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45–112—PDF 2008

S. HRG. 110–836

INTERNATIONAL ASPECTS OF A

CARBON CAP AND TRADE PROGRAM

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

FEBRUARY 14, 2008

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

JOHN E. SUNUNU, New Hampshire

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

C O N T E N T S

OPENING STATEMENTS

Page

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee

on Finance ............................................................................................................ 1

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 2

CONGRESSIONAL WITNESS

Specter, Hon. Arlen, a U.S. Senator from Pennsylvania ...................................... 3

WITNESSES

Haverkamp, Jennifer, senior counsel, Environmental Defense Fund, Washington, DC ............................................................................................................. 6

Breehey, Abraham, assistant director of government affairs, International

Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths, Forgers,

and Helpers, Fairfax, VA ..................................................................................... 8

Kristiansen, Kjell Olav, director, advisory services, Point Carbon North America, Washington, DC ............................................................................................ 10

Mirza, Ruksana, vice president, environmental and government affairs,

Holcim, Inc., Waltham, MA ................................................................................. 12

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

Breehey, Abraham:

Testimony .......................................................................................................... 8

Prepared statement with attachments ........................................................... 25

Grassley, Hon. Chuck:

Opening statement ........................................................................................... 2

Haverkamp, Jennifer:

Testimony .......................................................................................................... 6

Prepared statement with attachments ........................................................... 47

Kristiansen, Kjell Olav:

Testimony .......................................................................................................... 10

Prepared statement .......................................................................................... 75

Mirza, Ruksana:

Testimony .......................................................................................................... 12

Prepared statement .......................................................................................... 87

Responses to questions from committee members ......................................... 95

Roberts, Hon. Pat:

Prepared statement .......................................................................................... 103

Specter, Hon. Arlen:

Testimony .......................................................................................................... 3

Prepared statement .......................................................................................... 104

(III)

(1)

INTERNATIONAL ASPECTS OF A

CARBON CAP AND TRADE PROGRAM

THURSDAY, FEBRUARY 14, 2008

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 10:10 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee) presiding.

Present: Senators Bingaman, Salazar, and Grassley.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The hearing will come to order.

The conservationist, Aldo Leopold, author of ‘‘A Sand County Almanac,’’ said: ‘‘We shall never achieve harmony with land any more

than we shall achieve absolute justice or liberty. . . . The important

thing is not to achieve, but to strive.’’

We may not achieve the perfect response to climate change, but

we must strive to address those elements of climate change that

stem from human activity. I applaud those Senators, including

Senator Bingaman of this committee, and Senator Specter, who has

joined us today, who have striven to address this goal in their legislative proposals. I believe it is a moral imperative to deal with

climate change. We all have the basic duty to leave this world to

our children in better shape than we found it.

As we address climate change, we must also strive to do so in

harmony with economic growth. Establishing a cap on carbon emissions has the potential to affect the American economy. It could

raise costs, especially for energy-intensive industries like aluminum and cement. We must strive to minimize the competitive

disadvantage that these costs will place on America, and we can do

that by encouraging other countries to commit to their own carbon

reductions. In that way we can level the regulatory playing field,

and in that way we can reduce the incentive for American manufacturers to move their operations and jobs overseas.

Pending legislation attempts to safeguard American economic

competitiveness through measures taken at the border. For instance, proposals require importers to buy carbon allowances for

products imported from countries that have not made commitments

to reduce greenhouse gases. Our trading partners are watching

these proposals carefully. Our challenge is to craft border measures

in a manner that both meets our domestic priorities and respects

international trade rules.

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Likewise, we can preserve American economic competitiveness by

reducing compliance costs for Americans. As we design the American carbon market, we must provide opportunities for American

industries to buy carbon allowances wherever they are available,

not only in the United States.

At the end of the day, climate change is a global problem. It requires a global solution. The solution that we develop must also

provide incentives for emerging economies like China, India, Brazil,

and others to join our efforts. Their economies compete with ours,

and they cannot enjoy a free ride while we bear the cost.

I thank today’s witnesses for helping us to consider ways to address climate change through a carbon cap and trade program. I

hope that they will give us their ideas about how we can learn from

others’ experience to achieve the most efficient emissions reductions for our industries and encourage our trading partners to join

in our efforts.

Today’s hearing is the first of several that this committee will

hold on climate change. Today we will cover trade and international carbon markets. At future hearings we will address tax

issues related to the sale and allocation of carbon allowances. So

let us learn about the trade implications of the cap and trade system, and let us strive to achieve greater harmony with the land.

Let us seek ways to do so that also achieve harmony with a prosperous America.

Senator Grassley?

OPENING STATEMENT OF HON. CHUCK GRASSLEY,

A U.S. SENATOR FROM IOWA

Senator GRASSLEY. There is a lot of consideration, as we all

know, and a lot of activity in other committees of Congress about

the question of whether or not it is appropriate to create a carbon

capture and trading program in the United States. It is a worldwide discussion as well. Of course, that broader discussion is not

the subject of today’s hearing, so I do not intend to address any

specific policy prescriptions on that point.

Today we will be focusing on a very narrow question, or at least

a more narrow question, which is, when we do go down that road,

what are some of the international issues that we will need to confront? This committee, being involved in trade issues, is very concerned about that.

I could give examples like, what considerations would we need to

take into account in terms of our obligations under the World

Trade Organization. We can hear about the experience in the European Union in administering its own cap and trade programs. If

the European Union encountered problems with this program, then

we should know about them, and we will find out about them.

So I cannot talk about a policy other than the narrow policies of

trade at this point, so I thank our witnesses for coming, traveling

here to be with us to help us understand this as we help other committees formulate policy in the area of cleaning up our environment, global warming, and climate change.

The CHAIRMAN. Thank you, Senator Grassley.

We are now honored to have with us the Senator from Pennsylvania, Senator Specter. I know he, Senator Bingaman, and others

3

have thought long and hard about these complex questions, and we

are very honored to have you here, Senator. We would appreciate

the advice you want to give this committee.

STATEMENT OF HON. ARLEN SPECTER,

A U.S. SENATOR FROM PENNSYLVANIA

Senator SPECTER. Thank you, Mr. Chairman. I am grateful for

the opportunity afforded by the Chairman and the committee to

testify briefly this morning on this important issue.

I have been asked to appear here in my capacity as vice chairman of the Steel Caucus. There is considerable concern in the steel

industry, and many industries, about what legislation on climate

change would do to the competitiveness of U.S. products.

We start with the proposition that GATT requires that important

products must receive no less favorable treatment than domestic

products. In article 20, it is provided as long as measures are not

arbitrary or unjustifiably discriminatory between countries or restrictions on trade.

I would urge the committee to take a close look at what has been

proposed by the American Electric Power and Electrical Workers

Union, which has been included in the so-called Bingaman-Specter

bill, and subsequently in a bill addressing similar issues in the

Lieberman-Warner bill. It is my judgment—our judgment—that

the restrictions to require imports by the year 2020 to have credits

to account for the carbon which they will emit is fair treatment.

Candidly, I have some concern that there ought to be an extended

window between the imposition of requirements on U.S. products

contrasted with imports.

We may find that that window will further harm the environment because it will send products made in the United States,

which have less carbon emissions, back to foreign sources which

have higher carbon emissions if they can be produced at a cheaper

rate and take away business from U.S. production which has a

lower carbon content.

