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75–408 2015

GREEN AND MEAN: CAN THE NEW U.S. ECONOMY 

BE BOTH CLIMATE-FRIENDLY AND COMPETITIVE? 

HEARING 

BEFORE THE

COMMISSION ON SECURITY AND 

COOPERATION IN EUROPE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

MARCH 10, 2009 

Printed for the use of the Commission on Security and Cooperation in Europe 

( 

Available via http://www.csce.gov 


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(II) 

COMMISSION ON SECURITY AND COOPERATION IN EUROPE 

LEGISLATIVE BRANCH COMMISSIONERS 

SENATE HOUSE 

BENJAMIN CARDIN, Maryland, 

Chairman 

CHRISTOPHER DODD, Connecticut 

SAM BROWNBACK, Kansas 

SAXBY CHAMBLISS, Georgia 

RICHARD BURR, North Carolina 

ROGER WICKER, Mississippi 

JEANNE SHAHEEN, New Hampshire 

SHELDON WHITEHOUSE, Rhode Island 

TOM UDALL, New Mexico 

ALCEE HASTINGS, Florida, 

Co-Chairman 

EDWARD MARKEY, Massachusetts 

LOUISE MCINTOSH SLAUGHTER, 

New York 

MIKE MCINTYRE, North Carolina 

G.K. BUTTERFIELD, North Carolina 

JOSEPH PITTS, Pennsylvania 

ROBERT ADERHOLT, Alabama 

DARRELL ISSA, California 

EXECUTIVE BRANCH COMMISSIONERS 

MICHAEL POSNER, Department of State 

ALEXANDER VERSHBOW, Department of Defense 


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(III) 

GREEN AND MEAN: CAN THE NEW U.S. ECONOMY BE BOTH CLIMATE-FRIENDLY AND COMPETITIVE? 

MARCH 10, 2009 

COMMISSIONERS 

Page 

Hon. Benjamin Cardin, Chairman, Commission on Security 

and Cooperation in Europe ..................................................... 01 

Hon. Alcee Hastings, Co-Chairman, Commission on Security 

and Cooperation in Europe ..................................................... 03 

Hon. Tom Udall, Commissioner, Commission on Security and 

Cooperation in Europe ............................................................ 12 

Hon. Sheldon Whitehouse, Commissioner, Commission on 

Security and Cooperation in Europe ...................................... 15 

WITNESSES 

Richard Morgenstern, Senior Fellow, Resources for the Future ........................................................................................... 03 

Trevor Houser, Visiting Fellow, Peterson Institute for International Economics .................................................................. 05 

Robert Bradley, Director of International Climate Policy, 

World Resources Institute ...................................................... 08 


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(1) 

GREEN AND MEAN: CAN THE NEW U.S. ECONOMY BE BOTH CLIMATE-FRIENDLY AND 

COMPETITIVE? 

MARCH 10, 2009 

COMMISSION ON SECURITY AND COOPERATION IN EUROPE, 

Washington, DC. 

The hearing was held at 10:00 a.m. EST in 428A Russell Senate 

Office Building, Washington, DC, Hon. Benjamin Cardin, Chairman, Commission on Security and Cooperation in Europe, presiding. 

Commissioners present: Hon. Benjamin Cardin, Chairman, Commission on Security and Cooperation in Europe; Hon. Alcee Hastings, Co-Chairman, Commission on Security and Cooperation in 

Europe; Hon. Sheldon Whitehouse, Commissioner, Commission on 

Security and Cooperation in Europe; and Hon. Tom Udall, Commissioner, Commission on Security and Cooperation in Europe. 

Witnesses present: Robert Bradley, Director of International Climate Policy, World Resources Institute; Trevor Houser, Visiting 

Fellow, Peterson Institute for International Economics; and Richard Morgenstern, Senior Fellow, Resources for the Future. 

HON. BENJAMIN CARDIN, CHAIRMAN, COMMISSION ON 

SECURITY AND COOPERATION IN EUROPE 

Mr. CARDIN. Good morning, everyone, and welcome to this hearing of the Commission on Security and Cooperation in Europe. I’m 

very pleased that we are focusing our attention today on climate 

change. Security, cooperation, these two words are central to the 

commission’s title and its mission, and they are also two of the essential elements of dealing effectively with climate change. Today 

America’s security is undermined by our dangerous reliance on foreign oil. Too much of our economy is captive to uncertain supplies. 

Too much of our fortune goes to parts of the world that harbor deep 

animosity towards our nation and our values. 

As analysts increasingly point out, climate change is real and a 

present threat to world security. Dramatic shifts in climate will 

likely lead to massive displacement of people who are faced with 

flooding from rising oceans and extended droughts that dry up 

their food supplies. Social unrest is almost certain and international instability is likely to follow. Europe faces many of the 

same issues and challenges, and that brings us to cooperation. 

The only effective way to address the global crisis of climate 

change will be through unprecedented international cooperation. 

The world has seen an unprecedented international scientific colVerDate Sep 11 2014 06:45 Jul 23, 2015 Jkt 075408 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 E:\HR\OC\A408.XXX A408

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laboration under the auspices of the United Nations Intergovernmental Panel on Climate Change, an effort that culminated in a 

Nobel Peace Prize in 2007. We have seen nation after nation take 

important steps to curb the greenhouse gas emissions and plot a 

new carbon-friendly future. This effort has been especially important in Europe. The European Union has taken strong actions to 

address climate change. The Union designed and implemented the 

first coordinated international cap-and-trade program. 

Although the initial effort was flawed, the entire world looked to 

Europe because of its leadership role. The cap-and-trade program 

that we will design in America will owe much to the European experience. America has been on the sidelines. We have had an administration that denied the reality of global warming even as glaciers melted and sea levels rose and the international scientific consensus became much more unified. Today we have a new president 

and a new commitment to action. This year the Congress and 

President Obama will work together to enact climate change legislation. Based on sound science, this legislation will rely on tough 

mandatory cap-and-trade program. 

The climate bill will harness market resources to bring down 

greenhouse gas emissions, while simultaneously stimulating investment in a clean, sustainable economy for the decades ahead. We 

live in an interconnected world, where the decisions we make here 

impact other countries and vice versa. Nowhere is that clearer than 

on the issue of climate change. Our economy and our environment 

depend on the commitment we make today to retool our nation’s 

economy for the future. Increasingly that holds true for the rest of 

the world as well. 

The time has come for America to do more than simply get off 

the sidelines. The time has come for America to assert its leadership in the world again. Taking action on climate change legislation must be a top priority for Congress this year. The time for action is long past. The time to catch up is now. Even in the shadow 

of the most severe recession in a generation, America’s role in the 

world economy is unparalleled. Other nations may have more consumers or greater portions of certain market share, but it’s clear 

that the world is looking to the United States to lead us out of the 

economic wilderness, and we will. It is also clear that the world 

needs America to exert its leadership on climate change. Along 

with China, we are the largest emitters of greenhouse gases in the 

world, but unlike China America has the history of combining intellectual resources, entrepreneurial spirit, market savvy and optimism that can translate into an effective worldwide leadership on 

this issue. 

With the adoption of a tough cap-and-trade bill, America will set 

on a path that will improve our national security by reducing our 

reliance on foreign oil, stimulate our economy by generating millions of new, clean, green jobs in energy efficiency, solar wind, biomass, and more, and pull the world back from the brink of catastrophic climate change. 

Today the commission will address climate change. When the 

commission goes to Vilnius later this year, we should be bringing 

with us a message of change, hope, and renewed commitment to 

common international actions, and by the time the community of 


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nations convenes in Copenhagen in December, all should recognize 

that America is taking meaningful, effective action in bringing a 

strong pragmatic and moral leadership back to the world stage. 

Today we will hear from a panel of witnesses who will discuss 

some of the experiences in America and in Europe, some of the difficult issues relating to international trade and some of the promise 

that bold action on climate change can yield. Before our witnesses 

start their testimony, I would like to point out that in the spirit 

of today’s hearing on climate change and the recognition of the 

need for each of us to take steps to combat global warming, the 

commission is reducing the volume of paper that it uses at our 

hearings by making all commissioner and witness statements 

available online instead of distributing hard copy. You can visit our 

Web site, www.csce.gov for all hearing material. 

At this time let me recognize the co-chairman of the Helsinki 

Commission, my friend, Congressman Hastings. 

HON. ALCEE HASTINGS, CO-CHAIRMAN, COMMISSION ON 

SECURITY AND COOPERATION IN EUROPE 

Mr. HASTINGS. Thank you very much, Chairman Cardin. I echo 

your sentiment, Senator. In light of the fact that I have to be back 

over on the House side in about an hour I’m going to forego any 

opening statement and ask unanimous consent that any statement 

that I may make be placed in the record. I’m really interested in 

being able to hear all of our witnesses before I leave. Thank you, 

sir. 

