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CLIMATE CHANGE

CONFERENCE

BEFORE THE

COMMITTEE ON 

ENERGY AND NATURAL RESOURCES 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

ON

CLIMATE CHANGE

APRIL 4, 2006

(

Printed for the use of the 

Committee on Energy and Natural Resources 

(II)

COMMITTEE ON ENERGY AND NATURAL RESOURCES 

PETE V. DOMENICI, New Mexico, Chairman 

LARRY E. CRAIG, Idaho 

CRAIG THOMAS, Wyoming 

LAMAR ALEXANDER, Tennessee 

LISA MURKOWSKI, Alaska 

RICHARD BURR, North Carolina 

MEL MARTINEZ, Florida 

JAMES M. TALENT, Missouri 

CONRAD BURNS, Montana 

GEORGE ALLEN, Virginia 

GORDON SMITH, Oregon 

JIM BUNNING, Kentucky 

JEFF BINGAMAN, New Mexico 

DANIEL K. AKAKA, Hawaii 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

TIM JOHNSON, South Dakota 

MARY L. LANDRIEU, Louisiana 

DIANNE FEINSTEIN, California 

MARIA CANTWELL, Washington 

JON S. CORZINE, New Jersey 

KEN SALAZAR, Colorado 

BRUCE M. EVANS, Staff Director 

JUDITH K. PENSABENE, Chief Counsel 

ROBERT M. SIMON, Democratic Staff Director 

SAM E. FOWLER, Democratic Chief Counsel 

JOHN PESCHKE, Professional Staff Member 

JONATHAN BLACK, Democratic Legislative Assistant 

(III)

C O N T E N T S 

STATEMENTS 

Page

Bailey, Paul, Director, Generators for Clear Air ................................................... 43

Bingaman, Hon. Jeff, U.S. Senator from New Mexico .......................................... 2

Bradley, Michael, Executive Director, Clean Energy Group ................................ 40

Callahan, Kateri, President, Alliance to Save Energy .......................................... 38

Claussen, Eileen, President, Pew Center .............................................................. 62

Domenici, Hon. Pete V., U.S. Senator from New Mexico ..................................... 1

Doniger, David, Policy Director, Climate Center, Natural Resources Defense 

Council .................................................................................................................. 46

Edward, Garth, Trading Manager, Environmental Products, Shell .................... 7

Feinstein, Hon. Dianne, U.S. Senator from California ......................................... 14

Grumet, Jason, Executive Director, National Commission on Energy Policy .... 24

Helme, Ned, President, Center for Clean Air Policy ............................................ 21

Hobson, Chris, Senior Vice President, Research and Environmental Affairs, 

Southern Company .............................................................................................. 9

Johnson, Kirk, Executive Director of Environmental Affairs, National Rural 

Electric Cooperative ............................................................................................. 45

Krupp, Fred, President, Environmental Defense .................................................. 42

Marron, Donald, Acting Director, Congressional Budget Office .......................... 22

Moler, Elizabeth A., Executive Vice President, Government and Environmental Affairs and Public Policy, Exelon Corporation ...................................... 5

Montesano, Craig, Director of Governmental Affairs, National Mining Association ........................................................................................................................ 44

Morris, Michael, Chairman of the Board of Directors, Edison Electric Institute ........................................................................................................................ 41

Morris, Michael, Chairman of the Board, President, and Chief Executive 

Officer, American Electric Power ........................................................................ 58

Murray, Michael, Director, Legislative Policy, Sempra Energy .......................... 8

Pershing, Jonathan, Director, Climate, Energy, and Pollution Program, World 

Resources Institute .............................................................................................. 63

Pizer, William, Senior Fellow, Resources for the Future ..................................... 26

Pomerance, Rafe, Chairman, Climate Policy Center ............................................ 60

Richels, Richard, Technical Executive for Global Climate Change Research, 

Electric Power Research Institute ...................................................................... 23

Rosenzweig, Richard, Chief Operating Officer, Member of International Climate Change Partner, Natsource ....................................................................... 61

Ruben, Andy, Vice President of Corporate Strategy and Sustainability, WalMart Stores, Inc ................................................................................................... 10

Shaw, Ruth, Group Executive for Public Policy and President for Duke Nuclear, Duke Energy Corporation ......................................................................... 4

Slump, David, General Manager, Global Marketing, GE Energy, General 

Electric Company ................................................................................................. 5

Sterba, Jeff, Chairman, President, and CEO, PNM Resources ........................... 6

Thorning, Margo, Senior Vice President and Chief Economist, American 

Council for Capital Formation ............................................................................ 20

Walsh, Michael, Senior Vice President, Chicago Climate Exchange ................... 59

Wolfe, Samuel, Chief Counsel, New Jersey Board of Public Utilities ................. 25

(1)

CLIMATE CHANGE 

TUESDAY, APRIL 4, 2006 

U.S. SENATE, COMMITTEE ON ENERGY AND NATURAL RESOURCES

Washington, DC. 

The committee met, pursuant to notice, at 9:55 a.m., in room 

SD–G50, Dirksen Senate Office Building, Hon. Pete V. Domenici, 

chairman, presiding. 

OPENING STATEMENT OF HON. PETE V. DOMENICI, U.S. 

SENATOR FROM NEW MEXICO 

The CHAIRMAN. Hello, everybody. I guess if one was planning a 

way to make something difficult, we would have planned it this 

way. It is going to be about as tough as possible to get this done 

in an orderly manner. Nonetheless, we want you to know we do appreciate it, and we’re going to get the benefit of what is gathered 

here and what you have worked on, regardless on the—what intervenes and what causes us to have commotion because of us not 

being in control of the Senate. And we are not in control of that. 

The Senate’s going to have votes this afternoon. There’s an appropriations markup, which takes six of our members. Other things 

are going to intervene regularly. And we are about as far from the 

floor as we can be, by just an accident of arrangement. So, that’s 

going to mess things up a bit, too. 

But I think what we’ll do is just see what happens, and you bear 

with us. Okay? We’ll try to follow our schedule. 

I have some brief opening remarks, and then I’ll yield to Senator 

Bingaman, and we’ll move right along from there. 

First, I want to take this opportunity to thank everyone who submitted comments on our white paper. We received more than 150 

submissions, containing more than 500 individual documents. Our 

white paper is based on the Sense of the Senate Resolution adopted 

by the U.S. Senate shortly before it passed the Energy Policy Act 

of 2005. That resolution was not included in the conference report, 

but Senator Bingaman and I agreed that we would follow that resolution with the white paper in an attempt to identify a path forward on developing an approach to a mandatory-based mechanism. 

The white paper proposed four questions: Who is regulated, and 

where? Should allowances be free or auctioned? Should a U.S. system allow trading with other cap-and-trade systems around the 

world? And should the U.S. cap-and-trade system be conditioned on 

comparable action by developing nations? 

These, the response, both in terms of sheer numbers and breadth 

of input, is overwhelming. Most of those who submitted answers 

2

were extremely generous with their time and ideas, for which we 

are extremely grateful. A number of responses were adamantly opposed to the imposition of mandatory controls on greenhouse gas 

emissions. Some expressed opposition, others offered suggestions 

about how to construct a mandatory program. Still others wholeheartedly supported a mandatory approach. A number of comments 

suggested an upstream approach to regulation. Others recommended regulating downstream, large emitters. And still others 

recommended a hybrid system that regulates at various points 

along the economic spectrum. 

Responses to other questions were equally diverse. Some favor 

free allowances, to minimize any economic impacts, others favor 

the allowance auction approach. Some favored linking trading with 

other systems, and opposed linkage. With regard to comparable action by the developing world, some suggested waiting for such action by others, and some submitters urged that the United States 

move now, rather than wait, and believes that our imposition 

would encourage the development, in those nations, of similar or 

the same. 

Obviously, I have simplified, dramatically, the range of responses. Many are very detailed and complex, and, in some instances, it was very hard to even summarize them, to be honest. 

But the range of responses to the questions supports my feeling, 

when we were discussing a possible amendment to the energy 

bill—I felt then, and I feel now, that designing and implementing 

a mandatory system will be very difficult, both politically and economically. Consensus will be a very difficult thing. But I also feel 

now, as I did then, that we need to start somewhere. And this conference is our starting point. 

Special thanks go to those selected to participate today. Your 

comments illuminate the magnitude of the task faced by the committee, and, indeed, the task faced by the Congress, if it is to design a mandatory market-based greenhouse gas emission program 

that is fair to all affected and produces substantial greenhouse gas 

emission reductions that does no harm, does maximum harm to 

the—minimum harm to the economy and encourages the developing world to get on with their part of the effort. 

I do not know where we will end up, but I do believe that a large 

number of our citizens are concerned about climate change and I 

think that Congress needs to explore ways to reduce our contribution to the greenhouse gases to the atmosphere. 

With that, I ask Senator Bingaman to take his time and proceed 

as he sees fit. 

Senator Bingaman. 

STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR

FROM NEW MEXICO 

Senator BINGAMAN. Thank you very much, Mr. Chairman. 

Thanks, first, to you for holding this conference. I think this is a 

very useful thing to be doing, and I echo your thanks to all of those 

who are participating and to all of those who have filed comments 

in response to the white paper that we issued. I think that the seriousness with which many of the respondents address the issues, I 

3

think, is very heartening. It’s obvious that this is a subject that 

many people feel is in need of attention. 

Let me just take the rest of my few minutes here to call on Perry 

Lindstrom, who’s with the Energy Information Agency. He, kindly, 

came over here to very briefly explain a chart that the Energy Information Administration prepared for us, entitled ‘‘Greenhouse 

Gas Emissions Flow 2004.’’ When I finally took the time to look at 

that chart, I thought it was pretty useful. And so, I suggested that 

maybe Perry could come and briefly describe what’s involved with 

the chart. I think copies have been made available to people. 

And, Perry, why don’t you go ahead and give us your short explanation, and then I think the chairman intends to go ahead with the 

statements. 

Go ahead, Perry. 

Mr. LINDSTROM. Thank you, Senator. 

This is just a brief overview of what the emissions look like in 

the economy in 2004, which is the latest year for which we have 

complete data. As you see, petroleum is the largest single category, 

starting on the left here, which is the—kind of the input, or upstream, side. And then coal is the second largest, followed by natural gas. If you look down here, this ‘‘renewables’’ is mainly plastics and things of that nature that are burned at municipal solidwaste sites, things of that nature. 

So, those four categories make the energy total—subtotal. And 

then, you add to that, for the CO2 total, industrial process emissions, and that gives you the total CO2 in the economy. 

In addition to CO2, there are other gases, such as methane, nitrous oxide, and some high GWP gases, which are more esoteric, 

things like sulphur hexafluoride, that are also used in our economy. 

You move from there to the middle of the chart, this is where the 

conversion to electricity takes place. And you see that we have ‘‘direct emissions’’ here, which then are in the end-use sectors. And 

then, the conversion emissions, we allocate them out to the end-use 

sectors based on electricity sales. 

A little more complex part of this chart was allocating methane 

and nitrous oxide and the other gases to the end-use sectors. We 

had to make some judgments as to where those other gases would 

go, and you can see, from looking at the ‘‘C’’ section, over to the 

far right, that many of those end up in the industrial sector, in 

terms of our end-use allocation. 

There are some adjustments that are made under the United Nations Framework Convention on Climate Change. We add in the 

U.S. territories, and we—under that agreement, the international 

bunker fuels are removed from every country’s inventory. 

I should mention that we have a memorandum of understanding 

with the U.S. EPA, and we give the energy data to the U.S. EPA, 

and they submit it every April, around April 15, to the United Nations, and that’s our official submission, in terms of the U.S. inventory of greenhouse gases. 

That’s basically it, in a nutshell, fairly straightforward. I can answer any questions, if you have them. 

Senator BINGAMAN. Well, instead of me asking questions, maybe 

we’ll have some as we go through the first panel here. 

4

Mr. LINDSTROM. All right. 

Senator BINGAMAN. Thank you very much, Mr. Chairman. 

The CHAIRMAN. Well, Senator Bingaman, I think that was a very 

good way to start this day off. It’s the best explanation I have seen 

of the whole summary of it—where it starts, how it changes, and 

where it comes out. 

Now, with that, we’re going to hold to the schedule, and we ask 

everybody to do their very best. We’re going to go right around. 

Each one knows what they’re going to be talking about. Each one 

has their mike. 

And we’re going to start with you, Ruth Shaw, Duke Energy Corporation. 

STATEMENT OF RUTH SHAW, GROUP EXECUTIVE FOR PUBLIC 

POLICY AND PRESIDENT FOR DUKE NUCLEAR, DUKE ENERGY CORPORATION 

Ms. SHAW. Thank you, Mr. Chairman. 

I am Ruth Shaw, group executive for public policy, and president 

of Duke Nuclear, for Duke Energy Corporation. We appreciate the 

committee’s initiative in holding this Climate Conference, and the 

opportunity to participate. 

As the Nation’s largest investor-owned utility with a diverse fuel 

mix and a commitment to sustainability, Duke Energy is considering plans for new nuclear generation, for new lower emission pulverized coal units, and for IGCC, with the ability to capture carbon, 

as well as other options, including improved efficiency. 

The assets we are contemplating will serve our nearly 4 million 

electric customers across five States for 50 years or more, and will 

impact their electricity power—their electricity prices for at least 

that period of time. The investment required is many billions of 

dollars. Customers and shareholders need greater certainty about 

carbon constraints and costs as we make these significant decisions 

for our future. 

Therefore, Duke Energy favors U.S. policy on climate change 

that, first, is mandatory, not voluntary; second, is economywide in 

its scope, sending consistent signals to all sectors in all regions; is 

market-based, with price transparency; promotes development and 

use of new technologies, which are essential long-term success; is 

simply to administer; provides price certainty; and begins now, becoming more stringent gradually over time. We think this can be 

achieved through a well-designed cap-and-trade program that applies upstream, effectively sending a price signal to all energy 

users, including a safety valve, and using allowance allocations to 

address economic impact. 

A carbon tax could also be an effective approach, and we look forward to working with you on a greenhouse gas reduction program 

that can be part of a global solution. 

The CHAIRMAN. Thank you very much. 

Elizabeth Moler. 

5

STATEMENT OF ELIZABETH A. MOLER, EXECUTIVE VICE 

PRESIDENT, GOVERNMENT AND ENVIRONMENTAL AFFAIRS 

AND PUBLIC POLICY, EXELON CORPORATION 

Ms. MOLER. Good morning, Mr. Chairman and members of the 

committee. 

I’m executive vice president of government and environmental affairs for Exelon Corporation, the Chicago-based utility company. 

Our chairman and CEO, John Rowe, serves as co-chair of the bipartisan National Commission on Energy Policy. We appreciate the 

committee’s invitation to appear today, and, in particular, the recognition you have given to the NCEP report in the committee’s 

white paper. 

In my brief time this morning, I want to stress the need for a 

mandatory, comprehensive, and balanced national greenhouse gas 

program. Like Duke, Exelon believes the greenhouse program must 

be mandatory. There is compelling scientific evidence that global 

warming is both real and caused by human activity. 

We advocate either a carbon tax, which has many advantages, 

particularly from an efficiency point of view, or a cap-and-trade 

system of the type recommended by the NCEP. It is critical that 

we start now. We need economic and regulatory certainty in order 

to invest in a low-carbon energy future. The committee has held 

hearings on climate-change issues for nearly 30 years. The first one 

was in 1978, when I was still on the staff. It’s time to act. 

Second, greenhouse gas regulation must be comprehensive. It 

must employ carbon intensity targets designed to slow, stop, and 

ultimately reverse greenhouse gas accumulation in the atmosphere. 

It must be a national program. It must be economywide, in order 

to be fair. And it should be upstream. 

Finally, any cap-and-trade program must be balanced. It must 

include a safety valve and an allocation scheme designed to ensure 

that the costs do not outweigh the environmental benefits. Allowances should initially be allocated for free, to avoid undue economic 

burden to consumers, but, over time, they should be options. And, 

finally, any allowance program should not create windfalls or distort price signals to customers. 

Thank you. 

The CHAIRMAN. Thank you. 

Now we’re going to stand in recess and go vote. You’re free to behave as you’d like. 

[Laughter.] 

[Recess from 10:06 to 10:26 a.m.] 

The CHAIRMAN. Thank you very much. We will now proceed. 

David Slump, please. 

STATEMENT OF DAVID SLUMP, GENERAL MANAGER, GLOBAL 

MARKETING, GE ENERGY, GENERAL ELECTRIC COMPANY 

Mr. SLUMP. Chairman Domenici, Senator Bingaman, members of 

the committee, I am David Slump, general manager of global marketing for GE Energy. We thank you for this opportunity to speak. 

GE supports congressional action now to start reducing greenhouse gas emissions. Any solution must include a market-based 

price for carbon and incentives to develop and deploy zero- and lowcarbon-emitting technologies. Clean energy technologies cannot 

6

reach their full potential unless and until energy choices reflect a 

forward price for carbon. Prolonging uncertainty on carbon in the 

United States delays and distorts technology decisions, particularly 

with respect to power generation where investment lives are 50 

years or more. 

Technology is the answer to this dual environmental and economic challenge. Development and deployment of new technologies 

cannot occur in a vacuum. Clear public policy is needed to accelerate continued development and deployment of high-efficiency natural gas, renewables, cleaner coal, next-generation nuclear, and advances in carbon capture and sequestration. 

Coal must continue to be a significant part of our energy fuel mix 

in a carbon-constrained world, and IGCC is a way to burn coal 

cleaner. IGCC provides a very clear example of the economic distortion and technology deployment caused by the lack of a forward 

predictable price for carbon. IGCC is more expensive in initial capital cost, but becomes the most cost-effective coal options when carbon-capture and storage are valued. Absent a public policy that values carbon, IGCC is disadvantaged, as utilities must justify their 

decisions on a cost basis for rate recovery or financing. 

Any U.S. sector subject to carbon constraint must be allowed to 

meet a portion of its obligations through offset projects, including 

in India and in China. Such linkages will lower U.S. costs, help 

maintain U.S. energy technology leadership, preserve U.S. jobs, 

and also revitalize U.S. leadership in science and engineering education. We stand ready to work with all stakeholders to assure that 

this issue is addressed in the most cost-effective manner possible. 

Thank you. 

The CHAIRMAN. Thank you very much. 

Jeff Sterba. 

STATEMENT OF JEFF STERBA, CHAIRMAN, PRESIDENT,

AND CEO, PNM RESOURCES 

Mr. STERBA. Thank you, Mr. Chairman, Senator Bingaman, 

members of the committee. 

I’m Jeff Sterba, chairman, president, and CEO of PNM Resources, an energy holding company headquartered in Albuquerque, New Mexico. We provide electric and gas service throughout the State of New Mexico, parts of Texas, and at the wholesale 

level throughout the Western United States, using coal, nuclear, 

wind, and natural gas. 

At PNM Resources, we agree with the comments that have gone 

before us that we believe now is the time for a healthy debate, at 

the Federal level, on climate change, and support the move to a 

mandatory program. 

Let me speak specifically on some of the design principles. I 

would suggest a climate program that, first, is economywide. There 

is no single carbon fuel or industry sector that causes a majority 

of carbon emissions and the low hanging fruit of carbon reductions 

are likely scattered throughout the economy. And only an 

economywide program will avail itself to those opportunities. 

Second, it needs to place the focus on the real solution: technology, both the deployment of existing technology and energy effiVerDate 0ct 09 2002 15:10 Jun 15, 2006 Jkt 109420 PO 28095 Frm 00010 Fmt 6633 Sfmt 6633 R:\DOCS\28095.TXT SENERGY1 PsN: RSMIT
7

ciency, but, more particularly, the funding of future low-carbon and 

carbon-free technology deployment. 

Third, that utilizes market mechanisms such as a cap-and-trade 

program and other mechanisms that recognize the interrelationship between carbon reductions and economic vitality. So, I commend the notion of a carbon intensity measure as the one to work 

with, because it brings the two things together. 

Fourth, that places the point of regulation as close to the end 

user as possible, for efficiency reasons, but recognizes the transactions costs when millions of users are involved. So, I would differ 

a bit with the previous speakers and recommend a hybrid system, 

where the point of regulation is at the plant level for coal, where 

you have just several thousand users, and upstream for petroleum 

and natural, where there are millions of users. 

Fifth, that allocates to existing coal-fire-generation allowances of 

large major of their emission—of their current emissions. It could 

be reduced over a long-term timeframe. 

Sixth, that incorporates a safety valve to manage the impact of 

a cap-and-trade system. 

Seventh, that allows U.S. companies to invest internationally. 

And, last, that requires the United States to pursue multiple mechanisms, such as the AP6 Initiative, to encourage all major nations 

to commit in an appropriate way. 

Thank you. I look forward to your questions. 

The CHAIRMAN. Thank you very much. 

Garth Edward. 

STATEMENT OF GARTH EDWARD, TRADING MANAGER, 

ENVIRONMENTAL PRODUCTS, SHELL 

Mr. EDWARD. Chairman, Senators, thank you for this opportunity. 

I’m Garth Edward. I’m the manager for the environmental trading in the Shell group. 

Shell shares the concern on climate change, and we believe that 

action should be taken in an equitable and an economically responsible way. Now, let me focus on the questions that you’ve tasked 

us with. 

First of all, on the issue of the point of regulation, Shell believes 

that a downstream allocation approach delivers the best results. 

The entity that is regulated and has the allocation must be able 

to actually implement the technologies that reduce emissions. This 

means that generators in large industry, including refineries, 

should be covered in respect to their stationary source emissions. 

However, on the transport side, we believe that vehicle manufacturers may be in the best position to implement the technologies 

and choices that address mobile source emissions. 

In terms of allocation approaches, we believe that 

grandfathering—by that, we mean the free allocation of allowances, 

based on historical emissions—may have a role to play at the start 

of a system, but we believe that a move towards auctioning is likely 

to become necessary, and that this will become more attractive to 

business if a transparent recycling of revenue can be achieved, especially one that minimizes the draw on any working capital. 

8

In terms of linking with other international markets, both in developed and in developing countries, we believe this is necessary 

for environmental and economic reasons. However, careful thought 

has to be given to the interaction of existing emission markets. 

Two final points, to wrap up. We understand the attraction of a 

price cap or a safety valve, but we believe that measures on the 

supply side may be a better way to protect competitiveness in this 

country. And we do note, of course, the benefits of including all six 

greenhouses gases, rather than just CO2 alone. We believe that this 

can lead to significant cost savings and efficiencies. 

Thank you very much, sir. 

The CHAIRMAN. Thank you very much. 

Now we’re going to back up. 

Michael Murray. 

STATEMENT OF MICHAEL MURRAY, DIRECTOR, LEGISLATIVE 

POLICY, SEMPRA ENERGY 

Mr. MURRAY. Thank you, Chairman Domenici and other Senators. I appreciate the opportunity to be here today and to participate on this very important issue. 

Sempra is based in San Diego, California, and provides electricity, natural gas, and value-added products and services to over 

29 million customers in the United States, Europe, Canada, Mexico, South America, and Asia. 

In my brief comments today, I would like to focus on two points 

that I think we ought to talk about a little bit as we have the panel 

discussion. 

The first is the need for a national program. We fully support 

your efforts here in developing a national program. We think broad 

sector participation is critical to the success of this. We are concerned about the patchwork of State regulatory programs that are 

going forward. There are over 20 States now that are considering 

some type of climate action programs, from registries to caps to 

performance-based standards. And we are concerned for companies 

like ours, that operate in multiple states, that we’ll have different 

sets of regulations to comply with. 

We also think that it should address issues of allowance allocations to assure companies are not significantly disadvantaged. This 

is the hybrid auction allowance approach. 

And, finally, we think that the promotion of technological development will really be key and instrumental to driving the success 

of this program. 