But at a minimum, there ought to be the same carbon requirements applied to imports as applied to domestic product. It is a

very basic and fundamental proposition because, if not, there will

be a major competitive disadvantage to American products. If the

legislation does not account for this, it is going to be hard to get

support.

We do not have support from the steel industry, for example. We

have had substantial support in many quarters to what Senator

Bingaman and I have proposed, and now what Senator Lieberman

and Senator Warner proposed. But in order to get public acceptance of legislation on climate change, we are going to have to demonstrate that we are not at a competitive disadvantage; it is just

that fundamental.

Of course, the Finance Committee is a powerful committee generally, but with jurisdiction on international trade, when this committee speaks to address this issue and make sure that there is not

a disadvantage to U.S. production and that it is consistent with

GATT, that will have a considerable impact in informing the American public and American industry that they will not be discriminated against. Once assured that they will not be discriminated

4

against, they will be more inclined to accept the restrictions that

Bingaman-Specter or Warner-Lieberman imposes.

I know you are busy, and when you grant 5 minutes—I have had

some experience as chairman—I know you like to have a minute

yielded back. But I would ask unanimous consent that the full text

of my statement be included in the record, because I only gave an

abbreviated summary.

The CHAIRMAN. Without objection.

[The prepared statement of Senator Specter appears in the appendix.]

Senator SPECTER. I would be glad to respond to questions. As I

always say, I would be glad not to respond to questions. [Laughter.]

The CHAIRMAN. Well, Senator, in honor of your enlightenment, I

want to thank you very much for coming before this committee.

Senator GRASSLEY. Could you wait just a second, Senator Specter? Because both you and the Chairman brought up the global impacts and taking this into consideration. I am just taking off on a

position you had of the impact on the rest of the economy and the

global competition we have.

I think one of the major problems we have here among the hundred of us, or among the 535 of us, is that there are a lot of members of Congress who are very inconsistent in maybe legitimately

being concerned about the transfer of jobs overseas by some of our

manufacturers particularly, but now it is happening in the IT and

service industries as well.

I think it is inconsistent that some people complain about jobs

leaving the United States, and argue at the same time that we can

solve this problem just by focusing on the United States. It has to

be solved on a worldwide basis. The second-largest economy in the

world and the number-one emitter of CO2 into the environment

being China, it cannot be left out of it.

They are making an argument that they need a 30-year phasein because of the fact that they are presumably still developing.

But if you are the second-largest economy in the world and we are

having all of our manufacturing jobs go to China, and we are going

to put more burden on our industry from the standpoint of the environment, the same people cannot be complaining about jobs going

overseas. They ought to be working with us to make sure that

China is included and not find some excuse to exclude China and

fall for the propaganda of the Chinese Government at this point.

Senator SPECTER. Senator Grassley, if we were to give China a

30-year phase-in process, that would phase out American industry.

There would not be any left.

Senator GRASSLEY. Yes.

Senator SPECTER. Phase in China, phase out the United States.

We are not going to do that. That is why we ought to structure the

legislation so that their steel imports, illustratively, have the same

burdens on carbon emissions which ours do. We ought to do that

sooner rather than later.

Careful consideration ought to be given to how long they need to

accommodate that, but they ought to be paying the piper just as

we are. You cannot solve the problem of global warming by the

United States alone, or by the so-called developed countries alone.

5

China is a major factor, and they have to belly up to the bar like

all the rest of us.

If they don’t, we have to structure our loss so that their imports

have the same costs as ours do. Then we’re not at a competitive

disadvantage, and then we can legislate on climate change and we

can get public support and industry support to do it. But you put

your finger on the critical problem.

The CHAIRMAN. Thank you, Senator. I have a question for you,

though. I daresay none of the four of us voted for the Kyoto Treaty

when it was before the Senate. I think it was 90 something against

it, and it was primarily because China and other developing countries were not included.

It is my judgment we have come to the point in American world

history where climate change is now being accepted. It is a fact

that humans are contributing to the climate change. We are not

the total source, but certainly contributing. It has also been accepted, I think, generally, that we have an obligation, as members of

Congress, to try to do something about it even though China is

dragging its feet.

First of all, I will give you my view and then ask you the degree

to which you agree. My view is, we as the United States must, nevertheless, lead. We must lead, as much as possible, the effort in the

world to address climate change. The Europeans do have their cap

and trade system. It has lots of problems, but at least it is a start.

We in the United States are attempting to enact our own version

of cap and trade. Hopefully it is more thought through and it is

more effective. But at the same time, while we are leading—and it

is my judgment that the United States must lead, we must not just

wait for the rest of the world, we must lead—we must lead in a

way that assures that other countries are also contributing to the

solution.

As you basically said in your statement, China has to pay the

piper, too. We just cannot be alone in addressing climate change.

But my basic question is, do you agree, even with all the problems,

even though China will soon be the world’s biggest carbon emitter,

that we still have an obligation to lead our country and other countries to find a global solution?

Senator SPECTER. I do agree with that, Mr. Chairman. I think

our leadership can be accomplished, still maintaining adequate

concerns for U.S. production. We can do that by saying the same

restrictions will be imposed on Chinese imports which are being

borne by U.S. production. But I do think we ought to take the lead,

but we ought not to commit economic suicide in the process. We

face a very major threat from China, beyond any question. If we

allow them to run roughshod over us, we’re not going to have any

steel industry, or any glass industry, or any industry. They are on

all fronts.

But we are not going to be able to lead and get the American

people behind Specter-Bingaman or Warner-Lieberman unless the

United States is treated fairly. So, as an indispensable ingredient

in leadership, you see to it that it is fair and equitable. We have

the standards in the WTO, and we can comply with them and still

maintain our own industrial base and lead the Chinese, tough as

that is.

6

The CHAIRMAN. Thank you, Senator, very much for your very,

very strong contribution.

Senator Bingaman?

Senator BINGAMAN. I just wanted to compliment Senator Specter

for his work on this issue. It is a pleasure to work with him on our

legislation. We are just at the very beginning of this debate here

in the Senate. The issue will be on the Senate floor, we believe,

here in the next 2 or 3 months. Senator Specter’s strong role in

helping with this legislation and moving the issue forward is a

major contributor. Thank you.

Senator SPECTER. Well, thank you, Senator Bingaman, for those

nice comments.

Mr. Chairman, Senator Baucus, thank you for letting me appear.

It is always nice to be with my classmate of 1980. We do not get

together too often.

The CHAIRMAN. Thank you, Senator, very much. I appreciate

that.

Now I am pleased to announce our panel of witnesses. First, Jennifer Haverkamp, who is chief counsel for the Environmental Defense Fund and a former Assistant U.S. Trade Representative for

Environment and Natural Resources.

Next, Abraham Breehey, the assistant director for government

affairs for the International Brotherhood of Boilermakers, Iron

Ship Builders, Blacksmiths, Forgers, and Helpers.

Next, Mr. Kjell Olav Kristiansen, the director of advisory services

at Point Carbon North America, a carbon market analysis firm.

Finally, we welcome Ms. Ruksana Mirza, vice president for environmental and government affairs for Holcim, a global manufacturer of cement and other building products.