Mr. CARDIN. Thank you, Mr. Chairman. We have a distinguished 

panel of witnesses. Their bios have been distributed so the bios are 

before all of us so we know them very well, so let me get on by 

introducing them: Mr. Richard Morgenstern, who’s a senior fellow 

with Resources for the Future; Mr. Trevor Houser, who is a visiting 

fellow with the Peterson Institute for International Economics; Mr. 

Robert Bradley is the director of international climate policy at the 

World Resources Institute. We will begin with Mr. Morgenstern. 

Let me also point out, as everyone here knows, that he was the 

senior economic counsel to the undersecretary for global affairs in 

the U.S. Department of State before taking on his present assignment. Mr. Morgenstern, it’s a pleasure to have you before the committee. 

RICHARD MORGENSTERN, SENIOR FELLOW, RESOURCES FOR 

THE FUTURE 

Mr. MORGENSTERN. Mr. Chairman, thank you very much. I appreciate the opportunity to appear today to discuss competitiveness 

and trade impacts of domestic carbon action. Resources for the Future is an independent, nonpartisan research organization, and the 

views expressed today are those of myself, strictly. 

Broad market-based strategies of the type that you’ve referred to, 

cap and trade, that attach a price to greenhouse gas emissions 

have the potential to offer significant cost and efficiency advantages to the United States as it seeks to reduce its carbon emissions. At the same time, there is the potential that this approach 

will impose significant costs on particularly energy-intensive, import-sensitive industries. It is these industries and this question of 


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competitiveness that is referred to as the subject of this hearing 

and which my comments relate to. 

I have been involved in some research activities with several of 

my RFF colleagues and what I want to do today is quickly review 

some of the key results of those studies that we have conducted, 

and then talk about some of the options that the United States 

might have in trying to deal with these problems. The conclusions 

of our research can really be succinctly stated in a couple of points. 

Number one, measured by the reduction in output, a readily 

identifiable set of industries is at the greatest risk of contraction 

over both the short and long term as a result of domestic action. 

Secondly, although the short run output reductions may seem relatively large in these industries, these reductions shrink over time 

as firms adjust inputs and adopt new technologies to the changing 

environment. Third, the largest cost increases are concentrated not 

in broad industry categories as we commonly refer to them, but oftentimes in industry sub-categories. For example, we may see impacts on aluminum, which is a broad category. We may see impact 

on lime, which is a somewhat smaller category. And it is this combination of large and small industry sectors that we need to understand. 

In the non-manufacturing sector there are also some declines 

that are seen, but a rather diverse pattern applies. For example, 

you see that in the electric utility industry the impact is relatively 

consistent over time, whereas you see in something like mining 

there may be a continuing deterioration as there is a substitution 

away from metals, to a substitute for metals that may be attractive. 

In terms of employment, the short-run impacts are roughly proportional to the losses in output, but over the longer term we tend 

to see other industries come in, pick up the slack, and we do not 

see a net loss in employment. 

Most experts agree that the best solution for addressing this 

problem is to have an international agreement that in fact binds 

all of our key trading partners to some relatively comparable policy 

to the one the United States would undertake. But in the interim, 

unilateral action should and must be taken, in my view, to begin 

to address this problem. That leads to the possibility, and in fact 

the likelihood that there will be some emissions leakage, and that 

means that some of the domestic reductions will be partially offset 

by increases abroad as production increases outside the United 

States and energy-intensive activities are relocated globally. 

Importantly, displacement of production through lost competitiveness is not the only source of carbon leakage. A large scale 

withdrawal of demand for carbon-intensive energy in the United 

States will drive down prices globally and expand consumption 

elsewhere. 

Turning, to the question of how do we address this problem, 

there are really several different ways that we can go about it. An 

efficient policy, a cap-and-trade policy of the type that you’ve referred to and President Obama has endorsed is certainly a first 

step in that direction. Several other measures, for example the use 

of carbon offsets, either domestic or international, are other ways 

of addressing the competitiveness issue. 


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Thirdly, one can envision cost containment policies whereby 

there’s an attempt to prevent dramatic fluctuations in prices which 

could in fact adversely affect competitiveness. Those are the approaches that are commonly discussed. 

Beyond those, pending legislation here in both the House and the 

Senate is focused on two approaches. One is free allowance allocation, and the other is trade-related border adjustment type approaches. Speaking to the latter, import adjustment proposals 

would require importers to purchase allowances based on the embodied emissions in their products, which would attempt to level 

the playing field. One can imagine a broader border adjustment 

where you also dealt with exports. However, I would point out that 

there are particular WTO problems that may impede that action. 

The other approach is to try to limit the increases in domestic 

costs by using free allowance allocation, and particularly a type of 

free allowance allocation that we have some experience with, but 

somewhat limited experience with in the United States, and that 

is in contrast to, say, the Clean Air Act approach, where we grandfathered the allowances based upon historic emissions, this would 

involve an updating of allowances. That is to say, that the better 

performance that is turned in by a firm, the more allowances it 

would receive. This has the effect of lessening the burden of the 

cap-and-trade system of the carbon price on that particular industry. 

I would point out there are other approaches that have been discussed. For example, people have talked about the possibility of exempting certain industries from control, and I would note that 

doing so removes any incentive that you would normally want to 

place on these industries to reduce their emissions, and it also 

raises the cost to all other industries, every other individual in the 

United States, of reaching the carbon goal. 

In summary, Mr. Chairman, I would say that until we have a 

truly global system in place where we would not need these special 

provisions to deal with the problems imposed on energy-intensive 

industries, I would personally advocate a free allowance allocation 

via updating as a transitional measure for the adversely affected 

industry. Thank you, Mr. Chairman. 

Mr. CARDIN. Thank you very much for your testimony. I Appreciate it. Mr. Houser. 

TREVOR HOUSER, VISITING FELLOW, PETERSON INSTITUTE 

FOR INTERNATIONAL ECONOMICS 

Mr. HOUSER. Thank you very much. My name is Trevor Houser. 

I’m a visiting fellow with the Peterson Institute for International 

Economics, and the director of the energy and climate practice at 

RHG, which is a New York-based research firm. The same disclaimers that Dick provided are all true for me. Any comments that 

I have are mine and not the Peterson Institute’s. 

The title of this panel is, ‘‘Can a New U.S. Economy Be Both Climate-Friendly and Competitive?’’ I would urge us to think about 

that question broadly. The transition to a low carbon economy is 

going to affect U.S. competitiveness in many ways, and the first is 

what Dick commented on, a need to create a level carbon playing 

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advantage. The second would be our ability to capture opportunities in new low-carbon energy technologies that will be required to 

make the transition. Third is our ability to trim some of the $450 

billion we spend each year on imported oil would make the U.S. 

more competitive. And then finally, as we make these new investments in energy efficiency, to take that as an opportunity to invest 

in increased U.S. productivity more broadly. 

This panel is focused on the first of those, on creating a level 

playing field, and that’s where I’ll focus my comments. I wanted 

from the outset to put that in a broader context of how we think 

about competitiveness. 

This issue of the impact on energy-intensive industries, it’s critical that we get this piece right, and in doing so we need to think 

about three things: first, dealing with the impacts for domestic industry in a way that’s equitable and effective. Addressing climate 

change is going to be a multi-decade process that’s going to require 

continued political support. And to draw a lesson from trade liberalization, the need to up front make sure that folks who might be 

negatively impacted are compensated or retrained is going to be 

critical to maintaining a consensus surrounding climate policy 

going forward. 

Two, we need to make sure that we do that in a way that’s supportive of international climate negotiations. As the chairman 

pointed out, this is a problem that no individual country can solve 

and that we’ll need a collective solution for. And so we have to address this through the lens of the multilateral approach. But finally, it’s important that we do this in a way that is compatible 

with the principles of the world trading system because for us to 

capture that upside, the clean revolution on which our ambitions 

lie, we’re going to need open markets to export low carbon goods 

to the rest of the world, so we need to think about that inclusively. 

In the 110th Congress, most of the energy and climate bills that 

were introduced, cap-and-trade bills, took one primary approach to 

addressing this issue of competitiveness, of leakage, and that is to 

impose a comparability test, to look at what other countries are 

doing to reduce emissions, and those who are seen as not taking 

comparable action to the U.S. to have the price for carbon on energy-intensive imports—on steel, aluminum, and cement—adjusted 

at the border. 

The goal here is to meet two objectives simultaneously. The first 

is to address the leakage concern that Dick mentioned, and the second is to try to provide a leverage on other countries to help encourage them to join international climate negotiations. And the 

authors of those provisions were pretty thoughtful about trying to 

design them in a way that would be consistent with the WTO. 

I would argue, though, that by combining leakage and a desire 

to address leakage with a need to create leverage, those provisions 

fail at doing both. Let me point out why. On the leakage front, an 

international agreement of the type that we hope to get from Copenhagen is not going to yield the same carbon price between countries that are part of that agreement. We need to allow flexibility 

between developed and developing countries in how they reduce 

emissions, and then within a country we need to allow flexibility 

for what types of targets and timetables we adopt. 


