a much more elaborate program, I think is about

$10 million. What we’re talking about here is probably substantially larger than that. We have not had a reason at that point to

calculate what those resources would be. I think that the range

could be considerable, depending on how this was designed. I think

a lot of people are designing programs; there are just a lot of options. But it would certainly be much bigger and more expensive

than what we’re talking about with the voluntary program.

Mr. TERRY. Well, does the sulfur dioxide emissions trading program provide a basis for estimating the administrative complexity

and costs of the greenhouse gas emissions credit program?

Mr. HAKES. Well, I think it’s been used as an example and I

think it has some advantage. It shows that there are some advantages to trading. But the sulfur system is much more complex because up to the present period it’s covered about 115 utilities and

so that’s a fairly manageable universe. It’s about to expand to 2,000

utilities and that makes it bigger. But if you look where energy is

used and combusted, that’s obviously a much bigger, more complex

universe than people who are emitting sulfur. There are ways of

designing the system to limit the number of reporters but the more

you do that you lose the downstream ability to trade. So there’s a

lot of compromises that would probably have to be made.

Mr. TERRY. I appreciate that.

Mr. Kucinich.

Mr. KUCINICH. Mr. Hakes, thank you very much for your testimony. I think the Energy Information Administration should be

commended for all of its hard work in implementing the 1605(b)

voluntary reporting program, and I agree with your testimony that

we could learn a lot from that program as we debate any plan for

early action credits. I have just a few questions for you.

Mr. HAKES. Thank you.

Mr. KUCINICH. When did the Federal Government start its voluntary reporting program?

Mr. HAKES. 1994.

Mr. KUCINICH. That would be in the Bush administration, correct?

Mr. HAKES. Well, that was when it started to operate. It was established by the Energy Policy Act of 1992.

Mr. KUCINICH. It was established during the Bush administration.

Mr. HAKES. It was authorized statutorily in the Bush administration, yes.

55

Mr. KUCINICH. Do you believe that offering incentives to companies that voluntarily reduce their emissions has been successful?

Mr. HAKES. It’s a hard question to answer. I would say that during the 1990’s that emissions have continued to grow at more or

less the pace they were growing before. We have had increases in

emissions every year since EPACT was passed. And as I say, our

projections are that emissions are likely to reach 33 percent above

1990 levels. So I think there have been some successes but the

overall trajectory of the emissions increases does not seem to have

changed very substantially.

Mr. KUCINICH. What about for companies that participate in a

program?

Mr. HAKES. Well, those companies have reported large savings

and undertaken activities. I think the question of additionality has

not really been addressed because there’s no real baseline against

which the savings can be calculated that’s uniform. So it’s hard to

say whether these are activities that they would have done under

normal business practices or whether they were additional activities that they undertook because of the voluntary programs.

It’s clear that there’s a success story here in that the economy

has been growing at a very rapid rate, more rapid than was expected, and emissions have been rising much slower than economic

growth. So certainly the companies and the technologies are very

successful in the sense of keeping emissions well below the economic growth. The economy has been growing quite rapidly, but

they have not been successful in changing that trajectory so that

the emissions are either stable or going down.

Mr. KUCINICH. So you don’t really take a position on the

incentivization?

Mr. HAKES. Well, EIA is a statistical agency, not a policy agency.

Mr. KUCINICH. I understand that. I’m just interested in your

opinion.

Mr. HAKES. Well, it would be hard for me to give an opinion

apart from my official position I think.

Mr. KUCINICH. Oh, give it a try. OK, my next question.

Mr. HAKES. OK.

Mr. KUCINICH. As you noted, the 1605(b) program was designed

to encourage entities to take voluntary action to reduce their emissions and reward them with publicity. This is very different, however, as I think we know, from an early action credit program that

would award these entities with tangible assets for tangible

verifiable emission reductions. In fact, a GAO report found that

‘‘Many of the claims for reducing greenhouse gas emissions that

have been submitted to the voluntary reporting program would

probably be ineligible for credit.’’

With this in mind, is it possible to set up an accounting system

to implement a credit program?

Mr. HAKES. Yeah, I think it is possible.

Mr. KUCINICH. Thank you. Thank you, Mr. Chairman.

Mr. MCINTOSH [presiding]. Actually that was going to be my first

question. Do you think it’s possible to implement a credit program?

Actually, before I get into that, let me say I commend you for the

work you are doing in terms of keeping an honest track of what

56

is done out there in this area and not trying to be a heavy handed

bureaucracy but merely truly implementing a voluntary program.

You know, I’m an optimist too. I think lots of things are possible.

But let’s explore that. In your testimony you mentioned that it

might be quite extensive and costly to do. Can I—and I know Mr.

Terry explored some of those costs, but are the barriers essentially

conceptual? And you mentioned a couple in terms of being able to

discern whether it was something that would occur in the normal

course of a business practice. Are the problems mainly technical in

measuring the reductions, or are they political where you might get

entities gaming the system?

Mr. HAKES. Yeah, I think that they’re really all three. I mean,

I actually have tried to attend a lot of technical sessions on this

issue, more than I normally would because I think the technical

issues are so wrapped up into the conceptual and political, and

there are a lot of decisions that have to be made that create winners and losers. I mean, how you calculate the baseline that may

help one company and another way of calculating might help another company? And that’s why I think it would be inappropriate

if such a system would have the EIA make a decision about what

the baseline should be. I mean that’s a decision I would think the

Congress would make.

Mr. MCINTOSH. Let me interject. You think therefore there’s such

inherent tradeoffs that it needs to be a political decision by Congress rather than a technical decision?

Mr. HAKES. In the best sense of the word, yeah. I mean, it’s a

policy decision much as the tax code is a policy decision. Who gets

taxed. It has technical issues, it has conceptual issues, and it has

political issues.

Mr. KUCINICH. Mr. Chairman, no one ever games that system.

Mr. MCINTOSH. My office is in Longworth and having been

blocked for 2 days now getting in and out with all the lobbyists

over there as the tax bill is being written, that’s a scary thought.

But I think you make an interesting and important point that it

can’t merely be thought of as a technical decision because there are

winners and losers that result from the choices being made.

Mr. HAKES. That’s definitely my view, yes.

Mr. MCINTOSH. Any estimate of how expensive it would be once

those winners and losers were chosen to actually implement the

system?

Mr. HAKES. Well, let me explain why that’s a difficult question

to answer. When we think about this question initially, the thought

is, well, everybody that drives an automobile is emitting carbon

and therefore if we had to track every automobile in the United

States that would be a very expensive system and very onerous.

The technical people that I’ve seen that have looked at this have

usually moved away from that and moved back to more of an upstream approach where they might say tax at the oil refinery,

which then sends a price signal up through the system. And that

makes it a lot easier to administer.

You lose some of the advantages of trading. So the policymakers

have to design a system, and I’m sure they would take into account

the administrative complexity of it, and my suspicion is that you

might move more to an upstream system. But until we know the

57

answers to those questions it would be hard to know how big this

reporting system would have to be. If you do it at the upstream

where there’s a more limited number of refineries, it’s certainly a

lot easier than keeping track of every automobile.

Mr. MCINTOSH. Right. And so given the pervasiveness of energy

consumption in society, to do it with 100 percent accuracy you

would essentially need to have a tracking system for every activity.

Mr. HAKES. I don’t know if the issue is so much accuracy as it

is to maximize the trading potential. Because the person who is

driving the automobile has choices about the efficiency of that automobile. And I think if we were measuring things at the refinery

that it probably would be possible to get accurate counts. But energy is so widespread that one can think of areas where things

might fall through the cracks. And this would certainly be a formidable challenge I think to make sure that everyone was treated

fairly.

Mr. MCINTOSH. Let me move in a different direction. The administration has told us all over and over again that the Kyoto Protocol

is a work in progress. They’re still negotiating with the other foreign countries hoping to get some of the Third World countries to

sign up for mandated reductions in energy use or global warming

gases being emitted. Is there a risk that if we adopt an early action

credit at this time, that it will impact the negotiations over the implementing rules of the Kyoto Protocol?