Welcome, everybody. Thank you very much for coming before our

committee to give us the benefit of your expertise. We will begin

with you, Ms. Haverkamp. I might remind everybody, 5 minutes

oral; written testimony automatically included.

STATEMENT OF JENNIFER HAVERKAMP, SENIOR COUNSEL,

ENVIRONMENTAL DEFENSE FUND, WASHINGTON, DC

Ms. HAVERKAMP. Good morning. Thank you, Mr. Chairman and

distinguished members of the Finance Committee. I am Jennifer

Haverkamp, senior counsel at Environmental Defense Fund.

Chairman Baucus and Ranking Member Grassley, thank you for

holding this hearing. The Finance Committee has a crucial role to

play in getting market-based policy design right, and we are very

pleased to see you starting that process. Thanks also to Senator

Specter for his remarks and for his commitment to enacting an effective climate program that brings in all major emitters. The leadership represented in this room today is inspiring.

Here are three key steps Congress can take to engage major developing nations in cutting their total greenhouse gas emissions to

ensure that, if those nations do not engage, neither our programs’

environmental effectiveness nor the strength of our economy will be

undermined, and to do this consistent with our WTO obligations.

My written testimony also addresses how cap and trade can reduce compliance costs experienced in the European Union’s carbon

7

market and our support for adaptation funding for the poorest

countries.

First, we must cap and trade our own emissions. Congress

should pass the Lieberman-Warner Climate Security Act this year.

Federal inaction has compromised our ability to demand action

from other nations, and every year we delay steepens the path of

reductions needed to avoid serious environmental consequences

and costs. Just 2 years of delay requires us to reduce emissions

twice as fast in order to reach the same levels by 2020.

In the absence of a clear market signal on carbon, our industries

will continue to watch from the sidelines as foreign competitors

move to create the new low-carbon technologies of the future. We

must unleash our companies to start doing what they do best: innovate. To do that, we must enact mandatory emissions caps.

The second key step is to use access to the U.S. carbon markets

as a carrot to encourage other nations to cut and curb their emissions. Other nations’ interest in gaining access to our carbon market, which is likely to be the largest in the world, gives us valuable

leverage to encourage them to cap and trade.

My testimony lays out three leverage points. Here is one: to let

tropical forest nations participate in our carbon market with credits earned by reducing deforestation. Forest destruction emits

about as much as all the fossil fuel burned in the U.S. After us and

China, the world’s third and fourth biggest emitters are rain forest

countries. But there is no carbon market today in which rain forest

nations can earn carbon credits for reducing these emissions, so

these nations have little incentive to keep their forests standing.

We urge you to structure the U.S. carbon market to compensate

developing countries if they reduce their rate of deforestation nationwide below a historical baseline. The Lieberman-Warner bill

takes the first important step in this direction, but it should be expanded significantly.

The third step: enact a backstop to make sure that imports of

high-carbon products from uncapped nations do not undermine

America’s program. Congress should consider requiring importers

of greenhouse gas intensive products from major emitting uncapped

nations to tender emissions allowances or offsets as a condition of

import, just as if the products had been produced here at home.

This would serve as a backstop, there if we need it—that is if negotiations or national actions do not meet the serious emission limits—but ideally never invoked.

As you heard previously, the various versions of this approach

have been included in both the Lieberman-Warner and the Bingaman-Specter bills. This can be done in a way that preserves the integrity of our cap and trade program, encourages other nations to

join that program, and is consistent with our WTO obligations.

Lieberman-Warner’s title 6, with some minor adjustments, can satisfy these criteria. The main alternatives that have been offered so

far, border tax adjustments or carbon intensity standards for imports, do not.

This committee is right to be asking questions about WTO compliance. Only the WTO members can definitively interpret the

agreements, of course. But of the proposals currently on the table,

only title 6 type provisions stand a very good chance of surviving

8

a WTO challenge. It imposes comparable obligations on domestic

entities and importers consistent with national treatment.

Should a WTO panel disagree, which as you know is always a

possibility, strong arguments can be made that it qualifies for the

WTO’s environment exceptions. Questions have arisen about title

6’s time gap between when U.S. companies must obtain allowances

and when importers must. There may well be ways to shrink that

gap and reasonable arguments for doing so. We do not, however,

believe that it can be eliminated entirely.

For one thing, the importer’s obligation must be based on the

U.S. emitter’s actual performance, which must first be measured

and verified and the foreign country then given fair notice to comply. These three steps, capping U.S. emissions, using access to our

carbon market as leverage, and enacting a backstop can engage developing countries while maintaining our economic strength.

Thank you for your attention. I look forward to your questions.

The CHAIRMAN. That was very good. It was only 4 minutes.

[Laughter.]

Ms. HAVERKAMP. Do I get more?

The CHAIRMAN. And very succinct, to the point, and very helpful.

Thank you very much.

[The prepared statement of Ms. Haverkamp appears in the appendix.]

The CHAIRMAN. Mr. Breehey?

STATEMENT OF ABRAHAM BREEHEY, ASSISTANT DIRECTOR

OF GOVERNMENT AFFAIRS, INTERNATIONAL BROTHERHOOD OF BOILERMAKERS, IRON SHIP BUILDERS, BLACKSMITHS, FORGERS, AND HELPERS, FAIRFAX, VA

Mr. BREEHEY. Good morning, Chairman Baucus, Senator Grassley, Senator Bingaman. My name is Abraham Breehey, and I serve

as assistant director of government affairs for the International

Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths,

Forgers, and Helpers.

Our union represents workers in the manufacturing, construction, and ship building industries. On behalf of our president, Newton Jones, and our members across the country, we really appreciate the opportunity to express our views on this important topic.

Our union and others in the labor movement have longstanding

concerns about the impact of policies designed to reduce our Nation’s greenhouse gas emissions on the competitiveness of our economy and workers, particularly those whose work relates to manufacturing of energy-intensive products. However, we are committed

to finding a solution that protects American workers while allowing

the United States to demonstrate much-needed global leadership

on this pressing environmental challenge.

In 1997, the delegates to the 22nd convention of the AFL–CIO

affirmed very clear objectives on the issue of climate change. They

included assuring environmental repair of the carbon dioxide concentration problem with the formal participation of the entire international community, committed to mutually agreed upon, binding

solutions; protecting the industrial base of the U.S. with no movement of jobs or pollution to other countries; and providing a just

9

transition so that no American worker loses economic ground in

our pursuit of more sustainable global practices.

A decade later, our goals remain the same; however, climate

science makes increasingly clear that we delay reducing greenhouse gas emissions at our own peril. Our union believes there are

potentially effective ways to ensure carbon mitigation policies do

not place American workers at a further disadvantage in the global

economy. Congress should seek to make certain that necessary and

environmentally responsible action on the issue of climate change

is not yet another reason why domestic industries relocate their

production offshore, as so many already have in search of low-wage

workers.

While there are other well-intentioned proposals to address the

issue of competitiveness, we believe the proposal of the International Brotherhood of Electrical Workers and American Electric

Power that was incorporated into the legislation introduced by Senators Bingaman and Specter and later into Senator Lieberman and

Warner’s legislation and that the Boilermakers and other unions

have endorsed, we believe that is the best approach. We have a few

remaining concerns about the provision as it is currently drafted,

and I will offer some suggestions for improving them later in my

testimony. However, they form the framework for sound and effective policy.