The second point is that we think any Federal program should 

recognize the actions of companies like Sempra, who have taken 

significant steps to reduce their overall carbon footprint. Examples 

of these include our major efforts in infrastructure of LNG facilities 

in the west coast and gulf coast to bring in clean supplies of natural gas to supplement our domestic supplies. Our clean generation 

fleet in the West, which is one of the cleanest combined-cycle gas 

fleets in the country, are significant energy-efficiency programs. 

We’re very proud of the fact that, on our customer side, since 1990, 

we have reduced about 21⁄2 million tons of CO2 equipment from our 

customer reductions. This is about a 500 megawatt powerplant. 

9

And, over the next 10 years, we hope to achieve about the same 

amount. 

On our own facilities, we have an energy conservation strategy 

of 10 percent energy reduction per square foot by 2010. 

On the renewables, Sempra’s utilities are well on their way to 

meeting the renewable portfolio requirements of California, which 

is 20 percent. 

And, finally, on voluntary registries, Sempra’s utilities are a voluntary member of the California Climate Registry, which is efforts 

to determine GHG inventories and developing measuring metrics. 

Thank you very much. And we look forward to working with you 

as you go forward in developing this important program. 

The CHAIRMAN. Thank you very much. 

Chris Hobson. 

STATEMENT OF CHRIS HOBSON, SENIOR VICE PRESIDENT, RESEARCH AND ENVIRONMENTAL AFFAIRS, SOUTHERN COMPANY 

Mr. HOBSON. Thank you, Mr. Chairman. 

My name is Chris Hobson. I’m senior vice president of research 

and environmental affairs for Southern Company. And we very 

much appreciate being included in this conference today. 

Southern Company operates 40,000 megawatts of coal, nuclear, 

natural gas, and hydroelectric generation capacity to serve 4 million customers in the Southeast. We believe that our Nation’s efforts and resources ought to be committed to the development of 

new technologies to address climate change, rather than being focused on mandatory caps and taxes. Developing these low-CO2- emitting technologies give us the opportunity to meet the challenges of climate change, and, at the same time, provide the energy 

for a growing economy. 

In our service territory alone over the next 15 years, we anticipate the demand of 11,000 megawatts of new generating capacity 

and our company as being a leader in developing those technologies 

that will serve that demand. 

We, along with DOE and Orlando Utilities, will be building an 

ITCC 285-megawatt plant in Orlando, Florida. We think that this 

technology, even though it’s coal-based, would generate between 20 

and 25 percent less CO2 emissions than the current fleet of coalfired powerplants. We have taken a leadership effort in FutureGen, 

which will develop a zero-emission powerplant that will deal with 

the issue of carbon capture and sequestration. 

We’re actively involved, in our own region, on the issue of CO2

capture and sequestration with the Southeast Regional Carbon Sequestration Partnership. And we are also pursuing the construction 

of the new generation of nuclear powerplants, with our goal of having new nuclear capacity online by 2015 and 2016. 

In our written comments, we address specific questions posed by 

the committee, and there are some important points I’d like to 

briefly make. One, the impact to the American consumers and our 

competitiveness must be addressed up front. This program should 

be economywide. Allowances should be allocated fully to emitters. 

And regulated entities should always have the opportunity to use 

offsets for compliance. 

10

With those brief remarks, I look forward to any questions you 

might have. 

The CHAIRMAN. Thank you very much. 

Andy Ruben. 

STATEMENT OF ANDY RUBEN, VICE PRESIDENT OF CORPORATE STRATEGY AND SUSTAINABILITY, WAL-MART 

STORES, INC. 

Mr. RUBEN. Yes. Mr. Chairman, Senator Bingaman, and members of the committee, my name is Andrew Ruben. I am vice president of corporate strategy and sustainability for Wal-Mart Stores. 

On behalf of my CEO, Lee Scott, I would like to thank the committee for this very important conference and inviting Wal-Mart to 

participate. 

In 2005, our CEO announced a vision for Wal-Mart that places 

sustainability at the core of our corporate mission. Lee Scott stated 

that environmental threats should be seen as Katrina in slow motion. Environmental threats are challenges for our business, just as 

they are for our communities, our associates, and our customers. 

Mr. Scott noted that at the top of the list of such challenges was 

the fact that increasing greenhouse gases are contributing to climate-change and weather-related disasters. Wal-Mart is not—is 

waiting neither for further study nor for legal mandates to take 

strong action on climate change. 

We’ll eliminate 30 percent of the energy used by our stores. We 

have set our corporate goal of eventually being supplied by 100 percent renewable energy. We’ll eliminate 25 percent of our solid 

waste in U.S. stores in the next 3 years as we approach a corporate 

goal of producing zero waste. We’ll increase the efficiency of our 

truck fleet by 25 percent over the next 3 years, and we’ll double 

that efficiency in the next 10. 

Mr. Chairman, these are only a few of the steps that Wal-Mart 

is taking to reduce its own climate impact. But let me be clear, we 

believe this is good business. Through these strong actions, we are 

proving that reducing greenhouse gas emissions through innovation adds value to our shareholders and our customers. It’s because 

we see climate as a critical social issue, and because we believe 

that greenhouse gases can be cost-effectively reduced throughout 

the economy, that Wal-Mart would accept a mandatory cap-andtrade system to control greenhouse gas emissions. 

Finally, as the committee develops the details of such a program, 

we look forward to sharing what we’ve learned in the past 18 

months. If properly incentivized, companies like Wal-Mart can 

drive innovation up the supply chain in passing those savings on 

to consumers. 

A well-designed system would also encourage companies like 

Wal-Mart to help offset any negative impacts of climate regulation 

on those least able to afford it. 

And, finally, in short, we hope to be part of the solution. We look 

forward to sharing with you in more detail the many ways that we 

could, and already are, using our position to drive positive change. 

Thank you. 

The CHAIRMAN. Thank you very much. 

11

Now, with that, we have completed the first round of witnesses. 

And now we have, what, staff? How much time do we have for 

questions? Forty-five minutes for—to go around between us and 

talk with each other, among each other, and exchange views. 

I’m going to start by asking Senator Bingaman if he would like 

to open with some questions. Senators, would you be ready to have 

questions, so we can stimulate some conversation? 

Senator Bingaman. 

Senator BINGAMAN. Thank you very much. 

One of the key issues that we’re trying to get at here and have 

heard a lot about is how to allocate emissions, or how to allocate 

permits to emit. 

Let me ask Betsy Moler about Exelon’s view on this. As I understand what you’ve submitted, you talk about, ‘‘The approach to allocation should evolve over time in order to acknowledge the different circumstances among existing electric generators, while also 

encouraging a transition to more efficient low-carbon generation 

over time.’’ Could you describe what you have in mind there with 

this evolution of the allocation system? 

Ms. MOLER. I will try, Senator Bingaman. 

We would propose to start the allocation of allowances by giving 

away the vast majority of allowances for free, selling perhaps 10 

percent, in order to mitigate the impact of the program on our 

economy. And we have endorsed a safety valve, as well, where 

DOE would sell allowances. Over time, we advocate auctioning 

more and more allowances in order to encourage the development 

of clean technologies and to increase the efficiency of the program. 

We have suggested one innovation—what we think’s an innovation in the program. We propose to give the allowances, not to the 

generators, but to the local utilities, and to require them to pass 

through the financial benefits of those allowances to retail customers. This is particularly important where we have a patchwork 

of State regulatory programs with some utilities on a cost-of-service 

basis, and some of them based on a market basis. Over 50 percent 

of our citizens in the United States are served by utilities that have 

restructured, so this is not a trivial consideration. 

If you give free allowances to the generators, we think it’ll disproportionately benefit consumers in States that have not restructured. So, we would give the allowances to the local distribution 

companies, the utilities, and then they would have to be purchased 

by the generators and by the fleet operators, or what have you, in 

order to actually implement the program. 

Senator BINGAMAN. I didn’t know if you wanted to have someone 

ask a question. 

The CHAIRMAN. Yes. 

Senator BINGAMAN. We might get Jeff Sterba’s comment on that 

same set of issues, at some point here. 

The CHAIRMAN. Jeff, do you have comment on that—on the comment that was made by Elizabeth Moler? 

Mr. STERBA. I would generally agree with what Ms. Moler has 

expressed, in terms of, number one, allocating the vast majority of 

them to current users. I think—we serve both regulated and unregulated markets—I think it is a complexity to allocate them to 

the distribution company. The vast majority of coal units, which, 

12

for our industry, is the real issue; 80 percent of the carbon emissions come from coal out of the electric utility industry—the vast 

majority of coal units are regulated. They’re in regulated rates. The 

benefit clearly must flow through to customers. 

I’m not sure that that wrinkle that she’s throwing in is really 

worth the added risks and complications of doing it. But I do believe that they ought to be allocated to the users, because you’ve 

got to mitigate the impact on the ultimate consumer. 

I also think that her argument that over time you should phase 

down the amount that’s allocated for free is a reasonable approach, 

over a long period—say, 40 or 50 years. So, on the margin for new 

resources, you’re providing the right kind of signal to get new 

clean, low-carbon- or no-carbon-emission technologies being deployed. 

The CHAIRMAN. Thank you very much. 

Anybody else want to comment on that? 

[No response.] 

The CHAIRMAN. All right. 

Senator Alexander. 

Senator ALEXANDER. Thank you, Mr. Chairman. 

Perhaps you discussed this, but at—with General Electric I’m interested in your IGCC, your coal gasification that you purchased 

from Chevron, and took steps in Florida. And, as I understand it, 

there is a new facility in Ohio with AEP. What can you tell us 

about that progress, what about the technical challenges and obstacles that you see there, and when will it be completed? 

Mr. SLUMP. Correct. GE acquired ChevronTexaco’s technology 

mainly because our customer base was, at the time, having to buy 

a license, as opposed to a standard powerplant, and integrate that. 

They wanted a standard powerplant solution with a single-point accountable provider. So, we announced a partnership with Bechtel, 

and we are in a position to provide a 630-megawatt standard plant. 

We’ve launched the FEED study, the front-end engineering study, 

with AEP for their site, as well as Cinergy. And the commercial operation date for these will begin in 2010 and beyond. 

The CHAIRMAN. Senator Murkowski. 

Senator MURKOWSKI. Mr. Chairman, I was struck, by listening to 

most of you, that you have all indicated an economywide regulatory 

program is needed for—just from the equity perspective, but then, 

similarly, the number of respondents that acknowledge that this is 

going to be tough to do. 

Mr. Slump, I guess I’ll direct the question initially to you. What 

would the impacts to the economy be if we do impose the 

economywide program, as opposed to doing a more directed approach—say, for instance, directed towards the electricity sector? 

Singling out you, because you’ve got the vast majority of the greenhouse gases coming from that sector of the industry. We’re saying 

that, from an equity perspective, it makes sense to go 

economywide, but it’s going to be difficult. So, what would the effect be if we just focused, or we just began with a single sector? 

Mr. SLUMP. We’ve proposed a third-party study to look at the economics and the tradeoffs of the various proposals. You know, the 

impact of the economy varies with the cap or the price of carbon. 

So, the comment we were making was just the 80/20 rule. If you 

13

capture transportation and the utilities, you’ve captured a percent 

of it; and, initially, it may be easier to begin to implement, with 

less administrative burden. 

Senator MURKOWSKI. Anybody else want to comment on that? 

Mr. Hobson. 

Mr. RUBEN. I’d add——

Senator MURKOWSKI. Mr. Ruben. I’m sorry. 

Mr. RUBEN. I’d add one comment to that. I think there’s a way 

to not only capture an efficient segment of the market, but, at the 

same time, leave enough available credits to reward those players 

who might be able—for example, a player like Wal-Mart, who can 

reach up and down a supply chain, both creating additional benefits, either up the supply chain, such as, for example, with a supplier we have in southern Georgia, and being able to incent that 

supplier to reduce their electrical needs by 60 percent, benefiting 

both our consumers and the prices, as well as reducing greenhouses gases, or reach down the supply chain and offer those same 

benefits to a customer, a technology like a compact fluorescent light 

bulb, that, just by increasing the penetration of a high-efficiency 

product like that, we’re able, not only to share that benefit, but 

also—not only to reduce greenhouse gases—I’m sorry—but also 

share the economic benefit of using less energy, potentially mitigating some of the increased costs that we’d see, depending on the 

type of policy and regulation. 

The CHAIRMAN. Mr. Sterba, would you comment on that? 

Mr. STERBA. Mr. Chairman, Senator, I think the logic that was 

just given is the best logic for why it needs to be economywide. 

There are many things that can be done throughout the economy. 

And what you want to do is incent the lowest-cost initiatives that 

can be taken in the economy to reduce carbon dioxide emissions, 

whether it’s on energy-efficiency, whether it’s in the transportation 

sector, through the refinement of the efficiency of diesel engines, or 

whether it be in the production of electricity through a coal or a 

natural gas facility. That’s the value of it being economywide, is, 

you can get the lowest-cost solutions, because they are everywhere 

within the economy. 

The CHAIRMAN. Yes. I think I was going to Garth next. Excuse 

me. 

Mr. EDWARD. Thanks, Senator. 

A quick point. I mean, I think, all things being equal, the costs 

of compliance to the overall economy will be brought down, the 

wider the scope of the emissions trading system. I think that’s true. 

It’s just that the costs of implementation—the transaction costs, if 

you will, if we try and reach everybody, in terms of monitoring and 

verifying and enforcing—tend to outweigh the benefits at the margins. So, we’ve got to take a balance and go where we can achieve 

the best results in the quickest timeframe for the best transaction 

costs. And that tends to mean that we’re going to focus on applying 

the regulation to those parts of the economy that actually deploy 

technology, change their capital investment plans, and so on. And 

that’s why we favor a kind of—a downstream approach, in terms 

of stationary-source emissions, the power generating in large-industrial sector. But when we look at the transport sector, we do 

recognize that as a very important source of emissions, and one 

14

that must be addressed, but the upstream approach may not best 

change emissions from the transport sector. When it comes to 

transport, the ability to change the emissions coming from the 

transport sector may best be done at the vehicle manufacturer’s 

level, where the purchase of a car is probably one of the single biggest impacts on the emissions from the transport sector. 

Thank you. 

The CHAIRMAN. Now, Mr. Murray. 

Mr. MURRAY. Thank you, Senator. 

Senator Murkowski, I think we should consider that we do have 

a fair amount of experience when we look at the broader scope of 

trading, if you look at the criteria pollutant efforts that we’ve done, 

where we’ve been able to trade stationary versus mobile sources. 

The more robust you make the trading, the—and I agree with the 

earlier comment, that we will get the most efficient way of getting 

the reductions. And that’s why I think the broader the participants 

in the market, if you will, the more opportunities we have to make 

these reductions. 

We have a lot of history on criteria, stationary versus mobile 

trading, and we could look at that, and look at the successes and 

things that we’ve done, and be able to take from that, perhaps, for 

applying it to CO2. The CHAIRMAN. We want to let Senator Feinstein ask a question 

here before we run out of time. 

Senator Feinstein. 

Senator FEINSTEIN. Mr. Chairman, I’d like to make a brief statement, if I might. 

The CHAIRMAN. Please. 

STATEMENT OF HON. DIANNE FEINSTEIN, U.S. SENATOR

FROM CALIFORNIA 

Senator FEINSTEIN. Let me just thank you for holding this hearing. 

I can’t help but notice that it’s the most widely attended hearing 

that I think I’ve been to for this committee. And I think it shows 

the gravity of the situation. I also think it shows the need for action. 

Now, California is going to take action. The Governor, last year, 

signed an executive order to reduce global-warming emissions by 

25 percent by the year 2020. Yesterday, the speaker of the legislature and Assemblywoman Pavley introduced a bill that would require the California Air Resources Board to institute a mandatory 

emissions reporting and tracking system to monitor compliance 

with the emission limits. That would essentially reduce global 

warming by 145 million tons by 2020, or 25 percent below forecast 

emissions. 

The State has taken action on automobiles. It’ll probably be litigated. The attorney general says that the State can move ahead 

independently. We believe Canada will follow. 

I think it is very critical that we take action. 

I’ve put together a bill, which is really based on McCainLieberman, but adds more flexibility. And essentially what it does 

is caps companies’ emissions at today’s level from 2006 to 2010, 

then reduces emission .5 percent annually from 2011 to 2015, and 

15

then 1 percent annually from 2016 to 2020. It would require companies to cut overall emissions 7.25 percent from today’s levels by 

2020. Now, that’s equal to 400 million metric tons of CO2 by 2020. 

What’s interesting is that California’s cut would be 145 million 

metric tons. That’s about a third of what a 71⁄2-percent reduction 

nationally would mean. I think what that points out is really the 

unique wisdom of taking national action. 

Now, I’d like to make my bill available to anyone who would like 

to look at it and comment on it prior to our introduction of it, so 

all you have to do is let us know your thoughts. But I’d like to ask 

this question. 

Ms. Moler mentioned the issue of the auction. The auction is disputed between business and the environmentalists. The environmentalists want an auction. Most businesses say, ‘‘Hold off.’’ The 

proceeds of the auction would go, obviously, to fund new technology. 

My question of you, if I might, is—you have said, ‘‘Over time, an 

auction’’—and I’d like to ask you to expand on that. You and others, as well—commented on the role of an auction if you did have 

a mandatory cap-and-trade system. Our system includes carbon sequestration and agriculture, providing credits for that, so that 

there is incentive for agriculture to get involved, as well—we’ve left 

the question of the auction open, and I’d like to have comments 

from the panel on when you believe an auction should come into 

play, how many years hence, and what the rationale for that time 

delay would be. 

Ms. MOLER. We would start an auction in, say, the year 2009-

2010. Initially, the vast majority of allowances, we would give away 

for free, if you will, and have a small portion of the allowances subject to auction, 10 percent—90/10 is what we have proposed—and 

then, over a period of time—and it’s, frankly, pretty arbitrary, 

but—how quickly you ramp up the auction really depends on how 

much you think the economy can handle the cost. But over a period 

of time, we would invert it, so that you eventually have all of the 

mission allowances auctioned. And we would take the money and 

put it in a sequestered off-budget fund for technology development. 

Senator FEINSTEIN. Thank you. That’s very helpful. Anybody 

else? 

Ms. Shaw. 

Ms. SHAW. We, basically, would endorse the approach that Ms. 

Moler has described. But I would add to that the—your comment 

about the wisdom of a national approach is essential. And that’s 

one reason I really applaud the work of this committee. As laudable as some of the efforts are on a State-by-State or regional basis, 

they make it extremely difficult for us to achieve the end goals. 

Senator FEINSTEIN. Anybody else, on the auction question? 

Yes, sir? 

Mr. EDWARD. The advantages of auctioning, in particular, are 

that they promote the entry of new entrants, or new efficient players, let’s say, in the power generation market or the industrial 

market, over time. It also deals very well with exit or closures of 

installations from an emissions trading system. Auctioning has 

many benefits, just in terms of the operation of an emissions tradVerDate 0ct 09 2002 15:10 Jun 15, 2006 Jkt 109420 PO 28095 Frm 00019 Fmt 6633 Sfmt 6633 R:\DOCS\28095.TXT SENERGY1 PsN: RSMIT
16

ing system, and, from economic-theory points of view, is good benefit to do with equity, and so on. 

The problem may arise, though, when companies come new to an 

auctioning system that auctions, let’s say, 100 percent or a large 

majority of the allowances from the get-go, and that means that 

those companies are having to pay a great deal in order to get the 

allowances that effectively form their license to operate. And that 

initial payment to get those allowances can be a huge dent, in 

terms of cash flow or working capital. And so, there are difficulties 

there, from a business point of view. 

The way that auctioning may deal with that is by recycling part 

of that revenue, either through the tax system or back in some 

way. But some of those issues need to be dealt with. 

Senator FEINSTEIN. You’re advocating recycling the auction proceeds, partially, back to the businesses that are participating, in 

addition to the technology. So, in other words, in a certain ratio? 

And what would that ratio be? 

Mr. EDWARD. Well, I don’t think we have any precise views about 

the ratio. I think it’s the principle that the cash-flow impact to 

companies has to be addressed. And I think there are various ways 

to do that. Probably can explore them further. But that’s a concern, 

initially, from a business point of view. Recognize the benefits of 

auctioning from a system point of view has a lot of benefits in the 

long term, but how to get it up and running at the start without 

seriously hurting companies from a cash-flow point of view. 

Senator FEINSTEIN. Well, let me just ask, does anybody disagree 

with what Mrs. Moler said about holding an auction to 2009 or 

2010, and then doing it on a 90/10 basis? Is there any disagreement with that? 

The CHAIRMAN. There’s one. 

Senator FEINSTEIN. Mr. Hobson. 

Mr. HOBSON. I don’t think that we necessarily disagree. I think 

the auction program under the SO2 program has worked reasonably well. I think where we might part company is, what does the 

future detail of that auction look like? Does it stay constant? It’s 

that ramping down that can generate real problems for emitters in 

the future. And so, I think the concept of an auction, with a small 

percentage of allowances being auctioned, is not a bad idea. But I 

think it’s the ramp that becomes——

Senator FEINSTEIN. Mr. Sterba, did you have——

The CHAIRMAN. Senator, I think we’re going to get on with the 

next one. 

Senator FEINSTEIN. All right. 

The CHAIRMAN. Senator Menendez. 

All right. I’m going to pose a proposition here. I’m listening to 

all of you, and it seems like Chris Hobson—Southern Company’s 

statement is a little different than most of yours. 

[Laughter.] 

The CHAIRMAN. Is that a fair assessment? And I don’t think he’s 

embarrassed at my saying that. 

Mr. HOBSON. No. 

The CHAIRMAN. I gather that Southern Company, a very reputable, strong company in the United States, is saying they’re 

going to get there a different way. They’re going to stop emitting 

17

carbon into the atmosphere, but they’re going to do it with technology changes in the makeup of that which they use to generate 

electricity. Am I correct that that’s what you say you’re going to do, 

and that you would explain to us, at this forum, how that’s going 

to happen? 

Mr. HOBSON. Yes, Senator. The items I articulated, such as 

FutureGen, the building of an ITCC, the development of new nuclear, are all technologies that will ultimately get us where we 

want to be, in terms of addressing CO2 emissions. And I point 

those out to highlight the fact that, even in the absence of a mandatory program, there are substantial efforts underway to bring 

these technologies to the point of deployment. 

The CHAIRMAN. Yes. 

Mr. HOBSON. And a mandatory program, in our view, is not necessary to make that happen. 

The CHAIRMAN. Now, Chris, I did not bring you—bring that up, 

and your name up, and your company’s, any way other than because it is a bona fide approach, and it’s out there, and the American people understand it, and your constituents understand it. 

And I think it ought to be talked about here. What’s wrong with 

what they’re saying? And what should we be doing to make sure 

that more of what they say is going to happen, happens? I’d just 

throw that before you for a few minutes of discussion. 

Jeff, did you have your hand up? Then we’ll come to you, Ruth. 

Mr. STERBA. Mr. Chairman, I’m glad you put this question out 

there. I really think it’s more an issue of form than substance. 

There is no way that we can accomplish what needs to be done on 

greenhouse gases without technology. It is the only answer that we 

really have. So, I think all of us would agree with the statement 

that Chris has made that technology is the driver. And some of the 

technology exists today, but much of it does not. And that’s the big 

investment gap that we have to bridge. 

So, the question then becomes: Well, how do you move this ball 

forward? And is there low-cost reductions to carbon that could 

occur with a mandatory system, that may not occur without it? 

And for, I think, us in the utility industry, whether you make it 

mandatory or it stays voluntarily—voluntary, there’s an awful lot 

of things we’re going to stay focused on, in trying to reduce greenhouse gases, because we see the call for that. 