Mr. HAKES. Well, I think there are two major areas of that treaty

that are unsettled, that it would be extremely useful to know the

answer to before setting up this program. One of them is the level

of domestic effort that will be required. The treaty contains a lot

of offsets against what you have to do domestically. The most obvious one is the trading. And we could, for instance, purchase credits

from Russia, which is by most estimations going to have a lot of

credits to sell because their economy has collapsed and they

haven’t been using energy as much. But there are other offsets

such as sequestration and other things that might allow emissions

to grow in this country and still meet the Kyoto limits. But since

the treaty is not interpreted the same way by all parties, we really

don’t know the answer to that yet.

The second thing that would be very useful to know is what

would be the equivalency between activities like forestation and

the reductions in emissions. Because many of the programs that

the utilities are reporting right now, for instance, are things like

reforestation activities, but we don’t—we do have formulas for comparing say methane emissions with carbon emissions but we don’t

have a formula for comparing sequestration activities with emissions activities. So it would be difficult to construct a system that

would fairly reward these different activities until we had that.

Mr. MCINTOSH. One other question that’s a pet personal issue.

Assuming you were going to credit all different sources, you mentioned the formula between methane and carbon, would this system create an incentive for eliminating wetlands because they are

a source of methane gas?

Mr. HAKES. My technical expert says that it is an extremely

small matter statistically and probably would not be a big factor

in the larger numbers.

58

Mr. MCINTOSH. That is what I see in terms of the amount of

methane gas produced, but I don’t know what the formula between

carbon dioxide and methane is.

Mr. HAKES. We would be glad to get those calculations to you

subsequent to the hearing and compare notes on that.

[The information referred to follows:]

Wetlands account for 15-20 percent of total global natural and man-made methane emissions. However, these emissions are concentrated in tropical (rather that

temperate zone) wetlands. According to researchers Matthews and Fung, worldwide

temperate zone methane emissions are about 5 to 10 million metric tons. Dividing

the U.S. figure for temperate zone wetlands from the Department of Interior’s Status and Trends of Wetlands in the Coterminous U.S. by the Matthews and Fung’s

figure for world temperate zone wetlands, results in the U.S. having about 57 percent of world temperate zone wetlands. This implies U.S. natural wetland emissions

of 3 to 6 million tons of methane, equivalent to 63 to 126 million tons of carbon dioxide equivalent (using 1 ton of methane equals 21 tons of carbon dioxide, the Intergovernmental Panel on Climate Change’s 100-year integration global warming potential of methane), or 17 to 34 million tons of carbon equivalent. This is equal to

about 1 to 2 percent of U.S. GWP-weighted anthropogenic greenhouse gas emissions.

Mr. MCINTOSH. Thank you. That would be helpful. I don’t have

any other questions.

Do you have anything?

Thank you very much, Mr. Hakes, and we will followup and let

me ask unanimous consent now to keep the hearing record open for

10 days on some of the technical questions.

OK. Our third and final panel for the day is the big one. Let me

call forward Mr. David Ridenour, Mr. Fred Krupp, Mr. Frederick

Palmer and Mr. Kevin Fay. You all stay standing as I administer

the oath. As I explained, Chairman Burton requires us to swear in

each of the witnesses here.

[Witnesses sworn.]

Mr. MCINTOSH. Let the record show that each of the witnesses

answered in the affirmative, and what we will do is ask each of you

to summarize in 5 minutes or less your written testimony and put

into the record the complete testimony. Let’s simply go left to right

and start with—my left to right at least—Mr. Ridenour. Welcome.

If you would like to begin, share with us a summary of your testimony and then we’ll include the whole thing into the record.

STATEMENTS OF DAVID RIDENOUR, VICE PRESIDENT, NATIONAL CENTER FOR PUBLIC POLICY RESEARCH; FRED

KRUPP, EXECUTIVE DIRECTOR, ENVIRONMENTAL DEFENSE

FUND; FREDRICK PALMER, GENERAL MANAGER AND CHIEF

EXECUTIVE OFFICER, WESTERN FUELS ASSOCIATION; AND

KEVIN FAY, EXECUTIVE DIRECTOR, INTERNATIONAL CLIMATE CHANGE PARTNERSHIP

Mr. RIDENOUR. OK. Thank you. Mr. Chairman, thank you for the

opportunity to testify on early action crediting. I’m David Ridenour,

vice president of the National Center for Public Policy Research, a

Washington, DC, think tank. The National Center has never received government funding and we have no financial stake in the

decisions of this subcommittee. In addition to representing the National Center, I’m representing 12 members of the Cooler Heads

Coalition, coalition of nonprofit groups concerned with consumer

costs of the Kyoto Protocol. Together these groups represent nearly

4 million Americans. It’s not often that free market groups like

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mine agree with the Sierra Club, Ozone Action, Friends of the

Earth, and National Environmental Trust. But when it comes to

early action crediting proposals under discussion, we agree on several points.

First, such programs can’t possibly benefit the environment, second, they can’t possibly benefit the economy. Even if one assumes

that man-made greenhouse gas emissions are responsible for global

warming and neither satellite nor weather balloon data support

this, early action crediting could prove counterproductive. These

programs would make it more difficult for small businesses and

family farms to comply with Kyoto’s emissions targets. They would

allow the President to offer companies reducing emissions prior to

2008, when the Kyoto Protocol is slated to take effect, emissions

credits that these companies could either use or sell during Kyoto’s

first emission budget period 2008–2012. But unlike the developing

countries, the United States would not be entitled to more credits

during the first budget period for any emissions reductions occurring prior to 2008. In other words, every early action credit the

President grants would mean one less credit in the U.S. pool during 2008–2012. Since most small businesses lack the political context and expertise to negotiate deals with the Clinton administration, and lack the financial resources to reduce their emissions

early, large businesses would likely garner most of the early credits. Thus, the burdens of Kyoto would rise for small firms while

dropping for large ones.

By making compliance more difficult for small firms early crediting will make it less likely the United States could meet the

Kyoto targets and unless of course we were willing to kill the goose

that lays the golden egg: Small businesses which create two-thirds

of all new jobs.

Early action crediting appears designed more to create a proKyoto corporate lobby than to reduce emissions. As you know, prospects for Kyoto’s ratification has been poor thanks in part to industry opposition. In response the Clinton administration included provisions in its fiscal year 2000 climate change budget designed to

build corporate support for Kyoto. For example, the budget included a $273 million program to make buildings more energy efficient. This provision may explain why Honeywell, which was recently awarded a DOE contract to work on building efficiency, now

supports the treaty. Other examples of the administration’s efforts

are included in the National Policy Analysis No. 233, which I have

here that I would be grateful if it could be entered into the record.

[The information referred to follows:]

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Mr. RIDENOUR. Early action crediting is another means of building corporate support for Kyoto. Early crediting would help build

corporate support because it would give companies earning credits

a vested interest in seeing to it that the credits are worth something. Without Kyoto ratification, the credits would be worthless.

Early credits are the industry’s insurance against the possibility

that Kyoto will be ratified. But in buying the insurance, Kyoto ratification would become even more likely. It’s analogous to buying

auto insurance to increase your chances that you’ll actually be in

a car crash. The fact that early action credits could influence or

preordain the outcome of the Senate’s consideration of the Kyoto

Protocol is particularly distressing. As Senator Byrd said of a high

profile Senate deliberation, don’t tamper with this jury.

We shouldn’t tamper with Kyoto’s jury either.

The final issue concerns accounting and verification. Independent

third parties would be permitted to measure corporate emissions

reductions but there are no guidelines for who would qualify for

this work. This certainly brings the validity of any accounting into

question in my view.

We’re also concerned with the very people pressing for early action crediting and for third party monitoring could profit from it.

According to the environmental group Nonprofit Accountability

Project, the Environmental Defense Fund, through its quote Satellite Group Environmental Resources Trust, would provide monitoring services for a fee.