The international provisions of S. 2191 and S. 1766 seek to avoid

the negative trade impacts of a domestic cap and trade program by

requiring importers of bulk, energy-intensive primary goods to purchase allowances to cover the emissions associated with their production. Failure to do so would disqualify the entry of these products from importing into the United States.

We believe it is appropriate in terms of establishing a level playing field for American producers, and within our rights under the

WTO, to apply this requirement on covered imports from a country

that is not taking comparable action. The price of international reserve allowances would be pegged to the price of domestic allowances, assuring the close association between the cost of compliance

for both foreign and domestic producers.

While I am not an expert on trade law, I have attached to my

testimony a detailed analysis supporting the conclusion that such

a requirement is fully in compliance with our obligations under the

WTO.

We believe there are two primary reasons why this approach is

the best mechanism to avoid the negative trade impacts of domestic

climate change legislation. First, it could potentially provide valuable leverage to U.S. climate negotiators in their efforts to establish a global framework that includes other major emitters.

We are hopeful that when our trading partners know that the

price of their exports headed for U.S. shores would be adjusted by

the cost of its carbon content, they would recognize that there are

no benefits to be gained from further delay.

As pressure mounts for truly global action on climate change, including commitments from the fastest-growing nations in the developing world, the leverage provided by the International Reserve Allowance requirement increases.

10

Second, and no less importantly, this requirement is consistent

with the environmental goals of domestic climate action. We agree

with the Stern review that climate change is the greatest and

widest-ranging market failure ever seen, and the International Reserve Allowance requirement helps address this market failure in

the context of a global economy without weakening or shortcircuiting domestic efforts.

However, we believe that timely application of the international

requirement is essential to its effectiveness. As drafted, S. 2191 requires importers of greenhouse gas-intensive goods to hold and submit allowances starting in 2020, while domestic regulations take effect in 2012.

American workers and businesses cannot afford to wait 8 years

for the playing field to be leveled, and we believe the mechanism

can, and should be, triggered soon after the implementation of a

domestic program. Assuming that starts in 2012, we believe the requirement should be triggered no later than 2015.

In addition, we believe Congress should clarify what exactly constitutes comparable action on the part of other major emitters. We

recognize the differentiated responsibilities and respective capabilities of developing countries to reduce their emissions while pursuing necessary economic development and alleviating poverty;

however, comparable action must mean more than token gestures

and statements of good faith. Efforts undertaken by major emitters

in the developing world should be real, measurable, and verifiable

to be considered comparable.

We also believe that the international provisions included in this

legislation serve the interests of American workers but also reflect

the political reality confronting the Senate as it seeks to address

this issue and enact comprehensive mandatory legislation. As you

know, the Senate unanimously voted against unilateral U.S. action

when it adopted the Byrd-Hagel resolution. The labor movement

strongly supported that resolution.

However, like so many members of the Senate, we recognized

that the longer we wait the more difficult and expensive that action

will be. We believe that imposing an international requirement on

energy-intensive imports is the best mechanism for achieving the

policy objectives reflected in the Byrd-Hagel resolution.

Thank you very much for your consideration of our views on this

matter, and I look forward to your questions.

The CHAIRMAN. Thank you, Mr. Breehey, very much.

[The prepared statement of Mr. Breehey appears in the appendix.]

The CHAIRMAN. Mr. Kristiansen?

STATEMENT OF KJELL OLAV KRISTIANSEN, DIRECTOR, ADVISORY SERVICES, POINT CARBON NORTH AMERICA, WASHINGTON, DC

Mr. KRISTIANSEN. Thank you, Mr. Chairman and distinguished

members of the committee, for this opportunity to testify before you

today on behalf of Point Carbon. My name is Kjell Olav Kristiansen. I am director of advisory services at Point Carbon. Point Carbon is a global provider of news and nonpartisan research analysis

and advisory services on the carbon and energy markets.

11

The United States is facing important choices about how to define a cap and trade scheme, and your decisions will have significant impact on the cost for you as consumers, on the cost for you

as industry, and consequently on the competitiveness of U.S. industry.

Knowing the importance of these choices, we can look towards

the European Union and learn from the 3 years of experience in

setting up and running an emission trading system for carbon dioxide. While this market functioned well during the first year and a

half, it experienced a sudden price collapse when it became apparent that the market was over-supplied with allowances.

The generous allocation of allowances was caused predominantly

by lack of reliable emissions data. The most important lesson from

the first phase of the EU scheme is that there must be a scarcity

of allowances in the market to maintain a carbon price, which of

course is needed to send the signal to reduce emissions.

So it is critically important to set a proper cap to achieve the desired emissions reduction. Despite this experience, the pilot phase

of this scheme has developed a lot of knowledge, infrastructure,

and financial instruments necessary to embark on the next stage

of the program.

The EU now has verified emissions data, and the allocations proposed by the member states have been curbed to create the needed

scarcity in the market. Phase 2 of the scheme is now developing

well, with allowances trading in the $30 range.

My next point is that the European Union allows emitters to use

carbon offsets for reduction projects in developing countries. Because of the low cost of these reductions, they offer European companies an attractive option to reduce compliance costs. Studies for

the Intergovernmental Panel on Climate Change show that the potential for reducing greenhouse gas emissions in non-OECD countries is twice as high as within OECD nations.

As the Congress considers creating a national cap and trade system which may place restrictions on the use of international offsets, it is important to remember the costs and benefits of such restrictions. Restricting the use of global offsets would have the benefit of increasing investment in domestic emissions reductions.

However, such limits would also make it more expensive for the

U.S. economy to achieve its emissions reduction goals. These limits

would likely place U.S. businesses at a competitive disadvantage

with respect to global peers with lower emissions.

Another reason to allow offsets is that they may prove to be indispensable to reach the short- to mid-term reduction targets that

are now being discussed. We believe that the mid- to long-term targets are feasible with a combination of various non-emitting technologies, clean fuels, energy efficiency, and carbon capture and

storage.

The greatest challenge may be the lack of flexibility in the system, in the energy system, to break this increasing trend in emissions. In this case, we believe that offsets can function as an important safety valve or a transitional remedy against very excessive

carbon pricing.

Lastly, I would like to discuss the economic benefits of linking a

domestic cap and trade program with other similar schemes. As

12

markets grow bigger, they become more efficient. Direct linking between a U.S. trading program and the EU scheme would create a

mutually beneficial larger market, which would increase choice, improve market liquidity, decrease price volatility, and equalize competitive disparities. We believe a U.S. program can be successfully

linked with existing international programs.

Distinguished members of the committee, the United States invented emissions trading with the creation of the successful acid

rain program in the 1990s. The U.S. was instrumental in making

offsets in global trading a key component of the Kyoto protocol. The

EU then adopted these concepts successfully in its greenhouse gas

cap and trade program.

As we now embark on defining what will become the world’s

largest emission market, we can reap the benefits of these innovative concepts and the experiences that have been gained, and we

can create a program that will reach the target and minimize costs

to consumers and to the U.S. industry. Again, thank you for this

opportunity to appear before you today. I will look forward to your

questions.

The CHAIRMAN. Thank you, sir, very much.

[The prepared statement of Mr. Kristiansen appears in the appendix.]

The CHAIRMAN. Ms. Mirza?