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For example, Europe is committed to reduce emissions 20 percent 

by 2020 off a 1990 baseline, 30 percent if we get an international 

agreement. The Obama plan pledges to reduce emissions 14 percent by 2020 from a 2005 baseline, which is a slight increase over 

a 1990 baseline. That means there’s going to be different carbon 

prices between the U.S. and Europe, let alone between the U.S. 

and China. And that’s okay from an environmental standpoint as 

long as the end of the day we get to the numbers that we need for 

global emissions reductions. We can’t rely on a global agreement in 

the interim until we get to a single global carbon price which is ultimately where we’ll try to go to address our concerns of leakage. 

We need to do that in the way we design domestic policy. 

The approach taken in the Boxer-Lieberman-Warner bill—would 

impose trade measures on countries that stay outside of an international agreement but doesn’t look at how we can adjust the 

prices between countries within a national agreement. That’s something we need to consider. 

On the leverage front, if we look at imposing a tariff on the carbon content of goods that come into the U.S. we don’t have sufficient leverage to force any country to the negotiating table. While 

exports from China of textiles, T-shirts and electronics are very important for economic development, exports of carbon-intensive 

goods like steel, aluminum, cement aren’t, because most of the 

steel, aluminum and cement that countries like China and India 

manufacture is for domestic consumption to feed this massive urbanization drive that’s going on in those countries today. Exports 

of energy-intensive goods of the type that RFF’s work has identified 

as being potentially vulnerable account for about 0.1 percent of 

Chinese GDP. That’s fairly small in comparison to the cost of climate policy. 

The good news is that developing countries are in fact willing to 

come to the negotiating table on their own and we probably don’t 

need that type of leverage. And that’s something that I think Rob’s 

going to mention. 

In a multilateral environment we could think about the role of 

trade sanctions imposed on all goods as a way to enforce an international agreement. But to be effective we’d have to do that multilaterally. No individual country is going to have enough leverage 

by denying market access to get any major emitter into an international agreement. It’ll have to be a collaborative approach. 

For addressing leakage, until we get to a harmonized global carbon price—either a global cap and trade system or global carbon 

tax—which is more than a decade off at least—we could have a 

multilateral agreement on how to adjust border prices—adjust carbon prices at the border between countries, in the way that Europe 

does a value-added tax. Alternatively, we could have an international sectoral agreement where within the broader global agreement countries agree to a common price or a common set of standards for internationally traded goods like steel and cement. Both of 

those things would need to be negotiated multilaterally. 

In the interim, as Dick mentioned, we have a number of options 

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based rebating proposals that folks in the House are working on 

today hold quite a bit of promise. 

Thanks very much. 

Mr. CARDIN. Thank you very much for your testimony. Mr. Bradley. 

ROBERT BRADLEY, DIRECTOR OF INTERNATIONAL CLIMATE 

POLICY, WORLD RESOURCES INSTITUTE 

Mr. BRADLEY. Good morning, Mr. Chairman, Mr. Hastings, Mr. 

Udall. Thank you very much for the opportunity to join you today. 

My name’s Robert Bradley and I direct the international climate 

policy work for the World Resources Institute. 

Both my companions here, Trevor and Dick, in their testimonies 

have referred to the desirability of placing U.S. climate policy in 

the context of a broader international agreement. And so I wanted 

to step back and explore that possibility a little bit. 

I’d like to make three points, each of which I treat in more detail 

in my written testimony which I hope can be included in the 

record. First, success against climate change will mean strong federal policy in the United States and action from major developed 

and developing economies. Second, the world has changed dramatically since the days of the Kyoto Protocol. Major developing countries are ready to take significant action on limiting emissions. And 

third, all countries will seek to harness the benefits of growth and 

new jobs from a switch to cleaner energy. Constructive international policy on both trade and technology cooperation can help 

build support for an effective climate regime. 

The United States is an indispensable leader in the fight against 

climate change. Without the world’s largest economy and biggest 

historical emitter other countries cannot fix the problem. But nor 

can the U.S. do it alone. Almost 80 percent of global emissions are 

produced by 15 counties, nine of which are in the developing world. 

The Kyoto Protocol, the main climate agreement to date, has been 

rejected by the United States in particular because of the concern 

that without meaningful participation from major developing countries it would be ineffective and costly to the U.S. economy. 

Developing countries have historically argued that with their 

poverty and small historical contribution to the climate problem 

they should not be responsible for curbing emissions. But in recent 

years there’s been a flood of developing country climate plans. For 

example, Brazil announced that it would reduce its deforestation 

rate over 50 percent from recent levels by 2017, avoiding an estimated 4.8 billion tons of carbon dioxide emissions. China committed to reducing national energy intensity—that’s energy per 

unit of gross domestic product—by 20 percent by 2010 and looks 

on course to meet that goal with programs expected to cut emissions by 550 million tons of CO2. Investment in wind, hydro, nuclear and biomass are expected to save an additional 640 million 

tons by 2010. 

India has a number of states that are taking forward aggressive 

renewable energy targets with renewable portfolio standards. Mexico pledged to half its greenhouse gas emissions by 2050 and is considering a cap and trade policy not dissimilar to the one recently 

considered by U.S. Congress. South Africa has presented a highly 


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detailed and ambition plan to peak its national emissions by 2020 

and to bring them down to low levels in 2050. 

These policies will often not be of the same form as the cap and 

trade approach favored in the United States and Europe, but that 

need not make them any less ambitious. They are the more impressive when we consider the poverty of many of these countries. In 

India 550 million people still lack any access to electricity and they, 

like Europeans and Americans in the last century, legitimately aspire to get it, but they are seeking to do so on a lower carbon pathway. 

An international climate agreement can help reinforce these actions. Many of these countries have a poor record of implementing 

national plans. It will certainly not be enough for countries to take 

each other’s plans at face value. The Bali Action Plan, which 

frames negotiations for a post-2012 climate agreement, provides for 

both developed and developing countries to take mitigating actions 

that are, quote, ‘‘measurable, reportable and verifiable.’’ This language also applies to finance technology and capacity building support for developing countries. 

One factor common to all countries taking action on climate is 

the promise of new jobs and economic opportunity from the switch 

to clean energy. Over 10 percent of the United States’ recent stimulus package was aimed at climate-friendly and environmental objectives. In South Korea the corresponding figure is 80 percent. 

China has also pledged to put hundreds of billions of dollars from 

its stimulus package into projects that cut greenhouse gas emissions. And rightly so. Research we have undertaken recently with 

the Peterson Institute calculates that green recovery programs generate 30,000 jobs on average per $1 billion invested. They also reduce the cost of meeting climate goals in the longer term. 

All countries focus on generating jobs at home. But the truth is 

that clean energy, like any high-tech industry, will depend on inputs from around the world. A multilateral approach to developing 

and deploying clean technologies can be enhanced through cooperation on climate change and supported by freeing up trade and environmental goods and services. 

This body can shape the success of the international process. An 

ambitious federal climate policy will unleash action not only in the 

United States but also from countries that have been waiting on 

the world’s biggest economy. International cooperation on technology programs can help build on the push to cleaner energy 

through the stimulus. Finally, U.S. policy should include provisions 

for financing international action on adaptation, forest protection 

and clean technologies to help ensure an inclusive climate deal. 

I don’t want to imply that this will be easy. Many countries remain wary of commitments and their rhetoric will stress these 

fears. But the world has moved on a lot in 10 years. There’s a real 

willingness to tackle emissions and a potential agreement that can 

turn this willingness into verifiable action. 

Thank you and I look forward to your questions. 

Mr. CARDIN. And, Mr. Bradley, thank you for your testimony. 

We’ll start with Congressman Hastings. 


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Mr. HASTINGS. Thank you very much, Mr. Chairman. And gentlemen, thank you all for your testimonies. And I can assure you your 

words resonate very strongly. 

Mr. Chairman, I was thinking as our three presenters were going 

forward that probably in other places around the world—either 

today, yesterday or tomorrow—similar type discussion are being 

had. One of the continuing problems it seems that we have in trying to reach international agreement is the lack of communication. 

I would emphasize at the outset you spoke about our Web site and 

I would hope that the testimony of these gentlemen will be appropriately diaried and disseminated to other individuals in other 

countries that might very well find their remarks useful. Mr. 

Morgenstern, how long were you actually involved and to what degree were you involved in Kyoto? 

Mr. MORGENSTERN. I was working at the Environmental Protection Agency throughout most of the ’80s and in the ’90s, and then 

in the early 2000s. I worked on Kyoto pretty much from the inception. I was at Rio in 1992. I attended a conference in Toronto that 

was in the late ’80s. I’ve been involved in this issue for a long time. 