But I think in other sectors, in other areas, that may happen a 

lot more slowly if it remain solely voluntary, where it’s much more 

dispersed, in terms of the obligation or the—I’m sorry, the cause 

of the emissions of carbon dioxide. 

So, that’s where I think the—it—the difference really is how we 

get there, not, what is it going to take, in terms of technology? I 

think we all agree, that’s the only solution we have. 

The CHAIRMAN. Yes, Ruth. 

Ms. SHAW. And, essentially, I would echo Jeff. I think the difference is more one of timing. We, too, are committed to advances 

in technology. But there are very significant regional differences. 

For example, even though we’re looking at IGCC in the Carolinas, 

among the States that we serve, carbon sequestration is not possible, because of the geology. Some of the technologies that are 

available today and emit no greenhouse gases, including nuclear, 

18

face significant barriers to future construction, of which this committee is well aware. And financial investments will not be made 

until some of those issues are resolved. 

We simply believe that we cannot delay, and cannot count on a 

strictly voluntary approach if we’re going to move forward on this 

action. We also believe the United States cannot be alone in the 

world, in terms of acting on these issues. 

The CHAIRMAN. What was the last statement? 

Ms. SHAW. We believe the United States must act, must be part 

of the global community in acting on these issues. 

The CHAIRMAN. Right. 

Andy Ruben, from Wal-Mart? 

Mr. RUBEN. Yes, thank you, Senator. 

It’s a very good question you’ve posed, and I think we agree with 

the last statements that are made. And it really—for us, we see it 

one of timing, of how fast things move, and what market forces 

come into play with a system like we’re talking about, or some type 

of policy. 

The initiatives and the actions that we are taking, we’re going 

to take anyway—again, because we believe they’re good business. 

But the timing of those, the aggressiveness, will change, based on 

what type of policy is set up in a U.S. system such as we’re talking 

about. 

And just a quick example, LED lighting is a much more efficient 

lighting technology that we are—that we have just rolled out in all 

the signage programs in the front of the our stores. 

Now, we’re currently working, because we know it will save 50 

percent of the energy, even over an efficient T8 light, in our freezer 

coolers. That, right now—we work every day to find better ways to 

roll that out faster. But some type of policy, a policy that rewards 

that kind of innovation, will accelerate the pace of those type of opportunities. 

The CHAIRMAN. Very good point. 

Mr. Murray. 

Mr. MURRAY. Yes, thank you, Senator. 

I think another thing we should always consider when we’re 

looking at this is the energy efficiency aspect. And I think California has been a leader in energy efficiency, and just the information exchange with the other States, I think, is important, to look 

at technology development and what we’ve done out there, and to 

share that with others, and basically put these programs in place. 

You can get a lot of megawatt reductions with energy efficiency. 

And this is particularly important in the Southwest, where we 

have such huge growth, when you think about it, where California 

is growing at a rate of about 600,000 people a year, which is about 

1,000 megawatts of new power that’s needed every year. That’s two 

500-megawatt powerplants that are needed just for the new people 

coming into California. So, just to keep up with that demand in the 

West and the Southwest, we’re going to have to institute these kind 

of programs. 

The CHAIRMAN. Okay. 

Yes, David? 

19

Mr. SLUMP. GE believes, as with others here, that technology is 

the key. But to accelerate technology, a forward and predictable 

price for carbon must be used. 

If you look around the world—China will add 170 gigawatts of 

new capacity by 2020; the United States and Western Europe, 100 

gigawatts; India, 60 gigawatts—you have to do this through fuel diversity. You will need coal, you will need nuclear, you will need renewables. So, the only way to put that into that investment choice 

is to value carbon equally. 

Where there are markets, such as India—2 weeks ago, we were 

in India and launched a rural electrification program. For years, 

people have been trying to do rural electrification in India. You 

know, over 400 million people have no power. And because of the 

Clean Development Mechanism, we were able to deploy 24 

megawatts of biomass gas receps. The government of India has reduced tariffs for clean energy technologies from 15 to 5 percent. 

We’re working with the local governments. It’ll provide 4,000 new 

jobs. And I think the point is, technology innovation and commercial innovation are linked, but you need a market price to drive it. 

The CHAIRMAN. Senator Bingaman. 

Senator BINGAMAN. Let me just ask—David, you say because of 

the clean technology mechanism? 

Mr. SLUMP. Sorry. CDM, Clean Development Mechanism. 

Senator BINGAMAN. The Clean Development Mechanism. And 

that is a mechanism that’s set up in the EU trading system. So, 

what I understand is that because of the financial benefit to GE 

in the European trading system, you are able to make this investment in reduction of energy use in India. Is that correct? 

Mr. SLUMP. Partly. Actually, the way we did this is, the developer we’re working with needed it for the pro forma to go forward, 

so we partnered him with PriceWaterhouse to do the exchange, but 

we got our standard margins and payment terms on importing the 

engines to India. I think India is the number one market for CDM 

in the world right now, twice as big; and number two, Brazil. And 

it’s just a point that—where you have market mechanisms, maybe 

not perfect, you get some traction. 

Senator BINGAMAN. Okay. I was going to ask one other question 

of Garth. You had said in your testimony, that Shell favors measures on the supply side, rather than a safety valve, in any kind of 

a cap-and-trade system. Could you describe or elaborate on that a 

little bit? I’m not clear exactly what you mean. 

Mr. EDWARD. Well, I guess the concern with a safety valve or a 

price cap is to ensure the competitiveness of industries in the 

United States. And there are, maybe, different ways of doing that. 

A price cap can be difficult to maintain in markets, especially markets that have interaction with the international community. And 

we don’t have price caps in the rest of the energy complex. And so, 

there can be difficulties in trying to introduce a price cap in this 

part of the market. But if we are concerned about ensuring competitiveness, rather than capping prices, per se, then there are, 

maybe, ways of doing that, and one of those ways if by supply-side 

actions, being able to increase the supply of allowances as competitiveness is challenged, or if competitiveness is challenged. And so, 

20

that’s just one way of meeting the competitiveness objective without necessarily interfering directly in the market. 

Senator BINGAMAN. So, when you say ‘‘on the supply side,’’ you’re 

talking about the supply side of allowances. Is that it? 

Mr. EDWARD. That’s exactly it. There may be various sources of 

supply. The supply of allowances issued by the Government is one. 

Access to international markets is another. The possibility to have 

access to new and additional sources of offsets within the domestic 

economy is another. 

Senator BINGAMAN. You talk about an open architecture approach that encourages a global carbon market through linking 

with other systems. And that’s what you’re talking about there? 

Mr. EDWARD. That would be part of the equation. But if we just 

hold it domestically for a second, the—an increased supply of allowances from the Government is one possibility, but, also, increased 

access to offsets that are domestically generated is also another 

possible source of supply. 

Senator BINGAMAN. Thank you. 

The CHAIRMAN. All right. I think we’re a bit early. We haven’t 

used our full 45 minutes, but we’re—I think we’re going to finish 

this panel, if you don’t mind, and move to the next one. 

Thank you all very much. 

The next panel, please? 

[Recess from 11:15 to 11:16.] 

The CHAIRMAN. Thank you very much. Very, very good exchange. 

We’re going to get started, and, if it works, by 12:30 or so, we’ll 

be out for lunch, until our 2:30 meeting. 

We’re going to start right now, over on our left. Margo, are you 

about ready? You’re first. And turn on your mike and give us your 

2 minutes. We look forward to hearing from you. 

STATEMENT OF MARGO THORNING, SENIOR VICE PRESIDENT 

AND CHIEF ECONOMIST, AMERICAN COUNCIL FOR CAPITAL 

FORMATION 

Dr. THORNING. Thank you very much for the opportunity to appear before this very important hearing. 

I’d like to take my time to compare, briefly, the pros and cons 

of a cap-and-trade approach to reducing greenhouse gas emissions 

to one based on a voluntary approach. 

In the European Union, the emission trading system is not working very well. Their environmental agencies shows that they’ll be 

4 percent above their 1990 targets in 2010, not 8 percent below. 

Companies have been faced with higher energy prices—in part, due 

to their emission trading system. 

A cap-and-trade system will not provide the investors certainty 

or drive the technology that’s needed to reduce greenhouse gas 

emissions. Caps such as those proposed by policymakers in Washington are just the first step. As many of us know, the call is to 

reduce greenhouse gas emissions 60 to 80 percent by 2050. So, a 

small first step is just the beginning of additional reductions, which 

increase uncertainty for investors. Furthermore, unlike EU firms, 

U.S. firms would be compelled to comply with emission reduction 

targets. They would have to meet these targets or be shut down; 

whereas, the EU has a more flexible system that will allow continVerDate 0ct 09 2002 15:10 Jun 15, 2006 Jkt 109420 PO 28095 Frm 00024 Fmt 6633 Sfmt 6633 R:\DOCS\28095.TXT SENERGY1 PsN: RSMIT
21

ued production. Caps would also increase electricity prices, reduce 

economic growth, and reduce the uncertainty about the return that 

could be expected on investment. Furthermore, they won’t drive the 

technology that’ll be needed, because of the fact that a current government can’t bind a future government as to prices that will be 

in effect as a safety-valve price or for the targets that would be in 

place. 

So, I think a focus on the administration’s approach, which is 

based on voluntary approach and a strong drive for new technology 

to reduce greenhouse gases, is the most efficient way to go forward. 

EIA data shows that a high-tech scenario reduces emissions, reduces electricity prices, and increases GDP, compared to a mandatory reduction in greenhouse gas emission intensity. 

Finally, reforming the U.S. tax code to reduce the cost of capital 

for new investment by increasing depreciation allowances for energy investments could pull through the cleaner, more efficient 

technologies that we need, and reliance on mechanisms like the 

Asia-Pacific Partnership to transfer technology to developing countries can also be a strong factor in global greenhouse gas reductions. 

Thank you. 

The CHAIRMAN. Would you repeat the last statement, regarding 

foreign investment, please? 

Dr. THORNING. The Asia-Pacific Partnership, which is focused on 

development—economic development and on technology transfer to 

countries like India and China, can have a very strong impact on 

reducing global greenhouse gas emissions. 

The CHAIRMAN. Thank you. 

Mr. Helme. 

STATEMENT OF NED HELME, PRESIDENT, CENTER

FOR CLEAN AIR POLICY 

Mr. HELME. Thank you, Senator. It’s a pleasure to be here this 

morning. 

I’m Ned Helme. I’m the president of the Center for Clean Air 

Policy. It’s an environmental think thank based here in Washington, and also in Brussels and in Toronto. We were the principal 

consultants for the European Commission in the design of their 

emissions trading program that, as you know, is up and running, 

and we’ve worked a lot, Senator Feinstein, with Governor 

Schwarzenegger and with the folks in California, on the design of 

the California program, and also with the Governments of India, 

China, Brazil, and Mexico, on the designs of their programs to 

move on climate change and reduction of greenhouse gases. 

I’ve got five points I want to make this morning: 

First, we strongly favor an economywide approach and a mandatory approach, as you’ve heard from other speakers, and for the 

same reasons. 

Second, in terms of point of regulation, we would favor a hybrid 

approach, as Jeff Sterba outlined to you; basically, one which would 

put the six or seven major industrial sectors and the electric generators as points of regulation, along with natural gas distribution 

companies and oil refiners. That way, you get the advantages of 

capturing the small sources, like residential and commercial transVerDate 0ct 09 2002 15:10 Jun 15, 2006 Jkt 109420 PO 28095 Frm 00025 Fmt 6633 Sfmt 6633 R:\DOCS\28095.TXT SENERGY1 PsN: RSMIT
22

portation through the upstream, and you get the advantage of 

going after the major industrial point sources, where they really 

have an ability to identify good opportunities for emission reduction 

if they’re regulated directly. 

As a footnote to that, it’s not a problem, in terms of the number 

of sources that we’d regulate. If you went on a hybrid, it would 

take about 8400 sources in the United States would be regulated, 

less than are currently regulated in the European Commission system. If you went upstream, it would be about 2,000 sources. So, 

clearly workable, from a technical point of view. 

In terms of allocation, we favor the auction, as was discussed. 

One point I want to add is that the auction, if you recycle the revenues in the form of tax reductions, reduces the total societal cost 

of the program significantly, so you’re going to have a cheaper program for society if you go that route. I would agree with Betsy 

Moler that it makes sense to start the auction slowly. 

What we found—we did a study with Charles River Associates, 

looking at this, and found that it would take about 9 percent of the 

allowances to hold the shareholders harmless of the major corporations that are involved in this—a little more for coal, probably 35 

percent; a little more for utilities—but it’s doable. So, you have 

plenty of allowances left for other purposes, and we would favor 

some tax relief and also technology innovation, using the allowances as an incentive for companies to develop new technologies 

that wouldn’t happen under the kinds of caps we’re probably able 

to pass, legislatively, in the near term. So, I think the combination 

of setting aside a pool of allowances, letting companies compete for 

those allowances if they’re going to do coal gasification sequestration, if they’re going to do advanced nuclear, if they’re going to do 

advanced wind technology, much like California now does for their 

renewables program. The company that asks for the fewest allowances to do that technology gets the award. And I think it’s a great 

way to create competition for pushing these new technologies that 

we need. We aren’t going to get it with the kind of caps we can do 

in the near term. We need additional incentives to get those new 

technologies. 

Thank you very much. 

The CHAIRMAN. Thank you very much, Ned. 

Donald, we’re looking forward to hearing from you, please. 

STATEMENT OF DONALD MARRON, ACTING DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE 

Mr. MARRON. Great, thank you, Mr. Chairman. 

I’m Donald Marron, Acting Director of the Congressional Budget 

Office. Thank you for inviting CBO to participate in today’s conference. 

In keeping with CBO’s mission, my comments will focus on the 

key economic issues that arise in designing a cap-and-trade system, 

but do not actually make any specific policy recommendations. 

In response to the first question, ‘‘who is regulated, and where?’’ 

we agree with many of the previous panelists, that an economywide 

approach would be the most economically efficient, and that administrative costs would probably be minimized in an upstream approach. An important limitation of a purely upstream approach, 

23

however, is that, in itself, it doesn’t provide any incentives for 

emissions capture or emissions sequestration. 

In response to the second question, the allocation of emission allowances, really, the key issue there is that the emissions potentially might have a significant amount of value, and that Congress 

has to make choices about who’s going to receive that value. 

There are three basic options that we’ve heard about. The first 

option would be to sell the allowances, and then use the resulting 

proceeds to reduce distortionary taxes. I think economists are generally in agreement that that approach has the overall greatest 

economic benefit, and that minimizes the overall economic burden 

that would be placed in the economy from the regulations. However, it would also do nothing to directly offset the burdens that 

would be placed on effected producers and consumers. 

A second option would be to sell the allowances and then use the 

proceeds to finance R&D adaptation efforts, things like that. Such 

efforts may be valuable, but it turns out there’s very little economic 

rationale for linking expenditures on them directly to the revenues 

that come from the allowance auctions, or selling the auctions—

selling the allowances. 

A third option would be to allocate allowances to offset some of 

the costs that are borne by producers and consumers by the introduction of the regulations. Unfortunately, identifying who actually 

bears those costs would be extremely difficult. Market forces, not 

the identity of the regulated parties, will ultimately determine who 

bears the costs. Consumers would pay higher prices. Some companies would earn lower profits. Some workers would earn lower 

wages. Indeed, even the Government would bear costs through 

higher prices. Each of those groups might have a reasonable claim 

for some allocated allowances. At the same time, there will also be 

some winners. Some companies, for example, would actually have 

higher profits because of the introduction of the regulations. Sorting through those impacts to determine an appropriate allocation 

of allowances would be very challenging. 

Thank you. 

Senator BINGAMAN [presiding]. I think the chairman intended we 

just go right ahead. 

Richard, why don’t you tell us EPRI’s point of view? 

STATEMENT OF RICHARD RICHELS, TECHNICAL EXECUTIVE 

FOR GLOBAL CLIMATE CHANGE RESEARCH, ELECTRIC 

POWER RESEARCH INSTITUTE 

Dr. RICHELS. Thank you very much, Senator. 

Good morning. My name is Richard Richels. I’m technical executive for global climate change research at the Electric Power Research Institute, in Palo Alto, California, Senator. 

EPRI is a not-for-profit public-interest organization conducting 

research on issues of critical importance to the electric power industry. I will highlight five points from our written submission. 

One, economic efficiency—that is, achieving our environmental 

goals at least cost—is critically important. Climate policy will have 

costs. The difference between an efficient and inefficient system 

can be at the order of hundreds of billions of dollars, and can determine the very success of a program. 

24

Two, technology advances are central to controlling the cost of 

addressing climate change. The value of near-term policies will ultimately be judged by how effectively they create technology innovation. 

Three, a cap-and-trade system should have as broad a coverage 

as possible in order to reduce emissions where it is cheapest to do 

so, and to provide the framework for an efficient, long-term transformation of the economy. This is true both domestically and internationally. Stabilization of atmospheric concentrations cannot be 

achieved without the active involvement of both developed and developing countries. 

Four, the point of regulation is not important, from the standpoint of economic efficiency, as long as coverage is the same, but 

very important in determining administrative feasibility, complexity, and costs. 

And, five, the allocation of permits is unlikely to affect the net 

costs of a policy significantly. However, it can greatly impact different households, companies, and regions of the country. The issue 

of who pays is a question of equity and a matter for the political 

process. 

Thank you for the opportunity to share some of the insights from 

our research with you. I look forward to your questions. 

The CHAIRMAN [presiding]. Thank you very much for your comments. 

Now we’re going to move to Jason—how do you say your last 

name? 

Mr. GRUMET. Mr. Chairman, it’s Grumet. 

The CHAIRMAN. Grumet. 

STATEMENT OF JASON GRUMET, EXECUTIVE DIRECTOR, 

NATIONAL COMMISSION ON ENERGY POLICY 

Mr. GRUMET. Thank you, Mr. Chairman, Senator Bingaman, and 

Senators Murkowski and Feinstein, for the opportunity to be here 

today on behalf of the National Commission on Energy Policy. 

I’d like to start with a general reflection, and then make a couple 

of specific points. 

At the outset, I think it’s worth trying to distinguish between the 

basic notion of the costs to society of a program, and the equity 

issues, which I think are really the focus of today’s discussion. And 

just to illustrate, from a question of overall societal costs, the proposal by the Energy Commission, in essence, seeks to reduce emissions by about a percent a year. The EIA concludes that the costs 

of that, the costs of the control technologies to achieve those reductions, would be somewhere between $1 and $4 billion a year, and, 

on the basis of that conclusion, reaches the ultimate conclusion, 

which I like to repeat daily, that our proposal would have no material effect on economic growth. 

Now, equity considerations are critically important, but rather 

different. Equity considerations are essentially the question of, how 

do we divide up the 99 percent of permissible emissions among the 

various stakeholders in society? And that’s what you have to do at 

the outset of a market-based program. The beauty of a marketbased program is, then the market itself decides the most efficient 

way to achieve those reductions. But these questions are of critical 

25

importance, from fairness, equity, and, ultimately, political viability. 

But I guess I want to stress, at the outset, that it is possible to 

have a meaningful step towards reducing greenhouse gas emissions 

that meets with the Sense of the Senate obligation not to undermine the economy here in the United States. 

On specifics, just for a moment, out of the 150 or so truly excellent submissions, of course, someone raised every different possible 

point. But I’m encouraged that there do seem to be some centers 

of gravity forming. I believe there is a general preference for an 

economywide program and an appreciation that to achieve that, administratively, you would have to move upstream in the energy 

food chain, either all the way upstream or—hybrid, in my book, is 

all basically upstream. NCEP believes that it’s important that allocations are used to mitigate the costs of the program on those who 

bear those costs. We agree with the Center for Clean Air Policy and 

others, that actually you need a very small fraction of those allowances to compensate the major energy users. This is good news and 

bad news. It’s bad news, because that contradicts, I think, basic 

conventional wisdom, so it’s hard to develop a policy consensus 

around that. It’s good news, because it means that there are, in 

fact, a lot of allocations available to compensate broadly the people 

who will bear the costs of this program, and to pursue broader social desires. 

So, let me just close by recognizing that there are very strong 

disagreements remaining about whether, and how, to pursue a program. But I do believe that if this committee and the Congress decides that it is, in fact, appropriate to proceed, there is an analytical consensus forming that will enable that to happen. 

Thank you. 

The CHAIRMAN. Thank you very much, Jason. Jason, maybe, at 

the end of this session, I’m going to ask you to make a little presentation, so that those listening might understand what this upstream/downstream/sidestream hybrid——

Mr. GRUMET. I welcome the warning, Senator, thank you. 

The CHAIRMAN. Can you get ready for that? If you need a chart, 

think about it. If not, get ready. 

[Laughter.] 

The CHAIRMAN. Samuel Wolfe. 

STATEMENT OF SAMUEL WOLFE, CHIEF COUNSEL, NEW 

JERSEY BOARD OF PUBLIC UTILITIES 

Mr. WOLFE. Good morning, Mr. Chairman, Senator Bingaman, 

and members of the committee. Thank you very much for the 

chance to participate here today. 

The CHAIRMAN. You’re welcome. 

Mr. WOLFE. New Jersey and several other States have spent 

much of the last 3 years designing a regional program to cut greenhouse gas emissions from powerplants. We wanted a program that 

would get real reductions in greenhouse gas emissions, that would 

minimize the cost to energy consumers, and that would make our 

region’s economy more competitive rather than less competitive 

with respect to the rest of the country. 

26

The key to accomplishing all three of this goals—all three of 

these goals was the decision to hold back at least 25 percent of the 

emission allowances for the benefit of consumers, and specifically 

to leverage the value of those allowances to spur investment in energy efficiency, and also to encourage the development of renewable 

energy resources. 

So, the result of this is that growth in our economy does not have 

to be accompanied by growth in greenhouse gas emissions. And 

what means for the cost of the program is, we’re keeping down the 

demand for these allowances, keeping down the price of these allowances, as a result, and so, in that way, trying to keep down the 

overall direct cost of the program. 

In addition to that, investing in energy efficiency in renewable 

energy means that we’re less dependent on fossil fuel electricity, 

and we’re making better use of the energy that we have. So, the 

result is that we are keeping down the pressure on electricity 

prices, as well, and, indirectly, since so much of the electricity in 

our region is generated from natural gas, keeping down the pressure on natural gas prices, at the same time. So, as a result, I 

think we’ve positioned ourselves to be more competitive than regions that generate and use electricity less wisely. 

Now, we don’t accomplish any of this, and we certainly don’t 

have any effect on wholesale prices, if we were to simply hand all 

the allowances over to the electric generating community. And the 

Congress is true, too. By holding back 25 percent or more, we’re not 

having any effect on wholesale prices as a result of that, either. 

So, just to sum up, I would respectfully suggest that a wise national program would share the same goals as a regional program, 

achieving real reductions in greenhouse gas emissions, minimizing 

the cost to energy consumers, and making ourselves more competitive with respect to the rest of the world, rather than less competitive. 

And I’d also suggest that leveraging a greenhouse gas program 

is not simply a matter of damage control, it’s really an important 

reason to do the greenhouse gas program in the first place. We’re 

going to be making an awful lot of investment in our energy infrastructure over the coming years. And whether that’s a matter of investing more in railways to transport coal, powerplants to burn it, 

transmission lines to deliver electricity to places where it can’t get 

right now, you know, if we put that investment in those directions, 

we’re doing nothing more than perpetuating what we’re doing right 

now, and we’re—and we have the chance, with a wise national program, to, instead, put our country on a course towards really equipping ourselves to be as competitive as possible in the 21st century. 

Thank you. 

The CHAIRMAN. Thank you very much. 

William Pizer. 