Of greater certain to me, however, is the incentives that would

be created for corporations to give and give generously to the EDF

or similar group. Corporations will be tempted to pay tribute to

monitors knowing that they are the final arbiters of who does and

doesn’t deserve emissions credits, who is a good corporate citizen

and who is not.

Third party monitoring could compromise not only the integrity

of accounting and verification but our political process.

I want to thank the chairman very much for the opportunity to

address this hearing. Thank you.

[The prepared statement of Mr. Ridenour follows:]

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Mr. MCINTOSH. Appreciate that very much, Mr. Ridenour.

Mr. Krupp, welcome to this subcommittee and please summarize

your testimony. We’ll put the entire written testimony into the

record.

Mr. KRUPP. Appreciate that. Mr. Chairman, members of the subcommittee, thank you for the invitation to testify on behalf of the

Environmental Defense Fund. I am the executive director of the

Environmental Defense Fund. We’re an organization of 300,000

members with offices located across the country. Our formal involvement with climate policy extends back at least 15 years as our

scientists, economists and attorneys have worked to understand the

problems and suggest workable solutions.

I would like to begin with a statement for those who seem to believe that the possibility of human induced climate change is nonexistent and that all questions surrounding that issue already have

been settled once and for all. To those who are comfortable in such

a position, who believe that no risk is posed even by the questions

raised by the body of accumulating science on global warming, I

would offer that the notion of rewarding companies for voluntary

actions to reduce greenhouse gas emissions is patently absurd. If

there is no possibility of a problem, then no policy consideration is

even necessary.

On the other hand, for those who are either convinced that climate change is a problem, or, perhaps this is the most important

group, for those who believe that we as a society are now operating

in a context of change and uncertainty concerning climate change,

a credit for voluntary action program offers a compelling management option to a set of serious environmental and economic risks.

With that in mind, let me provide some history on this issue. In

early 1997 before the Kyoto negotiation began, my group developed

a proposal for rewarding businesses that undertook voluntary actions that resulted in greenhouse gas emission reductions. The proposal reflected two key beliefs: First, that the threat of human induced climate change demands prompt and vigorous action to curb

greenhouse gas emissions; second, that for the sake of both the environment and the economy, policy tools used to accomplish this

should tap to the maximum extent possible the ingenuity and resources of the private sector instead of relying solely on the mandates of politicians and government.

Our proposal reflected an existing reality as well that, to put it

mildly, there has been no or little consensus here in Washington

to support decisive action. Thus, our own preference for strong aggressive policies to achieve greenhouse gas emissions reductions is

simply not in our view politically feasible in this time.

In short we thought this would be a modest, prudent proposal.

Accordingly, EDF’s proposal to achieve immediate reductions now

through a voluntary basis offered U.S. businesses the chance to use

voluntary actions to create real economic benefits for themselves.

Let me emphasize these two critical points, voluntary, real reductions in emissions and those real reductions occurring now, not a

decade from now. At the same time by creating this environmental

and economic quid pro quo a credit for voluntary action program

also gives policymakers here in Washington a strategy for managing the high stakes issue. Again unless one is firmly convinced that

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climate change is not and will never be a problem, then climate

change represents an environmental and economic risk as well as

a potentially calamitous track for future policymakers. Credit for

voluntary action is nothing more than a tool for managing this

suite of risks. The basic concept that we proposed is reflected in

Senate bill 547, introduced by Senator Chafee along with a bipartisan group of 11 cosponsors and echoed in legislation that was introduced yesterday by Representatives Lazio and Dooley.

The concept is simple. A company could earn emissions reduction

credits if it succeeds in reducing its greenhouse gas emissions

below current levels or sequestering greenhouse gases over the

next decade. The logic of this approach and the related legislation

is reflected in simple arithmetic. According to the leading analysis,

U.S. greenhouse gas emissions could be more than 30 percent

above 1990 levels if our economy continues on a so-called business

as usual course. While the expected economic growth is essential,

the prospect of the attendant emissions growth represents a triple

threat to the environment, to business, and public policymakers.

The credit for voluntary action proposal is aimed as diffusing the

threats implicit in the projected emissions growth while preserving

economic progress. Here’s how. If greenhouse gas emissions represent a serious standard to danger to the environment the prospect of at least 9 more years of unchecked emissions increases represents an ever increasing environmental risk. Under a credit for

voluntary action approach, the environment would benefit directly

as companies work to earn credits by achieving real greenhouse gas

reductions. At the same time for any businesses contemplating a

future greenhouse gas limitation regime, whether created under

the Kyoto Protocol or other domestic or international policy, that

same unchecked emissions increase poses an economic threat. For

if future U.S. policymakers should decide to either ratify the protocol or otherwise adopt comparable emissions limitations, then

those additional emissions represent that much more of an expense

that will have to be incurred in meeting such emissions limitations.

The credits businesses could earn under the proposed program

represent nothing less than a form of insurance against the high

cost of a future regulatory regime since businesses could use those

credits as a means of complying with such a regime. In addition,

we believe that the incentive to earn credits that could be used in

such a way would spark a private sector led process of searching

for the most cost effective strategies and techniques for reducing

greenhouse gas emissions in turn, creating a larger economic momentum toward lowering greenhouse gas reduction costs.

Finally, for policymakers 9 more years of greenhouse gas emissions increases on the scale projected also represent a threat. Even

the most adamant and categorical opponents of Kyoto Protocol

characterize the science surrounding global warming and climate

changes uncertain. Current uncertainties in fact may be masking

a grave threat. This uncertainty does not provide justification for

inaction. Credit for voluntary action provides the opportunity to

manage that uncertainty.

Simply put, the chance to earn emissions reduction credits for

emissions reductions achieved in the short term would allow the

environment, businesses and policymakers to opt out of the game.

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The alternative, so long as today’s policy stalemate resulting inaction persists, sounds like the title of a movie from a few years ago,

‘‘No Way Out.’’ Not even those companies who see substantial economic risk from future compliance liability will have any options

or tools for managing the risk.

Finally, Mr. Chairman, let me close by saying that like many, if

not all members of this committee, the Environmental Defense

Fund believes that the greatest opportunities to make discoveries

about true costs, about cost savings and about technological innovation are created when the resources of the private sector are engaged in market based incentives. This is precisely the strategy

that would be embodied in the credit for voluntary action program.

It’s voluntary, it’s market based, it can provide certainty where

none now exists. It can let the market work. We strongly encourage

this Congress to make that possible. Thank you for the opportunity

to be here and of course I would be happy to answer questions.

[The prepared statement of Mr. Krupp follows:]

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Mr. MCINTOSH. Thank you, Mr. Krupp. And we will get to questions after the end of the panel presentations.

Mr. Palmer, welcome to the committee, and please share with us

a summary of your written remarks.

Mr. PALMER. I appreciate it, Mr. Chairman. I want to congratulate you on your leadership on this important issue. Let me briefly

describe who I am here representing today, Western Fuels Association. I am CEO of it. Western Fuels is a coal cooperative. We are

owned by rural electric cooperatives and municipal electric utilities.

These utilities put in coal fired power plants some 15 and 20 years

as the result of project energy independence in the Carter years.

They have invested billions of dollars in these assets. The Rio Treaty, the Kyoto Protocol, the Chafee early action legislation are all

designed to curtail the utilization of coal as a boiler fuel in the

United States. And that’s what brings me to the committee today.

My message to the committee today is a very simple and

straightforward one and it is this: I think what’s happened in the

last 5 years with the development of the Internet and the telecommunications revolution and technology that surrounds it may

very well moot the issue of the Rio Treaty and Kyoto Protocol. The

growth of the Internet is now generally recognized. Indeed very recently the Commerce Department produced a study called the

Emerging Digital Economy II. It’s an excellent study. I have it here

in front of me. I refer to it in my testimony. It’s 42 pages of detailed information on the explosive growth of the Internet in the

United States and abroad. Intel’s vision is for a billion people to be

connected on line within the next 5 to 10 years. That would entail

not only a billion people but tens of millions of businesses doing ECommerce on line. The next 50 years the world’s population is projected to grow to some 10 billion people. So in the next 50 years

we will have well in excess of a billion people on line.