STATEMENT OF RUKSANA MIRZA, VICE PRESIDENT, ENVIRONMENTAL AND GOVERNMENT AFFAIRS, HOLCIM, INC., WALTHAM, MA

Ms. MIRZA. Good morning, Chairman Baucus, Ranking Member

Grassley, and members of the committee. It is a privilege to appear

before you today. My name is Ruksana Mirza, and I am the vice

president of environmental and government affairs at Holcim U.S.,

Inc.

Holcim U.S. is a subsidiary of Holcim Limited, a global company

with operations in over 70 countries, including 27 facilities in 10

countries operating under the European Union emission trading

system.

Mr. Chairman, I am proud to inform the committee that we have

facilities that employ many of your constituents. In addition to our

plants in Three Forks, MT and Mason City, IA, we have operations

in Colorado, Michigan, Utah, New York, and Massachusetts.

Cement is the key ingredient in concrete, the world’s most prevalent and versatile building material. The cement industry has several characteristics that make it particularly susceptible to leakage

of emissions. First, while cement is energy-intensive to produce, it

is an inexpensive commodity that sells at only about $90 a ton.

Second, over the next few decades the demand for cement is expected to grow by over 40 percent. Third, production of cement is

highly capital-intensive. Costs imposed only on the U.S. cement industry are likely to discourage the investment needed to meet domestic demand.

Holcim supports responsible climate legislation, and our proposal

seeks to prevent leakage of carbon emissions by creating a level

playing field between domestic producers and importers. We believe that importers should be included in the scope of a domestic

13

cap and trade program and subject to the same rights and the

same obligations as domestic producers, including the obligation to

monitor, report, and verify emissions, and to surrender and trade

allowances. Such a system would effectively prevent carbon leakage

and place domestic production and importers on an equal footing.

Through the importer, exporting installations would face the

same carbon efficiency objectives and also have the same business

opportunities as domestic producers. This system of equal rights

and equal obligations is clearly non-discriminatory and is, therefore, compatible with WTO rules. This, in turn, would allow the

measure to take effect at the same time as a domestic cap and

trade program.

In the European Union, allowances are currently allocated to domestic installations based on historical emissions. The perverse result of this method of allocation is that our most inefficient plants

in the European Union have received the highest number of allowances. Holcim believes that the allocation of allowances should be

based on a performance benchmark. This would reward efficient

users and provide an incentive to modernize equipment.

I raise this issue today, Mr. Chairman, because we believe

benchmarking is the method of allocation that would most easily

allow for equal treatment of domestic production and imports.

Current EU rules do not explicitly address leakage and defer the

issue of competitiveness to member countries. They, in turn, have

primarily addressed it by granting installations a higher proportion

of allowances. Moving forward to 2013 and beyond, however, the

European Commission has recognized the need for an equalization

system to put domestic production and imports on a comparable

footing.

In conclusion, Mr. Chairman, we urge the committee to address

the issue of leakage of emissions through the adoption of a system

of equal rights and equal obligations. We believe that such a system would be compatible with WTO rules, making it possible for

leakage protection measures to take effect simultaneously with a

domestic program.

We further believe that these measures should remain in effect

until exporting nations have taken comparable action within a

global climate protection framework.

Thank you, Mr. Chairman. I am happy to respond to questions.

The CHAIRMAN. Thank you, Ms. Mirza.

[The prepared statement of Ms. Mirza appears in the appendix.]

The CHAIRMAN. If I can, a question for you is, how do we make

sure the border provisions are, if not bulletproof, very sound and

will clearly withstand a WTO challenge and/or flexibility in whatever we have to adjust to WTO rulings?

Your thoughts on what can be done to shore up the firmness, if

you will, of the border provision that requires companies to purchase allowances from companies overseas, or for a company overseas to show that it has had a comparable program. But the basic

question is, anything we do has to conform with national treatment, MFN, clearly. But what else can we do to kind of help ensure

that we have a program that is solid and makes sense, and if it

is challenged, the challenges would likely be unsuccessful?

14

Ms. HAVERKAMP. Thank you. I will give a shot at that. Starting,

as I said, though, first, we cannot be bulletproof. I wouldn’t want

to try to predict today.

The CHAIRMAN. But as bulletproof as we can.

Ms. HAVERKAMP. All right. I think, as I said in my testimony,

that title 6 comes pretty close, and possibly a couple things that

we might want to look at more closely. One, is the question of the

international emissions allowances, because domestic entities—one

thing I think that is good about the provision is that it gives the

importers a choice of whether to purchase the international emission allowance or to purchase allowances on the open market, in

other words, from other countries’ cap and trade programs.

One question, though, is in terms of trying to make bulletproof

the environmental objective of these provisions so that they satisfy

the environmental exceptions of the WTO, would be seeing whether

there is anything to do with the international emissions allowances

so that they in fact represent a cap and that there is not an unlimited amount that then could be produced for however many imports

that came in.

The CHAIRMAN. Mr. Kristiansen, how do we set the allowances

to get sufficient scarcity? Say we need to have good data to know

what emissions rates are, something the Europeans did not do very

well. You mentioned the scarcity issue, prices collapsed. How do we

get scarcity?

Mr. KRISTIANSEN. I would say that the United States is in a

much better position to define a cap and trade scheme based on

several years’ of experience with air quality control legislation, and

you have a very good emissions tracking system in the U.S., so you

have a better understanding of emissions history and numbers. So,

from that perspective, you are better off. Basically you have to

know where you are to know where you are going; so, we know

where we are.

The CHAIRMAN. Do we know well enough where we are?

Mr. KRISTIANSEN. I think you have a good understanding of the

emissions, but you have to understand, in terms of setting a cap,

you have to understand what are the possibilities, what does it cost

to reduce emissions in different industries. How much can be reduced? What is the availability of technology and when will technology be available, so how fast can we reduce?

Based on those assessments, you can set a realistic progression

in reducing emissions, and you can have a realistic view on what

it would cost. That is basically what we need to understand. We

need to understand accurately how emissions are related with costs

and with the technology development.

The CHAIRMAN. The Europeans did not have enough data?

Mr. KRISTIANSEN. We did not have, in Europe, the amount of

data available to set that cap appropriately. Emissions data was invited from the emitters themselves. In a scheme where basically

you will be given allowances for free and you know that you will

be given allowances for free, you have an incentive to exaggerate

your emissions.

The CHAIRMAN. What are they doing differently under phase

two?

15

Mr. KRISTIANSEN. Well, in phase two, first of all they have very

fine emissions data from 2005, which was the first time they had

a bottom-up measurement of emissions on an installation level. So

they knew exactly the benchmark or the baseline from which to design the next phase.

The CHAIRMAN. My time has expired. But under the Clean Air

Act, allowances were set. There was a big question of whether that

would work. The general feeling, I think, is that it has worked very

well. What lessons are there under emissions trade and so forth

that can be applied here, or is that such a different animal that

it really does not have——

Mr. KRISTIANSEN. Well, the issue with the acid rain scheme was

that, in a way, the solution was to put a scrubber at the tail-end

of a coal plant at a manageable cost, and the issues related to carbon dioxide are more complex and more costly for emitters.

While, generally, the experience from the acid rain scheme was

that, as a policy instrument, it enabled us to reach emissions reduction faster and at a lower cost than other instruments, we believe the mechanics are the same and the same incentives will

apply in the CO2 cap and trade scheme. That is why cap and trade

is, we believe, the best policy instrument to deal with emissions.