STATEMENT OF WILLIAM PIZER, SENIOR FELLOW, 

RESOURCES FOR THE FUTURE 

Mr. PIZER. Thank you, Mr. Chairman and members of the committee, for the opportunity to speak here today. 

I should say that my comments don’t reflect any sort of institutional position of Resources for the Future, which is an indeVerDate 0ct 09 2002 15:10 Jun 15, 2006 Jkt 109420 PO 28095 Frm 00030 Fmt 6633 Sfmt 6633 R:\DOCS\28095.TXT SENERGY1 PsN: RSMIT
27

pendent, nonpartisan, nonadvocacy organization that doesn’t take 

positions on matters of public policy. So, these are my own comments. 

What I’d like to do, really, is just make two points—first, about 

the difference between upstream and downstream points of regulation. And I guess I would like to point out that, in the European 

emissions trading scheme, which is the only example we have of a 

CO2 program right now, which is a downstream program, they actually don’t measure emissions directly; they measure fuel use, and 

they apply emission factors to that fuel use, which is exactly the 

same thing we do in an upstream program. So, it’s not obvious to 

me that some of the differences that people suggested with regard 

to what it’ll encourage or incentivize are really there. 

The second point I’d like to make is that a lot of people have 

pointed out the capacity to differentiate between where things are 

regulated and where the allocations are going to occur. And I would 

suggest that, not only can we do that, but we probably should do 

that, and that’s because the costs of the program do not generally 

follow where the regulation occurs. And, again, I would point to the 

experience in the EU ETS so far, where, in power markets, the 

German power markets, what we’ve observed is that even though 

the power companies are required to turn in allowances for the CO2

emissions associated with the fuels they use, what we see is that 

power prices in those markets have actually risen sufficiently to 

cover most of the cost of those allowances, even though they’re getting the allowances, 95 percent of the allowances, for free. 

Now, this is not to say that in the U.S. power markets, we 

shouldn’t be giving out allowances for free. It just means to say 

that when we choose where we’re going to give out allowances, it 

shouldn’t be blindly applied to where the regulation is—actually occurs. And I think we actually can say some pretty intelligent things 

about where the costs are borne and who might deserve to get allowances in order to be more equitable. 

Thank you. 

The CHAIRMAN. Thank you. 

Well, that finishes the panel. And, Senator Bingaman, that 

brings us to questions. And if you’d like to go first? 

Senator BINGAMAN. Thank you. Let me ask—sort of, follow up on 

Billy Pizer’s comment there. 

As I understand it, EIA’s estimate is that the cost of a mandatory program, such as the one that NCEP, this National Commission on Energy Policy, has proposed—the cost would be roughly $4 

billion a year. I think Jason referred to that. At the same time, the 

program would allocate somewhere between $30 and $40 billion 

worth of allowances. I guess I’d like your explanation as to how 

those two numbers relate. I mean, does it make sense to be allocating $30 to $40 billion of allowances? And what will that—what 

will the ultimate economic effect of doing that be, relative to the 

$4 billion cost of implementing the program, overall? 

Mr. PIZER. Sure. The $4 billion—or the $3 to $4 billion that 

Jason mentioned reflects the cost to the economy of undertaking 

specific activities to reduce emissions, like switching fuels or applying more energy-efficient technologies, or what have you. And so, 

that’s the real cost, in terms of resources. 

28

The $30 to $40 billion represents the value of the allowances. 

And this isn’t a real cost, in an economy sense; it’s a transfer from 

whoever doesn’t have the allowances, and needs them, to whoever 

is allocated the allowances for free, or to the Government, if they’re 

auctioned. It’s much the same way as if housing prices go up. It’s 

not a really cost, in the sense that someone owns the house, and 

they get the higher price. It’s just a transfer between who has the 

allowances and who needs the allowances. 

Senator BINGAMAN. Mr. Chairman, you might—did you want to 

have Jason go through this description? 

The CHAIRMAN. I did, but I want to make one other observation. 

I noted that sitting over here were two people. Ned, you mentioned that you did work for the European community, and our 

first witness talked about the failure of the program. And I wondered how compatible you were, sitting there together. 

[Laughter.] 

The CHAIRMAN. Well, first, I assume that you told them how to 

do it, and they didn’t follow your instructions. Is that——

[Laughter.] 

Mr. HELME. Not at all, sir. I think they’ve done very well. I don’t 

think the program’s a failure at all. My sense is that it’s quite successful. It’s underway. Prices are a little higher. What Billy Pizer 

was pointing to, in terms of the German situation, just as someone 

on your earlier panel raised, in Europe the electricity markets are 

not fully deregulated. And so, companies are actually able to capture monopoly pricing in some situations. And there’s a lot of debate now that companies are basically passing on costs, saying it’s 

because of the allowances, and basically capturing some big rents. 

And I think that’ll be fixed, over time, as a major debate in Europe. 

But, remember, this is the first year. They’ve got a 3-year pilot 

phase. The real program kicks in in 2008. But, I would argue, it’s 

been quite successful, so far. 

The CHAIRMAN. Yes, ma’am? 

Dr. THORNING. I’d like to give a little different perspective on 

that. As I’m sure most of you know, the European emissions system only covers one-third of all power generation. For the Europeans to actually put in place a system that covers all emissions 

would be political suicide, because energy prices and trading prices 

would have to rise such that it would simply be unsustainable. So, 

I believe that the European emission trading system will not ultimately prevail, and that they will gradually be moving toward a 

more realistic approach, reducing global greenhouse gas emissions. 

In my discussions with officials and companies in the EU, I sense 

a growing unease about where they’re going with this. And Italy 

has already said it wants to opt out of the second commitment period. 

So, I think we need to look carefully at the lessons we can learn 

from Europe, and not make the same mistakes they’re making. 

Mr. HELME. Can I respond? 

The CHAIRMAN. Absolutely. 

Mr. HELME. In terms of the, (a) all of electricity generation is 

covered, not one-third. About 45 percent of total emissions are covered, in terms of the overall sectors. You threw me off by your comment. 

29

In terms of the politics of this, the way the European Commission works, once you have a regulation in place, as they do, it requires an action by the Commission to pull it back. The member 

states can’t stop it. In fact, there’s a lot of debate about extending 

the program to aviation, to transportation, et cetera. And, I would 

argue, that would be smart, but their programs of taxes and the 

efficiency standards that they have in other sectors are less cost effective than a trading program, that, over time, you will see this 

program expand to other sectors, because—precisely what you 

heard in the first panel, broader trading brings costs down, you get 

more environmental bang for your buck, and that’s what you want. 

So, I think—I have quite the different view from my colleague here. 

The CHAIRMAN. All right. Well, I guess time will tell. 

Now we’re going to have Jason give us a little explanation of how 

this works. 

Jason, are you ready? 

Mr. GRUMET. Sure. This nice chart, to my left—and, I guess, up 

on the screen—provides a useful visual aid. Thank you for that. 

A few words about point of regulation, which, I think, in general, 

is really the question of, where in the energy food chain do you 

place the burden to collect and surrender permits to the Government? Boiled down, it’s an administrative issue. It really, as has 

been said, has no bearing on the costs of the program, and, ultimately, no bearing on the ultimate effect of the program. It does 

bear significantly, though, on your options with regard to the scope 

of your overall program. But, from a substantive sense—and, I 

would say, from political sense—it bears strongly on the question 

of who gets the goodies at the outset of the program. And I’ll say 

a word about that. 

What this chart shows is essentially the range of options, from 

the top of the food chain, fuel extraction, which would be oil wells, 

point of entry of petroleum. It’s the economy coal mines and—with 

natural gas, there are a number of options, but the top of the food 

chain would be natural gas wells. Going all the way down to the 

right, you see the true downstream expression, which would be, 

you know, light sockets, small businesses, automobile tailpipes. I 

think that when most people talk about a market-based program, 

they’re imagining something generally on the upstream side of the 

equation. To go all the way downstream, I think that the statements from Shell, that we should really focus on the auto companies, would be perceived by the auto companies as advocacies for 

CAFE, which is really more of a command-and-control option, as 

would be setting new efficiency standards or, in some ways, requiring limitations on, you know, use of energy. 

So, I think the real debate kind of fits into the top half of the 

equation, what Jeff Sterba and others described as a hybrid program, where you would regulate the large stationary smokestacks, 

which is the full scope of the program in the EU, at that point of 

combustion, and everything else above that. To my mind, it’s really 

essentially still an upstream expression. 

And I guess there’s two, kind of, closing points that—I don’t pretend to have the monopoly on this topic—as both Mr. Helme and 

Ms. Thorning point out, the European Union only focuses on the 

large, stationary-source emitters. It does not, in fact, have full proVerDate 0ct 09 2002 15:10 Jun 15, 2006 Jkt 109420 PO 28095 Frm 00033 Fmt 6633 Sfmt 6633 R:\DOCS\28095.TXT SENERGY1 PsN: RSMIT
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gram coverage. It covers about half of the economy. To move beyond that half of the economy, my view is, you have to actually 

move the program farther upstream, that to go smokestack by 

smokestack, you start getting very, very small smokestacks after 

about half of the emissions are covered. You have to start regulating bakeries and, you know, small businesses. Not going to happen. So, if you really want full program coverage, that actually, in 

some ways, pushes you farther up the food chain. 

The second point, which I think is less substantive, but politically, in some ways, more important, is that there is a perception, 

based on history, that who you regulate is the entity that should 

get the lump sum of the allocation, at the outset. That has been 

our history with the acid rain program and other stationary-source 

control programs. Billions—Rich Richels and others can explain to 

you better than I why carbon is different, but I think there is a 

perception that if you are regulated, you’re going to get more of the 

allocation at the outset. And I would suggest to you that some of 

the preferences we’re hearing about point of regulation are actually 

derivative from the broader question of who gets the allocation to 

start the program. And so, I think there is a clear political linkage 

between the two, while there is no necessary substantive linkage 

between those two questions. 

I would pause there. 

The CHAIRMAN. Okay. Does anybody want to comment on—as a 

panelist here, on that chart, on that explanation? 

[No response.] 

The CHAIRMAN. Okay. 

Senator MURKOWSKI. Mr. Chairman? 

The CHAIRMAN. Yes. 

Senator MURKOWSKI. Can I just ask for you to follow up, then, 

on your last comment there? You’re suggesting that the downstream users, the household—the little folks, even though they’re 

not subject to the regulation, you’re suggesting that they share in 

some of the allowances. And you’ve indicated that perhaps Mr. 

Richels or Mr. Pizer can speak more to that. Can——

Mr. GRUMET. I’ll frame it, and then pass it on. 

The Energy Commission believes strongly that the allocations—

the free allocations should be given to the people who bear the burdens of the program. And, you know, different people have their 

different estimates, but you’ve heard the word—the number, 10 

percent, thrown around, that the actual regulated entities are only 

likely to bear, cumulatively, about 10 percent of the costs of the 

program. And that is because they pass those costs on. If the cost 

of coal increases because they have to purchase in permits, that 

will then get passed on to the electric sector. And so, even if the 

electric sector wasn’t regulated, they will still bear costs from this 

program. And then, they, being good, smart capitalists, will pass 

those costs on, through higher electricity prices, and large energy 

users, like the aluminum companies, and others will bear some cost 

of compliance. And so, actually, the point of a carbon constraint is 

to send a price signal all the way through the economy so that everybody has an incentive use energy more wisely. And so, in that 

regard, there is a logic to trying to allocate broadly. There are a 

lot of different ways in which people suggest that be done, but the 

31

notion of an auction as a mechanism do so that is simply that you 

would raise revenue that then could be disbursed broadly through 

society. But there are other suggestions that people actually give 

direct allocations to a cement—to the cement industry to cover 

some of their costs of higher energy costs, and then they would sell 

those allowances to the energy producers, or whoever needs them, 

to create some greater equity. 

The CHAIRMAN. Okay. Good question—comment. 

Yes, Richard? 

Dr. RICHELS. With regard to the—thank you. With regard to the 

issue that you could somehow make the electric utility industry 

whole by allocating between 5 and 10 percent of the permits to 

them—and, earlier, Ned mentioned the study by CRA—there was 

a subsequent study by CRA, I believe, that took a very careful look 

at the analysis that came up with the 5 to 10 percent number, and 

found some very unrealistic assumptions underlying that analysis. 

I won’t get into the detail, but one of the analyses were that the 

utilities would receive the permits in perpetuity. When they calculated the number of permits that would be required to make the 

utility whole under what they consider to be more realistic assumptions, the number was more like 75 percent. 

Now, I’m not saying that 75 percent’s right. I’m not saying that 

10 percent is right. What I think that the Senators need to understand is that there’s a great deal of uncertainty underlying some 

of the numbers that are being tossed around. 

The CHAIRMAN. Ned, before you—I know you had your hand up, 

but I had on my mind asking you a question. You threw around—

mentioned a number, 8400. 

Mr. HELME. Yes, sir. 

The CHAIRMAN. About that number. 

Mr. HELME. This is the number of entities—you know, plants, 

sources—that would need to be regulated if you did the hybrid, the 

combination that Jason and I have been talking about, where you 

regulate the industrial point sources over a certain size, and you 

go to natural gas distribution companies and oil refiners and natural gas processing plants. There’s about—this is several years 

ago—there were 8400 facilities. And the EU program today is, like, 

12,000 facilities. So, clearly that hybrid kind of thing, which would 

cover basically 100 percent of the economy, could be done with 

8400 facilities, which is quite workable, in terms of a regulatory 

program. Whereas, if you went downstream as—you know, down to 

the individual bakery and dry-cleaner, you’re talking about hundreds and hundreds of thousands of sources. So, in contrast, an upstream system that’s just coal mines, coal preparation plants, natural gas pipelines, distribution, refineries, is about 2,000 sources. 

So, either way, it’s quite workable. 

But, I wonder, as to Rich’s comment about the studies—I think 

the other key point here for Senators to think about is the amount 

of allowance you need to give to, let’s say, the utility industry is 

completely a function of how tough the cap is. Okay? In the study 

I cited, we were looking at a cap at 7 percent below 1990 levels, 

basically the equivalent of the Kyoto target for the United States. 

The kind of study that Jason’s talking about, for the proposal 

NCEP put together, is a much less stringent cap. And so, less alVerDate 0ct 09 2002 15:10 Jun 15, 2006 Jkt 109420 PO 28095 Frm 00035 Fmt 6633 Sfmt 6633 R:\DOCS\28095.TXT SENERGY1 PsN: RSMIT
32

lowances are required. In our study that the CRA did, we found the 

utility industry needed 26 percent of the allowances, and in Jason’s 

study it’s, like, 10 percent, but that’s because it’s a less stringent 

cap. So, remember that when you think about this, obviously the 

tougher the cap, the higher the cost, the more you need to give to 

the companies to offset their—the loss to their shareholders. So, 

that’s the way to think about this. 

The CHAIRMAN. Senator Murkowski. 

Senator MURKOWSKI. I want to follow up on the 8400 comment. 

That’s today. That’s the number today. How do we deal with the 

fact that we’ve got a growing population? How do we account for—

if you’ve got a cap-and-trade program—this is what some of those 

who object to it say—you can’t account for an increasing population. How do we keep those sectors—for instance, the coal industry, which many of us are concerned about—how do we keep those 

from seeing rising unemployment rates? We’ve got a society, an 

economy, that’s constantly moving, constantly in flux. How do we 

account for those? 

Mr. HELME. Well, there’s two answers, I think. One is, in terms 

of the number of facilities, it’s a function of how many cement 

plants, steel mills, refineries, powerplants, et cetera, are built. So, 

I would argue that—not going to be that many more. I mean, it 

might be more than 8400, it might be 10,000, over time, but not 

such a problem. But your other question is trickier. It’s, sort of—

when I say it’s enough to give 26 percent to the utility industry to 

hold their shareholders harmless, that’s not the same as saying—

for the coal industry, it’s 34 percent—that’s not the same as saying, 

‘‘I’m taking care of the communities,’’ or ‘‘I’m taking care of the 

workers,’’ or, ‘‘I’m taking care of the railroads.’’ That’s saying, ‘‘I’m 

taking care of the shareholders of coal companies, electric utilities 

companies, steel companies, et cetera.’’ That’s not the same thing. 

And the point I think Jason was making, that we have a lot of 

allowances left over when we take care of those shareholders. A 

portion of that certainly could be put to the workers. I mean, if 

we’re going to have an effect on oil refinery workers, they could be 

compensated. 

So, the point here is, you’ve got plenty to play with. There’s a lot 

more money on the table in a carbon program than there was in 

the SO2 trading program. So, there are ways to design this. And 

I think we can say, ideally, from an economist’s perspective, you 

want to auction as much as you can. But from a political perspective, it’s all about equity, who—as Rich Richels said, who do we 

want to give this to? And there’s plenty of opportunity to do that. 

The CHAIRMAN. Mr. Pizer. 

Mr. PIZER. I just wanted to add to Ned’s comments and say, you 

don’t want to get the impression that you can make everybody 

okay. I mean, this is a program that’s going to cost $4 billion to 

someone. But the point is, is that you can use the allocation, if you 

do it carefully, to try to control the distribution of those impacts 

and make sure that the communities or the companies that would 

otherwise be more adversely affected, are somehow compensated. 

And I think that, you know, we have some idea, and you’ve heard 

some different estimates today. I was actually going to point out 

that I think the estimate that Jason referred to, that said 5 to 10 

33

percent, was actually 5 to 10 percent of the total. Whereas, I think 

the number that Ned was talking about was actually 20-something 

percent of the power sector’s actual emissions. So, when you take 

those together, they’re actually not that far apart. 

The CHAIRMAN. Okay. 

Mr. PIZER. Well, the point was, is that this is 10 percent of a pool 

for the entire economy. So, if you talk about that, relative to the 

emissions in the power sector, it’s actually closer to 20-something 

percent. I think that the estimates that we’ve heard, while they’re 

going to be subject to debate, clearly, there are numbers that can 

be dealt with in the power sector to deal with them. 

The CHAIRMAN. All right. 

Senator Bingaman. 

Senator BINGAMAN. I wanted to ask Samuel Wolfe to comment a 

little more on this public benefit allocation that you folks are contemplating in this RGGI program. How does that relate to what 

Senator Murkowski was asking about there? I mean, how do you 

see this working? And would each State make its own decision as 

to what allocation to make to what purposes? How would it work? 

Mr. WOLFE. Thank you, Senator. 

It would be a State-by-State decision about, first of all, whether 

to stay at the 25-percent floor or whether to go above that level. 

It would also be, I think, a State-by-State decision on exactly how 

to invest the proceeds of that portion of allowances, but with setaside to benefit consumers. I think the best way to do it is to see 

where you can best leverage that money, if, say, by investing—and 

some of what we’ve seen in the modeling that’s been done for the 

Regional Greenhouse Gas Initiative is that by investing that money 

in energy efficiency, we see a very quick and very large reduction 

in the cost of CO2 allowances, and that means, again, a very quick 

and large reduction in the cost of the program. So, that seems to 

be a much better leveraged way to take advantage of the resources 

that we’re creating when we create a cap-and-trade system. 

Just to expand on that concept, one thing that I think we’re all 

circling around here is the idea of making regulated entities whole. 

And it’s worthwhile just taking a moment to explore what that 

means. 

One way to help reimburse them for their costs is certainly to 

hand them allowances. But in a large chunk of our electric generating fleet in this country they’re not subject to utility regulation; 

and so, they are going to recover their costs of a greenhouse gas 

cap through the wholesale electricity markets. And they are not 

going to change their behavior in doing that; they’re not going to 

seek to recover any less money through the wholesale markets, if 

they’re handed a larger stack of allowances. Really, it’s two separate things. And the allowances that they’re being handed are basically almost a direct pass-through to the shareholders, in addition 

to the money that’s going to be recovered through the wholesale 

power markets. 

The CHAIRMAN. Senator Feinstein. 

Senator FEINSTEIN. Thank you very much, Mr. Chairman. 

I wanted to go back, just for a moment, to what California is 

doing, because it’s certainly the most aggressive action in the Nation, so far. And they have a macroeconomic study from the UniVerDate 0ct 09 2002 15:10 Jun 15, 2006 Jkt 109420 PO 28095 Frm 00037 Fmt 6633 Sfmt 6633 R:\DOCS\28095.TXT SENERGY1 PsN: RSMIT
34

versity of California at Berkeley that actually shows that these limits will produce new jobs and new employments, and, actually, as 

a boon to the economy of the State. 

I see you nodding, Mr. Helme. I’d like everybody to comment on 

that, because the fear has been economic disadvantage by moving 

in this direction. Everything I see is economic advantage in moving 

in this direction, because, sooner or later, global warming is going 

to begin to impact every company, as well as every other kind of 

entity on the planet, if we don’t address it. 

Mr. HELME. We work extensively with them, and did our own 

sort of bottom-up microeconomic study that mirrored the kind of 

findings they had. So, I think it’s—you’re right, in terms of the 

level of reductions that are required in the caps in California, it is 

a very positive picture. A lot of that positive picture comes from the 

Pavley auto standards, where you’re saving a lot on gasoline consumption, that far exceeds the cost to the automakers that goes in 

building in additional price of the hybrid cars, and that sort of 

thing. So, a big piece of those benefits from that, and also for energy efficiency. But I agree with you. 

Senator FEINSTEIN. Right. Anybody else on that? Please. 

The CHAIRMAN. Please. Margo? 

Dr. THORNING. I’d like to mention that there is some work on the 

ACCF’s Web site looking at the impact on California of trying to 

meet emission reductions. And we found, with our general equilibrium model, by—I think Charles River Associates also prepared 

that study—significant cost to California, in terms of jobs and employment. So, I think you need to look very carefully at the two different microeconomic simulations and assess the question of how 

realistic the assumptions are. 

And, second, just to draw us back one more time to our friends 

in Europe, Europe is, of course, growing at 1 percent or less a year, 

and the higher energy prices they’re facing are definitely having an 

impact on their ability to provide jobs and sustain well-being. So, 

I think it would behoove us to take a good look at the voluntary 

approach, which the EIA’s own recent analysis shows is more productive, in terms of reducing greenhouse gas emissions and reducing electricity prices, than is a mandatory emission intensity reduction program. 

Senator FEINSTEIN. Mr. Marron, and then Mr. Richels. 

The CHAIRMAN. Just before we go to the next person, could I ask 

Ned—you mentioned two main reasons that the economic study 

came out positive. Repeat them again. 

Mr. HELME. The two biggest pieces of benefits are the benefits 

from the California car standards, where you get a lot less consumption of gasoline, because it’s much stricter standards, and so 

that’s a big saving for consumers, and more than offsets the additional costs to the automakers of producing the more efficient vehicles. And, second, the extensive energy efficiency program and removals program that they’re building, which has huge—again, it’s 

like appliance standards—the homeowner gets a more efficient 

dishwasher, and obviously saves energy for a long period of time, 

so big benefits there. 

The CHAIRMAN. All right, thank you. 

Now, who was next on this? 

35

Donald. 

Mr. MARRON. Yes, I want to just say that from the macroeconomy point of view, introducing the kinds of regulations that 

have been discussed today would almost certainly have net costs, 

leaving aside whatever benefits come from preventing, possibly, or 

changing, the degree of global warming. And I guess the easiest 

way to think about that is to think about the various products that 

we produce today in the economy—say, electricity—if a cap-andtrade system were implemented, firms would either be paying more 

for the fuel sources they get, switching to more expensive fuel 

sources, or installing various kinds of capital that might capture 

and sequester emissions. All of those things are a net cost. They 

may employ people, but, from a macroeconomic point of view, what 

you basically observe is a switching of jobs from one role, where 

people used to produce some other products, into a role in which 

they’re helping, in essence, execute other requirements of the regulation. And so, again, I think, from an overall economy point of 

view, the key issue would be whether the costs that are imposed 

by the regulation are balanced by more than offsetting benefits 

from the environmental benefits. They’re not going to be offset by 

benefits within the economy. 