The people that we work with on energy matters we went to

them and asked them what the electricity implications of this

means with respect to the explosive growth of the Internet. And I

would note here that the Department of Commerce left out a huge

part of the examination in their study. Nowhere in this study will

you see any discussion about the electricity implications of the

growth of the Internet. It’s simply not there, and it’s something

that needs to be addressed.

Our preliminary work suggests, Mr. Chairman, that for a billion

additional people to be connected on line worldwide would require

the installation of generating capacity in the world equal to what

exists in the United States today. That’s not going to be solar and

it’s not going to be wind and it isn’t going to be biomass. It’s going

to be primarily coal fired electricity and natural gas. This discussion we’re having today over global warming or the threat of catastrophic global warming is one that began in 1988 before the Internet emerged. The Internet didn’t emerge until 1995. It is now becoming clear that the Internet is going to cause a tidal wave of

electricity demand worldwide that will result in more and more

carbon dioxide emissions going into the air, created by human

beings. Whether the Environmental Defense Fund, the Sierra Club,

the Natural Resources Defense Council, the Clinton administration

or anybody else likes it or not, it’s going to happen, and the impediVerDate 11-MAY-2000 11:17 Mar 26, 2001 Jkt 066360 PO 00000 Frm 00084 Fmt 6633 Sfmt 6602 E:\HEARINGS\60254.TXT pfrm09 PsN: 60254
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ment to the Internet and the development of the American economy will only come from our own government if we make another

major mistake in energy policy the way we did in the 1970’s with

the Fuel Use Act and stand in the way of the market that is developing this wonderful technology and the energy assets that are required worldwide to serve it. For that reason, Mr. Chairman, we

oppose the Chafee early action legislation. We oppose the Kyoto

Protocol, and we believe that the Rio Treaty will be soon recognized

to be an anachronism.

In closing let me say this. There have been references to the

science here today. I’m not going to talk about it. I have my own

views on it. I think the science is bogus on the question of catastrophic global warming. Of course people are going to impact climate. No question about that, no argument from me. That’s not the

issue. The words of the Rio Treaty, however, focus on dangerous interference with the climate, not will there be any climate change

by humans. Of course we change the climate. We impact the climate. But there has been no science suggested, developed, examined, or underscored by any of the environmental groups, by any

of the government agencies that are involved in it, by any of the

governments that are involved in the U.N. deliberations that

should or could deny to the American people the robust utilization

of fossil fuels as our economy has enjoyed over the years.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Palmer follows:]

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Mr. MCINTOSH. Thank you, Mr. Palmer, and I will have a couple

questions for you when we get to that session. Our final witness

on this panel is Mr. Fay. Welcome. Please summarize your written

remarks and we’ll put them entirely into the record.

Mr. FAY. Thank you, Mr. Chairman. My name is Kevin Fay. I

serve as executive director of the International Climate Change

Partnership, the coalition of U.S. industries and associations as

well as international associations interested in the policy development process with respect to global climate change, and we appreciate the opportunity to be here today. We were organized in 1991.

We’re one of the largest industry coalitions in the world dedicated

to this issue. We have consistently stressed the need to provide legally binding assurances that voluntary actions to reduce greenhouse gas emissions be credited in the event any future mandatory

scheme is to be adopted by the government.

It’s been suggested that supporting credit for early action may

unwittingly create support for the Kyoto Protocol or that instituting a credit for early action program is tantamount to implementation of the Kyoto Protocol. We do not agree. ICCP believes

that the Kyoto Protocol is incomplete and should not be ratified in

its current form and should not be implemented without the advice

and consent of the Senate. While the treaty does make a good

start, we believe, in establishing a market based framework for addressing the issue on a global basis, it is a work in progress. It sets

ambitious targets to be met in a most difficult timeframe and does

not yet provide for developing country participation. Further, the

treaty negotiators have also failed to yet identify an appropriate

long term objective.

We believe that credit for early action legislation can and should

be Kyoto Protocol neutral. Regardless of the fate of the treaty, investments made in energy efficiency, in the reduction of greenhouse gas emissions should be legally protected if and when any

mandatory program is implemented. The predicate for this stems

not from the Kyoto Protocol but from the Framework Convention

on Climate Change which the United States signed during the

Bush administration and sent to the Senate and was ratified in

1992. This agreement is what establishes 1990 as the baseline for

measuring greenhouse gas emissions and also requires signatories

to make measures to reduce them. Responding to this commitment

and to the subsequent U.S. climate change action plan, many companies have already taken steps to reduce their greenhouse gas

emissions. Enactment of credit for early action legislation represents in our view open door compliance with the Framework Convention and sends a positive public policy message that those who

acted in response to this national commitment will not be penalized. Companies that have already taken action or are contemplating doing so want to ensure these contributions are not ignored

if and when a mandatory phase of emission reductions begins. Failure to recognize these contributions could unfairly force companies

to make even greater reductions through increasingly more costly

options. This would have the perverse effect of penalizing those

companies who acted early. Assurance of baseline protection is an

important step in this process. In addition to removing existing disincentives to action, a credit for early action program could provide

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an additional incentive for technical as well as policy innovation.

Now is the time to experiment with the broad range of options and

to more precisely determine the costs and benefits of various opportunities for reductions.

This type of experimentation and innovation, which only occurs

in the United States, in terms of dealing with these issues in our

view not only spurs economic growth but could provide an insurance policy against truly wrenching economic impacts in the event

that much deeper cuts in the emissions were to becoming necessary

in the future.

Finally, while many have touted the success of market based

mechanisms in reducing environmental compliance costs, the fact

remains that our experience with such mechanisms is very limited.

An active credit for early action could provide useful experience

and educate both government and industry alike as to policies that

perhaps should be avoided. It has been argued that small businesses and farmers will be hurt by a credit for early action program. Again we do not agree. ICCP is currently encouraging a simplified approach to credit for early action that will allow small businesses to participate with minimal administrative or bureaucratic

burdens. Discussions have also included the issue of credit for

changes in land management practice that could allow farmers to

participate. In addition, the program should create a market for

the technical innovations that are often made by small entrepreneurial companies. And last but not least we should keep in mind

that is an entirely voluntary program. There are no mandates for

small business or farmer participation.

We believe the precedent for crediting early action was established in the 1990 Clean Air Act Amendment when companies who

moved early on sulfur dioxide emission reductions received additional consideration in the subsequent sulfur trading program.

Drawing on the statutory precedent is important for the climate

change issue. However, given the scope of industries covered and

the enormous task to be undertaken, the government should go on

record now by developing experience in advance of any regulatory

requirements.

The United States is on record in support of a responsible action

to address greenhouse gas emissions. We have ratified the Framework Convention on Climate Change. Congress has funded a variety of activities under the climate change action plan, and other

significant government programs. It is not unreasonable to request

assurance from the government these activities, whether past or in

the future, not place the voluntary actors in future regulatory jeopardy. There are a number of legislative proposals that seek to address this short term aspect of climate change policy. We commend

S. 547, introduced by Senators Chafee, Lieberman and Mack and

others, to create—to eliminate these disincentives and provide credit.

We commend the efforts of Senators Murkowski and Hagel in

their legislation to compel more systematic attention to the long

term challenge of climate change and to focus on the necessary role

of research and technology in meeting that long term challenge. We

also commend the newly introduced legislation by Representatives

Lazio and Dooley to help advance the debate on these issues in the

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House. None of these initiatives meet all of our objectives but we

are committed to working with the appropriate parties to address

these concerns, such as provision for growth and product coverage.

We believe it is time to start forging a bipartisan national strategy for addressing the climate change challenge. That strategy

should begin by liberating the leadership, which Jack Kemp called

for earlier in his testimony, of U.S. industry in this global cause.