I guess you might say the short answer is from the outset. 

Mr. HASTINGS. All right. Now, taking from all of your testimonies, and specifically from Mr. Bradley’s, it appears that for a 

variety of reasons the United States never became a signatory to 

Kyoto. Is that correct? 

Mr. MORGENSTERN. Technically we signed it but we didn’t ratify 

it. 

Mr. HASTINGS. We’ve kind of like been missing in action on the 

subject. Would you agree with me that those who would use an argument that—to trust your partners for international agreements 

would then turn around and argue, well, the United States didn’t 

go along with Kyoto. What makes us think that they or Russia or 

China or India or any of the larger countries are going to go along 

with some kind of carbon emission international agreement? 

Mr. MORGENSTERN. You raise a very important question, Mr. 

Chairman. I guess I would say that looking back on the situation 

with Kyoto that the fact that United States did not take any domestic initiative at that time, perhaps the negotiators got a little 

bit ahead of the political reality back home. 

That the current thinking now—certainly it’s embodied by President Obama’s statements and by the actions in both houses of Congress in the past several years in developing legislation—is that 

the United States really needs to be a leader and needs to take domestic action and that that’s a way of demonstrating to the world 

that we are serious and that we’re simply not showing up at the 

negotiating table, participating in all the rhetoric and then failing 

to deliver. 

That’s probably the approach that makes most sense given the 

way our system operates. 

Mr. HASTINGS. But now we’re in a climate of slumping economic 

activity and the overall financial crisis globally. And my read is 

that Europe’s ambitious plans are now suspect among themselves. 

Reading one statement from a European negotiator whose name 

doesn’t appear in the article, he says the Germans are giving up 

and the Italians are getting ready to follow. And then we know 


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about President Chirac—Sarkozy’s forward-leaning discussions. Mr. 

Bradley talked about it, about trying to come to some terms by the 

year 2020. 

My overall concern is this: In any major change that requires 

world agreement, it takes too much time. And how then can we 

shorten that time and get to the business of collective undertaking 

worldwide or the collaboration that’s going to be needed in order 

to do anything really substantial? 

I hear you argue and I agree with you that unilateral action is 

going to have to take place. But it seems in order for us to be unilateral we need then to have widespread understanding inside the 

United States and the various sections that are likely to be affected 

from steel, petrochemicals, all the way down the line, and try to 

get as many people on board with the policy rather than coming 

up here and yakking it up. That’s, to my way of thinking, what 

needs to be done. You can’t have a one-day summit. You have to 

have an ongoing, concentrated, hot effort to try and come to agreement from within before we act unilaterally. Or am I making any 

sense? 

Mr. MORGENSTERN. Definitely so, Mr. Chairman. I guess two key 

elements of a domestic initiative that could pave the way to a 

greater international cooperation. Number one is that the domestic 

action be cost-effective; that is to say that it be designed in a way 

that it is affordable and it is efficient and it is getting the most possible reductions for the dollars that we commit to it. Secondly is 

that we need to demonstrate to ourselves and to the world that 

there are new technologies that can come into play quickly and efficiently and that they can lessen the burden for others as well as 

ourselves in trying to meet these goals. 

The United States’ initial action is really a small down payment 

to a global future here. Nobody is kidding themselves to think that 

we can solve the problem. As we all know, we’re a fraction of the 

emissions and so on. But the fact is that we need to demonstrate 

that this can be done efficiently and that in fact new technologies 

can come into play and that they can be effective and efficient. 

Mr. HASTINGS. Right. Right here in our bicameral legislature, 

Mr. Chairman, in my view it would be helpful if we communicated 

better among ourselves. A lot of times the left hand doesn’t know 

what the right hand is doing. A hearing is held over here in Commerce, another one’s held over here in Foreign Affairs and another 

one’s held over here in financial. All of this stuff needs to be coordinated, at least in my opinion. 

Thank you, Mr. Chairman. 

Mr. CARDIN. I think Mr. Bradley wanted to respond. 

Mr. BRADLEY. Thank you with your indulgence. As the more astute amongst you will have noticed, I am European and I was actually closely involved in the design of the European emissions trading system. And I wanted to pick up on a point that Mr. Hastings 

made, that there is a very similar dialogue going on in capitals 

around the world. 

I would include in that Beijing, to a certain extent Delhi. The 

countries are in fact saying to themselves, we get it; climate change 

is a really big deal. China’s national climate change program goes 

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mate change. They say, we get it. We have to do something. We’re 

a really big emitter. It can’t be done without us. We have to still 

combine that with other concerns we have: economic development, 

energy security and things like that. But how can we move without 

the United States? 

So this comes to your second point, Mr. Hastings, about how we 

can move forward urgently—because you’re right; international 

agreements themselves don’t move particularly fast. But I would 

argue that while an international agreement is important in an ongoing confidence building, it’s not the thing that will trigger action. 

The thing that will trigger action, the thing that can be done here 

that will be far more important than any other single activity undertaken on climate change in the world will be to implement and 

give a clear signal about the implementation of U.S. climate policy. 

The European Union has spent the last decade—you refer to the 

divisions. Those divisions are rooted in in a reluctance to move too 

far ahead without the United States. The Europeans have actually 

put a lot on the line by saying we’ll do—we’ll go for 20 percent 

below 1990 levels by the year 2020 in terms in greenhouse gas 

emissions, regardless of what everybody else does. But they’ve actually gone out and said if other major emitters play then we can 

maybe get that down to 30 percent. 

The Europeans are not the only ones but they’re perhaps the 

ones that have gone out most transparently in making that case. 

The U.S. has it in its power not only to take action on American 

emissions but to trigger action amongst others. 

Mr. CARDIN. Thank you. Senator Udall. 

HON. TOM UDALL, COMMISSIONER, COMMISSION ON 

SECURITY AND COOPERATION IN EUROPE 

Mr. UDALL. Thank you very much too both chairmen for doing 

this hearing, and thank you for the witnesses for being here today. 

I’m of the belief that there will be a long-term competitive advantage for those who embrace green technology and infrastructure in 

a world moving towards a low carbon economy. Mr. Bradley, it 

really goes to the heart of what you were talking about there. I 

mean, we’re in this situation where we say, let’s not move forward 

unless we have the rest of the world—or many seem to be saying 

that. And if we don’t move forward, the rest of the world won’t engage and won’t continue to push down the road of a low carbon future. 

I would ask the panelists, how do you suggest we promote green 

technology and infrastructure without saddling companies with additional burdens and distorting global competitiveness? Go ahead. 

Mr. BRADLEY. Thank you. I very much agree with the premise 

of the question you’re articulating there. The World Resources Institute, incidentally, together with several partner NGOs and 27 

major U.S. corporations, in the form of the U.S. Climate Action 

Partnership, has come out very strongly in a unified voice over the 

last two years in making the case for the United States moving forward with clear policy. 

The economic advantage that American corporations are seeing 

in that is that if you’re playing in the power sector or in heavy industry, the one thing you don’t want is uncertainty. They get it 


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that climate change is going to be a problem. They get it that sooner or later, public policy is going to have to respond to that problem. Better that you know that sooner before you start building 

your power plants and that you know what that’s going to be and 

that you have some clear forward signal that allows you to adapt 

not only your investment choices today but your research and development and the business choices that you make looking into the 

future. So while we can get lost in the weeds, That’s a very strong 

early signal. 

Mr. UDALL. What you’re talking about there is really a price signal in the market, isn’t it? Having some kind of consistent strong 

price signal to move us in a new direction in terms of green technology and infrastructure and that kind of thing? 

Mr. BRADLEY. Absolutely. If you’re managing a business unit and 

you want to go to your executive board and ask for capital this 

year, they’re going to ask how you hedged against all of the risks 

that they see against both the reality of climate change and the reality of the potential policy coming down the pipe. The sooner you 

can have a price that you can start incorporating into the forward 

planning on that, the sooner you’re able to make smart decisions 

that help your growth and your employment in the long run. 

Mr. UDALL. That’s one of the first things we need to be doing, 

isn’t it? It’s to put that price signal out there, to get it in place, 

and then that will start driving where we want to go. 

Mr. BRADLEY. That’s absolutely correct. There are a lot of other 

very exciting things going on at the moment—certainly spending 

through some of the stimulus and recovery measures in new technologies. But without a long-term signal that allows them to say, 

okay, not only do I develop this technology but there is a market 

for it, the impact of those things is going to be limited. 

Mr. UDALL. Current price signals right now aren’t doing the job, 

are they? I mean, when we have the drop in oil and gas prices to 

where they are today, that’s not sending a price signal to move us 

in a low-carbon direction, is it? 

Mr. BRADLEY. It’s not providing the consistent enough signal. 

We’ve certainly seen as oil prices went up over the last year how 

the market can respond to those things. People were buying different vehicles. People were making different investment choices. 

