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51–119 2009

ADDRESSING PRICE VOLATILITY IN 

CLIMATE CHANGE LEGISLATION 

HEARING

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

MARCH 26, 2009 

Serial No. 111–11 

Printed for the use of the Committee on Ways and Means 

( 

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COMMITTEE ON WAYS AND MEANS 

CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

CHRIS VAN HOLLEN, Maryland 

KENDRICK MEEK, Florida 

ALLYSON Y. SCHWARTZ, Pennsylvania 

ARTUR DAVIS, Alabama 

DANNY K. DAVIS, Illinois 

BOB ETHERIDGE, North Carolina 

LINDA T. SA ́ NCHEZ, California 

BRIAN HIGGINS, New York 

JOHN A. YARMUTH, Kentucky 

DAVE CAMP, Michigan 

WALLY HERGER, California 

SAM JOHNSON, Texas 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

GINNY BROWN-WAITE, Florida 

GEOFF DAVIS, Kentucky 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

DEAN HELLER, Nevada 

PETER J. ROSKAM, Illinois 

JANICE MAYS, Chief Counsel and Staff Director 

JON TRAUB, Minority Staff Director 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to prepare 

both printed and electronic versions of the hearing record, the process of converting between 

various electronic formats may introduce unintentional errors or omissions. Such occurrences 

are inherent in the current publication process and should diminish as the process is further 

refined.

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C O N T E N T S 

Page

Advisory of March 19, 2009, announcing the hearing .......................................... 2 

WITNESSES

Dr. Douglas Elmendorf, Director, Congressional Budget Office .......................... 8 

Dr. Daniel Lashof, Director, Climate Center, Natural Resources Defense 

Council .................................................................................................................. 25 

Dr. Dallas Burtraw, Senior Fellow, Resources for the Future ............................. 37 

Dr. William Whitesell, Director of Policy Research, Center for Clean Air 

Policy ..................................................................................................................... 50 

Michelle Chan, Program Director, Green Investments, Friends of the Earth— 

United States, San Francisco, California ........................................................... 64 

Dr. Gilbert Metcalf, Professor of Economics, Tufts University, Medford, Massachusetts ............................................................................................................. 74 

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

Council for Capital Formation ............................................................................ 89 

SUBMISSIONS FOR THE RECORD 

Joyce Dillard, Statement ......................................................................................... 144 

Terence P. Stewart and Elizabeth J. Drake, Statement ...................................... 145 

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ADDRESSING PRICE VOLATILITY IN 

CLIMATE CHANGE LEGISLATION 

THURSDAY, MARCH 26, 2009 

U.S. HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

Washington, DC. 

The Committee met, pursuant to notice, at 10:16 a.m., in room 

1100, Longworth House Office Building, Hon. Charles B. Rangel 

(Chairman of the Committee) presiding. 

[The advisory announcing the hearing follows:] 

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ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721 

March 19, 2009 

FC–5

Chairman Rangel Announces Hearing on 

Addressing Price Volatility in 

Climate Change Legislation 

House Ways and Means Committee Chairman Charles B. Rangel today announced that the Committee on Ways and Means will continue its series of hearings 

on climate change. The next hearing will take place on Thursday, March 26, 

2009, in 1100 Longworth House Office Building, beginning at 10:00 a.m. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. However, any individual or organization 

not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing. A 

list of invited witnesses will follow. 

BACKGROUND:

During the 110th Congress, the Committee on Ways and Means began a series 

of hearings on climate change. In the first hearing, the Committee heard testimony 

that human greenhouse gas emissions are having an adverse impact on our planet’s 

climate. In the second hearing, the Committee heard testimony from numerous witnesses recommending that Congress implement revenue measures (e.g., auctionbased cap-and-trade proposals or carbon taxes) that would reduce human greenhouse gas emissions. In connection with the development of these revenue measures, witnesses at this hearing also encouraged the Committee to (1) promote a comprehensive global effort to address climate change and to ensure a level regulatory 

playingfield for U.S. manufacturers, (2) mitigate higher energy costs borne by consumers, (3) maximize the impact that climate change legislation will have on growing the U.S. economy, and (4) maintain the competitiveness of U.S. businesses, 

farmers and workers. 

During the 111th Congress, the Committee continued this series of hearings by 

holding a hearing on the scientific objectives of climate change legislation. This 

hearing provided a discussion of the goals that climate change legislation should 

seek to achieve from a scientific perspective over both the short term and the long 

term. Furthermore, the Subcommittee on Income Security and Family Support held 

a hearing on protecting low- and moderate-income families while curbing global 

warming, and the Subcommittee on Trade has announced a hearing on the trade 

aspects of climate change legislation. 

In announcing this hearing, Chairman Rangel said, ‘‘As we develop climate 

change legislation, we must ensure that the program is structured to 

achieve specific environmental goals at the lowest possible cost to the 

economy and consumers.’’ 

FOCUS OF THE HEARING:

The hearing will focus on a discussion of the ways that climate change legislation 

can be designed to reduce or eliminate price volatility while still achieving specific 

science-based environmental objectives. 

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DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘Committee Hearings’’. Select the hearing for 

which you would like to submit, and click on the link entitled, ‘‘Click here to provide 

a submission for the record.’’ Once you have followed the online instructions, complete all informational forms and click ‘‘submit’’ on the final page. ATTACH your

submission as a Word or WordPerfect document, in compliance with the formatting 

requirements listed below, by close of business Thursday, April 9, 2009. Finally, 

please note that due to the change in House mail policy, the U.S. Capitol Police will 

refuse sealed-package deliveries to all House Office Buildings. For questions, or if 

you encounter technical problems, please call (202) 225–1721. 

FORMATTING REQUIREMENTS:

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response 

to a request for written comments must conform to the guidelines listed below. Any submission 

or supplementary item not in compliance with these guidelines will not be printed, but will be 

maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official 

hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone, and fax numbers of each witness. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://waysandmeans.house.gov.

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

f 

Chairman RANGEL. The Committee and the hearing will come 

to order. I want to thank our invited guests for lending us their expertise as we move forward with this historic mission. 

The CBO director, Douglas Elmendorf, will give his testimony, as 

traditionally done, singly on the panel. But before we go into questions, the additional panel members will join him, and he is willing 

to remain in his seat and be a part of the six-witness panels as 

they give their testimony. 

I think it is safe to say that we are embarking on waters that 

have been uncharted and that, indeed, this is a historic move on 

this Committee’s part, the House, and hopefully the country. It is 

not that well known as to the dangers and increase of cost of making certain we have climate control. I think in our initial panels, 

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it was abundantly clear that gas emissions is having a severe, dangerous, adverse effect on our planet. 

We have had hearings where the scientific objectives of climate 

control has been heard. I think that there is very little controversy 

in terms of the accepted scientific directions in which we curb global warming. 

We have had our Trade Committee look into the costs of bringing 

some equity in terms of the costs and commitment of foreign countries with their imports, as well as given incentives to American 

companies that export. 

Now we get to a part as to how can people depend on the costs 

or the method of climate control, whether or not there is going to 

be a new commodity market, how the private sector can have some 

degree of confidence that we are not going to be changing the rules, 

whether we create a derivative market, and what is the impact of 

the different directions that we take. Whether we call it cap and 

trade or carbon tax, ultimately we know that it is going to be a tremendous expense in doing what we believe has to be done. 

So I yield now to David Camp to get his views, and look forward 

to hearing the witnesses. 

Mr. CAMP. Well, thank you very much, Mr. Chairman. I look 

forward to our witnesses as well, and want to welcome them to the 

Committee.

The issue of price volatility and climate change legislation is a 

critical issue for the Committee to consider. I am pleased the full 

Committee and the relevant Subcommittees are taking the appropriate time to study the complex issues of cap and tax. 

Many of our witnesses today will get into great detail about the 

varying methods to deal with volatility. But there is a larger issue 

I would like to raise, and that is the certain impact on American 

families, especially the increase in electricity rates they will face 

under the President’s proposal. 

At this time, I would like to submit for the record a state-bystate analysis of annual increases in electricity costs that would 

occur under a 100 percent auction, as the President has called for 

to meet the President’s target carbon emissions reductions. 

Chairman RANGEL. Without objection. 

The information referred to follows: 

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Mr. CAMP. In my home state of Michigan, electricity price increases total $6.7 billion, $668 for every man, woman, and child, 

$2,676 for a family of four. Those are staggering costs for a family 

to pay, especially in these already difficult economic times. 

We have price information for every state and broken down for 

every Member of the Committee so you can see the impact on your 

constituents. Let me just say in almost every case, these increases 

in electricity rates alone would exceed the full Make Work Pay benefit.

I know some will say this analysis doesn’t take into account everything. You are right. This doesn’t even begin to consider price 

fluctuations in other utilities, let alone goods and services. This is 

simply the impact of cap and tax on electricity prices alone. 

No one—I repeat, no one—is arguing against reducing carbon 

emissions. Each of us in this room, including those from coal states, 

has long advocated for the greater use of clean, renewable energy 

sources.

In fact, with the help of this Committee and when Republicans 

were in charge of Congress, we implemented clean renewable energy bonds; tax credits for production of wind, solar, and advanced 

nuclear power; energy-efficient new homes tax credit; energy-efficient appliance tax credit; alternative motor vehicle fuel tax credit, 

one I worked very hard on; alternative fuel vehicle refueling property tax credit; tax credits for biodiesel and renewable diesel used 

as fuel; tax credit for residential energy-efficient property. We also 

continue to support the environmental goods and services negotiations in the WTO, which would further slow emissions without penalizing American workers. 

These incentives are making a difference. If you look at the latest 

scientific data available, U.S. emissions have been relatively flat 

and even decreased in 2006, the last year for which data is available. That was despite a booming economy in those years. 

So, my question today is this: When carrots work, why is the 

Committee so readily resorting to the stick? The severe costs and 

penalties of the cap and tax system will cause hardships for American families and eliminate American jobs, as Dr. Margo Thorning, 

the senior vice president and chief economist with the American 

Council for Capital Formation, will testify. 

Mr. Chairman, I will repeat and I have said in the past, and 

something every expert agrees to, unilateral action by the U.S. will 

not impact climate change, but it will put millions of Americans out 

of work. This is not a solution, let alone one this Committee should 

endorse.

With that, I yield back the balance of my time. Thank you. 

Chairman RANGEL. Dr. Elmendorf, we appreciate especially, 

and we agree with you, the great work that is done by the Congressional Budget Office. We thank you for taking time out to share 

your professional views with us. 

As you know, unfortunately, we limit the witnesses to 5 minutes. 

But certainly we want you to rest assured that we would want to 

get as much from you as we can during that limited time. Then 

after you conclude your testimony, we would ask you to remain 

with the rest of the panel. 

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You can proceed. You know the method of the lights and the 5 

minutes as best as anyone else. Thank you so much for being with 

us.

STATEMENT OF DOUGLAS ELMENDORF, DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE 

Mr. ELMENDORF. Thank you, Chairman Rangel, Ranking 

Member Camp, and Members of the Committee. I appreciate the 

invitation to talk with you today about ways to reduce the economic cost of a cap and trade program for greenhouse gas emissions by increasing flexibility in the timing of the emission reductions. Analysts have developed a number of options for increasing 

timing flexibility, and my testimony reviews the advantages and 

disadvantages of some leading options. 

Accumulating evidence about the pace and potential extent of 

global warming has heightened policy-makers’ interest in cost-effective ways to achieve substantial reductions in emissions of greenhouse gases. Although the potential damage from climate change 

is large, the potential cost of avoiding change is large as well. 

Many analysts agree that putting a price on carbon emissions 

rather than dictating specific technologies or changes in behavior 

would lead households and firms to reduce emissions where and 

how it was least costly to do so. Allowing flexibility about when 

emissions were reduced would lower costs further because changes 

in weather, fuel markets, and other factors lead the costs of the 

emissions reduction to vary substantially from year to year. 

Moreover, this flexibility in timing can be achieved without lowering the benefits of emission reduction because climate change depends not on the amount of greenhouse gases released in a given 

year, but on the buildup in the atmosphere over decades. 

Let me make five points about incorporating flexibility in the 

timing of emission reductions. First, permitting firms to bank allowances—that is, save allowances for the future—has helped 

lower compliance costs in existing cap and trade programs. However, the cost savings from banking are limited by firms’ difficulty 

in distinguishing between temporary and permanent factors affecting allowance prices. 

Indeed, existing cap and trade programs that use banking still 

experience volatility in allowance prices that appears to be greater 

than can be explained by changes in expectations about future compliance costs. 

The first figure shows allowance prices in the acid rain program 

where prices varied from less than $75 to more than $200 in roughly 3 years. Similarly, allowance prices in the European Union’s 

emission trading scheme have varied considerably over time, even 

though banking and some limited borrowing are allowed. This figure shows that prices started 2008 at less than $20, rose to over 

$28, dropped to roughly $16 by the end of last year, and continue 

to fall in the beginning of this year. 

My second point is that permitting firms to borrow future allowances, as well as to bank them, could further lower compliance 

costs. However, existing cap and trade programs typically preclude 

borrowing, in part because of concerns that firms that borrow allowances might be unable to pay them back later. 

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The third key point is that permitting firms to purchase allowances from a public reserve pool composed of allowances that were 

borrowed from future years or that supplemented the initial supply 

could partially substitute for borrowing by individual firms. 

The reserve pool could help reduce costs by giving firms the opportunity to exceed annual caps in years when the cost of complying was temporarily high. Its effectiveness in realizing cost savings would depend on the size of the pool and the threshold price 

at which firms could purchase the reserve allowances. 

Fourth, setting a floor and ceiling for the price of allowances 

would also lower a firm’s compliance costs, but it would not ensure 

a particular level of emissions in the end. 

Fifth, a so-called managed price approach could allow for substantial cost savings by eliminating short-term volatility in the 

price of allowances, while accommodating longer-term shifts in 

prices that would be necessary to keep emissions within a longterm cap. In the managed price arrangement, firms could purchase 

allowances from the government each year at a price specified by 

regulators. The policy would be similar to a tax in that respect. 

However, the policy is like a cap and trade program in other key 

respects. Policy-makers could choose to distribute some allowances 

for free. They could allow firms to comply by purchasing offsets or 

credits for emissions reductions made in sectors not covered by the 

cap. Cumulative emissions over a period of several decades would 

be capped. 

To implement this approach, regulators would establish a path 

of rising prices for allowances, with a goal of complying with the 

cumulative cap that legislators had set. That path would be adjusted periodically if new information indicated that future compliance costs were going to be higher or lower than anticipated, or 

progress in meeting the cumulative cap was less than expected. 

In conclusion, let me emphasize the main theme of my testimony. 

The more flexibility that is granted regarding the timing of emission reductions, the less short-term volatility in the price of emissions and the lower the cost of meeting any given emissions target. 

Thank you. 

[The prepared statement of Mr. Elmendorf follows:] 

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Statement of Dr. Douglas Elmendorf, Director, Congressional Budget Office 

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Chairman RANGEL. Witnesses to join the good doctor. Dr. Dallas Burtraw has done outstanding work on this subject, including 

the European union. Dr. Lashof is an old friend of the Committee 

who has done work on limits of carbon dioxide, and has testified 

before the Congress many times. 

Dr. William Whitesell, director of policy research, Center for 

Clean Air Policy. Devoted himself to consulting and writing on 

these issues. Dr. Chan, who is the program manager of the green 

investment projects in Friends of the Earth, who has had decades 

of work in this area. 

Dr. Gilbert Metcalf, professor of economics at Tufts University, 

who has spent quite a time researching this important issue and 

will share with us the different provisions of funding and protecting the consumer. Of course, an old friend, Dr. Margo Thorning, 

who is senior vice president and chief economist of the American 

Council for Capital Formation. 

We know that 5 minutes is a very limited time in which you can 

help us. But because you have spent so much time in this subject, 

we hope you understand that the closer we get to some degree of 

harmony in both the scientific approach of the control of carbon dioxide and the more complex question of how we protect the consumer, that we will be calling you back in a less formal way to 

share the legislation and to get a critique from it so that before we 

go to the House, we will again have the benefit of not just talking 

about the subject but getting your specific understanding of the direction in which we have decided to go. 

So if I could call now on Dr. Lashof, it would be appreciated if 

you start off this panel. 

STATEMENT OF DANIEL LASHOF, DIRECTOR, CLIMATE 

CENTER, NATURAL RESOURCES DEFENSE COUNCIL 

Mr. LASHOF. Thank you very much, Mr. Chairman. I appreciate 

the opportunity to address this Committee, Mr. Chairman, and 

Members of the Committee. 

The atmosphere is too big to fail. A bailout will not restore our 

coastlines. We cannot replace the natural capital that nourishes 

our heartline. The good news is that we still have an opportunity 

to avoid a meltdown of our climate system. 

Repowering America with clean energy is the work of a generation, millions of good jobs, building real and sustainable growth, 

not a bubble economy. We need to begin cutting the atmospheric 

deficit now and steadily reduce emissions of global warming and 

pollution by 80 percent or more by the middle of this century. 

As the President has said, in order to accomplish that, we need 

to make clean energy the profitable kind of energy. The best way 

to do that, in my view, is to establish a firm cap on global warming 

pollution that declines each year. 

The cap is the cornerstone of the policy that we need to reduce 

emissions. But it is important to emphasize that it is not the entire 

strategy. We should compliment the cap with specific measures 

that are targeted at unleashing profitable energy efficiency opportunities, and a robust program to promote continuous innovation 

that can reduce the costs of advanced technologies that will be 

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needed to get us across the finish line of the emission reductions 

that we need. 

A comprehensive cap and robust, complimentary efficiency policies are the most important elements of cost containment. They are 

not always thought of as cost containment, but I think they are 

critical.

Another key provision, as we have just heard, is allowing the 

banking of allowances. I will just spend a minute on that. This is 

the European Union’s emission trading system price history. You 

can see in the yellow curve, in their pilot phase they did not allow 

banking. That resulted in extreme price volatility and a collapse of 

allowance prices because they couldn’t save allowances from the 

pilot phase into the future phase. 

In the current period, allowance prices have fallen about 50 percent in the last 6 months due to the economic downturn. But that 

type of price reduction is not necessarily problematic. In fact, it is 

beneficial. As we have seen with other commodity prices that fall 

during an economic downturn, this actually provides a form of economic stimulus. So having some price responsiveness in the system 

is actually beneficial for consumers and for the economy. Banking 

allows that without prices collapse. 

Let me spend the rest of my time focusing on the proposal included in my testimony for strategic offset and allowance reserve, 

not because I think this is necessarily the most important mechanism, but because it is perhaps the least understood. 

The idea here is to create a pool of allowances and offsets that 

are available to be released into the market if prices exceed a certain threshold. There are a couple of questions that have to be answered. What should the price threshold be, and how big does this 

pool need to be? 

In this example, rather than predetermining what the threshold 

should be, the first 3 years the price threshold is set based on a 

forecast, and it is twice the expected amount. But after that, a rolling average of actual prices is used, and the threshold is set at 

twice that level. 

In this example—and these allowance prices are really just an 

example—I basically synthesized them with a random component 

plus a systemic component. 

The price stays below the threshold in most years. But, for example, in 2019, it approaches the price threshold. The idea would be 

to have an auction with a reserve price in this case of $29 a ton. 

Bidders could purchase additional allowances or offsets at that 

price, and that would put downward pressure on prices and tend 

to keep the price of allowances from exceeding that price threshold 

in that year. 

The last point I want to make is on how big does this have to 

be to be effective in reducing extreme price volatility. What I have 

done is to look at the actual variations in U.S. greenhouse gas 

emissions since 1990, when data became available, compared with 

just a linear trend drawn through that data. 