U.S. industry will be a major player in developing technologies to

reduce greenhouse gas emissions, making investments in equipment, facilities and products, and generating reductions in their operations. Enactment of legislation that removes disincentives for

early action and that preserves investments already made will help

to retain our competitive edge and provide significant economic and

environmental benefits for our Nation as well as for the world.

Thank you very much.

[The prepared statement of Mr. Fay follows:]

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Mr. MCINTOSH. Thank you, Mr. Fay. And let me say that Mr.

Kucinich had to go to Rules Committee about an amendment he is

putting forward and will try to be back, but he wanted everyone

to know that is why he’s not here right now. My first question is

to Mr. Fay, and picking up on your closing statement, are you saying that American businesses will not take leadership in reducing

emissions without the type of incentive provided by the early action

credit program?

Mr. FAY. I think the American business is taking leadership

every day in developing technologies every day, but the fact remains that what’s happened with the passage—with the ratification of the Framework Convention and the establishment of 1990

as the baseline for measurement of any future action on climate

change—it potentially puts any actor in jeopardy if their economic

activity has increased, even if they have tremendously reduced

their emissions, if in fact a future regulatory program is adopted

that establishes a different baseline. No. 1.

No. 2, that baseline, 1990, is starting to get pretty far away.

What most business are finding, it is tremendously difficult to go

back and even produce a significant data base to establish what the

emissions were at that point. And so it is time to get experience

with what are the emissions that are occurring for those entities,

and how do they measure that. We don’t have a good handle on

that.

Mr. MCINTOSH. So to solve both of those problems you don’t need

a credit, you need a baseline.

Mr. FAY. We think at a minimum as a credit for early action it

should be some baseline action or baseline assessment process, yes.

Mr. MCINTOSH. Which seems reasonable—to find out exactly how

many emissions we do have. Very different beast than a credit program. You think in the absence of a credit program that businesses

would reduce their level of experimentation with new technologies?

Mr. FAY. I think that it’s not a question of whether they would

reduce their experimentation. I think it’s a question of whether

they would take overt steps different from their businesses as

usual course. We’re innovating all the time. That’s not a question.

Could it affect product implementation? Perhaps it could, yes.

Mr. MCINTOSH. What do you mean by affect product implementation?

Mr. FAY. If it could affect the investments that achieve say short

term changes versus research in the longer term, technological evolution, that most would suggest, if you agree with the climate

change theory, are going to be necessary in order to reduce the

emission concerns.

Mr. MCINTOSH. Which way does the credit program change that?

Mr. FAY. We think the credit program eliminates both disincentives and possibly creates some incentives. I think it works first toward eliminating disincentives for some of the short term actions.

Mr. MCINTOSH. OK. So with the credit program you’ll have more

short term actions and fewer long term investments in experimentation?

Mr. FAY. I think you’ll be more willing to take some shorter term

actions that may be marginal.

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Mr. MCINTOSH. OK. And then finally, the commitment that your

members have made to reducing emissions, will that be lessened in

any way if there’s not an early action credit program?

Mr. FAY. It’s not a question of whether it will be lessened. It’s

a question of whether the impression is that they feel as though

they’re being placed in a position of future regulatory jeopardy. If

they take steps to reduce—— Mr. MCINTOSH. Before we get to that, when you say it’s not a

question, does that mean the answer to the question is no?

Mr. FAY. Repeat the question again.

Mr. MCINTOSH. Will your members do less or have less of a commitment to reducing greenhouse gas emissions if we don’t pass an

early action credit program?

Mr. FAY. I think it does affect short term investment on marginal

investment, yes.

Mr. MCINTOSH. So some of your members will in the short term

do less to reduce their emissions.

Mr. FAY. I think it’s a question of where they apply their capital.

It could affect where they apply their capital.

Mr. MCINTOSH. And that could lead to fewer—— Mr. FAY. In the short term, yes.

Mr. MCINTOSH. Which of your members would reduce their efforts?

Mr. FAY. Well, I will not get into speaking for individual company decisions on capital investments decisions.

Mr. MCINTOSH. So you don’t know of any that would do that, you

think there might be some.

Mr. FAY. No, I will not get into speaking for individual company

investments decisions. I would be happy to come back and talk

with you on that. I’m not prepared to address that specific topic in

terms of those companies today.

Mr. MCINTOSH. OK. And we have unanimous consent to keep the

record open. Why don’t you give us a complete answer to that within the next 10 days so we can put that into the record.

[The information referred to follows:]

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Mr. MCINTOSH. The reason I’ve asked you these questions is because I want to know what behavior will change versus what desire

there is for people to make money. Because it strikes me that when

companies make money off of an early action credit, somebody else

is going to have to pay for it in the future in terms of taking even

greater reductions that they may make at some future date.

Mr. FAY. I don’t think we’re suggesting that we’re trying to make

money on early action credits. I think what we are suggesting is

we don’t want to be in a position of creating again, regulatory jeopardy in the future if their actions, if their actions that were taken

today don’t count 10 years from now. But the question is would

they.

Mr. MCINTOSH. But the question is would they not take those actions today.

Mr. FAY. And I would have to suggest that there are actions that

may not be taken today.

Mr. MCINTOSH. That’s what I would like you to supply for us— some concrete examples of that. Let me now turn to Mr. Palmer.

I’ve got a question for you. You mentioned the Internet. Have you

seen any projections in terms of the percentage of the electricity

generated that will be used by the Internet say 5, 10 or 15 years

out?

Mr. PALMER. If you take the historical path, the studies that we

did with the Internet begins with coal. And these are preliminary

conclusions because no one has looked at this, and I might just add

as a digression here I think it might be very useful for this committee to ask the GAO to take a look at electricity implications of

what Congress has done here and the administration itself. We

have to answer these questions if we’re going to grow the Internet

because you need electricity. But the preliminary conclusions in our

study, the ‘‘Internet Begins with Coal,’’ is that current U.S. demand

is about 8 percent as related to the Internet. And 30 to 40 percent

of all increased U.S. demand since the Internet became a big thing,

1995, the growth and electricity demand is related to the Internet.

It you take that and extrapolate it there are about 60 or 70 million

Americans on line today and there are a total of 150 million people

approximately on line worldwide. You could come up with some

numbers with respect to what happens when you go to a billion.

Now, the conclusion that we have in our report is that when you

go to a billion, worldwide, you need electricity generating capacity

equal to what’s on the ground in the United States today and what

is on the ground in the United States today is a very large number.

We burn a billion tons of coal in the United States today in power

plants.

Mr. MCINTOSH. Per year you said.

Mr. PALMER. Per year, 1 billion tons. In close to 500 power

plants. I’m suggesting, Mr. Chairman, that it is going to swamp all

of the policy experts’ projections with respect to electricity demand.

It makes people like Amery Lovins, who made his living preaching

negawatts, and it makes him yesterday’s news. The notion that we

are going to conserve our way to a brighter future is nonsense. You

have to burn fossil fuels to make electricity and the coming demand worldwide because of the Internet is enormous and it’s not

stoppable.

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Mr. MCINTOSH. I’ll have to think a little bit to wrap my hands

around the billion or—— Mr. PALMER. Billion people on line.

Mr. MCINTOSH. Speaking in the United States you indicated

there were about 60 million people connected to the Internet.

Mr. PALMER. 60 to 70 million are the numbers I see most commonly used.

Mr. MCINTOSH. What are the projections for the number of people ‘‘on line’’ in 5 or 10 years?

Mr. PALMER. Our growth is actually projected to be

percentagewise not as great, so we might go to 150, you might get

a little over a doubling, but it’s the rest of the world where the

growth is going to be the greatest. But even in the United States

the growth will be dramatic.

Mr. MCINTOSH. And so if it doubled the number of users does

that mean, is it fair to say that Internet-related electricity demand

goes from about 8 percent to about 15 percent?