But of course, then demand goes down. The oil price drops. Instead 

of maintaining a longer-term signal that can then help consistent 

investment, we’re subject to the vagaries of what happens in the 

oil market. Certainly a more active price signal would allow us to 

take control of our destiny a little bit more. 

I would note that, again, this isn’t the only country where this 

discussion is taking place. In China, India, not to mention Europe, 

other countries are also saying, hey, wow, if we start moving early 

on this, we’ll be the ones who are leading this green technology revolution. The Chinese are already making a third of the world’s 

solar panels. And the Indians have some of the world’s leading 

wind energy companies. This is not a static target. This is something that I would say is very much an opportunity that others are 

starting to seize. 

Mr. MORGENSTERN. If I could add perhaps one point of emphasis, 

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nologies, most of the legislation that’s been introduced has a significant auctioning component for the allowances. And that generates a significant revenue stream for the federal government, 

which in most of the proposed bills is channeled to some extent to 

new technologies. This provides an additional mechanism whereby 

one can aid and facilitate development and deployment of new 

technologies. 

Mr. UDALL. Richard, would you comment on the idea of having 

a mandate in terms of renewable energy for electric power companies? I mean the president has put out a proposal for 25 percent 

by 2025. Without picking technologies, you give a goal and you give 

a mandate and you say that’s the direction we want to move in. 

Do you have any thoughts on whether that is a helpful way to go? 

Mr. MORGENSTERN. The question you’re asking is whether the 

focus on on renewables, in general—is the preferred way to go. I 

guess my own sense is that we should probably have a little more 

of a market focus by setting up a carbon pricing mechanism, which 

allows all technologies to compete. Renewables will do very well. 

But a renewable standard tends to distinguish, focus on only those. 

If we’re seeking to get the most bang for the buck, the carbon price 

mechanism may be the most effective way. 

Mr. UDALL. So you’d rather see a cap-and-trade than a renewable 

standard? That first? 

Mr. Morgenstern. If it was a choice, I would certainly rather see 

that. I guess the question is whether one could augment the other. 

And that gets into some complexities. But I would probably favor 

the strong cap-and-trade. 

Mr. UDALL. Thank you, Chairman. 

Mr. CARDIN. Mr. Houser, did you have a point? 

Mr. HOUSER. I just wanted to add one comment. I mean, we’re 

having this conversation in the midst of the worst economic crisis 

in a generation. That’s certainly coloring the politics of this. And 

as Senator Udall pointed out, people are looking to investment in 

green technology as a way to help us emerge from this crisis, which 

is promising. It’s important to think about the timelines. 

We’re having the debate about a cap-and-trade program today in 

the midst of a crisis. The costs wouldn’t hit the economy until 2012. 

That’s when it would take effect at the earliest, by which time we 

all hope that we’re on a more stable economic footing than we are 

today. But as Rob said, setting that price signal now, even if the 

costs aren’t going to take effect in 2012, is critical in giving companies certainty. I mean, part of the reason that investment has dried 

up is about uncertainty about the health of the financial system. 

For energy-sector companies, that’s coupled with uncertainty about 

the outcome of environmental regulation, which they know is coming but don’t know what it looks like. Clarifying that uncertainty 

now will help unlock investment in the energy system, which will 

have a broader economic effect. 

Now, until that price for carbon takes effect, there’s things we 

can do to help prime the pump and ensure that the cost of carbon, 

once it’s imposed, has as little impact on the economy as possible. 

We did a decent amount of that with the stimulus bill in investing 

in emerging technologies and alleviating infrastructure bottlenecks. 

The benefits of those programs, if properly implemented, is that 


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not only will they reduce the costs of a cap-and-trade program but 

the energy savings that will come off of them will help offset the 

budgetary impact of the stimulus efforts we’re having now. 

In the report that we did a couple months ago, we estimated that 

of about the dozen green stimulus programs that were being considered, on average for every billion dollars of government investment, $450 million per year in energy cost savings were returned 

to either the federal government or the economy as a whole, which 

helps smooth the transition into both a cap-and-trade system and 

eases the budgetary impacts. 

Mr. CARDIN. Senator Whitehouse. 

HON. SHELDON WHITEHOUSE, COMMISSIONER, COMMISSION 

ON SECURITY AND COOPERATION IN EUROPE 

Mr. WHITEHOUSE. Thank you, Mr. Chairman. Thank you to the 

witnesses for being here. We describe the problem here as a climate change problem. We describe it as a global warming problem. 

We very rarely describe it as an ocean chemistry problem. The fundamental problem is carbon loading of the atmosphere that creates 

global warming; it creates climate change. It also creates chemical 

changes in the ocean that can lead to acidification of the ocean that 

could dramatically change the ecosystem of the ocean. The little 

krill and algae and things, the coral creatures that build nurseries 

in the tropical waters, all of those things are very much at risk. 

There is evidence yesterday out of, I believe, New Zealand about 

a 30-percent reduction in the shells of these microscopic creatures. 

We haven’t seen these kinds of changes in the oceans in certainly 

living memory. It could well be that ocean acidification, the wipeout of the bottom of the food chain as a result of the inability of 

these small creatures to make the shells that are their structural 

frameworks and the consequent collapse of the food chain that depends on that base could be the worst outcome for humankind of 

our carbon loading. It could be more significant, ultimately, than 

climate change or global warming. 

There seems to be very little discussion about that and I’m interested in to what extent, as you look at this as an international 

issue, this issue is cropping up in other countries in their discussions? It seems to be the forgotten issue in this case. In fact, the 

very name that we give to the problem overlooks this dimension of 

it. Mr. Bradley. 

Mr. BRADLEY. It’s a very important point. The short answer to 

the question that you ended with is that largely those two areas 

are conflated. The countries are focused on the question of bringing 

carbon emissions down, thus reducing the carbon loading in the atmosphere. 

It certainly lends color to the discussion that still periodically 

takes place in climate circles: To what extent are we trying to 

adapt to change as opposed to cutting the emissions off at source? 

Certainly this lends color to the view that our ability to adapt to 

those kinds of changes is likely to be pretty small, not least of 

course because the oceans that are getting hit by increased acidification and by warming at the surface layers are simultaneously 

being hit by all kinds of other human activity, whether it’s nutrient 


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runoff from our farms, whether it’s over-fishing, which has devastated most of the world’s fish stocks. 

Certainly, we’re seeing a combination of warmer waters and 

higher acidity levels dealing death blows to a lot of coral reefs. I’m 

a diver myself. I see a lot of the impact there in ways that is extremely sad to see, but as you say has much broader repercussions. 

That lends very much color to the idea that, yes, we need to help 

poor and vulnerable people adapt where we can. But we should not 

kid ourselves that we can adapt our way out of this problem. Essentially, dealing with it at source through urgently moving forward on mitigation is going to be needed. 

Mr. WHITEHOUSE. Mr. Morgenstern. 

Mr. MORGENSTERN. Yes, Senator. I guess I would just maybe reinforce your point. I should say I’m an economist, not a natural scientist, so take what I say with a grain of salt perhaps. The impact 

on oceans is a very important issue. I would note that the IPCC, 

the Intergovernmental Panel on Climate Change, which has been 

examining and kind of summarizing the literature in a number of 

different areas, has studied the potential and the already-observed 

impacts—of climate change. And they have identified ocean impacts as quite significant. 

They have also looked at other areas of great concern. I would 

emphasize, for example, terrestrial ecosystems. And there is a concern that in various parts of the United States, we have 

vulnerabilities, for example, in mountain regions, that are quite 

significant. We could see a rather significant alteration of our ecosystems, which could impact, not necessarily the food chain but 

could impact life as we know it in the United States and around 

the world. 

They’ve also looked at sea-level rise, infrastructure impacts, agriculture impacts, health impacts and others. So I would just emphasize that there’s a whole range of concerns out there that are, as 

you highlight, extremely important. 

Mr. WHITEHOUSE. The other question that I wanted to get into 

with all of you, again from an international perspective—we have 

not had very robust experience yet with the management of a capand-trade system. There are issues about regulation. There are 

issues about market manipulation. There are issues about licensing. Who should be allowed to participate? There are issues about 

the verifiability of offsets and whether they’re actually marginal 

offsets at all or just paying people to do what they’d do anyway. 

Around the world, are there good and more developed or robust 

models for solving those market management problems? I’m sold on 

the notion that a cap-and-trade system is necessary. The market 

aspect of it is efficient. But we’ve seen even developed and regulated aspects of our economy go completely into the trash in the 

last couple of months, largely because of failures of regulation, 

blind eyes—whether deliberate or not—to exotic and bizarre products that nobody wanted to take a look at. Are there models out 

there that can give assurance that we can keep a cap-and-trade 

model running cleanly from around the rest of the world? 

Mr. Morgenstern. 