What I have found is that there are variations from year to year 

based on whether, in economic conditions, they have not exceeded 

200 million tons in any 1 year during that period. That suggests 

to me that if we allow some cushion, perhaps double that number, 

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and allow up to 400 million tons of allowances to be purchased in 

the strategic offset and allowance auction, that that should be sufficient to limit price volatility. 

So, Mr. Chairman, let me just finish where I began. Getting the 

details of climate legislation right is very important, and I appreciate the opportunity to discuss these suggestions that I have. The 

bottom line is our atmosphere is too big to fail. Delaying action to 

address the threat of global warming is not a viable option. Thank 

you.

[The prepared statement of Dr. Lashof follows:] 

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Statement of Dr. Daniel Lashof, Director, Climate Center, Natural 

Resources Defense Council 

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Chairman RANGEL. Thank you. 

I would like to hear from Dr. Dallas Burtraw, Senior Follow, Resources for the Future. 

STATEMENT OF DALLAS BURTRAW, SENIOR FELLOW, 

RESOURCES FOR THE FUTURE 

Mr. BURTRAW. Thank you. I am with Resources for the Future. 

RFF does not take stands on specific issues, and the view I express 

today are my own. 

The main point I want to communicate today is the opportunity 

for cost management through the introduction of a price collar or 

a symmetric safety valve around the price and allowance trading 

program. The price collar would set a price ceiling and a price floor 

for trading emission allowances. 

We have heard about a one-sided safety valve previously which 

would place a ceiling on the price of emission allowances, and it 

has been criticized for two reasons. One is that if it was triggered, 

it would lead to the introduction of additional emission allowances 

into the market, and lead to emissions that exceeded the emissions 

target.

Second, the possibility that that might occur means that the return to investment in innovation and new technologies would be 

less than it otherwise would be because investors would anticipate 

that maybe their investments would be undermined through the introduction of additional emission allowances. Both of these criticisms have merit, and both of them can be overcome with a symmetric approach to a safety valve because it recovers expected 

emissions and expected returns on investment. 

The floor price is simple to administer through a reserve price in 

an auction, and a reserve price is a standard feature of good auction design. A symmetric safety valve also contributes in a serious 

manner to guarding against market manipulation and speculation 

by limiting the range within which prices can fluctuate in the market.

But most importantly, the symmetric safety valve reduces price 

volatility, and that is important for investment in new technology. 

A volatile price erodes the incentive to invest because it raises the 

hurdle rate on new investment. Consequently, volatility actually 

ends up raising the cost of climate policy because it leads to lower 

levels of investment, slowing the pace of technological change. 

We already saw this slide of the degree of price volatility in the 

E.U. emissions trading program. The spot price in phase 1 rose to 

30 Euros before collapsing. The price in phase 2 has fluctuated substantially from a peak of around 30 Euros to a recent low of 8 

Euros.

The next slide indicates the role of a systemic safety valve situated at plus or minus 30 percent of the expected price path. The 

last cost path should rise at the interest rate, which I illustrate is 

7 percent per year. Many of the peaks and valleys could be limited 

with a loose safety valve. The safety valve could be tightened further, here indicating a price collar that is plus or minus 15 percent 

around the expected price path. 

In the limit, of course, the safety valve converges to a single price 

that provides the greatest possible stability in prices. Whether a 

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loose price collar is chosen or a single price is chosen, it is very important that the program be able to self-correct. A symmetric safety 

valve provides some measure of this because it allows the program 

to automatically adjust in a predictable way when costs deviate 

from expectations. 

The importance of this is evidenced in the SO2 trading program, 

where the optimistic EPA forecasts from 1990 anticipated that to 

achieve the emissions target under the Clean Air Act would require 

a price of about $885 in 2010. Various factors, including emissions 

trading and banking, contributed to the outcome that allowance 

price today has now fallen to just $65 per ton. 

Low cost is good news, but one would think that congressional 

intent to purchase benefits, environmental and public health benefits, at $885 per ton would lead us to want to take advantage of 

a bargain sale when the price turned out to be much less. However, 

the quantity target left our feet in cement. A symmetric safety 

valve would have harvested billions of dollars in net economic benefits that have been left unrealized. 

With either a quantity cap or a price approach, it is important 

that the program be flexible to new information. A price collar 

helps achieve this with a decision rule that is transparent to the 

investment community and to the public. 

Thank you for the opportunity to testify today. 

[The prepared statement of Mr. Burtraw follows:] 

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Statement of Dr. Dallas Burtraw, Senior Fellow, Resources for the Future 

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Chairman RANGEL. Thank you. 

Dr. William Whitesell, director of policy research, Center for 

Clean Air Policy. 

STATEMENT OF WILLIAM WHITESELL, DIRECTOR OF POLICY 

RESEARCH, CENTER FOR CLEAN AIR POLICY 

Mr. WHITESELL. Thank you, Mr. Chairman, Ranking Member 

Camp, and Members of the Committee. I appreciate the opportunity to testify today. I am an economist with 20 years experience 

at the Federal Reserve Board before recently becoming director of 

policy research at the Center for Clean Air Policy. 

CCAP, as we are called, has helped design climate and air quality policies at the international, national, and local levels since 

1985, including cap and trade for acid rain and for the European 

carbon program. We convene discussions among climate negotiators 

from over 30 countries, and also sponsor other dialogs, including 

one with U.S. corporations, environmental groups, and government 

representatives to address national climate policies. 

CCAP strongly favors the passage of cap and trade legislation to 

control greenhouse gas emissions. I would like to emphasize three 

messages today. 

First, price volatility is a key risk in the early years of a new climate program. Second, a carbon tax is the surest way to fix prices, 

while cap and trade is the surest way to meet environmental goals. 

Third, the safe markets approach to cap and trade, which I will 

discuss, would make prices predictable while still ensuring environmental goals. 

A new cap and trade program creates a new market for mission 

allowances, which are a commodity that could be subject to the 

booms and busts in prices we have seen in many markets recently, 

including general commodity prices, as shown on the chart, and 

also prices in the European carbon market, as you have seen in 

many charts today, including this one. 

Such price swings would be especially harmful as a new carbon 

market takes shape in the United States. Uncertain prices will 

cause some firms to mistakenly invest in projects to reduce emissions that are too costly, while other firms will fail to invest in lowcost projects that should go forward. The overall cost of reducing 

emissions will therefore be higher than necessary. 

In addition, fears of and the reality of market manipulation could 

undermine support for the program. A carbon tax would avoid price 

volatility by eliminating the market. Regulated firms would merely 

pay the Treasury for their emissions. 

However, with a carbon tax or other fixed price approach, we 

may not reduce emissions enough. Even if legislation specifies a 

rising tax over time, the level of the tax or its rate of increase may 

be too low to reduce climate risks to respectable levels. 

We believe the safe markets approach to cap and trade is a better way to address price volatility. It makes carbon prices as predictable as possible, while still achieving a hard 2020 emission cap 

and ensuring cumulative emission reductions. 

Before 2020, it acts as training wheels for a new carbon market, 

eliminating opportunities for market manipulation and thereby allowing companies and regulators time to gain experience with the 

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market. We were very pleased to work with Representatives 

Doggett and Cooper on the Safe Markets Development Act, which 

reflects these concepts. 

Under this approach, an independent board manages carbon 

prices prior to 2020 with procedures similar to those used by the 

Federal Reserve to manage interest rates. The board announces a 

multi-year forecast for allowance prices, and before each year sets 

a target for the average market price that year. 

The board keeps prices close to the target by adjusting the number of allowances sold in auctions. Emissions may differ from expectations in a year as the board makes sure that firms get all the 

allowances they need at roughly the target price. This is okay because the emissions of carbon dioxide in a single year, unlike a traditional air pollutant, do not cause local health risks. 

Stable prices, along with limits of allowance banking or hoarding 

of allowances, eliminates opportunities for gaming of the system 

and excess speculation, as those behaviors would fail to move 

prices. At year end, the board would compare actual emissions with 

expectations, revise its forecasts if needed, and report to Congress 

on its decisions and program results. 

The next chart shows an example. The board’s initial forecast of 

rising allowance prices is the solid blue line. That price path is designed to achieve the gradual reductions in emissions indicated by 

the lower black line with square markers. 

Actual emissions might come in above or below expectations in 

the first year. In the example shown the round dot, they exceed expectations. If emissions were higher than expected because of temporary factors like unusual weather, the board would not change 

its forecasts. 

The chart assumes a worst-case scenario, where the excess emissions are caused—are likely to persist in future years. The board 

therefore revises up its price forecast, as shown by the dashed blue 

line. The revised path for expected emissions is the dashed red line 

with triangle markers. 

This annual revision in prices helps to keep cumulative emissions on track better than if prices were fixed or a price ceiling 

were used. While excess emissions are made up after 2020, the risk 

of large borrowings from the future is much lower than in the case 

of an allowance reserve. The safe markets approach allows a traditional cap and trade program to begin in 2020, or the features of 

the early years to be continued. 

In sum, we believe this approach combines the best features of 

cap and trade and carbon taxes. It provides a high level of environmental integrity along with predictable carbon prices. It eliminates 

incentives for manipulation and excess speculation, creating confidence in a new carbon market. Thank you. 

[The prepared statement of Mr. Whitesell follows:] 

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Statement of Dr. William Whitesell, Director of Policy Research, Center for 

Clean Air Policy 

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Chairman RANGEL. Thank you, Doctor. 

Michelle Chan, program director for the green investments, 

Friends of the Earth United States, from California. 

STATEMENT OF MICHELLE CHAN, PROGRAM DIRECTOR, 

GREEN INVESTMENTS, FRIENDS OF THE EARTH—UNITED 

STATES, SAN FRANCISCO, CALIFORNIA 

Ms. CHAN. Thank you Chairman Rangel and Ranking Member 

Camp and Members of the Committee for inviting me today. My 

name is Michelle Chan, I am with Friends of the Earth, and my 

testimony today will focus on four lessons learned from the current 

financial crisis and how we might think about how they could 

apply to a cap and trade system. 

So, lesson one: Avoid speculative bubbles. By 2020, the U.S. carbon markets are expected to be a $2 trillion business and the biggest derivatives market in the world. That is because most carbon 

trading is not done by companies needing to comply with carbon 

caps. Instead, they are done by financial speculators. 

So, if you look at this chart, which you have seen now for the 

fifth time this morning, but I would like to point out something different. It is the grey line on the bottom, which shows trading volumes. You can see that even though carbon prices have softened 

recently, that trading volumes continue to skyrocket. A lot of this 

churn comes from speculators. In the long term, I believe that a 

market that is dominated by speculators will run the risk of creating an asset bubble. 

This brings us to lesson two: Bubbles encourage excessive risktaking like, for example, making home loans to people with no income because it seems like housing prices will go up and up with 

no end. 

So, the same thing could happen in carbon. Most cap and trade 

proposals, as you know, include two types of carbon commodities. 

The first is allowances, which the government creates, and the second are offset credits, which are earned by companies that are not 

subject to carbon caps. 

So, an example of this would be: a pulverized coal-fired power 

plant in India makes its operations marginally more efficient, and 

then it sells those credits into the U.S. or the E.U. markets. This 

is where the issue of subprime carbon comes in. 

Now, we have just released a new report in which we explain 

how a carbon bubble could actually create a temptation for carbon 

offset developers to over-promise to their investors—for example, 

selling carbon credits based on projects that don’t exist, or simply 

just don’t create the greenhouse gas reductions that they are supposed to. So if that happened, those derivatives would collapse in 

value and the investors holding those derivatives would be, well, 

holding the bag. 

Which brings us to our third lesson: Financial innovation, if unchecked, can get out of hand. Now, we all saw in the mortgage debacle that financial engineers created increasingly exotic and complex financial instruments because it seemed like there was an unlimited demand from investors to sop up all of these mortgagebacked securities. With a $2 trillion carbon market, you can bet 

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that Wall Street is going to not just sell plain old carbon derivatives. They are going to get creative. 

So, for example, last year a big Swiss bank actually put together a $200 million deal in which they bundled together offset projects 

which were in various stages of completion, right, not finished yet, 

from three different developing countries. They sliced them into 

tranches, and they sold them as securities into the secondary markets.

Now, if this looks familiar, it is because it is the exact same 

structure that we saw with mortgage-backed securities. So, if some 

of the offset projects were to fail, then we would see that they could 

collapse in value and they could contaminate the tranches of securities that were sold and spread subprime carbon risk to the broader economy. Of course, it would also be an environmental failure 

as well. 

So that leads us to lesson four, which is that we all know Wall 

Street is not well regulated, especially derivatives. So, for example, 

we now see that there was a really long value chain between mortgage brokers and investment banks and credit default swappers 

like AIG. 

We had a patchwork of different rules and regulators that were 

responsible at different parts of the chain, but actually nobody was 

responsible for looking out at the entire chain, at the entire system. 

Nobody had the responsibility for responding to the risks that were 

building up in the system. 

Now, the carbon value chain also is going to be pretty long and 

complex. So, in the blue, we have offset project markets. In the yellow, we have the primary carbon trading markets, which have both 

credits from offsets as well as allowances. Then we will have a secondary market, which will have carbon derivatives and financial 

products based off of those carbon derivatives. 

I would say that unless Wall Street cleans up—unless Congress 

cleans up Wall Street and introduces new and robust systems for 

actually governing Wall Street, that it seems imprudent to create 

a really large and complex derivatives market and foist it upon an 

untested regulatory regime. 

So, what are our options? I mean, we can create the system, and 

we can try to curb the most excessive behaviors through rules like 

margin limits and anti-speculation and antifraud rules. That is absolutely necessary. 

But it may just be better to design a system that is more simple 

in the first place. So, for example, here is what would occur under 

a system proposed by Mr. Doggett—or, sorry, excuse me, by Mr. 

McDermott. This slide, as you can tell, does not allow for carbon 

offsets. So, subprime carbon wouldn’t buildup in the system. There 

isn’t a space for the proliferation of exotic financial products and 

so, of course, it is more manageable from a regulatory standpoint. 

This hybrid approach has both a cap on emissions, which gives 

us environmental certainty, and it also has us setting a stable price 

for carbon, which prevents this boom/bust cycle that other testifiers 

have talked about, where the boom stage sets the stage for excessive risk-taking and pushing up prices and making life more expensive for consumers and companies; and in the bust, you have 

tanking carbon prices, which pull the rug out from underneath 

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those who have invested in breakthrough technologies and those 

holding carbon securities. 

So, in closing, we commend Representative McDermott for his 

hybrid approach that he presents in H.R. 1683. We also thank the 

Committee for the opportunity to testify today. 

[The prepared statement of Ms. Chan follows:] 

House Committee on Ways and Means 

Statement of Michelle Chan, Program Director, Green Investments, Friends 

of the Earth—United States, San Francisco, California 

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Chairman RANGEL. Thank you so much, Ms. Chan. 

Dr. Gilbert Metcalf, the professor of economics at Tufts. 

STATEMENT OF GILBERT METCALF, PROFESSOR OF ECONOMICS, TUFTS UNIVERSITY, MEDFORD, MASSACHUSETTS 

Mr. METCALF. Chairman Rangel, Congressman Camp, and 

Members of the Committee, thank you for the invitation to testify 

this morning. 

Price volatility is of considerable concern to the business community and to the public. It will be very important for Congress to design a program to limit emissions in a way that minimizes unexpected price shocks to which firms and consumers cannot easily adjust.

My testimony makes the following key points about these issues. 

First, policy should distinguish between short-run price uncertainty, which the policy should try to minimize, and long-run uncertainty. Second, a carbon tax provides the greatest certainty over 

the future carbon price. 

Third, hybrid policies can bridge the difference between the desire for price certainty and emissions certainty, and I will describe 

in a moment a proposal for a hybrid tax system. Finally, cost containment mechanisms and cap and trade systems may have unintended outcomes. 

As we have seen already today, price volatility for cap and trade 

systems is well-known. This is the graph you have seen already for 

the European Union emission trading scheme. Prices vary over the 

past 3 years by a factor of four, ranging from 8 to over 32 Euros. 

The permanent price volatility experienced in the E.U. program is 

not unique. We have also seen this in domestic cap and trade programs, as I discuss in my written testimony. 

Concern about volatility has led to a number of cost containment 

proposals for cap and trade systems. One approach we have heard 

about today is a safety valve provision, with a price floor combined 

with a ceiling, as described by Dr. Burtraw. If one is going to take 

the cap and trade approach, the safety valve has much to commend. It is transparent, and it puts clear limits on the up side and 

down side price movement. 

One problem with a traditional safety valve approach is that anticipation of future government policy tightening to reduce emissions creates an arbitrage opportunity. Permits can potentially be 

purchased today at the safety valve price and banked for use in future high permit price years in a way that loosens aggregate caps. 

One way to address this concern is to limit the number of permits that may be purchased at the safety valve price. This is the 

approach that a strategic allowance reserve policy takes. 

But this also raises its own issues. Many of the cap and trade 

policies currently under consideration call for extremely sharp reductions in emissions by the middle of the century. Various analyses of these policies, including work I have done with colleagues 

at MIT, suggest that allowance banking will be sizeable in the 

early phase of the program. Making more permits available in the 

present through an allowance reserve that borrows against future 

allocations may simply lead to further banking. In other words, the 

reserve may be ineffective at damping price volatility. 

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I would like to suggest an alternative approach whereby a carbon 

tax is designed to meet emission targets during a control period, 

while minimizing price uncertainty. I call this the responsive emissions autonomous carbon tax, or REACT. It works as follows. 

An initial tax and standard growth rate for the tax is set. Benchmark targets for cumulative emissions are set for the control period, which might run, say, from 2012 to 2050. The law would require that the targets be met at 5-year intervals, for example, some 

target intervals. 

If cumulative emissions exceed the target in the benchmark 

years, the growth rate of the tax would increase from its standard 

growth rate to a higher catch-up rate until cumulative emissions 

fall below the target again. 

This graph illustrates the price path of a carbon tax designed to 

limit emissions between 2012 and 2050 to 250 billion metric tons 

of carbon dioxide. This is consistent with a moderate control regime. Emissions respond to price, but have some amount of randomness to represent short-run weather events and other random 

shocks.

I assume the fixed rate carbon tax grows at a 4 percent annual 

rate plus inflation. The REACT rate has a standard growth rate of 

4 percent plus inflation, and a catch-up rate of 10 percent real. 

A fixed rate carbon tax that would achieve these cumulative 

emission targets leads to excess emissions equal to 4 percent of the 

target, given the randomness I have assumed for emissions with 

this particular simulation. REACT, on the other hand, ensures the 

cumulative target is met. While there are a few instances of the tax 

rate increasing at an annual rate of 10 percent, it predominately 

grows at a 4 percent rate. 

While this graph is simply illustrative of a possible price path, 

it demonstrates the smoother and more predictable price path for 

emissions as compared to the price path that I showed for the European Union emission trading scheme. 

The advantages of REACT are, first, that short-run price volatility is eliminated. Long-run price uncertainty is reduced. It is a 

transparent mechanism for price changes. Emission targets over 

the control period are maintained. The approach I am taking in 

REACT is similar in spirit to the approach proposed in Congressman Larson’s H.B. 1337 and Congressman McDermott’s H.B. 1683. 

Summing up, policy should focus on eliminating short-run price 

volatility. A carbon tax provides the greatest certainty over future 

carbon prices. REACT is a tax-based approach that ensures longrun emission targets are met. 

Thank you for the opportunity to testify today. 

[The prepared statement of Dr. Metcalf follows:] 

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Statement of Dr. Gilbert Metcalf, Professor of Economics, Tufts University, 

Medford, Massachusetts 

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Chairman RANGEL. Thank you, Doctor. 

Our last witness on this panel is Dr. Margo Thorning, who is the 

senior vice president and chief economist for the American Council 

for Capital Formation. We thank you for being with us. 