Senator FEINSTEIN. Mr. Richels. 

The CHAIRMAN. Richard, did you want to comment? 

Dr. RICHELS. Actually, I couldn’t have said it better than Donald. 

I mean, what you’re talking about is what economists typically 

refer to as a ‘‘free lunch.’’ I don’t think we should fool ourselves into 

thinking that there’s a free lunch out there to be had. It could be 

the best lunch we ever paid for, but I think we’re doing consumers 

a disservice by telling them that we can get all this done at zero 

cost. 

I think that the California study, we need to start taking a more 

careful look at that. I’ve summarized the IPCC economic analyses, 

the Intergovernmental Program on Climate Change analyses, for 

the last three reports. There’s been a lot of tension between the 

top-down modelers—I’m pleased to say Billy is an example of a topdown modeler, as well as myself—and the bottom-up modelers. Bottom-up modelers tend to think that there’s a lot of—awful lot of inefficiencies in the economy, so much inefficiencies that if we could 

just take advantage of those inefficiencies, we can put the economy 

on track, and it’ll be a win-win for the environment and the for the 

economy. I just am not convinced that that’s the case. 

Senator Feinstein, EPRI will be doing an analysis of the California situation, looking at the costs of California going it alone. 

And, typically, we find that when a State goes alone, there is a cost 

to that State. There’s a migration of jobs out of the State, there’s 

a migration of employment, there’s a decrease in net income. 

And, you know, the best of all situations—we say we want as 

wide a coverage as possible—well, we want it to be globally, is 

what we would really like to see. I mean, that’s the way to really 

protect the environment. The United States could reduce its emissions to zero, and it’s not going to stabilize atmospheric concentrations. Without international cooperation, then we’ll have to go to 

some kind of country-by-country action and hope that, at the end 

36

of the day, we’ll be able to put together some kind of patchwork 

quilt. 

But I’d hate to see us put ourselves in the position where we 

have to put that patchwork quilt together at the State level, because that’s going to be extremely difficult to do. And I commend 

you on coming forward and trying to move California, where I just 

moved out of after 28 years, into a more national perspective. 

Senator FEINSTEIN. Okay. 

The CHAIRMAN. Thank you. 

Now, we’re just getting near the end of this. Let’s go, Jason. 

Mr. GRUMET. If I can pile on. First I’d like to say, Richard, I hope 

you didn’t move because of the job dislocation. 

[Laughter.] 

Dr. RICHELS. Well, I would have done that later. 

Mr. GRUMET. I am neither a top-down or bottom-up modeler. But 

I think it’s important to recognize the frame of this issue, and that 

is that for a long time there have been some who have been saying 

this is free and easy, and there have been some who have been saying it’s economically ruinous. And neither, I think, is the case. 

There are clearly significant opportunities to have benefits, in addition to the environmental benefits, from encouraging efficiency 

and trying to internalize these costs of carbon. And I think many 

of those will be long-term benefits, they’ll enhance our economic 

competitiveness overseas, they’ll provide all types of benefits. At 

the same time, there will be real costs of this program. 

And, I think, to Senator Murkowski’s broad, and, I think, most 

important question, how do we make sure that those costs are, in 

fact, consistent with our broader desires for economic well-being? 

And that’s a question of program design at a metalevel, which is 

really not invoked in the white paper. That’s a question of the pace 

of emission reductions, whether or not you have cost certainty to 

overcome the kinds of unhappiness that they’ve been experiencing 

in Europe, where the costs are about three times what had been 

initially perceived, and whether, in fact, you also invest resources 

in new technologies to provide an incentive. 

And I guess I would just say, at the end of the day, the first 

panel nailed it, that this is about technology. And the question is, 

how do you create the incentives for technology? There’s a polar argument which says, do it all through markets, do a kind of Kyotolike—you know, put it all on business. We don’t think that’s going 

to work. There’s an all—a voluntary notion, which says, put it all 

on the tax base, have it all done through taxpayer-funded incentives. Don’t think that’s going to work. 

What the Commission believes is, you need a combination. You 

need a modest market signal, to provide a long-term message to 

the ingenuity of America to start to make different decisions and 

to have the benefit of generating some revenue to provide incentives. So, you have kind of a pull and push, which gradually moves 

us forward. And, I think, with that kind of combined approach, we 

can take a meaningful first step. 

The CHAIRMAN. All right. Getting close now. 

Richard. 

Dr. RICHELS. I just want to add to that. I totally agree that capand-trade, or whatever market mechanism we need, makes a lot of 

37

sense, as far as economic efficiency is concerned. But without a 

technology policy that goes along with it, it’s going to be very difficult to do the heavy lifting that’s going to be required downstream. And that’s not going to come about through cap-and-trade. 

We need, somehow, to incent the public sector and the private sector to make sure that the carbon-free technologies are available in 

the future, when we’re making those 50-percent reductions or 80-

percent reductions that will be required to stabilize atmospheric 

concentrations. 

The CHAIRMAN. Okay. 

Ned. 

Mr. HELME. I just want to clarify that I agree with Jason’s point, 

on the larger, longer term. Clearly, it’s not going to be a free lunch, 

by any means. You’re going to face additional cost. And I agree 

with Richard’s point, here at the end here, the reason we really 

need to push technology—and that’s why I propose this reverse 

auction, where you put some of the allowances out there—is that 

if you look at the SO2 program in 1990—you remember, the acid 

rain program—the cost estimates for SO2 scrubbers and for NOx

SCR controls were much—factor of two, factor of three higher than 

they are today. We’ve got a cap. We drove the technology. The competition of that trading market created a lot of innovation in the 

technology. And today we have very reasonably cost technologies. 

And that’s why none of the utilities are objecting to the CAIR rule 

or—and so on, because they know what it costs, and it’s not absurd, in terms of the costs. 

And our hope with climate is the same way. We need to drive 

the technology. We don’t have the technologies today. You know, 

we’re talking about gasification sequestration, but it’s 30 percent 

more expensive than—you know, traditional supercritical coal. 

That can happen. If we drive those technologies—same with nuclear, same with advanced renewables—if we drive those technologies now, by the way you design the program, by creating a set 

of allowances that make it attractive for people to build those technologies and not—today they can’t make—recover their costs doing 

that, for the most part. So, I think that’s where we want to go. And 

we’ll see the same pattern, I would argue. Those technologies will 

be competitive by 2020, and we’ll be able to get there. 

So, I agree with a lot of our panelists here, that that’s where we 

need to go. 

The CHAIRMAN. Okay. Margo? And we’re going to wrap this up. 

Dr. THORNING. I certainly concur we need to drive technology, 

but I—focus this on the strong role economic growth can have in 

pulling through the technology that we need. For example, in Europe, emissions intensity has only fallen by 7.6 percent from 1997 

to 2003, in spite of their mandatory push. Here in the United 

States, emissions intensity has fallen by 12.6 percent over that 

same time period, because we’re growing in, on average, 31⁄2 percent a year. Europe is only growing at 1 percent. So, economic 

growth can play a really strong role in pulling through the technologies that we need. And another incentive that, as I had mentioned before, we need to focus on is making our tax code competitive with the rest of the world. 

The CHAIRMAN. All right. 

38

Senator Bingaman. 

Senator BINGAMAN. Let me just ask Ms. Thorning. It’s true, 

though, that most of our growth is in the service sector as I understand it. Also, we are much less efficient than Europe, as a general 

matter, in use of energy. Therefore, we can reduce our energy intensity more easily. Am I right about either of those? 

Dr. THORNING. Well, I would suggest that, because the United 

States has a whole different structure and is—you know, the distances are greater, energy prices have been cheaper—that it’s not 

necessarily easier for us to make the kind of switches toward lower 

greenhouse gas emissions. But because we’re able to invest in new 

capital, because our economic growth is stronger, we’ve made better 

progress than has Europe. And Europe is increasingly a servicesector economy, as well. And, by the way, in the service sector, 

there’s a lot of manufacturing buried in there, because there’s been 

a change in the structure of how services are provided to the manufacturing sector. 

The CHAIRMAN. All right. We stand in recess until 2:30. Take 

your belongings with you and return to this room at 2:30. 

[Recess from 12:11 to 2:36.] 

AFTERNOON SESSION 

Senator BINGAMAN [presiding]. Okay, why don’t we go ahead and 

get started here. 

Senator Domenici has been delayed with a meeting of the Appropriations Committee on the supplemental appropriation bill, but 

he’s going to be here as quick as he can. But he indicated that we 

should go ahead and start. 

So, why don’t we just do what we did this morning, go around 

and have everyone make the points that they would like to make, 

and then we’ll have some questions. Hopefully by then we’ll have 

some additional Senators so we can have some give-and-take discussion. 

Kateri, thank you for being here, with the Alliance to Save Energy. Go right ahead. 

STATEMENT OF KATERI CALLAHAN, PRESIDENT,

ALLIANCE TO SAVE ENERGY 

Ms. CALLAHAN. Thank you, Senator. 

My name is Kateri Callahan, and I serve as the president of the 

Alliance to Save Energy, which is a nongovernment and bipartisan 

organization dedicated to advancing energy efficiency worldwide. 

And, as the first panelist, I’d like to thank and commend you, Senator Bingaman and Senator Domenici, for organizing this conference and for inviting the Alliance to be part of what I consider 

to be a very important national dialogue. 

The Alliance has two overriding recommendations today. First, 

we would like to urge that any national climate strategy employ 

energy efficiency to the greatest extent possible, because there’s an 

impressive body of study that suggests that such technologies and 

practices are the most cost-effective means we have at our fingertips to controlling greenhouse gas emissions. And, second, while we 

engage in what could be a very protracted debate on national climate policy, we would like to urge the Congress to go ahead and 

39

immediately adopt policies that will drive energy efficiency in every 

end-use sector. We believe that such measures are likely to complement any kind of an overarching national scheme that’s finally 

enacted. And, meanwhile, we can begin to reduce greenhouses 

gases immediately, while also growing our economy. 

We already have solid evidence that efficiency can, and is, delivering tremendous carbon savings to our economy. Our own research, Senator, indicates that energy efficiency policies, the building and appliance standards, the incentives we’ve put in place, and 

technology improvements, since the mid-1970’s are allowing us to 

avoid the use of approximately 40 quadrillion Btus, or roughly 40 

percent of the energy currently consumed, and that we avoiding the 

emission of almost 2 billion tons of CO2 every year. 

These impressive savings don’t come close to tapping the full efficiency gains. For example, the modeling that was undertaken by 

RGGI, the Northeast greenhouse gas initiative, showed that doubling that region’s energy efficiency policy impacts could cut electricity growth by two-thirds by 2024 and would keep carbon emissions flat, and it would do all of that while adding jobs, at a cost 

of less than 3 cents a kilowatt hour in improvement to the economy. 

So, to reap the promise of energy efficiency in any national climate strategy, we ask that the Congress make explicit provisions 

for such technologies and measures. For example, if you undertake 

an upstream cap-and-trade program, we’d urge that you follow the 

lead of RGGI and allocate a significant portion, at least 25 percent, 

of the allowances or revenue from such an auction—or from the 

auction of such allowances directly to support energy end-use activities and other public benefits. And, again, as stated earlier, we 

believe it’s critical to move forward today in front of any agreement 

on a national climate strategy to reduce greenhouse gas emissions, 

and we think you can cost effectively do this by implementing and 

funding the provisions—the energy efficiency provisions that were 

in EPAct 2005. We also urge you to consider adopting additional 

measures, including policies to improve the fuel economy of our 

light-duty fleet, to extend and expand the current suite of tax incentives—energy efficiency tax incentives that are in place, and, finally, to institute something I know you’re interested in, Senator, 

a national energy efficiency resource standard and/or a public benefits fund that could be modeled on successful programs that States 

have underway to deliver—or to invest in energy efficiency. 

We believe this dialogue is critical to the development of a sustainable energy future in the United States, and that energy efficiency represents the cheapest, the quickest, and the cleanest 

mechanism that likely will be considered all during this debate. We 

also believe, however, as I mentioned earlier, that we can take action now, a no-regrets policy, put in place Federal legislation that 

will drive energy efficiency, in transportation, in buildings, in the 

energy supply sector, and we can do that while we debate broader 

programs and make a meaningful impact on greenhouse gas emissions. 

Thanks for your time, and I look forward to your questions. 

Senator BINGAMAN. Thank you very much. 

Michael Bradley, with the Clean Energy Group. Go right ahead. 

40

STATEMENT OF MICHAEL BRADLEY, EXECUTIVE DIRECTOR, 

CLEAN ENERGY GROUP 

Mr. BRADLEY. Thank you, Senator. 

My comments today represent the views of the six Clean Energy 

Group companies which support the Clean Air Policy Initiative. 

Since 2000, these companies have actively supported a Federal 

multipollutant legislative approach for reducing NOx, SOx, mercury, and CO2 emissions from powerplants. These companies include Calpine, Entergy, Exelon, Florida Power & Light, PG&E, and 

the Public Service Enterprise Group. Collectively, these companies 

own or operate more than 140 gigawatts of electric generating capacity in 40 States. This represents about one-sixth of the total 

U.S. generating capacity. 

Our members support the adoption of a mandatory greenhouse 

gas regulatory program based on a fair and cost effective program 

design. We believe that the scientific evidence on the risk associated with climate change is sufficient to warrant immediate legislative action. We agree with many of the participants today that an 

economywide regulatory system could be effective in controlling 

greenhouse gas emissions. However, the practical reality is that the 

economywide approach will require tremendous political lift. I 

think we’re seeing that. 

We believe strongly that a sector-specific cap-and-trade program 

initially focused on electric generating would be a good first step 

in setting us on a course to begin reducing our Nation’s greenhouse 

gas emissions. A cap-and-trade program for the electric generating 

sector could be designed to readily integrate into a broader 

economywide program at a later point in time. 

As the industry makes substantial investments in both new and 

existing powerplants, we are better served by having the right economic signals in place to guide these capital planning decisions. 

In terms of program design, my comments today will focus primarily on the methodology used for distributing allowances to the 

electric generating sector. 

One of the options that we have seen proposed in the responses 

to the four questions over the last month is to use the allocation 

to compensate higher emitting facilities by basing the allocation on 

a facility’s share of historical emissions. We disagree with this approach. We don’t think that this approach is good public policy, nor 

do we think that it would be good business practice. 

An allocation based on compensation fails to drive innovation 

and the deployment of new high efficiency generating technologies. 

An allocation based on compensation penalizes new market entrants that would be excluded from the allocation entirely. And, finally, an allocation based on compensation penalizes companies 

that have invested in generating fleets with a lower carbon intensity prior to the imposition of the cap. 

Instead, we advocate an alternative approach that requires companies to earn allowances based on their current performance. Allowances are a valuable commodity that should be used by policymakers to drive investment decisions that will lead to better environmental and lower costs. 

Specifically, we advocated updating output-based allocation. 

Under this approach, allowances would be apportioned based on 

41

the facility’s recent power output. This creates a very strong financial incentive for improving powerplant efficiency. Also, an updating—output-based allocation approach encourages the deployment 

of new innovative technologies by providing a mechanism for new 

powerplants and new projects to be integrated into the cap-andtrade program on an equal basis. From a business perspective, we 

feel this approach is the right approach, because it treats companies equitably based on their ability to deliver low-cost energy supplies. 

In the absence of an equitable distribution allowance approach, 

such as an output-based allocation, we would support an alternative allowance allocation approach, such as an auction, to ensure 

a fair distribution of the burden under national greenhouse gas 

programs. 

Thank you very much. 

Senator BINGAMAN. Thank you very much. 

I am reminded here, we need to try to get this done in a couple 

of minutes, if people can possibly do that. But appreciate the good 

comments that we’re hearing. 

Michael Morris is here to represent the Edison Electric Institute. 

Welcome, and go right ahead. 

STATEMENT OF MICHAEL MORRIS, CHAIRMAN OF THE BOARD 

OF DIRECTORS, EDISON ELECTRIC INSTITUTE 

Mr. MORRIS. Thank you very much, Senator. Appreciate the opportunity to try to be the first to get done within a couple of minutes. I’ll do all that I can in that regard. 

Senator BINGAMAN. We wish you well. 

Mr. MORRIS. I’m sure you were addressing the previous speakers, 

not me, right? 

[Laughter.] 

Mr. MORRIS. We really are here to represent the Edison Electric 

Institute. I think you’re very familiar with it, 185 member companies and 65 international affiliates, as well. We would like to commend you and your colleagues for the opportunity to be here and 

comment on the white paper. 

EEI strongly supports voluntary technology, carbon intensitybased approaches to the global climate issue. We believe that this 

can—and, in fact, already has—achieved significant results. Technology is the key to addressing the greenhouse gas issue as we go 

forward. Strategies should be adopted that develop and implement 

a zero- or lesser-emitting generation technologies, taking into account the economic turnover of capital stock. Robust voluntary 

measures that reduce carbon emissions and emission intensity 

surely will get us in that direction. 

Emphasis on the reduction of carbon intensity is important, because we think that’s essential to make certain that we don’t 

dampen economic growth as we go forward. In addition, we would 

support a robust budget support for the implementation of the 

issues that came up in the Energy Policy Act of 2005. And I know 

you’re a strong supporter of that, as well. 

We note the critical international dimensions of the climate 

change issue and the importance of investment overseas in technology and best practices. 

42

The reality of rapidly increasing emissions from major developing 

nations such as China and India demonstrate the importance of the 

international partnerships and other voluntary technology-based 

multinational agreements like the Asia-Pacific Pact. We feel very 

comfortable with that, and believe it’s the right way to go. American electric power and EEI will continue to work in that direction. 

As we look at the issues in front of us, we believe that it ought 

to be an economywide system that surely is based on the point of 

the actual pollution themselves. We would talk about downstream 

and upstream analysis, as we go forward. And clearly we are 

strong supporters of the allocation method, rather than the auction 

method, and will address that we get to the questions. 

I’m seeing the signs behind you that say I’m out of time. 

Thank you. 

Senator BINGAMAN. Well, thank you very much. 

Fred Krupp, we’re glad to have you here, and you’re speaking for 

the Environmental Defense Fund. 

STATEMENT OF FRED KRUPP, PRESIDENT,

ENVIRONMENTAL DEFENSE 

Mr. KRUPP. That’s right, Senator, Environmental Defense. And 

it’s an honor to be with you here today. And I want to commend 

both you, Senator Bingaman, as well as Chairman Domenici, for 

your leadership on U.S. climate policy and the progress you’ve 

made in opening this dialogue and allowing us to delve more deeply 

into this most serious challenge. 

The first principle of effective climate policy is establishing a 

clear emissions target related to the problem we’re trying to solve. 

That problem is the increasing concentration of greenhouse gases 

in the Earth’s atmosphere, which are causing an accelerated warming of the planet. 

Just last month, the Journal of Science published an article that 

found that the rate at which Greenland, the ice sheet, is draining 

into the ocean has doubled over the last decade, suggesting that a 

tipping point leading to the complete loss of the Greenland ice 

sheet and a 20-foot sea-level rise may be closer than previously 

predicted. 

Because of the increasing flood of similar evidence, we must now 

establish real limits, not emissions caps that would allow greenhouse gases to rise. They would ultimately make our task more difficult and more costly. 

In response to your questions on the point of regulation and allocation, we believe those decisions flow from the basic design of the 

program. In order to achieve reduced greenhouse gases at the least 

possible cost, the basic design of the program must include both a 

real emissions limit and an opportunity for all sectors of the economy to contribute to the solution. This is because Environmental 

Defense believes the most powerful tool to manage the cost of climate policy is the ingenuity of the American people responding to 

the incentives in a market economy. A stable and predictable emissions limit creates the demand for emissions reduction and offset 

technologies. Market demand and innovative entrepreneurs will 

provide a better mix of technologies than any government employee 

could choose. Similarly, the fundamental elements of emissions 

43

trading and banking in a competitive market serve to grind down 

costs far better than any government program could. 

Finally, I believe farmers can play an important role in meeting 

the climate challenge. Farmers can raise the crops that would become renewable fuels in ways that produce less carbon than traditional fossil fuels. This can provide a win-win solution for energy 

security and climate policy. 

In addition, we think agricultural offsets are one of the most 

powerful tools to reduce costs. EPA’s analysis of the Clean Air 

Planning Act last fall predicted that—carbon dioxide allowances 

prices between $1 and $2 if the use of offsets is unlimited. At the 

same time, they would provide new revenue streams for farmers as 

the world markets for farmers become ever more challenging. 

Thank you. 

Senator BINGAMAN. Thank you very much. 

Next, Paul Bailey, who is speaking on behalf of Generators for 

Clean Air. 

Go right ahead. 

STATEMENT OF PAUL BAILEY, DIRECTOR, GENERATORS

FOR CLEAN AIR 

Mr. BAILEY. Sir, if I fail to meet the 2-minute challenge, it won’t 

be Jonathan’s fault. He has warned me. 

Senator BINGAMAN. All right. 

Mr. BAILEY. So, we’ll see how I do. 

I thank you for this opportunity today, Senator Bingaman. I also 

wanted to express our appreciation to the committee staff and the 

National Commission on Energy Policy staff, because they’ve been 

helping us over the last few months in explaining issues to us and 

responding to questions. And we appreciate that. 

Although the members of this group—there are nine utility companies that belong to the group—although the members have different views regarding mandatory climate change legislation, all 

wish to be responsive to your request for input on the white paper. 

I will briefly summarize their major points. 

If Congress enacts mandatory climate change legislation, it 

should apply economywide and should encourage all greenhousegas emission reductions and offsets. Reducing utility compliance 

costs and electricity price increases should also be a major criterion 

for deciding on point of regulation and allocation of allowances. The 

electric sector should receive an allowance allocation based on its 

pro rata share of covered greenhouse gas emissions. Legislation 

should allocate sufficient allowances to fossil generation to minimize utility compliance costs and increases in electricity prices to 

consumers. 

A 95 percent allowance allocation to fossil generation would minimize both compliance costs and electricity price increases. On the 

other hand, auctioning allowances would increase compliance costs 

dramatically, without any additional environmental benefit. GCA is 

generally opposed to any auction. Allocation of allowances within 

the electric power sector should be based on either historic greenhouse gas emissions or historic heat input adjusted for type of fossil fuel combusted. 

44

We support a safety valve for allowances—a safety-valve price for 

allowances to protect the economy and provide cost predictability. 

For similar reasons, Congress should consider mechanisms to ensure that compliance costs are recovered and that unregulated fossil generation is not penalized. 

Lastly, Congress should also consider ways to avoid a patchwork 

of State requirements, in favor of a uniform Federal program. 

Thank you. 

Senator BINGAMAN. Well, thank you very much. 

Next is Craig Montesano, with the National Mining Association. 

STATEMENT OF CRAIG MONTESANO, DIRECTOR OF 

GOVERNMENTAL AFFAIRS, NATIONAL MINING ASSOCIATION 

Mr. MONTESANO. Thank you, Senator. We’ll try to meet your 

mandatory requirement today on the time. 

Senator, in our post-Katrina world, the National Mining Association believes Congress should consider climate policy in the context 

of energy security, technology development, and U.S. economic competitiveness. From this perspective, America’s abundant supply of 

coal should be viewed not as a problem to be overcome, but as a 

solution to our growing dependence on foreign energy sources, a solution that requires only the proper investment in technology to 

fully realize its potential. 

In fact, clean-coal-based electric generation and coal-to-liquids 

technology can play a vital role in addressing both our economic 

and environmental challenges. But this will be far less likely if 

Congress imposes a mandatory cap on greenhouse gas emissions. 