The CHAIRMAN. Much better than a carbon tax?

Mr. KRISTIANSEN. We believe that cap and trade is better than

a carbon tax because it presents us with more options. Basically,

an emitter in the tax scheme will have the options of paying the

tax or reducing its emissions, and it will reduce its emissions to the

point that it is cheaper than paying the tax. But in a cap and trade

scheme, you have the option also to go outside the scope of the

scheme and invest in emissions reductions elsewhere, and you can

create big capital flows that can lead to reductions.

The CHAIRMAN. Thank you. Thank you.

Senator Grassley?

Senator GRASSLEY. Thank you, Mr. Chairman.

Ms. Haverkamp, if we wanted to defend a cap and trade program

at the WTO, is it essential that we try to negotiate an international

agreement before we applied for the programmed imports? In your

testimony, I think you said we should do it. My question is, do we

have to do it?

Ms. HAVERKAMP. Thank you. The WTO itself does not require

that there be international negotiations, but, based on the ShrimpTurtle case, if you do have international negotiations with some

countries, you need to be making the good-faith effort to negotiate

with all. So that is the source of the obligation. In terms of the timing, the negotiations do not have to be completed before, I do not

think, these provisions would kick in, but I think you do want to

allow plenty of time for the international negotiating process to

work, and again to show that as a general matter the WTO favors

measures that are the least trade restrictive. I think the idea

would be to negotiate international agreements where these countries have capped their own emissions fully, so that is another reason you want to allow time for the international negotiation.

Senator GRASSLEY. Just a slight diversion from that question. In

your testimony, you had mentioned the possibility of negotiating bilateral carbon market access agreements as a fall-back to the mulVerDate 11-MAY-2000 14:49 Jun 17, 2009 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 45112.000 SFIN1 PsN: SFIN1
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tilateral agreement. You suggested that these types of agreements

could help us defend a cap and trade program at the WTO. Explain

further. For example, are you suggesting that we need to negotiate

a bilateral agreement with the European Union if that would help

us defend against the WTO challenge by China?

Ms. HAVERKAMP. I think that the idea of the bilateral negotiations is several. One is, in case the international negotiations, multilateral negotiations in the U.N., take a very long time or do not

reach a successful conclusion, these bilateral negotiations are a

way of showing that we are still trying to achieve the less traderestrictive way of getting to the environmental objective.

As far as whether a bilateral with the EU would help with a

challenge from China, I definitely would have to think a little bit

more about that, but I think that there would be many other reasons, as you heard from the Point Carbon witness, for why we

ought to try to have a bilateral agreement with the EU.

Senator GRASSLEY. Well, let me invite you, since you maybe need

to give it some thought, to submit additional comments in writing.

Ms. HAVERKAMP. I would be very pleased to do that.

Senator GRASSLEY. Ms. Mirza, in your testimony you discussed

the need to apply any cap and trade programs in the United States

to imports. Are there any other lessons from your participation in

the European cap and trade program that you think we should

keep in mind here in the United States?

Ms. MIRZA. I think one of the things that is clear to us from my

experience in the European Union is that significant reductions

from the energy-intensive sector cannot really be realized in the absence of a system that equalizes domestic production and imports.

I think the European Commission themselves recognize this now.

Senator GRASSLEY. And ‘‘equalize’’ meaning with international

competition?

Ms. MIRZA. That is right.

Senator GRASSLEY. Also to you, some have suggested that any

U.S. cap and trade program should impose tariffs on imports from

countries without equivalent systems. Could you explain why you

prefer your concept of equal rights and equal opportunities as an

alternative to the imposition of tariffs?

Ms. MIRZA. We believe, Senator, that the system of equal rights

and equal obligations, because it is non-discriminatory, is more

likely to be able to withstand a challenge under WTO rules than

a system of tariffs.

Senator GRASSLEY. All right.

Mr. Kristiansen, you noted in your testimony that phase three of

the European Union’s cap and trade program will include a preference for offsets that originate in least-developed countries. Can

you explain the reason behind this aspect of the European Union

system? I think, also, you heard the discussion we had with Senator Specter. Could you work that discussion into your answer?

Mr. KRISTIANSEN. My belief, from reading their explanation and

the new proposal from the Commission—basically it is a proposal

from the Commission that has not been subject to political discussions in the EU—is that they are restricting this now, also, based

on the same questions we are discussing here today.

17

This is a way to provide an incentive for the advanced developing

countries to take on commitments and caps, and that they will, for

the time being, reserve the right for the least-developed countries

to generate credits. They do say, however, that if they are able to

get wider international agreement with the United States and with

the large, advanced developing countries, they would be willing to

lift that restriction.

Senator GRASSLEY. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

Senator Bingaman?

Senator BINGAMAN. Thank you very much for having the hearing, Mr. Chairman. Thanks to all the witnesses.

Let me start with a question for Mr. Breehey. Is that the correct

pronunciation?

Mr. BREEHEY. Yes, sir.

Senator BINGAMAN. Mr. Breehey, what is the appropriate amount

of time, in your view, both from a WTO perspective but also just

trying to be realistic about the length of time it will take particularly a developing country, to put in place an adequate cap and

trade system? We are taking our own sweet time here in the

United States trying to figure out how to do this, and now we are

saying, okay, all you developing countries, we want you to hurry

up and speed this up.

I mean, in the legislation that Senator Specter and I have introduced, we do call for this to be done by 2020 by developing countries or by other countries, or we would have the right at that time

to begin to require some emission allowances if people wanted to

continue importing into our markets.

I think you said, Senator Specter expressed the view, that maybe

that is too long a time. What is the right length of time? We are

not putting any obligation on the U.S. if we were to adopt the

Lieberman-Warner bill or the Bingaman-Specter bill. We would not

be starting any obligation on U.S. firms until 2012. When should

obligations be imposed on others?

Mr. BREEHEY. Well, first, let me say thank you again for including those provisions in your legislation We think that was an important first step to start this conversation. Both with regard to ensuring the effectiveness of the provision and withstanding a challenge under the WTO, we think it would be appropriate to accelerate the imposition of this requirement on major trading partners

from 2020, as you included in your bill, to perhaps 2015, assuming

that the U.S. program would start in 2012—so, 3 years—to allow

us time for further negotiations with our trading partners.

We believe there are about 30 that the U.S. would be required

to negotiate with, and that would also provide adequate time to

demonstrate the effectiveness of the U.S. cap and ensure that we

meet the standard of comparability that is required.

Senator BINGAMAN. All right.

Let me ask about the appropriateness of including Clean Development Mechanism (CDM) credits as part of a U.S. cap and trade

system. I think, Ms. Haverkamp, as I understand your testimony,

you say that that is an all right thing to do, as long as the countries from which people are obtaining these credits are capped,

18

have caps on their emissions as well. Is that what I understand

your position to be?

Ms. HAVERKAMP. That is the direction that we think the policy

should go. Right now, CDM credits come from countries that do not

have caps. Therefore, while they are a good way for getting the developing countries to control their emissions, they do not represent

overall global emissions, because a reduction there means that a

company in the U.S. can emit more.