STATEMENT OF MARGO THORNING, SENIOR VICE PRESIDENT 

AND CHIEF ECONOMIST, AMERICAN COUNCIL FOR CAPITAL 

FORMATION

Ms. THORNING. Thank you, Chairman Rangel, Ranking Member Camp, Members of the Committee, for allowing me to appear 

before you today. 

I would like to focus on two key issues: First, what is the impact 

of a cap and trade system on energy price volatility and on energy 

prices, GDP, job growth? Second, what is the impact of the U.S. 

achieving targets similar to some of the legislation that has been 

proposed, including the Lieberman-Warner bill, the Administration’s proposal, and others out there? 

I would like to talk first very briefly about the work that—the 

impact of a cap and trade system on GDP and job growth. As you 

can see in table 1 of my testimony, there is a range of results presented, from the ACCF/NAM, from MIT, from Charles Rivers, from 

EPA, from EIA. 

The range of results shows significant impact on GDP from imposing the Lieberman-Warner bill, which is a similar target to the 

Administration bill. GDP falls by a range of .2 percent by 2020 to 

1.5 percent. By 2030, the range is significantly higher, .3 to as 

much as 2.7 percent. There are jobs lost ranging from 270,000 in 

2020 up to 3.2 million, according to one set of estimates. By 2030, 

the job losses are even larger. 

The allowance prices, which are also shown in table 1, vary from about $31 a ton of CO2 to approximately $73 a ton of CO2 in 2020. 

By 2030, the cost of a payment to emit a ton of carbon ranges from 

$62 to $271. So, the impact of the cap and trade system is to increase unemployment relative to the baseline, to reduce GDP, and 

to significantly impact price volatility. 

I would like to show one slide from my testimony. The results 

from the NAM/ACCF study, which we released last year looking at 

Lieberman-Warner, shows significant impact on energy prices for 

gasoline, residential electricity, industrial electricity, and natural 

gas prices. These price increases occur because companies have to 

pay for the right to emit a ton of CO2.

The model we used was the National Energy Modeling System, 

EIA’s model, with constraints as to how quickly we could build new 

nuclear generation capacity. Our high-cost case assumed 10 

gigawatts, 10 new nuclear plants by 2030, the low-cost case 25 new 

nuclear plants by 2030. 

We assumed carbon capture and storage for coal and natural gas 

became available at rates of between 50 and 25 gigawatts, depending on high—or low-cost case. We assumed growth in renewables, 

and assumed carbon capture and storage did begin to be available. 

So, we built in reasonable assumptions, and when we do that 

and constrain nuclear, constrain carbon capture to what experts 

think is doable rather than, you know, what people might like to 

see, we see that gasoline prices by 2020 could be 20 percent higher 

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than the baseline case under the—or as much as 70 percent higher 

under the high-cost case. 

Residential electricity prices rise by as much as 28 to 33 percent. 

If we look at the high-cost case, which may prevail if we can’t build 

the nuclear and capture the carbon, we will see industrial electricity prices rising by as much as 49 percent by 2020 and 185 percent by 2030. 

Natural gas prices for the industrial sector might be as high as 

244 percent higher by 2030 because, of course, electric generating 

plants will have to switch to natural gas to try to meet the carbon 

reduction targets. 

So, the impact of this type legislation is almost certain to increase price volatility for energy, with negative consequences for 

economic growth, for jobs. The unfortunate consequence of this type 

of legislation is that if the U.S. goes it alone, according to the Administration’s own estimates, there will be virtually no difference 

in global concentrations of GHGs by the end of this century. 

This chart is taken from the new CEA report. The red line shows 

the referenced case for GHG emissions in the atmosphere, concentrations in the atmosphere. The blue line shows the reductions 

that would be made if the U.S. achieved targets similar to the 

Lieberman-Warner bill, or some of the other emission reduction 

proposals out there. 

So, the bottom line is there will be significant economic, negative 

economic consequences of the U.S. embarking on this path. If we 

go it alone, without China and India participating to reduce emissions, we will suffer economic loss and there will be no environmental benefit. Thank you. 

[The prepared statement of Dr. Thorning follows:] 

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Statement of Dr. Margo Thorning, Senior Vice President and Chief 

Economist, American Council for Capital Formation 

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Chairman RANGEL. Thank you, Doctor. 

How many of you believe that cap and trade is the most efficient 

way to go in terms of reducing emissions? 

[Show of hands.] 

Chairman RANGEL. Of the three of you, do any of you violently 

oppose a carbon tax? 

Mr. ELMENDORF. CBO, just to—as you know, Mr. Chairman, 

CBO does not make policy recommendations, so I am not for or 

against any particular policy. On the matter of efficiency, I think 

analysts widely agree that a carbon tax is an efficient way to reduce carbon emissions. 

A cap and trade system is certainly more efficient than a command and control approach, maybe less efficient than a tax. It depends importantly on the sorts of mechanisms that we have been 

talking about today that can help to reduce the short-term price 

volatility in the cap and trade system. 

Chairman RANGEL. I appreciate that. I think that most Members of Congress, like knowing Americans, believe that we have to 

do something. We have to do it fast. But they also acknowledge it 

is going to be a tremendous cost on the consumer in terms of the 

increase that is going to be passed on to them. 

So we have Members going in two different directions. A lot of 

us are concerned with what protection can we give the consumer, 

and believe that the tax system is the most efficient way to cushion 

the additional costs. 

But I am concerned with those people that favor the tax and 

trade even though, as far as I am concerned, I would want the 

most efficient way and have that proven to me as to what would 

be wrong. 

In terms of the common objective we want, if the carbon tax was 

the method that we decided on, where would you see the shortfall 

in terms of accomplishing our common mission? 

Mr. WHITESELL. Mr. Chairman, perhaps I could speak to that. 

I am an economist, and so I know the economic agreements for a 

tax. It is basically based on the idea that if emission reduction 

costs are uncertain, you want to set a price close to where you 

think the damage costs are from the emission of CO2. So you get 

as much reduction in emissions as needed to reach those damage 

costs.

So, that is a reason why a tax has advantages over a cap and 

trade. However, with the climate, we are not dealing with risks 

that are symmetric around possible outcomes. There is a huge risk 

that if we don’t do enough, we could be facing tipping points in the 

climate and a potential catastrophe. 

So, because of the fact that the risks are not balanced on either 

side, that is an added reason to focus on emission goals and make 

sure that cumulative emissions are within what scientists are arguing are necessary to reduce climate risks to acceptable levels. So, 

that is the reason for a cap. 

So I think that is a reason to kind of combine the best approach, 

the best features, of a tax with the emission caps that would reduce 

climate risks to acceptable levels. 

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Chairman RANGEL. Well, it doesn’t seem, from what you say, 

that you are violently opposed to using the tax system in part in 

terms of being able to cushion the additional costs to the consumer. 

Mr. WHITESELL. Yes. I think that the price stability of a tax 

is very helpful because it will allow us to get reductions that we 

need. However, I think you can get that price stability while still 

giving attention to cumulative emission goals, and I think that the 

approach in the Doggett-Cooper bill actually achieves that. 

Chairman RANGEL. Okay. 

Mr. LASHOF. If I could, I think in any policy designed to deal 

with global warming, we certainly have to pay attention to consumers. But I want to focus on energy efficiency as a critical component of a comprehensive policy because if we get that right, consumer energy costs can actually go down as we are reducing pollution.

The reason for that is even though prices per kilowatt hour of 

electricity may go up as power companies are forced to pay for putting pollution into the atmosphere, if consumers are able to use 

electricity more efficiently so they are using fewer kilowatt hours, 

what they care about is their bills. Our analysis suggests that consumer bills can go down while we are driving down pollution. 

So, whatever mechanism is required to make clean energy the 

profitable kind, we need to be sure that we are investing in energy 

efficiency technologies that will help consumers drive their bills 

down, and I think that is a critical component. 

The other component of it is whether—— 

Chairman RANGEL. Before you go to the other one, are you talking about an immediate moving toward penalizing those who don’t 

stay within the cap, that there will not be an increase initially to 

the consumer, that efficiency would drive the electricity costs 

down?

Mr. LASHOF. No. I am talking about getting incentives right so 

that utility companies have a profit motive to actually help their 

consumers be more efficient in how they use electricity. I am talking about building codes that are effective and enforced. 

Chairman RANGEL. I am asking how long. We have 2-year contracts in here in the Congress, and I just want to know how long 

would it take for a consumer-voter to recognize that efficiency is 

going to drive down his or her electricity costs. 

We are anxious to make certain that they don’t feel—they feel at 

least paying this possible. Are you suggesting that they don’t have 

to feel any in the short run? 

Mr. LASHOF. Well, I am suggesting that we should, as we have 

with the economic recovery bill, start investing in efficiency right 

now——

Chairman RANGEL. Assuming we do all of that, are you suggesting that if we do everything that you are suggesting we do, 

that initially the consumer electricity costs would not be increased 

or indeed may be driven down? 

Mr. LASHOF. Monthly bills could be driven down. Now, I do believe that we—the second part of it, particularly for low income 

consumers, we need to have particular provisions. That is where 

the Tax Code certainly comes in to ensure that their costs are managed.

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Chairman RANGEL. Okay. Mr. Camp. 

Mr. CAMP. Thank you, Mr. Chairman. 

Dr. Elmendorf, I just want to talk about a couple fundamental 

principles. In the short run, would a climate change policy that 

places a price on carbon, whether it’s cap and tax or straight carbon tax, would that mean higher energy prices across the entire 

economy?

Mr. ELMENDORF. Yes. I don’t know what you mean by the 

short run, but at any point in which we are putting a price of carbon emissions, that would be passed through to the cost that consumers face in energy products, but also all other products that are 

made using fossil fuels. 

Mr. CAMP. Thank you. Are there any goods and services that 

would not rise in price in response to that policy? 

Mr. ELMENDORF. I don’t know if there are any goods that use 

no energy in their production. It seems to me unlikely. 

Mr. CAMP. Dr. Elmendorf, two weeks ago, CBO testified that a 

15 percent reduction in greenhouse gas emissions from 1998 levels 

would cost the average household about $1600 per year. That 

seems like a far less ambitious target than the President’s desire 

to get emissions 83 percent below 2005 levels. So, accordingly, wouldn’t the $1600 per household per year cost 

likely understate the true cost to families of the policies in the 

President’s budget? 

Mr. ELMENDORF. I think there are two answers. One is about 

the time scale. The change that we talked about in our testimony 

a few weeks ago was the 15 percent reduction in the fairly—in the 

near or medium term. The reduction that people discuss on the 

order of 70, 80 percent in the emissions are in the order of 40 years 

from now. So, the time scale of that process is quite different. 

I think the second comment is that the cost to households depends very critically on what is done with the revenue that is 

raised from a carbon tax or from auctioning cap and trade allowances. As you know, our testimony discussed the ways in which 

that revenue might be used in different ways to affect the efficiency 

and distribution in the economy. 

Mr. CAMP. But when CBO estimates the impact of imposing, 

say, a cap and tax system on the economy, isn’t it true that when 

CBO scores those proposals, that it assumes the increases in energy taxes—that the increase in energy taxes act as a drag on the 

economy and thereby reduce other income and payroll receipts? 

Mr. ELMENDORF. Yes. An indirect tax—sales taxes, other sorts 

of indirect taxes—and the carbon tax, so the price of cap and trade 

allowances would fit in that category, that kind of revenue then reduces the incomes that people have and the taxes they pay to the 

government. That is part of what we estimate when we estimate 

the effects of these bills. 

Mr. CAMP. Isn’t it also correct to say that while the exact 

amount of this offsetting loss and other revenues depends on the 

design of the specific policy, and the CBO in January noted that 

traditionally there is a 25 percent offset, meaning that for every 

dollar of revenue generated by cap and tax, other tax receipts fall 

by 25 cents? 

Mr. ELMENDORF. Yes. 

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Mr. CAMP. So, that the net extra burden is not the amount of 

the tax or the price of the allowances. It is less than that. 

Mr. ELMENDORF. I think that 25-percent reduction in payroll 

and income tax receipts, that reflects CBO’s view that policies like 

cap and tax will result in a slowing of the economy, and therefore 

more unemployment and slower wage growth. 

The unemployment is more complicated. The estimates that people make suggest that an ambitious cap and trade plan of the sort 

that Senator Lieberman and Warner talked about and that we 

have estimated might reduce the level of GDP by 1 to 3 percent, 

about 20 years from now by 2 to 5 percent, or 2 to 6 percent 40 

years from now. 

Unemployment effects are more likely to be transitional issues. 

It is the shift of the economy from a fossil fuel-centered production 

toward other forms of energy that then creates some new jobs and 

costs some jobs. It is that transition that tends to affect unemployment. In the long run, I don’t think the effects on unemployment 

would be—— 

Mr. CAMP. Well, and just quickly, going back to this 25 percent 

offset issue one more time, we have heard about a number of proposals that attempt to mitigate the damage to American families 

from cap and tax by returning revenue raised via other programs, 

like energy stamps. 

Isn’t it true that if we were to return every dollar raised from 

cap and tax, the reduction in income and payroll tax receipts would 

mean the proposal would add to the deficit? 

Mr. ELMENDORF. If you returned every net dollar the government gains from a carbon tax or selling cap and trade allowances, 

then that would have a net zero effect on household—— 

Mr. CAMP. No. I am talking about making families whole. 

Mr. ELMENDORF. A net zero effect on—— 

Mr. CAMP. I am talking about making families and employers 

whole.

Mr. ELMENDORF. But that is what I am saying, too. I am saying that if you collect a dollar for carbon tax, the offset that we discuss is that with the dollar less that firms or households have, they 

will pay less in tax on that. So, in fact, you have collected a dollar 

in the carbon tax, but you as the government have collected 25 

cents less through some other tax. 

So, the government has collected a net of only 75 more cents. 

Those 75 cents can be returned to households and firms and make 

them whole and leave the government whole. 

Mr. CAMP. Your testimony today is that this is budget-neutral? 

This would be budget-neutral? 

Mr. ELMENDORF. I am not sure what ‘‘this’’ is. So, a specific 

proposal could do different things, and we would—— 

Mr. CAMP. Let’s say cap and tax. 

Mr. ELMENDORF [continuing]. The proposal. 

Mr. CAMP. In my question I referred to cap and tax. 

Mr. ELMENDORF. But there are lots of different cap and taxes. 

What I am trying to follow through on is your, I think, hypothetical 

case in which the government collects the dollar of revenue directly 

through a carbon tax, but it collects 25 cents less in revenue because households and firms have less income. 

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So, the government has collected a net of only 75 cents for that 

apparent dollar, and that 75 cents could then be recycled to households and firms that would be then in a neutral position. 

Mr. CAMP. I see I am out of time. But I would just say that if 

you raise a trillion and you give back a trillion, it is not revenueneutral because you haven’t raised a trillion dollars. But I see my 

time is expired, and I thank you, Mr. Chairman. 

Chairman RANGEL. Thank you. Let me share with the panel: 

Assume the bells will ring, and it is my understanding that we will 

have several votes, including a motion to recommit, that would 

cause us not to be able to get back for an hour. 

Certainly I would not want the panelists to remain here unless 

I knew that there were Members that would be coming back here 

when that is over. I think they tend to adjourn. That would be at 

12:30, approximately. 

So, could I get by show of hands how many Members would be 

coming back in an hour? 

[Show of hands.] 

Chairman RANGEL. So, we will continue the way we are, and 

I hope that—and I apologize to the panel that it will be a break 

while we go to the floor and vote. But there is clear interest in 

Members that are here and Members that probably would be returning later. 

So I would like to yield to Mr. Stark, who many, many years ago, 

when George Washington’s hair was black, he started in this down 

here in the Congress. I yield to you for 5 minutes. 

Mr. STARK. Thanks, Dad. 

[Laughter.]

Mr. STARK. It was that many years ago that I guess I introduced the first carbon tax. I guess I would ask: Is there anybody 

on the panel where the carbon tax wouldn’t be your second choice? 

Wouldn’t be your second choice? 

Ms. THORNING. It would be my first. 

Mr. STARK. First choice? Okay. I go back and I think, for instance, gas taxes. This Committee collects an awful lot of gasoline 

taxes, which eventually get spent by the states to build roads, pretty much. I don’t see any reason why we couldn’t change that to a 

cap and trade, and let the states swap their right to tax gasoline, 

and California could buy from Nevada, who doesn’t really need any 

roads any more because everybody flies to Las Vegas. 

When we had the Superfund—Dr. Elmendorf, you probably 

weren’t even out of high school then—but was there any major—— 

Mr. ELMENDORF. Thanks, Dad. 

[Laughter.]

Mr. STARK. Was there any major change in the economy or employment when the Superfund went in or when it went out? 

Mr. ELMENDORF. Well, changes in where the government 

spends money and collects money affect those sectors of the economy. Jobs are created where money is spent, and jobs are lost 

where money is no longer spent. 

Mr. STARK. Wouldn’t it be your understanding that at the rate 

the government is now spending money, that any carbon tax would 

get spent, if it hasn’t already been spent a dozen times over—— 

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Mr. ELMENDORF. I don’t think I want to speculate on the actions of the Committee. 

Mr. STARK [continuing]. So that while there is an issue, I guess, 

about—and I don’t know if anybody here would deny that consumers would pay eventually, whether it is cap and trade or tax— 

but the issue that somehow we have avoided is what is the cost to 

the country or to consumers if we do nothing. 

We haven’t heard a lot of testimony from the panel there. There 

is some disagreement, I guess, as to how important it is that we 

stop global warming, and there is a question of whether the United 

States by itself makes any difference unless we can encourage the 

rest of the free world, or the rest of the world to follow suit. 

I guess my question, Dr. Elmendorf, would be: What would be 

the economic pressure, if any, on the rest of the world to follow suit 

if we enacted any kind of a program, whether it be cap and trade 

or taxes? Would there be anything besides just moral suasion on 

the rest of the world to indeed follow suit? 

Mr. ELMENDORF. I think the crucial part of economic pressure 

can be how we treated imported goods. If we force imported goods 

that come from countries without compatible carbon prices to pay 

an extra duty on admission to this country, that puts economic 

pressure on other countries to raise carbon prices. 

The issue, as you know, is whether those sorts of border adjustments are consistent with WTO rules. I am not a lawyer. I am told 

there is uncertainty about that issue. 

Mr. STARK. The risk of retaliation, I suppose, from those countries who would—— 

Mr. ELMENDORF. Yes. There are provisions of the WTO Agreement that seem—that in some people’s judgment provides the opportunity for the sort of border adjustment that people are discussing. There are other interpretations that this particular thing 

that people would try to do, if we did the cap and trade system 

with border adjustments, would not pass muster with those rules. 

Mr. STARK. Thank you. I want to thank the panel for their patience and their efforts to help us understand what is the best way 

to go forward. Thank you all very much. 

Chairman RANGEL. An update on the floor situation. It may be 

a little less than an hour, but we will say that Members will return 

as soon as the last vote. 

I would like to yield to Mr. Herger. 

Mr. HERGER. Mr. Chairman, Mr. Nunes needs to be leaving on 

an airplane. Would it be possible to—— 

Chairman RANGEL. It is your time. You can do what you want. 

Mr. HERGER. Could I exchange with him and then have my 

question in his time slot? 

Chairman RANGEL. Of course you could. 

Mr. HERGER. Good. So, I will yield, too. 

Mr. NUNES. Thank you, Mr. Herger. Thank you, Mr. Chairman, 

for obliging me so I can make my flight. I appreciate it. 

I will be very quick with the panel. I want to get you all on the 

record. I just have some very simple questions that I would like to 

have answered, and it is ABC type of questions. So I will just start 

on the left. We will just go all the way to the right. 

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But the first question is that in your professional opinion—I 

don’t need scientific data or anything—but to take more carbon out 

of the air, would it be better off to, A, build 200 nuclear reactors, 

B, institute a cap and trade or carbon tax, or C, you don’t know? 

We will just start here with Dr. Lashof. 