Mr. PALMER. I think that’s right. Well actually it depends on

what happens to the rest of the economy. And this isn’t in the

study, but I do think we see it in our business that the Internet

driving, the economy through the new startup companies in the

Internet. You see it with young people that you know, maybe members of your family that go to work for the dot coms. I have a

daughter who has done that, the startups, the boutique firms. It’s

happening everywhere all the time. This extraordinary growth in

the U.S. economy that we have is nationwide and it tends to be

very even no matter where you go. I believe it is related to that.

So if you have more economic growth generated by the Internet,

then the Internet itself, those numbers may change. But I would

say it would be safe to conclude that if you have a doubling of people on the Internet in the United States that the electricity supply

required for the Internet would go to 15 to 20 percent based on the

study, this preliminary study we’ve done.

Mr. MCINTOSH. Just so I can again get my hands around that

billion people figure, the electricity that you said required to fuel

that will be equal to the amount produced by the United States.

Mr. PALMER. Yes.

Mr. MCINTOSH. What percentage will that be assuming a static

amount of electricity used for other purposes for worldwide consumption.

Mr. PALMER. The United States today is 25 percent of the total

electricity demand worldwide. We are criticized for this by the way.

The environmental community thinks we live too well, that we

need to cut back the way we live. That we need to change the way

we live. We use by far more energy than any other society on

Earth. We’re 25 percent of that total. So if you double worldwide

production, in the next 5 to 10 years because of the billion people

that Intel says are going to be on line, 1 billion additional people,

you’re adding an increment of 25 percent to worldwide electricity

demand by definition. And I think that probably is going to understate it, which is going to be a lot of CO2 in the air.

Mr. MCINTOSH. From the Internet. So therefore between 20 and

30 percent, we would have to work out the math, of worldwide electricity consumption in the future will go to the Internet.

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Mr. PALMER. Will go to the Internet.

Mr. MCINTOSH. And Internet-related demand currently is a very

small percentage.

Mr. PALMER. Right now it’s a very small percentage.

Mr. MCINTOSH. Thank you. I wanted to get in my own mind

where we were headed with that and what the magnitude was. I

do have a couple more questions but let me turn now to Mr. Terry

see if he has any.

Mr. TERRY. The new motto is recycle, reuse and log off?

Mr. PALMER. That’s it. We’re going to ration Internet access. So

put in for your time slot.

Mr. TERRY. Well, I’ll remember that when I want to check out

the Huskers Web site the next time out. For the Environmental

Defense Fund, there’s no reason for you to just sit there, let me ask

you a question. One of my concerns in this allocation is who are

the winners and the losers by way of big business versus small

businesses. I missed the first part of your testimony, but I know

that you’ve hinted about it and or discussed it in your written testimony. Let’s talk about it a little bit more.

The crediting program would if reallocate the compliance credits

from firms that don’t act early to those who do—I think that’s the

way it works—you nonetheless maintain that small businesses

would enjoy some form of economic benefits, that the overall burden on the national economy would be less. I’m getting lost on that

to tell you the truth. For one, it assumes that small businesses

would not be able to compete in this, which is probably an accurate

statement. But also it seems to recognize that they would benefit

because of what I’ll call a ‘‘trickle down theory.’’ But I’m getting

lost how they’ll benefit from that. Perhaps you could explain to me

how small businesses that wouldn’t be able to compete for these

will enjoy this benefit?

Mr. KRUPP. Absolutely. That’s a very fair question and a good

one. I think what you’re really asking is a design question. Can you

on the Hill together with those in the private sector design a system that allows small business a level playing field and equal access to participate. I’m confident that you can. In fact the proposal

that was introduced yesterday by Congressman Lazio and Congressman Dooley and about 10 other Congressmen does allow small

businesses to play and allows small businesses to earn these credits through a variety of means, first of all by making sequestration

credits available. It’s easy to see how sequestration credits could be

monetized and parceled out and purchased by small businesses.

Second, it facilitates the playing by small businesses which would

be expected to face higher transaction costs by allowing a pooling

concept, a bunch of small businesses, associations of dry cleaners

could get together, associations of any sort could get together and

pool their actions.

So, in terms of the premise that it’s important that small businesses be allowed to play, I completely agree. And I think there are

ways through intelligent design that a good credit for early action

bill can anticipate that and I would include the proposal by the

Congressmen introduced yesterday in that category.

I would say that you’re quite right that as the expected emissions

growth goes down because there are incentives to make that busiVerDate 11-MAY-2000 11:17 Mar 26, 2001 Jkt 066360 PO 00000 Frm 00109 Fmt 6633 Sfmt 6602 E:\HEARINGS\60254.TXT pfrm09 PsN: 60254
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ness as usual curve go down, the burden on the whole economy, including small businesses, would go down. So that is yet another advantage.

Might I mention that I’ve become aware of an enterprise in Iowa

recently, Sherwood Forestry, a couple of enterprises, actually,

Americo 2 and Sherwood Forestry, both of which are small businesses devoted to working directly with farmers to harvest carbon

dioxide sequestration credits on a strictly business basis. Now, our

information is that one of these businesses is working in cooperation with the Iowa Farm Bureau.

This is the sort of participation not only by small conventional

business, but also by small farmers and farming businesses that

Senator Lugar, actually a Republican from your home State, as you

know, Mr. Chairman, of Indiana—he has actually introduced a bill

on the Senate side to facilitate such transactions to allow more

small farmers to play. It’s really a design question and a very legitimate concern, and one that can be addressed.

Mr. TERRY. I appreciate that. Even though I represent an urban

area of Omaha, NE, it’s a rural State. Our Farm Bureau was in

here asking for $14 billion in bailout because of the ag economy.

I was wondering how they are going to pool those resources. Maybe

the government should just go ahead and buy the credits for them.

I am still at a loss of how small businesses are going to be able

to accumulate the assets to participate and play in this.

Let me go on, though. I want to ask Mr. Fay one question here.

One of the ICCP’s credit for early action principles is no limit

should be placed on the amount of emission reductions or enhancement of things for which early action credit could be earned. But

all of the experts—the Center for Clean Air Policy, the Pew Center,

Resources for the Future—acknowledge that the early action program would reallocate Kyoto budget period credits from those who

do not act early to those who do. This principle seems downright

greedy. In fact, someone might even suspect the ICCP advocates of

early action crediting because ICCP member companies expect to

corner the market. Fair discussion.

Is that a reasonable suspicion or not in your opinion?

Mr. FAY. It’s not a reasonable suspicion at all, Mr. Terry. The

reason that we have said that there shouldn’t be any limits is because if entities are able to produce verified reductions, there is no

legitimate reason, in our view, for them not to be credited with

those reductions. That doesn’t deal with the issue of—what we

have set as one of our principles is that you should be credited with

the reduction.

We are not saying that the value of the credit should be determined at this time. That will be determined when ultimately the

Congress gets around to adopting some future programs. So there

shouldn’t be a question of whether you have earned the credit, did

you actually reduce the ton. But what that is precisely worth, that

is not going to be decided until, if and when there is a mandatory

program.

But you shouldn’t start discounting credits. If an industry has

taken steps and reduced a million tons of carbon, they ought to be

credited with reducing a million tons of carbon. It’s pretty silly to

start discounting that now.

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If you have got to the point where there was a mandatory program, you might be limited in how many of those credits you could

use at one time. That perhaps might be a reasonable proposal. But

if the incentive is to encourage taking steps to reduce tons, it is— it would be a silly exercise, particularly at this stage in a voluntary

program to start saying, well, you can’t have credit for—you can

only have credit for half of what you actually did. That, as an exercise, is—in our view, is pretty silly.

It is not a question of trying to corner the market to other people’s disadvantage. We would like to see those credit programs be

designed ultimately to establish the fact that the reductions occurred and not ultimately to disadvantage any future actors if

there is a mandatory program. We are not saying there should be

a mandatory program in the future.

Mr. KRUPP. Congressman Terry, if I might add, the idea that big

businesses may stand to gain more credits, if you look at the fact,

if we are trying to bend down the business’s usual curve, big business who are the big emitters are the ones that we are trying to

incent. So if one thinks climate change is real or may be real, if

one thinks there are risks to the U.S. economy by allowing the

curve to continue and face regulatory action in the future that

would be harsher if we don’t bend down the curve, then, yes, the

idea is to come up with a system that will get big emitters to emit

less. So I would acknowledge that to you.