The goal I think we would have is to look for ways to put a multiplier on CDM emissions so that, over some not terribly long period of time, they are phased out of our program unless those countries have a cap in place.

Now, the kind of international credits that we think are particularly valuable, as I mentioned, are the forest credits. If a country

takes a national historic baseline on their emissions and gets credit

only for deforestation below that, then those in fact represent genuine emissions reduction.

Senator BINGAMAN. Mr. Kristiansen, I would be interested in

your view. You make a strong plea here for us allowing offsets in

anything we do as a sort of a safety valve that would allow us to

meet aggressive short-term goals, as I understand it. How does

that square with what you think we ought to do on CDM? What

is your thought on that? Maybe tell us also your views on the way

Europe has treated the CDM issue.

Mr. KRISTIANSEN. I can start by explaining that the European

Emission Trading Scheme accepts CDM credits as a compliance option. There are quantitative limitations on how much emitters can

use, but basically it has become the most important source of emissions reductions for the EU ETS, and it has created a very significant flow of capital to developing countries, and also a lot of

projects in reducing emissions in developing countries.

We do understand that accepting offsets will mean that actually

you can increase emissions at home while you reduce emissions in

the developing countries. The point is, this is a true emission reduction caused by the cap and trade scheme, and what is most important is that you get this emission reduction at a much lower

cost.

That is very significant because it gives emitters in the U.S. and

in Europe a way to comply with their obligations at a much lower

cost than reducing emissions at home. So it is a win-win. It is good

for the emitters and it is good for the environment, because it gives

us an opportunity to reduce more emissions.

The CHAIRMAN. Thank you, Senator.

Senator Salazar?

Senator SALAZAR. Thank you very much, Senator Baucus. Let me

first say this is a very important hearing, and I appreciate the

leadership that Senator Baucus has taken on this issue.

The goal, I think, is one that we understand, that we have to do

something with global warming before we end up frying our planet.

That is something that we need to take action on. We have these

dialogues around the country. I have these dialogues with people

in my State. What I hear back from them is, we are not ready to

do it now. We should go ahead and take a look at the issue of globVerDate 11-MAY-2000 14:49 Jun 17, 2009 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 45112.000 SFIN1 PsN: SFIN1
19

al warming this year perhaps, and then next year move forward to

pass legislation on global warming.

The rationale for that is essentially the subject matter of this

hearing, which is, you cannot do this alone. Global warming is a

planetary issue and, given the emissions we have coming out of

China and India and other places, how is it that the United States

can move forward with its global warming legislation on its own

this year?

So I guess my question to all of you is, this is an issue which

I believe will probably be on the floor of the U.S. Senate some time

over the next several months. Is this something that we should

wait for until we have a new President, a new administration, taking a different look at trying to put together the international accords that will make an effective global warming initiative drill, or

is this something that you think we ought to try to get across

through legislative effort this year in 2008?

So, Jennifer, if we can start with you, why don’t each of you just

take about a minute to respond to that question. Should we use

this year as a year of learning or should we use this year as a year

to try to get a good global warming bill across the finish line?

Ms. HAVERKAMP. Thank you very much for that question. We feel

strongly that we need to use this year to get the bill across the finish line for some of these reasons. One is, the longer we wait, the

steeper the path we have to take to get to the ultimate emissions

level that we consider safe to avoid serious consequences. There is

a graph in my testimony that shows that the rate basically has to

double to get us where we need to if we wait even just 2 years.

Also, this is a very critical next 2 years in the international negotiations. Developing countries are deciding right now in those negotiations what kind of commitments they will take in this process,

and they need to see leadership from the United States. We have

not until now, and we cannot continue to play chicken with waiting

for which country will take leadership first. Thank you.

Senator SALAZAR. Mr. Breehey?

Mr. BREEHEY. Frankly, Senator, I wish I had the opportunity to

go first. I will give a similar answer to Jennifer. I think that if the

Senate can come together to reach bipartisan consensus on a bill

this year, we believe they should. The longer we wait, the more it

is going to cost.

Certainly we wish we had more time for technology to develop,

particularly much-needed technology for carbon capture and sequestration from coal-fired power generation, but we do not necessarily have that time. We believe investment in vital carbonsaving technology should be accelerated. But a bill should be

passed as soon as possible.

We also believe that, as Jennifer indicated, a bill passed by the

U.S. Congress and signed by the President would demonstrate to

the rest of the world that the United States takes its obligation seriously and would perhaps accelerate negotiations towards a truly

global agreement that includes the major emitters in the developing world, particularly China and India.

Senator SALAZAR. Mr. Kristiansen?

Mr. KRISTIANSEN. I can add to that, it is critically important to

get a good bill. This is legislation that will shape the way the enVerDate 11-MAY-2000 14:49 Jun 17, 2009 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 45112.000 SFIN1 PsN: SFIN1
20

ergy sector is going to look in the next decades, perhaps, and it will

give incentives to investors to make the right choices. In the current bills there are some features we think could be better, but it

is important from our perspective that you get agreement.

I think it is such a significant issue, climate change and legislation. If you have bipartisan support for the bill, then you get robust

legislation that will not be subject to the 4-year cycle discussions.

It is so significant that you have a good bill for which there is wide

agreement. Thank you.

Senator SALAZAR. Ms. Mirza?

Ms. MIRZA. Senator, Holcim supports responsible, timely legislation. We think it can be done. It can be done properly. We think

the U.S. can take a leadership position on this, and should take a

leadership position on this. We would, however, like to see the time

taken to make sure that this is done appropriately, including addressing some of the issues we have discussed today on the competitiveness issues.

Senator SALAZAR. Thank you very much.

The CHAIRMAN. Thank you, Senator.

To the four of you, you advocate leadership, you advocate that

the United States move forward responsibly. Let us take the bill

that was passed out of the Environment and Public Works Committee, the Lieberman-Warner bill. That is our operating hypothesis here. That bill is going to go to the floor. What changes would

you make? And I am not asking for detailed changes, but just, is

there something in that bill that has to be addressed before it is

passed this year?

Let me go down the line here. Ms. Haverkamp?

Ms. HAVERKAMP. I guess one thing I would consider is strengthening the scientific review provisions so that, as we go forward, if

we get new science or realize that we could change the bill in ways

to achieve the desired result sooner, better, that it is easy to do

that.

The CHAIRMAN. All right.

Mr. Breehey?

Mr. BREEHEY. Sir, I think most of the labor movement would

agree that there are a few things that we would certainly like to

see included in Lieberman-Warner that are not currently. First, we

believe the cost containment provisions should be strengthened to

some degree. One of the reasons why so many of us supported Senator Bingaman’s legislation was the inclusion of a price cap on

emissions allowances.

The CHAIRMAN. Is that called an escape valve or the price cap?

Price cap.

Mr. BREEHEY. Technology accelerator payments. But we recognized that there are some concerns about how that would work. We

hope that there could be some further exploration of——

The CHAIRMAN. The basic point is that it is not fatally flawed,

but it can be improved?

Mr. BREEHEY. We think so. We would also advocate for the inclusion of a program that would assist workers that might be displaced under a carbon-regulated economy.

The CHAIRMAN. All right. Good.

Mr. Kristiansen?