Mr. LASHOF. I would say to institute a carbon cap, depending 

on the level of the cap, but because it is comprehensive. 

Mr. NUNES. Thank you, Doctor. Dr. Burtraw? 

Mr. BURTRAW. Not understanding the level of the cap that you 

speak of, I would agree that a cap would be better. 

Mr. WHITESELL. A price on carbon through either means would 

provide incentives for a lot of adjustments to be made, including 

nuclear power to be used more. 

Mr. NUNES. Thank you. 

Mr. ELMENDORF. I agree with the other statements from the 

panelists.

Mr. NUNES. B. All right. 

Ms. CHAN. As well. 

Mr. NUNES. B. 

Mr. METCALF. I would agree with that. 

Ms. THORNING. I would suggest that it might be more efficient 

to try to build the nuclear plants as fast as possible because they 

would have a meaningful impact on slowing emission growth. 

Mr. NUNES. Thank you. The second question I have is yes or no. 

But should we put a carbon tax and/or a cap and trade scheme on 

animal agriculture? Yes or no? 

Mr. LASHOF. I believe that concentrated animal feeding operations that would otherwise meet the emissions threshold for a 

large stationary source, say, 10,000 tons of carbon dioxide equivalent, could be regulated. 

Mr. NUNES. So, you mean a larger sized farm? Is that—— 

Mr. LASHOF. We are talking about large factory farms should 

be treated as factories. 

Mr. NUNES. Okay. 

Mr. BURTRAW. No, sir, I don’t. I believe that they could be subjected successfully to some direct regulation, or qualify for offsets, 

bringing valuable revenue into the agricultural sector from a cap 

and trade program in the rest of the economy. 

Mr. NUNES. Thank you. 

Mr. WHITESELL. I agree that larger farms, where you can 

measure the emissions, could perhaps be brought into a cap and 

trade system. But for smaller units, it is easier to measure the capture of greenhouse gases rather than the emissions that occur 

without special projects, and there are ways of handling that 

through an offset mechanism associated with a cap and trade system.

Mr. ELMENDORF. As you know, Congressman, I don’t make 

policy recommendations. 

Mr. NUNES. Thank you, Dr. Elmendorf. 

Ms. CHAN. Friends of the Earth would agree that CAFOs, concentrated animal feeding operations, should be subject to a cap. 

Mr. METCALF. I think certain elements of agriculture can be 

brought into the system. We are not going to be able to get all elements. The way to proceed is to look at where we can measure, 

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monitor, and verify easily, whether under a tax or cap and trade. 

Those systems should be brought in, and they would tend to be the 

large feed lots and some other applications. 

Mr. NUNES. Thank you. 

Ms. THORNING. I doubt that the costs of such a program would 

be worth the benefits, particularly in light of my slide showing that 

if the U.S. cannot get China and India and other countries to participate, what we do here will have virtually no impact. 

Mr. NUNES. Thank you. Mr. Chairman, I would like to thank 

the panel, and I would like to thank your kindness for letting me 

jump in front of Mr. Herger. 

Chairman RANGEL. Thank you. Have a good flight. 

The Committee will adjourn until the last vote. I hope that the 

panelists would be able to stay with us. I apologize for this delay. 

[Recess.]

Chairman RANGEL. First, thank our witnesses for your patience 

in coming back and for understanding our legislative process in 

causing this. Again, I would say that the closer we get to resolving 

this, I hope you don’t mind if we call you back in informal session 

to try to make certain that we have a bill which is going to be successful in the House and Senate. 

I would like to call on my dear friend from Michigan, who has 

quite a few emission problems in his hometown, besides other problems. Mr. Levin. 

Mr. LEVIN. Thank you, Mr. Chairman. We all join in thanking 

the witnesses. I said to several of you, your schedule has to assume 

we don’t really have one. So thank you. 

There are so many important details that need to be thrashed 

out, and it is tempting to focus in on them. But I thought instead, 

for my turn, I would ask questions, question a little more broadly, 

because I think the only hope of having any bipartisan approach 

to this is if there is acknowledgment of two things: 

No. 1, that there is a climate crisis in the world, and if that isn’t 

acknowledged, there is no hope, I think, of having an approach that 

cuts across some of the lines; and secondly, that there is a way to 

put together a plan that addresses the issues of the economic impact on manufacturing, on the economic impact on consumers, and 

also the issue of competitiveness. 

Let me zero in on an issue that has been raised here, and that 

is the impact on consumers. Maybe I will start with you, Dr. Elmendorf, and others will comment if you can if there is time. 

Whether one takes a cap and trade approach or a carbon tax approach or some combination, the agreement has been given that 

there will be kind of automatic impacts on the consumer, and that 

their costs will automatically increase dramatically. 

So, I would like to ask you your judgment. Isn’t there a way to 

address that issue, for example, to take revenues that would come 

and make sure part or many of them would be returned? Address 

this issue of the potential impact on the consumer and ways that 

might be addressed, if there are any, to—ways to address that 

issue.

Mr. ELMENDORF. Yes, sir. An increase in the price of carbon 

emissions would be passed through to the prices of goods that 

households buy, and in that way, would affect households’ ability 

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to buy what they have been buying before. They would need to 

have more money or buy less. 

But the revenue that the government would collect if it sold allowances in the cap and trade system or had a carbon tax can be 

used to offset the burden that households face, at least in the aggregate.

I think the harder issues are how one directs that money, if one 

wants to direct it; what mechanisms are used, and in part can be 

through proposals that have been raised for using the earned income tax credit or other tax means. There are government programs that adjust automatically with higher prices, so Social Security benefits would rise with higher prices. So, there are some 

things that would happen automatically, others that would have to 

be constructed separately. 

The other distributional effect worth noting is that there are people in particular industries that will be particularly hurt. That is 

different from the sort of rich versus poor distributional analysis 

that is often done, but also, I think, quite important, and those are 

people in particular industries or particular parts of the country. 

Mr. LEVIN. There are ways to address those issues as well? 

Mr. ELMENDORF. Yes. So, again, if the allowances are sold and 

the government collects revenue, or if it uses a tax, then it can use 

those revenues to compensate people who are being hurt. 

Again, it would need to develop a mechanism for directing money 

to people in particular industries, so one idea that has been proposed is to provide a subsidy for industries that continue to operate, and thus continue to employ people in those businesses. That 

is one mechanism that could be used. 

Mr. LEVIN. I think—yes, Ms. Chan. I have just a few seconds. 

Because I think if we simply raise red flags, any hope of a bipartisan approach will end. Yes, Ms. Chan. 

Ms. CHAN. I would just like to add very briefly that a couple of 

weeks ago, Friends of the Earth submitted some written testimony 

for another hearing, along with a couple of other organizations 

such as the National Community Action Fund and Public Citizen. 

It was focusing on how lower and middle income consumers could 

be protected. 

I would note also that this Committee has some really unique jurisdiction in their ability to use tax policy to keep consumers whole, 

such as the earned income tax credit, maybe electronic debit transfer systems, and things like that. So, there are some things that 

we might be able to submit for the record here. 

Mr. LEVIN. My time is up. Thank you. 

Chairman RANGEL. Thank you. 

I recognize Mr. Herger. 

Mr. HERGER. Thank you, Mr. Chairman. 

Dr. Burtraw, 2 weeks ago in your testimony before the Income 

Security Subcommittee, you stated that we would need to devote 3 

to 4 percent of allowances to offset the decline in international competitiveness of U.S. manufacturers. Is that correct? 

Mr. BURTRAW. Yes, sir. What I was saying was that that 

amount of allowance value, according to some, would be sufficient 

to keep those industries that are exposed to unfair import and export competition to provide a subsidy to production onshore to 

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make sure they keep jobs onshore. That does not reduce or remove 

all of the possibility for leakage, but it does protect jobs. 

Mr. HERGER. Now, on Tuesday, one of the witnesses invited by 

Congressman Levin stated that we would need at least 13 percent 

of allowances to offset some of the decline in international competitiveness for only some industries. 

Based on just the increase in energy prices projected by EPA’s 

analysis under the Lieberman-Warner bill, which would impose a 

less severe reduction in emissions than what the President has proposed, we have statistics that show that 52 different sectors of the 

economy would see declines in exports of at least half a billion dollars each. 

Many of these sectors are not covered by the plan described on 

Tuesday, and presumably are not covered under your plan. I want 

to list some of the sectors that would see significant declines in 

both exports and employment, and I would like you to give me a 

yes or no as to whether you think these sectors will suffer a decline 

in international competitiveness. 

Automotive stamping and parts? 

Mr. BURTRAW. Sir, I would defer to my colleagues on that, and 

be happy to send information to you about that and correspond 

with your staff further. But I don’t claim this is my own personal 

area of expertise. I am sorry. 

Mr. HERGER. Okay. Is there anyone who would like to comment 

on automotive stamping and parts? Would you have—— 

Mr. ELMENDORF. Congressman, I am sorry. I don’t think the 

Congressional Budget Office has done analysis on an industry 

basis. As a general matter, if there are not appropriate border adjustments made, then the industries that tend to be more carbon 

energy-intensive will be hurt worse. But I also don’t have specifics 

on that to offer you right now. 

Mr. HERGER. Okay. Well, what would you think on automotive 

stamping and parts? 

Mr. BURTRAW. I would think that that’s possible. Yes, sir. 

Mr. HERGER. How about fruits? 

Mr. BURTRAW. Fruits is a subcategory of food. If it is processed 

fruits or fresh fruits, I don’t really have the information to be able 

to answer that. 

Mr. HERGER. Car and tractor engines. You are nodding your 

head yes? 

Mr. BURTRAW. Yes. I think that that could be an exposed industry that we should be concerned about. 

Mr. HERGER. Semiconductors. 

Mr. BURTRAW. I don’t know. 

Mr. HERGER. Paint. 

Mr. BURTRAW. I have heard that mentioned before, but I don’t 

know, sir. I can’t speak with expertise. It could be an important 

one.

Mr. HERGER. It could be. Soybeans. 

Mr. BURTRAW. I don’t know. 

Mr. HERGER. Textiles and fibers. 

Mr. BURTRAW. I don’t know. 

Mr. HERGER. Tools and dies. 

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Mr. BURTRAW. I would imagine that would be, but I am guessing, sir. 

Mr. HERGER. Now, we used energy prices that assume slow 

growth in nuclear power and clean coal, which are consistent with 

the positions of two of your colleagues at the witness table today 

that oppose nuclear and clean coal. The estimates do not include 

the impact of allowances on cost. 

Let me turn and—but these are just some—and this is the point 

of the question—these are just some of the sectors that we would 

see significant declines in exports. I think many would say that the 

answer would be yes to each of those. I am very concerned that 

folks are rushing toward a policy without understanding the full 

ramification of its impacts. 

Director Elmendorf, has the CBO estimated how many allowances would be necessary to offset the decline in the international 

competitiveness of U.S. manufacturers? 

Mr. ELMENDORF. No, we have not. I think you raise an important issue, Congressman, and I think we need to do more work on 

the distribution of economic effects of this sort of legislation. 

Mr. HERGER. Well, I appreciate your saying that. I would like 

to urge you and ask you to do this analysis. I think it is crucial 

to our economy, to jobs, particularly now when we are in a down 

time. I really believe that Congress needs this information. 

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

Chairman RANGEL. I would like to join with Mr. Herger in 

making that request because it is so important no matter which solution people are seeking that we have to know the number of people and the nature of the impact. 

I want to thank Dr. McDermott, as I recognize him, for the hard 

work that he has put in this over the years. I hope your day has 

come.

Dr. MCDERMOTT. Thank you, Mr. Chairman. 

Dr. Thorning, I want to pose a hypothetical for you and then let 

you respond to it. We need to have energy independence from Middle East oil. We need to deal with climate effects. So, change is 

going to happen. Let’s assume that. Business is going to have to 

respond to one of these proposals made by various people up here. 

I would like to hear your choice as to which one you think would 

be best for the economy. Since you are the only one that is directly 

representing business—we have got a lot of people who are peripherally business, but you are the business person—which one of 

these plans? 

Do you want cap and trade, or do you want a cap with a fixed 

price and a guideline decline over the next 40 years? What is it you 

want? Since you have to take something. This is hypothetical. 

Ms. THORNING. Well, I think what—the long-term solution to 

reducing greenhouse gas emissions is going to depend on technology. It is going to depend on more use of nuclear power. It is 

going to depend on capturing and storing carbon. 

So, I think we need to continue the large government programs 

and private programs that are underway to develop these technologies. I think, as I said in my testimony, because whatever the 

U.S. does will have almost no impact on a couple of—— 

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Dr. MCDERMOTT. Please, don’t go into the rest of the world. It 

is going to happen here in the United States. The solar and the 

wind and the coal and the geothermal and all these energy proposals, what is the best one for them economically? 

Ms. THORNING. The least bad proposal, I think, would be a tax 

on emissions. But as I said, we will incur substantial costs with no 

environmental benefit from trying to hit near-term targets. 

Dr. MCDERMOTT. I take your point. I know that part of your 

argument. I want to know—because I think the business community is divided. I think that there are some industries who don’t 

want anything to happen, and there are other green energy kinds 

of industries who want to be able to predict the price and then put 

a plan in place to develop, over 3 or 4 or 5 years, a plan. 

I would like to hear Ms. Chan talk about that. 

Ms. CHAN. Well, I would agree with Dr. Thorning in that we 

will need some breakthrough technologies to come our way. That 

is going to take investment. It is going to take investment in R&D, 

capital investments, infrastructure investments. These investments 

are going to perhaps be significant for some industries. 

That is actually why it is helpful to have a stable and predictable 

price path, because you can do the business planning for that. If 

you had very volatile carbon prices, there would be a bit of an uncertainty for a company that wanted to make investments, in 

breakthrough R&D, for example, and then find out by the time 

they are paying back their bankers that they could have just really 

done it cheaper by just buying relatively inexpensive offsets or allowances right off the market. 

So, I think that because we really will need these breakthroughs 

in cleaner technologies to transition to a low carbon economy, that 

the clear price signals that are offered, for example, by your bill, 

by Mr. Doggett’s bill as well, provide that kind of stable path that 

allows companies to actually plan. 

Dr. MCDERMOTT. Mr. Lashof, I want to add a little because I 

see you would like to answer. Let me ask a further question for 

you.

What does a carbon-trading scheme, with all the inherent potential problems of derivatives and all the rest, what does that add 

to—rather than doing a tax? Why do that? Because you are just 

struggling, I think, to find stability in a cap and trade system, 

which is never going to get to zero. You are always going to have 

some fluctuations, whether you bring the lines together or however 

you do it. I would like to hear your answer. 

Mr. LASHOF. Well, I think the primary advantage that we see 

from a cap is providing greater certainty about achieving the emission reductions. Then the trading part—— 

Dr. MCDERMOTT. But my—let me just stop you. The bill that 

we put in has a cap that declines over the next 40 years, to 2050. 

So, we have already a cap in the bill. 

Mr. LASHOF. Right. No, and I—— 

Dr. MCDERMOTT. That’s what you want. You want a cap. 

Mr. LASHOF. I appreciate the—you know, I think a lot of 

thoughtful and interesting proposals that you and Mr. Doggett 

have put out, and I think there—and we are sort of converging 

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here between—you know, I think all of us have talked about various versions of hybrids. 

I think when you do that, though, you have to have some ability 

to adjust the price in order to make sure that you actually achieve 

those emission reductions. So, in that sense, it also becomes a little 

bit more like a cap and trade. So, I wanted to address—— 

Dr. MCDERMOTT. Would you trust the Secretary of Treasury 

and the Secretary of Energy and the head of EPA more than the 

derivative traders on Wall Street to set the price? If you gave the 

change capacity to those department chairmen in the government 

versus the traders? 

Mr. LASHOF. Well, I would—you know, what I proposed and 

what many businesses that are members of the U.S. Climate Action Partnership have called for is a cap. I trust EPA to address 

the environmental problem, which is limiting emissions. The price 

would be set not on the derivatives market but in the actual market for allowances. 

I think it is very important to regulate the derivatives market to 

ensure that any derivatives related to carbon allowances are traded 

on an exchange, and that it is transparent. I certainly agree that 

an unregulated derivatives market in this area, as in other areas, 

is a problem. But I think that can be addressed through proper 

market oversight rather than moving away from the cap mechanism.

Dr. MCDERMOTT. With just one bit of—more question, where 

have you seen a regulated derivative market? 

Mr. LASHOF. Well, I think that—— 

Dr. MCDERMOTT. I think you called it a well-regulated derivative market. 

Mr. LASHOF. The Commodities Futures Trading Corporation 

has, I think, moved in that direction, in some commodities. I am 

not saying that—I am sure that can be improved on. 

Dr. MCDERMOTT. Thank you, Mr. Chairman. 

Chairman RANGEL. Thank you. We have to follow up in that 

area.

Who was it? Oh, yes. Mr. Reichert of Washington may inquire. 

Mr. REICHERT. Thank you, Mr. Chairman. Thank you for hanging around while we had to go vote, and appreciate your presence 

here today. I know some of these questions might seem repetitive, 

but we are all trying to understand a very complicated issue. I 

think it also gives the citizens across the country who happen to 

be watching, who might catch this hearing at another time, to hear 

the answers more than once. 

We have heard that the United States must show leadership in 

the international climate change debate by imposing emissions reductions without requiring other countries to do the same. But concerns have also been raised that unilateral action by the United 

States won’t reduce global greenhouse gas levels. Even this week, 

the president, Mr. Gerard, of the Steel Workers Union expressed 

some concern over maybe the possibility that China and India 

won’t participate in this effort. 

If the United States acts and others don’t, U.S. employers and 

workers could be disadvantaged in the international markets. My 

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question is: What happens if the United States goes first, then 

other countries don’t follow our lead? 

Mr. ELMENDORF. Well, I think it is important to note that we 

have not gone first. In fact, the European Union has already started the process. So, we are in a sense playing catch-up. 

Mr. REICHERT. What about India and China, though? What if 

we go before India and China? 

Mr. ELMENDORF. So, I think it is very important to do two 

things in legislation. The first is to make sure that you include in 

the legislation a GATT legal form of border tax adjustment that allows you to put a tax on the carbon-intensive products—paper, cement, steel, glass. There are a number that are critical. 

What is interesting is that in fact, if you look at some of these 

carbon-intensive products, they actually—many of them don’t come 

from China. They actually come from Canada, from the E.U., from 

other countries that either have or will have a carbon price. 

But I think it is still important to do that, and it is important 

to do that in a GATT legal way. I think that is one reason why the 

tax-based approach is something that you really do want to be looking at because there is this uncertainty about the legality, but it 

may be easier to do with the tax. 

The second piece is that you may want to revisit—I think a necessary condition to get China and India on board with a policy is 

that the United States has to act. They are simply not going to do 

anything unless we act. Then if we do, then we have to use the 

moral suasion that we have by having a policy in place to lobby for 

their involvement. 

Mr. REICHERT. Are you calling these safety valves? Is that 

what those two things would be defined as? If India and China 

don’t work, is that the two issues you just mentioned? 

Mr. ELMENDORF. So, we have—the two issues are that we 

have taxes on carbon-intensive products in the imports of fossil 

fuels at the border to level the playing field between domestic production and imports. I think that is a very important piece. 

Then we go from there in terms of bringing China and India into 

a system within the next 10 to 15—— 

Mr. REICHERT. Dr. Thorning, real quick. 

Ms. THORNING. Yes. I would just like to point out that the European Union’s record is not very good. The E.U. 15 emissions have 

increased .8 percent since 2000. E.U. 27, all the 27 countries, have 

increased 1.5 percent over the 2000–2006 period. So, while the European Union has an emission trading system in place, it is not 

being enforced. 