I would also note, though, that the United Kingdom, Canada,

New Zealand, Norway, Denmark, in their highest levels of governments and their parliaments are moving ahead to establish these

programs. When you think of the benefits that would accrue to

their economies as they develop new technologies, new ways to

power the Internet with less energy, new ways to have more efficient cars, it becomes a real risk that if we don’t adopt a similar

system, we will be left behind competitively from a competitiveness

standpoint. That troubles me.

I see this proposal as a very modest proposal in view of the risks.

Mr. TERRY. Let me give you the forum here.

Mr. RIDENOUR. I would like to throw in my 2 cents here. It has

been suggested that this emissions crediting system would allow us

to spread out over time and avoid the wrenching consequences of

Kyoto. It is an insurance policy, we are told.

But they wouldn’t allow us to avoid these wrenching consequences. Early crediting would simply redistribute them as you

have wisely suggested, to small business. The plain fact of the matter is that small businesses don’t have the kind of lobbying power

here in Washington, DC, to be able to get early credits. The Kyoto

Protocol, as you have also suggested and groups such as the Pew

Center have suggested, requires that any credit that is given by

the President of the United States, would have to come out of the

total that is allowed for the United States under the Kyoto Protocol. That’s assuming, of course, that there aren’t changes to the

Kyoto Protocol. But right now as it stands, it would come out of our

allotment.

That is something that should concern us a great deal. Remember, small business creates two-thirds of all new jobs in this country. We are talking about competitiveness here.

108

I also want to point out that if we are really concerned about

people who are disadvantaged in this country, blacks and Hispanics, we can’t possibly support early action crediting. What kind

of businesses do you suppose they have? They are small businesses.

We should not snuff out their chance at the American dream.

Mr. TERRY. I have got some folks in my office, but this is fun.

Can I have one more question?

Mr. MCINTOSH. Sure. You have been with us diligently all day

long.

Mr. TERRY. Getting back to Mr. Fay, I guess we are going right

to left from our perspective at least. In your testimony, you write

that, ‘‘the failure of the credit voluntary emissions reductions could,

unfairly,’’ force early reducers to make more costly reductions later.

But isn’t this a problem of your own making, a problem groups

like the ICCP have brought upon themselves by promoting the concept of a mandatory global treaty?

Mr. FAY. I don’t think that I am going to characterize us as promoting a mandatory global climate treaty. We were organized to

provide what we consider to be responsible input into a policy process. We have attended all of these negotiations.

It is pretty amazing to go to a negotiation for 10 years to watch

170 countries, including our own government, including Republicans and Democrats, and there is no country opposed to dealing

with climate change. So if you want to look big business in the eye

and say, well, climate change isn’t an issue, it would be pretty hard

to convince them of that based on the activity that we have seen

to date.

We do believe that there is some compelling scientific concern out

there that this is an issue that is going to be dealt with. We also

believe that technology, hopefully, will deal with this problem or

survive the policy processes so that technology can deal with the

problem. We think that we are going to have the technology solutions to do that.

But there is no question the policy process is moving on ahead

and no one seems inclined to say there is not going to be a climate

change policy. What we are saying is, if you are going to do this,

it should be done on a market basis. Every economic study that I

have seen says that the market-based approach reduces costs 40 to

80 percent. But if you are going to do this, that’s a policymaker’s

decision. And at the same time we should try to do this as cost effectively as possible so that we can manage our way through this

and so that we can introduce the technologies to achieve the objectives that, frankly, the policymakers have yet to identify.

Mr. MCINTOSH. Thank you for joining us, Mr. Terry; I appreciate

it.

I do have a couple of more questions, just following up on Mr.

Terry’s and our earlier discussion, Mr. Fay. Am I incorrect in understanding that one of your core concerns is the fairness of the

baseline that gets established in the future? Would that concern be

solved if either at the time the protocol is ratified or as a separate

policy statement in advance of that, the Senate and Congress

agreed that when they establish the baseline for compliance they

will adjust from 1990 forward, based on what industry changes has

happened?

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Mr. FAY. That goes a long way toward addressing our concerns,

yes. I would also be willing to accept Mr. Kemp’s offer of a tax expensing provision in lieu of a credit, if they would like to do that,

too.

Mr. MCINTOSH. Well, I will tell you my concern about an early

action credit program goes way down when the credit that is received is a tax credit or even a credit against other environmental

compliance, because you don’t have these perverse incentives in the

policy debate on Kyoto. That’s really a timing question. Once the

decision has been made by the Senate to ratify that treaty then,

sure, have the credits for actions that are already established policy. OK.

Mr. FAY. Let me just say, though, that we started talking about

credit long before there was a Kyoto. We don’t see this as Kyoto

driven. The problem is the Framework Convention that we ratified

and is the official statement of the United States on climate

change: that climate change is a problem, that 1990 is going to be

our baseline and we have made a national commitment to reduction measures and, now, all of the discussions about mandatory

programs in the future. Well, between 1990 and whenever we get

to that mandatory program, things are going to change. Companies

like Intel, the semiconductor industry is five times the size they

were then.

Mr. MCINTOSH. You read ‘‘Kyoto’’ as a shorthand for mandatory

requirements in the future, which I don’t think is established policy

of the country.

Mr. FAY. No. I am saying that our credit protection discussion is

not—our opposition is not based on the fact that Kyoto is out there.

It’s based on the fact that all of the discussion that we have seen

on climate, every indicator that we have seen is that at some point

somebody is going to propose a mandatory program. We are not

saying that we want a mandatory program. We would love to do

it on a voluntary basis if we could.

Mr. MCINTOSH. Let me be clear, my concern about a program for

early action credit is giving you credit toward any future mandatory program because it creates perverse incentives for adopting

that policy. Credits toward other things, such as tax credits, I am

happy to do; I think that makes sense. You create incentives for

people to do something that is socially useful. That’s assuming the

science is correct or assuming, as Mr. Krupp pointed out, that in

uncertainty you want to take some policy action.

Thank you. I think that you have cleared up in my mind the different concerns that your group has, although I really would like

some of those specifics that we talked about.

Mr. Krupp, let me ask you, have you had a chance to see a

story—I think it appeared today in the GreenWire, titled, ‘‘Critics

say EDF tainted by association with ERT?’’

Mr. KRUPP. I have.

Mr. MCINTOSH. You haven’t seen that?

Mr. KRUPP. I have seen that.

Mr. MCINTOSH. So you are familiar with it. Some critics say that

EDF would profit from the policy of which it is a leading supporter,

essentially this early action credit policy. Now, some people believe

that EDF was the chief outside consultant in developing some of

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the language of that legislation specifically over in the Senate. Is

that perception a correct one?

Mr. KRUPP. I think EDF was one of a series of constituent groups

that participated in discussions that led to the Senate bill.

Mr. MCINTOSH. Did you work at all or did EDF work at all on

the measurement and verification section?

Mr. KRUPP. I am sure we consulted on the entire bill.

Mr. MCINTOSH. I assume that you are familiar with this. That

section would permit qualified independent third parties to measure, track, and report emission reductions on behalf of participants.

You are more familiar with this legislation than I am, having consulted and given opinions to the Senate in its drafting. What type

of organizations are qualified to measure, track, and report emissions reductions and would EDF or Environmental Resources Trust

or EEI, I guess, would any of those entities fit the description of

qualified independent third party?

Mr. KRUPP. Let me—EDF, I am told, would not fit the description. It’s unclear whether ERT would or not. Perhaps it would be

useful, Mr. Chairman, since you have raised the question if I—I

understand it is a legitimate question to ask when the money is involved, what is going on—if I explained a little bit about ERT and

EDF.