21

Mr. KRISTIANSEN. The current bill does not allow for import of

global offsets, and we would like to see that change. It is not necessary to curtail the global carbon market and to reduce U.S.

emitters’ options and possibilities to take advantage of low-cost reductions. That can be done by other means, for instance, the border

adjustment tariffs that have been introduced and discussed.

Second, the allocation discussion. Right now, the bill creates disparities in competition between natural gas and coal-powered generators, because natural gas is regulated upstream at the point of

the fuel supply, while coal plants are regulated at the emission

source. So, while coal plants get free allocations, natural gas plants

do not get allocations. That creates a situation you would like to

avoid. What we would like to achieve is to have cleaner production

of power and intensify cleaner production sources. Thank you.

The CHAIRMAN. Ms. Mirza?

Ms. MIRZA. I would like to support what Mr. Kristiansen said

with respect to offsets. I think the Lieberman-Warner bill sets out

some very aggressive targets for reduction. For industry to be able

to comply with them, I think we need to make the maximum use

of flexibility mechanisms such as international offsets. So, that is

one thing that we would like to see.

The other thing would be a greater, perhaps, consideration of the

predicament of energy-intensive industries, ensuring an equitable

allocation system for energy-intensive industries.

The CHAIRMAN. What do we do here in this country to encourage

other countries to come along and do the right thing? Let us take

China. What is the best leverage we have, what is the best encouragement that we have? What carrots, what sticks might we have

to help other countries come along? As we enact our cap and trade

system, we are trying to do the right thing.

We have the border provisions to encourage other countries. Is

that sufficient? What else should we do? How does that fit in with

what is going on in Bali, for example? How do we get other countries to participate so we have a global solution here? What is the

best way? This bill is not sufficient, really, but how much do you

think it will help in what else we need to do? I will go backwards

this time. Ms. Mirza, you are first.

Ms. MIRZA. I think the issue of access to our market. I mean,

that is, I think, a huge incentive. It was brought out in some of the

testimony we have heard today. That relates directly to how we

treat imports. I think that is at the center of it. I think creating

a carbon signal where developing countries, other major emitters,

have an incentive to produce efficiently. If they produce efficiently,

they are able to benefit from that. I think that is the main encouragement.

The CHAIRMAN. Mr. Kristiansen?

Mr. KRISTIANSEN. That is a hard question.

The CHAIRMAN. That is why I asked.

Mr. KRISTIANSEN. The border adjustment tariffs that have been

proposed, I think, would be very effective. That is a stick. A carrot

could be to let them remain in the global carbon market, trade with

them in terms of carbon credits.

The CHAIRMAN. All right.

22

I do not know. What is going on with Bali? What are the next

international steps in climate change? Yes?

Mr. KRISTIANSEN. The Bali negotiations gave a negotiation mandate to arrive at a new global agreement, hopefully within 2 years.

These discussions, I assume, will take place during the course of

those years.

The CHAIRMAN. Mr. Breehey, what is the best way to encourage

other countries to join in here?

Mr. BREEHEY. We believe that the mechanism that I discussed

in my testimony, the international reserve allowance, is the appropriate stick. While some folks in the administration have indicated

their resistance to it, we also know that the U.S. chief climate negotiator, in fact, used this requirement in some negotiations that

took place. It was pretty widely reported in the press.

It is our understanding that some of our major trading partners

took notice when that was put on the table. We are hopeful that

the effectiveness of that requirement could be so strong that it

would never need to take effect, that it would provide the incentive

necessary for folks to come to the table and negotiate before the

trigger would ever happen. So, we prefer that as the approach.

The CHAIRMAN. Ms. Haverkamp?

Ms. HAVERKAMP. To be honest, I think the best thing we can do

is pass our bill soon and have a strong cap and trade program ourselves, because that gives us the authority to go to the Chinese and

others and say, it is your turn. It also significantly gives other developing countries the latitude to place leverage on the major emitting developing countries. The small island states and others see

that this problem is going to hurt them, and the larger countries

are also seeing that they have to be part of the solution. But it is

hard for the rest of the world to leverage those countries until the

United States is in a better place.

The CHAIRMAN. I would agree with that. People around the world

still look to the United States to lead. We have that obligation and

responsibility, and we have that opportunity. If we lead, theoretically we can lead well, lead in the right way, set the right tone.

I think I very much agree with it. I just would encourage all of us

to do what we can to help make that happen.

One of you mentioned, and it might have been you, Ms.

Haverkamp, about the waiting period between requiring U.S. allowances on the one hand and requiring international allowances

on the other. Is that not going to hurt American industry, a waiting period?

Ms. HAVERKAMP. Well, I think it depends on what the entire

package looks like. I think we want to have a waiting period as

short as we need for the whole range of purposes that the waiting

period serves, but there are other things that can be done to help

address the competitiveness concerns of our country during the

waiting period.

The CHAIRMAN. Such as?

Ms. HAVERKAMP. One, I think, is to look at the allowance allocation. Are there things that we ought to be doing for severely affected U.S. companies during that gap period?

The CHAIRMAN. All right.

23

Ms. HAVERKAMP. And there are also just many other provisions

in a cap and trade system that will lower the compliance costs for

our companies, the banking and borrowing provisions, things like

that.

The CHAIRMAN. We have a border program. How do we measure

comparability with other countries, whether another country’s actions are comparable or not? Mr. Kristiansen, your answer to that?

Mr. KRISTIANSEN. I am not sure I am the right person to answer

that.

The CHAIRMAN. Anybody who wants to take a crack at it.

Mr. KRISTIANSEN. Comparable action in relation to abandoning

the border——

The CHAIRMAN. Comparable action. Abandoning the borders. If

we do not implement this border provision because other countries’

actions are comparable, and we buy steel from that country.

Mr. KRISTIANSEN. Well, I think it’s a split position. I mean, at

what point do you consider the restrictions imposed by another

country to be adequately stringent or acceptable?

The CHAIRMAN. That is the question, yes. That is the question.

Mr. KRISTIANSEN. So, I mean, you can look at it from what kind

of cost the system imposes on the different industries and how

their competitive positions are evolving.

The CHAIRMAN. Mr. Breehey, I think you might have mentioned

that in your statement.

Mr. BREEHEY. Yes, sir. We feel like that is one of the critical

questions that still needs further fleshing out and answering. The

standard that was acknowledged in the Bali negotiation was this

idea of real, measurable, and verifiable. We think verifiability is essential, ensuring that the reductions are absolute and that they

frankly are not fudged in any way.

We know, if we are talking about China, there are laws on the

books in China that are not enforced. Minimum wage, for example.

We need to ensure that, if they impose domestic regulations, that

they are enforced. How do we see to it that they are and that they

are putting similar burdens on Chinese producers as we would put

on American producers? It is a tough question. We hope that some

folks can take a hard look at it and figure out just how we make

that happen.

The CHAIRMAN. Thank you very much.

Before I adjourn this, does anybody want to say something that

should have been said, or did somebody say something that has to

be addressed? [No response.]

The CHAIRMAN. Maybe I should ask the audience. [Laughter.] I

am not going to go that far. [Laughter.]

Thank you very, very much. This could well be the most important issue of our time, climate change. It is very, very important

that we address this very aggressively, but also that we address it

very seriously. You are all doing a great job on both counts, aggressively and seriously. Thank you very, very much.

The hearing is adjourned.

[Whereupon, at 11:26 a.m., the hearing was concluded.]

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