Mr. MORGENSTERN. Thank you. I was trying to think of examples 

in the environmental field which even come close to paralleling the 


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financial disasters and I can’t think of any, and I’ve been involved 

in this field for some time. And I look, for example, at the Clean 

Air Act, where we’ve used a cap-and-trade system in this country 

very successfully to control SO2 emissions and partially NOΧ emissions. And the EPA reports a compliance rate of near 100 percent 

on their SO2 program. 

Mr. WHITEHOUSE. Although to jump in on you there, my understanding is that that program deals specifically with a narrow 

group of emitters and doesn’t allow offsets. It gives you credit for 

reducing and you buy back and forth. But you don’t go to the forest 

in Brazil and claim that you’ve saved on sulfur dioxide emissions 

by going someplace else. 

Mr. MORGENSTERN. Now, that is absolutely correct, Senator. And 

that I was just trying to start off by saying that our experience 

with environmental regulation, using cap and trade, the notion of 

it, the principle of it, I think, has been well established. And as you 

suggest, we probably all agree on that. 

If you move to looking at non-traditional sources of emissions 

and you move outside of highly regulated areas, there is the potential for greater problems. I would put these in a couple of categories. First of all, let’s distinguish domestic from international. 

The consideration is that the United States might start off with its 

own system where we would have a lot more control over all the 

issues that are kind of implied by your question. That’s the first 

point to make. 

The second point to make is that we’re looking largely at an upstream system. You can think about how you would regulate greenhouse gases. And one extreme would be all the way upstream when 

the carbon essentially emerges into commerce. The other would be 

a kind of downstream system. The Europeans, in fact, have chosen 

somewhat more of a downstream system than the United States 

has, if you look, at least as embodied in the proposals that have 

been advanced. 

As you think about an upstream system, you’re more likely to be 

able to have better information, better controls, better—kind of two 

sets of books really, which kind of enable you to have a better set 

of accounting of what’s going on. So I would say that the upstream 

system has a lot to recommend it in terms of the credibility and 

the avoidance of problems. 

Now, when you move into offsets, you do get into a softer area. 

There’s no question about that. That the notion would be that here 

at home we would set up a system. It might well be more stringent 

than the global system, than the international system that is set 

up under Kyoto, to try to track and regulate and monitor the use 

of these offsets. That there are issues there. 

But I guess perhaps the premise of your question was that this 

is somehow like the financial system. While obviously, the future 

is uncertain, I would say that we have enough experience to give 

us reasonable confidence that we’re not going down that road. But 

let me turn to my colleagues. 

Mr. BRADLEY. Clearly this is a bad time to be sort of discussing 

a policy that puts its faith on the financial markets. And the irony 

is lost on nobody. But, first of all, Dick is right. The kind of markets that are being proposed here are linked back to, particularly 


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energy, commodity markets that allow some sort of cross-checking. 

We’re not quite disappearing into the world of ultra-abstract, highfalutin derivatives markets, although of course derivatives markets 

can spring up around anything. Broader questions of financial regulation are ones that are going to apply to any market. And maybe 

the flipside of the financial crisis that we’re in at the moment is 

that this is a great time to be thinking about financial regulation 

and how we structure it better in general. And perhaps then an incipient carbon market can start off on the right foot. 

In addition to the Clean Air Act that Dick already talked us 

through, I would say that the experience in the EU emissions trading system to date is relatively robust on that score. Certainly the 

system has had problems, but those have actually been largely 

around the politics of allocating allowances in the first place in 

ways that simply don’t have an analogue in the United States; essentially, Brussels doesn’t have anything like the power relative to 

London and Paris that Washington has within the United States 

as a solid nation-state. 

Countries essentially got a license to allocate to their own industries and sort of competed to be overgenerous. That’s an approach, 

incidentally, that the Europeans have since corrected. But certainly 

I don’t think that any of the problems that have arisen so far have 

been of a nature that questions the sort of financial regulation 

around those areas, which probably makes it one of the few markets that hasn’t run into those problems. 

Financial regulation is going to be clearly very important, but I 

don’t think that we should necessarily think of a cap-and-trade system as particularly vulnerable in that area. But it is something 

that, as we reexamine the whole question of how the financial sector is regulated, is a new ingredient that needs to be there in our 

minds. 

Mr. HOUSER. I guess I would think about that question in three 

ways: We’re concerned with possible systemic risk of financial market regulation; we’re worried about price volatility; and then we’re 

worried about the verifiability of offsets. So, from a systemic-risk 

standpoint, the size of the carbon markets that we’re thinking 

about here is unlikely to be at a point where the type of very real 

systemic risk we’re facing from things like collateralized debt obligations or credit default swaps is creating. If we’re thinking about a 100-billion to $200-billion carbon market, even if you had derivative products arise around that that 

were leveraged five times you’re not going to get to the systemic 

risk point. You compare that to a corporate bond market of $5 trillion that has derivatives on it of $60 trillion or a Forex market that 

has derivatives of hundreds of trillions of dollars riding on it. And 

those are the systemic risk challenges we’re facing. 

But a carbon market will be a commodity market. The good news 

of that is that someone has to take delivery of the product at the 

end of the day. There’s a tangible asset that guards against extraordinary bubbles. But it also means that prices will be volatile 

like in commodity markets, like in oil and gas markets. 

I would say the difference of a carbon market, relative to our experience with the SO2 program is that with SO2 we had fairly clear 

backstop technology and a flue gas desulphurization system. We 


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don’t as clearly have a backstop technology on carbon. That’s where 

the price uncertainty comes from, is that we’re not entirely clear 

on what the technology solution will be. The way we address that 

is through flexibility for firms, banking and borrowing allowances, 

giving people flexibility in the timeframe that they meet compliance costs. 

People have talked about the possibilities of price collars. There 

could potentially be value for that if the ceiling was set high 

enough to only address those extraordinary price spikes that might 

occur. On offsets, there are challenges facing domestic offsets and 

challenges facing international offsets. On the domestic side, offsets 

are likely to come from places that aren’t regulated, from non-regulated entities, which means that that additionality test that you 

talked about, which is so troublesome for international offsets, 

won’t really play a role as much because those non-regulated sectors will have no compliance obligation. 

On the international side, we have a lot of lessons to learn from 

the clean development mechanism under Kyoto and how exactly to 

measure what’s additional. That’s going to be a major challenge in 

how we design policy here and how we design policy internationally. The important thing to keep in mind is that the use of offsets 

is going to play a valuable role in keeping overall costs down. We’re 

going to have to balance the risk that those offsets are valid with 

the benefit it provides as a cost-containment mechanism. 

Mr. CARDIN. One of the most difficult public-relations problems 

we have in the United States in passing a strong bill—and I am 

for unilateral action, I’m for us moving forward and becoming a 

leader, it’s going to be good for our economy. Our economy will 

grow as a result of capping carbon emissions. But the public is saying, why would the United States move forward unless simultaneously there was action from China and India and other emitters 

of major greenhouse gases—and that the United States will put our 

industries at a disadvantage. 

We’ve talked about that and your testimonies have dealt with it. 

And you have pointed out the difficulties of enforcing this through 

border adjustments, if we were trying to adjust for the carbon content. And you raise a very valid point that the specific product coming in from a country might be low-carbon content compared to the 

total emissions of a particular country. 

If we’re successful in Copenhagen and there is a regime that is 

developed as to what is expected from nations like the United 

States and developed nations, what is expected from developing 

countries, and then if we can adjust our international trade commitments under WTO to reflect that type of commitment then it 

seems to me that we have a regime that could enforce the reasonable expectations of the international community, which could be 

enforced through the WTO for those countries that are concerned 

that they might be disadvantaging their own industries by allowing 

products from other countries to come in that are not subject to the 

international regimes on carbon reductions. 

That seems to me to be a reasonable path. And when I ask my 

European friends about it, they seemed like, gee, that’s a novel approach; why hasn’t someone suggested that the WTO be amended 

as we move forward with a Copenhagen-type of an agreement. I’m 


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wondering whether in your circles these discussions have any traction, whether there could be an expectation of a change in the 

WTO as it relates to environmental issues if there’s an international consensus reached in Copenhagen. 

Mr. HOUSER. Chairman, I would absolutely agree and my colleague at the Peterson Institute, Gary Hufbauer, released a book 

last week about how to make modifications to the WTO to address 

the climate-change reality that we’re going to be facing. I think 

that those changes would come in two forms. The first is the potential role of trade sanctions as a way to enforce an international 

agreement. So the countries that are party to a Copenhagen protocol, or whatever the emerging climate agreement that we have, 

agree that if countries fail to comply that trade sanctions can be 

used as an enforcement mechanism. I think that there’s promise 

there. 

The other amendment that would need to be made is a multilateral agreement on allowing within a global framework individual 

countries to adjust carbon prices at the border to allow them to 

take aggressive cuts. For Europe and the U.S. to be able to take 

the type of aggressive emission-reductions target that we’re talking 

about, ultimately, we’re going to need to be able to ensure that our 

carbon price is consistent at the border. 