Second, if we impose a border tax adjustment on imported goods 

from countries like China, who are funding a large portion of our 

deficits, I don’t think that is going to be helpful in terms of their 

being willing to continue to buy our debt. So, I think that border 

tax adjustment that people are looking at to try to save our manufacturing and energy-intensive jobs is probably not going to work. 

Mr. REICHERT. Was there some—yes, sir? 

Mr. WHITESELL. So, the border tax adjustment is something 

that applies to a particular foreign country that does not have a 

comparable carbon program. It may be better for the U.S. to put 

in place an output-based rebate along the lines of the Inslee-Doyle 

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proposal for the first several years of our carbon policy, which 

would protect our industries irrespective of the direction of the 

competition that they face in future years. 

After other countries, to a large extent, have implemented a comparable climate policy and there are few remaining holdouts, then 

you could apply a border tax adjustment specifically against a few 

countries.

The advantage of taking a sector-based approach to the application of output-based rebates would also be a way of encouraging developing countries to take a more sector-based approach to trying 

to solve their emissions problems as well. 

That might be a better way of creating an incentive structure 

through international negotiations and some technological and financing help from rich countries, rather than simply relying on the 

fact that you are putting a small tax on a very small share of their 

exports.

For example, China exports like only about 1 percent of its steel 

production, I believe. If we put a small tax on steel, then—or cement is another case. That would not have much of an incentive 

effect on getting China to the table in terms of climate policies. 

Mr. REICHERT. I thank the witnesses for their answers, and 

thank you, Mr. Chairman. 

Chairman RANGEL. Thank you. 

The chair recognizes my friend Richard Neal. 

Mr. NEAL. Thank you very much, Mr. Chairman. 

Dr. Elmendorf, this is fairly confusing to people even who pay attention to it. Price volatility, short-term consequences, how do you 

design a climate change program to account for what might be 

short-term or volatile changes in price? 

Mr. ELMENDORF. The price volatility in the short term arises 

in cases where there is a cap on emissions over a short time period, 

and then shifts in the cost of achieving that emissions cap. That 

can come from changes in the weather. 

Mr. NEAL. Right. 

Mr. ELMENDORF. It can come from economic conditions, or so 

on. So, the ways to reduce volatility, and thus the ways to reduce 

the cost of meeting any long-term emissions target, is to provide 

flexibility in the timing of when emissions reductions are achieved. 

The sorts of ideas we have all been talking about today in terms 

of price ceilings and floors, banking and borrowing, and managed 

price approaches are all different ways of trying to limit variability 

in the year, but allow over time for some level of confidence about 

the level of emissions reductions that occur. 

These different approaches make some different tradeoffs in how 

much emissions uncertainty they are willing to tolerate and how 

much price volatility they are willing to tolerate. 

Mr. NEAL. What does that mean to the consumer? 

Mr. ELMENDORF. Well, if prices are less volatile in the short 

run, then that reduces the dislocations in the economy. We have all 

seen, as the price of gasoline doubled and then fell sharply again, 

that causes distortions in people’s behavior. 

It hinders advanced planning by households and firms. It causes 

abrupt shifts in the things people do and the products they buy and 

who they buy them from, and so on. All those things make a cap 

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and trade program more costly for any given level of emissions, or 

which is to say if you keep the prices more stable, you can get the 

same level of emissions at a lower overall cost. 

Mr. NEAL. Are there any others that wish to comment? 

[No response.] 

Mr. NEAL. Thank you, Mr. Chairman. 

Chairman RANGEL. The chair recognizes Mr. Doggett for—and 

also for the hard work he has put in this subject over the years. 

Mr. DOGGETT. Thank you, Mr. Chairman, and thank you for 

convening this hearing. You know, it is obvious that some people 

can just not envision the tremendous economic benefits of moving 

to a clean energy economy. ‘‘Just say no’’ or its companion, ‘‘Just 

say higher taxes,’’ or its cousin, ‘‘Just say higher energy cost,’’ is 

not a policy. It is a state of denial. That is what we have seen here 

this morning. 

Fortunately—and the attacks on the Lieberman-Warner bill, 

Warner is Senator John Warner, the former Chairman of the 

Armed Services Committee, who recognized this is a serious national security challenge, and that just relying on the goodwill of 

polluters at home and abroad will not solve this program, is not a 

solution.

Dr. Lashof, I agree with you that there is something of a convergence here this morning. We have at least six people who have 

come to testify, all of whom are about trying to construct a solution. There are an almost endless number of problems with this 

whole issue, but we can’t abandon a solution. We need to try to figure out how to resolve each of these problems. 

I happen to think, and that is why I filed the safe market legislation, that Dr. Whitesell has with his work identified a mid-ground, 

a position that tries to get the benefits of limited price volatility 

with maximum emission reduction. 

Let me just ask you, Ms. Chan, in that regard: Doesn’t the safe 

market approach that Congressman Cooper and I have filed meet 

all of the objectives that you have set forth that you want to see 

addressed here? 

Ms. CHAN. I think it does. Friends of the Earth obviously cares 

about the environmental certainty. So to the extent that your bill 

provides for that, that is our first concern. 

Then on top of that, with the report that we released on 

subprime carbon, we are also pointing to the need to avoid the kind 

of market and regulatory train wreck that we are still sort of 

digging ourselves out of, especially when we don’t have a really set 

and tested regulatory regime to handle what Wall Street will take 

and make into a very, very complex market. 

So, I think that the benefits of price stability are not just in 

terms of being able to provide companies with the ability to plan 

and to make the breakthrough technology investments that they 

need to, but it also ends up really addressing the ‘‘subprime carbon,’’ the financial—the runaway financial innovation questions 

which we raised in our report as well. 

So, I would definitely say that your bill helps get us there to a 

good hybrid approach, as well as Mr. McDermott’s bill. 

Mr. DOGGETT. Thank you. Dr. Elmendorf, you have noted the 

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ulation, and trying to get emission certainty. There is a certain tension there. 

But doesn’t the safe markets approach achieve most of what one 

would seek on the price side, while assuring some emissions certainty?

Mr. ELMENDORF. Well, as you say, Congressman, there is often 

a tradeoff there. I think the safe markets approach picks a particular time horizon over which to achieve this uncertainty— 

achieve the certainty of emissions. 

Relative to a longer time horizon, your plan achieves certainty 

more quickly, but would generate somewhat more price volatility as 

a result. I think you are right that your plan balances those various considerations in a particular way. 

Mr. DOGGETT. You have pointed out, and this is true of a number of questions including those that Chairman Rangel has asked, 

it is possible to design a system where the net cost to the consumer, whether it is a consumer in Harlem or a consumer in Austin, Texas, is zero. It all depends on how you collect the revenue 

and how you redistribute it. It is difficult to do that, but it is possible to do that. 

Mr. ELMENDORF. So, I think the—I want to be clear about 

this—the money that is raised through selling allowances or having 

a carbon tax can be—your question of legislation—redistributed. 

Mr. DOGGETT. Right. 

Mr. ELMENDORF. Two cautions, though. The consumer in Harlem and the consumer in Austin, Texas have different lifestyles. 

Mr. DOGGETT. Right. 

Mr. ELMENDORF. They buy different goods in different proportions. So, holding harmless every individual person, regardless of 

where they work and what they do, is a much more challenging 

task than what I described in terms of the aggregate distribution. 

Mr. DOGGETT. Is a challenge. It requires people coming together, as you are today, trying to figure out how to solve the problem instead of how to deny it. 

Mr. ELMENDORF. The second caution is that imposing a price 

on carbon emissions would, in the estimate of all analysts that I 

have seen, reduce GDP as it is measured to some extent over time 

because we would be spending resources on limiting carbon emissions and not doing other things. 

Mr. DOGGETT. Just two final points, Mr. Chairman, if I might. 

We have got a chart here that has been passed out about what 

the cost is of addressing this problem. What we don’t have is a 

chart on the cost per state of not addressing it. I believe that these 

witnesses will concede—will be the first, in fact, to say—that the 

cost of inaction, the economic cost, can be disastrous for our economy.

Finally, as to Dr. Lashof’s position, my only disagreement with 

this U.S. Climate Action Network is the solving the problem 

through giving away allowances. I don’t think that has worked in 

Europe. I think that it is contrary to the objectives that we have 

here.

We would be much better off using the tax system in trying to 

get these moneys back into the hands of people most directly affected rather than trying to give away allowances to utilities and 

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hoping they pass along some of the benefits to the consumer. 

Thank you. 

Chairman RANGEL. You should all know in the course of your 

studies that the proponents of the cap and trade have not been 

very effective in explaining how they would prepare or cushion the 

consumer. I am not saying they are not thinking about it, but it 

is not as clear as those that believe that the Internal Revenue 

Service should be used for this purpose. You can wrestle with that 

and come back with some answers. 

Mr. Boustany. 

Mr. BOUSTANY. Thank you, Mr. Chairman. 

Dr. Elmendorf, does CBO have a definition of green job? What 

is a green job? 

Mr. ELMENDORF. We don’t have a definition of that. 

Mr. BOUSTANY. Shouldn’t we have a definition, an operational 

definition, if we are going to look at the economic impacts of this 

type of program, particularly as we start to look at job loss in certain sectors? 

Mr. ELMENDORF. Well, as I said to Congressman Herger, I 

think that we need to do more analysis at CBO of the economic effects of a cap and trade system or a carbon tax. We have done some 

work in that area, and as you know, we testified several weeks ago 

about distributional impacts across broad pieces of the income distribution.

But in terms of more specific analysis about the sorts of jobs that 

might be lost and the sorts of jobs that might be gained and where 

that would occur, that is not an analysis that we have done. But 

we will try to proceed in that direction. 

Mr. BOUSTANY. I would hope so because I think it is a critical 

issue as we go forward on this. 

Dr. Thorning, in your testimony you showed us some information 

about the increase in the prices of natural gas and some of the 

other energy areas that would occur substantially if we moved forward with something like this. 

Do those projections take into account President Obama’s budget 

provision to increase oil and gas taxes by $31 billion? 

Ms. THORNING. No, they do not. This analysis was prepared 

last year on the Lieberman-Warner bill. But clearly, anything that 

we do that raises taxes on U.S. industry, particularly oil and gas, 

will mean we are going to get less oil and gas production. That will 

put increased pressure on prices. So, those would be incremental 

to the numbers we are showing. 

Mr. BOUSTANY. If we look back historically and we look at 

what the impact was on the windfall profits tax on the oil and gas 

industry, the domestic oil and gas industry, what ended up happening was we shipped a lot of jobs overseas and became more dependent, in effect, on foreign oil. 

Ms. THORNING. Yes. 

Mr. BOUSTANY. Is it your opinion, if we move forward with this 

type of proposal, that we will indeed increase our dependence on 

foreign oil at a time when we don’t have other options or transition 

strategy going forward to the next energy economy? 

Ms. THORNING. Yes, I think that would be the case. I think 

there was a CBO report dealing with that windfall profits tax issue 

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that suggested we did lose domestic production. If we impose carbon taxes or cap and trade on domestic production, refineries will 

have to bear increased costs, which will mean—I believe we are importing about 15 percent of our refined product right now. 

We will certainly tend to import refined product from countries 

who do not have caps on emissions, so we will see leakage, not only 

of the jobs, but of the carbon emissions, and have less energy security.

Mr. BOUSTANY. In the absence of a transition strategy which— 

it looks like the two promising areas, in my mind, as somebody 

who has studied the energy markets, would be that natural gas is 

a transitioned fuel, as would be increasing our nuclear capacity. 

If we deny building out nuclear capacity, we run up the cost of 

natural gas. What are we doing to our economy? 

Ms. THORNING. Well, you can look at the chlorine industry and 

the ammonia industry, which I mention in my testimony. We have 

lost large chunks of jobs in those industries because of high natural 

gas prices over the last decade. The aluminum industry has also 

been impacted. 

So, we have some real-world examples of what high energy prices 

do to segments of U.S. industry. I think certainly the cap and trade 

or the tax on emissions would have similar impacts. 

Mr. BOUSTANY. Thank you. 

Dr. Elmendorf, I think it is safe to say that without the analysis 

on employment and unemployment in all these different sectors, we 

don’t really have a full understanding of how pervasive the impact 

would be in creating levels of unemployment in certain sectors, 

that we might—maybe on service we are not considering it at this 

time.

Obviously, the oil and gas industry, the domestic oil and gas industry, would be severely impacted by something like this. But 

there are other areas that are, you know, second, third degree removed from the oil and gas industry, but yet depend on these products.

So this analysis, I think, is extremely important if we go forward. 

Wouldn’t you agree? 

Mr. ELMENDORF. So, I think it is important for us to do. The 

uncertainty surrounding every aspect of climate change is very 

large. That is one of the themes of CBO’s work in this area. The 

uncertainty about economic effects is important. Uncertainty about 

the effects of further greenhouse gas emissions on temperature and 

then on other aspects of the climate is also very important. 

I think the challenge that you and your colleagues face is in acting under a certain amount of uncertainty. We and obviously other 

people at this table are doing our best to learn about the economic 

effects, and scientists are doing their best to learn about the physical effects. But we don’t know the answers yet. 

Mr. BOUSTANY. One final question. I know there are specific 

proposals out there that have been introduced as legislation. Have 

you modeled job loss based on those proposals? 

Mr. ELMENDORF. I don’t believe we have modeled job loss. 

Mr. BOUSTANY. Okay. Do you plan to? 

Mr. ELMENDORF. We have estimated a number of other aspects of the proposals. I don’t think we have done job loss. As I say, 

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that is an area that we think we need to move into. It is very challenging. I don’t know at what point we would have estimates that 

we would be comfortable with. 

Mr. BOUSTANY. Thank you. I yield back. 

Chairman RANGEL. Thank you. 

Does my friend Mr. Blumenauer have any thoughts on this subject?

Mr. BLUMENAUER. A few thoughts and observations, and 

maybe even a question, Mr. Chairman. 

Chairman RANGEL. You are recognized. 

Mr. BLUMENAUER. Thank you very much, and I appreciate 

your forbearance and our witnesses’ sticking with us on a dreary 

afternoon.

One of the things that I think is important, I want to be sure 

that we are precise about terminology when people are talking 

about holding harmless because the whole point of having a fee on 

carbon pollution is to change behaviors. 

If we come up with a lot of elaborate procedures that end up putting everybody exactly where they were before we started, we have 

got a lot of administrative costs and hoops and bells and whistles, 

but we haven’t dealt with the notion of discouraging industrial 

practices and personal behaviors that are slowly cooking the planet.

So, it is absolutely certain that we can take the resources or the 

regulatory scheme or whatever it is and make sure that this money 

somehow—and I spent 10 hours yesterday in the Budget Committee hearing every other Republican friend of mine across the 

aisle assume that somehow all this money is generated and it disappears, that it isn’t spent to revitalize the economy, that it’s not 

spent to help people who may have higher utility rates but lower 

utility bills because of what we incent and the practice as we go 

forward.

I hope, Mr. Chairman, that we can be sensitive, absolutely sensitive, to the impacts on some people who are locked into certain 

practices in rural America, or some industries that are going to require time to transition. But the whole point of this is to not keep 

everybody where they were when we started because then we 

haven’t accomplished anything for saving the planet. 

The second observation I would make, and I hope we have a 

chance with CBO and some of our other experts, to deal with the 

costs that people are bearing now. It isn’t the imagination of people 

in Alaska that has permafrost no longer perma, roads buckling, villages washing away, the costs of drought, amazing costs that the 

city of Las Vegas—I am sorry our friend Shelley is not here to talk 

about not only are they the No. 1 in this and the No. 1 in this and 

the No. 1—they are having probably the most serious water problems in America as the water level of Lake Mead goes down and 

down and down, below the intakes. 

So, being able to understands costs and consequences because I 

am deeply troubled the traditional way that we model. The most 

productive man in America is a rich businessman who is in a critical auto accident and is in intensive care and is going through a 

divorce because we measure all sorts of economic activity rather 

than value that is added. 

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We are going to need your help to be able to craft this as we go 

forward. I am not going to ask speculative questions based on a bill 

that hasn’t yet been designed about what the costs and consequences are. But I wonder if you might be able to help us with 

a little research. 

We don’t need it now, but I heard my friend Mr. Nunes talk 

about the value, you know, of 200 nuclear plants. I am wondering 

if any of you has access to research you can benefit about the carbon footprint of constructing 200 nuclear power plants—the concrete, a ton of carbon for every ton of carbon; the carbon that is 

expended to mine and process uranium. If we can have your help 

to look at the big picture, it would be helpful. 

I am concerned that we are moving in a situation here where we 

are not looking at both the costs and the consequences. I am hopeful that we can work with you to be able to deal with the notion 

of certainty. 

I would like to conclude on this point, and if I haven’t exhausted 

my time and your patience, because there will be regulation of carbon. It is happening around the world. Businesses are moving in 

this direction. The EPA just decided that unlike 8 years of the 

Bush Administration, getting slapped not once but twice by this 

Supreme Court for ignoring the law, that they are going to obey 

the law with carbon as a pollution. 

So, it is going to happen. It may happen in a regulatory fashion. 

It may happen in the cap and trade or a tax. In terms of certainty, 

do we get more certainty if carbon is regulated via administrative 

regulation, or the give and take of a legislation process like we 

hopefully can do in Congress? 

Mr. ELMENDORF. I was just going to say, very briefly, that 

CBO will be releasing shortly a review of the extensive literature 

on the consequences of climate change. I think that would address 

at least some of the issues you just raised, Congressman. 

Mr. BLUMENAUER. Super. Thanks, Mr. Chairman. 

Chairman RANGEL. Thank you. 

The chair recognizes Mr. Brady of Texas. 

Mr. BRADY. Thank you, Mr. Chairman. Just as an aside, I know 

that sort of throwing around claims like denial and do-nothing 

probably poll well. But I would just caution this Committee against 

such frivolous charges on such a serious subject. It seems to me 

that this is a complicated one, and it deserves legitimate questioning.

I mean, just in the last—the hearing today and the hearing Tuesday we had on this, which I really appreciate you holding, Mr. 

Chairman, you know, we have discussed different opinions on everything from cap and trade versus carbon tax versus a hybrid free 

versus auction emission allowances, and direct versus indirect 

emissions, core versus downstream industries, price caps, borrowing allowances, banking allowances, tax credits, offsets, exemptions, non-carbon costs, border taxes, tariffs, and sanctions, determining carbon intensity by process, feed stocks, firm versus national levels, questions of compatibility, leveraging, and leakage. 

This is a complicated issue. 

I would encourage Members to keep an open mind, but to ask 

questions. Because we have already seen as a Congress the impact 

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of us not questioning sophisticated modeling of financial risk. We 

have already seen the impact of that. I think we would be remiss 

in not fully examining the modeling and science that goes into an 

issue that has such a direct impact on this economy. 

I want to raise that issue. This week, analysis was done using 

the Lieberman-Warner bill EPA numbers modeled by the International Trade Commission. Chairman, what it shows is that if the 

Lieberman-Warner bill were enacted, or some version of it, that it 

would have a devastating impact on our U.S. exports, the American-made products and services here in the United States. 

On the screen right now is the result of this analysis, and what 

it shows is they just took a look at the top 52 sectors in manufacturing and agriculture and services in America. It shows that we 

would lose $162 billion in lost sales overseas from our Americanmade products. It is a 31 percent decline in exports. 

Those are a lot of U.S. jobs, and something we need to be concerned about as we deal with this issue. It is important we not 

rush to legislation. It is important we look at this whole issue very 

carefully, which again is why I appreciate Chairman Rangel holding these hearings. It is important to talk about of these. 

On the pricing issue today, so far we have heard at least four, 

and as of this morning five, ways to spend the money to keep 

American competitiveness as a result of auctions off these allowances. They are used to lower electric utility costs to finance transition to renewable energy, to offset the cost to core industries and 

carbon-intensive industries in America, and tax relief. 