Mr. MCINTOSH. I’m sorry, Mr. Krupp, but would you repeat that

last——

Mr. KRUPP. Since you have raised this issue, perhaps you would

like me to explain, and I would appreciate the opportunity to explain a little bit about EDF’s role and ERT’s role.

Mr. MCINTOSH. Absolutely. In fact, that was going to be my next

question. Please do.

Mr. KRUPP. I think when money is involved people have a right

to ask questions. I don’t take offense at people asking tough questions of us, just as we ask tough questions of ourselves and others.

Especially since there are folks who don’t like emissions trading to

begin with, I can understand why these questions would be asked.

Let me make three points——

Mr. MCINTOSH. Also, if I can interject, so you know where I come

from, I like the concept of emissions trading in general. I commend

what EDF has done in some of the other areas, in acid rain and

any other policy areas. So it’s not an automatic that I’m opposed

to those types of ideas. I tried to explain earlier some of the factors

that lead me to be concerned about this particular legislation. But

you are right, there are probably some people out there who are opposed to——

Mr. KRUPP. I appreciate that, Mr. Chairman, that you were part

of the Bush administration that came up with the historic innovation of acid rain emissions trading, and I am very appreciative of

that. But the Environmental Defense Fund’s advocacy of these

market-based solutions, as is illustrated by that particular example, when we advised the White House—and ‘‘advised’’ is the right

word in all of these cases—about how to establish a market-based

policy for acid rain is part of a long tradition at the Environmental

Defense Fund of believing that market-based solutions offer flexible

opportunities to get performance, get environmental benefits.

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We have worked with legislators on water marketing in California, part of the Miller-Bradley act that was enacted at CDPIA.

We have worked with companies from McDonalds to—as various as

from McDonalds to British Petroleum on various voluntary programs to get environmental gains, just as we have continued to litigate and engage a whole wide variety of tools.

So at no time has the Environmental Defense Fund’s advocacy

been affected by the fact that a couple of years ago we did help to

create an independent 501(c)3 organization whose mission, I might

say, is my second point, is also environmental protection. The

whole concept that there is a supposed conflict of interest between

two independent 501(c)3s, both nonprofits, both with environmental missions, one that chooses advocacy and one which chooses

transactions, strikes me as odd. I just don’t see it. But to the extent

that the Environmental Resources Trust ever earns fees or revenues that exceed expenses, as I understand their operations, those

revenues would be plowed right back into environmental projects.

In no case will funds ever flow from the Environmental Resources

Trust to the Environmental Defense Fund.

My third and final point is that because the missions of these organizations are both environmental missions, because both organizations believe in market-based transactions, I think the fact that

EDF has a continuing relationship and that three of our staff members serve on the board of Environmental Resources Trust is a useful confluence that allows for synergies because if one believes that

these market mechanisms are good ways to achieve environmental

progress, as we do, then having the ability to work with an organization that is doing demonstration transactions like ERT is good

from the perspective, my perspective as head of the Environmental

Defense Fund.

So I don’t see the case for a conflict; I see a real confluence. But

there are no revenues that are going to flow back to the Environmental Defense Fund from this whatsoever.

Mr. MCINTOSH. OK. You have addressed the conclusion which

that article moved toward, and I am glad that you were able to put

that on the record. Let me, though, ask you a couple of questions

about ERT. I think that I understand the difference between EDF

and ERT. You are telling me they are separate entities with some

overlap on the board, and you EDF helped ERT to get started, but

they are run as independent organizations.

You may not be able to answer some of my questions about them,

but let me ask you if you know. Does ERT have contracts or memorandums of agreement to monitor and certify emissions reductions

with any company at this point, particularly any utility?

Mr. KRUPP. Yes.

Mr. MCINTOSH. They do? Do you know what that arrangement

is and what that company is?

Mr. KRUPP. The company is Niagara Mohawk.

Mr. MCINTOSH. What is the nature of that memorandum of understanding and, in particular, how is ERT compensated for providing the monitoring services?

Mr. KRUPP. It’s—there is compensation for the reporting of emissions that is provided to ERT by Niagara Mohawk under that

memorandum.

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Mr. MCINTOSH. And I think this came from a press release from

ERT, but they were to receive some of the compensation as a commission on reductions sold or transferred, is that right, and then

some emissions credits themselves?

Mr. KRUPP. That was discussed but, no, that is not the way that

it works.

Mr. MCINTOSH. OK. Share with me then how it does work.

Mr. KRUPP. I think I just did. There is straight monetary compensation for the provision.

Mr. MCINTOSH. OK. It’s a flat fee that they are paid?

Mr. KRUPP. Yes.

Mr. MCINTOSH. OK. And they are capable of entering into the

business of monitoring those emissions credits for which they understandably would ask for a fee to do that work?

Mr. KRUPP. Yes.

Mr. MCINTOSH. Let me ask this.

Mr. KRUPP. Mr. Chairman, I guess the services that are provided

really are reporting as opposed to monitoring. ERT would have to

interact with others who would do the monitoring.

Mr. MCINTOSH. So the company or monitors—they hire someone

else to monitor, and the ERT certifies that they are correct?

Mr. KRUPP. Essentially, yes. An independent public registry is

provided by ERT.

Mr. MCINTOSH. Based on my experience in the Bush administration that you referred to, an independent registry gives people a

great deal of comfort that, in fact, reductions are occurring. I understand the purpose of it.

You can understand, I think, dealing in public policy as you do,

the concern that arises that there would be, if not an actual monetary benefit to the Environmental Defense Fund, an appearance

that there may be a potential here to benefit from this legislation.

Would you support language being added to the legislation that

prohibits companies or charitable organizations, whatever, from receiving compensation other than compensation for the monitoring

service from those individuals or those entities that they monitor?

In other words, people with conspiracy theories could construct a

scenario where ERT is monitoring Mohawk and Mohawk is also approached by EDF for a financial contribution. Would you agree that

it would be important, to maintain the integrity of the legislation,

that that be prohibited?

Mr. KRUPP. I think there is a simpler solution, Mr. Chairman.

Environmental Defense Fund doesn’t accept contributions from

anyone that emits. We have never accepted a corporate contribution from a utility or manufacturer, period.

Mr. MCINTOSH. So yours are more broad in avoiding that appearance of conflict?

Mr. KRUPP. I think that we have found, in effect, a solution. We

are not supported by companies that emit pollution, manufacturing

business and the oil business. Out of our $30 million budget last

year, I would be surprised if one-tenth of 1 percent of our income

came from corporate foundations, and if so, I think Newman’s Own

gave us a gift.

Mr. MCINTOSH. Two questions then arise. I think that you are

correct in pointing out that that would solve the problem for you.

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I assume that you would make pledges to not change that policy

if EDF or ERT entered into the monitoring business.

Mr. KRUPP. We are not going to change that policy.

Mr. MCINTOSH. Given that, do you think that it would be good

to change the legislation so that other non-profit organizations

would have the same legal restraints that you have adopted voluntarily?

Mr. KRUPP. I would be happy to look at any suggestions that you

draft and comment on specific language.

Mr. MCINTOSH. Good. I appreciate that.

I appreciate your candor on this, and hopefully we have given

you the opportunity to respond to that article.

I have no further questions. Anybody else?

Mr. Ryan.

Mr. RYAN. Where is Jack Kemp?

Mr. MCINTOSH. Catching a football.

Mr. RYAN. I just want to apologize, Mr. Chairman. Like you got

dragged into an office with the Ways and Means chairman, I did

with the majority leader on some important issues—important to

Wisconsin. So sorry about being late.

Mr. MCINTOSH. Diary farmers?

Mr. RYAN. It has something to do with part of our daily diet; let’s

put it that way. At this time I really have no questions.

Mr. MCINTOSH. Thank you, Mr. Ryan. As I said, we will keep the

record open for 10 days. If the minority has any additional questions, since Dennis wasn’t able to get back, you can forward those

on to the witnesses.

Thank you for participating. I appreciate it greatly. The hearing

is adjourned.

[Whereupon, at 5:44 p.m., the subcommittee was adjourned.]

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