The key is that you have to negotiate that multilaterally otherwise countries will have different opinions about what the criteria 

used should be. And if we have a unilateral approach that gets settled at a WTO dispute panel without a code beforehand where we 

have multilateral agreement then we risk undermining the credibility of both the WTO and creating extraordinary tensions for climate negotiations. 

Mr. CARDIN. I agree with your point there. That’s going to be the 

challenge. But I just hope we put some energy into that in addition 

to just trying to deal with Copenhagen. 

Mr. Morgenstern, I appreciated your comments on that and I 

also didn’t quite understand your point about import-export differential that you said in your original testimony. Maybe you can 

help clarify that for me. It seems to me adjusting for imports could 

have the same WTO problem as making a border adjustment for 

exports. 

Mr. MORGENSTERN. My understanding, Mr. Chairman, is the 

prospect of dealing with an import adjustment, for example, as embodied in the various legislative proposals that have been advanced, has a pretty good chance, probably, to that being accepted 

by the WTO whereas an export rebate, which is what it would have 

to be in order to allow your domestic producers to compete overseas, would face more difficulties internationally. That there is a 

difference within the WTO lingo there. 

But the reason why I actually asked to comment on this was that 

your question, if I understood it, was really about the public relations aspect. I presume that where you were going with this, in 

part, was to suggest that if we act unilaterally and we harm our 

domestic industry somehow, if we cause further job losses, if we do 

things that are perceived as negative, there’s going to be a public 

outcry. 


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Mr. CARDIN. I’m not sure we could pass the bill with the public 

perception that we’re putting U.S. industries at a disadvantage. I 

personally believe the U.S. industries will compete more effectively 

if we become a leader on greenhouse gas emissions. But the political reality of trying to get a bill passed in Congress is that this 

will disadvantage U.S. industries if we act and China does not. 

Mr. MORGENSTERN. I appreciate that point. And I guess what I 

was going to say was that Trevor has spoken about the ways to 

modify the WTO, which sound very promising and I want to support those. But I want to come back to a point that I tried to make 

earlier, which is that the use of an updating free allocation system 

for these impacted industries, the use of a mechanism which, essentially, provides a cushion to domestic industries which are facing this increased competition is a way of addressing the problem 

in the near term, at least as a transitional measure. It’s a way of 

providing protection, if you will, of some sort without labeling it 

protectionism in WTO terminology for our domestic industries. 

That this approach, my own observation, has not gotten adequately debated and I don’t think that the public fully understands 

that this is a way of helping domestic industry and, in fact, offsetting—even offsetting by 100 percent—the burdens that would be 

imposed by this system. 

Mr. CARDIN. Of course the cap-and-trade bill that was considered 

last year in the Senate had significant transitional assistance for 

carbon-intense industries. There was, in reality, a rebate, whether 

it was labeled that or not, they did get credits and those credits 

were worth money and they got help, I think Mr. Bradley wanted 

to comment first and I have a follow-up question on whether that 

should be done or not. 

Mr. BRADLEY. Sure, thank you. I won’t add to Trevor and Dick’s 

comments on the viability of the WTO approach. I would endorse 

their comments. 

I wanted to make a couple of notes to that. One is that the tone 

in which this question is often posed certainly in some of the debates in Washington—is, how do we coerce countries like China to 

the negotiating table? Can we use trade measures to do that? 

I’ve tried to make the case in my testimony that the need for coercion is not obvious. In fact, Trevor’s made the point that a trade 

measure may not be a very good—an effective measure—to leverage that participation, and I would also make the case that it’s 

probably not necessary. The way that you have framed this, in a 

way, of taking trade measures forward in as multilateral a way as 

possible, is very promising and is a welcome variant on the type 

of discussion that we’ve been having. 

Another area is also to focus on what might be done in the WTO 

in a more positive sense around trying to move some of these technologies forward. Periodically, we revisit this question of liberalizing the trade in the environmental goods and services. A lot of 

countries still maintain fairly high tariff and non-tariff barriers to 

technologies that we actually want to see widely deployed in the 

world. Disentangling that from a broader trade agenda is not easy; 

a lot of developing countries see that discussion largely as a selfserving one from the rich economies. And frankly, it’s been handled 

fairly clumsily in the past. It’s not that long since the EU and the 


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22 

U.S. both brought forward a proposal, which didn’t manage to get 

a whole lot of buy-in from developing countries. 

But if we’re serious about trying to move technologies on a global 

scale that are going to help us deal with this problem, that is something positive and forward-looking that can be done within the 

trade regime that goes beyond and is complementary to the, perhaps, more defensive measures that help us with these transitional 

arrangements around energy-intensive industries. 

Mr. CARDIN. Thank you. Let me just bring up an issue, that 

we’re trying to get a greater consensus in Congress to pass a strong 

bill and the suggestion has been made that gives me heartache, but 

let me just bring it out. That is that the concerns expressed by 

many of the colleagues on the other side of the aisle is that there’s 

too much money in a cap-and-trade bill and that it establishes— 

it’s really a tax and it establishes all these new programs. 

Why don’t we consider putting in the cap—and to the extent that 

there’s revenues generated, that they be rebated to the consumers 

of America or to the businesses of America that are impacted, but 

without the revenue flow to government to deal with investment 

issues, whether they are in developing a reasonable flow of affordable alternative fuels or renewable fuels, whether it’s in public 

transportation, whether it’s in our international funds that are created to help Third World countries or developing countries, that 

that be left to the normal budget process rather than going through 

this extraordinary revenue flow created through the cap-and-trade 

system. I welcome your thoughts on that approach as a way of trying to get a broader consensus in Congress to move forward on a 

cap on our carbon emissions. 

Mr. HOUSER. The first comment I would make is that a cap-andtrade bill will have—the impacts will not be equitable, either by region or by income group, and there are redistribution impacts that 

will have to be addressed. Now, that can be addressed by directly 

rebating the emission allowances for free to affected industries and 

consumers or by moving that revenue through the budgetary process. 

But there’s two issues, that will critical to maintain—not just to 

generate, but maintain—public support for a cap-and-trade bill 

that will deal with allowance revenue. The first is what Dick talked 

about—providing some cost offsets to energy-intensive industry to 

help them invest in new technologies to reduce emissions so that 

they’re competing on a level playing field. That’s a critical component. And that to be effective, we’ll have to be addressing it that 

way—that unilateral trade measures won’t be effective in protecting those industries. 

The second is consumers in coal-rich parts of the country that 

will see a higher increase in electricity prices than consumers in 

less coal-rich parts of the country. To help those utilities make the 

transition and offset the impacts of those consumers that’s going to 

be important. Taking the histories of trade liberalization, coming 

from a trade and finance think tank, to sustain political support for 

these types of policies that have distributive impacts, like climate 

change and trade do, it’s important to be serious about those efforts. Otherwise, you risk undermining support for a bill a couple 

years down the road. 


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Mr. MORGENSTERN. I would just add one or two points. I agree 

with Trevor’s comments here. There are some, clearly, particularly 

adversely affected segments of society. You probably have to deal 

with those as we’ve been discussing and as Trevor’s indicated. But 

it’s also true, as you indicated, that there’s a lot of money that’s 

generated by either a cap-and-trade or a carbon tax. Any of these 

is going to generate a lot of money. 

That it’s really up to Congress to decide how they want to allocate those dollars. Certainly, one can think of a long list of activities that one can choose to support, either in the normal federal 

budget process or, in some way, outside of it. My answer is—it 

sounds like a bit of a cop-out—but maybe that’s why they pay the 

big bucks, okay? Essentially, it’s a political decision and it really 

there are some clear questions of equity, okay. One can make a 

case that helping technologies, advancing new technologies that are 

essential for the future are critical. 

Mr. CARDIN. I agree with that, and I guess one of my concerns 

is with how we do this; to me is critically important that it’s not 

just capping the carbon emissions, but if the people of my state 

don’t have better public transportation, it’s going to be an extraordinarily difficult change in lifestyle that they shouldn’t have to suffer. We should be investing in public transportation. When else are 

we going to get the revenues to really build the types of transit systems that we need in this nation if we don’t use the revenue flow 

from a cap-and-trade system? I’m sure Senator Whitehouse in 

Rhode Island has a different priority that he thinks is important 

for his constituents, and I agree that we have to make those decisions—but I think, though, it would be a mistake if we just ignore 

the need for public investment. 

Then our international commitments—there’s going to be serious 

issues that the international community needs to address with developing countries, as a matter of fairness and to get to the goals 

that we need to get to. We’re going to have to be prepared to make 

those investments. The United States is going to have to put up the 

money to do that. To try to rely on the normal budget process for 

that, it’s going to be difficult to see us meet those goals. 

Mr. MORGENSTERN. The good news, Senator, is that you do have 

a revenue stream here. You do have a fairly reliable revenue 

stream that can support the types of initiatives that you’re talking 

about. 