As of this morning, Senator Harry Reid said that we ought to use 

the cap and trade dollars as a down payment for health care reform. So, now have promised these dollars to at least five different 

sectors. That is sort of how Washington works. 

My question, though, to Dr. Thorning is: If we divert—you know, 

in addition to electric costs, which are going to hurt our U.S. exports, but if Congress imposes these costs, increases these taxes, 

and then diverts those dollars to other issues, doesn’t that exacerbate our competitiveness with other countries, especially if we fail 

to convince China and India to go along with us? 

Ms. THORNING. Well, clearly energy costs are an important aspect of U.S. competitiveness. In fact, if you look at EIA data over 

the, say, 10 years, each 1 percent increase in gross domestic product is accompanied by a .3 percent increase in energy use. 

So, in order to increase GDP, we are going to have to use more 

energy. If we force quicker uptake of renewables than is technologically cost-effective, we are going to be increasing energy prices. 

That will obviously hinder competitiveness. 

So, I think we need to—another thing we need to remember is 

that the capital stock is long-lived. Refrigerators last 15 to 20 

years. So, do washing machines. So, do drill presses. Electric utility 

plants last 50, 60, even 100 years. So, the capital stock in the U.S. 

turns over very slowly, and it is going to take time to adjust in a 

cost-effective way to higher energy prices. 

So, the proposals that we are seeing discussed now will sharply 

increase energy prices and obviously render us less competitive. I 

think a host of other studies show the significant impact on leakage of jobs and imports—exports. 

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Mr. BRADY. Thank you very much. Thank you, Chairman. 

Chairman RANGEL. I want to thank Bob Etheridge and Mr. 

Davis for their patience. You are recognized for 5 minutes. 

Mr. ETHERIDGE. Thank you, Mr. Chairman. Let me thank each 

of you for coming. 

I am going to ask a little different question because I think we 

are in an area that is so complicated. It has been my experience 

through the years of working with folks and being in education 

that on complicated issues, that people don’t understand, and if 

they don’t understand it pretty quickly, they tend to be opposed to 

it until they have a better understanding. That is our first inclination. If you ask people do they want clean air, oh, of course we do. 

You start getting into the technicals of how we get there, that is 

the huge challenge. 

Let me ask a little different question, and I hope each of you— 

I will try to do it quickly so each of you have a chance to touch 

on because each of you mentioned in one way or another the potential of market manipulation, depending on how we do it, and the 

proposed mechanisms that we would have to put in place to limit 

volatility if we go whatever route we go. 

I am concerned about a larger question of oversight. Whoever 

wants to share their thoughts on this I would welcome because let 

me tell you why I say this. Last year I worked on legislation that 

sought to put some control mechanisms back into CFTC, and to try 

to rein in at that point what I thought everyone would agree was 

excessive speculation, maybe even a bit of manipulation, in the energy futures market. 

Then it started to bleed over into the commodity markets. Not 

only did we see what amounted to a doubling of our energy cost 

to the consumer, but we also saw corn prices and all the commodity 

prices go up within a year, which in turn doubled feed prices, causing agriculture to have problems, made a difference at the consumers’ table, and you know the rest of the story. 

My question is: How can we be recollection that we will be able 

to manage such a new and unfamiliar market and keep it from 

being manipulated, not just in this country but on a worldwide 

scale?

I think that is a huge issue that maybe not just this Committee 

but others have to look at, assuming we go and finally—what can 

Congress do to make sure that there is appropriate oversight of a 

market to prevent the abuse? Are there new regulatory schemes we 

might need to look at, CFTC, SEC, et cetera, et cetera? Because if 

somebody is doing something, we have got to figure out how to 

make sure it is done right. 

Mr. WHITESELL. So, perhaps I could speak up on that one. We 

do have existing regulation of commodity markets, and it has come 

across a number of loopholes. Congress has made efforts to try to 

close those loopholes. 

Mr. ETHERIDGE. Oh, I know. I introduced legislation that 

didn’t pass last year. It just got halfway through. 

Mr. WHITESELL. Uh-huh. There will undoubtedly be—with 

whatever kind of regulatory structure we put in place for the new 

carbon markets, the inventiveness of financial markets will undoubtedly come up with potential loopholes in that regulation, too. 

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So, I think that we should have—we should think as carefully as 

we can about what kind of regulatory structure we need. But I 

think that Congress should have some help in providing the oversight function for the regulation of these markets, so that I think 

that it is useful to have an independent board of some kind that 

actually oversees the regulators of the markets, and itself—— 

Mr. ETHERIDGE. Do you really believe the public trusts the 

market right now? 

Mr. WHITESELL. I believe the public has a lot of skepticism 

about the markets, and rightly so. So, that is why I think in addition to providing the best regulatory structure possible, we also 

want to structure a new a new climate program so that the incentives for this kind of behavior are removed to the extent possible 

so we don’t need to rely exclusively on the regulators after the fact 

to go and police these markets and make sure that doesn’t happen. 

Mr. ETHERIDGE. Anyone else want to comment? 

Mr. METCALF. Mr. Etheridge, you have identified an important 

issue here. I think this is one of the reasons why price-based approaches avoid this problem. It also speaks to the importance of 

trying to do this as far upstream as possible, which means that 

there are fewer entities that we need to actually regulate and monitor.

It also means that we can address the issue that, for example, 

for refineries, that we are applying the carbon price not only on domestic oil but on imported problem. It addresses that problem, too. 

Ms. CHAN. I would just like to add that I think that the question of regulatory capacity is a serious one, obviously. There are a 

couple of ways we could go about it. We could rely on sort of the 

plain vanilla financial regulators to cover this new market—CFTC, 

FERC, SEC, you know, and try to figure it all out between those. 

We could introduce or we could actually design these markets in 

a way that, as Bill had mentioned, are more stable in the first 

place, and eliminate the basic incentive for speculation, which is, 

you know, making prices more stable would cut out a lot of the 

pure speculators that are just in it for arbitrage, and would be 

more tempted to manipulate the markets, to resort to fraud, and 

those things like that. 

The really unique opportunity that we have here, and this is so 

much unlike the energy markets or unlike commodities, other commodities, is that we are creating this market from scratch. We can 

create it in whatever way we see fit. We don’t need to actually create it based on the same completely liberalized financial model that 

we have just seen, I mean, what it produces for us, for example in 

mortgages.

So, we have an amazing opportunity here to actually design it, 

not only for its own market stability but also for environmental effectiveness. So I think that some of the bills that have come out 

of this Committee take a really good stab at doing that. 

Mr. ETHERIDGE. Thank you, Mr. Chairman. I yield back. 

Chairman RANGEL. Thank you. 

Mr. Davis, you are recognized for 5 minutes. 

Mr. DAVIS OF ILLINOIS. Well, thank you very much, Mr. 

Chairman.

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Dr. Thorning, I appreciate the analysis that you have included 

in your testimony. I would like to ask you: How much of a problem 

do you think global warming really is? 

Ms. THORNING. Well, I think global warming is an issue that 

we all need to take seriously. But based on work of—for example, 

the Copenhagen Consensus convened 10 Nobel prize winners and 

looked at the world’s worst economic and environmental problems. 

They concluded that lack of clean water for the developing world 

is a particularly urgent problem. World Bank data show 5 million 

children die every year from lack of sanitation and clean water 

around the world. 

The International Energy Agency data show that over a million 

women and children die every year because they cook over dung 

fires, and they breathe in and have respiratory infections, and so 

premature death. So, there are many environmental problems that 

need the world’s attention. 

Mr. DAVIS OF ILLINOIS. Well, let me ask if you think that 

greenhouse gas emissions are contributing significantly to this 

problem.

Dr. THORNING. I don’t think they are contributing significantly 

to the burning of dung fires and the women and children dying 

from that. I think that is poverty. Poverty is the worst problem in 

the world, and climate change can better be addressed by promoting strong economic growth so that people have the wherewithal to adapt to change in climate. 

So, I think we need to focus on an array of issues, and shouldn’t 

devote an unduly large amount of society’s resources to addressing 

one problem. We have a host of issues that need attention. 

Mr. DAVIS OF ILLINOIS. Well, do you think that there would 

be significant long-term costs associated with this problem if we 

don’t put forth some real effort? 

Dr. THORNING. Well, as I showed the chart from the President’s economic report this year, even if the U.S. were to meet targets as President Obama is suggesting we meet, because global 

emissions are growing so much faster around the world in developing countries, our efforts will not result in any meaningful improvement in the environment. 

Therefore, I think we need to be cautious about putting our resources into programs that, when you look at the costs and the 

benefits, the costs far exceed the benefits. We need to continue to 

spend taxpayer money on R&D, which we are, on renewables, on 

carbon capture and storage so that we can burn our coal supplies, 

on nuclear generation, on renewable technologies. But we should 

not saddle our economy with a program that will be very costly and 

not materially improve the world’s environment. 

Most scholars think that China and India are not going to be 

swayed by moral suasion. What they care about is jobs, economic 

growth, and relieving the abject poverty of their citizens. Energy is 

necessary for economic growth, and right now we don’t have the 

technology to make the kind of switch that will enable us to quickly 

phase out CO2 emissions.

Mr. DAVIS OF ILLINOIS. Thank you very much. 

Dr. Elmendorf, let me ask you: Could you give us a real world 

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ance reserve and a cap and trade program would address extreme 

weather conditions in a short period of time? Say it is extremely 

hot in the summer, seriously cold in the winter, but averaged out 

over, say, a 5-year period, the climate change is not as great as either one of these extremes. 

Mr. ELMENDORF. So, Congressman, in a managed price approach, a regulator would set a path of prices that would be consistent in its estimation with the emissions cap that Congress had 

legislated. Then this regulator would sell allowances at that price 

in each of those years. 

If in certain years reducing emissions was more difficult because 

of weather conditions, then more emissions would be bought—more 

emission allowances would be bought at that price. If in other 

years it was easier to reduce emissions, then fewer allowances 

would be bought at that price. 

If the regulator has correctly assessed the average conditions, the 

average cost of reducing emissions, then over that period the emissions target would be met. If the regulator is wrong, as it undoubtedly would be to some extent, then it would make adjustments over 

time.

So, prices would not be fixed forever. They would not be perfectly 

predictable. But the very large short-term volatility that we have 

seen in existing cap and trade programs that don’t have this feature would be avoided. 

Mr. DAVIS OF ILLINOIS. Thank you very much. 

Mr. Chairman, could I have one additional question? 

Dr. MCDERMOTT [presiding]. Yes, you may. 

Mr. CAMP. Mr. Chairman, before we do that, I would ask unanimous consent to submit for the record an article and a slide referred to by Mr. Brady in his testimony. 

Dr. MCDERMOTT. Without objection, so ordered. 

The information referred to follows: 

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f 

Dr. MCDERMOTT. Go ahead, Mr. Davis. 

Mr. DAVIS OF ILLINOIS. Thank you. Yes. I would just like to 

ask Dr. Lashof: If your testimony, you state that the cap and trade 

system that the NRDC supports would provide the highest possible 

level of certainty that our environmental goals will be achieved. 

Could you tell me why you believe that? 

Mr. LASHOF. Yes. Thank you, Mr. Davis. You know, I think 

that we have heard a lot about a lot of details and complicated aspects, and I want to come back to the beginning. 

This is a problem we have to address. When we talk about the 

costs of addressing it, we need to, as Mr. Doggett and others have 

reminded us, always ask, compared with what? Compared with 

what is an economy right now which is in serious trouble. We have 

an opportunity to put people to work actually building solutions to 

global warming. 

I think that the key to the certainty is providing a long-term 

pathway for the emission reductions that have to be achieved. We 

can provide a lot of flexibility about how to achieve those emission 

reductions, and as we have heard Mr. McDermott’s and Mr. 

Doggett’s ideas, have a similar goal of achieving that long-term reductions.

But I think that is the key. We need a strategic decision to essentially phase out emissions of global warming pollution, and we 

need to get on that pathway as soon as we can. That will put people to work right now and will build a sustainable economy. 

Mr. DAVIS OF ILLINOIS. So the sooner we start, the sooner we 

will ultimately get there? 

Mr. LASHOF. Absolutely. In fact, we have an opportunity to use 

what are slack resources in the economy right now, putting people 

back to work to get started right away. 

Mr. DAVIS OF ILLINOIS. Thank you all very much, and thank 

you, Mr. Chairman. 

Dr. MCDERMOTT. Mr. Davis of Kentucky will inquire. 

Mr. DAVIS OF KENTUCKY. Thank you, Mr. Chairman. 

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Just listening to all this testimony today, earlier in the week, 

and just in the last couple of months on the Committee on Ways 

and Means, I am reminded of an experience I learned as a young 

Ranger in the Army, that after publishing a number of articles and 

doing a lot of academic research, I suddenly found that those who 

come up with the most complicated plans often are the ones who 

have never actually had to implement what they have developed. 

I spent many years in manufacturing, doing work in the energy 

industry. I am a big fan of alternatives. Provided a lot of support 

for the academic community on doing true, extensive alternative 

energy research to create jobs from the existing economy. I would 

like to build on the comments that Congressman Davis, my colleague from Chicago, made earlier. 

You know, we have forgotten one cost in this process, and having 

had to actually create jobs professionally, and live with the consequences of regulation, and see many of these across the country. 

The first thing I would point out is the rise in energy cost is a 

huge issue, and the human cost is profoundly beyond anything that 

has been talked about by any witnesses this morning. 

Just in the last—from the fall of 2007 to the spring of 2008, the 

increase in energy prices drove 100 million people additionally in 

the world into daily malnutrition. That is a real number, and a real 

cost, and a real human cost, with implications vastly beyond economy into national security, stability of cultures, et cetera. 

Where I would like to take this in this area is, having been an 

implementer, if you will, of a number of these policies in dealing 

with environmental compliance, and also wanting to be a good 

steward of the environment, I would like to follow up on these comments about electricity costs domestically that will rise under this. 

When I look at—we talk about cap and trade, and we look at the 

costs relative to the states, the one thing that is forgotten is a 

premise in the analysis. States like Wyoming, Kentucky, Ohio, Illinois, Utah, that have huge, much larger per capita increases, actually also are exporting their electricity to California and New York, 

which benefit from this massively. Those are not being considered 

in the production numbers, you know. 

I want to stress that the analysis in the proposed energy tax that 

the President has put forth—and it is a tax—I think is very conservative, but it assumes a 30 percent reduction in emissions, the 

one that we were shown here today, versus the 83 percent one the 

President wants. It assumes an allowance of $85 per ton, consistent 

with the recommendations of the Stern Review and consistent with 

the tax called for in Congressman Larson’s bill. 

In fact, if we adopt the policies recommended by some of the organizations represented here today, no new nuclear power—that 

actually does create jobs immediately—no clean coal, and limited to 

no offsets, the EPA has estimated that prices could cost more than 

$400 a ton. That means costs four times higher than the analysis 

shows.

You know, when we look at this real world issue, I don’t know 

how you tell the elderly person in Kentucky—and there is no way 

to possibly provide a tax offset to this—that a $3300 increase for 

their household cost for energy is going to be sustainable on a 

small income. 

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Dr. Elmendorf, Dr. Thorning, do you disagree with the EPA’s 

analysis that if we don’t expand nuclear power, if we don’t develop 

clean coal, if we prohibit or limit offsets, that this allowance would 

be as high as it is? 

Mr. ELMENDORF. So, Congressman, I agree with the logic that 

the extent to which we limit alternative sources of energy from 

being used, that raises the cost of reducing our use of fossil fuels. 

I can’t speak, I’m afraid, to the specific number that they use. I 

think it is—— 

Mr. DAVIS OF KENTUCKY. Reclaiming my time, you are a very 

strong advocate against much of the counsel that was brought by 

the Committee earlier, and thoroughly forward in those comments 

at the beginning of the hearing. 

I think it does beg an answer, though, you know, from your organization because this cost is real. It is an unavoidable fact that individual working families can be effectively and whole communities 

can be legislated out of business as a result of this. 

Mr. ELMENDORF. I am not sure what you think I was an advocate for in my testimony. I think I was very careful not to advocate. 

But I did in response to several questions talk about the harm that 

we inflicted on people in particular industries and particular parts 

of the country. 

I have agreed with several people who think that we should be 

doing more analysis of that than we have done. So, I think I have 

been very clear in recognizing that, but—— 

Mr. DAVIS OF KENTUCKY. So, you do agree with the EPA provision that it would drive these costs up without offsets in the use 

of clean coal? 

Mr. ELMENDORF. As I said, I agree with the logic that if one 

restricts alternative fuels, then that raises the cost of moving away 

from our current fossil fuel-based economy. But I cannot speak offhand to the specific numbers that you are citing. 

Mr. DAVIS OF KENTUCKY. How about you, Dr. Thorning? 

Ms. THORNING. Well, again, like Dr. Elmendorf, I haven’t seen 

the new study. But if you look back at EPA’s work last year on the 

Lieberman-Warner bill, they clearly show that without nuclear 

power, in their scenario No. 7, without a big ramp-up in nuclear, 

and without carbon capture and storage, the allowance costs would 

be substantially higher than under, you know, the more favorable 

assumption. So, I would tend to agree. 

Mr. DAVIS OF KENTUCKY. Okay. Thank you. 

Mr. Chairman, I just beg your indulgence for an additional moment for a follow-up question. 

Dr. MCDERMOTT. Go ahead. 

Mr. DAVIS OF KENTUCKY. Just open to the Committee: I am 

an engineer by background, coming from manufacturing. One of 

the things I would hear over and over from folks who actually have 

to carry out these programs is a request from the entrepreneurial 

community, particularly in research and development, to not impose command and control systems that pick winners and losers, 

which I believe much of these proposals inadvertently does. 

I think the intentions are all very good. They are very wellmeant. I think we all have common concerns on wanting to be effective stewards of the environment. 

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But just posing one point: When we look at the vast costs that 

could potentially be put out there, how would you feel—and I 

would leave it open to anybody—about instead of talking through 

very complex schemes of cost and balance, maybe to simplify, but 

to get to the intent of the goal of, I think, most of the parties that 

are in the hearing room today about going to an end state simply 

to find output levels rather than talking about trading regimes and 

things like that, and allow all alternative fuels, regardless of the 

nature, as long as they can hit compliance with acceptable environment standards. 

Of course, the consensus would ultimately come through the Congress that we would agree that if the nuclear plant, the coal plant, 

people could burn any kind of as-yet-to-be-discovered technology or 

develop that, wouldn’t that make sense? 

Mr. LASHOF. Mr. Davis, if I could start. 

Mr. DAVIS OF KENTUCKY. Yes, go ahead. 

Mr. LASHOF. I mean, I think that that is the intent of the proposal that I have outlined, which is to provide an overall cap on 

global warming and pollution and allow the maximum flexibility 

for any teaching that can deliver electricity or transportation services that people want without exceeding those emission levels, to 

participate in the economy. So, I think that—— 

Mr. DAVIS OF KENTUCKY. It is just the one reason that—if I 

could just reclaim my time for one second as we close up here. I 

appreciate everybody’s patience with the votes and everything else 

going on here today. I would be interested sincerely in follow-up 

from those of you who are interested in sharing this with me. 

The reason that I bring this up is I think it does beg a place for 

alternatives because the one thing I hear over and over in looking 

at developing jobs in the private sector is the inability to comfortably plan some predictability for risk management on investment.

This is worldwide in a global economy where we are dealing with 

a variety of challenges. Many countries are simply not going to 

play, and in fact could afford not to play because of their—you 

know, our relative impact on their economies. 

More to this point of how do you effectively make this kind of a 

transition? Why would nuclear or coal or some of these others not 

fit if we simply could set a SOX/NOX/mercury, some reasonable 

level for carbon emission, knowing that Earth has its own ability 

to generate that well—and this isn’t disputing or refuting claims or 

assumptions, even. 