Rationing the use of our most abundant and least costly fuel will 

result in higher costs for U.S. manufacturers and consumers, especially in the 26 States that rely on coal to generate more than half 

their electricity. 

Moreover, mandatory control systems in countries where they 

are in place are proving to be unworkable, amassing a record of 

missed targets, bureaucratic uncertainties that retard economic 

growth while yielding negligible reductions in greenhouse gas emissions. 

By contrast, America’s pro-technology voluntary multilateral approach is achieving economic productivity, matched with impressive reductions in greenhouse gas intensity. The Asia-Pacific Partnership embodies this approach. It is a serious commitment by the 

world’s largest energy consumers to find long-term sustainable solutions to both clean development and emissions reductions. 

Finally, the 2005 Energy Policy Act will greatly enhance the 

positive trends of which I speak, and America’s coal producers look 

forward to working with the committee in fully implementing the 

Act. 

So, in conclusion, we hope the solutions proposed at this hearing 

will address the energy and emissions challenge posed by China 

and India, and acknowledge the importance of energy efficience 

and clean coal technologies for reducing America’s reliance on foreign energy sources. 

Thank you for fostering this constructive discussion on climate 

today. 

Senator BINGAMAN. Well, thank you very much. 

45

Kirk Johnson is here, with the National Rural Electric Co-ops. 

Glad to hear from you. 

STATEMENT OF KIRK JOHNSON, EXECUTIVE DIRECTOR OF 

ENVIRONMENTAL AFFAIRS, NATIONAL RURAL ELECTRIC 

COOPERATIVE 

Mr. JOHNSON. Thank you, Senator Bingaman, Senator Salazar. 

It’s a pleasure to be here before the committee. 

My name is Kirk Johnson. I am executive director of environmental affairs for NRECA, and I’m here representing the 930 electric cooperatives around the country who provide power to the 39 

million Americans, who are not just our consumers, but who are 

also our owners. And so, we come at this from a slightly different 

perspective, being consumer-owned utilities. 

I’d like to address a couple of general policy matters before we 

get to the specifics of your questions. 

First off, I think, very much, Congress got it right last year, in 

the Energy Policy Act, by including the technology-based programs 

for our clean coal development and other programs to address the 

climate change issue. It garnered well over 60 votes, and we think 

that is the way forward on the climate change issue. 

We also think the administration is getting it right on the international front by focusing on the Asia-Pacific Partnership. We believe that will be a more productive international effort than Kyoto 

or whatever might be following after Kyoto. And so, we think that’s 

also going in the right direction. 

It’s interesting to note that the Kyoto Protocol appears to—or it 

appears the European countries will not meet their targets under 

the protocol. And it reminds me of a very famous quote from Albert 

Einstein, when he said, ‘‘The definition of insanity is doing the 

same thing over and over again, and expecting a different result.’’ 

I don’t think we want to do that. 

To get to the specific questions posed by the white paper that you 

want to be here to discuss today, we, NRECA, support a voluntary 

technology-based program. And we have not supported mandatory 

climate programs in the past, and nor do we now. But if the Congress does decide that additional measures are required, we would 

give a few ground rules for those. 

First, we think any policy must be sound economic policy, sound 

energy policy, sound environmental policy, and sound national security policy. We believe any approach must be economywide. We 

think there probably should be a safety valve or other type of economic off-ramp. Any approach must include a global component. 

And we firmly believe that allowances should be allocated, rather 

than auctioned, which simply imposes a tax on the American economy unnecessarily. 

So, again, thank you very much for the opportunity to be here. 

I look forward to a productive dialogue. 

Senator BINGAMAN. Okay. Our final participant on this panel is 

David Doniger, with the Natural Resources Defense Council. 

Thank you for being here. 

46

STATEMENT OF DAVID DONIGER, POLICY DIRECTOR, 

CLIMATE CENTER, NATURAL RESOURCES DEFENSE COUNCIL 

Mr. DONIGER. Thank you, Senators. 

I would like to make two points. First, we’re facing very real dangers that require urgent action. Most serious climate scientists 

warn that we need to cut emissions at least in half by the middle 

of this century to avoid truly dangerous climate impacts. These 

emissions cuts must begin in the next 10 years if we want to pull 

this off with a minimum of economic impact. Delay makes the job 

much harder. 

As this graph shows, a slow start would mean a crash finish. The 

rate of reductions that would be necessary to achieve a given target 

if we start later becomes much steeper and much more economically disruptive. 

Senator Bingaman, you deserve a great deal of credit for working 

towards mandatory legislation, but the bill under consideration 

would only slow emissions growth and postpone decisions on cutting emissions for another 10 years. With respect, we do not have 

that much time. 

It is possible to be more ambitious and yet still centrist. A longterm declining cap, tracing out the line in the—the green line on 

that chart—would meet the environmental challenge and also give 

businesses clear market signals to guide their investments. We 

have offered an alternative to the safety valve—borrowing—which 

can be used to prevent unexpected spikes in compliance costs without breaking the cap. 

My second point is that emissions allowances, which would be 

worth billions of dollars each year, should not be given away for 

free to current polluters, giving them huge windfalls at consumers’ 

expense. Rather, allowances should be used to cut costs and promote investments in energy efficiency and cleaner technology. So, 

we would recommend that at least half the allowances should be 

used to help consumers invest in energy efficiency measures that 

hold down costs and another quarter of the allowances should be 

used to help industries invest in the big change technologies that 

we need to cut emissions in half. And that sum also should be used 

to help communities adapt to the changes that can’t be avoided. 

And we look forward to discussing these ideas today and in the future. 

Thank you. 

Senator BINGAMAN. Well, thank you very much. Thanks for your 

very interesting statements. 

I’m joined by the chairman here. Did you want to ask any questions, to start with, or should we just go ahead with questions? 

We’ve heard from each of the witnesses. 

The CHAIRMAN [presiding]. Let’s proceed. Thank you very much, 

Senator Bingaman. 

And thanks to all of you for your understanding. I don’t know 

what you could do. Maybe you’re not understanding, but you 

couldn’t——

[Laughter.] 

The CHAIRMAN [continuing]. You couldn’t do anything about it, 

because I can’t, either. So, I’m back. 

And, Senator, if you’ll just tell me where we are, we’ll proceed. 

47

Senator BINGAMAN. Well, we’ve heard from each of these witnesses. And now I think we’re ready to present questions and——

The CHAIRMAN. Okay, let’s go. You start, and I’ll follow. 

Senator BINGAMAN. Okay. 

The CHAIRMAN. Thank you very much. 

Senator BINGAMAN. Let me ask about—one of the disagreements 

that we seem to have built in here is the question of, if you do an 

allocation of permits, on what basis do you do it? I pick up that 

there is a difference of opinion. Mr. Bailey, you said, as I understand it, why don’t you repeat how you think the allocation should 

occur. I believe, Mr. Bradley, you said it should be on an updated 

output-based allocation. And I think that’s different from what 

you’re suggesting. Mr. Bailey, could you explain whether you disagree with Mr. Bradley—and, if so, why? 

Mr. BAILEY. Well, Michael and I have a different perspective on 

this. He favors updated output allocation. And my group, which is 

about 20 percent of the coal-fired generation in the country, favors 

allocating emissions—allocating allowances based on either emissions—in other words, if you produced 1 percent greenhouse gas 

emissions in some baseline period, you’d get 1 percent of the allowances. Or you can distribute allowances based on heat input, which 

is sort of analogous to that, also. 

Senator BINGAMAN. You’re advocating that, whether or not these 

particular companies actually incur costs. Am I understanding that 

correctly? 

Mr. BAILEY. Yes, sir. That’s merely a way to allocate allowances 

beneath that cap among the companies. That’s exactly right. 

Senator BINGAMAN. It seems to me that a lot of the witnesses 

I’ve heard from have been in favor of allocating these permits in 

order to reduce the economic impact on different entities in the 

economy. And if you got the ability to pass on the additional cost 

that’s imposed, I don’t know why you would want to—why it would 

make good sense to give you the permits. 

Mr. BAILEY. I think, Senator, there are two issues here. And I 

get them confused sometimes, myself. One of the issues is, the electricity sector gets a certain number of allowances. And that may 

be what you’re talking about. We can address that, also. I’d like to 

address that. The other issue is, regardless of the number of allowances, how those allowances should be distributed among the companies. So, I was addressing that latter question, given some number of allowances. The question you raised about how many allowances, let’s say, the electricity sector should get, we looked at this. 

We were the ones who suggested a 95 percent allowance allocation. 

And we looked at that from the primary standpoint of reducing 

compliance costs and impact on electricity consumers. That’s the 

only way we looked at it. We did some very simple math. We provided that in comments. 

If you look at EIA’s analysis under a National Commission on 

Energy Policy-type program, just pick one year, say in the year 

2015, the increased fossil fuel costs are about $19 billion in that 

year. So, those are costs that somebody’s going to have to pay for. 

You can do that either of two ways. You can handle those costs either of two ways. For example if you auctioned all allowances off—

there were no allowances given away free—then electricity price’s 

48

compliance costs would increase by $19 billion in that one year 

alone. So, over, let’s say, a 10-year period or so, the increased compliance cost would be about $200 billion. But I’m just focusing on 

the year 2015 right now. 

If fossil generation got a 90-percent allowance allocation, which 

some people mentioned this morning, that cuts those compliance 

costs by a factor of 10, so you’ve gone from $19 billion a year in 

2015 to about $2 billion a year in 2015. If you provide a 95-percent 

allowance allocation, you’ve cut that again by a factor of two, and 

you’re talking about compliance costs of about a billion dollars. 

So, we looked at it merely from the standpoint of reducing compliance costs and electricity price increases. That was the only reason that we proposed that number. The allowance allocation, 

whether you had 100 percent auction for $19 billion or a 95 percent 

allocation for a billion dollars, none of those—all those have the 

same environmental effect. The emission reduction would be the 

same under those. So, we propose that merely as a way to hold 

down electricity price increases. 

Senator BINGAMAN. Mr. Doniger. 

Mr. DONIGER. I think that Mr. Bailey’s analysis is based on the 

model of a regulated utility and an assumption that if the allowances are given for free, they will not have any economic value to 

those companies and they will not be passed—there will not be any 

increases in electricity prices. Well, we don’t know that that’s the 

case, in that there is a market value to these allowances, and those 

allowances can be sold, and companies can reap a very large windfall. 

We’ve made a proposal, which would deal with the fact that some 

of the electric utilities are under regulation, and others are not. 

And that proposal would be to give the allowances, in either case, 

to the distribution entities, with a proviso that those allowances 

would be used to pass through savings to ratepayers and also to 

invest in energy efficiency for business and residential customers 

to hold down costs. In a regulated scenario, the company may be—

it may be vertically integrated, so it may be the same as giving this 

to the generator. But in a deregulated scenario, there’s a market 

transfer that will occur between the distribution company and the 

upstream generator. In either case, you would be getting the value 

of the allowances into the hands of consumers in the form of energy 

efficiency investments or in the form of lower rates, and we think 

that’s a durable way to deal with the distinction between regulated 

and unregulated jurisdictions in the electricity sector. 

Now, that’s just the thumbnail sketch of an idea. It happens to 

be quite similar to what Betsy Moler suggested this morning. And 

we would be happy to explore it with the committee and with others to see if there’s a way to bridge the gap between the—those 

who are talking about this from regulated versus an unregulated 

perspective. 

The CHAIRMAN. Mike Morris. 

Mr. MORRIS. Thank you, Senator. 

First off, 80 percent of the fossil-based generation is still regulated in this country. And I would argue that some of those States 

that have deregulated are rethinking their approach to that as we 

49

go forward. So, the point made by David, I’m not sure that that 

holds water on a wider range. 

The fact of the matter is, credits that are given to utilities would 

defer a cost that, but for that, they would have to buy a credit or 

invest capital in some technology, and a customer’s electric rates 

would go up. That’s why we did the allocation based on the input 

method when we looked at the SO2 and NOx allocation process. 

To touch on one of Michael Bradley’s points, to say that that 

would then stop technology from being put in place, because we 

have all these credits, we wouldn’t use them, is simply wrongheaded thinking. American Electric Power, Duke, Southern Company are all going forward with integrated gas combined-cycle technology facilities, all of which are extremely expensive and very 

much technologically driven. So, even with those credits in hand, 

we’re going forward with that. So, part of the premise that is used 

by Michael, I think was a bit of a misstatement. I want to make 

sure that we get that on the record so that people realize how we 

use those. And to the extent that credits were in excess of the actual emissions targets that we have, and they were monetized, that 

goes back to your customer by way of a credit to the fuel cost. So, 

there is no gain. If, in fact, you went to an output—to someone who 

incurs no cost, then it would be a huge gain. And if those people 

were willing to credit whatever they got by selling those back to 

their customers as a credit to the fuel costs over the overall cost 

of delivery of electricity, that might be a fair way to look at that. 

But, short of that, it’s just an economic grab. 

Mr. BAILEY. Senator, could I add one thing? 

The CHAIRMAN. Where was this? Paul? 

Mr. BAILEY. Yes, sir, right here. 

EIA did an analysis of the Energy Commission-type program 

some time ago, and we took a look at that. And we’re not the first 

ones to work with a 90- or 95-percent allowance allocation. Actually, EIA’s results, macroeconomic results, some of which were very 

modest for a program like this, compared with other mandatory climate change programs, those results were so modest, in part, because EIA assumed a 90-percent allowance—95-percent allowance 

allocation through the year 2013, and, after that, an allowance allocation of 90 percent. So, there is a case study in how an adequate 

allowance allocation can hold down these impacts we’re all concerned about. 

The CHAIRMAN. Now, we need the other Michael. 

Mr. BRADLEY. Yes. Let’s make it clear. Input is based, as Paul 

indicated, 1 percent of the emissions, they get 1 percent of the allocations. Output, it’s—1 percent of the electric generation that’s delivered gets 1 percent of the allocations. Similar to your car. Your 

car is regulated on a per-mile basis. 

When it comes to some of Mike’s comments, what we’re talking 

about, from the Clean Energy Group’s perspective, is allocating in 

a manner that sends a signal to create and continue to grow clean 

and efficient generation, zero-emitting generation, like renewables 

and nuclear, as well as low-carbon generating emission, like natural gas, combined-cycle natural gas. We’re talking about creating 

a market signal for efficiency, for clean energy, which sends a very 

different signal for investments, going forward, than if you base 

50

your allocation based on historical emissions. The more you pollute, 

the more allocation you get, is essentially what the basis comes 

down to. 

We have advocated strongly in favor of Senator Carper’s bill. And 

in his CO2 title, there’s an allocation scheme that treats all forms 

of generation equally, except for nuclear. Nuclear is just allocated 

based on the increased capacity that has been added to those facilities since 1990. An investment has been made. We would be worse 

off if it hadn’t been made, in terms of CO2 emissions today. And 

keep in mind that the emissions—CO2 emissions from the electric 

sector have increased by approximately 27 percent since 1990. The 

portion of greenhouse gas emissions coming from the electric sector 

since—in 1990, it was about 36 percent, now it’s about 39 percent. 

So, the sector itself is growing. It’s meeting demand. It’s delivering 

what it has to deliver. But it’s not becoming less intensive, in terms 

of CO2 emissions. 

The CHAIRMAN. All right. If Paul would take that, one more, and 

then we’ll move on to another one. 

Mr. BAILEY. Okay. Just to put this in perspective a little bit, 

coal-fired generation, there are 26 States that get more than half 

their electricity from coal. Those are the States that these companies operate in, and those are the States we’re concerned about 

being harmed economically by the wrong allocation scheme. 

The CHAIRMAN. Yes. 

Mr. BAILEY. I’m about to lose my point here. Sorry, I’ve lost my 

train of thought here. 

The CHAIRMAN. That’s fine. 

Fred? 

Mr. BAILEY. I apologize. 

The CHAIRMAN. If you get it back, put your hand up. 

Mr. KRUPP. Mr. Chairman, thank you. 

As I listened to the back and forth about allocation, it reminds 

me that what’s really primary here is, what’s the level of environmental performance, and what’s the level of design quality, so that 

we grind down the costs and have the least possible cost and the 

most innovation to the economy? I can understand that this allocation issue is going to be very important in the weeks and months 

ahead to your constituents. But I think we should bear in mind, 

it’s really secondary to the primary issues of environmental performance, the cap, and design performance to grind down the costs. 

And if we keep sight of that, there probably is more than one answer to this allocation issue in—it’s an equitable question, and an 

important one. I don’t mean to minimize it, but I do think it’s secondary. 

Mr. BAILEY. I got my thought back, Mr. Chairman. 

The CHAIRMAN. Just a minute. 

Mr. BAILEY. Yes, sir. 

The CHAIRMAN. Fred, secondary in the context you have just put 

it, but maybe not secondary from the standpoint of us having to 

work something out with constituents of our country. It may be 

very primary as to how we’re able to allocate. That may be our 

toughest job. 

We could arrive at those others, because in—matter of fact, 

they’re not pinching anybody, right? They’re theory. They’re what 

51

you’d like to do. They’re goals. But when you get to the other, people are going to be able to—institutions, entities are going to be 

able to measure what we’re talking about, right? 

Mr. KRUPP. Yes. Mr. Chairman——

The CHAIRMAN. It’s difficult. 

Mr. KRUPP [continuing]. I understand what you’re saying, and I 

completely agree with you. The primary thing that history will 

judge a bill on is the level of environmental performance, and, did 

it drive the cost down? But history will also judge the leadership 

that you, Mr. Chairman, provide, and your skill in bringing together parties, and Senator Bingaman’s skill in bringing together 

parties, on what I’ve termed a secondary question, bringing together parties behind a cap-and-trade mechanism so that there is 

one, to begin with. 

The CHAIRMAN. I understand. 

Mr. KRUPP. We need your leadership on that, absolutely. 

The CHAIRMAN. I understand. 

Mr. KRUPP. And you’re expert in that. I don’t pretend to be. 

The CHAIRMAN. I understand. 

Fred, you had a quick rethought? Now, that—when you get a rethought, that means it’s got to be short. 

[Laughter.] 

Mr. BAILEY. We took a look at the Carper bill that Michael Bradley likes, did some analysis of it, and we found that that penalized 

coal-fired generation about $3 billion a year, based on an output allocation providing allowances for nuclear generation. 

Thank you for your patience, sir. 

The CHAIRMAN. All right. Okay. 

Ms. CALLAHAN. May I make a comment on allocations, too? I 

mentioned in my testimony that we believe that there ought to be 

a significant share of the allocations set aside for energy efficiency 

and other public goods. RGGI has taken that approach and suggested to the States a 25-percent-or-more allocation. That is being 

proposed, because, to the point of cost effectiveness, there are 

measures that can be taken at the end use, particularly in the electricity sector, that could be more cost effective. And, in fact, the 

RGGI modeling has shown that there could actually be positive impacts to the economy and the creation of jobs by setting aside these 

energy efficiency allocations and upping their commitment, in 

terms of policy, to those activities. 

The other thing I wanted to mentioned, that in order to get to 

that, RGGI had to change their modeling. And the modeling that 

we’re doing now, in looking at the costs of implementation of capand-trade programs, often doesn’t recognize the benefits of energy 

efficiency and appropriately model. So, the RGGI modeling that 

was done, and the work there, is really groundbreaking and can 

evidence what can happen, in terms of using energy efficiency as 

a cost-effective mechanism. 

The CHAIRMAN. Before I give this mike back to Senator Bingaman, I was coming next to you on the subject you’re talking about, 

because I’m having some difficulty understanding, although I’m intrigued, by your suggestion that significant reductions in greenhouse gas emissions can be realized by marked improvements in 

our ability to use energy more efficiently. I guess I’m just going to 

52

ask you, would you just elaborate? Where are these savings going 

to be achieved? How do we reduce greenhouse gases, the emissions, 

and then—under a mandatory reduction program—and then have 

it designed in such a way that it encourages these efficiencies that 

you’re talking about? 

Ms. CALLAHAN. Well, sir, the way that it would operate—and it 

may not be a direct one-for-one—they’re indirect emissions at the 

end use. And the way that you’re creating—or—the emissions reduction is by avoiding the emissions, in the first place. You’re not 

using the energy that you once were for the same end product or 

the same good. So, for example, in California, where they have employed energy efficiency building codes, appliance standards that 

are greater than they are in many parts of the country, they also 

have very significant public benefits funds, public education and 

outreach programs. Their electricity use is about 40 percent less 

than the national average in that State, per capita. So, I’m hoping 

I’m addressing your question on this, but it would be investments 

that would be set aside for energy efficiency improvements at the 

end use by homeowners, by commercial buildings, by energy users, 

electricity consumers, natural gas consumers. 

The CHAIRMAN. Okay. Nothing exotic or extraordinary, just very 

straightforward. Some people wouldn’t call them efficiencies. You 

do. I understand that. That’s good. At least I understand what 

you’re saying. 

I have a question to the National Mining Association, and then 

I will go back to you, Senator. 

Craig, the Energy Information Administration, in its latest longrange outlook, suggests that the United States will require half 

again as much electricity in 2030 as it now consumes. As much as 

60 percent of that will be generated by the use of coal, which is 

kind of startling to a lot of people. The use of coal is not going to 

go down during the next 25-year projection of American use—going 

up—even though they’re going to put some nuclear in, for the first 

time. We don’t know how many. They at least show ’em, which is 

rather incredible, they do. How would a mandatory greenhouse gas 

reduction program alter the EIA estimate on the United States and 

how heavily we will remain dependent on domestic coal reserves 

for electric generation? Could you tell us why—that’s one. And we’ll 

talk about the developing countries, as a second question. 

Mr. MONTESANO. Okay. 

The CHAIRMAN. Could you answer that? 

Mr. MONTESANO. Thank you, Senator. 

I think the answer to the first question is, it puts us in a very 

bad fix in the United States, as far as energy. You mentioned the 

projections for coal-based electricity use. Now, coal-based electricity 

use since 1970, has increased 136 percent. By 2020, it’s supposed 

to go up another 36 percent. I think that you can just bank on that 

number getting higher and higher. 

The CHAIRMAN. Right. 

Mr. MONTESANO. And that is complicated by another fact, that 

by 2050 there will be 1 million more persons here in the United 

States than there are now. And there will be an associated energy 

demand with that, particularly in the residential and commercial 

sectors. 

53

Understanding, as we do, some of these parameters, I think the 

problem becomes, then, what an artificial restriction of coal does to 

our domestic energy picture. 

Now, assuming, for a second, that nuclear power isn’t quite up 

and running. The siting, permitting, and waste-disposal issues 

haven’t been worked out yet. And assuming that renewables 

haven’t reached the point where they can address that demand. 

Well, that leaves natural gas. The problem with natural gas is, No. 

1, the EIA estimated that our domestic supplies of natural gas, 

which are 3 percent of the world’s proven reserves, are not going 

to be enough simply to supply the needs of the lower 48 States. 

Well, then, where do we get our natural gas from? Well, 58 percent 

of the world’s reserves are controlled by Russia, Iran, Qatar, and 

then, our good friend to the south, Venezuela, holds another chunk 

of that. 

If we are forced to rely on LNG from abroad, I think, again, that 

puts us in a very bad fix, but especially because we are competing 

with China, which is gobbling up petroleum left and right. So, I 

think that a pretty good preview of things to come, Senator, was 

something that happened, I believe, in—it was either December of 

January, where there was a deal brokered by a Massachusetts congressman with Citgo, the Venezuelan petroleum company, to supply natural gas to the State of Massachusetts. Now, I don’t think 

we want to be there—as a Nation, I don’t think we want to be dependent on foreign supplies. In fact, I think we want to enhance 

our domestic supplies. And I think we can do that through clean, 

coal-based electric generation and coal-to-liquids technology. And I 

think that once we realize those technologies, we will be, I think, 

better poised for our energy demands. 