Mr. CARDIN. That’s the point. The point is, do we give up that 

revenue stream? I think that was the compromise that was suggested, that we give up that revenue stream. 

Mr. BRADLEY. Picking up on that, I would agree with what 

Trevor and Dick have said and I’m not even an American voter, so 

I’m not going to take a stab at what is the appropriate political, 

sort of, distribution between the various, important priorities— 

dealing with consumers that are impacted by energy prices, dealing 

with businesses that have competitiveness concerns. I do want to 

speak briefly to this question of some of the international priorities, 

though, that will be funded. 

I tried to make the case in my testimony that there is a significant national interest for the United States in seeing a successful 

international climate deal. It helps bind international partners into 


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delivering on the things that they said they were going to deliver. 

In the long run, it helps us deal with a critically important problem 

that affects all of us. It’s not an exaggeration to say that if there 

is no finance available for some issues within the international regime, there will be no climate agreement. 

It’s important that we shouldn’t have any illusions about that. 

It’s true that developing countries, as part of the inevitable negotiating process, vastly overstate some of the, sort of, bottom lines 

that they say they have in terms of what they would need to see 

on the table. But it’s important to recognize—and it has been recognized, as bills have been formulated in both houses during the 

last couple of years—that there is a strong case for financing, in 

particular, I would pick out adaptation, where, in part because of 

the lifestyles that we’ve led and the prosperity that we enjoy, people around the world are going to be suffering significant impacts, 

in some cases—and I regularly meet with representatives of some 

of the small island states—these are existential threats—their 

countries will disappear. 

But even on less dramatic scales, there are impacts around the 

world. I think there’s a strong sense amongst many U.S. constituencies—and in particular, I point to the religious community and 

the way that this unfolded over the last couple of years—that, really want to take up that ethical challenge that we all face to try and 

deal with some of those questions. We all have an interest in seeing markets for clean technology expand, and if we can be collaborating internationally around technology and helping co-finance 

some of those things, that’s going to be really important to helping 

that process move forward. It is important that that should be 

raised. 

Now, does allowance revenue provide a sort of politics-free or politics-light way of securing that revenue? That seems to be what we 

were, in many cases, hoping in the last round of bills—I wonder 

whether that dream is kind of evaporating but whether we get 

around the politics or not, that argument needs to be won. And I 

would argue that just as we have, from a U.S. perspective, legitimate grounds to try and put an international deal together that 

tries to hold our international partners to some standard of, 

verifying and reporting that they’re really making progress, it may 

not be a bad idea to have a similar structure in which commitments that the U.S. takes up to fund things, whether adaptation 

or forest protection or technology, also be subject to that 

verification. 

When you’re in an appropriations discussion, being able to say 

this isn’t something that we’re arbitrarily throwing on the table 

this year, this is part of an overall international engagement that 

we’ve got, we know what we’re getting in exchange for it; we’re getting the viability of this deal going onwards. That seems to me 

something that can help us construct what ultimately an international agreement is all about, which is a greater level of trust 

that enables countries to move forward more effectively together. 

Mr. CARDIN. Senator Whitehouse. 

Mr. WHITEHOUSE. I wanted to follow up on the chairman’s discussion about the local impacts and how you address them. We 

touched on, for instance, the states where much of the electricity 


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is generated by coal. It’s obvious that a great deal of the revenue 

generated by a cap-and-trade program needs to be returned to the 

people who will be paying for it—to families. If you do it across the 

board, as many have suggested, through reductions in the withholding tax, through reductions in tax rates, through increases in 

EITC and things like that, you spread it evenly across the country 

and you fail at the goal of making region-specific adjustments. 

If you go specifically to the cost centers in the region, like the 

utilities, and you rebate back to them, you risk either mitigating 

or even completely canceling the price signal that it was the purpose of the legislation to achieve. If you do it state-by-state and 

say, well, we’re going to give Ohio, West Virginia a slug of money 

to compensate for this and they can figure out how they make that 

distribution, you get into the problem of the state government becoming an agency for itself and you see what we saw, for instance, 

with the tobacco settlement, in which every dollar just disappeared 

into various prerogatives and it did not get back to solving the 

smoking problem that it was designed to address. 

I don’t see a ready way to transfer revenues back to regular families on a regionally defined basis that doesn’t suffer from one infirmity or another. Am I missing a silver bullet that solves this problem? 

Mr. MORGENSTERN. I’m not sure I’d call it a silver bullet, but I 

guess I would say that assuring that the program that’s put in 

place is gradual in nature and doesn’t bring about very abrupt 

changes—and Trevor mentioned the idea of a price collar or some 

other cost-containment mechanism. This is a way of preventing 

price shocks on the upside and, by the way, on the downside, it 

would limit declines that could be a problem for new technology developers who are concerned that they—if they push forward a new 

product, the market collapses and somehow, they can’t sell their 

product. It actually is helpful on both sides. 

But something of that nature could prevent some of the extreme 

price shocks, but the fact that there may be some—not may be— 

that there will be some redistributive effect in ways that cannot be 

readily compensated, that’s, to some extent, unavoidable, but if you 

can keep it small, that’s probably the best hope. 

Mr. WHITEHOUSE. How about in the area of conservation? It 

would seem to go back to the coal-fired electricity example, that if 

we wished to focus resources in areas that were suffering particularly because of their dependence on this as a result of the increased cost, that we could increase conservation in those areas 

and, although the ultimate consumer’s per-kilowatt-hour rate 

might be higher, if their ultimate electric bill is lower because they 

burn less of it because we’ve funded conservation very aggressively 

in those areas, we may have a situation in which the price signal 

has not been reduced or mitigated or canceled and yet, they’re not 

harmed in the family pocketbook when they have that long, grim 

night every month at the kitchen table trying to make sure that 

the bills and the checkbook meet. 

Mr. HOUSER. I work at the Institute for International Economics 

so that I don’t have to answer sticky questions like this but I guess 

one thing that I could add is, you’re right in that the goal is not 

just to offset the cost of electricity increases to coal-dependent parts 


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of the country, it’s to help them transition to less coal-dependent 

sources of energy or less energy consumption. And there’s a couple 

of ways to do that: If allocations are provided for free to utilities 

that does provide the potential for revenue. The key is in ensuring 

that if those allowance are provided for me, that that money transitions into new investment and is not passed through into price increases for consumers. 

If utilities are going to finance their transition to a low-carbon 

economy on the backs of consumer price increases, then that’s 

where the assistance needs to be transitioned to offset that price 

increase as they make that technology investment. Ultimately, 

you’re right: However the assistance is targeted, the price signal 

needs to be there and the incentives need to be right for moving 

towards lower-carbon forms of energy. 

Mr. CARDIN. Senator Whitehouse has really summarized the dilemma we have rather effectively. It’s interesting, if you look at the 

Lieberman-Warner bill from last year, it was developed in a very 

political environment. Senator Boxer was very clear: She wanted to 

get the support to get the bill out of committee and, hopefully, moving on the floor and she ended up with 54 senators prepared to 

move forward on a pretty controversial cap-and-trade bill. I would 

suggest she got it right last year. 

We were pretty close to the balance that Senator Whitehouse 

was talking about of making sure that we deal with the adverse 

impacts that we didn’t want to see happen in our community, but 

still allowing the market forces to operate in order to make our 

economy function the best way with low-carbon emission. I’m not 

saying we can’t improve last year’s bill; we can improve last year’s 

bill and it will be different as it moves through this Congress, but 

I do think a lot of these are political judgments that we have to 

make in order to try to balance the competing interests. 

Let me thank our witnesses for their testimony. What I intend 

to do is to take this testimony and use it in developing a position 

for the Helsinki Commission that we will move forward in Vilnius 

when we have our parliamentary assembly meetings this summer, 

hopefully working with our administration as to the position that 

we will be taking moving towards Copenhagen so that the United 

States plays a very constructive role in the Copenhagen meetings. 

I know that the committees of Congress intend to be very actively 

involved in work leading up to Copenhagen, and I would like to see 

the Helsinki Commission be part of that effort, recognizing that 

we’re all going to have to give a little bit to get us to an effective 

international agreement. 

I have very strong views about some of the international enforcement issues under WTO and I’m always concerned that our European partners are too timid in trying to use WTO to advance legitimate international objectives. Hopefully, we’ll be able to work out 

those issues as we move forward. The bottom line is that the 

United States cannot sit on the sidelines—that we have to be the 

leader—and we have relinquished that role. I do thank our European friends because that they have done some really remarkable 

initiatives on dealing with carbon emissions. 

That will help us a great deal in reaching, I hope, a consensus 

in Copenhagen. Once again, let me thank our witnesses for their 


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27 

participation. It was extremely helpful and we particularly appreciate your frankness in the exchanges that took place with the 

members of the commission. We’ll stand adjourned. 

Æ 


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