That is where I am just coming into this and trying to understand the need for this. If you want to set a foundation base, it 

would be some fairly simple boundaries, and the tech and academic 

and research communities could come up with a lot of things in a 

lot of different areas. There are a lot of different regions to create 

jobs based on the resources they have. 

Mr. LASHOF. I think you have identified the clarity of clear carbon pricing, that however we do it, that does then provide the incentive to come up with carbon capture and storage that gets—that 

doesn’t get this price applied to it. 

Mr. DAVIS OF KENTUCKY. Well, and to that point, I understand the question is always storage and sequestration. But you 

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can make stuff with CO2. You can use it for oilfield reclamation. 

You can use it for biomass feed stock, you know. Every aspect, you 

can open up new ones in terms of research and value-added usages 

that aren’t necessarily, though, going to get reflected in this where 

the average consumer could bear a huge burden. 

We can continue this dialog at another time. I know that we are 

well past this. But I would be interested in follow-up communication with you on this as we address this because ultimately my 

concern is the huge cost that is going to be put on the working poor 

and working families. 

Thank you, Mr. Chairman. I yield back. 

Dr. MCDERMOTT. Thank you very much. 

As we close here, I would like to give you one last opportunity 

around a question I will pose, and that is: We have heard today 

the fear, and certainly it has been expressed in many different 

ways, any system is going to be so costly to the American economy 

that it sounds almost like it would be brought to its knees. 

Now, how is it that the Europeans were able to design a system 

and make some events—maybe not much, but they made some— 

that didn’t bring the economy to its knees? I mean, I don’t want 

to leave the last thing here is that this is the end of the American 

economy as we know it if we put a system in place one way or another.

I would like to hear what you say. How did the Europeans do 

this?

Mr. WHITESELL. Perhaps I could start this one off. I think if 

we avoid the kind of command and control approach that could result in substantial costs, and instead put a broad price on carbon, 

the American economy is very inventive and will adjust to the market price of carbon in ways that will probably result in more reductions in emissions than our models will forecast. 

That seems to have been the case with other kinds of cap and 

trade programs. The inventiveness of the economy is often underrated, and its ability to respond to a reasonable price on carbon. 

In addition to that, we also need to take account of the client scientists’ views about the levels of emissions that could pose substantial risk to the climate. So, we need to take account of both price 

as well as emission levels. I think a lot of the proposals we have 

put forward today are ways of taking account of both of those objectives.

Dr. MCDERMOTT. Yes. Dr. Thorning? 

Ms. THORNING. Yes. I would just like to point out, as I show 

in figure 7 of my testimony, according to the European Environmental Agency, the E.U. is not on track under current measures 

to even hit the Kyoto target. My testimony from last week—which 

maybe I could submit for the record—I had charts that showed that 

the European GDP growth over the last decade has been slower 

than that in the U.S., and their unemployment rate has been substantially higher. 

So, not only are they not meeting their targets, as I mentioned 

earlier today, overall emissions are growing from 2000 to 2006. 

GHG emissions, according to their own data, are growing. 

So, Europe is not making it. I think to try to base a system in 

the U.S. on what they are doing is to set us up for failure, too. 

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Dr. MCDERMOTT. I wasn’t saying we would set up the same 

system. I was saying we would set up American system. I think 

that that is perhaps a nuance you might want to think about. 

Yes.

Mr. ELMENDORF. I would just conclude where I began, Congressman, which is that either a carbon tax or a cap and trade system provide great flexibility in where and how emission reductions 

are achieved. That is why they are so much more cost-efficient than 

a command and control system would be. 

But also allowing flexibility in when emission reductions are 

achieved through the sorts of mechanisms that have been discussed 

today can reduce the cost still further. Ultimately, it is a matter 

for you and your colleagues to decide whether those costs are worth 

bearing for the benefits of slowing climate change. 

Dr. MCDERMOTT. Yes? Dr. Lashof? 

Mr. LASHOF. Well, Dallas, too. 

Dr. MCDERMOTT. After you, my dear Alphonse. 

Mr. LASHOF. Well, thanks for that question. I would like to 

point out a couple of things about this. 

First of all, if we look at Dr. Thorning’s testimony, in the worst 

case in her analysis she talks about—she presents it as a reduction 

in GDP. But look at it a little more carefully, it is a reduction relative to the baseline projection of growth in GDP. In the very worst 

case of her analysis, that was a 1.1 percent reduction in 2020. 

Now, I think that is wildly exaggerated in the fact that if we do 

this right, we will expand our GDP relative to baseline. But let’s 

assume it is true. What that means is that the projected growth 

in our economy between now and 2020, which is probably on the 

order of 50 percent, would be achieved three or 4 months later than 

otherwise.

So, nobody’s analysis, even the opponents of moving forward in 

this direction, is saying this is the end of our economy as we know 

it, to answer your question. 

But beyond that, I think when you look at these scary numbers 

about cost, yes, if you assume that—you take 90 percent of the 

compliance options off the table by imposing artificial constraints 

on the use of carbon capture and storage. You don’t account for energy efficiency, and you say you can’t build as much wind in the 

future as we actually built in the United States last year. 

You impose all of these constraints on your model. Then you can 

be sure that you can calculate very high costs. So, you can get any 

answer you want depending on how you torture the model. 

But I think a realistic assessment says that there are huge opportunities to put Americans to work building the solutions to climate change, and actually build a much more robust and resilient 

economy going forward as we address this problem. 

Dr. MCDERMOTT. Yes? 

Mr. BURTRAW. Mr. McDermott, I would just sum by saying 

that, yes, we are trying to build an American system here. We have 

learned from the Europeans. The European cap and trade program 

covers only 50 percent of the emissions on the continent, so the 

growth is occurring in the uncapped portion of their economy. 

That is why you hear most American proponents talking about 

any economy-wide approach, and you have heard a number of prowwoods2 on DSKGBLS3C1PROD with HEARING

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posals here today that can seriously help manage and constrain the 

overall costs to the economy. 

Dr. MCDERMOTT. Ms. Chan? 

Ms. CHAN. I would again reiterate your point that we are going 

to be creating our own system. So we can create one, for example, 

in which we auction or sell all of the permits, and that will reduce 

some of the problems that we have seen in the E.U. 

We can design a system that covers a bigger part of the economy, 

and we can design one that actually closes down and shuts down 

the ability for Wall Street speculators to make havoc with potentially complex securities that will be built off of these markets. So, 

we can do it our own way. 

Dr. MCDERMOTT. Mr. Metcalf. 

Mr. METCALF. I would just caution one against looking at the 

European unemployment experience in trying to attribute to the 

cap and trade program. They have been struggling with high unemployment long before they were thinking about climate change. 

As others have said, we will do an American, a U.S.-based approach. It will be very different than the European approach. In a 

sense, the European approach is how not to do it. It was very limited coverage done in a very complex way. I think we can learn 

from that and do a much more streamlined, efficient, and comprehensive approach, which will also address many of the leakage 

problems that have been raised today. 

Dr. MCDERMOTT. Thank you all very much for your testimony. 

I want to say that your contribution to this is very important because you are educating a lot of people on this dais who do not understand all the nuances of what we are going to make decisions 

about.

So you spent a lot of time here, and I want you to know it is appreciated by all of us. Thank you very much. By the American people, frankly. Thank you. 

[Whereupon, at 1:59 p.m., the hearing was adjourned.] 

[Submissions for the Record follow:] 

Statement of Joyce Dillard 

We, voters, in the City of Los Angeles defeated a ballot measure called Proposition 

B Solar Energy and Job Creation Program. We voted against these popular issues 

of renewable energy and jobs because there is no long-range strategic planning for 

the anticipated costs, the validity of the applicable uses is questionable, and predetermined deals omitted the public. Cap and Trade is the financial element of Renewable Energy. Missing is that long-term planning that is a State-mandated issue 

such as the General Plan and its many Framework Elements. Required, consistent 

reporting is not occurring, leaving a void in execution of any such broad plans on 

Climate Change. Key is the watershed issue, yet watersheds are delegated to State 

and Regional Water Boards, the State Department of Water Resources and the City 

of Los Angeles’ Department of Water and Power, a supplier; and the Bureau of 

Sanitation. Disadvantaged communities (DAC) are an item in the funding planning 

of State water propositions. 

Unfortunately, State law allows non-profit corporations as a voice. The Citizens 

are absent from the equation. Christopher Field, Carnegie Institution, Department 

of Global Ecology, Stanford University and contributor to Nobel Peace Prize winning 

IPCC, gave a talk at the UCLA Marshak Colloquium in February, 2008.We got his 

message. It is the maintenance of the ecosystem that counts in Climate Change. Destruction of the rain forests causes destruction of the climate. Cap and Trade is not 

the answer for the long-term. The recognition and incorporation of the Ecosystems, 

and Ecoregions (non-political regional jurisdictions), are key elements for our future. 

It is not only the Oceans, but the Forests that will maintain a balance. It is the 

fish, flora, fauna and wildlife. It is not only the United States, but China, Russia, 

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1The views expressed in these comments are those of the authors, and do not necessarily reflect the views of any clients of the firm. 2See, e.g., Lieberman-Warner Climate Security Act of 2008, S. 2191, 110th Cong. 

India, Brazil, and Iraq that will maintain a balance. It is the atmosphere that 

counts, not the financial institutions. We are unique in Los Angeles as we are a City 

on oilfields with methane and other greenhouse gases. Yet, regulation is minimal 

and emissions inevitable. A construction worker at Belmont High School, now 

known as Roybal Learning Center, told an associate that this site was worse than 

the fields of Kuwait. Landfills, such as Sunshine Canyon, are surrounded by ‘‘cancer 

clusters.’’ Methane issues have not been addressed. Public health is at risk. Disease 

costs are part of Climate Change. Real property is affected. That property gets devalued with greenhouse gas issues. Geothermal energy is up for discussion in Los 

Angeles as we address solar energy issues. Solar produces intermittent energy; geothermal produces baseline energy. Geothermal is deep into the earth, near earthquake fault, like the Salton Sea. California is known for earthquakes, so why is geothermal being addressed without the discussion of the damage caused by a quake. 

The insurance industry is not at the table in these discussions. Cap and Trade 

has no effect here. That issue needs to be tabled. We need long-term strategic planning in land use, water, renewable energy, transportation and economic development. One without other leaves a void. Regulation needs to be review and updated. 

Cost is an issue. Quality of life is an issue. Green Job Creation is the hidden hook, 

but based on closed-door deals. Transparency? Let the public in. It is their money 

and their lives. 

Joyce Dillard 

f 

Statement of Terence P. Stewart and Elizabeth J. Drake 

The following comments are submitted in response to the Advisory from the Committee on Ways and Means, dated March 19, 2009, announcing an opportunity for 

the submission of public comments for the record regarding the ways that climate 

change legislation can be designed to reduce or eliminate price volatility while still 

achieving specific science-based environmental objectives. We attach hereto a paper 

we have written on criteria for a U.S. climate change initiative that is designed to 

meet the scientific objectives of reducing greenhouse gas emissions while avoiding 

excessive economic costs, price volatility, and unnecessary distortions to international trade. 

We appreciate the opportunity to provide these comments to the Committee, and 

thank the Committee for its attention to this vitally important issue. 

A Consumption-Based Approach to Combating Climate Change 

By Terence P. Stewart and Elizabeth J. Drake 1

Introduction

Recent debate over climate change policy in the U.S. Congress has focused primarily on programs that seek to regulate the production of greenhouse gas (GHG) 

emissions in the United States. For example, proposals for a cap-and-trade program 

to address climate change would require U.S. entities to obtain permits for the GHG 

emissions they produce, and permit such permits to be traded among entities.2 Consensus on such an approach remains elusive, as stakeholders debate the proper 

scope and ambition of such a program, the administrative burdens of the program, 

the costs it would impose and who would bear those costs, the extent to which producers in other countries would bear similar costs and how any cost differentials 

can be best addressed, the consistency of certain elements of the program with existing international trade obligations and on-going international climate negotiations, 

and whether the program would deliver the emissions reductions required to reach 

scientific and environmental objectives. 

A number of the limitations and difficulties posed by current cap-and-trade proposals stem from the program’s focus on regulating GHG emissions associated with 

domestic production. Refocusing regulatory efforts on the emissions associated with 

domestic consumption, instead of production, can avoid many of these pitfalls. This 

assessment of the advantages and disadvantages of the different approaches is guided by three principles. 

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3The U.S. imported $1.491 trillion in manufactured goods in 2008. U.S. Census Bureau, U.S. 

Bureau of Economic Analysis, U.S. International Trade in Goods and Services: December 2008 

(Feb. 11, 2009) at Ex. 15. In 2008, U.S. manufacturers had $5.185 trillion in shipments. U.S. 

Census Bureau, Full Report on Manufacturers’ Shipments, Inventories and Orders: December 

2008 (Feb. 5, 2009) at Table 1. Imports were thus equal to 29 percent of domestic production 

for 2008. 4See, e.g., U.S. Environmental Protection Agency, ‘‘Cap and Trade: Acid Rain Program Basics,’’ available on-line at http://www.epa.gov/airmarkets/cap-trade/docs/arbasics.pdf. 5The ozone-depleting chemicals tax is codified at 26 U.S.C. §§ 4681–4682. The superfund tax 

was codified at 26 U.S.C. § 4661 et seq. See, e.g., J. Andrew Hoerner, The Role of Border Tax 

Adjustments in Environmental Taxation: Theory and U.S. Experience, Working Paper Presented 

at the International Workshop on Market Based Instruments and International Trade of the Institute for Environmental Studies, Amsterdam, the Netherlands (Mar. 19, 1998) at 9–12; Elizabeth Cook, ed., Ozone Protection in the United States: Elements of Success, World Resources 

Institute (Nov. 1996). 

1) Maximize Environmental Benefits: Regulating the emissions associated 

with domestic production captures only a portion of the nation’s carbon footprint. 

In manufacturing, for example, the U.S. is a large net importer, and goods purchased from abroad equal nearly 30 percent of all domestic production.3 A consumption-based approach would maximize the environmental impact of a climate change 

program by regulating emissions associated with goods consumed in the U.S., regardless of their origin. A consumption-based approach further maximizes environmental benefits by avoiding the creation of incentives to relocate carbon-intensive 

production to less-regulated environments. This will help ensure that domestic climate change policies do not distort international trade and that emissions regulations do not inadvertently raise global emissions levels instead of lowering them. 

2) Minimize Economic Costs: A production-based approach will impose a variety of costs on domestic entities, some of which may be volatile and unpredictable 

under a cap-and-trade system. Such costs may be particularly difficult for manufacturers to pass on to their customers in a recessionary environment, especially so if 

domestic manufacturers bear costs that are not borne by foreign producers. A consumption-based system, by contrast, is designed to increase the price of carbon-intensive goods consumed in the U.S. in a transparent, predictable and uniform manner, regardless of the good’s origin. This approach sends the appropriate signals to 

consumers and creates demand for less carbon-intensive goods, while avoiding imposing disproportionate costs on U.S. producers. 

3) Honor International Trade Rules and Principles: A system that seeks to 

impose costs on production may create WTO concerns, because efforts to impose 

similar costs on foreign producers (or rebate such costs for domestic producers or 

for export production) could be challenged as trade barriers or subsidies that would 

have to be justified under exceptions to WTO rules. In contrast, a system that regulates domestic consumption treats all domestically-consumed goods equally, no matter where they are produced, based only on their carbon-intensity. While it is possible to fashion WTO-consistent approaches under either approach, there is a higher 

likelihood of limited or no conflict from a system that is based on consumption with 

equal treatment for domestic and imported goods alike. 

Based on the above principles, some of the advantages of targeting consumption 

instead of production in a climate change program are reviewed in more detail 

below, followed by suggestions for some possible elements of a consumption-based 

program.

II. The Advantages of Regulating Consumption Instead of Production 

In assessing various proposals for addressing climate change, it is helpful to understand production-based and consumption-based approaches that have been used 

to address other environmental problems. Cap-and-trade systems regulating the 

GHG emissions associated with domestic production are primarily modeled on the 

acid rain program, which created tradable permits for domestic entities that emitted 

sulfur dioxide.4 The primary mechanism for regulating emissions associated with 

domestic consumption would be a carbon tax or GHG emissions fee. There are several precedents for such a fee, including the excise tax on ozone depleting chemicals 

(ODCs) and the Superfund tax.5 These precedents are discussed in more detail 

below.

While there are potentially many advantages to addressing climate change by regulating consumption of carbon-intensive goods rather than their production, the 

focus below is on ten key areas in which a consumption-based approach better 

achieves the core goals of maximizing environmental benefits, minimizing economic 

costs, and honoring international trade obligations. Finally, while these comments 

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6For a critique of the applicability of the acid rain model to climate change, see, e.g., Robert 

J. Shapiro, Addressing the Risks of Climate Change: The Environmental Effectiveness and Economic Efficiency of Emissions Caps and Tradable Permits, Compared to Carbon Taxes (Feb. 

2007) at 18–19, available on-line at http://www.sonecon.com/docs/studies/climate_021407.pdf;

Kenneth P. Green, Steven F. Hayward, and Kevin A. Hassett, ‘‘Climate Change: Cap vs. Taxes,’’ 

Environmental Policy Outlook, No. 2, American Enterprise Institute (June 2007). 7 Elizabeth Cook, ed., Ozone Protection in the United States: Elements of Success, World Resources Institute (Nov. 1996). 8 26 U.S.C. §§ 4661(a) (Superfund); 26 U.S.C. § 4681(a) (ODCs). 

9 26 U.S.C. §§ 4662(e) (Superfund); 26 U.S.C. § 4682(d)(3)(A) (ODCs). 

10See, e.g., the international reserve allowance program contained in the Lieberman-Warner 

Climate Security Act of 2008, S. 2191, 110th Cong. § 6006. 

focus primarily on the contrast between a production-based cap-and-trade system 

and a consumption-based emissions fee system, it is important to recognize that 

some sectors with sufficiently special circumstances may merit alternative approaches, and a multitude of approaches may be appropriate. 

1) Scope: For environmental harms that are localized at the site of emissions, 

such as the incidence of acid rain near the site of sulfur dioxide emissions, a production-based approach to regulating emissions is likely to achieve the appropriate 

scope of coverage to produce the desired environmental results.6 By contrast, for environmental harms that are not so localized and that are instead global in nature, 

a consumption-based approach with a broader regulatory scope is more appropriate. 

Such an approach is particularly appropriate for nations that are large consumers 

of the goods that cause the harmful global impact of concern. For example, the use 

of ozone-depleting chemicals harmed the global environment regardless of where 

those chemicals were produced—thus, a consumption-based excise tax in the United 

States (a key consuming nation) was appropriately broad in scope. It drastically curtailed the use of ozone-depleting chemicals and effectively protected the ozone 

layer.7 Similarly, climate change is a global phenomenon—a ton of carbon dioxide 

emissions will do the exact same harm to the earth’s environment regardless of 

where it is produced. Thus, a consumption-based approach matches the scope of the 

environmental problem to be addressed by regulating emissions associated with all 

carbon-intensive goods consumed, no matter where those goods might have been 

produced.

2) Uniformity: A consumption-based approach has the additional advantage of 

automatically treating the emissions associated with a good exactly the same no 

matter where that good may originate from. Thus, the same science-based results 

are achieved, and environmental damage is prevented or mitigated to the exact 

same extent, for all goods subject to the same uniform, consumption-based regulation. A production-based approach, however, necessarily treats goods differently depending on where they are produced. This fails to recognize that, in the case of GHG 

emissions and climate change, the location of production is irrelevant from a scientific and environmental perspective. Attempts to correct for this differential treatment (by, for example, adding on ‘‘competitiveness’’ mechanisms to a cap-and-trade 

program) are extremely challenging because they force policy-makers to assess 

which other production locations should be regulated and how. The variety of complications that arise in trying to design such compensatory mechanisms only underscores how ill-suited an approach that differentiates treatment based on the site of 

production is to addressing the global problem of climate change. 