The CHAIRMAN. Yes, David? 

Mr. DONIGER. Thank you, Senator. 

This doesn’t have to be an issue of whether we’re going to use 

more or less coal, or more or less of any fuel. It should be an issue 

of whether we’re going to use those fuels with more or less emissions. And the future of coal is going to be sturdier if we get to very 

low carbon-emitting coal plants, like IGCC with carbon disposal, 

than if we’re continuing with our only choice to be to build conventional coal plants and drive the climate problem to disaster. 

So, that is where we have a huge opportunity, first, from having 

the price signals that come from a carbon cap, and, second, from 

using a good, solid chunk—we recommend at least a quarter—of 

the allowances to go to power companies and others, for example, 

who are prepared to build the IGCC plants with the carbon storage, and move that along a lot faster. That’s going to be good for 

the coal industry, as well as for the stable future of the electric industry. That’s the formula for getting out of this tradeoff between 

more coal and more emissions. 

The CHAIRMAN. That’s true. The problem is that you can’t get 

them built. 

Let’s move over here. We had some questions. Let’s take Michael 

Morris. 

Mr. MORRIS. Thanks again, Senator. 

Let me try to address that issue. I think it’s very important that 

if we have a mandatory cap, that new coal technology with the inVerDate 0ct 09 2002 15:10 Jun 15, 2006 Jkt 109420 PO 28095 Frm 00057 Fmt 6633 Sfmt 6633 R:\DOCS\28095.TXT SENERGY1 PsN: RSMIT
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tegrated gas combined-cycle implementation and ultimate carbon 

capture and sequestration will work for the new coal activities. But 

let’s not forget, on the energy demand cycle that you spoke of earlier, not only the growth that we’ll see between now and 2030, but 

the physical ability to satisfy demand today requires that we keep 

as many of the current coal fleet plants online that we can. And 

the retrofit technology that we’re working on through EPRI and 

other activities are heading in the appropriate direction, but, to 

date, a very expensive, and, most importantly, a very parasitic 

amine technology takes about 30 percent of the energy production 

capacity away from a plant. So, if you had 1,000 megawatts, and 

you retrofit with amine, and you’re down to 700 megawatts, you’ve 

exacerbated, rather than helped, your situation. 

With the new ammonia technology that EPRI is working on, the 

parasitic impact is only 10 percent, and that may be a way, as that 

technology continues to develop, that we can do retrofit. 

So, I have no disagreement with David and the comments that 

he makes, but we need to make certain we have adequate energy 

to grow the economy of today, let alone the economy of 2030 and 

2050. 

The CHAIRMAN. Right. 

Mr. MORRIS. So, we have to have those plants in the——

The CHAIRMAN. Right. Fred. 

Mr. KRUPP. Michael, I’m an American, and I completely agree 

with you, we need to have energy. We need to have low-cost energy. But there are some retrofit technologies that are available 

today that are pretty cheap. I was in Kansas not long ago and saw 

farmers that, together, own a million acres of land, the Agri-Mark 

group of farmers. And they are able to sequester carbon, about 

three-quarters of a ton per acre per year for 25 years. And I think 

they’d be willing to sell those offsets—I know they would—for quite 

a modest price. 

This brings me to the fact, we need a robust future for coal in 

this country. There’s no question, we’ve got a lot of it. We have to 

be able to burn it. But one thing that’s really important as you go 

forward and mark up a bill is, let’s make sure there’s a robust opportunity for these farmers, who can change their practices and 

provide a retrofit technology today, for the burning that’s happening today, for very cheap—let’s make sure that those offsets are 

robustly available in the bill. 

Mr. MORRIS. Excuse me, Senator, I just want to make sure—

that’s not a retrofit technology. That is an offset. And we do that 

through the Chicago Climate Exchange. A number of operating 

utilities are doing just that, creating credits with better farming 

technology. We totally support that. We think that’s an excellent 

idea. 

The CHAIRMAN. I think we’re going to get way off base here and 

have just a general discussion, an argument, about this. The truth 

of the matter is, the utility companies—utility companies do know, 

Fred, what’s available for their industry, and they aren’t going to 

come here before us and tell us something that’s not so. They know 

about the farmers, but that doesn’t help what the problem is described that they have. Farmers—is a great thing that’s occurring, 

and we’re proud of it, but it doesn’t solve the fact they need a bill 

55

to move 1,000 megawatt plants, and they’ve described the dilemma 

they’ve got. 

Mr. KRUPP. But, in terms of today’s capacity, if you set a modest 

limit, it would allow them to continue to operate the plants, at very 

modest costs. 

The CHAIRMAN. Yes. 

All right. Now, we’re going to move right along here, Senator 

Bingaman, unless you have something urgent. You can have a couple, and then we’ll——

Senator BINGAMAN. I have one question, and it’s not urgent, but 

I would ask it, if we’ve got time. 

David, let me ask your view on this whole issue of offsets. I 

mean, what are appropriate offsets? There’s a lot of talk, a lot written in these responses to our white paper about offsets outside the 

cap. What do you think is an appropriate offset to allow, and what 

do you think is not? 

Mr. DONIGER. Thank you, Senator. 

First, in the draft bill that you have developed, you’ve proposed—

and we think this is a good idea—that a slice of the allowances 

should be dedicated to—as a reward for offset activities, such as 

Fred described, and encourage those activities with a slice of the 

allowances from within the cap. Where we get concerned is with 

the idea that offsets would coin new allowances beyond the cap, because the prior experiences that we’ve had with this—and this goes 

back almost 30 years, through several different variations of the 

Clean Air Act—is that it’s very, very difficult to ensure that offsets 

are really additional to what would have happened anyway. 

We’ve seen, in the Energy Policy Act’s 1605(b) Program that electric utilities, in particular, have registered with DOE millions of 

tons of supposed reductions that really represent no difference in 

the business-as-usual activity. And sorting out the rules for how 

you would tell what’s a valid offset has been an impenetrable problem. But funding them from within the cap means that the environmental cap is maintained, and we support that. We think that’s 

a great way to get incentives to the farmers for biofuels and for soil 

sequestration and so forth. 

But there is also a bit of a dilemma here. We rely on the market 

signal from the cap to generate incentives for innovation to drive 

new technologies. On the other hand, if there’s unlimited offsets, 

and you have a near-zero price of carbon, where was the incentive 

to develop new technologies? 

Senator BINGAMAN. Let me just do one follow-up and ask, Michael Morris referred to the Chicago Climate Exchange—they have 

a system for permitting offsets and verifying offsets. How, in your 

view, does that work, if you’re familiar with that? Is that designed 

in a way that you think makes sense, or not? 

Mr. DONIGER. Well, I don’t want to speak to all the rules that 

the Chicago Climate Exchange uses, but I do believe that if you 

tried to scale up what they’re doing from—when you’re dealing 

with pilot programs, you can give the kind of care and attention 

that it takes to vet these offsets, but when you try to mass produce 

them on a big scale, especially when both the providers and the potential users have an interest in the largest number of offsets at 

the lowest possible price, you end up with a quality-control proVerDate 0ct 09 2002 15:10 Jun 15, 2006 Jkt 109420 PO 28095 Frm 00059 Fmt 6633 Sfmt 6633 R:\DOCS\28095.TXT SENERGY1 PsN: RSMIT
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gram—problem. You end up with it being very difficult to ensure 

that the offsets are really all they’re cracked up to be. 

And the international treaty, the CDM, which you heard about 

earlier, they’re really struggling with that, because they have a 

international board to try to vet the quality of the offsets, and 

there’s lots of complaints about bottlenecks, ‘‘Why are you scrutinizing this? Just let me go, let me have this, let’s get going.’’ And 

the quality starts to go down as the volume goes up. 

So, we don’t have a great solution to that, but keeping things 

within from—the reward coming from within the cap puts a discipline on this that would really help ensure that quality and keep 

the numbers from going out of control. 

Mr. MORRIS. Senator, if I just might add, because we’re one of 

the founding members of the CCX, it is an audited event. For a 

farmer to say he’s created 1,000 credits, that activity actually gets 

audited to ensure that they’re real. I couldn’t agree with David 

more, no one wants to create credits out of whole cloth. And the 

utility industry has not done that. I think he made that statement. 

That’s just absolutely wrong. And, to Senator Domenici’s comment 

earlier, to what purpose would we do that, to be hammered for 

doing something that’s wrong? Not going to happen. 

So, the larger the program gets, the more difficult the audit is 

to make sure that someone who says, ‘‘I’ve got a credit’’—because 

he’s gonna be paid for that—and we’re not going to send them 

money unless we’re sure that there’s a real credit that’s been created. And having it above or below a cap is immaterial as to its 

reality. So, I think the logic is missing in David’s comments. 

Thank you. 

Mr. KRUPP. Mr. Chairman, might I just mention one thing, constructively, that you all could do, even before you mark up a bill, 

and that would be to direct the Federal agencies to come up with 

standards, both for geological sequestration, where there are similar problems, that things can leak, as well as for agricultural and 

forest offsets. I think that could be done right away, and that 

would be terrific. 

I, for one, hope that this problem is so big that if there’s the potential—the greenhouse gas problem is so big that if there’s the potential for cheap carbon credits by allowing farmers and foresters 

to play, that will let them play and make sure, of course, that the 

credits have integrity—by one study, as much as 146 million metric 

tons are available in our agricultural industry, enough to get us a 

third of the way back to 1990 levels, if we just set up the cap and 

write the rules. That’s very promising. 

The CHAIRMAN. I know we’re supposed to be finished, but, you 

know, what Senator Bingaman and I have been toying with is a 

proposal that has a safety valve in it. And some of you have commented that you didn’t think the concept was a very good idea. 

Now, if you did think it was a good idea, don’t comment now. 

[Laughter.] 

The CHAIRMAN. We don’t need no more of that. But for any of 

you who didn’t think it’s a good idea, or don’t, you can have a couple of minutes here to tell us why. So, we’re going to do that, if 

you put up your hands. 

Mr. MONTESANO. Mr. Chairman? 

57

The CHAIRMAN. Yes? 

Mr. MONTESANO. The one problem that the National Mining Association has with the idea of a safety valve is that it’s part of a 

larger compliance problem with mandatory bills that eat into funding that would otherwise be used by companies to conduct research 

and development. And a healthy economy is one that’s actually 

going to lower emissions more than an unhealthy economy. And we 

think that safety valve as part of a bureaucratic—part of a compliance regime, would be problematic for us to work with. 

The CHAIRMAN. I don’t get it. I don’t get what you’re saying. Can 

you try it again? 

Mr. MONTESANO. If companies are paying—you know, basically 

paying for compliance costs, and the costs of meeting, you know, 

the standards set forth in a mandatory problem, that’s money that 

they can’t use otherwise for R&D. I think that’s the problem that 

we have with it. 

The CHAIRMAN. Well, a safety valve doesn’t say anything about 

that. It says that, at some point, after you’ve done that, if it isn’t 

working, we’d cut it off. 

Mr. MONTESANO. Well, the safety value also—remember that 

EIA did a study on the safety valve, and the safety valve drastically increases in prices over the years. 

The CHAIRMAN. Fred—David? 

Mr. DONIGER. Senator, I appreciate your asking this question. 

There’s two cost-control issues that I think a safety valve is intended to deal with. One is the instability in prices, the chance that 

you’ll have a price spike, unexpected problems, in the short term, 

that would—sorry. 

The CHAIRMAN. Hold it a second. 

Mr. DONIGER. Yeah. 

The CHAIRMAN. Okay, thank you. Thank you. Go ahead. 

Mr. DONIGER. If I may, there’s two cost issues that I think the 

recommendation for a safety valve is trying to deal with. One is the 

instability in prices. It could spike up and down, not be stable. 

Short term problem. 

The CHAIRMAN. Right. 

Mr. DONIGER. The other problem is a sort of long-run issue. If 

you knew what the price was, it still might go up, or it might go 

down, depending upon how technology develops. 

Well, the first problem seems to be, really, the dominant one. 

People react to price spikes. If you had a long-term carbon cap, 

such as we were suggesting there, then you could have both banking, which is already built into your program—people do things 

early, as a hedge against future price spikes—and borrowing, 

which would allow them to do things late, as a way of dealing with 

price spikes. If you had banking and borrowing, you would not 

have price spikes. You would have a long-term stable price. It 

would be affected by what the real cost is of meeting the cap. 

And so, what we’re proposing is that you consider using borrowing as the main cost-control tool, and the safety valve becomes 

a trigger for Congress thinking, every 5 years or 10 years, ‘‘Is this 

thing—in light of the science, in light of international cooperation, 

and in light of the costs, is this thing too weak or too strong?’’ and 

use the periodic review, informed by the prices, to decide what you 

58

should do. But don’t have an automatic safety valve that breaks 

the cap. 

The CHAIRMAN. Okay. Now, Craig, you have the luxury of playing the chairman. See, if you were me, you could have said, to me, 

‘‘You don’t get it’’——

[Laughter.] 

The CHAIRMAN [continuing]. Instead of the reverse, because I 

didn’t get it. I got it now. And I thank you for your answer. 

Okay. I understand. We’re going to go on now to the next group. 

Thank you, everybody. It’s been a great session. 

[Recess from 3:40 to 3:47.] 

The CHAIRMAN. All right. Are we ready to start? One, two, three, 

four, five. Is that right? Six. 

All right. This is our fourth panel. And we are pleased to have 

you. 

This is the Trading and International Competitiveness Panel, 

and they’re responding predominantly, as I understand it, to questions 3 and 4 of the white paper. That is, ‘‘Linking and Developing 

Country Action,’’ correct? Should a U.S. system be designed to 

eventually allow for trading with other greenhouse gas cap-andtrade systems around the world, as Canadian Large Final Emitter 

system or European Union? And, question 4, if a key element of the 

proposed U.S. system is to encourage comparable action by other 

nations that are major trading partners and key contributors, 

should the design concepts in the NCEP plan, to take some action 

and then make further steps contingent on a review of what these 

other nations do, be part of the mandatory market-based program? 

And, if so, how? 

American Electric Power, Michael Morris, you’re first. 

STATEMENT OF MICHAEL MORRIS, CHAIRMAN OF THE 

BOARD, PRESIDENT, AND CHIEF EXECUTIVE OFFICER, 

AMERICAN ELECTRIC POWER 

Mr. MORRIS. Thank you very much, Senator. And since I was on 

the last panel, I won’t have to thank you for the chance to be here, 

but I’ll do that anyway. 

I want to specifically—because I know that the 2-minute warning 

will get to us in a hurry, talk specifically to the questions. 

As to question 3, we absolutely believe that it should ultimately 

be linked to other trading programs on an international basis, as 

well as a much broader and more flexible creation of potential credits. The farming things that we just heard about, a panel ago, 

would apply to any country that is dedicated to agriculture. So, creating credits in other environments and using those as part of an 

international trading platform, I think would be an excellent way 

to go on that question. 

As to the other, developing nations being involved, it’s essential. 

If you truly believe that the goal here is control of the greenhouse 

gas growth worldwide, then you have to have the world involved 

in it. And if we don’t do that, we find ourselves in very awkward 

positions. We believe very strongly in that. However, we do not believe in the current paper concept of having a two-tier, ‘‘We’ll get 

started, and if they come along, great; but, if they don’t, then Congress will reconsider and throttle back.’’ I’ve lived through some of 

59

that, and the likelihood of that happening is probably very, very 

small. 

So, I would go into the program either with an absolute commitment, like the Byrd-Hagel undertaking of some years ago, and, if 

not that approach, at least set up an automatic ratchet down if the 

other countries don’t act in the way that they are committed to or 

the way that we would hope that they would. 

Short of that, I think what we’ll find is a period of time when, 

in fact, America is doing the things that it’s committed to do, and 

others are not, with the associated economic impact that that 

would have on the manufacturing base of this country, when our 

manufacturing competitors are just, willy-nilly, going on their way. 

So, I would think automatic, rather than reconvene, reconsider—

that would be a good way to go. 

Thank you very much for your time. 

The CHAIRMAN. Thank you very much. 

Michael. 

STATEMENT OF MICHAEL WALSH, SENIOR VICE PRESIDENT, 

CHICAGO CLIMATE EXCHANGE 

Dr. WALSH. Thank you, Senator. 

If Congress considers it appropriate to pursue legislation in this 

area, we think that you’re going to want to ask the following question, what really works out in the field? And, since 2003, the members of the Chicago Climate Exchange have formed not only the 

first North American market, but the first international greenhouse gas reduction and trading program, that includes all six 

gases, agricultural and forestry offsets. And, indeed, this market, 

if—as a country, would be the second largest emission group under 

cap-and-trade in the world. It’s a diverse market. And the good 

news is, it works, and it works well, now, on an international basis. 

Now, we’ve brought to the design of this program a lot of handson experience, a couple of decades of experience working with these 

markets, SO2 auctions we administered, and so on. We also operate 

the largest carbon trading system in Europe, the European Climate 

Exchange. And that is another dimension of the international market that’s in place now. 

CCX members take a legally binding commitment to cut absolute 

emissions 4 percent over 4 years, 6 percent by 2010. They use 

standardized rules to measure and qualify emissions, all subject to 

independent audit. It’s a comprehensive rules system involving a 

registry, a trading platform, and predefined project-based domestic 

and international offsets for agriculture, methane, and forestry. So, 

the international links are in place now. 

We’ve got about 140 very diverse members, but my input today 

really reflects the views of the exchange, and not those members, 

members such as Ford and DuPont, American Electric Power, Baxter, Tampa Electric, Waste Management, Rolls Royce, International 

Paper, IBM, many international companies. We’ve got cities, like 

Chicago, Oakland, and Portland. The State of New Mexico, the first 

State to take the commitment to reduce its own emissions, taking 

that leadership action. 

60

The Iowa Farm Bureau is, right now, aggregating hundreds of 

thousands of acres of farm—and selling the credits as a new crop 

in the market. So, it’s working now. 

Let me close with some key lessons that we think are useful for 

informing any policy discussion. 

First, learn from proven methods. Use existing measurement and 

verification protocols, and don’t reinvent the wheel. 

Second, keep it simple. We asked all of our members to simply 

take a 4 percent emission cut. Why define major winners and losers? 

Third, standarized offset rules work, and can work in the international context. 

Fourth, the market should, and can, define and credit early emission reductions. The market concept works now. We should build 

international linkages, from the outset. 

And I look forward to discussing some ideas for making that happen in the open discussion. 

Thank you, Senator. 

The CHAIRMAN. Now, yours is voluntary. 

Dr. WALSH. Voluntary, but legally binding. They sign a——

The CHAIRMAN. Oh, you have——

Dr. WALSH [continuing]. Contract once they join the exchange. 

That’s correct, Senator. 

The CHAIRMAN. Yeah. 

Now we’re going to take Rafe. 

STATEMENT OF RAFE POMERANCE, CHAIRMAN,

CLIMATE POLICY CENTER 

Mr. POMERANCE. Thank you, Senator. And thank you for holding 

this conference to elucidate the debate——

The CHAIRMAN. You’re welcome. 

Mr. POMERANCE [continuing]. And your structure, hopefully, of a 

real mandatory system. 

I want to answer the questions 3 and 4 in the context of an overall program. And, briefly, what I believe, and the Climate Policy 

Center believes, that that program should be economywide to capture all emissions and level the playing field. Second, it should be 

upstream-regulated—the point of regulation should be upstream, 

for simplicity. Third, there must be a safety valve to protect the 

economy. Fourth, there should be linkages in this program to actions by key developing countries to ensure global progress. And, 

fifth, and finally, there should be wise use of allowances for a number of different purposes; not just compensatory purposes, but purposes of solving the climate problem and protecting the treasury. 

Now, having said that, a number of these elements were present 

in the Bingaman amendment of last year, and in the Udall-Petri 

bill that was introduced in the House last week. 

On question 3, should we design the system to be compatible? At 

this time, my answer is no. The Kyoto Protocol, of which I was a 

negotiator, is quite different than the system that I advocated, in 

terms of an overall program. And, in particular, the safety valve 

makes them incompatible. And the other part I’d just say is that, 

if that were to happen, it would require, I would sense, an enorVerDate 0ct 09 2002 15:10 Jun 15, 2006 Jkt 109420 PO 28095 Frm 00064 Fmt 6633 Sfmt 6633 R:\DOCS\28095.TXT SENERGY1 PsN: RSMIT
61

mous amount of international negotiations to make it work. But it 

doesn’t—they’re actually literally incompatible in important ways. 

On the developing-country linkage, the answer is, yes, that a 

first step by the United States, with a safety valve, with an escalator, that escalator could be linked to ensuring that it would rise 

at a certain rate, but only if developing-country actions in key developing countries passed the test by the executive branch. In other 

words, we would create an incentive for China and India to take 

comparable actions, by saying, ‘‘We will take the first step, but 

we’ll only go so far, unless you respond.’’ And it’s possible, in fact, 

to use some of the allowances to help them make the changes that 

are required. 

Did I hit 2 minutes? Thank you. 

The CHAIRMAN. Fine. You did very good. 

Mr. POMERANCE. Thank you. 

The CHAIRMAN. Richard. 

STATEMENT OF RICHARD ROSENZWEIG, CHIEF OPERATING 

OFFICER, MEMBER OF INTERNATIONAL CLIMATE CHANGE 

PARTNER, NATSOURCE 

Mr. ROSENZWEIG. Thank you, Senator. Thank you, Senator 

Bingaman, Chairman Domenici. 

In addressing questions 3 and 4, very briefly, 2 minutes—I’ve 

never been limited to 2 minutes before, so I’ll talk fast. 

With respect to linkage, we would think that you’d want to create the opportunities to develop a program which has opportunities 

for linkage. And it’s for a very simple reason. You want entities to 

be able to buy, sell, trade with each other. It’s the comparative advantage of trade. The more sources that are participating, and the 

more opportunities there are, the more it will drive down costs and 

facilitate reductions in environmental activities. 

This is no different than the reason for an economywide program—to bring transport into an economywide program, as opposed to just regulating a couple of sectors. You have those economic benefits. 

There are several issues that have to be considered in doing this. 

The cost cap is one. It can have a perverse effect with respect to 

potential arbitrage opportunities across boundaries. It’s going to 

have to be considered. 

Second, compliance instruments. All the various legislation allowed different types of instruments to be used by regulated entities for compliance. This, once again, creates opportunities for different types of activities that may or may not be what a country 

had in mind. 

Last, we’ll call it comparability of effort. Some governments just 

simply are not going to allow linkage with a country who they—

whose target is far less stringent. They are not going to want to 

allow that government’s regulated firms to be sellers in such a 

market. 

The other types of linkage with respect to developing countries. 

Right now, that’s being done through the project-based mechanisms. The United States can do one of three things. I can, sort of, 

allow U.S. firms to buy certified emission reductions, which—according to the international standards, or, I think, to actually play 

62

a leadership role in this area, there is an opportunity for the 

United States to create new standards for domestic offsets that can 

actually inform the debate post-2012, in the first commitment period of the Kyoto Protocol. 

Thank you. 

The CHAIRMAN. Thank you. 

Eileen. 

STATEMENT OF EILEEN CLAUSSEN, PRESIDENT, PEW CENTER 

Ms. CLAUSSEN. Thank you, Senator Domenici, Senator Bingaman. 

I’d like to address the issue of the comparability of national efforts by disentangling two distinct, but related, objectives. First, 

achieving adequate action by all major emitting countries, and, second, protecting U.S. firms against competitive impacts. 

The first of these objectives is best achieved through multilateral 

commitments, engaging all the major greenhouse gas-emitting nations in a fair and effective long-term effort. Twenty-five countries 

account for 83 percent of global emissions. Engaging these major 

economies requires a flexible framework that allows different countries to take on different types of binding commitments. We believe 

the United States should play a leadership role in developing such 

a framework. 

But ensuring broad comparability at the national level will not 

necessarily achieve the second objective, protecting U.S. firms 

against competitiveness impacts. It’s not the competitiveness of the 

U.S. economy as a whole that is at issue. To the degree that there 

are competitiveness impacts, they will fall on specific sectors, energy-intensive industries whose goods are traded internationally. 

These sectors might remain vulnerable, even if efforts by all major 

emitters are broadly comparable, because countries could choose to 

exempt a given sector from controls, giving that sector an advantage over the foreign competition. 

At the international level, one way to ensure a level playing field 

is to establish multilateral agreements along sectoral lines. These 

could be one element of a flexible framework. 

At the domestic level, in designing a national cap-and-trade system, we should set the caps at modest levels, allow offsets, and 

grandfather allowances in a way that protects vulnerable firms or 

sectors. We could also dedicate funds, possibly by auctioning a portion of allowances, to provide technology assistance to affected industries and transition assistance for their workers. 

Let me just say, in closing, that the single most important step 

the United States can take to encourage stronger efforts by other 

countries is to begin in earnest to address our own greenhouse gas 

emissions. 

Thank you very much. 

The CHAIRMAN. Thank you very much, ma’am. 

Jonathan. 

63

STATEMENT OF JONATHAN PERSHING, DIRECTOR, CLIMATE, 

ENERGY, AND POLLUTION PROGRAM, WORLD RESOURCES 

INSTITUTE 

Dr. PERSHING. Thanks very much, Senators. It’s a pleasure to be 

here. 

My name is Jonathan Pershing, and I am the director of the Climate, Energy, and Pollution Program at the World Resources Institute, which is a nonpartisan research and policy think tank here 

in Washington. 

I think that this discussion in the conference, and the effort, is 

at a critical time. Science is clearly telling us that action is urgent 

if we’re to forestall the climate problem. 

I’d like to make several points based on our submission and the 

analysis that we’ve done. 

The first, we can learn a lot from existing programs. We have a 

series of U.S. programs—the SOX, the NOX program, now the 

RGGI program; we have the CCX program. We also happen to have 

the advantage of the EU program, and those lessons are ones that 

apply here, even though they have somewhat different circumstances. 

On the international side, clearly international action has got to 

happen. According to the U.S. Energy Information Administration, 

in 25 years from now, in absolute terms, the United States is going 

to have more growth in its emissions than India, Russia, Korea, 

Mexico, and Brazil, combined. And it’ll be about the same time as—

size as China, which has four times our population. So, to give you 

some sense of scale, it’s quite critical. But we can’t just, therefore, 

wait for them to act. We’re 20 percent of the problem. We’ve got 

to act, ourselves. And the issue of the technology drivers that you 

can create become a central part of the future. If this is a technology program, as this morning’s panel indicated, we clearly need 

to move that forward. And others are ahead of us in that curve. 

I’d like to make a brief point about linking. In principle, it’s very 

desirable. The economics of markets means that the more countries 

and the more players we have, the lower the price is going to be. 

But not all markets are legally and equally robust. We need to 

have institutional integrity. That means systems where compliance 

rules are strong, trustworthy, where reporting is open and transparent, and monitoring and verifications assured. That may not 

apply to all developing countries, if any. And we should not be 

bound by that. 

And, finally, if I say that we need to have China and India in, 

that’s quite clear. But it does not mean they need to do the exact 

same thing that we do. Something different might reasonably 

apply. It may not be a market in trading, it may be a system of 

offsets for project-based activities that we can look to. 

Thank you. 

The CHAIRMAN. Thank you very much. 

Senator Bingaman. 

Senator BINGAMAN. Well, thank you all very much. Very interesting testimony. 

Let me ask Michael Walsh, first, and maybe then Michael Morris. You folks have been doing this for about 2 or 3 years now—

3 years, right? 

64

Dr. WALSH. Almost 4, sir. 

Senator BINGAMAN. Nearly 4 years. And you have in place a legally binding system, which you believe is reducing greenhouse gas 

emissions—as having the effect of reducing greenhouse gas emissions that would otherwise be produced by your members. And the 

AEP is a member, as I understand. 

What would be wrong—as at least a theoretical basis—what 

would be wrong with just taking what you have come up with, by 

way of requirements for your members, and essentially mandating 

that everybody in the country comply with those? 

Dr. WALSH. Well, to be clear, Senator, it’s not that we believe the 

emissions are down. The independent audit body, NASD, which is 

a congressionally sanctioned entity, has verified to us that emissions are down faster than we have required under our commitments. And at very modest cost, I might add. So, these are audited, 

and those numbers are adjusted for dispositions of facilities. So 

that, on a real basis, these emissions are, in fact, down. 

Senator, it’s up to our elected officials to determine whether it’s 

appropriate to apply that structure. It’s a very conservative structure. We don’t give out as many credits to farmers, as some people 

have quoted in the numbers today. We discount our offsets quite 

frequently, to be extremely careful. Maybe we could be a little bit 

more liberal. We have some safety valves in the system that may 

not be appropriate for a national policy. But, by and large, we 

strived, with our many members who helped us to design this, to 

have a functioning system that is a respectable and credible and 

serious audited system. So, we think it may offer useful insights 

for policymakers here and around the world. I want to emphasize, 

we had members from Brazil sign a legally binding contract to reduce emissions, members from Canada, members from other countries. 

Senator BINGAMAN. Well, let me ask a, sort of, follow-up. The 

cost of a permit to emit a ton of carbon in your system is about 

$2.50, right? 

Dr. WALSH. Yesterday’s close was about $3, so a farmer in the Midwest is getting about $1.50 an acre per year in his new environmental service crop. 

Senator BINGAMAN. Okay. Now, the cost in Europe to emit a ton, on the European Exchange, is about $30. 

Dr. WALSH. That’s correct. 

Senator BINGAMAN. What would the cost—of course, there are 

many differences. One obvious difference is that in Europe, their 

system is mandatory. It applies to a specific segment of the economy. What would be the cost—what would happen to the cost of 

a permit to emit a ton of carbon in your system, with your requirements, if it were mandatory for everyone in the country? 

Dr. WALSH. Well, as an exchange official, Senator, you probably 

can understand I really can’t make a conjectural remark about 

where price might go. We have many——

Mr. MORRIS. Sarbanes-Oxley? 

Dr. WALSH [continuing]. We have many professional 

marketmakers and entities that have a position in the exchange. 

It would be a function of, does new supply in the market come in 

faster than new demand? And we have opened the market to all 

65

six greenhouse gases, so that IBM or Waste Management can cut 

fluorocarbons and methane at very low cost. And as we—if we saw 

a signal towards a bigger market, instead of having half a million 

acres of farmland enrolled now, we might be out in Curry County 

getting all kinds of ranchers and grazing land enrolled, as well, 

and landfills in Las Cruces, as credit suppliers. Many people were 

hesitant to get involved in the market, on the sell and the buy side, 

until they saw that it was working. So, it’s impossible to say, and 

I couldn’t. Even if I had a hunch, I wouldn’t be able to reveal it 

to you, sir. 

Mr. MORRIS. Senator, if I might just add to your question, because I think it’s an important one, the fact of the matter is, the 

Chicago Climate Exchange is voluntary, and that’s the appeal to 

people like Ford, IBM, DuPont, and American Electric Power, and 

others. And it does work. The notion—to Senator Domenici’s question earlier, you volunteer to get involved, but, once involved, 

you’ve signed a legally binding contract that, if you fail to live up 

to, you’re in violation of the NASD standards, and you’ll be on 

the—you know, above the fold in the Wall Street Journal for being 

someone who did a fraudulent activity. So, it has with it the beauty 

of the integrity. 

And, to the point that was asked in the earlier panel, about the 

auditing of the actual creation of the credit, very important. If you 

took your program and made it nationwide, it would work. I know 

it would work. The price, unknown. If we had allocation of credits, 

because that would be part of the way you’d create it, we would 

surely step up into the $8 or $9 or $10 a ton. If you put your safety 

valve in, that might work to suppress that price as we go forward. 

But what American Electric Power stands for, and, I think, what 

we all hope, is that voluntary actions will really lead this country 

in the right direction. The Asia-Pacific activity that we did in Australia—I happened to be there when we did it—China and India 

were there trying to learn from us and others, from Japan or from 

Korea and from Australia, what they’re doing, how—what we’re 

doing to control greenhouse gas emissions. And those are the kinds 

of things——

So, mandatory, without those huge emitters in the game, takes 

the American economy and puts a real damper on it, going forward. 

And, again, we need to have them in a Reagan-like ‘‘trust and 

verify’’ program. And if we’re going to have that, ‘‘we start first,’’ 

it has to be an automatic step down if they don’t live up to their 

end of the goal, or we’ll be, again, economically behind the eight 

ball. But, your idea would work, I’m certain of it. 

The CHAIRMAN. Now, let’s move over and ask some of you. 

I’m constantly amazed to read the views of people that say, ‘‘If 

we’ll just do something, Chinese will do something.’’ And the other 

day I read a very long dissertation about China, in which they said 

the very opposite, just—they took the position in—exactly the opposite of that. Can any of the four of you just talk to me a little bit 

about——let’s just take China. It’s clear that China is a controlled 

environment, in terms of economics. They decide they’re going to 

buy nuclear powerplants, they place an order for 20, right? No 

horsing around. They figure how many new powerplants they need, 

and they say this, and they tell somebody, ‘‘Locate ’em, and build 

66

’em,’’ right? ‘‘We don’t care how dirty it is, or what.’’ So, I assume 

it’s the same if they decided to change their mind on pollution. 

Would you agree, Rafe? They could fix it, and they—if they wanted 

to? 

Mr. POMERANCE. I’d just give my view on this. Everyone has 

tried to predict what the Chinese or the Indians would do in the 

future on this problem. What is their behavior going to be? And 

their per-capita incomes are very low, so the usual answer is, ‘‘Not 

much,’’ because they’re unwilling to spend capital. Well, how do you 

answer the skeptics’ question? The way we would—we certainly 

know that they’re not going to act if we don’t act. That would be 

pointless, just as we say it’s pointless for us if they don’t. We’re 

much wealthier, we have the ability to act. So, what—how might 

we do this? 

Our suggestion is, the United States takes the first step, but 

within that step is a review to examine what the Chinese have 

done in response. And if they don’t measure up to the standard 

that we create, we don’t go further. That would induce the possibility of a negotiation. I think that all governments—with what I 

understand about the climate system, the way it’s going, all are 

going to be subject to incredible international pressure to act in 

some reasonable fashion as time goes on. And I include the Chinese. I was in—present in the—many meetings, and there are 

many domestic measures—I’m no expert—that the Chinese have 

taken, for their own reason, to date. 

Thank you. 

Mr. ROSENZWEIG. A couple of things. I think anyone who’s looked 

at climate knows that you’re not going to address the problem over 

100 years without the Chinese, other large developing countries 

coming into the system. But I think it’s important for the United 

States to, sort of, step back and, sort of, recognize what the Chinese, I’m sure, have said to all of my colleagues, former negotiators 

here, is that the developed world is responsible for about 80 percent of the concentrations in the atmosphere. So, that may warrant 

the United States taking the first step. 

I’m just going to, sort of, take one other point here, which is, we 

did a lot of work with respect to metrics in evaluating countries’ 

performance in dealing with climate change. And we developed a 

series of economic, environmental, and technological metrics in 

order to evaluate that. And we looked at four developing countries. 

We looked at China, India, Mexico, and Brazil, for obvious reasons, 

given their size. And so, I think to take this to write legislation 

that says, ‘‘The United States will look and then determine how to 

go forward,’’ probably needs to be done in a fairly general way, because it’s very complicated. 

And here’s the results of just looking at their environmental performance. China’s performance, from the dataset we had, improved 

their emissions intensity by about 45 percent, I believe, over 10 or 

15 years; their absolute emissions went way up. India’s emissions 

intensity improved much less; their absolute emissions went way 

up. Mexico’s emissions intensity improved; their absolute emissions 

went way up. Brazil, who probably has done more than all of these 

countries, from a climate perspective, emissions intensity did not 

67

improve, because they have this little problem of having no water, 

so they use a lot more gas to generate power. 

So, looking at metrics is an awfully difficult, complicated thing 

to do, and it’s also important to note that the Chinese improvements were mostly based upon economic reforms, taking subsidies 

out of the economy, not addressing climate. So, as you look at 

metrics, I think it’s important to, sort of, stay general. 

The CHAIRMAN. Before you get rid of the mike, you would agree, 

however, would you not, that if they decided they wanted to—they 

are the kind of governance and economy that could just get it done? 

Mr. ROSENZWEIG. I think there’s going to be several ways that 

developing countries can play in this system. It’s going to have to 

be determined through international negotiations. 

The CHAIRMAN. Yes. 

Mr. ROSENZWEIG. I think Jonathan’s comments have that about 

right. But, yes, I think there are certainly things——

The CHAIRMAN. I’m not talking about negotiations, but just as a 

matter of—we have a harder time accomplishing it than them. 

That’s why we’re doing all of this. 

Ms. CLAUSSEN. Yes. 

The CHAIRMAN. They wouldn’t have to have all these meetings, 

right? 

[Laughter.] 

Mr. ROSENZWEIG. They might be more efficient, from a governance perspective. 

The CHAIRMAN. Well, they just tell somebody to do it, right? 

Ms. CLAUSSEN. Yeah. I mean, if I could just make a couple of 

comments. We just completed a dialogue with 25 individuals from 

15 countries with seven companies, so it was a real mix of people, 

to try to figure out what kind of arrangement we could have, post2012, sort of after Kyoto was over, to, sort of, think ahead. And we 

had a couple of people there from China, also from India and 

Brazil, and a lot of American companies, and actually some Senate 

observers, as well. So, it was mixed group. And I think there was 

great willingness on the part of everyone to consider something, 

post-2012, that is broad, flexible, allows them to do different kinds 

of things, as long as they are meaningful and verifiable. And the 

Chinese were right there. 

So, I really believe that if we were to try to do something ourselves, and then move forward we would find them willing to do 

some things that would also be meaningful. 

The CHAIRMAN. Jonathan. 

Dr. PERSHING. Just two additional points, perhaps, to add. The 

first one is, if one compares India and China—because those are 

the two that you frequently look at—I’d just take the example over 

the past 25 years in electrification. India currently has about 500 

million people who do not have access to electricity. Twenty-five 

years ago, China had the same number. Today, still the same 500 

million in India, only about 10 million in China. 

The CHAIRMAN. Really? 

Dr. PERSHING. So, you can get some sense about—as you—just 

very directly answering your questions, Could they do it? I believe 

they could do it. It doesn’t necessarily mean that they would adopt 

a program the same as ours. It could mean that they do things for 

68

reasons of energy security, which we clearly have as a priority, as 

well, that deal with things like transport efficiency. They have just 

done this massive push to gas, which is having the same size net 

reductions as the current combined offset projects around the 

world, one dash-to-gas in China. So, you see these fundamental opportunities that they could meet. So far, they have not. And, in 

fact, they have rejected the idea of adopting a trading program. 

I would suggest that an area that you could support would be to 

push, for example, the State Department to be your interlocutor. 

You can get a judgment as to how effective or valid or valuable relative and comparable efforts have been. 

The CHAIRMAN. Senator Bingaman. 

Mr. ROSENZWEIG. China’s also become the largest seller, as well, 

of project-based offsets in the world. 

The CHAIRMAN. All right. 

Mr. ROSENZWEIG. In one year, they have decided they wanted to 

do this, and they’re, by far, the biggest seller. 

The CHAIRMAN. Okay. 

Senator BINGAMAN. Let me try to understand how the various 

permits or allowances—I guess the words are, sort of, used interchangeably in this process—but how these international markets 

would relate—those allowances that are generated in a system in 

this country that has a safety valve, how that would relate to what 

is generated in Europe, which has no safety valve, with what is 

generated on the Chicago Climate Exchange, which has no safety 

valve, how—I mean, if there were some kind of world market for 

allowances and permits, is it clear that there’s a clearing mechanism for those different types of—and different-valued permits? Dr. 

Walsh, you’re the expert on that. 

Dr. WALSH. Well, you’ve got a lot of expertise here today, sir. 

I just spent the weekend in Europe with a roomful of some of the 

very top energy and emissions traders throughout the continent, 

and they’re eager to see U.S. leadership—in part, because they 

know that we would pursue a more flexible, six-gas—perhaps a little more comprehensive offset system than what the European system allows now. So, where we’re going and how those markets will 

interface is difficult to predict. 

Currently, the Chicago Climate Exchange accepts international 

credits from the Clean Development Mechanism and from the European Union allowance system. We are at a significant price differential. How that would pan out if we opened up our markets to 

international trade is difficult to predict. However, if we did see 

something like a $7 or $8 price gap in the United States, and the 

European demand was strong at $30, clearly the credits would flow 

to that higher priced market. All else constant, whether it be business relationships or credit or payment worthiness issues, putting 

those aside, the markets would seek out the highest and best opportunity, one would expect, sir. 

Senator BINGAMAN. Well, some of the discussion in the previous 

panel about capped—about offsets outside the cap—give me a little 

explanation as to how you see that. If each country has a separate 

cap, and offsets are being generated in China, you know, how 

does—what is meant by this concept of ‘‘outside the cap’’? David 

Doniger was saying that he thought it was a big mistake to allow 

69

offsets outside the cap. I think, Michael Morris, you were saying 

you thought wherever the improvement in the environment occurs, 

so much the better, there’s no reason to limit that. 

Dr. WALSH. Senator, let me preface my answer with the following 

observation. To a significant degree, the debate about offsets has 

become a bit of a tempest in a teapot. If we were to stack up the 

emission reductions realized by the Chicago Climate Exchange 

members, and stack ’em 50—they’d be a 50-foot-tall pile—only one 

foot of that would be offsets. Offsets do not come flowing in like Niagara Falls. We see that in the Clean Development Mechanism, 

which has a high price at the end of that rainbow. We see that in 

the Chicago Climate Exchange. 

So, there’s been a—frankly, a bit more debate than I think is 

worthy. One can clearly define, in a conservative, verifiable way, 

what an offset is. And if you provide those clear instructions, you 

still will see a relatively modest pace of uptake on offsets. 

Now, that said, there is some view that if you were to call for 

a—say, a 4-percent cut in emissions, as CCX does, over 4 years, 

and were to allow in, let’s say, up to one-fourth of that, 1 percent, 

as offsets, that, in fact, some view that you wouldn’t really achieve 

the 4-percent cut, you would only achieve a 3-percent cut, because, 

well, those offsets are somehow—are new and different and extra. 

But we don’t see it that way. If the cut occurs in Brazil or in China 

or in Canada, and it’s verifiable, we think that’s a cut. 

So, I think there’s some confusion on that issue, but a lot of folks 

have a different viewpoint on inside or outside the cap. 

Senator BINGAMAN. So, you’re saying that, ‘‘outside the cap,’’ the 

25 percent of the reduction that you would permit to come from offsets would be outside the cap? Is that the way you’re understanding that term? 

Dr. WALSH. The example I gave you was a scenario where 25 

percent of the reductions—in fact, it’s only—it’s been less than—

less than 5 percent of our reductions—25 percent of the reductions 

were occurring offsite, not at the smokestack of our members, but 

were occurring on farms and through forest growth or methane 

capture. I don’t understand, Senator, why anybody would consider 

that not to be a desirable thing to have happen. These are win-win 

things that are both reducing carbon emissions and providing local 

environmental benefit. Some people think that that is not enough 

of a cut, or is not a valid contributor to progress. I would beg to 

differ. 

Senator BINGAMAN. Yes, go ahead, Jonathan. 

Dr. PERSHING. I think one of the big questions around the offsets 

market has been how robust they are. One of the issues that David 

Doniger raised earlier was that there is some suspicion that you 

can’t accurately monitor and verify them. One of the approaches 

that’s been taken in a number of markets as they develop is to try 

and create benchmarks. So, there’s some standard that’s set, and 

that’s a standard that’s universally applied. And if you do that, you 

have more likely integrity of all the market structures you’re going 

forward with. And when you do that, you have more confidence in 

those market options. That has two effects. The first is, it maintains market integrity. The second, it allows you to look at those 

70

offset benefits, probably anywhere in the world, that meet that 

benchmark. And that’s got a huge economic value. 

Senator BINGAMAN. Rafe. 

Mr. POMERANCE. Just to try to elucidate this a bit more, I think 

that David Doniger made a proposal to use—if I recall correctly—

use allowances to, in effect, buy offsets. In that case, you don’t have 

to worry about their verifiability. They’re just good projects. And 

they don’t, sort of—they’re not in the accounting of the cap. The 

outside-the-cap is, if a Nation has 100 units of allowable emissions, 

and it decides to buy ten units outside the country, through the 

Clean Development Mechanism, say, then its allowable domestic 

emissions would be 110. But there is a real question about—in 

many people’s minds—about the verifiability of the offset. So, he’s 

sort of—would—I believe, was taking an insurance approach to offsets, which is to use the value of the allowances to buy offsets. 

Mr. ROSENZWEIG. I disagree with David. Offsets are good. I think 

it’s important to step back and look at what they’re trying to accomplish with a first stage of a climate program. And you want to 

encourage activities that may not occur without the incentive to do 

it. 

The problem with offsets is the transactions costs, which basically do not allow developers to secure financing to develop their 

projects. There are several different ways that the world is learning 

to implement, to develop modern verification standards, and to ensure that they are real, verifiable reductions. 

So, as a first step, we would, you know, disagree with David. We 

think that you can create offsets outside the cap that create a lot 

of beneficial activities. That would also work fairly well if you’re 

going to go with a safety valve, that you would probably create a 

whole bunch of environmental activities that may not occur if there 

were not a safety valve. 

So, I would, sort of, suggest that the two things play hand in 

hand. 

Thank you. 

The CHAIRMAN. I have no further questions. 

Michael Walsh, I just wanted to indicate that my office will be 

calling to see if we can set up an appointment with either you or 

whomever, so you can come to the office and tell me more about 

the program, in detail, specifically, so I will understand it. 

Dr. WALSH. We look forward to that opportunity, Senator. 

The CHAIRMAN. I think it’s important that I do that, and do that 

as soon as I can. 

Now, with that——

Senator BINGAMAN. Mr. Chairman, I thought you—I thought you 

were going to volunteer to join the Chicago Climate Exchange, have 

your office join. 

Dr. WALSH. Well, Senator, you should be aware that we have an 

open-door policy, not only to corporate emitters in Brazil and elsewhere, but to organizations like the World Resources Institute, that 

wanted to define and help us build the system and offset their own 

emissions. So, we’ve got the thought leaders, but we’ve also got the 

prayer leaders, from the Jesuits of Santa Clara, California, who are 

one of our original investors, and are also offsetting their members 

71

in our exchange. So, you’ll be in very blessed company if you want 

to become a member, sir. 

[Laughter.] 

The CHAIRMAN. I have not yet said I’d be a member, but you’ve 

given me a very good reason, with that new group——

[Laughter.] 

Dr. WALSH. Thank you, Senator. 

The CHAIRMAN [continuing]. There. I’m sure I’ll be close to them 

quickly——

[Laughter.] 

The CHAIRMAN [continuing]. What they do. Maybe I can act like 

them, right? In any event——

All right. Thank you, everybody. I notice a lot of your were patient, stayed a long time. A lot of coverage stayed the whole day. 

And we think it was beneficial to us. We will not deny that it was 

hard work for us, and for you, too. But our schedules are the things 

that make our lives tough. But for that, it would have been a very 

nice, fun day with all of you. 

Thank you. We look forward to the compilation of this, and see 

what comes next. You all wait and see. 

[Whereupon, at 4:28 p.m., the conference was adjourned.] 

Æ