3) Equal Treatment: With a consumption-based approach, emissions are regulated for all goods consumed domestically, and goods not consumed domestically are 

not subject to the domestic regulation. For example, the Superfund tax and the ODC 

excise tax were assessed on the same basis for domestic goods sold in the U.S. and 

for imported goods sold in the U.S.8 In addition, the taxes were rebated on exports.9

Because all goods were taxed upon consumption, no additional mechanisms were 

needed to ensure equal treatment of domestic and foreign goods—all domestic and 

foreign goods consumed domestically were taxed equally; all domestic and foreign 

goods not consumed domestically were equally exempt from the tax. A productionbased approach, however, makes it much more difficult to achieve equal treatment. 

While some compensatory charges may be assessed on imported goods based on 

their own site of production, ensuring those charges treat domestic and foreign 

goods equally based on the environmental harm associated with that good’s production has proven challenging.10 Rebating the costs of domestic regulation on exports 

is also problematic, and not only because of problems with WTO consistency. Because the costs imposed on production provide the only incentive to meet environmental goals under such an approach, eliminating those costs necessarily reduces 

the desired environmental impact. 

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11 26 U.S.C. § 4672(a) (Superfund); 26 U.S.C. § 4682(c) (ODCs). 12 26 U.S.C. § 4671(b) (Superfund); 26 U.S.C. § 4681(b)(2) (ODCs). 13 Id. See also 26 C.F.R. § 52.4682–3(e) (ODCs). 14 Congressional Budget Office, Policy Options for Reducing CO2 Emissions (Feb. 2008) at ix. 15See, e.g., Robert Shapiro, Nam Pham and Arun Malik, Addressing Climate Change Without 

Impairing the U.S. Economy: The Economics and Environmental Science of Combining a Carbon-Based Tax and Tax Relief, The U.S. Climate Taskforce (June 2008); William D. Nordhaus, 

To Tax or Not to Tax: Alternative Approaches to Slowing Global Warming, 1 Review of Environmental Economics and Policy 26 (2007); Kenneth P. Green, Steven F. Hayward, and Kevin A. 

Hassett, ‘‘Climate Change: Cap vs. Taxes,’’ Environmental Policy Outlook, No. 2, American Enterprise Institute (June 2007); Gilbert E. Metcalf, ‘‘A Green Employment Tax Swap: Using a 

Carbon Tax to Finance Payroll Tax Relief,’’ Tax Reform, Energy and the Environment Policy 

Brief, Brookings Institution and World Resources Institute (June 2007); Richard N. Cooper, The

Kyoto Protocol: A Flawed Concept, in Trade and Environment: Theory and Policy in the Context 

of EU Enlargement (John Maxwell and Rafael Reuveny, eds., 2005). 16For example, observers of the EU’s Emissions Trading Scheme have noted that the regulatory environment for utilities enabled them to raise rates while emissions allowances were 

being allocated at no cost. See A. Denny Ellerman and Paul L. Joskow, The European Union’s 

Emissions Trading System in Perspective, Pew Center on Global Climate Change (May 2008) 

at 24–31. 

4) Coverage: Even if regulation of some upstream products can be roughly equalized under a production-based program, downstream producers are likely to suffer 

differential treatment based on their location. For example, even if foreign and domestic steel are regulated on a somewhat equivalent basis under a production-based 

approach, domestic automakers will bear more costs in purchasing that steel than 

will foreign automakers who can source steel produced under unregulated conditions. Thus, the differential treatment, and the failure to uniformly address environmental impacts, is simply pushed further down the production chain. A consumption-based approach can avoid this unfortunate result by covering all goods that entail harmful emissions. For example, the Superfund tax and ODC excise tax, in addition to taxing upstream products consumed domestically regardless of their origin, 

also taxed imports of downstream goods that used more than a de minimis amount 

of such upstream goods in their production process.11 The Superfund tax and ODC 

excise tax were not only assessed on imports that incorporated regulated chemicals, 

but it was also assessed on imports that entailed the use of such chemicals in their 

production process.12 The amount of regulated chemicals consumed in the production process was evaluated based on foreign manufacturer certifications or the predominant method of manufacture for the product in question.13

5) Efficiency: A consumption-based approach can also be significantly more efficient than production-based approaches. For example, the Congressional Budget Office estimates that a tax on the consumption of carbon could achieve the same GHG 

emissions reductions as a cap-and-trade program, and that the net economic benefits of the tax could be up to five times greater than the net benefits of a cap.14

Many economists agree that a carbon tax or emissions tax is significantly more efficient than a cap-and-trade program and would create much less of a drag on economic growth.15 In part this is due to the advantages of transparency and predictability discussed below. In addition, the United States already has a tried and true 

system for assessing and collecting taxes, whereas the creation of a cap-and-trade 

program would require the establishment of a new bureaucracy to oversee the distribution of emissions permits, a new trading market, and new rules and regulators 

to ensure the adequate functioning of that market. 

6) Transparency: The goal of a consumption-based approach is to increase the 

price of carbon-intensive goods, thus sending a clear signal to consumers and driving up demand for less carbon-intensive goods. Thus, the premium is on transparency. A consumption tax, for example, is set at a known level that clearly relays 

the same market signals to consumers, producers, and investors alike. The cost of 

GHG emissions—in terms of the environmental damage such emissions cause—is no 

longer hidden, but is openly represented in the additional tax levied on goods that 

produce such emissions. A production-based approach lacks such transparency. Because the focus is on imposing costs on producers, the extent to which such costs 

may be passed on to consumers is unknown and will likely vary based on the market conditions such producers face and other regulations they may be subject to.16

7) Predictability: Closely related to the greater transparency of consumptionbased systems is the increased predictability they provide to market participants. 

For example, when a tax rate is set—either legislatively or administratively—it is 

public knowledge how much each excess ton of GHG emissions will cost, when that 

cost will be imposed, and, if the tax increases over time, when and how those costs 

will rise. Advance knowledge of these costs is extremely valuable in industries such 

as capital-intensive manufacturing, where firms must plan production schedules 

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17The ODC excise tax was considered to be a very successful means of spurring industry to 

develop and use alternative chemicals and technologies. See Elizabeth Cook, ed., Ozone Protection in the United States: Elements of Success, World Resources Institute (Nov. 1996) at 50. 18 Allowance prices have been highly volatile in the European Emissions Trading Scheme, the 

Acid Rain program, and other cap-and-trade initiatives. See Gilbert E. Metcalf, Designing a Carbon Tax to Reduce U.S. Greenhouse Gas Emissions, NBER Working Paper 14375 (Oct. 2008) at 

25–28. 19See Congressional Budget Office, Policy Options for Reducing CO2 Emissions (Feb. 2008) 

at viii-ix. 20Taxes were raised as needed under the ODC program to ensure environmental goals were 

being met. See Elizabeth Cook, ed., Ozone Protection in the United States: Elements of Success, 

World Resources Institute (Nov. 1996) at 42–43. 21 Bali Action Plan, Decision 1/CP.13, FCCC/CP/2007/6/Add.1* (Dec. 2007) at para. 1(a). 

and solicit capital from investors to make that production possible. In addition, public certainty regarding the cost of excessive GHG emissions both now and in the future will stimulate entrepreneurs and investors to develop new abatement technologies and new energy sources as quickly as possible.17 By contrast, a productionbased system that lacks a transparent cost structure introduces significant uncertainty that makes it difficult for capital-intensive industries to raise funds and plan 

production strategies. Such uncertainty also provides little initial incentive to ramp 

up development of new technologies and alternative fuel sources. The problem is 

particularly acute with a cap-and-trade system, where the price of excess emissions 

is set by a trading market open to speculators and financiers. Past experience demonstrates that allowance prices in such markets can be extremely volatile from 

month to month or even day to day.18

8) Flexibility: A consumption-based system provides flexibility in two ways. 

First, by putting a price on emissions instead of a cap, the system allows producers 

to make technology improvements when it is most cost-effective to do so, instead of 

when the declining cap makes it cost-prohibitive not to do so.19 Second, the level 

at which a consumption-based tax is set can be adjusted as necessary to ensure that 

environmental and economic goals are being met and to allow policy-makers to 

adapt to advancements in scientific and environmental knowledge. In a tax system, 

such adjustments only require a re-setting of the rate—they do not require a complicated re-balancing of trade-offs among sectors and producers.20 Once stakeholders 

have signed on to a production-based system, however, and received certain quantities of allowances relative to other actors with similar expectations for the future, 

adjusting the system to reflect economic developments, advancing scientific knowledge, or new environmental realities could be extremely difficult both as a practical 

matter and a political one. 

9) Development: One of the thorniest issues in designing a production-based system for addressing climate change is how to regulate emissions produced in developing countries. International negotiations under the UN Framework Convention on 

Climate Change (UNFCCC) are based on the principle of common but differentiated 

responsibilities for developing countries, in recognition of the fact that such countries will need to achieve significant economic growth to emerge from poverty and 

that such growth will likely entail rising emissions levels rather than declining 

ones.21 Industries in developed countries who face competition from developing 

country producers are, however, justifiably concerned that such differentiated levels 

of emissions regulations will put them at a competitive disadvantage, leading to efforts to either mitigate the costs of developed country regulations or impose similar 

costs on developing country producers. A consumption-based approach avoids this 

dilemma by regulating goods based on their site of consumption, not their site of 

production. Thus, developing countries will be free to set their own national emissions reductions targets and design their own programs to meet those targets, consistent with their internationally-agreed rights and obligations. Only the goods such 

countries produce that are consumed in the U.S. would be subject to further regulation, and those goods would be treated like all other carbon-intensive goods consumed in the U.S. A consumption-based approach thus recognizes the need for 

wealthy nations to take full responsibility for their higher consumption levels and 

the emissions associated with that consumption, while providing the policy space for 

poorer countries to meet domestic emissions targets that reflect their development 

needs.

10) WTO Consistency: Another important advantage of a consumption-based approach is that it is more likely to be viewed internationally as consistent with international trade rules and principles. For example, GATT and WTO rules have long 

allowed indirect taxes (such as VAT taxes) to be adjusted at the border. Such taxes 

may be assessed on imports to the same extent they are charged on domestic goods 

without violating national treatment or other obligations, and such taxes may be rewwoods2 on DSKGBLS3C1PROD with HEARING

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22See GATT Art. III:2 and Ad Note Art. XVI. For an example of the application of these principles to permit the border adjustability of an environmental tax, see GATT Panel Report, 

United States—Taxes on Petroleum and Certain Imported Substances, BISD 34S/136, adopted 

on June 17, 1987. 23See, e.g., Gary Clyde Hufbauer, Steve Charnovitz, and Jisun Kim, Global Warming and the 

World Trading System, Peterson Institute for International Economics (Mar. 2009). 24 Under such an approach, manufacturers may still bear additional costs in the form of higher energy prices that are not reflected in the tax. Additional steps would then need to be taken 

to alleviate any disadvantage imposed on manufacturers due to higher energy costs. Such steps 

may include credits for manufacturers to compensate for higher energy costs and/or a system 

that includes a proxy for costs associated with such indirect emissions in the import assessments described above. 

bated on exports without constituting a prohibited export subsidy.22 To the extent 

any refinements to WTO rules or the conclusion of a stand-alone agreement under 

the auspices of the UNFCCC is needed to provide greater certainty that similar 

charges can be assessed based on a good’s carbon intensity, such adjustments are 

not likely to be major and would be consistent with long-standing WTO principles. 

By contrast, attempts to patch ‘‘competitiveness’’ mechanisms on to a productionbased system are likely to draw more scrutiny under international trade rules. 

While there are likely to be WTO-consistent approaches to a cap-and-trade system 

which is structured to minimize ‘‘leakage,’’ many have written that such approaches 

could be challenged as disguised barriers to trade and/or export subsidies.23 Absent

modification to the WTO rules to specifically authorize the types of leakage prevention approaches being considered, the disadvantage of a cap-and-trade system with 

leakage mechanisms is the uncertainty that will surround U.S. policy until a final 

WTO decision is rendered and the U.S. considers how to respond if the decision is 

negative. While countries can always agree to amend WTO rules or reach other 

international agreement to permit such competitiveness mechanisms, the more significantly these competitiveness mechanisms depart from current trade rules the 

more difficult it may be to reach consensus regarding needed changes to those rules. 

III. Elements of a Consumption-Based Approach 

Two elements of a consumption-based approach are discussed below: 1) A fee on 

excess emissions associated with goods consumed in the United States; and 2) A 

program to spur consumer demand for more efficient vehicles. As noted above, the 

varying needs of different sectors may justify a variety of approaches for addressing 

climate change. These comments are intended to suggest some elements of a program, and not to exclude other approaches. 

1) Excess Emissions Fee 

A key element of a consumption-based approach would be the imposition of a fee 

on each ton of excess emissions associated with goods consumed in the U.S., whether those goods are of domestic or foreign origin. There are strong arguments for imposing a uniform emissions fee that would apply to excess emissions from all sectors 

in the economy, including electricity generation. The fee would operate in a manner 

similar to value-added taxes, putting a price on excess emissions at each stage of 

the production process. The amount of those fees borne by manufactured goods could 

be adjusted at the border by rebating them on exports and assessing them on imports. This would ensure that manufacturers’ costs related to both their direct and 

indirect emissions do not create a competitive disadvantage. 

However, an emissions fee could also be targeted specifically to manufacturing, 

while implementing a broader cap-and-trade program for other large emissions 

sources such as electricity generators and fuel suppliers. A separate program could 

be carved out specifically for manufacturing that would assess border-adjustable 

fees on industrial emissions, and manufacturers subject to the fees would be exempt 

from the requirements of the cap-and-trade program.24

An emissions fee would be assessed on manufacturers based on the tons of greenhouse gases they emit each year. By creating a cost for excess emissions, the fee 

would incentivize firms to adopt the most cost-effective emissions abatement technologies. An administratively determined fee rate would also provide more cost predictability to producers than a volatile market for emissions allowances, allowing 

producers in capital-intensive industries to plan ahead more effectively for investments in technology upgrades and emissions reductions. Any such fee should be 

structured to minimize costs to industry and maximize emissions reductions. 

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25 As noted above, the import tax on ODCs is assessed on a ten-digit HTS level according to 

a standard ODC weight for the product determined on the basis of the predominant method of 

manufacturing for that product. See 26 C.F.R. § 52.4682–3(f)(6). 26This process could incorporate elements of the foreign manufacturer letters that importers 

are required to present in order to be exempt from taxes on imports of ODCs. See 26 C.F.R. 

§ 52.4682–3(e). 27 U.S. Department of Energy, Transportation Energy Data Book, Edition 27 (2008) at Table 

11.5. 28 Id. at Tables 3.7 and 3.8. 

• First, producers emitting below a certain threshold each year would be exempt 

from the fee. The threshold could be set to only cover producers that account 

for a significant portion of emissions. 

• Second, the fee could apply only to emissions that exceed a set quantity, and 

this level can decline over time. A floor below which no fees are assessed could 

be structured in a manner similar to a cap on emissions in a cap-and-trade program. Thus, producers who maintain emissions at current levels initially and 

gradually reduce them within the prescribed timeline would pay no fees. 

• Third, the base rate of the fee per ton of excess emissions can rise gradually 

over time to increase the economic incentive to reduce emissions. Even if the 

fee rate needs to be adjusted later in time to ensure emissions targets are being 

met or to respond to new scientific or environmental developments, the fee still 

provides more predictability to manufacturers than a trading market for allowances.

• Fourth, proceeds from the fees can be recycled back to the industry in the form 

of tax credits or other assistance to reward firms that reduce emissions more 

quickly and/or to help finance the acquisition of emissions abatement technology, worker training, and other transition costs. 

A major advantage of the emissions fee is that it can apply equally to both domestically-produced and imported goods. The fee could also be rebated on exports, eliminating the competitive disadvantage U.S. goods would face abroad. To rebate the 

emissions fee on exports, producers that have any fee liability at the end of the year 

can report the portion of their emissions that were generated by production for export and deduct a proportional amount from the fees owed. Any such export deductions would be subject to verification. There are several methods that could be used 

to assess an emissions fee on imports. 

• First, the fee would be assessed on all imports regardless of origin and based 

solely on the emissions associated with the imported good. The emissions fee 

would apply to any import that generates emissions above a de minimis level,

including downstream products. 

• Second, the base rate of the fee per ton of emissions associated with imports 

would be equal to the base rate of the fee per ton of domestic emissions. Thus, 

the amount of the fee would increase over time to strengthen the incentive for 

emissions reductions. 

• Third, adjustments to the import assessment can be made to account for the 

fact that the fee is only assessed on U.S. emissions that exceed a certain level. 

• Fourth, to determine the amount of emissions generated by imported products, 

regulators could establish a greenhouse gas intensity rate for foreign industries. 

The intensity rate could be further refined down to a product-specific basis depending on the sector and on administrative feasibility.25

• Finally, a process could be created whereby an importer could apply to demonstrate that the emissions generated by specific merchandise are lower than 

the standard intensity rate for the country of origin (resulting in a lower assessment).26 Similarly, other interested domestic parties should have the ability to 

apply to demonstrate that the actual emissions generated by specific merchandise are higher than the standard rate for the country of origin (resulting in 

a higher assessment). 

2) Creating Demand for More Efficient Vehicles 

Another element of a consumption-based approach would be a program to stimulate demand for new, more fuel-efficient cars or for the retrofitting of existing vehicles to make them more fuel efficient. Transportation is a significant source of GHG 

emissions in the United States.27 As of 2001, there were 20 million cars and 15 million trucks on the road that were 15 years old or older.28 While there are numerous 

ways to incentivize the production of more fuel-efficient cars, one way to do so would 

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be to retrofit older and less efficient vehicles from the road and stimulate consumer 

demand for more efficient cars. 

There are several approaches that could contribute to this goal. First, consistent 

with the emissions fee proposed above, a tax on gasoline that reflects carbon content 

and increases over time would lead consumers to demand more fuel-efficient cars. 

Second, vehicles themselves could be subject to a consumption or use tax based on 

their gas mileage. For existing cars already on the road, application of such a tax 

would encourage drivers to invest in retrofitting older cars or turning them in for 

more efficient vehicles. Third, current state-level exceptions to emissions testing requirements for older cars could be phased out over time to require all vehicles on 

the road to meet emissions standards. Finally, any of the approaches above could 

be combined with targeted assistance for drivers who lack the means to upgrade or 

exchange their current vehicles. Together, policies to stimulate and support demand 

for more efficient vehicles could dramatically alter the emissions profile of the transportation sector in the United States. 

Conclusion

The crisis of climate change demands solutions that address the global nature of 

the problem. Policies that focus on regulating the consumption of carbon-intensive 

goods rather than their production are much more likely to fulfill scientific objectives, improve environmental outcomes, maximize incentives for new technology development, and minimize economic costs, while honoring international trade rules 

and principles. Such consumption-based approaches have been used successfully in 

the past to address other global environmental challenges, such as the depletion of 

the ozone layer. 

Regulating consumption by putting a price on GHG emissions has numerous advantages over regulating production by capping the quantity of GHG emissions. A 

consumption-based approach would cover more of the U.S. carbon footprint, treat all 

goods uniformly based solely on their associated emissions, ensure equal treatment 

of domestic and foreign goods, and cover downstream products made with carbonintensive inputs. In addition, consumption-based approaches are likely to be more 

efficient, transparent, predictable, and flexible, providing significant economic and 

environmental benefits. Finally, a consumption-based approach will permit developing countries to pursue common but differentiated emissions reduction commitments without putting developed country industries at an unfair disadvantage, all 

while honoring international trade rules and principles. 

Elements of a consumption-based approach to combating climate change could include a fee on excess emissions associated with goods consumed in the United States 

and programs to stimulate consumer demand for more efficient technologies and 

products.

Æ 

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